Aided by the acquisition of Schuh Group and a strong performance at its Journeys segment, Genesco Inc's quarterly results handily beat expectations, prompting the company to raise its full-year profit outlook.
Earnings from continuing operations rose 38.7 percent in the quarter ended April 28, to $20.8 million, or 86 cents a share. On an adjusted basis, the company earned 98 cents, coming in well above analysts' expectations of 74 cents. The adjustments were tied to compensation expense related to deferred purchase price payments in connection with the acquisition of Schuh Group, a U.K.-based footwear chain, in June 2011.
“We have been able to maintain momentum despite more difficult year-over-year comparisons thanks to our businesses' strong strategic positioning, favorable fashion trends and excellent execution by our operating teams,” said Bob Dennis, chairman, president and CEO, on a conference call with analysts. “This top-line strength continues to drive operating expense leverage and profitability above expectations.”
Sales increased 24.5 percent to $600.1 million, reflecting the addition of sales from Schuh. Comps increased 9 percent on top of a 14 percent comp a year ago and follow a 12 percent gain in the fourth quarter. Quarter-to-date comps through Saturday, May 19, were up 7 percent versus 12 percent over the same period last year. Companywide, gross margin in the quarter was 51.5 percent compared with last year's gross margin of 51.4 percent.
By concept, Journeys' 12 percent comp gain came on top of a 14 percent increase last year. Quarter-to-date comps grew 10 percent. Said Dennis, “Our spring merchandise assortments are resonating with consumers which gives us confidence about our prospects for summer and our plans for back to school.”
ASPs in the Journeys stores were up 9 percent in the quarter, some of that coming from the stores being less promotional in the quarter than last year. Excluding the promotional offset, ASP increased mid-single-digit. Operating income increased 45 percent in the quarter and operating margin increased by 220 basis points to 9.6 percent.
Shi by Journeys and Journeys Kidz also posted strong comps during the quarter. Dennis said Shi still needs “to improve four-wall profitability before we will be ready to resume growing the store count, but we continue to be encouraged by their trend.”
In Canada, Journeys opened five stores in the period, increasing its count to 18 in the country with plans for seven more over the balance of the year. Journeys.com's sales were up 5 percent in the quarter on top of 29 percent last year, helped by increased traffic. A significant broadening of online merchandise offering is expected to boost results in the back half of the year. The plan to convert most of its urban-themed Underground Station stores into Underground by Journeys remains on schedule although the merchandising changes won't be visible in the stores until back-to-school.
At its The Lids Sports Group segment, comps grew 4 percent versus 16 percent last year. Quarter-to-date comps were up 5 percent. Operating income was up 37 percent with operating margin improving 220 basis points to 10.5 percent.
In the Lids hat stores, snapback hats, which have been a fashion item for the past several quarters, continue to be an important driver of the business.
“We know there is some buzz in the market that this trend may have peaked, but Snapbacks are still selling nicely at Lids,” said Dennis. Inventories are being managed for any slowing. Added Dennis, “We also believe that Snapbacks were not incremental sales, but rather they took demand from fitted hats in Major League Baseball and other categories and we expect those categories to improve when snapback demand weakens.”
The hat stores are also benefiting from the expansion of the embroidery business, now available in 652 stores. Dennis added that early reads on the new NFL licensed product, which is shifting from Reebok to Nike, New Era and others, ” are quite favorable” although it’s a second-half business. Sales of the Lids Sports Group's e-commerce business were up 2 percent in the quarter on top of a 42 percent increase last year.
Dennis said developing Lids Locker Room, which feature wider apparel assortments as well caps, “continues to be a major focus,” along with Clubhouse, which consists of stores within sports stadiums. It plans to add 11 Locker Rooms and seven Clubhouse stores this year between the U.S. and Canada. Said Dennis, “We have both a good pipeline of potential regional acquisitions and very strong interest from landlords for brand-new stores.”
Regarding Lids Team Sports, Dennis said the integration of the three businesses acquired over the last few years “is moving forward nicely. Performance metrics like fill rates and orders booked are on positive trends. That said there is to work to be done developing the proper infrastructure, including implementing improved systems and processes to better support future growth and achieve our vision for redefining how this industry operates.”
Schuh performed well above expectations through the first quarter and into May despite a challenging U.K. economy. Expansion plans are being ramped up to 16 stores with as Genesco moves to take advantage of the real estate opportunities. Schuh's operating income was essentially a breakeven but better than planned.
Johnston & Murphy's comps grew 4 percent on strong demand for dress shoes. Operating profit was up 38 percent and operating margin improved by 180 basis points to 7.8 percent.
Looking ahead, the company now expects full-year adjusted earnings of $4.70 to $4.82 per share, up from its previous forecast of $4.58 to $4.70. The outlook represents an increase of 15 percent to 18 percent gain over last year's adjusted earnings per share of $4.09. Comps are projected to increase 3 percent to 4 percent. Said Dennis last week, ” I know you've heard us say this before, but we continue to believe we should be conservative in our guidance. While second-quarter comps through this past Saturday were up 7 percent, we are still guiding off low comps, especially given the tougher two-year comparisons that began in the third quarter.”
