Speaking at the Baird Global Consumer, Technology & Services Conference, Bob Dennis, chairman, president and CEO of Genesco, the parent of Journeys and Lids, said he expects the company will be operating “significantly fewer” stores over the next five years due to continuing declines in mall traffic.
“Our strategy is to close stores only when we can no longer make money,” said Dennis at a presentation Tuesday in New York City.
The company operates 2,750 retail stores and leased departments throughout the U.S., Canada and the U.K. also under the Schuh, Little Burgundy, Locker Room by Lids, Lids Clubhouse and Johnston & Murphy names.
Dennis said the company lowered its guidance for the year when it reported first-quarter results, in part due to worse-than-expected declines in mall traffic for the year. On May 25, Genesco said it now expected adjusted diluted EPS for the year to arrive in the range of $3.90 to $4.05, compared to its previously issued guidance range of $4.40 to $4.55.
In the first quarter, store comps were down 4 percent as mall traffic was “down more than we expected and really more than we had seen in the past.”
Dennis said that the company saw a “bigger pickup” than expected in digital, up 28 percent in the quarter, but that didn’t offset the weaker store sales. He also noted that “every dollar that leaves the store and goes to e-commerce is dilutive to earnings because there’s more variable costs with an incremental digital sale.”
Dennis said traffic has been declining over the last four or five quarters “across the board.” While the c-malls had been feeling much of the drag in traffic early one, the a-malls “seem to be failing us now” as well. He said, “What we’re looking at is traffic is down across the mall until you get to the very, very lowest level, where it’s more severe.”
To combat the reduced traffic, Genesco will initially focus on closing stores that can’t be supported with lower rent. The company will also be working aggressively with landlords to “get rents in line” with traffic patterns. Half of its fleet is coming up for lease renewals over next three years.
Dennis said that despite the particular pressure on c-malls, it’s just as likely that Genesco will close a store in an a-mall because it all depends on the cost structure. He also noted that many c-mall landlords “have been very active with us” and the company has worked out “huge reductions” in rent in some cases.
On the positive side, Dennis noted that Genesco will likely gain a comp opportunity whenever a mall or store closes. He noted that when a flood closed the Opry Mills shopping center in Nashville, all four nearby stores saw comps climb and he expects a similar benefit as retail stores close overall. Said Dennis, “Overall, that will be a very healthy outcome for us.”
To drive traffic, the Journeys chain will be further investing in its catalog, which continues to resonate with teens despite their mobile obsession and features a coupon redemption. Journeys will also be reaching out to its customer digitally to help drive them to stores and recently has been working with “high-profile teenage bloggers” to drive social media traffic. Journeys.com has also been enhanced to enable browsers a “seamless and easy way to share” favorite items online with friends to also expand the brand’s social reach.
Lids will also focus on driving social chatter. A “Listening Room” at Lids headquarters ensures Lids is involved in trending sports conversations, with the latest one being the surprising success of the Nashville Predators.
Genesco also expects the Journeys chain to start benefiting from a sharp “fashion rotation” around the time of back-to-school selling last year at the Journeys chain into retro athletic styles. Dennis said Journeys “had not anticipating the severity of the shift.” Journeys has brought $40 million new inventory and the mix is “pretty much where we need to be. Comps at Journeys are expected to start improving in late June and early July when it starts anniversarying steep declines in the year-ago months.
Dennis also said Journeys is not seeing similar weakness on the athletics side as those cited by other mall chains in the “athletic” space. Foot Locker had said sales of Adidas Superstar, Stan Smiths as well as signature basketball have been slowing down.
Mimi Vaughn, SVP, finance and CFO, also said its vendor partners are viewing Journeys as “the place for lifestyle” and is providing the chain with product to help its mix differentiate from mall competitors.
Lids, which saw its business pickup starting in the fourth quarter, remains in “restructuring mode” with its Locker Room stores and its Macy’s partnership not performing up to targeted levels. Dennis said he nonetheless remains “very enthusiastic about where we’re headed with” Lids with a new management team “jelled and ready to take it to next level.”
Dennis also said Lids only has one major competitor, Fanatics, which is only focused online and particular addresses the “displaced fan” that he estimates represents 30 percent of all buyers of fan apparel. He added, “Store based retailing in the licensed sports space we think is very important as do the leagues and teams.”
The company also said it continues to stick its five-year plan announced last year despite the lowered guidance due to an expected bounce-back in sales at Journeys and double-digit growth digitally.
Vaughn also noted that while Genesco has made a number of acquisitions, including Lids, Schuh and Little Burgundy, in the past, but acquisition prices are trading in the high-single to low double-digit multiple range and Genesco’s stocks is “significantly below that.” As a result, any cash would likely be used for stock buybacks or investments such as one this year on Journey’s distribution center.
Photo courtesy Journeys
