Driven by huge gains in revenues and profitability at Journeys, Genesco Inc. reported the company’s first positive store comp in eight quarters while posting a surprise profit in the second quarter.
The company maintained the company’s outlook for the year.
On a conference call with analysts, Bob Dennis, chairman, president and CEO, said, “In the second quarter, we delivered our strongest quarterly comp gain in over two years and a meaningful improvement in profitability compared with last year’s second quarter. The strong week of back-to-school sales that moved into the second quarter as a result of last year’s 53-week calendar shift helped boost this year’s quarterly earnings.”
He said Journeys and Johnston & Murphy drove the top-line growth. Lids’ comps dipped in the period but improved on a sequential basis and was well up from the double-digit declines posted in the fourth quarter. Schuh’s comps were also down but improved “meaningfully” from the first quarter.
Said Dennis, “The significant improvement in our U.S. footwear businesses, especially Journeys, more than offset the headwinds at Lids and across the Atlantic.”
Dennis noted that the second-quarter is typically a low-volume quarter with the summer slowdown but the arrival of back-to-school selling has driven an acceleration in sales growth. Said the CEO, “August was a strong month with all four of our retail businesses posting comps that were better than Q2.”
Excluding non-recurring items, adjusted earnings came to $810,000, or 4 cents a share, against a loss of $2.0 million, or 10 cents, a year ago. Wall Street had expected a loss of 3 cents on average. Net earnings from continuing operations reached $67,000, or 1 cent a share, for the three months ended August 4 compared to a loss of $3.9 million, or 20 cents, last year.
Revenues grew 6.0 percent to $654 million, ahead of Wall Street’s consensus target of $641.1 million
Companywide comps increased 3 percent with stores up 2 percent and direct ahead 7 percent. Direct-to-consumer sales were 10 percent of total retail sales for the quarter, up slightly over last year.
Gross margins were down 50 basis points to 49.2 percent due primarily to increased markdowns to clear slower-moving product at Schuh and Johnston & Murphy’s wholesale operations, as well as at Journeys due in part to the shift caused by 2017’s 53-week calendar. Those margin pressures offset better full price selling in the company’s other business segments.
SG&A expenses for the quarter shrunk 120 basis points to 48.8 percent of sales. The decrease reflected the leveraging of rents, selling salaries and several other expense categories on higher sales, partially offset by higher bonus accruals.
By segment, Journeys Group’s revenues jumped 17.8 percent to $305.0 million. Comps advanced 10 percent on top of a 1 percent gain in the year-ago quarter and accelerating from the first-quarter’s 6 percent growth. The Journeys Group segment showed an operating profit of $7.7 million against a loss of $2.2 million.
Said Dennis, “Despite lapping positive comparisons when Journeys successfully emerged from the fashion shift a year ago, business picked up as consumers responded very favorably to the current product offering, which features a broad range of casual and fashion athletic styles from a number of brands and franchises. Sandals sales were also strong throughout the quarter and have continued selling through nicely right into back-to-school.”
Journeys Kidz also notched “especially good” results in Q2 as well.
Dennis added, “Importantly, Journeys momentum has carried into the start of the third quarter and through the heart of the back-to-school season. While comparisons get more difficult in the back half, we are increasing our comp expectations based on the strength of the assortment and multiple initiatives, which have been effective in driving traffic to Journeys stores and websites.”
At Lids Sports Group, sales slumped 7.4 percent in the quarter to $166.9 million. Comps were down 5 percent against a 2 percent decline in 2017’s second quarter and showed some improvement over the 7 percent decline in the first quarter. Operating earnings tumbled 62.1 percent to $1.15 million.
Lids comps were aided by sales of World Cup product, easier comparisons and a healthy mix of teams in the NHL playoffs, especially the Las Vegas Golden Knights. But the fourth consecutive year of having the Golden State Warriors face the Cleveland Cavaliers in a short series in the NBA finals offset those positive developments.
Lids, particularly in the hat business, continues to struggle with weak store traffic, but gross margin was up year-over-year, thanks in part to the enhanced markdown practices. Store closings and aggressive efforts to manage costs also helped reduce the impact of SG&A deleverage on the negative comp.
Dennis said Lids remains “between trends” in headwear and is expected to see a strong turnaround akin to Journeys once a trend emerges.
“We have seen this in the past with snapbacks, with knits, with bucket hats, most recently with the dad hat trend,” said Dennis. “Our long history with Lids hat stores shows over a decade and a half of store four-wall profit in the teens during the fashion troughs and in the 20s at the peaks, which demonstrates tremendous ability to cycle through trends successfully. History points to a rebound, though we just don’t know the exact timing.”
Due to the weak traffic, Lids’ comps in the quarter came in slightly below plan and the company is now “more cautious” on a comp rebound in the second half. Said Dennis, “In the meanwhile, we are working diligently with our vendor partners to investigate all opportunities to ignite a new headwear trend, which is what will really drive a meaningful uptick in results.”
Dennis also said the exploration of a potential sale of Lids, first announced in February, continues. He said, “The process of exploring a sale is advancing and we have narrowed our alternatives.”
At Schuh Group, sales inched up 0.5 percent to $98.2 million. Comps were down 7 percent versus a 7 percent gain last year and showed some improvement against a 13 percent drop in the first quarter. Schuh’s operating earnings were down 76.4 percent to $1.07 million.
Dennis said the challenging selling environment for footwear and apparel in the U.K. that began last holiday continued through the first half as many shoppers sought out bargains. Schuh’s performance was also impacted by certain vendors’ decisions to pursue a scarcity model, limiting supply of some top selling styles in the U.K. Schuh’s profitability was impacted by expense deleverage due to the comp decline in a low-volume quarter a s well as markdowns that were necessary to clean-up inventories.
In the Q3 to-date, Schuh’s comps have “improved a little with less negative traffic and a back-to-school bump” and a big push is being placed behind demand ‘90s retro footwear for the back half. Dennis added, however, “While we are optimistic about improving the comp trend, we are now more cautious about the ability to return to positive comps this year given the consumer environment and vendor supply constraints. In addition, the pound-dollar exchange rate decline will reduce back half profitability further, if it stays where it is today.”
In its two last segments, Johnston & Murphy Group’s sales grew 5.5 percent to $68.4 million with the dressier footwear label seeing strength in casual footwear and apparel offerings. Same-store sales rose 8 percent versus a 1 percent comp decline last year. Operating profits were down 40.0 percent to $928,000, impacted by the clearance of slow-moving women’s inventory.
Sales in the Licensed Brands segment, including Dockers footwear, grew to $15.3 million from $14.7 million. The segment showed an operating loss of $396,000 against a loss of $1.05 million a year ago.
For the year, Genesco continues to expect comparable sales to be up 1 percent to 3 percent and adjusted EPS in the range of $3.05 to $3.45.
Photo courtesy Journeys, Opry Mills Mall, Nashville, TN