By Thomas J. Ryan

Shares of Genesco Inc. tumbled on Thursday – down more than 30 percent, to less than $50 a share September 1 after the company slashed its earnings guidance for the year due to a flip in fashion trends at the Journeys chain.

Genesco now expects earnings per share for the full year in the range of $3.80-$4, down from a prior view of $4.80-$4.90. In 2015, Genesco earned $4.29 a share.

“We have experienced significant comp deterioration in our Journeys business over the past two months related to a fashion rotation which we expect will persist for several more quarters and, therefore, has meaningfully changed our outlook for the back half of the year,” said Bob Dennis, chairman, president and CEO, on a conference call with analysts.

The revised guidance came as Genesco delivered second-quarter earnings that came in largely as planned and even ahead of Wall Street’s estimate, although sales at both Journeys and Schuh came in below estimates.

At the Journeys segment, operating earnings were down 51.4 percent in the second quarter to $4.5 million. Sales improved 2 percent to $252.1 million.

Dennis said that after seeing positive comps in the first quarter, May, a low-volume month, saw a decline and business turned “progressively worse” in June, July and August – the peak of back-to-school (BTS) selling. Overall, Journeys comps declined 4 percent in the second quarter and upcoming third-quarter comps for the segment were down 7 percent through August 27.

Dennis noted that early-summer traffic at Journeys was weaker than earlier in the year, but expected to pick up as BTS selling kicked in. While traffic did pick up toward the end of July, conversion “dropped off considerably,” indicating that the fashion trends had shifted.

“We have seen the Journeys consumer shift away from several of the fashion trends that have helped fuel strong performance in recent years,” said Dennis. “We are also seeing strong consumer interest and rapid growth in brands that are not yet at a size in our assortment to fully offset the declines in the weaker styles.”

Dennis said Journeys typically sees trends change every two-to-four years citing grunge, urban, surf and skate as examples. But “the speed and the intensity of the shift in this instance are more pronounced than we have ever seen in the past.”

Journeys’ problems are exacerbated because it has gone “deep and narrow” in buying around the styles that had been working well in the recent past.

Part of the lower guidance also reflects challenges at Schuh, a U.K.-based chain similar to Journeys. Comps had picked up in May and June after a difficult first quarter due to the arrival of warm weather. However, consumer confidence dipped after the UK’s decision at the end of June to leave the European Union. Consequently, a drop in traffic and conversion in Schuh’s stores led to a one percent comp decline in the quarter.

Overall, Schuh’s revenues in the quarter were down 6.1 percent to $97 million. Operating income still improved 16.4 percent to $5.7 million.

Conversely, operating earnings at the Lids Group segment rose 27.5 percent to $7.1 million. The improvement reflects a jump in gross margins by 480 basis points driven by the decision to divest the Lids Team Sports business through a sale to BSN Sports and a lower level of promotions at retail.

Sales were down 15 percent to $188.9 million due to the sale. Comps in the second quarter were flat as Lids anniversaried last year’s elevated clearance sales. Positive store comps were offset by lower online sales, since e-commerce was a primary clearance vehicle a year ago. The segment was also facing tough comparisons in the year-ago period due to better full-price selling with the NBA and NHL championship wins by Golden State and the Chicago Blackhawks.

For the balance of the year, Lids is expected to show flat to negative comps that will be more than offset by gross margin increases, resulting in positive gross profit dollar gains.

The Johnston & Murphy segment also continued its recent momentum in the second quarter. Operating earnings more than doubled to $2.3 million from $846,000, thanks to increased wholesale and direct sales and meaningful expense leverage. Sales improved 7.1 percent to $65.2 million. Comps increased 3 percent on top of the 10 percent gain a year ago.

Companywide, revenues were down 4.6 percent in the second quarter to $625.5 million. Excluding Lids Team Sports, sales were flat. Consolidated comps decreased one percent, worse than expected due to softness at Journeys and Schuh.

Gross margins for the second quarter improved 150 basis points to 50.3 percent. Total adjusted SG&A expenses increased 170 basis points to 48.4 percent due to the absence of Lids Team Sports.

Companywide net earnings in the quarter rose 90.8 percent to $14.5 million, or 72 cents a share. Excluding a number of special items in both periods related to a network intrusion, the sale of Lids Team Sports, asset impairment charges and payments tied to its Schuh acquisition, earnings were down 18.8 percent to $6.9 million, or 34 cents a share. Results topped Wall Street’s consensus estimate of 27 cents.

For the current quarter through August 27, consolidated comps are down 5 percent, and Dennis said the company’s “early reads on the other winter seasonal product for Q4 have not been as promising as we would have liked, although this has been on small volumes and it is still summer.”

In the Q&A session, Dennis said the company wouldn’t discuss what brands and styles were seeing strong demand in the fashion shift at Journeys due to competitive reasons. But he underscored that main problem in reacting to the trend change is “how sudden, in terms of timing, and severe, in terms of swing,” the shift was. Vendors who have the potential to capitalize on the fashion shifts don’t have enough stock. Said Dennis, “We just can’t get any more product other than what’s on order. We’re chasing like crazy, but there’s not anything to chase.”

Dennis said it will likely take until spring before Journeys mix can undergo the changeover necessary to get back on trend.

“When we drop spring, which arrives in the first quarter, we will have a pretty pronounced move beyond what we had anticipated,” said Dennis. “But between now and then we think we’re going to be a little bit challenged, selling out of what is really in highest demand and a little long on what has gone soft.”

Photo courtesy Genesco