Genesco Third Quarter Gets Lift from Weather to Offset Tough Back-to-School

On a conference call with analysts, company President and CEO Bob Dennis said that October showed good signs of continued consumer recovery but also indicated that November has been “weaker than expected thus far,” despite a bump from the Yankees’ World Series victory. Genesco's month-to-date comps were down 3% through November 21, a trend Dennis believes is due in part to “an unseasonable warm November” in much of the country. 

 

Dennis went on to note that the first three weeks of November historically represent only about 15% of total retail sales for the quarter for Genesco so the early weakness can be overcome.

Net sales for the third quarter were $389.8 million, essentially flat with the year-ago period.  Comp store sales were down 2% for the quarter.  When adjusting for one-time items in both years, earnings from continuing operations were $12.3 million, or 53 cents per diluted share, for the third quarter, compared to earnings from continuing operations of $9.5 million, or 43 cents per diluted share, for the third quarter last year.

Total gross margin for Genesco increased by 50 basis points to 51.3% compared to 50.8% last year, due primarily to lower margin reductions and an increase in initial mark-up.  Total SG&A was 45.7% of sales, down 30 basis points from 46.0% of sales in the year-ago period.
After seeing slight growth in inventories at the end of the second quarter, Genesco found it necessary to take a “somewhat more promotional” stance. 

 

At the end of the third quarter inventories were down 5% from last year's levels, even with additional inventory associated with the Impact Sports acquisition late last year. Excluding Impact Sports, inventories would have been down 7% at quarter-end.

Journeys Group sales dipped 1.2% in the third quarter to $198.4 million as overall comps declined 2% for the period versus a 5% gain in the year-ago quarter.  Comps for the first three weeks of November were down 7%.  Despite the sales decline, operating margin was up to 9.0% of sales from 8.4% last year, reflecting a 5.9% increase in operating profit to $17.9 million for the quarter. Gross margin for the Journeys group was up 70 basis points due primarily to lower margin reductions and lower shipping and warehouse costs.

Inventories for the Journeys Group ended the quarter down 4% compared to last year.

GCO expects to end the year with 1,024 stores in the Journeys Group.
In the Journeys stores, comp store sales were down 3% compared to a 4% increase in Q3 last year. Footwear unit comps decreased 1.0% and average selling prices decreased 1.5% in Q3 after posting a 1.8% increase in the second quarter.  GCO said the ASP decline was driven primarily by mix changes and higher markdowns in the athletic area during a more promotional back-to-school period.

Mr. Dennis said they continue to feel good about Journey's merchandise position as they head into holiday, especially in the boot category. He said they expect that canvas, women's fashion and core skate will continue to “perform well.”

GCO only opened one new Journey's store during the third quarter and did not close any stores. They have renewed or renegotiated leases on 64 stores year-to-date with an average decrease in occupancy costs of 10%.  Journeys remains on track to open 10 stores and close 8 stores to end the year with 818 stores, up from previous plan for 816 stores.

The Journey's Direct business was said to be “strong,” with sales up more than 8% for the quarter which management believes was driven both by more paid searches and by the retailer’s increased presence in social media through vehicles such as Facebook, Twitter and others.
Journeys Kidz store comps increased 3% in the quarter versus an 8% increase in Q3 last year, a sharp departure from the 13% comp sales decrease in the second quarter this year. Footwear unit comps increased 0.4% and ASPs increased 2.7%.  The reversal of fortunes here may be due in large part to a focus as a kids destination for UGG boots as boots were described as “very strong” for the period.

GCO did not open or close any new Journey Kidz stores during the quarter and expects to end the year with 150 stores in operation after opening nine new stores for the year.

Shi by Journeys comps in the third quarter were down 3% compared to a 6% increase in Q3 last year.  Footwear unit comps were down 12.3% for the period and footwear ASPs were up 9% on a comp basis as GCO continues to increase the selection of athletic product in the stores. Athletic represented 27.5% of total footwear sales for Q3 compared to 25.3% in Q3 last year.

GCO currently has 55 Shi stores in operation and plans to end the year with 56 stores having opened one new store this year, but they have no plans to further expand Shi until they “see more sales momentum.”
Hat World sales were up 13.5% to $105.7 million for the third quarter, but were up 4% excluding the addition of the Impact Sports team dealer business acquired since last year’s third quarter. Comps were up 1% during the quarter versus a comp increase of 2% for the same period last year despite a World Series that shifted back by one week and ended in Q4 this year versus Q3 last year.

The positive offsetting factor in the quarter was said to be that the sales of Yankees product, even before they won the series, contributed to a net gain in the quarter of roughly one point of comp versus the Philly's victory last year.  Hat World has already seen more benefit from the World Series in the fourth quarter compared to the third quarter, with quarter-to-date comps up 4% through November 21.  Dennis said they expect Yankees product to “provide a boost throughout Q4.”
Hat World had a 4.3% increase in operating income to $7.0 million despite modest comps which was the result of solid expansion of gross margin. Hat World's gross margin was down about 260 basis points due to the lower gross margin from Impact Sports a wholesale business. Excluding Impact Sports, Hat World's retail gross margin would have been up for the quarter.

In November, Genesco, Inc. acquired Sports Fanatic, a Florida-based retailer of licensed apparel, accessories and novelties with 37 stores in seven states. The stores average about 3,000 square feet and the retailer generated about $29 million in sales for its 12 months ended in September. Sales per store are about $800,000 and consist of a very broad mix of fan-based licensed merchandise, giving Hat World a broader mix instead of just headwear.

Dennis said they made the acquisition for its strong strategic position, its synergies with Hat World and its solid growth prospects.  He called the retailer “one of the best regional chains out there” which came with a great team that has deep knowledge and experience in the category. He said they were “nicely profitable on their own even in this economy.”  Dennis said the synergies upside will come from adding a replenishment system for the Sports Fanatic stores and will add embroidery and an e-commerce platform.

Additional acquisitions will be rolled into the mix here.  Dennis said GCO has already identified six to seven chains representing roughly 300 stores in this niche and said there are “many more smaller chains and pure mom and pops.”

Hat World's Direct business increased 9% for the quarter.

GCO opened a total of 10 new Hat World stores and closed nine in Q3. They expect to end this year with 889 Hat World stores, including 60 stores in Canada after opening 38 new stores and closing 35 during the year. Hat World also just opened its second Lids flagship store in New York City on Broadway and 33rd street, which Dennis said is doing “extremely well with, of course, help from the Yankees.” He said they also recently had strong openings for their first two stores in French speaking Canada.        

 

Underground Station Group sales were down 9.6% to $21.9 million for the quarter as comps decreased 6% in the quarter compared to positive 1% last year and a 19% decrease in the second quarter this year.  Footwear unit comps decreased 1.3% for the third quarter and ASPs declined 3.7%.  Comps for the three-week November month-to-date period were down 9%.

Underground Station's gross margin was also up about 110 basis points, due primarily to higher initial mark-up.  The Group’s operating loss improved 16.7% for the third quarter to a loss of $1.9 million.
GCO will not open any Underground Station stores this year and expect that store count for the Underground Station Group will be down to 169 stores by year end after closing 10 Underground Station stores. GCO has reduced occupancy expenses by an average 32% for renewals or renegotiated leases on 30 stores year-to-date.

Genesco opened a total of 13 stores in the quarter and closed 12, ending the quarter with 2,243 stores compared with 2,228 stores last year. This represented a net new store increase of 15 stores or a 1% year-over-year increase while total square footage increased 1.7% to 3.2 million square feet.

GCO expects capital expenditures for fiscal 2010 to be in the $42 million range, based on opening 66 new stores this year, or a net increase of 2%, to end the year with a total of 2,281 stores at year-end.  Retail square footage is expected to increase about 5% by year-end.  Excluding the Sports Fanatic acquisition, GCO estimates square footage would have increased by 1.5%.

GCO will spend about $19 million on previously announced acquisitions this fiscal year.

Looking ahead, GCO now expects fourth quarter comps to be “flat to slightly positive” as easier comparisons versus Q4 last year offset some of the early weather-influenced declines.

Genesco’s Q3 comps last year were up 2% while the fourth quarter was down 5% for the last two Q4 periods. Fourth quarter earnings are estimated in the $1.07 to $1.13 range.  Dennis indicated that the second half has historically generated approximately 60% of GCO’s total sales and 70% of total operating income for the year.

Based on the fourth quarter sales and earnings expectations, plus the better-than-expected Q3 and the addition of the Sports Fanatic business, GCO now expect EPS in the range of $1.78 to $1.84 for the fiscal year through January.

For next year, GCO will be planning for only modest store growth no greater than this past year, modest comps of low-single digits, and 60 to 70 new stores, but continued improvement in expense control, especially on rents due to GCO expectations that mall occupancy will continue to be down. Early estimates see earnings for fiscal 2011 of $2.00 to $2.10 per share.

Genesco indicated that its financial position remains strong, with no bank debt at the end of the third quarter, compared to $50 million last year and $32 million at year-end. Total debt at quarter-end, including the convertible notes, was down about $101 million on a year-over-year basis, and the company finished the quarter with $24 million in cash.