Genesco Inc. reported adjusted earnings fell slightly due to operating earnings slides at Journeys, Lids and Schuch. Although earnings came in line with expectations and better than Wall Street’s targets, Genesco slightly lowered its full-year outlook due to a slower-than-anticipated start to the holiday selling season.
On a conference call with analysts, Bob Dennis, chairman, president and CEO, noted that comps so far in the fourth quarter were flat through last Tuesday, slightly below expectations. Dennis also noted that it’s “unusually tricky” this year to analyze and forecast the fourth quarter given the shift of Thanksgiving, early start to the Black Friday weekend, and a retail promotional environment that encouraged holiday buying before Thanksgiving’s arrival.
“Thus far, the competitive environment in the US has been reasonable in our market categories,” said Dennis. “But because of the short holiday selling season, we recognize that the promotional atmosphere could easily change, adding to the uncertainty.”
In the third quarter, adjusted earnings slid 2.0 percent to $33.8 million, or $1.43 a share, exceeding Wall Street’s consensus estimate of $1.38.
Net earnings in the latest quarter reflected pretax items of $8.5 million, or 25 cents per share after tax, including expenses related to the change in accounting for deferred bonuses, deferred purchase price payments in connection with its acquisition of Schuh Group Limited, and network intrusion expenses, asset impairment charges and other legal matters. The year-ago period included net pretax charges of $1.5 million, or 8 cents per share after tax, due to a change in accounting for deferred bonuses,
Net sales for the quarter increased 0.3 percent to $666.3 million. Comp-store sales slid 1 percent, which was an improvement from minus 4 percent in the first quarter and minus 2 percent in the second quarter. Easier comparisons through the period of Hurricane Sandy last year and a favorable lineup of teams in baseball playoffs and World Series accounted for part of the improvement.
Dennis said comps for the quarter were again strongest in the direct channel with e-commerce and catalog sales up 8 percent on top of a 9 percent gain in its 2012 third quarter, benefiting from omnichannel investments.
At Journeys Group, revenues in the quarter declined 6.5 percent to $281.1 million with comps down 2 percent. Comps were positive in October with some benefit from the Sandy comparison and are flat for the fourth quarter to date. Said Dennis, “We continue to see a general mix shift from athletic to casual in our sales trend. Given the significant seasonal emphasis in casual during Q4, which reflects our buy plan, we feel good about our overall assortment for the remainder of the holiday season.”
Journeys Kidz comps were flat for the quarter going against a strong 12 percent last year and fourth quarter to date comps were plus 2 percent. Dennis said the Kidz has particularly benefited from the shift to casual footwear and management remains “excited” by Journeys Kidz expansion potential. Operating income at Journeys Group declined 16.1 percent to $32.3 million.
Lids Sports Group’s revenues grew 7.2 percent in the quarter to $199.2 million. Operating profit fell 33.6 percent to $12.0 million.
Comps increased 5 percent in the quarter coming on top of a 5 percent comp decline a year ago, better than planned. For the quarter to date through Tuesday, comps for the group increased 2 percent. The fourth quarter for Lids faces particularly easy comparisons against a 10 percent decline a year earlier.
In addition to a favorable lineup of baseball teams for the MLB playoffs, comps at its Locker Room and Clubhouse stores continue to outpace its Hat stores and were up double digits driven in part by increased demand for NFL licensed apparel. The license transition from Reebok to Nike last year hurt last year's third and fourth quarters due to delivery issues.
Dennis the performance of these larger format stores, which represent the primary growth vehicle for the Lids Sports Group over the next several years, are validating its focus on merchandise localization and adding customization capabilities to differentiate the stores. Said Dennis, “We believe we have broken the code for operating these stores successfully particularly with regard to the merchandise mix, promotional cadence and an effective staffing model.”
Lids hat stores comps improved over recent quarters due to in part to stabilization in the snapback category following the anniversary of price reductions taken September 2012 in order to be more competitive with the wider distribution of the category. Dennis said the snapback trend has lasted longer than Lids expected but signs are being seen of a gradual shift back toward the core fitted category, the sweet spot of the Lids chain.
Snapback comps in the Lids stores declined 6 percent for the quarter. Snapbacks represented about 17 percent of its comp sales in the quarter, down from about 19 percent in last year's third quarter, but only represented 11 percent of its hat inventory at quarter-end
The first 26 Locker Room by Lids departments rolled out in Macy’s in the quarter on schedule and on budget, mostly in major NFL markets. Another 175 departments are expected to open next year. Dennis said that “while it is too early to draw any conclusions based on performance, we remain excited about the potential of this partnership as it provides access to Macy's large and loyal consumer base both in stores and on Macys.com where we have been up and running for about three weeks.”
Lids.com saw an improved conversion rate and an increase in the average number of items per transaction to drive “exceptional growth.” Lids entire inventory is scheduled to be available online early next year to further support growth.
At Schuh, the U.K. teen footwear chain, sales were essentially flat at $92.6 million versus $92.3 million. Comps were down 10 percent, largely due to sluggish traffic and challenges against a 9 percent comp increase a year ago. Operating earnings were down 46.0 percent to $1.95 million. Dennis said Schuh has “remained under pressure from a combination of tough comparisons, a footwear market that currently lacks a must-have fashion trend and a marketplace that descended more deeply than the US into price-based competition.”
Schuh will end this year with 95 permanent stores, up from 79 a year ago, with another 13 set to open in 2014.
At Johnston & Murphy Group, revenues were up 16.2 percent to $61.7 million; operating earnings climbed 53.5 percent to $4.8 million. In its Licensed Brands segment, which includes Dockers footwear, sales slid 2.5 percent to $31.6 million; operating earnings rose to $4.1 million from $3.7 million.
Companywide gross margins in the quarter were 49.8 percent compared with last year's gross margin of 50.3 percent.
Looking ahead, comps in the fourth quarter are now expected to be up 1 to 2 percent, down from a prior expectation of 3 percent to 4 percent. Comps were down 2 percent in the 2012 fourth quarter. Fourth-quarter earnings are now expected to range from $2.17 to $2.27 a share, still above $2.16 last year.
EPS for the year share is projected to be in the range of $5.10 to $5.20, compared to $5.20 to $5.30 expected previously. When reporting its second quarter on Aug. 28, the retailer had slashed its guidance from $5.57 to $5.67 previously. In 2012, Genesco’s adjusted EPS was $5.06.
Dennis concluded that Genesco still expects to hit the targets of its recently-updated 5-year plan that calls for annual sales to hit $3.9 billion and operating margins to be approximately 9 percent to 9.5 percent by Fiscal 2018. Said Dennis, “On a longer-term basis, we continue to be optimistic about the potential of our business and our ability to generate increased value for our shareholders.”
