Genesco Inc. reported fourth-quarter earnings on an adjusted basis were down 0.8 percent, missing its guidance range by a penny, largely due to lower-than-expected profitability at lids.com. The bigger disappointment, however, was the lowering of expectations for the current year, in part because of a lack of a strong fashion trend in juniors footwear.
Current year earnings on an adjusted basis are now projected in the range of $5.40 to $5.55, which represents a 6 percent to 9 percent increase over 2013’s adjusted EPS of $5.09. When third-quarter results were released on Dec. 6, Genesco projected adjusted EPS growth of 10 percent to 12 percent
Same-store sales are expected to increase in the low-single digits for 2014. Comps are projected to rise only in the 1 to 2 percent range in the first half, then slightly pick up for a gain in the range of 2.5 percent to 3.5 percent in the second half.
“The absence of a meaningful new fashion driver in the teen footwear space makes us cautious about Journeys' and Schuh's prospects in the first half of this year, and customer traffic remains somewhat choppy across the whole company,” said Bob Dennis, Genesco’s chairman, president and CEO, on a conference call with analysts.
In the fourth quarter ended Feb. 1, earnings adjusted to exclude non-recurring items in both periods were $51.0 million, or $2.16 per diluted share, compared to $51.4 million, or $2.16 per diluted share, for the year-ago fourth quarter. On Dec. 6, Genesco had provided guidance in the range of $2.17 to $2.27 a share. On Jan. 14, Genesco said it expected earnings to reach the lower end of the guidance range.
Adjusted earnings exclude deferred purchase price payments tied to its acquisition of Schuh Group Limited, network intrusion expenses, other legal matters, a lease termination, asset impairment charges and a change in accounting for deferred bonuses. Including the special items, net earnings in the latest quarter rose 8.4 percent to $42.2 million.
Dennis said the slight shortfall in adjusted profits largely related to Lids.com getting aggressive in January with dynamic pricing on clearance goods and on their digital marketing spend, which drove solid sales growth, but hurt profitability more than expected.
Net sales in the quarter slid 0.5 percent to $793 million, which Dennis said “roughly met our expectations.” Comparable sales increased 1 percent. Direct comparable sales increased 10 percent in Q4 on top of a 17 percent a year ago.
Through March 8, quarter-to-date comps companywide were down 2 percent. The first week was “down significantly” due to a major winter storm, but sales have improved as more normalized weather arrived and the IRS started returning money to earlier filers. Comps have also been positive in the west and southwest regions “where weather has not been much of a factor,” said Dennis. Excluding the first week, comps are basically on plan.
By concept, Lids Sports Group showed a 4 percent comp gain in the fourth quarter against a 10 percent decline a year ago, aided by strong Super-Bowl-related sales in its Seattle-based Lids Locker Room stores. Sales grew 4.6 percent to $251.5 million while operating earnings for the segment advanced 8.2 percent to $28.2 million. Lids' direct business increased 18 percent on top of 27 percent last year. First quarter comps for the group were plus 3 percent through Mar. 8.
At its Lids hat stores, Dennis said snap-backs “continue to decline slowly as a percent of sales,” with its core fitted product regaining some traction. Snap-back inventories were “in good shape” at the year’s close, with margins for the product remaining strong. Dennis added, “While we see less growth in the hat store square footage, this business remains our cash cow.”
Its Locker Room and Clubhouse stores saw comparable sales increase in the double digits for the second consecutive quarter, helped by the performance of its eight Locker Room stores in Seattle. It ended the year with 128 Locker Room and 49 Clubhouse locations. It plans to add approximately 40 to 50 stores across both concepts in the current year through organic expansion and acquisitions. Said Dennis, “We continue to believe we have the opportunity to scale this business to a nationwide footprint, which, along with our digital business, should give us a competitive advantage that mimics those that we currently enjoy in the headwear space.”
Locker Room by Lids also had 26 in-store departments inside Macy’s at the close of the year, with plans to open up to 175 in 2014. Dennis said Lids is “learning a great deal about the Macy's customer in terms of their product preferences and shopping patterns, and we continue to seek good potential for this business.”
Lids.com had “another strong quarter,” benefiting from efforts to expand “well beyond hats” to other fan gear. The website is expected to further benefit this year by enabling access to inventory in stores. Also supporting lids.com is the capability for consumers to buy online and return in store, as well as being able to reserve online to pickup in store.
In the Journeys Group segment, comps were flat in the fourth quarter with a slightly negative store comp and a strong double-digit increase in Journeys direct. Comps were down 1 percent in last year’s fourth quarter. Sales were down 4.7 percent to $321.5 million. Operating earnings were down 2.6 percent to $41.2 million. Comp quarter to date at Journeys Group were minus 2 percent.
The Journeys chain in the quarter saw a “solid gain” in casual, including boots, but its athletic business was “softer” due to a lack of a dominant new trend or key new product launch. Dennis expects Journeys revenues “to be somewhat challenged” until the back half of the year, when the chain gains “more visibility on positive fashion trends and the non-athletic casual product once again becomes a much bigger percentage of the mix.” Overall, Dennis sees positives in the casual trend, noting the Journeys is seen as “the go-to store for many of the brands on that side of the store.”
At the same time, he added that fashion “troughs are a recurring feature in this space” Dennis noted that only two brands from this year's list to top sellers would have made the same list ten years ago. He added that Journeys continues to hold a “strategic advantage as a branded retailer of being able to ship into the next trend, and there will be a next trend.”
Journeys Kidz comps were up 2 percent on top of a 5 percent decline a year ago. While casual also led the gains, paced by boots, athletic was able to “hold its own.” It ended the year with 174 Kidz locations, plans to add 25 in 2014, and sees the overall potential to reach 300 doors.
Journeys Group’s direct comps were up 20 percent for the quarter, driven by a notable increase in traffic with a substantial increase in particular to its mobile site.
At Schuh Group, comps were down 7 percent on top of a 7 percent increase a year ago. Revenues were down 4.0 percent to $121.7 million. Operating profits were up 24.2 percent to $7.2 million. Like Journeys, Schuh has also been challenged by a lack of fashion drivers while facing heightened price competition from competitors. Comps were down 8 percent quarter to date with heavy rains and flooding impacting results.
At Johnston Murphy Group segment, comps were flat in the quarter. Revenues improved 5.0 percent to $72.5 million; operating profits were up 6.9 percent to $7.2 million.
Companywide gross margin improved 50 basis points in the quarter, slightly below expectations but its first quarterly gross margin increase in the past six quarters. Officials said its gross margins are closely tied to its product mix. Adjusted SG&A as a percentage of sales was 38.3 percent, up about 40 basis points, due to the lack of sales leverage.
For the full year, adjusted earnings were down 1.2 percent to $120.3 million, or $5.09 per share. Revenues inched up 1.2 percent to $2.62 billion.
The current year’s low-single digit comp guidance assumes a low single digit gain in its stores and high teens in its direct business. A total of 125 new stores are expected to open in 2014,with 92 coming from Locker Room by Lids/Clubhouse in North America, Journeys Kidz in the US, Schuh in the UK, and Johnston & Murphy in North America.
E-commerce accounted for 7 percent of overall retail sales in 2013, and is projected to reach 8 percent this year. It’s expected to benefit by extending efforts to enable online shoppers to access entire inventory positions across concepts, as well as rolling out in-store digital kiosks, online reserve/in-store pickup, and online inventory checking by store. New front-end e-commerce platforms being implemented across all of its North American businesses, as well as ongoing call-center and warehouse upgrades are also expected to support its digital segment.
Concluded Dennis, “Despite recent challenges and our muted expectations for the first half of 2015, we believe the fundamentals of our business remain intact, and we are encouraged about our store opening plans, and especially about taking our omni-channel initiatives to the next level.”
