Shares of Genesco, Inc. lost about 17 percent of their value on Thursday after the parent of Journeys slashed its outlook for the second half due to a sales slowdown in the latter part of the quarter at the Journeys chain amid inflationary pressures.

Under its revised guidance:

  • Sales are expected to be down 3 percent to flat year-over-year, versus prior guidance of up 1 percent to 3 percent;
  • Adjusted EPS is expected in the range of $6.25 to $7.00, with an expectation that adjusted diluted earnings per share for the year will be near the mid-point of the range. Previously, adjusted EPS was expected to be near the mid-point of $7.00 to $7.75.

The lower outlook comes despite earnings in the quarter topping Wall Street targets.

“Stronger than expected results that Schuh and Johnston & Murphy helped overcome some softness late in the quarter versus expectations at Journeys, due to an increasingly challenging macro environment, which is affecting certain segments of consumers more than others,” said Mimi Vaughn, Genesco board chair, president and CEO, on a call with analysts.

In the quarter that ended July 30, sales decreased 3.6 percent to $535 million year over year while increasing increased 10 percent versus the pre-pandemic 2019 second quarter.

The sales decrease compared to last year was driven by a comparable decrease of 2 percent as the company continued to anniversary the significant stimulus distributed a year ago, which benefitted Journeys Group, and by foreign exchange pressure on the Schuh business from the strengthening dollar, partially offset by increased sales in the wholesale channel. Excluding lower exchange rate impacts, sales decreased by 1 percent for the second quarter year-over-year.

Journeys Q2 Comps Slide 8 Percent
By concept, total sales at Journeys were down 7.2 percent to $321.3 million, with same-store sales dropping 9 percent. Operating income at Journeys was down 69.6 percent to $9.2 million from $30.4 million a year ago.

Vaughn said the second quarter “started well” for Journeys, with May and June benefiting from restocking inventory back to pre-pandemic levels for the first time since the onset of the pandemic, although sales did not further accelerate as much as expected in July. The negative trend included the last two weeks of the month, the beginning of the back-to-school season.

“Sales have since reaccelerated in August and are nicely up above last year, but we expected an even sharper acceleration given our vastly improved inventory position and a normal back to school this year,” said Vaughn. “We are seeing some evidence of the Journeys consumer getting squeezed by inflation, making fewer trips to the mall, waiting for tax-free events to shop, delaying purchases until the time of need and trading down to more affordable price point footwear.”

Journeys has shifted to assortments that better align with “the current more budget-conscious consumer.” She also said the current fashion cycle, which she sees as a “shifting away from fashion athletic more into casual,” has continued in the second quarter and “plays into Journeys strength.”

Journeys benefited in the quarter from improved conversion and higher transaction size, helped by higher ASPs (average selling prices). Compared to the pre-pandemic 2019 second quarter, lean inventory and more full-price selling delivered both better-than-expected and higher Journeys gross margins despite markdown and promotional actions increasing versus essentially none last year.

Schuh’s Q2 Comps Climb 9 Percent
Schuh, Genesco’s U.K.-based chain similar to Journeys, recorded sales of $101.5 million, down 4.3 percent. On a constant-currency basis, Schuh sales were up 9 percent for the second quarter this year. Same-store sales grew 9 percent. Genesco removed any stores closed for seven consecutive days from comparable sales. Operating profits in the second quarter at Schuh were down 42.2 percent to $2.1 million.

Vaughn said Schuh’s sales continue to exceed expectations despite extended lockdown periods and many retail bankruptcies impacting the retail marketplace in the U.K. She said, “The Schuh team has made the most of this disruption utilizing its advanced digital offering to drive online and out executing when stores were open.”

Schuh benefited from a better inventory position, including improved access to higher-tiered styles from several key vendors and “pent-up demand as young people enjoyed the warm summer weather and dressed fashionably for summer activities.”

Operating income at Schuh grew after adjusting for last year’s rent and other COVID credits. Vaughn said, “Like Journeys’ Schuh strength is its ability to deliver the fashion brands desired by its youth consumer and casual was up as a greater percentage of the mix as well, led by sandal growth and helped by higher prices.”

Johnston & Murphy Comps Gain 17 Percent
Johnston & Murphy grew 22.3 percent to $74.8 million. Same-store sales gained 17 percent. Operating income eroded 18.7 percent to $3.2 million. Growth stemmed from all channels this quarter, with stores up 13 percent year-over-year, direct up 16 percent, and wholesale up nearly 60 percent.

Operating income grew more than double pre-pandemic levels. Operating income was also up over last year, adjusting for last year’s sizable pickup from inventory reserve reversals.

“With the return to the office figures well below 50 percent, the brand is experiencing this growth from a shift in strategy from not just the footwear consumers’ need for work, but for footwear and apparel they desire for everyday life driving market share gains,” said Vaughn. “As a measure of this progress, nine of the top 10 SKUs in J&M’s DTC business in Q2 were casual and casual athletic styles. Intensified consumer messaging and fresh and continuous streams of new and innovative products with technology differentiating J&M’s offerings are driving this growth.”

In its Licensed Brands, which include Levi’s, Dockers and Bass footwear, sales declined 9.6 percent to $37.7 million. Operating profits reached $685,000, down from $991,000 a year ago but an improvement from a loss in the 2019 second quarter. The sales decline reflects a distribution repositioning of the recently-acquired Levi’s license.

Inventories increased 55 percent year-over-year as outsized stimulus demand and supply chain limitations resulted in extremely low inventory last year. Inventories increased 14 percent this year when compared to the pre-pandemic second quarter, driven by late-arriving Spring inventory, back-to-school products, core carryover products, and vendor cost increases.

Outlook
Looking ahead, Vaughn said back-to-school selling school in the U.S. has delivered positive results, and August saw a pickup over July’s slower start. However, expectations for increases for the season and back half over last year for Journeys were even higher at high single-digit growth.

“Given how low we were on inventory and out of stock on core items throughout the back half of last year, we believe we left significant sales on the table and had planned to capture the upside during this year’s back-to-school and holiday season,” said Vaughn.” In reaction to the increasingly difficult macro environment, we are seeing customers come out and shop when there is a reason to buy and retreat to conserve cash during the in-between period.”

As a result, she said Genesco is modifying its guidance for the back half to reflect weak trends at Journeys. Both the higher-income J&M consumer and the Schuh consumer have exhibited resilience in their shopping appetites, backed up by lifts in traffic over last year.

Vaughn added, “We anticipate these patterns will largely persist although we have tempered expectations to account for the increasingly difficult economy that may impact Schuh consumers in the U.K. Our fresh inventory will be a positive and we believe the strength of our concepts position us well to get more than our fair share of consumer demand, especially when the customer has a reason to shop. We can manage inventory by adjusting receipts as needed and do not believe we will need additional markdowns to keep inventories right-sized.”

Photo courtesy Journey’s