Genesco Inc. Fourth Quarter Sales and Earnings Post High-Teens Growth

Sales for the quarter increased 17.0% to $560.5 million. Organic growth, excluding sales from last year's acquisitions, was up 11% for Q4, driven by an overall 6% comp increase, a 29% increase at Lids.com and sales from 18 new stores. In February, comps were ahead 10% across all its businesses and was direct-to-consumer was up 34% for the month.

For the full year, Genesco's revenues grew 13.7% to $1.79 billion while adjusted earnings climbed 36.9% to $59.0 million, or $2.48 a share.
At Lids Sports Group, revenues in the quarter climbed 30.0% to $198.1 million. Comps were ahead 6% in the quarter and 14% in February.

 

Group operating earnings advanced 16.8% in the quarter to $23.3 million. In 2010, revenues at Lids Sports Group grew 29.5% to $603.3 million, of which 11% was organic growth and the rest stemming from its two new businesses, Lids Locker Room and Lids Team Sports. Operating income in 2010 jumped 31.2% to $57.8 million.

On a conference call with analysts, Bob Dennis, Genesco's chairman, president and CEO, said the Lids chain faced challenges in 2010 competing against 2009 due to the NY Yankees World series win. But the chain benefited from continued strength in fashion headwear, led by Major League Baseball and — while still much smaller — growth in NBA fashion as well. At the same time, the roll-out of in-store embroidery to an additional 111 stores, including new stores and retrofits, continued to positively impact the business.  Lids ended the year with 885 hat stores and plans to add 12 in fiscal 2012. It also plans to expand embroidery to another 105 locations to reach a total of 656.

The Lids Locker Room larger fan-shop concept ended the year with 99 shops. These include 63 stores with a wide offering of merchandise from multiple teams. The fan shops also include 36 team-specific stores referred to as clubhouse stores and acquired in the Sports Avenue acquisition that closed in November. These stores operate under team names such as the New York Yankees, Chicago Cubs and Auburn Tigers and carry the same broad assortment of merchandise as the Lids Locker Room stores but for only a single team.

“We see the potential to expand these relationships beyond brick and mortar to include more game-day and on-premise sales events while also exploring new partnerships with additional colleges and pro teams,” said Dennis. “In total we expect to open 20 new fan shops in fiscal 2012 including 12 Locker Room stores in the U.S., three Locker Room stores in Canada and five clubhouse stores.”

Regarding Lids Team Sports, Dennis said Genesco has “built a near national footprint in team sports apparel” with the acquisition of several regional players over the past few years, including Brand Innovators and Anaconda in 2010. Genesco is also working closely with Nike to go after high schools and small colleges whose teams are currently serviced by local dealers while also targeting the fans, relatives and friends who support those teams to sell additional product.

“We have quickly become the second largest team dealer in the country and we are investing in systems, inventory, infrastructure and our sales force to position us to capture additional share in this $3 billion to $5 billion market,” said Dennis.

Lids.com's sales were up 24% in 2010, excluding any acquired websites. Initial efforts to expand online merchandise beyond hats have been successful with non-headwear sales doubling off a small base in the fourth quarter. With the Sports Avenue acquisition at mid-year, Lids added 12 new team specific websites, including the University of Kentucky and the New York Jets. Including these websites, online sales for Lids Sports Group climbed 38% for the year.

At Journeys Group, revenues advanced 12.4% in the quarter to $253.3 million, fueled by a 12% comp sales gain and a 29% direct sales increase. Operating income advanced 19.7% to $28.8 million. Dennis said the ongoing fashion shift away from athletic toward more casual footwear combined with another strong boot cycle is fueling healthy comp gains.

The fourth quarter strength continued into February, when the Journeys Group comped up 9% and direct was up 31%. Journeys Kidz and Shi by Journeys saw comps for the quarter rise 14% and 15%, respectively.

Dennis said Genesco will continue to use available opportunities to further reduce rent and occupancy costs across Journeys' real estate portfolio in the U.S. with the goal of increasing operating margin. In Canada, however, its first stores opened last year are surpassing expectations and eight more will open this year.

At Underground Station Group, sales declined 8.7% in the quarter to $29.4 million. Operating earnings dipped 1.3% to $1.5 million. Dennis said that after a good back-to-school season and a solid November, sales trends at Underground Station have deteriorated since December. On the positive side, Dennis noted that last year's operating loss was roughly half the previous year. Of the 151 stores Underground Station currently operates, 110 are profitable on a four-wall basis. With nearly 50 leases up for renewal over the next 12 months, additional lease negotiations or closings will become available.

At Johnston & Murphy Group, sales climbed 18.3% in the quarter to $56.0 million with comps ahead 12%. Operating earnings increased 7.2% to $4.4 million. 

For the current 2011 fiscal year, Genesco expects EPS to be in the range of $2.78 to $2.85, which represents a 12% to 15% increase over last year's earnings.

The guidance assumes comp growth of 3%, overall sales growth of 8% to 9%, a gross margin decrease of about 20 basis points, and expense leverage of about 70 basis points.

Management also said that in the worst-case scenario, a prolonged NFL strike could impact its top line by about $12 million and reduce operating income by about $5.5 million or 11 cents to 14 cents per share. The NFL represents less than 10% of sales at its core hat stores in a normal year.

Looking at supply-chain issues, Dennis said the inventory shortages Genesco experienced last year “are largely behind us and we pushed up inventory at year end to ensure a good position entering fiscal 2012 given the timing and uncertainty caused by the Chinese New Year.” But cost pressures arising out of the increased demand for materials, higher labor rates and factory capacity issues in China may impact fiscal 2012.

Dennis said that its Johnston & Murphy and licensed brands Wholesale businesses “are most exposed” and will likely look to push-through price increased. But he also said its retail chains will be prepared to raise retail prices to maintain margins.