Genesco Inc. again counted on its Hat world acquisition to grow profits for the third quarter ended October, as the operating profit boost from the specialty retailer acquired in April helped push net income up more than 28% for the period. Top-line sales would have still increased 7.7% without the inclusion of the Hat World business, but operating profits would have declined 5.6% without its contribution. The top-line got the balance of its lift from continued strength at Journeys and an improving Dockers business.
The Underground Station/Jarman business was again the culprit in holding back even better results for the quarter, as the Underground Station stores reported a 2% same-store sales decline for the period on top of a 7% decrease in the year-ago period and the Jarman stores saw comps decline 9% for the third quarter.
Management said they see the reduction in the UGS comp decline as a positive trend, one they expect to see carry over into fourth quarter. UGS had reported an 11% drop in Q2 comps versus a 9% gain the previous year period, and noted at the time that that they saw a better outlook for the back half due to the negative comps in Q3 last year. Fourth quarter comps at UGS were also down 7% last year after a 17% jump in the prior year period.
Fashion Athletic was 36% of sales in Q3 versus just 26% in the year-ago period, but was off the 39% of sales in second quarter. Nike, which is expanding into 125 doors in the spring from the current 85 doors, was again called out as a key contributor along with Converse, Puma, Reebok, K-Swiss and adidas.
The $770,000 pre-tax profit was down sharply from a pre-tax profit of $1.4 million in Q3 last year, due primarily to aggressive markdowns and de-leveraging of expenses. GM showed “meaningful improvement”, but SG&A was up as a percent of sales due to de-leveraging of expenses against lower sales. GCO will convert five more Jarman stores to Underground Station in 2005 and close another nine Jarman units.
The store closures and conversions impacted EPS by two cents per share. Excluding the charges, EPS would have been up 33.3% for the quarter.
Average selling prices were again down at Journeys in the third quarter, dipping 3% for the period versus last year, but the decline was more than offset by a nice 10% footwear comp increase for the period. Athletic made up 53% of sales in the quarter at Journeys versus 44% in Q2 last year. GCO called out adidas, Puma, and New Balance as having “solid gains” in the quarter and Skate shoes were said to be strong. Management said they expect Boots to be strong in Q4.
Gross margin was down “slightly” and SG&A was “up slightly”, limiting pre-tax profits to a 9.0% gain for the period to $18.0 million versus $16.5 million in the year-ago period.
Hat World total sales were up 23% in the quarter, reflecting “increased demand” for core sports product and strength in the fashion and branded businesses. GCOs newest division saw strong MLB business, especially in Red Sox product. Sales were also bolstered by the addition of 25 new stores, including the retailers first campus location and the first two store sin Puerto Rico.
Gross margin was said the be “strong” and up “substantially” from last year. Income was up 12.9% versus last year.
In the other businesses, Johnston & Murphy sales were off 1.3% to $38.3 million, while pre-tax profits surged 370 basis points, or 310%, to $1.9 million. Dockers also delivered $2.1 million in pre-tax profit against $1.3 million in Q3 last year. Dockers sales were up 7.7% to $18.3 million in the period.
Fourth quarter EPS is seen in the 99 cents to $1.00 per diluted sahre range on $350 million in sales. Journeys and Hat World are both expected to comp up 3% to 5%, while Underground Station is forecast to comp flat to down in low-singles.
Genesco now expects sales for the year of approximately $1.1 billion and earnings per share to range from $2.01 to $2.02, including previously announced charges of approximately seven to eight cents per share associated with the planned closing of Jarman and other underperforming stores in fiscal 2005. If certain milestones are met in the fourth quarter additional shares from convertible debt could limit EPS to a range of $1.81 to $1.82 per share.
For fiscal 2006, GCO is forecasting diluted EPS in the $2.37 to $2.41 range, or from $2.11 to $2.15 if the convertible shares are included, on sales between $1.2 billion and $1.3 billion. GCO expects to open 65 to 70 Hat World stores next year.
