Genesco Looks Forward to Anniversary of Negative Trends to Offset Urban Declines…

Genesco Inc. lived up to its lowered expectations for the first quarter as the negative impact of its urban stores overshadowed upside elsewhere. The Journeys Group again posted “solid sales growth” and the company is also reporting some solid performances coming out of the new Shi by Journeys format. Management also described “positive momentum” in the Johnston & Murphy and Dockers Footwear businesses. But the drag continues to be from the Underground Station Group, which has been focused against the urban consumer, while Hat World has seen its business hurt by a shift in a key licensed MLB cap and some weaker street-level store locations in urban markets.

Journeys Group comp store sales rose 3% for the first quarter on top of a small 1% increase in Q1 last year. Journeys stores comp sales were also up 3%. Footwear unit comps increased 7% in the period, but average selling prices declined 3% during the quarter due in large part to product mix. Still, management said they were confident in their merchandising position for the summer and back to school season. Sales of athletic shoes were up 19% in the quarter and represented 62% of sales compared to 57% last year. GCO said the growth in the athletic category continues to be driven by skate product from Vans, Heelys and DC Shoes, as well as Nike Dunks. Crocs and Converse also posted strong results on the non-skate side. The kids' towers in the Journeys stores are still apparently doing well, with unit comps up 23% and ASP’s up 5% for the period.

Journeys store growth plans remain on track. GCO opened 11 stores during the quarter, ending the period with 777 stores in operation. They see 50 to 60 new Journeys stores for fiscal 2008.

Journeys Kidz saw total sales grow 35% to $11 million in the quarter, matching the same growth rate as Q1 last year, while same-store sales were up 6% on top of a 10% comp gain last year. Footwear unit comps increased 11% on the strength of Heelys, Vans, DC Shoes and Nike. GCO opened 11 new Kidz stores during the quarter, ending the period with 84 stores in operation, and they still see 40 total new stores for the year. As the company looks to expand the size of the regular Journeys store they are finding that they can convert the existing real estate into a Kidz format store. They still see an opportunity to open 250 to 300 Journeys Kidz stores nationwide.

Shi by Journeys, which is the newer format focusing on women, entered the comp base for the first time in the first quarter. Comps were said to be up in the high-single-digit range for the period. GCO opened 11 new Shi by Journeys stores during the first quarter, ending the period with 23 stores in operation versus just three at the same quarter-end last year. The target is to have 50 Shi stores open by the end of the fiscal year.

Although management said it still believes it is too soon to set a longer-term target and timetable, the price-points and demographics of the Shi chain make it suitable for “a broad set of mainstream malls, probably at least 500.” Perhaps one of the more interesting points on the quarterly conference call was how less important the athletic end of the business has been for the Shi by Journeys concept. They had expected the athletic mix to be roughly a third of the total, but it is trending at less than 20% of the total mix in the stores.

Net sales for the Underground Station Group, which includes the remaining Jarman stores, were down more than 25% for the period. Comp store sales fell 22% in the quarter. Management said the weak urban market, ongoing softness in the athletic category, and a tough Nike comparison negatively impacted the comps. GCO hinted that the overall athletic business in the stores may have been hurt by Nike’s departure. They see improvements for the Group in the back half of the year, due in part to a new product mix that includes more women's and casual styles and less athletic product. Secondly, Nike becomes progressively less of a factor through the second half for Underground. Nike represented 17% of the Underground Station business in the first half of last year, before pulling out after Back-to-school. Nike was 9% of the business in the second half. The third upside for the format is that they are starting to anniversary the urban downturn.

The Hat World Group posted a 4% decline in same-store sales for the period on top of a decline in Q1 last year, which had been the first decrease since the retailer was acquired by Genesco.

Last year, MLB and branded headwear were still trending strong, but this year a switch in the on-field MLB cap from New Era apparently caused many consumers to wait for the new product. The intro of the new hat at the beginning of April boosted sales and that has continued into the second quarter. GCO said it feels good about its inventory position in the old hats and believes they will “clear them at positive margins.” They said the branded action sports category remains strong led by DC, Quicksilver and Roxy, while fashion products from Kangol and private label were also said to be strong.

The Group was also hurt by the weaker urban business. The core urban stores saw a 15% comp store sales decline for the quarter, while comps for the rest of the chain were only down in low-single-digits. The eight Hat World stores previously mentioned as targeted for closing are primarily street stores located in urban communities.

GCO expects to see an “improving sales trend” at Hat World through the balance of the year. They opened 26 stores in the quarter and expect to open 100 to 105 new stores in the Hat World Group this year, including about 15 new Lids Kidz stores.

The Cap Connection stores in Canada saw comps increase in the low double-digits for the period, but sales in the newly acquired Hat Shack stores were “below expectations,” due in large part to the “drag created by their conversion to Hat World's inventory system.”

>>> Looking forward to the anniversary of a downturn… Now, there’s a positive spin…