Genesco Inc. delivered record second-quarter profitability for its footwear businesses that far exceeded expectations.
GAAP earnings from continuing operations per diluted share reached $0.74 for the three months ended July 31, 2021, compared to a loss from continuing operations per diluted share of ($1.33) in the second quarter last year and earnings from continuing operations of $0.05 per diluted share two years ago.
Adjusted for the Excluded Items in all periods, the company reported second-quarter earnings from continuing operations per diluted share of $1.05, compared to a loss from continuing operations per diluted share of ($1.23) last year and earnings from continuing operations of $0.15 per diluted share two years ago. Results were well above Wall Street’s consensus estimate of 1 cent.
Net sales increased 42 percent from last year to $555 million. Wall Street’s consensus estimate was $522.4 million. Net sales increased 14 percent over the second quarter two years ago with stores open about 97 percent of the days.
Mimi E. Vaughn, Genesco board chair, president and chief executive officer, said, “We delivered outstanding second-quarter results highlighted by record second-quarter profitability for our footwear businesses that far exceeded our expectations. Following a very strong start to Fiscal 2022, our top-line accelerated even further ahead of pre-pandemic levels fueled by robust full-priced selling, as our merchandise offerings, exceptional service and differentiated shopping experiences continue to resonate strongly with consumers. Our outperformance was driven by better than anticipated results across the board with all businesses exceeding pre-pandemic profits. The levels at which the company performed during the first half of the year following a challenging Fiscal 2021 reflect the strong competitive positions of our retail and branded concepts and the positive transformation we are driving through our footwear-focused strategy. Turning to the current quarter, we have been pleased with our results to date as sales tracked ahead of pre-pandemic levels in August, and we are several weeks into the all-important back-to-school selling season.
“Our exceptional year-to-date performance reinforces our confidence in the strategic course we have set for the company. Our footwear-focused strategy is working and is delivering results. Our opportunity to unlock value in Genesco is to further accelerate the digital and omnichannel potential in our retail business and to meaningfully grow our branded side. In addition, the pandemic has provided us the real opportunity to transform our business at a faster pace, as we deliver improved growth and operating margins. With a strong balance sheet, we believe we are well-positioned to further invest in this growth while also returning capital to our shareholders going forward.”
Thomas A. George, Genesco interim chief financial officer, commented, “We were very pleased that the second quarter marked an acceleration in the sequential improvement of our operating results since the onset of the pandemic. With much stronger revenue, higher gross margins, and well-managed expenses, operating income far surpassed last year’s levels and the second quarter Fiscal 2020 two years ago, delivering record second-quarter adjusted EPS of $1.05 compared to $0.15 in Fiscal 2020.”
Store Re-Opening Update
As of August 31, 2021, the company is operating substantially in all locations.
Second Quarter Review
Net sales for the second quarter of Fiscal 2022 increased 42 percent to $555 million from $391 million in the second quarter of Fiscal 2021 and increased 14 percent from $487 million in the second quarter of Fiscal 2020. The sales increase from Fiscal 2020 was driven by a 97 percent increase in e-commerce sales and increased wholesale sales, with store sales just under Fiscal 2020 levels. As a result of store closures in response to the pandemic and the company’s policy of removing any store closed for seven consecutive days from comparable sales, the company has not included second-quarter comparable sales for this year or last year, except for comparable direct sales, as it feels that overall sales are a more meaningful metric for these periods. Comparable direct sales for the second quarter of Fiscal 2022 were down 23 percent compared to up 144 percent for the second quarter of Fiscal 2021, and up 20 percent compared to the second quarter of Fiscal 2020.
Overall sales for the second quarter this year compared to the second quarter of Fiscal 2021 were up 25 percent at Journeys, up 48 percent at Schuh, up 154 percent at Johnston & Murphy, and up 122 percent at Licensed Brands. Overall sales compared to the second quarter of Fiscal 2020 were up 10 percent at Journeys, up 15 percent at Schuh, and up 260 percent at Licensed Brands, partially offset by a 9 percent decrease in Johnston & Murphy sales.
Second-quarter gross margin this year was 49.1 percent, up 640 basis points, compared with 42.7 percent last year, and up 50 basis points compared with 48.6 percent in the second quarter of Fiscal 2020. The increase as a percentage of sales as compared to Fiscal 2020 is due primarily to higher full-price selling at Journeys, partially offset by a mix shift towards Licensed Brands and higher shipping and warehouse expense in our retail businesses driven by the increase in penetration of e-commerce as compared to Fiscal 2020.
Adjusted selling and administrative expense for the second quarter this year decreased 270 basis points as a percentage of sales compared with last year and decreased 230 basis points compared with the second quarter of Fiscal 2020. The decrease from Fiscal 2020 is due primarily to reduced occupancy expense as well as reduced selling salaries, partially offset by increased performance-based compensation expense driven by improved profitability and increased marketing expenses. The reduction in occupancy expense is driven by the U.K. government property tax relief program and benefits from our ongoing lease cost initiative.
Genesco’s GAAP operating income for the second quarter was $12.9 million, or 2.3 percent of sales this year, compared with an operating loss of $(22.0) million, or (5.6) percent of sales last year, and an operating income of $3.0 million, or 0.6 percent of sales in the second quarter of Fiscal 2020. Adjusted for the Excluded Items in all periods, operating income for the second quarter was $21.1 million this year compared to an operating loss of $(20.9) million last year and an operating income of $4.7 million in the second quarter of Fiscal 2020. Adjusted operating margin was 3.8 percent of sales in the second quarter of Fiscal 2022, (5.3) percent last year, and 1.0 percent in the second quarter of Fiscal 2020.
The effective tax rate for the quarter was 11.1 percent in Fiscal 2022 compared to 20.3 percent last year and 70.7 percent in the second quarter of Fiscal 2020. The adjusted effective tax rate, reflecting Excluded Items, was 25.1 percent in the second quarter of Fiscal 2022 compared to 23.0 percent last year and 45.2 percent in the second quarter of Fiscal 2020. The higher adjusted effective tax rate for this year as compared to last year reflects the inability to recognize a tax benefit for certain foreign losses and a higher mix of earnings in jurisdictions where the company generates taxable income.
GAAP earnings from continuing operations were $10.9 million in the second quarter of Fiscal 2022, compared to a loss from continuing operations of $(18.9) million in the second quarter last year and earnings from continuing operations of $0.8 million in the second quarter of Fiscal 2020. Adjusted for the Excluded Items in all periods, second-quarter earnings from continuing operations were $15.3 million, or $1.05 per share, in Fiscal 2022, compared to a loss from continuing operations of $(17.4) million, or ($1.23) loss per share, last year and earnings from continuing operations of $2.5 million, or $0.15 per share, in the second quarter of Fiscal 2020.
Cash, Borrowings and Inventory
Cash and cash equivalents at July 31, 2021, were $304.0 million, compared with $299.1 million at August 1, 2020. Total debt at the end of the second quarter of Fiscal 2022 was $20.0 million compared with $210.9 million at the end of last year’s second quarter reflecting increased borrowings in the second quarter last year as a result of the COVID-19 pandemic. Inventories decreased 11 percent in the second quarter of Fiscal 2022 on a year-over-year basis and decreased 27 percent versus the second quarter of Fiscal 2020.
Capital Expenditures and Store Activity
For the second quarter, capital expenditures were $8 million, related primarily to digital and omnichannel initiatives. Depreciation and amortization was $11 million. During the quarter, the company opened three stores and closed eight stores. The company ended the quarter with 1,439 stores compared with 1,476 stores at the end of the second quarter last year, or a decrease of 3 percent. Square footage was down 2 percent on a year-over-year basis.
The company did not repurchase any shares during the second quarter of Fiscal 2022. The company currently has $90 million remaining on the $100 million board authorization from September 2019.
Fiscal 2022 Outlook
Due to the continued uncertainty in the overall economy driven by the pandemic, specifically the spread of the Delta Variant, the company is not providing guidance at this time but will provide commentary on its outlook for the coming quarter in its prepared remarks on today’s earnings call.
Image courtesy Journeys