Shares of Genesco Inc. lost $4.35, or 17.1 percent, to close at $21.15 on Thursday after the retailer axed its earnings guidance for the year due to sluggish overall mall traffic and weak sales trends at its Lids chain.
The company also announced a number of steps to reduce risks tied to its expansive store base while further expanding online.
For the year, earnings on an adjusted basis, which excludes cash asset impairments and other charges and certain tax effects, are now expected to arrive in the range of $3.35 to $3.65, compared to its previous range of $3.90 to $4.05. In the prior year, adjusted earnings were $4.33.
This guidance assumes comparable sales in the range of negative to positive 1 percent for the full year. The previous guidance had assumed comps would be flat to up 1 percent.
When it reported first-quarter results on May 25, Genesco had cut its guidance to the range of $3.90 to $4.05 from $4.40 to $4.55.
The lowered outlook came as Genesco reported second-quarter results that were slightly below expectations.
“The second quarter proved to be a bit more challenging than we expected with positive momentum from Journeys offset by increasing headwinds at Lids,” said Bob Dennis, chairman, president and CEO, on a conference call with analysts. “In addition, the consumer shift in shopping away from stores to digital continued at a faster pace and thus with a more pronounced impact on our results than we anticipated.”
In the quarter ended July 29, the company showed a loss of $3.9 million, or 20 cents a share, compared to earnings of $14.5 million, or 72 cents, for the same period a year ago. The latest year was impacted by new accounting guidelines for share-based payments while the year-ago benefited from a litigation settlement and a gain on the sale of Lids Team Sports to BSN Corp.
Excluding non-recurring items, the loss from continuing operations was $2 million, or 10 cents a share, down from earnings of $6.9 million, or 34 cents, the prior year. Wall Street was expecting a loss of 8 cents a share.
The latest quarter included 2-cents-a-share impact from a change in accounting for a software-as-a-service system implementation.
Sales in the quarter decreased 1.4 percent to $617 million. Without the sale in December of the SureGrip business and the impact of foreign exchange, revenue would have been flat.
Consolidated comparable sales, including same store sales and comparable e-commerce and catalog sales, were flat, at the low end of its guidance. Same-store sales slipped 2 percent while e-commerce revenues jumped 30 percent with strong double-digit comps in almost every business.
Said Dennis, “The flat comp pressured profitability in what is typically our lowest volume quarter as our teen customer gets out of school and customers in general turn their attention to summer activities rather than shopping. The buy-now-wear-now mindset for our teen shoppers has also shifted back-to-school later, which means out of July and the end of the second quarter and into August and September.”
By concept, Journeys Group’s sales improved 2.7 percent to $259 million. The segment showed a loss of $2.2 million against operating earnings of $4.5 million in the same period a year ago.
Same-store sales turned positive, up 1 percent, after dropping 5 percent in the first quarter. Traffic improved and average ticket increased as Journeys sold higher priced fashion athletic products through the summer and beginning of back-to-school.
“The Journeys team has adjusted its assortment in response to the intense fashion shift that emerged at this time last year,” said Dennis. “The new product is outperforming our expectations and in the second quarter, more than offset the decline in the core brands that previously had been driving the business.”
He further noted that Journey’s comps have turned “even more positive” in the third quarter amid back-to-school selling. August became the fifth consecutive month of positive comp sales and the strongest to-date.
“What was most exciting about August was the positive traffic trends in our stores with traffic up year-over-year,” said Dennis. “With most of back-to-school behind us, we are enthusiastic about the results we have seen both in stores and online, and the trajectory of the Journeys business. We believe we are well-positioned from a merchandise standpoint to build on this top-line momentum during the upcoming holiday season and into next spring. In short, while there are still uncertainties in this retail environment, it feels very much like Jim Estepa and the Journeys team, have again successfully navigated their way through another major fashion shift.”
At Schuh Group, sales inched up 0.7 percent in the quarter to $97.6 million. Operating earnings slumped 20.3 percent to $4.5 million. Comps were up 3 percent with the U.K. based footwear chain benefiting from strength in have fashion athletic product.
“Schuh emerged from its most recent fashion rotation late last year, a little ahead of Journeys and with building momentum, delivered a 10 percent comp in Q1,” said Dennis. “Q2 comps were 3 percent, but would have been stronger, had it not been for some temporary headwinds related to some delayed vendor shipments. The good news is, like Journeys, Schuh’s momentum has accelerated during back-to-school, both online and in stores.”
At Lids Sports Group, revenues were down 4.6 percent to $180.9 million. Operating profits tumbled 57.4 percent to $3.04 million. Comps in the quarter at Lids declined 2 percent. The drop came despite better conversion and higher transaction size in stores and strong positive digital sales.
Comps were negatively impacted by hot market teams with unfavorable payoff results for Lids in the NBA and NHL. While the Golden State win drove additional sales, the increase didn’t come close to matching the large gain from the Cavaliers last year and a Penguins three-peat for the Stanley Cup did not add sales either. The hat stores showed the “most challenging results.”
Stated Dennis, “After a positive start to the year, comps became more challenged in each successive month of Q2, driven by a sustained drop in store traffic, particularly in our hat stores. Unfortunately, the trends we saw in the second quarter have gotten worse in the third and have meaningfully changed our outlook for the back half of the year for Lids.”
At its remaining segments, Johnston & Murphy Group’s sales dipped 0.4 percent to $64.9 million and were down 1 percent on a same-store basis, also blamed on weak store traffic. Operating earnings were down 31.4 percent to $1.55 million.
Sales in its Licensed Brands segment, including Dockers and G.H. Bass footwear, dropped to $14.7 million from $22.1 million due to the sale of SureGrip. The segment showed a loss of $1.05 million against operating earnings of $234,000.
From a profitability standpoint, Dennis noted that overall, the shift in spending from stores to online is hurting profitability with its largely fixed expense base of stores contributing to deleveraging across its businesses.
Gross margin for Q2 decreased 60 basis points to 49.7 percent with increased shipping and warehousing costs, primarily from higher e-commerce sales accounting for half of the decline.
Total SG&A expense as a percent of sales increased 160 basis points to 50 percent with significant deleverage due to the negative store comp in our lowest volume quarter when expenses are the most fixed. All divisions deleveraged selling salaries and all divisions deleveraged rent expense except for Lids, which has made the most progress thus far with rent reduction.
Looking at the second half, Dennis said that while the company is optimistic about its holiday outlook for Journeys and Schuh, it’s adopting a “much more conservative outlook for Lids based on the fact that current trends are running a good deal below our expectations and will now make it even more difficult to lap the tough comparisons we faced from last year’s Cubs World Series win, starting in October.”
He noted that the wide EPS guidance range reflects many “variables” in the marketplace. These include whether mall traffic will continue to see steep declines and growth in digital continues at its recent rapid pace.
At Journeys, much still depends on winter weather and boot sell-through as well as the promotional cadence of competitors. The downturn in Lids core hats business “decreases visibility on the back half” but a promising match-up for the World Series can prop up the business. Said Dennis, “There is a meaningful difference between a possible Dodgers-Yankees world series versus for example a Nationals-Indians World Series this fall.”
Looking further ahead, Dennis said the company’s “strong commitment to our omni-channel strategy requires resetting our store fixed expense base while growing e-commerce and omni-channel even more.”
As a result, Genesco is taking “urgent actions” to reduce its real estate risk, enhance its in-store experience to drive traffic to stores; build further omni-channel and digital capabilities; strengthen the equity of its retail brands; and manage capital spending carefully as it enters 2018.
Around real estate, Dennis noted the Genesco’s overall store portfolio is “in very good shape.” The average lease life on its C-mall stores are three years and most are being renewed for one or two years to reduce risks should those locations worsen. At stores at A and B centers, Genesco has found some success renegotiating rents at lower prices as traffic erodes. With almost 650 leases expiring this fiscal year and close to 1,300 expiring over the next three years, almost 50 percent of its fleet’s rent structure can be favorably adjusted.
Said Dennis, “With an average lease life of four years, which continues to shorten, we believe we are accomplishing that. For stores where rents do not adjust to meet our ROI requirements, we will close. But thus far in the better malls, our landlord partners have worked with us.”
The drive traffic, Journeys is investing in targeted digital advertising campaigns. The chain will also increase the number of e-mail campaigns by 20 percent this holiday and the number of catalogs mailed by 40 percent. Lids will see a 60 percent hike in digital ad spending this holiday, as well as increased e-mail campaigns.
To support omni-channel and digital capabilities, Genesco is expanding its distribution center to handle growing e-commerce shipments and investing in technologies to speed online fulfillment.
Social media will be a primarily tool to strength the equity of its banners. Said Dennis, “We have been featuring influencers in our catalogues and websites of Journeys to leverage their social circles to generate awareness of the Journeys retail brand and are currently launching an ambassador program at Lids to do the same thing. We are especially focused on initiatives that strengthen the customer relationships and loyalty. We launched a revised loyalty program at Lids last quarter to capitalize on purchases across multiple sports and are currently evaluating options for loyalty at Journeys too.”
Finally, capital expenditures for the following year are expected to “come down meaningfully” with spending limited to a few store openings, fleet updates, and IT-investments to support digital and omni-channel capabilities. The current year’s heaviest expense is the Journeys’ DC expansion. Stated Dennis, “We are working hard to strike the right balance between protecting near-term profitability in the current environment and executing the long range plans that will see our concepts emerge from the ongoing retail transformation and even stronger strategic positions.”
Photo courtesy Lids
