Genesco Works through Choppy Second Quarter

In a conference call with analysts, Mr. Dennis reported that comps for the first month of the fiscal third quarter through August 24 were down 4% versus a 7% comp gain last year.  He described August last year as their “last strong trump month” as overall comps went negative in September through December.  He also suggested that the later Labor Day this year will move some comp sales from August into September, which gives them additional confidence in the current trends. 
Dennis said that the second half has historically generated approximately 55% of GCO’s total sales and 75% of total operating income for the year.

At quarter-end, year-over-year inventories were up 1.5% while inventories per square foot were flat. Dennis said they have found it necessary to become “somewhat more promotional” to keep inventories in line, especially in the Journeys Group, which affected gross margin during the quarter. He suggested the promotional posture will continue through back-to-school.

Genesco previously projected up to 73 new stores for this fiscal year, but now expects to open about 69 stores in total as they remain cautious with new store openings.  Year-to-date, GCO has closed 24 stores across all divisions.        

 

GCO saw net sales decrease 5.2% for the second quarter to $334.7 million as an 8% comp store sales decline more than offset any upside from new stores and the acquired Impact Sports business.  The company narrowed its net loss for the quarter to $2.7 million, or a loss of 12 cents per diluted share, compared to a net loss from continuing operations of $5.4 million, or a loss of 29 cents per diluted share, for the second quarter last year.

Journeys Group sales declined 7.7% in the second quarter to $148.6 million.  Comp store sales in the Journeys stores were down 9% compared to a 2% increase in Q2 last year. Footwear unit comps decreased 9.4% and average selling prices increased 1.8% to approximately $48 for the period, primarily driven by women's fashion, canvas and core skate.  In total, athletic was up slightly as a percent of overall sales. Dennis said Journeys saw softness in many key product categories.

Mr. Dennis said the chain has a strong assortment and depth in canvas and core skate as they head into back-to-school, but noted that a few vendors within these categories are becoming more widely distributed.  As a result, Journeys has adopted a “somewhat more promotional posture.”  He said their vendors have done a good job of staying fresh with existing trends, but no real breakout of new fashions has occurred.  However, he did suggest that the early read on boots for the fall and holiday season was “very encouraging.”

GCO opened three new Journeys stores in the second quarter and closed three stores. They remain on track to open 10 stores and close 10 stores to end the year with 816 stores.

Journeys Kidz store comps declined 13% in the quarter on top of a 2% decrease last year. Footwear unit comps fell 9.4% and ASPs decreased 4.4% for the quarter.  Dennis suggested that they see the kids business as more price-sensitive in this economy as moms choose to trade down, which also affected ASPs.

GCO opened three new Journeys Kidz stores during the quarter and expects to open 10 new stores in the back half to end the year with 151 stores in operation.

Shi by Journeys comps in the second quarter were down 10% compared to a 3% increase last year. The company continues to increase the selection of athletic product in the stores, which represented 27% of the total for the quarter compared to 21% last year. Footwear unit comps declined 15.1% for Q2, but footwear ASPs were up 5.5% on a comp basis as a result of more higher-priced athletic product and overall merchandise selection.  Dennis said they were encouraged with the early trends in their fall casual and boot categories.  

 

He suggested that it continues to be a difficult environment to develop new customers and, as a result, GCO will not be expanding the business until they have better visibility on a sustained positive comp trend.
GCO currently has 55 Shi by Journeys stores in operation and plans to open one new Shi store in fiscal 2010 to end the year with 56 stores.
Hat World comp store sales dipped 2% during the quarter versus a 7% increase for the same period last year, which was Hat World's most difficult quarterly comparison in fiscal 2009. Dennis said they have experienced “some headwinds” in their more urban stores, but have “achieved solid results in the rest of the business.” Comps in Hat World's urban stores fell 5% and comps in the non-urban stores declined less than 1% for the period.

Through August 24, Hat World's comps for the month were minus 1% versus plus 4% for the comparable period last year.  Branded and core Major League Baseball categories reportedly continue to be “very strong,” but NCAA and MLB fashion remained weaker.

GCO opened a total of eight new Hat World stores and closed five in the second quarter. They expect to open 40 new Hat World stores and close 32 stores to end the year with 893 stores. Hat World currently has embroidery capabilities in 404 stores. The category is up 15% year-over-year and black hats, which are driven primarily by embroidery, were reportedly up 3% for the year.  Both were said to be high gross margin businesses.  Dennis said the company’s goal is to have embroidery capabilities in 80% of the Hat World stores within four to five years.

Comparisons for Hat World get “significantly easier” in the back half of the year, according to Dennis.  He also pointed to a potential upside from key MLB teams “aligning nicely” for the playoffs with the Yankees, Red Sox, Dodgers and Tigers all in the running. He also sees upside in NFL this year after weaker sales last year.  Dennis also pointed to upside potential in their Canadian business, which “continues to perform very well.” 

Hat World will be opening three stores in Quebec in the third quarter.
For the acquired Impact Sports team dealer business, Genesco sees opportunities for consolidation due to the highly fragmented nature of the business and the technology and available efficiencies that make consolidation viable.  Dennis said they are investing right now in infrastructure to grow it to be an important business in the industry.  They think there are strong synergies with Hat World that further drives the logic of the initiative.

GCO sees Impact Sports as “basically a licensed athletic product sold to the youth market via a separate channel” that can benefit their systems and operations team that will assist in scaling it.  He also said there is a possibility for some retail outlets for clearance purposes.  Dennis said they continue to consider other possibilities of growth by acquisition in the team dealer market.

Underground Station Group comps fell 19% during the second quarter compared to a 9% comps increase in Q2 last year. Through August 24, comps for the month were down 13% versus a 14% increase in Q2 last year. Footwear unit comps for Q2 were down 14.2% and ASPs declined 3% for the quarter.

Women's and kids footwear made up about 45% of Underground Station's footwear unit sales and about 38% of its footwear dollar sales for the second quarter this year, compared to 43% and 39%, respectively, last year.  Canvas was said to be strong during the quarter, offset by weaker-than-expected results in women's athletic. Dennis said management continues to believe that the Underground target customer is being “disproportionately affected by the economy,” which has hurt results for the business.  However, he also said they feel good about their positioning in canvas, brown shoes and boots in general as they look to the back half of the year.  Management still expects Underground Station to be cash flow positive for the year.
GCO has closed nine Underground Station stores over the past 12 months, taking the total store count down to 176 at quarter-end. They have adjusted rents on 11 stores through kick-out extensions and co-tenancy violations, realizing an average decrease in occupancy cost of 36% for the stores.

GCO will not open any Underground Station stores this year and expect their store count for the Group to be down to 170 stores by year-end.
Total gross margin for Genesco, Inc. was down 50 basis points to 50.8% of net sales compared to 51.3% of net sales in Q2 last year, due primarily to higher markdowns. Gross margin for the Journeys Group was down 20 basis points as the company increased its promotional stance at Journeys to keep inventories in line.

Hat World's gross margin was down about 120 basis points, with most of the decrease coming from the recent acquisition of Impact Sports, a wholesale team dealer business with a lower gross margin. Underground Station's gross margin was down about 190 basis points due to higher markdowns. Gross margin for Johnston & Murphy was down about 250 basis points due in part to “a lower initial markdown due to mix and increased promotional activity to keep inventories in line.” Licensed brands' gross margin increased by 40 basis points due primarily to lower costs.

Looking ahead, GCO management remains “cautiously optimistic” about the second half of the year as sales comparisons continue to moderate throughout the period.  Last year, comps were positive 4% in the second quarter, positive 2% in the third quarter and negative 5% in the fourth quarter.  This year, GCO expects positive comps in the fourth quarter.

Based on the improved sales expectations, Genesco believes they should be able to achieve the previously announced forecast of earnings per share in the $1.70 to $1.80 range for the year.