Genesco Inc. slashed its profit outlook for the year after experiencing a drop-off in second-quarter sales and seeing the sluggish trend continuing so far in August.
“Back-to-school has been a disappointment for us relative to what we were expecting, and it has been a pretty steady disappointment,” Robert Dennis, chairman, president and CEO, said on a conference call with analysts.
Genesco cut its full-year profit forecast to a range of $5.20 to $5.30 a share, down from $5.57 to $5.67 previously. Analysts on average were expecting a profit of $5.63 per share.
After the report, shares of Genesco fell $6.31, or 9.1 percent, to $63.24 Thursday in trading on the New York Stock Exchange.
Adjusted for the non-recurring items in both periods, earnings from continuing operations in the second quarter rose 9.1 percent to $13.2 million, or 56 cents a share. Wall Street's consensus estimate had been 60 cents.
Net sales increased 5.7 percent to $574.7 million, reflecting a comparable store sales decrease of 2 percent. Comps were running down 3 percent through Saturday, Aug. 24.
A bright spot continues to be its direct businesses, with comps across banners up 11 percent for the quarter. Direct accounted for 6.3 percent of comp sales in the quarter.
At the Journeys Group segment, revenues grew 6.2 percent to $222.5 million. Operating profit improved 39.3 percent to $2.88 million.
Comp sales were down 1 percent compared to a 6 percent gain in the 2012-second quarter. Dennis said sales “became more challenging” after a 1 percent comp increase in May. He blamed a “a weak fashion athletic business” with its casual offerings seeing “strong” sales. Units and ASPs were both down.
August comps through Aug. 24 at Journeys Group were down 2 percent against a 13 percent increase for the comparable period last year. Dennis still expects comps to improve in the fourth quarter, when casual, driven in large part by boots, “historically becomes a much bigger component of the business.”
Journeys Kidz comps were down 2 percent against a 13 percent increase last year, although positive comps are still expected for the year.
In its Lids Sports Group segment, revenues rose 5.8 percent to $192.4 million. Operating earnings fell 38.3 percent to $12.7 million. Comps were down 3 percent on top of a 2 percent gain a year ago and compared to a 6 percent decline in the first quarter. August comps were down 3 percent month-to-date a 3 percent increase for the comparable period last year.
Dennis said snap-backs, which represented 19 percent of its Lids hat stores and Lids.com comp sales for the first half of the year, continues to present challenging comparisons for Lids Sports. Last year Lids was by far the largest seller in the category in the first half, leading to “exceptionally strong pricing and margins” in the early part of 2012.
As other entrants arrived, prices in the second half of last year were reduced to compete and although “margins were solid,” they were “below the levels achieved when we essentially had the market to ourselves.” The challenging comp and margin comparisons will anniversary themselves this September.
Dennis said Lids continues to narrow the snap-back assortment to the SKUs “that are most relevant to consumers.” And while margins on the most popular snap-backs “are solid, we still have some ways to go in clearing the less productive snap-backs inventory.”
Outside snap-backs, Lids “continue to freshen the fitted categories and we are encouraged by what we see. And we continue to test new silhouettes, with some early evidence of new potential opportunity,” said Dennis.
Comps at Lids larger multi-category retail concepts, Locker Room and Clubhouse, continue to outperform its hats stores. Fifteen new Locker Room and Clubhouse stores were added in the quarter through new openings and acquisitions, and plans call for the opening of approximately 36 more such stores over the remainder of the year. In-store kiosks are also being added to help out-of-town fans buy their favorite team’s gear.
Dennis also remarked that Lids deal announced during the quarter to operate Locker Room stores inside Macy’s “gives us a great new vehicle for reaching an even larger fan base.” Currently, only 40 to 45 Locker Room stores share a mall with the proposed 200 Macy's locations. And while Lids hat stores are at many of the same malls also occupied by Macy’s, only about 10 percent of the merchandise in the Macy's licensed department will be hats, reducing concerns about cannibalization. Lids also gained the exclusive right to sell fan apparel on macys.com.
Going forward, Dennis said the overall Lids business “should get help in the back half of the year from NFL product. Last year, the new licensees struggled to get their entire assortment developed and shipped. This year, we are in much, much better shape.”
Schuh Group’s revenues inched ahead 1.2 percent to $82.1 million while the U.K. juniors footwear chain lost $60,000, down from a loss of $545,000 a year ago. Comps were down 7 percent after an 11 percent decline in the first quarter, and are down 10 percent month-to-date in August. Clearance sales led to a decrease in ASPs for the quarter and lower year-over-year margins.
While also hurt by weakness in fashion offerings, Dennis indicated that the U.K. has undergone “an even more pronounced footwear cycle than the US during the period in which we have owned Schuh, both on the way up and on the way down. The very strong comp increases over the last two years are making comparisons difficult now.”
On the positive side, projected top-line and bottom-line results this year are expected to come in “well in excess of the projections” for the current year versus estimates at the time of its decision to acquire Schuh in 2011. The weakness appears to be lower traffic with conversion rate holding “strong,” said Dennis.
Johnston & Murphy Group’s revenues rose 10.3 percent to $53.3 million while operating earnings slid to $1.76 million from $1.81 million. In the Licensed Brands segment, mainly the wholesale Dockers footwear business, sales grew 7.2 percent to $23.9 million; operating earnings nudged up 3.2 percent to $1.47 million.
Companywide gross margins in the quarter were 49.2 percent, down from 50.2 percent a year ago. This was due to lower gross margins for Schuh and Lids, while Journeys, Johnston & Murphy and Licensed Brands had some margin expansion.
Genesco expects comparable store sales to fall about 1 to 2 percent in the third quarter, but improve about 3 percent in the fourth.
Regarding the fourth quarter improvement, Dennis expects the company to benefit from a shift from athletic-fashion to casual offerings at both Journey and Schuh, led by seasonal demand for boots; as well as clean inventory positions due to aggressive markdowns taken in the quarter. A particular benefit will be easier comparisons at both Journeys and Lids later in Q3 and especially in Q4. Dennis noted that comps in the 2012 fourth quarter declined 1 percent at Journeys and fell 10 percent at Lids. Added Dennis, “We are expecting Q4 to give us a nice recovery on comps for no other reason than comparisons begin to move in our favor.”
