Shares of Genesco Inc. tumbled $10.15, or 22.8 percent, to $34.40 on Thursday after the company slashed its guidance for the year due to weak store traffic in its U.S. businesses and expectations that the turnaround at Journeys would take longer than originally estimated.
The company now expects adjusted diluted EPS for the year to arrive in the range of $3.90 to $4.05, compared to its previously issued guidance range of $4.40 to $4.55.
“We expect that several of the specific factors that made Q1 difficult will improve in the course of the year,” said CEO Robert Dennis on a conference call with analysts. “But we’re lowering our outlook because we now expect it will take a little longer than we first thought to emerge from the fashion rotation at Journeys and we’re assuming a more conservative outlook for sales in our bricks-and-mortars stores given the anemic level of mall traffic we saw in Q1.”
Earnings in the first quarter plunged 90.6 percent to $1.0 million, or 5 cents a share, from $10.6 million, or 50 cents, in the same period a year ago. Excluding a small asset impairment charge in the latest quarter as well as non-recurring charges in the year-ago quarter, adjusted earnings were down 91.5 percent to $1.1 million, or 6 cents a share, well off Wall Street’s consensus estimate of 27 cents.
Sales slipped 0.8 percent to $643.4 million. Consolidated comps, including same store sales and comparable e-commerce and catalog sales, decreased 1 percent, with a 5 percent decrease in the Journeys Group, a 1 percent increase in the Lids Sports Group, a 10 percent increase in the Schuh Group, and a 3 percent decrease in the Johnston & Murphy Group.
On the call, Dennis said the first-quarter comp decline was at the low end of the company’s internal range. Following a “very challenging” February in the U.S. due to the IRS delay of income tax refunds, trends improved in March until an Easter shift led April to turn in the strongest month of the quarter. Sales in its U.S. businesses were more challenged than expected in total for the quarter although offset in large part by stronger sales in the U.K.
Sales were also more concentrated in digital than expected. Store comps were down 4 percent versus a 28 percent jump in direct comps. Almost every business saw double-digit gains in direct. Said Dennis, “Although we’re very pleased with these strong direct comps as a measure of success in the omnichannel investments we have made, the lack of traffic in the mall causes our store fixed expense base to deleverage and hurts profitability.”
While falling well short of Wall Street’s targets, Genesco’s EPS was only “a few cents below” its internal estimates for the quarter and the shortfall was blamed on somewhat lower sales and more SG&A deleverage. A challenging quarter was expected due to negative comps at Journeys from the fashion rotation, gross margin pressure at both Journeys and Lids, deleverage from soft comps and spending at Lids to fund initiatives that are expected to support growth in the back half of the year.
Elaborating on the quarter’s challenges, Dennis said the 5 percent drop in comps at Journeys in part reflects tough comparisons as the juniors footwear chain had shown two consecutive years of record sales and peak profitability and a positive comp in Q1 last year.
Journeys’ sales began weakening last year due to a fashion shift that began just before back-to-school selling with the adjustment challenges exacerbated by the chain’s “concentrated deep and narrow position in a smaller number of brands” that had been boosting sales.
“Journeys made excellent progress adjusting its assortment for the beginning of this year to better reflect current customer demand. The new brands and styles are performing very well and we’re pleased with our brand and style diversification as we have managed through the fashion shift over the past 9 months,” said Dennis. “However, the declining part of the assortment that is still a good part of our business decreased even more than we expected and therefore, comps were worse than they thought they would be and these weaker comps contributed to significant expense deleverage.”
As expected, Journeys’ gross margin was pressured by the mix shift to a greater fashion athletic assortment as the majority of the newer product carry lower initial margins.
Lids’ pickup in momentum seen in the fourth quarter was slowed by weak mall traffic caused in part by the tax refund delays and Easter offsets. The low comp wasn’t enough to offset expenses. Lids’ gross margin, as expected, was down versus a year ago due to a challenging comparison. Markdowns were at the more normalized level in the latest quarter while the year-ago period benefited from substantial inventory rightsizing actions that took place throughout 2015.
Finally, Dennis said a number of marketing and digital investments at Lids increased expenses during the quarter.
“We believe these investments are generating dramatic sales gains in e-commerce and will generate positive returns over time,” said Dennis. “But as our annual sales have become increasingly weighted to the second half and, particularly, the fourth quarter, these digital and omnichannel investments are more dilutive in the first part of the year.”
Going forward, Dennis expects the pressure on both Lids and Journeys gross margin will lessen in the rest of the year and Journeys comps will improve as it anniversaries the negative comps which began last summer.
He also noted that although Lids profitability was down year-over-year, results for Q1 exceeded internal expectations. Investments are being made in digital, social and loyalty programs to help sales regain momentum.
The 3 percent comp decline at the Johnston & Murphy Group was due to a customer traffic slowdown although the decline improved versus the rate just before the election.
One bright spot was its U.K.-based chain, Schuh, where comps accelerated to double digits for the quarter, driven by consumer demand “for the latest must-have fashion athletic product.” After experiencing a similar change in fashion like Journeys and then a few challenging quarters last year, Schuh’s current product offering translated into the strong comp gain.
The other bright spots were “solid results” from its Licensed Brands segment, which includes the Dockers footwear line; and Little Burgundy, which is posting double-digit comps again this year.
For 2017, Genesco now expects total sales will grow 1 percent to 2 percent with consolidated comps, including direct in the range of flat to up 1 percent. Said Mimi Vaughn, CFO, “We were heavily impacted by the more significant mall traffic declines in Q1. And while we don’t know for certain if this pattern will continue, we have to assume it will to some extent.”
Journeys’ comp should improve with easier comparisons as it anniversaries the start of the fashion shift and the May improvement likely continues. But Vaughn said the chain will have to “inject even more new product into the assortments” during back-to-school and holiday before comps turn positive. Added Vaughn, “And when they do turn positive, it will likely be at more muted levels than we first estimated.”
Lids’ positive comp trend is expected to continue for the next couple of quarters but lapping the Cubs World Series victory in the fourth quarter will be challenging and the growth of mall traffic has diminished the segment’s outlook overall.
Schuh should continue to benefit from solid trends in athletic footwear but the looming elections this summer and Brexit proceedings “could create volatility,” said Vaughn. Johnston & Murphy’s comps should improve as comparisons get easier over the course of the year.
Gross margins are expected to be flat to down a little in total for the company. With the low comp, SG&A expense is expected to delever in the 50 to 70 basis points range.
Photo courtesy Journeys