Shares of Genesco crashed 32 percent Thursday after the company axed its outlook for the year as weak demand and heavy discounts in the marketplace for athletic footwear pulled down sales at Journeys. Mimi Vaughn, CEO, told analysts, that even as spring assortments arrived in stores, Journeys’ consumers continued “to trade down to lower price points and take advantage of the abundance of discounted athletic products elsewhere in the market.”
She added that the athletic footwear’s “elevated inventory in the channel continues to suppress demand for other products.”
Vaughn added that the weaker demand and store traffic reflects the squeeze Journey’s younger consumers are feeling from inflation and lower tax refund dollars this year as well as due to many having stocked up on athletic footwear in the earlier stages of the pandemic.
“With closets already full, we saw lower store traffic and demand for a number of key styles this year,” said Vaughn. “As a result, Journeys did not see the desired sell-through in some of its core fashion athletic and casual products. Journeys countered with reduced receipts of core items and increased promotions and markdowns to clear slower moving non-core goods, taking these actions, along with others, like returns to vendors to rationalize inventory.”
On the positive side, Journeys saw “meaningful strength” in newness and Journeys buying team is aggressively working with vendors to adjust assortments. Vaughn said, “This will take some time to execute, but should begin to be evident by the back half of the year.”
Another bright spot for Journeys was digital, which has returned to healthy growth.
To improve Journeys’ performance against a “difficult macro backdrop” across the industry,” Journeys has identified more than 100 Journeys stores for closure this year with cost savings of up to $40 million, up from 60 closures originally planned. Journeys had 1,115 stores at the close of the quarter.
Vaughn also listed a number of steps Journeys is taking to improve its operating performance:
- “Working with our brand partners in a bigger way to test new brands and styles, tell additional unique brand and product stories and garner even more allocated and exclusive products;
- Conducting a much deeper dive on consumer and market insights to better understand current purchase intent and inform our future actions;
- Strengthening Journeys’ presence in key marketing channels to drive awareness, traffic and sales, such as boosting paid search and paid social media investments; and
- Refining our in-store selling approach using input from recently completed time and activity studies, such as adjusted selling tactics, promoting use of new technology and tools in stores and incentivizing our store employees to focus further on engaging with customers and driving conversion.”
Vaughn noted that Genesco in the past has successfully navigated multiple adverse retail cycles across the businesses, with the most recent being the COVID shutdowns in early 2020.
“As the leading destination for fashion footwear for teens, Journeys track record of performance, including record sales and profits in the year following the shutdowns, demonstrates the resilience of the business, the importance of its value proposition to the consumer, and the ability to rebound from economic headwinds and fashion shift,” said Vaughn. “I am confident we will come out on the other side of this environment in an even stronger competitive position.
The Journeys Group segment posted a net operating loss of $18.4 million in the first quarter against operating earnings of $14.9 million a year ago. Sales fell 13.4 percent to $272.2 million from $314.4 million a year ago.
The weakness at Journeys more than offset record sales at Johnston & Murphy, its dress footwear chain, and Schuh, its UK.-based juniors chain.
Companywide, sales for the first quarter declined 7.3 percent to $483 million, in line with Wall Street’s consensus target of $484 million.
The net loss on an adjusted basis was $18.7 million, or $1.59 a share, against earnings of $5.9 million, or 44 cents a share, and below Wall Street’s consensus estimate calling for a loss of $1.01 a share. The net loss on a reported basis was $18.9 million, or $1.60 a share, against $4.9 million, or 37 cents, a year ago.
Shares of Geneesco tumbled $9.66, or 32.5 percent, on Thursday to $20.11.
Companywide, comps were down 5 percent in the first quarter, with stores down 8 percent and direct up 7 percent.
At Schuh Group, sales grew 5.6 percent to $93.1 million while the chain’s operating loss shrunk to $1.8 million from $2.7 million. On a constant currency basis, Schuh sales were up 13 percent for the first quarter this year. Same-store sales expanded 13 percent.
Vaughn said Schuh’s gains were driven by solid increases in both stores and digital, with store traffic and average selling prices up. She said, “Schuh continues to benefit from a resilient consumer despite a challenging UK economy.”
The lower operating loss for Schuh was driven by stronger gross margins and market share gains. She added, “Efforts to improve access to the top brands and styles and reinvigorate its relationship with its customers through marketing and loyalty initiatives has resulted in a business operating much more effectively. These successful efforts inform the playbook for what we are now executing at Journeys.”
Johnson & Murphy’s sales jumped 16.3 percent to $82.6 million from $71.0 million. Operating income of $4.8 million compares with $550,000 a year ago.
“Johnston & Murphy remained a bright spot, delivering its ninth consecutive quarter of double-digit top line growth as well as the strongest gross margin and operating income gains among our businesses,” said Vaughn. “This record start to the year was driven by strength across all channels, digital, retail and wholesale, as the business continued to capitalize on the long-tail of the post-pandemic work plate casualization trend.”
She added, “J&M’s more affluent consumer is proving resilient against the challenging macro backdrop. But most importantly, J&M’s assortment continues to resonate, led by casual, and the Upton and Amherst franchises, in particular, as well as major strength in apparel, which grew 35%.”
The Genesco Brands Group segment, its wholesale footwear business, surpassed expectations in the quarter despite going up against large sell-ins to accounts that were replenishing from supply chain disruption in Q1 last year. The business includes Levi’s shoes for men, women, and kids, Levi’s slippers, and footwear sold under the Dockers, Bass, Starter, Etonic (Lifestyle), FUBU, and Phat Farm licenses.
Sales in the Genesco Brands Group segment were down 24.9 percent $35.4 million from $47.1 million a year ago. The segment showed an operating loss of $32,000 against earnings of $3.8 million a year ago. Vaughn said on the segment, “Results were driven by strengthening performance in the value channel and improved gross margins as freight costs ease, contributing to breakeven operating income. While there is more work to be done, Q1 was an encouraging start to the year that we believe should progress further as headwinds subside over the course of fiscal ‘24.”
Companywide gross margins were down 100 basis points to 47.3 percent due primarily to a more normalized promotional environment and increased markdowns at Journeys, which offset improved margins in the remaining businesses.
SG&A increased 520 basis points as a percent of sales compared with last year. Adjusted SG&A grew 550 basis reflecting the deleverage of expenses, especially compensation expense, selling salaries and occupancy expense against the sales decline.
Genesco’s GAAP operating loss for the first quarter was $23.0 million compared with operating income of $8.2 million in the first quarter last year. On an adjusted basis, the operating loss was $22.7 million against operating income of $9.5 million last year.
Inventories at the close of the quarter were up 17.3 percent to $470.8 million from $401.5 million, driven by Johnston & Murphy and Schuh to support the higher levels of demand in their businesses. Journeys’ inventory levels were flat to last year as adjustments were made to better position the chain to invest in the newness trends. CFO Tom George said on the call, “We continue to work with our brand partners to adjust our inventory levels and product assortments, and believe inventories will be more in line with last year as we get into the back half. We expect to end the year with lower inventories than last year.”
Looking ahead, Genesco now expects adjusted EPS is now projected in the range of $2.00 to $2.50, down from previous guidance between $5.10 to $5.90. Sales for 2023 to be down 4 percent to 5 percent, or down 5 percent to 6 percent excluding the 53rd week this year compared to last year. Previously, sales were expected to be flat to up 2 percent, or down 1 percent to up 1 percent, excluding the 53rd week.
Photo courtesy Journeys