Genesco Inc. Gets Q1 Lift from Merger Settlement…

Net income for the period included a pretax gain of $204.1 million, or $4.84 per diluted share, from the settlement, offset in part by expenses of $9.5 million, or 23 cents a share, related to the litigation, the settlement of unrelated litigation, and store closings and fixed asset impairments.

The company's adjusted earnings from continuing operations were $3.4 million, or 14 cents a share, compared to $6.1 million, or 25 cents a share, in the year-ago period.

Journeys Group comp store sales were flat for the fiscal first quarter on top of a 3% increase in the first quarter last year.  Journeys stores comp sales were up 1% on top of a 3% comp sales increase in the year-ago period.  Footwear unit comps increased 5% in the period, due to gains in the skate business, but average selling prices declined by roughly the same percentage rate due in large part to a 39% fall in average selling prices for Heelys product.  Excluding the Heelys business, average selling prices were roughly flat for the period.  Management estimates that Heelys negatively impacted Journeys' comp store sales by approximately 6% and net sales by $7.6 million. 

In a conference call with analysts, company President and COO Bob Dennis said that they still had a pretty strong Heelys business “through the first quarter and well into the second quarter,” but started to show some stress by the end of July as retailers started to cut price to liquidate the goods.  He said Journeys took the price down close to cost and were “basically clearing our Heelys at cost” to keep pace with the market.  Mr. Dennis said they expect to see the same dynamics related to Heelys in May and June as they saw in the first quarter this year, but expect to see some improvement in the back half of July as comparisons get easier.

Mr. Dennis also said they have seen a “little softening” in their Crocs business versus first quarter last year.  He suggested the brand had broadened distribution a bit.  However, he said that Crocs has never been a huge part of their business and “doesn't really compare to the Heelys situation.”  He said Crocs is more visible in their stores because they put so much more of the stock out on the floor, but it is smaller than Heelys was at its peak.

Men's footwear made up about 54% of Journeys footwear sales for the quarter and women's footwear was about 42%, with kids making up the balance.  Inventories were said to be below plan at quarter-end as the retailer moved to more aggressively manage exposure in the current business environment.

Journeys opened seven stores during in Q1, ending the quarter with 777 stores in operation.  They also expanded seven Journeys stores and plan to expand 22 more stores during the year.  GCO sees 28 new Journeys stores this year and plans to end the year with 831 stores. 
The Journeys direct business, which represents about 3% of the Journeys Group's total business, was up 37% during the quarter.

GCO did increase the number of catalogs mailed, but the sales increase was said to be “disproportionately higher than the circulation increase.”
Journeys Kidz saw same-store sales fall 8% for the quarter, compared to a 6% comp gain last year, also due to the Heelys issue. 

 

Management estimated that Heelys negatively impacted Journeys Kidz comps by about 7% in the first quarter.  They expect the Kidz business to continue to reflect the Heelys downtrend “fairly dramatically” through the end of June and then to benefit from the easier comparisons beginning in July.  GCO opened eight new Kidz stores during the quarter, ending the period with 123 stores in operation, and expect to have 140 stores in operation by year-end.

Shi by Journeys saw “nice gains” in the sandals and fashion athletic business, but that improvement was offset by broader weakness in dress and casual footwear.  Shi was described as “a work in progress.”  GCO said they continue to fine-tune merchandising, pricing and presentation and “remain encouraged about the prospects for this concept.”  GCO opened 13 stores in Q1 to end the period with 50 stores in operation and plan to end the year with about 60 stores.

Net sales for the Underground Station Group, which includes the remaining Jarman stores, were down less than 3% for the period after falling more than 25% in Q1 last year.  Comp store sales were up 9% for the period versus a 22% decline in the year-ago quarter.  Unit comps were up 13%, which management said reflected progress with its new merchandising strategies.

GCO has re-merchandised and re-positioned the Station concept to focus more on women's and kids.  Women's and kids footwear made up about 46% of Underground Station's footwear sales in the first quarter compared with 34% of sales in Q1 last year.  Women's and kids unit sales were more than half of total footwear sales. 

Operating margin improved to a negative 3.4% from a negative 7.3% in Q1 last year due to “increased leverage from the strong comparable sales increase.”

The overall Underground Station Group store count dropped 15% to 190 stores compared with 223 last year.  GCO does not plan to open any new Underground Station stores in fiscal 2009.

The Hat World Group posted a 3% increase in comp store sales for the period, reversing the 4% decline in same-store sales in Q1 last year, which had been the first decrease since the retailer was acquired by Genesco.  Hat World saw a positive comp in urban stores after eight consecutive quarters of negative comps.

MLB remains the largest category and performance in the quarter reflected favorable comparisons in February and March related to MLB's transition out of their old authentic on-field hat last year.  Core MLB product continues to perform well and branded was also said to be very strong, comping up approximately 20% in Q1.

Canadian store comps increased 10% for the quarter.
Hat World Internet sales, which represent about 5% of the total business, increased 21% in the quarter.