Boosted by a 9 percent comp gain at Journeys, Genesco Inc. reported its highest quarterly comparable sales increase in more than 2.5 years. Adjusted earnings were down due to the timing of expenses but easily topped Wall Street’s targets.
On a conference with analysts, Bob Dennis, chairman, president and CEO, said the ongoing strength of its U.S. footwear businesses again drove an acceleration in comparable sales on a sequential basis.
Comparable sales increased 4 percent, besting the 3 percent gain posted in the second quarter. After turning positive last quarter for the first time in two years, store comps were up 4 percent. Continuing its strong multiyear run, direct comps were up 9 percent, representing 11 percent of sales compared to 10 percent last year.
The gains were driven by Journeys and Johnston & Murphy. While still negative, Lids comps once again showed sequential improvement as the business continues its recovery from the double-digit decline it posted in last year’s fourth quarter., Schuh’s comps also rebounded, but remained under pressure from the challenging selling environment in the U.K. Said Dennis, “For both Lids and Schuh, additional promotional activity in Q3 generated positive consumer response driving incremental sales in gross margin dollars and keeping inventories clean.”
Revenues in the quarter ended November 3 reached $713.0 million, off 0.6 percent. The decline was due primarily to the calendar shift from last year’s 53rd week that moved a strong back-to-school week out of the third quarter and into the second.
Net earnings reached $14.4 million, or 74 cents a share, against a loss of $164.8 million, or $8.56, a year ago. The year-ago period included a write-off of $182.2 million, or $8.13 after-tax, related primarily to the sustained decline in the company’s market value to a level below book value.
Adjusted for exclude non-recurring items in both periods, earnings were down 5.1 percent to $18.7 million, or 95 cents, from $19.7 million, or $1.02, a year ago. Wall Street’s consensus estimate had been 86 cents.
Dennis said the company accrued significantly more bonus expense during the quarter than in the year ago period. In addition, a shift in the timing of catalog expenses due to new revenue recognition standards also drove expenses higher in the quarter. Excluding these two items, even with lower sales, operating income would have been “a little above” last year’s level, thanks to the cost saving measures implemented this year.
Gross margins were relatively flat at 49.5 percent compared with 49.4 percent last year.
SG&A expenses were 45.9 percent of sales, up 90 basis points. The increase was due to higher bonus accruals and the shift in timing of catalog expenses, partially offset by the leveraging of rents and several other expense categories.
GAAP operating income was $19.5 million this year compared with an operating loss of $152.4 million last year. Excluding non-recurring items, operating earnings were down 16.9 percent.
By concept, Journeys Group’s sales rose 3.7 percent to $345.7 million. The 9 percent comp gain compares to a 4 percent comp gain in the same period a year ago. Operating income at Journeys Group inched up 3.9 percent to $25.2 million.
Dennis said the strong momentum seen by Journeys in August continued through the end of the back-to-school season. He said, “The current product assortment which is diverse in terms of styles, brands and franchises within the fashion, athletic and casual categories, continues to resonate strongly with Journeys team customers. And as the weather turn colder, post back-to-school, boot sales picked up and helped deliver a strong finish to the quarter.”
He said both store and e-commerce comps were “nicely positive,” which led to a high single-digit total comp gain and a solid improvement in year-over-year profitability.
Added Dennis, “On the strength of boot sales, Journeys momentum had carried into the fourth quarter and the start of the holiday selling period against last year’s most challenging comp comparisons.”
Johnston & Murphy Group’s revenues were up 7.6 percent to $79.7 million. Comps jumped 10 percent – its highest quarterly increase in more than three years – against a 1 percent gain last year. Operating income reached $5.2 million, sliding 1.4 percent year over year.
Dennis said Johnston & Murphy is benefiting from a pivot from a dress footwear resource into a lifestyle brand that spans multiple categories. He added, “In fact, J&M’s sport casual assortment with a variety of uppers on athletic-inspired bottoms is currently what’s driving the double-digit growth of its footwear business.”
The strength at retail for Johnston & Murphy is offsetting weakness at wholesale. The lower profits reflect the shift in catalog expenses.
At Lids Sports Group, sales slid 4.5 percent to $173.2 million. Comps were down 2 percent compared to a 6 percent drop last year. Lids showed an operating loss of $388,000 in the period against earnings of $2.0 million a year ago.
Dennis noted that Lids’ comps continue to improve sequentially versus a 5 percent drop in the second quarter and a 7 percent slide in the first quarter but the five-game Red Sox World Series win over the Dodgers did not match the success of Houston’s seven-game win last year nor was the overall playoff lineup as beneficial to sales in 2018 as it was the previous season.
The NFL business improved, increasing “a bit over last year and Q4 sales have accelerated further as the season has advanced and exciting teams and players have strengthened the lineup.” The improvement has been driven by headwear, including the well-received debut of the NFL Logo Element series and more recently jersey sales. Said Dennis, “We are encouraged by this momentum and there is still significant opportunity for sales to grow before reaching historically higher levels.”
Lids’ hat business continues to struggle from a lack of store traffic. An increase in promotional activity helped revive some traffic but it came at the expense of margins. Said Dennis, “All-in-all, Lids’ business remains challenging. However, thanks to increased merchandise discounts, some of the hit to gross margin was mitigated and SG&A de-leverage on a negative comp wasn’t as pronounced as it would have been without store closings and aggressive efforts to manage costs.”
Dennis said headwear remains between trends and Lids is expected to see a strong rebound, like Journeys, once a new fashion driver emerges. Said Dennis, “Our long history with Lids hat store shows over more than a decade and a half store 4-wall profit in the teens during the fashion troughs and in the 20s at the peaks, which demonstrates great ability to cycle through trends successfully. History points to a rebound when headwear again becomes a fashion driver and it is a matter of time until that happens.”
Regarding its move to explore a sale of Lids that began earlier this year, Dennis said the company still has a “a reasonable prospect of accomplishing a sale” but it’s taking longer than anticipated. Added Dennis, “If we ultimately determined we are not able to complete a sale on acceptable terms, we will announce that decision. We do remain convinced of the potential of the core of the Lids business and therefore in the event we don’t sell, we will be immediately focused on the plan to realize that potential and significantly enhance profitability of the business.”
Schuh Group’s revenues were down 5.8 percent to $95.6 million. Same-store sales were off 4 percent against a year-ago gain of 4 percent. Operating earnings were down 40.4 percent to $4.2 million.
Like Lids, increased promotions at Schuh lifted the U.K. chain’s traffic at the expense of margins. Dennis also indicated that moves by certain vendors’ decisions to pursue a scarcity model, limiting supply of some top selling styles, continued to impact Schuh’s business. Dennis said fashion retailers continue to struggle in the U.K. amid an inflation pick up and drop in consumer confidence as Brexit progressed and a near-term turnaround isn’t expected.
Consolidated November comps picked up a little from Q3 levels with management pleased with the results over Black Friday weekend through Cyber Monday.
“Both our stores and e-commerce channels were up,” said Dennis. “The strength across our U.S. footwear and headwear brick-and-mortar locations in particular was noteworthy. Across the pond versus a very robust comparison from last year, Schuh’s Black Friday performance was disappointing. Against the backdrop of apparel and footwear discounting that has existed for several months in the UK, even bigger sale offerings were not enough to spur the consumer to purchase as much as we had hoped for.”
Inventories at the quarter’s close were down 5 percent on a sales decrease of 1 percent, not adjusting for foreign exchange. Journeys’ inventory was down 5 percent, J&M’s up 7 percent; Lids’ down 5 percent Schuh’s down 8 percent on a constant currency basis.
Looking ahead, Genesco narrowed its previously announced guidance range. The company now expects comparable sales to be up 2 percent to 3 percent versus up 1 percent to 3 percent previously. Adjusted EPS is projected in the range of $3.10 to $3.40 versus $3.05 to $3.45 previously. That compares to $3.13 in the prior year.
Image courtesy Genesco