Aided by better-than-expected sales across banners, Genesco Inc. reported second-quarter earnings that easily exceeded Wall Street’s targets.
Companywide revenues rose 6.5 percent to $655.5 million. Overall comparable sales increased 7 percent. Direct comparable sales grew 26 percent and store comps were up 5 percent.
Net earnings climbed 58.3 percent to $7.6 million, or 32 cents per share although results were skewed by numerous special items, including deferred purchase price payments in connection with the acquisition of Schuh Group Ltd. and asset impairment charges and network intrusion expenses. Adjusted for the items, earnings from continuing operations rose 6.3 percent to $8.5 million, or 36 cents share, well ahead of Wall Street's consensus estimate of 25 cents.
On a conference call with analysts, Bob Dennis, chairman, president and CEO, said the healthy top-line growth despite a later than usual start to back-to-school and the move of sales tax holidays in several states which shifted some sales into the third quarter versus last year. The sales growth helped offset expected gross margin pressure from its continued efforts to right size the Lids Sports Group's inventory levels.
“The third quarter is off to a strong start in spite of a later Labor Day, aided by the ramp up in the start of school in many areas of the country and the corresponding tax free shopping periods,” added Dennis. “Comparable sales for the month of August increased 6 percent.”
By division, August comps were up 6 percent at Journeys, 4 percent at Schuh, 5 percent at Lids and 3 percent at Johnston & Murphy. Genesco reiterated its guidance for the full year.
JOURNETS SEES STRENGTH IN FASHION ATHLETICS
At the Journeys Group segment, sales rose 4.4 percent in the second quarter to $247.2 million with a 4 percent gain in comps. Operating profits jumped 35.3 percent to $9.2 million.
Dennis said the shift in the timing of BTS and sales tax holidays due to a later Labor Day particularly impacted Journeys, where comps accelerated in May and June compared to the first quarter trends and then flattened out at the end of July as a result of the changes.
“Despite the headwinds Journeys delivered a solid comp for the quarter, benefiting from freshness and growth on the fashion athletic side as well as the casual footwear side,” said Dennis. “In addition, Journeys realized increases in gross margins from strong full price selling.”
Dennis said Journeys continues to benefit from a deep and narrow assortment, leading to more full-price selling and strength in both the fashion athletic and casual categories. Also driving traffic are initiatives such as an increase in catalog circulation, paid search investment and investment in grassroots marketing like its sponsorship of the Vans Warped Tour and the AP Music Awards.
He added that Journeys ShopperTrak effort has helped better identify prime hours to improve staffing levels and subsequently conversion. Added Dennis, “Now that most stores have anniversaried their implementation dates and we have prior year comparisons, the focus has moved to improved conversion year-over-year and we continue to see nice gains as a result.”
Looking ahead, he predicted a strong back half for Journeys. Said Dennis, “We believe the same trends that have fueled the Journeys business, plus another solid boot season, will contribute to positive holiday selling, in spite of stronger comparisons for the back half of last year.”
LIDS FOCUSES ON INVENTORY REDUCTIONS
Lids Sports Group’s revenues climbed 11.4 percent in the quarter to $222.2 million and gained 8 percent on a comp basis. Direct sales stood out with a 39 percent gain. Operating earnings slumped 34.0 percent to $5.6 million due to promotions used to reduce inventories.
Dennis said comps in Lids core headwear stores turned positive in the second quarter even with no strong new trends. Noted Dennis, “Snapback's remain a healthy part of this business and contributed to growth in the quarter. More favorable year-over-year NHL and NBA playoff lineups and the Blackhawks and Golden State championships drove comps across all the Lids retail businesses.”
Lids Locker Room posted double-digit comp gains, helped to some extent by favorable teams and higher promotional activity. Said Dennis, “We believe the NFL and college assortments have the business positioned nicely for fall.”
Dennis said Lids is making progress reducing inventories. Lids' inventory was up 5 percent on a square footage increase of 5 percent and sales increase of 11 percent. The increase was a little over its inventory reduction plan target for the end of the quarter due to timing of receipts. The year-end target calls for a 10 percent to 15 percent reduction
“Although the promotions to accomplish this are hitting gross margins hard, fresh merchandise in our stores is essential to longer-term improvement of the Locker Room business in particular,” said Dennis. “The better comps in that headwear stores from a fresher assortment and an easier shop – store to shop are reflected in these benefits already.”
The shift earlier this year to focus on execution instead of additional growth has also helped Lids “make considerable progress.”
Locker Room at Macy's, its in-store shops operating inside Macy’s, delivered high-double-digit comps in the quarter. The performance, according to Dennis, is “a good sign of realizing the potential of this business and we are currently working with Macy's on some improvements to the business model aimed at improving profitability.”
On the technology side, Lids is benefiting from the rollout of Locate, which tracks total system inventory from online and other stores. Dennis said Locate, which has reached 500 doors, is driving comps as stores now are able to access inventory in other stores, which is particularly beneficial for serving displaced fans.
Auto Store, the robotic system to expedite picking in the warehouse and add efficiency, has been operating successfully at Lids through its ramp-up phases. Lids is also rolling out a ShopperTrak to improve labor efficiency. A new front-end e-commerce system will launch in the first or second quarter next year.
Dennis said Lids ”got off to a good start” in the third quarter and should benefit from a “good lineup” of baseball teams that appear to be headed to the playoffs. Looking ahead however, Dennis said Lids has less visibility on overall sales in the third quarter than it usually does because the later Labor Day also led to a later start to the NFL and college football season and a later World Series. The Super Bowl is also scheduled later in the first quarter than typically, and may lead sales to shift to the first quarter from the fourth.
Dennis also said the level of promotions at Lids to trim inventories “is a first for us in this business and therefore not entirely predictable.”
At the Schuh Group segment, sales improved 3.4 percent to $103.2 million with comps ahead 8 percent. The U.K.-based juniors footwear chain scored an operating profit of $4.9 million in the period against a loss of $197,000 a year ago.
“At Schuh we were pleased to see the acceleration of comps in the second quarter and sustained strength of the e-commerce business which yielded improved profits over last year,” said Dennis. “In addition to growth through comps Schuh continued executing its store opening plan to add substantial square footage in the UK and new stores in the German market this year.”
At the Johnston & Murphy Group, sales rose 10.6 percent to $60.8 million as comps advanced 10 percent. Operating earnings in the segment reached $846,000, bouncing back from a loss of $424,000 a year ago.
GROSS MARGINS ERODE ON LIDS PROMOTIONAL ACTIVITY
Companywide, gross margin for the quarter decreased 20 basis points from last year to 48.8 percent. The decline reflected a 210 basis point overall gross margin decrease at Lids due to efforts to freshen inventory. Gross margins in Lids core domestic headwear business, which are traditionally the strongest, remained strong and were down only 30 basis points over last year.
Journeys saw a 100 basis point improvement in gross margins due somewhat to higher initial margins but mostly from more full price selling and fewer markdowns.
Total adjusted SG&A expense improved 10 basis points to 46.7 percent. Last year's expenses benefited from a bonus reversal and this year's expenses were hurt by foreign exchange but benefited from the end of an Schuh acquisition incentive. Store level wage pressure driven by minimum wage increases and retail competitor moves prevented some leverage on sales gains.
Based on second quarter results and start to the third quarter balanced with some uncertainty around the extent of gross margin pressure that will be necessary to complete the right-sizing of the Lids Sports Group's inventory, Genesco reiterated its outlook for the current year, which calls for adjusted EPS in the range of $4.70 to $4.80. The guidance assumes comp increases in the 4 percent to 5 percent range for the full year.
