With margins coming in better than expected and led by a profitability turnaround at Lids, Genesco Inc. reported fourth-quarter earnings that were slightly down but well above its internal guidance.
In the quarter, earnings excluding a number of non-recurring items eased 8.7 percent to $41.8 million, or $2.15 per share.
In early January, Genesco said it expected EPS to hit the high end of its guidance calling for earnings between $1.62 to $1.81 due to better comps and gross margins at both Lids and Schuh, as well as less negative comps at Journeys in December versus expectations.
But results easily topped its guidance as the company’s “markdown and other assumptions proved to be conservative and we benefited from a number of favorable items at year-end, like foreign exchange pickups and shipping rebates,” said Mimi Vaughn, CFO, on a conference call with analysts. Wall Street’s consensus estimate had been $1.78.
Shares of Genesco rose Friday by $4.90, or 8.7 percent, to $61.30 on the New York Stock Exchange.
The latest quarter included a pre-tax gain of $12.3 million from the sale of SureGrip Footwear that was partially offset by asset impairment charges, pension settlement expenses and other items. The year-ago period included a gain on the sale of Lids Team Sports that was also offset by asset impairment charges and network intrusion expenses. Including non-recurring items, net earnings in the quarter rose slightly to $46.8 million, or $2.40 per share, compared to $45 million, or $2.07, a year ago.
Net sales for the quarter decreased 5.3 percent to $883.2 million due to the sale of the Lids Team Sports business in the fourth quarter of last year and a decrease of approximately 2 percent in sales from its remaining businesses.
Consolidated comparable sales, including same-store sales and comparable e-commerce and catalog sales, were flat. Comparable sales for the company reflected a 2 percent decrease in same-store sales and a 12 percent increase in e-commerce sales.
Among its segments, Journeys Group’s sales slid 3.1 percent to $391.1 million. Combined comps decreased 6 percent compared to a 5 percent increase last year.
On the call, Bob Dennis, chairman, president and CEO of Genesco, said that following two consecutive years of record sales and peak profitability, Journeys’ results last year were challenged by an “intense fashion rotation” that began at the start of back-to-school season.
“We know that every two to four years that Journeys’ teen customer is ready for something different and embraces a new fashion direction,” said Dennis. “While Journeys had to deftly manage this shift before through several cycles including grunge, urban, and skate, among others, the sharp turn this time was exacerbated by our unusually concentrated positions in a small number of brands.”
He said Journeys made good progress adjusting its assortment at the beginning of this year to better reflect current consumer demand, but faces tough comparisons until it anniversaries the negative comps from last summer. Added Dennis, “Simply put, the declining part of the assortment has to level off or at least slow its decline before the rapidly growing part of the assortment can overtake it.”
Gross margin for the Journeys Group decreased 190 basis points in the quarter, due primarily to higher markdowns and lower initial margin due to changes in product mix. Journeys Group’s SG&A expense increased 220 basis points as a percent of sales, reflecting increased store-related expenses, primarily increases in rent and advertising expenses and higher credit card charges. The group’s operating income sunk 32.8 percent to $36.1 million.
At Lids Sports Group, sales in the quarter fell 7 percent to $278.9 million due to the sale of Lids Team Sports, its team dealer division. Sales of Lids’ remaining retail businesses increased 5 percent. Comparable sales, including both same store and comparable direct sales, grew 8 percent compared to 3 percent last year.
Lids Sports Group’s gross margins expanded 680 basis points with just over one-third of the improvement due to the sale of Lids Team Sports, which had lower margins. The remaining improvement was due primarily to decreased promotional activity, and to a lesser extent decreased shipping and warehouse expense. SG&A expense as a percent of sales increased 280 basis points due in part to the sale of Lids Team Sports, which had lower SG&A expense. The remaining Lids retail businesses were unable to leverage SG&A expense, primarily due to increased selling salaries and bonus expense. Lids’ operating income doubled to $20.2 million from $10.1 million.
Dennis said Lids Sports Group is benefiting from multiple steps taken to improve its profitability as well as the tailwind from the Chicago Cubs’ first World Series win that resulted in a “large pick up” in Q4.
“With inventories nearly right sized, several new merchandising practices implemented, direct capabilities expanded and a strong leadership team in place, we are poised to better reap the benefits of Lids’ positioning as the leading omni-channel retailer of licensed sports merchandise,” said Dennis. With operating income improving $25 million overall in 2016 at Lids Sports Group, “we began the process of recapturing the operating margin we’ve given up in the last few years and we’ll build on that success going forward.”
Among its other segments, the U.K.-based Schuh Group’s revenues declined 9.9 percent to $110.2 million with foreign currency headwinds accounting for the drop. Total comparable sales increased 2 percent compared to a 2 percent decrease last year. Operating income improved 3.3 percent to $10.9 million as margins benefited from less promotional activity and changes in mix.
Johnston & Murphy Group’s sales were up 1.2 percent to $82 million. Combined comparable sales decreased 1 percent compared to a 6 percent increase last year. Operating income slid 7.2 percent to $7.7 million.
At its Licensed Brands segment, revenues were off 16 percent to $20.7 million due to the sale of SureGrip. The segment, which also includes Dockers Footwear and G. H. Bass Footwear, showed an operating loss of $200,000 against operating income of $1.7 million a year ago. Besides the sales decline, the loss reflects lower initial margins, increased closeouts and increased shipping and warehouse expense.
Besides the net sales decline, the lower earnings on an adjusted basis reflects an increase in SG&A expense to 39.7 percent of sales compared to 37.4 percent last year, with higher expenses across all its business segments.
Fourth-quarter gross margin improved to 47.3 percent compared with 45.4 percent last year, primarily due to higher gross margin in Lids Sports Group, reflecting a lower level of promotions in the retail business and the sale of Lids Team Sports, higher gross margin in Schuh Group, and to a lesser extent in Johnston & Murphy Group, partially offset by decreased gross margin in the other businesses.
For the year, adjusted earnings slumped 11.6 percent to $87.2 million, or $4.33 per share. Including special items, earnings reached $97.9 million, or $4.85 per share, versus $95.4 million, or $4.15, a year ago. Sales were down 5.1 percent to $2.9 billion due to the sale of the Lids Team Sports business. Its remaining businesses saw a decline of less than 1 percent.
Looking to 2017, the year “is off to a sluggish start, which was expected with the IRS delaying close to $68 billion at its peak of income tax refunds compared with February a year ago,” said Dennis. Journeys and Lids are impacted in particular by delays in tax refunds.
“Comp trends improved significantly when the IRS started catching up and the refunds injected a higher level of spending into the economy,” said Dennis. “However, like any scenario when sales are pushed out, there is a degree of uncertainty as to whether we will make it all up. And this, combined with our outlook that it will take a little longer to get to the other side of the Journeys fashion rotation, plus some uncertainty with the direction of the overall retail economy causes us to be cautious about the current year, particularly in the first quarter.”
For the year, Genesco pegs earnings in the range of $4.40 to $4.55, which compares to adjusted earnings of $4.33. The guidance does not include expected non-cash asset impairments and other charges, estimated in the range of $5.8 million to $6.8 million pretax, or 22 to 26 cents per share after tax, for the full fiscal year. The guidance assumes comp increases in the 2 percent to 3 percent range for the full year.
While it typically doesn’t provide guidance by quarter, Vaughn noted that earnings in the first quarter are expected to be “substantially less” this year due to a negative comp at Journeys, gross margin pressure at Lids and Journeys, and timing of an elevated level of spending at Lids to fund initiatives “that payback later in the year and beyond, but hurts earnings in this smaller quarter of sales.”
Photo courtesy Lids
