Shares of Genesco Inc. were trading down $5.75, or 18.5 percent, to $25.35, after the company took a massive impairment charge to write-down the value of its Lids chain while also reducing its outlook for the year, again due to Lids.
The loss in the quarter came to $164.8 million, or $8.55 per share, compared to earnings from of $25.9 million, or $1.30, in the same period a year ago.
The latest quarter included a goodwill impairment charge of $182.2 million, or $8.13 per share after-tax, primarily because of the sustained decline of the company’s market value to a level below book value and underperformance relative to projected operating results, particularly in the Lids Sports Group. The impaired goodwill was created in connection with the company’s acquisition of Hat World in 2004 and several subsequent, smaller acquisitions, primarily in the Lids Locker Room licensed sports business.
On a conference call with analysts, Bob Dennis, CEO, said the charge was “driven entirely by our current market value and accounting standards and does not reflect any change in our assessment of Lids strategic position and long-term products.”
But Lids was the clear underperformer in the quarter.
Operationally overall, Dennis described the quarter as a “tale of two businesses.” He elaborated, “Journeys built on its momentum following its emergence from the recent fashion shift in its markets and posted a solid comp gain. Meanwhile Lids, after a challenging second quarter, faced a variety of additional challenges that meaningfully pressured its performance.”
He added that the “dramatic shift” in shopping behavior away from stores to digital continued across all of its divisions, although some bright spots were seen in both store traffic and store purchases during back-to-school in more than one of its concepts. The combination of these factors with gross margin headwinds in many of its banners, the deleverage resulting from negative store comps and higher expenses from its omnichannel initiatives led to earnings below last year’s level but slightly ahead of its internal forecasts.
Consolidated comparable sales increased 1 percent with stores down 2 percent and direct up 24 percent. Net sales inched up 0.8 percent to $717 million.
Excluding non-recurring items, adjusted earnings from continuing operations slumped 22.7 percent to $19.7 million, or $1.02, but above internal targets.
“We had expected it to be a difficult quarter given low levels of mall traffic, the more pronounced shift in shopping to online and the challenging facing Lids,” said Dennis. “Therefore we were pleased to see the strength in our teen and young adult fashion footwear businesses on both sides of the Atlantic.”
Both Journeys and Schuh carried strong back-to-school momentum from August into September.
“During back-to-school robust customer traffic in the store driven by must-have product propelled positive traffic increases year-over-year and store comps were positive in addition to e-commerce comps being extremely strong for both concepts,” said Dennis. “However, unseasonably warm weather impeded sales of seasonal product for both chains throughout October until cooler weather arrived for Journeys in the U.S. at the end of the month.”
As a result, Journeys comps improved on a sequential basis from positive 1 percent in Q2 to positive 4 percent in Q3. Journeys’ customers responded favorably in stores and online to new products and increasing quantities especially in “retro athletic and progressive athletic footwear.”
Comps gain were boosted by year-over-year increases in traffic and conversion and average ticket size, which was driven by higher-price fashion athletic product. Both footwear units and ASPs increased at Journeys
Dennis added, “Our current assortment is performing well and to our expectations. Importantly comps got even more positive as we move into Q4. Journeys has a much more balanced assortment now than in the previous fashion cycle and we expect to get a boost from colder weather footwear we sell this time of the year as well.”
In the U.K., Schuh maintained its consecutive positive comp streak as the business benefited from strong athletic trends. Comps were up 4 percent. Comps slowed in October as the warm weather discouraged demand for colder weather product. Continued warm weather also impacted November until a burst of activity on U.K. Black Friday drove comps into positive territory for the month.
Johnston & Murphy’s comps were down 1 percent but comps to-date in the fourth quarter “are in solidly positive territory” with the arrival of colder weather.
Lids “became even more challenged” following a difficult second quarter due to a number of factors facing the major sports leagues. First, the MLB playoff line-up – Yankees, Dodgers, Astros and Cubs – wasn’t as favorable for sales as last year’s line-up, “which included very strong games from the Cubs and the Toronto Blue Jays.” Baseball overall was down for the quarter.
NCAA sales were down due to less favorable performance by key schools. Added Dennis, “Finally and most importantly the well-publicized challenges facing the NFL have meaningfully dampened demand for NFL licensed merchandise during the heart of football season. This NFL impact was the single biggest factor weighing on Q3 sales.”
These challenges were exacerbated by the lack of a strong headwear trend to drive shoppers into its hat stores and drove double-digit store traffic declines and a comp of negative 6 percent, worse than anticipated. Store traffic was off to double-digits and conversion was down to leading to a negative 6 percent comp. On a positive note, Lids e-commerce sales continue to run up strong double-digit.
The fourth quarter has started off slow for Lids due to many of the same issues and the segment is also facing tough comparisons against a surge in Cubs merchandise sales last year after their World-Series win. Dennis added, “Moreover, price discounting has become intense and promotional activity has escalated especially online as competitors move to address inventories in response to the industry-wide sales weakness.”
For the fourth quarter to date, sales for its footwear business over Black Friday Weekend and Cyber Monday, accelerated over the third quarter, “and we are now more optimistic about Journeys’ fourth quarter prospects,” said Dennis. The gains continue to be led by e-commerce as store traffic remains challenging.
Lids sales are running below our expectations due to among other challenges, dampened demand for NFL licensed merchandise resulting from and disruption in our Canadian business from the NHL vendor transition.
Added Dennis, “While we anticipated a number of headwinds including Cubs and the lack of a major passion driver in headwear, the additional challenges are dampened demand were NFL license merchandise which is typically a big gift giving item in Q4 and then the ensuing promotional activity in the category that has already began. And two, disruptions from the NHL vendor transition which has been less than smooth for our Canadian businesses.”
As a result, Genesco now expects adjusted diluted EPS to range from $3.05 to $3.35 compared to its previous guidance range of $3.35 to $3.65. The guidance assumes comparable sales in the range of negative 1 percent to positive 1 percent range for the full year.
Said Dennis, “While we are very disappointed with the lowering guidance, we will take the actions necessary to end the year in a very clean inventory position.”
Photo courtesy Lids