In its first update of its five-year plan since 2006, Genesco Inc. disclosed that it expects store growth to slow down over the next few years but also expects robust bottom line growth.
Overall, top-line growth is expected to rise 8% to 10% annually to reach $2.2 billion in FY2013. Operating margins are expected to rise to 8.5% to 9.0% over the next five years versus 5.5% in 2007, and EPS is expected to grow 15% to 20% per year.
Regarding the slowdown in store growth, Robert J. Dennis, Genesco’s president and CEO, said at Thomas Weisel’s consumer conference that the slower store expansion in the current year partly stemmed from a decision to decrease store openings after its planned merger with The Finish Line.
The merger, which was not consummated, would have created a highly-leveraged company. After the deal fell through, the fewer store openings wound up being a smart move as the economy weakened, according to Dennis.
Going forward, the slow down reflects the fact that many of the newer shopping centers are open-air lifestyle centers, which “doesnt work for us as well as for a lot of other concepts.” But an overall slow down in shopping center building is also expected to impact expansion opportunities for Genesco.
“We think this slowdown in the development community is not a one year thing,” said Dennis. “We think this is a multiyear problem. We dont see the developers coming up with the next new mousetrap in terms of the kind of developments that are going to support us too. So were pretty modest about what we think our growth will be. Were also modest because we dont want to be the next Starbucks that has built out beyond what a store concept can support. So wed rather be a little cautious as we roll out and make sure that we continue to be productive.”
Genesco now contemplates new store openings “in the low hundreds” similar to the 124 that are being opened this year, which compares to the opening of 229 stores in 2007 and 225 in 2006.
Dennis also said Genesco will focus more on build out costs than in the past due to a shift in power from the shopping mall to the retailer. “As we walk away from a deal, the deal comes back much improved,” said Dennis. Except for “A++ malls, we should have more flexibility in holding our rent growth down,” added Dennis.
Regarding overall gross margins, cost pressures are expected from China but Dennis expects they will be offset by price increases. Overall, he anticipates that the stores will likely see average selling prices rising faster than unit sales over the next five years. “That would actually be okay with us, particularly at the Journeys chain where we are capacity constrained,” he said.
Journeys Group is expected to see modest same-store growth on a low-double-digit operating margin.
Overall sales are expected to rise 60% to $1.1 billion by FY2013. The store base is expected to grow 30% to 1,260 stores. Square footage is expected to expand 38% as many Journeys locations, which Dennis described as “capacity constrained,” seek bigger locations. But much of the store growth will come from Journeys Kidz and Shi by Journeys. The Journeys chain is expected to add slightly more than 100 stores over the next five years, a much slower pace than in recent years.
Hat World is expected to see low-single-digit comp growth and low-double-digit operating margins as it reaches $550 million in revenues by FY2013 on 1,100 stores. Square footage is expected to rise a bit faster, at 30%, as the concept seeks larger stores to accommodate its successful embroidery business.
Underground Station is not expected to add any stores, but is expected to undergo a turnaround. Overall sales are expected to expand 30% over the five-year period on mid-single-digit operating margins.
Johnston & Murphy is expected to see sales increase to $265 million due to the expansion of the new women’s concept and its new apparel collection. Dockers’s revenues are expected to grow 24% to $114 million.
Looking at its balance sheet, Dennis said Genesco expects to generate $275 million in excess cash by FY2013. The cash may fund new brand extensions such as Journeys Kidz or Shi, niche acquisitions such as Hat World, or stock buybacks. Genesco hadnt given a five-year outlook in two years. Last year’s was scrapped because of the companys failed merger with The Finish Line.
In the question & answer session, Dennis was asked about how the company was able to achieve strong comps in the first half, including a 4% overall Q2 comp, as well as for the rest of the year despite the tough macro-environment. Dennis said the strong comp trend partly reflects weak year-ago comparisons. The Journeys chain saw negative comps in the back half of last year as the Heelys brand was expanded to other channels at lower prices. Hat World was also hurt last year by a shift in trends away from hip-hop fashion to action brands.
But Dennis also said skate remains a “very strong category” for Journeys. “We are the destination within the mall for skate and that continues to resonate with our teen customer.”
He also noted that Journeys was able to increase ASPs in the second quarter for the first time in more than five or six years. “What were seeing is kids are chasing fashion,” said Dennis. The gain also reflects that fact that some skate vendors had “modestly raised prices and the customer has gone with that.”
