Genesco Posts Solid Q1 Profit Gain Despite Weak Comps in the Mall…

Genesco would appear to be the one location in the mall that would see the most upside from the shift from athletic silhouettes to more fashion athletic product. After all, they owned the low profile, or fusion, category long before the other mall guys got up to speed on the product. But GCO is also struggling with its over-reliance on utility footwear and boots in Q1, particularly the six-inch wheat variety, as that consumer moves to lower-priced silhouettes as well. Still, a healthy branded business and store growth helped Genesco post a solid net income gain for the quarter.

The one area that has helped boost revenues for the footwear doors over the last two years has been the steady growth of the Nike business, particularly at the more urban Underground Station format. That run may apparently be coming to an end as management acknowledges that Nike will not be part of the mix at Station after the back-to-school deliveries. Nike, which apparently pulled the brand as part of an overall shift in its urban strategy, represented a low-double-digit share of the Underground business.

Company chairman and CEO Hal Pennington said they don’t see an impact from the Nike move on the Q4 business because it represents less of the overall Station mix at that time.

Net sales for the Underground Station Group, which includes the remaining 46 Jarman stores, were flat at $40 million. Comp store sales declined 3% in the quarter, with Underground Station comps declining 2%, primarily due to weak demand in men’s boots and utility footwear. Management said they were pleased with gains in women’s footwear, apparel, accessories, and children’s shoes, and see opportunities to expand these categories further. Non-footwear categories were 19% of sales in the quarter compared to 16% last year. The women’s business grew 21% in the period. Kid’s towers are now in 100 doors and will be in all stores by back-to-school.

Journeys Group comp store sales rose just 1% for the first quarter on top of a 7% increase last year, while footwear unit comps increased 4% in the period, a clear sign that average selling prices are heading south. Management said that board sport and women’s casual shoes continued to perform well, but overall sales were affected by a shift in demand from men’s boots and utility footwear to lower-priced canvas shoes, clogs, and sandals, led by Reef and Crocs. Vans was said to be “very strong” in the skate category. GCO sees less impact from the shift in the second quarter, which has historically relied less on boots as a percentage of the business. The kid’s business at Journeys also impacted ASP’s in Q1. There were 730 Journeys stores at quarter-end versus 660 stores last year. Square footage was up 16%.

Journeys Kidz saw total sales grow 30% to more than $8 million in the quarter, while same-store sales were up 10% on top of a 22% comp gain last year on strength in sandals, board shoes, and Heely’s. ASP’s were said to be flat. Management said they opened seven stores in Q1 and remain on track to open a total of 25 Kidz stores in fiscal 2007. Store growth is planned at 39% from last year and square footage is planned to expand by 43% for the year. They still see Journeys Kidz growing to more than 250 stores in the U.S.

Shi by Journeys, which is the new format focusing on women, was said to have “performed well during the quarter.” GCO had three Shi by Journeys stores in operation at the end of the quarter and expects to have a total of 12 stores by the end of the year.

Hat World posted its first quarterly comp stores sales decline since it was acquired by Genesco. Comps declined less than one percent in Q1, compared to a seven percent comp store sales increase in the year-ago period.

Management said that MLB and branded core headwear from Nike and Under Armour continued to be strong, but was “somewhat offset” by softness in demand for NCAA product and NBA fashion product. They are also expanding their private label program, which is now in 170 doors, to more than 215 doors by fall. They are also continuing the roll-out of embroidery machines in the stores.

Hat World added 96 stores last year and expects to add 85 to 90 stores this year. They opened 22 new doors in the first quarter.

Hat World continued to expand its private label initiatives and roll out its embroidery machines, both of which represent attractive opportunities for incremental sales. The company remains excited about the growth potential of Hat World and expect to open a total of 85 to 90 new stores in fiscal 2007.

GCO slightly increased its fiscal 2007 guidance, now estimating diluted EPS of approximately $2.63 per share on 3% to 4% comp sales growth and an increase in total sales of 14% to approximately $1.46 billion for the year.