Genesco, Inc. reported second-quarter earnings that came in well above analyst expectations but reduced its guidance for the year as sales at Journeys slowed toward the end of the quarter and into August, as well as due to inflationary concerns.

GAAP earnings from continuing operations per diluted share reached $0.59 for the three months ended July 30, 2022, compared to $0.74 in the second quarter last year and $0.05 per diluted share three years ago, prior to the pandemic. Adjusted for the Excluded Items in all periods, the company reported second-quarter earnings from continuing operations per diluted share of $0.59, compared to $1.05 last year and $0.15 per diluted share pre-pandemic.

EPS of 59 cents topped Wall Street’s consensus target of 29 cents. Revenue for the quarter came in at $535 million versus the consensus estimate of $549.76 million. 

Mimi E. Vaughn, Genesco board chair, president and chief executive officer, said, “We are pleased with our second quarter performance, which combined with our first quarter results, represent a strong start to Fiscal 2023 on top of last year’s stimulus-induced spending environment. Strength from our Schuh and Johnston & Murphy businesses and careful expense control helped offset softness late in the quarter versus expectations at Journeys to deliver earnings ahead of projections. While we’ve seen nicely improved trends through August and we saw a good start to the back-to-school season, sales didn’t achieve levels contemplated in our previous guidance. With these current trends and in light of the current impact inflation is having on consumer discretionary spending we believe it’s prudent to take a more conservative approach to our back half outlook. We remain confident that our footwear-focused strategy has created a much more resilient and fundamentally stronger business that we believe is better positioned to successfully navigate more difficult market conditions and outperform in favorable economic backdrops.” 

Thomas A. George, Genesco’s chief financial officer, commented, “Our second quarter results were highlighted by solid revenue growth when compared to pre-pandemic levels as the top line grew 10 percent versus the same period in Fiscal 2020 despite having 5 percent fewer stores. With gross margin in line with our expectations combined with the work we’ve done reshaping and reducing our cost structure, we more than doubled operating income, which along with $176 million in share repurchases over the past three years, allowed us to achieve adjusted EPS of $0.59 this quarter compared to $0.15 in the second quarter of Fiscal 2020. While we are pleased with the long-term direction of the business, the current operating environment has led us to take a more cautious approach to our guidance. We now expect adjusted earnings per share for Fiscal 2023 to range between $6.25 to $7.00. We believe somewhere close to the middle of the range is where we will land.”  

Second Quarter Review
Net sales for the second quarter of Fiscal 2023 decreased 4 percent to $535 million from $555 million in the second quarter of Fiscal 2022 and increased 10 percent from $487 million in the second quarter of Fiscal 2020, prior to the pandemic. The sales decrease compared to last year was driven by decreased comparable sales, as the company continued to anniversary the significant stimulus distributed a year ago, which especially benefitted Journeys Group, and by foreign exchange pressure on the Schuh business from the strengthening dollar, partially offset by increased sales in the wholesale channel. Excluding the impact of lower exchange rates, net sales decreased by 1 percent for the second quarter of Fiscal 2023 compared to the second quarter of Fiscal 2022. As a result of store closures during Fiscal 2021 in response to the pandemic and the company’s policy of removing any store closed for seven consecutive days from comparable sales, the company has not included second quarter comparable sales for Fiscal 2022, except for comparable direct sales, as it believes that overall sales was a more meaningful metric for that period.

By concept, total Genesco comparable sales comparable-store sales were down 2  percent, dragged down by a 8 percent decline at Journeys. Comps grew 9 percent at Schuh Group and 17 percent at Johnston & Murphy Group.

Overall sales for the second quarter this year compared to the second quarter of Fiscal 2022 were down 7 percent at Journeys, down 4 percent at Schuh and down 10 percent at Licensed Brands as we repositioned the distribution mix, partially offset by a 22 percent increase in sales at Johnston & Murphy. On a constant currency basis, Schuh sales were up 9 percent for the second quarter this year.

Second quarter gross margin this year was 47.5 percent, down 160 basis points compared with 49.1 percent last year and down 110 basis points compared with 48.6 percent in Fiscal 2020. The decrease as a percentage of sales as compared to Fiscal 2022 is due primarily to increased markdowns in the Journeys business as they returned to a more normalized promotional environment and higher freight and logistics costs in the Johnston & Murphy business. Additionally, the company had the reversal of inventory reserves in the second quarter of last year at Johnston & Murphy as the brand began to recover from the pandemic making for a difficult comparison this year.

Selling and administrative expenses for the second quarter this year increased 30 basis points as a percentage of sales compared with last year but decreased by 180 basis points compared with Fiscal 2020. Adjusted selling and administrative expense for the second quarter this year increased 30 basis points as a percentage of sales compared with last year but decreased 200 basis points compared with Fiscal 2020. The increase as compared to Fiscal 2022 is due in large part to one-time benefits for rent credits and government relief in the second quarter of Fiscal 2022. Excluding these one-time benefits last year, decreased performance-based compensation expenses more than offset the deleverage in selling salaries and marketing expenses.

Genesco’s GAAP operating income for the second quarter was $9.1 million, or 1.7 percent of sales this year, compared with $12.9 million, or 2.3 percent of sales in the second quarter last year, and $3.0 million, or 0.6 percent of sales in the second quarter of Fiscal 2020. Adjusted for the Excluded Items in all periods, operating income for the second quarter was $10.0 million this year compared to $21.1 million last year and $4.7 million in the second quarter of Fiscal 2020. Adjusted operating margin was 1.9 percent of sales in the second quarter of Fiscal 2023, 3.8 percent in the second quarter of last year, and 1.0 percent in the second quarter of Fiscal 2020. 

The effective tax rate for the quarter was 11.3 percent in Fiscal 2023 compared to 11.1 percent in the second quarter last year and 70.7 percent in the second quarter of Fiscal 2020. The adjusted tax rate, reflecting Excluded Items, was 19.5 percent in the second quarter of Fiscal 2023 compared to 25.1 percent in the second quarter of last year and 45.2 percent in the second quarter of Fiscal 2020. The lower adjusted tax rate for the second quarter this year as compared to the second quarter last year reflects a reduction in the effective tax rate the company expects for jurisdictions in which it is profitably combined with the impact of foreign activity for which it has historically been unable to recognize a tax benefit.

GAAP earnings from continuing operations were $7.7 million in the second quarter of Fiscal 2023, compared to $10.9 million in the second quarter last year and $0.8 million in the second quarter of Fiscal 2020.

Adjusted for the Excluded Items in all periods, second-quarter earnings from continuing operations were $7.7 million, or $0.59 per share, in Fiscal 2023, compared to $15.3 million, or $1.05 per share, in the second quarter of last year and $2.5 million, or $0.15 per share, in the second quarter of Fiscal 2020.

Cash, Borrowings and Inventory
Cash and cash equivalents at July 30, 2022, were $44.9 million, compared with $304.0 million at July 31, 2021. Total debt at the end of the second quarter of Fiscal 2023 was $48.9 million compared with $20.0 million at the end of last year’s second quarter. The $288 million decrease in net cash position over the past 12 months was driven primarily by replenishment of inventory totaling $150 million and significant share repurchases totaling $135 million. Inventories increased 55 percent in the second quarter of Fiscal 2023 on a year-over-year basis, as outsized stimulus demand and supply chain limitations resulted in extremely low inventory last year. Inventories increased 14 percent this year when compared to the second quarter of Fiscal 2020, prior to the pandemic, driven by late arriving Spring inventory, back-to-school product, core carryover product and vendor cost increases.

Capital Expenditures and Store Activity
For the second quarter, capital expenditures excluding the new corporate headquarters building were $9 million, related primarily to investments in retail stores and digital and omnichannel initiatives. Depreciation and amortization were $11 million. During the quarter, the company opened four stores and closed six stores. The company ended the quarter with 1,412 stores compared with 1,439 stores at the end of the second quarter last year, or a decrease of 2 percent. Square footage was down 2 percent on a year-over-year basis.

Share Repurchases
The company repurchased 826,034 shares during the second quarter of Fiscal 2023 at a cost of $45.4 million or an average of $54.99 per share. The company currently has $54.9 million remaining on its expanded share repurchase authorization announced in February 2022.

Fiscal 2023 Outlook
The company revises its Fiscal 2023 full-year guidance:

  • Sales are now expected to be down 3 percent to flat, compared to FY22, versus prior guidance of up 1 percent to 3 percent.
  • Adjusted diluted earnings per share from continuing operations in the range of $6.25 to $7.002, with an expectation that adjusted diluted earnings per share for the year will be near the mid-point of the range, versus the prior expectation for adjusted diluted earnings per share to be near the mid-point of $7.00 to $7.75.