Shares of Genesco fell $6.53, or 13.7 percent, to $41.22 Thursday after the retailer gave a cautious outlook for 2023 and launched a cost-cutting program to help offset inflationary pressures that negatively impacted its flagship Journeys chain this past holiday season. Genesco also plans to close 60 Journeys stores this year.
“While we expected Journeys to get back some of its stimulus-fueled gains, the business was tested more than we anticipated,” said Mimi Vaughn, board chair, president and CEO, on an analyst call. “The effect of decade’s high inflation on the consumer and the elevated footwear channel inventories are the two factors that impacted us the most.”
Journeys’ Q4 Same-Store Sales Dip 1 Percent
Overall sales at the Journeys segment in the fourth quarter fell 1.7 percent to $465.8 million. Same-store sales were down 1 percent against a gain of 1 percent in the year-ago period.
“Journeys remained under pressure in Q4 as the consumer headwinds and excess footwear inventory weighed on demand,” said Vaughn. “During back-to-school, consumers shopped when there was a reason to buy and retreated to conserve cash during the in between periods and we expected the same for holiday. This was a big change from the strong selling environment the prior year when teens bought anything in stock and available.”
The fourth quarter for Journeys started slowly with warmer weather in November. While December saw a pick-up, it wasn’t at the level seen during back-to-school “as the consumer pressured by inflation shopped less and made harder choices on where to spend money,” said Vaughn.
While footwear units were up a little in the quarter with the benefit of a stronger January, overall sales including boots were down due to price-sensitive customers trading down to more accessibly-priced footwear and a significant drop-off in add-on purchases, like socks.
Given the heightened industry-wide discounting in response to elevated footwear inventories, Journeys decided not to employ additional discounting and as a result, adhere largely to full-price selling. Journeys’ gross margin was down 300 basis points but remained above pre-pandemic levels.
Operating earnings in the quarter at the Journeys segment fell 26.1 percent to $43.2 million. Beyond the margin pressures, the decline reflects additional marketing and other expenses to support e-commerce growth and major selling salary and other cost pressures.
E-commerce was a bright spot, up “well into the double digits” for Journeys.,
However, Vaughn stressed that Journeys “must double down” on efforts to right-size rent expenses and reduce store costs as expense growth is outpacing sales growth. She added, “That said, well positioned as the leading destination for fashion footwear for teens, Journeys has a proven track record of powering through economic cycles and emerging strong with growth and profit opportunities on the other side.”
Schuh’s Q4 Comps Jump 20 Percent
At U.K.-based Schuh Group, same-store sales grew 20 percent against a decline of 2 percent in the year-ago quarter. Sales advanced 6.6 percent to $137.5 million and gained 18 percent on a constant-currency basis. Operating profits improved 26.2 percent to $12.3 million.
“Schuh continues to out-execute competition and gain market share,” said Vaughn. “Elevated brand relationships and improved access to higher-tiered product assortments combined with effective consumer marketing put Schuh in a great position to capitalize on holiday demand despite the high inflation and economic headwinds facing UK consumers.”
Schuh saw strong demand for both casual and fashion athletic footwear and benefited from higher volume and selling prices. Vaughn said, “Schuh’s progress in fiscal 2023 is especially notable as profitability was up considerably excluding the substantial one-time rent and other COVID credit credits Schuh received in fiscal 2022.”
Johnston & Murphy’s Q4 Comps Climb 23 Percent
Johnston & Murphy Group’s same-store sales grew 23 percent on top of a 38 percent gain the prior year. Sales gained 17.4 percent to $89.3 million. Operating profits came to $7.1 million against $4.6 million a year ago.
Vaughn said Johnston & Murphy continues to benefit from its transition into a “more comfortable, more casual brand” over the last several years. Store traffic was up “considerably,” and e-commerce saw stronger growth. Vaughn said, “Casual and casual athletic were again the primary drivers of sales with strong apparel demand contributing to the positive results. J&M’s story marketing campaigns proved effective in attracting a broader and a younger consumer to the brand while building on our premium positioning and price points.”
Genesco Brands Group, formerly Genesco Licensed Brands, recorded an operating loss of $3.2 million against earnings of $3.2 million a year ago. sales were down 33.7 percent to $32.4 million.
Vaughn said a repositioning of Levi’s footwear business to higher tiers of distribution expectedly put pressure on sales growth this year. Vaughn added, “In addition, the inflated inventories in the channels, combined with much higher freight costs that hit this business, especially hard given its price points, made for a very challenging Q4 and fiscal 2023. We believe these issues will subside as fiscal 2024 progresses, which coupled with more distinctive product design will allow the business to drive improved profitability in the coming year and longer-term.”
Other brands in Genesco’s wholesale selling segment include Dockers, Bass, Starter, Etonic, FUBU, and Phat Farm. Vaughn said the name change “reinforces Genesco’s strategic commitment to the expansion of the company’s branded portfolio and Genesco Brands Group as a platform for growth.”
Companywide, net sales of $725 million eased 0.4 percent year over year and increased 7 percent from the pre-pandemic fourth quarter of Fiscal 2020. Sales were just below consensus estimates of $727 million. The year-over-year decrease was driven by foreign exchange pressure in the Schuh business and decreased wholesale sales, partially offset by a 15 percent increase in e-commerce sales and a total comparable sales increase of 5 percent.
Same-store sales at stores were up 1 percent against a 10 percent gain last year. Comparable direct or online sales were up 21 percent versus a 12 percent decline last year. E-commerce sales increased 57 percent above pre-pandemic levels. Excluding the impact of lower exchange rates, sales increased 2 percent.
Fourth quarter gross margins eroded 250 basis points to 46.4 percent due primarily to a more normalized promotional environment compared to essentially none last year, in addition to increased freight and warehouse costs this year.
SG&A expense decreased 50 basis points as a percent of sales and was up 90 basis points compared with Q420. Adjusted SG&A expense decreased 40 basis points as a percent of sales and increased 130 basis points compared with Q420. The year-ago quarter included one-time benefits for rent credits and government relief of approximately 70 basis points. Excluding these one-time benefits last year, leverage in performance-based compensation and occupancy expenses more than offset the deleverage from compensation and marketing expenses.
Net earnings reached $39.2 million, down 37.0 percent from $62.2 million a year ago but up 10.4 percent from $35.5 million Q420. Excluding non-recurring items, earnings were $37.1 million, or $3.06 per share, down 24.4 percent from $49.1 million, or $3.48, a year ago, and off 15.9 percent from $44.1 million, or $3.09, a year earlier. Earnings on an adjusted basis of $3.06 were ahead of Wall Street’s consensus of $3.00.
For the year, net sales of $2.4 billion decreased 2 percent compared to last year but increased 9 percent over FY20. Overall sales for Fiscal 2023 compared to Fiscal 2022 increased 2 percent at Schuh and 24 percent at Johnston & Murphy, partially offset by a decrease of 6 percent at Journeys and a decrease of 8 percent at Genesco Brands Group. On a constant currency basis, Schuh sales were up 15 percent for Fiscal 2023.
Excluding the impact of lower exchange rates, net sales increased 1 percent for FY23 compared to FY22. Non-GAAP EPS from continuing operations was $5.59 versus $7.62 last year and $4.58 in FY20
Inventories ended the year 25% higher than FY20 on a quarterly sales increase of 7%.
Tom George, CFO, said Genesco’s inventory levels are higher than planned, but substantially all the higher inventory can be attributed to “solid core product” for both Journeys and J&M. First-half receipts have been trimmed approximately 30 percent from last year and future buys will be adjusted. George said, “We do not believe we will be required to take incremental markdowns to right-size inventory levels.”
For the current year, Genesco is implementing a cost program aimed at reducing expenses by $20 million to $25 million. Areas targeted include selling salaries, rent expenses and credit card fees. George said, “We will benefit from projects to increase efficiencies like receiving automation in our main distribution center for much of this fiscal year, but we will also anticipate future efficiencies from store labor time studies being conducted at Journeys since due. This cost program is intended to reduce the rate of expense growth while at the same time, we are conducting a more holistic review of our cost structure in evaluating additional areas of savings.”
Sales for the current year are expected to be flat to up 2 percent, or down 1 percent to up 1 percent, excluding the 53rd week this year, compared to FY23. Adjusted EPS is expected in the range of $5.10 to $5.90 compared with $5.59 in FY23.
“We continue to experience a consumer holding back on discretionary purchases and elevated footwear industry inventories,” said Vaughn. “As such, we’re taking a cautious view on overall sales and planning the back half with back-to-school and holiday opportunities to be stronger than the front relying on initiatives and actions we’re taking to drive sales rather than a consumer rebound view. Q1 will be especially challenging with the top line impacted by lackluster boot and other sales, as well as a smaller retailer order book. Nevertheless, while the consumer environment remains difficult to predict, I am confident in the actions we’re taking and our team’s ability to execute.”
Photo courtesy Journeys