By Thomas J. Ryan
Genesco Inc. (NYSE: GCO) reported third-quarter earnings surpassed expectations as its Lids chain benefited from the Chicago Cubs World Series win. Unfortunately, its larger Journeys chain continued its recent struggles, impacted by ongoing fashion shifts to retro styles as well as the impact of unseasonably warm weather.
As a result, the company maintained its earnings guidance for the year despite the above-plan third-quarter performance.
In the quarter, net earnings declined 21.3 percent to $25.9 million, or $1.30 a share. Results were skewed by asset-impairment charges and a lower-than-normal tax rate in both periods, as well as network intrusion expenses in the year-ago period. Excluding the non-recurring items, earnings declined 20.8 percent to $25.5 million, or $1.28 a share. Results easily topped Wall Street’s consensus estimate of 93 cents.
Sales declined 8.2 percent to $710.8 million, partly reflecting the sale of the Lids Team Sports business in the fourth quarter of last year. Consolidated comparable sales, including same-store sales and comparable e-commerce and catalog sales, decreased 3 percent. Comparable sales reflected a 4-percent decrease in same-store sales in stores and a 7-percent increase in e-commerce sales.
Fashion Shifts Hit Journeys
At Journeys Group, sales in the quarter declined 2.4 percent to $314.2 million. Same-stores sales slumped 8 percent against a 6-percent gain a year ago. Operating income in the segment was down 34.1 percent to $25.7 million.
Genesco Chairman, President and CEO Robert Dennis said that, as noted in its second-quarter conference call, fashion trends in footwear tend to rotate every two to four years for the Journeys concept. “While Journeys has adeptly managed this shift through several rotations, including grunge and skate, the current shift has been exaggerated since Journeys has been narrow and deep in its merchandise assortment for some time,” stated Dennis. “A fashion rotation out of a more concentrated position clearly has more negative impact.”
Following a “very challenging” August, comps saw some improvement in September with a later back-to-school selling season, but then “deteriorated quite a bit” in October as unseasonably warm weather across the U.S. hurt mall traffic and boot sales. “We continue to see strong consumer interest and rapid growth in brands that are not yet at a size in the assortment to fully offset the decline elsewhere,” said Dennis. “Our confidence in the spring assortment continues to be strong as the Journeys team has committed to much larger positions and styles the consumer is looking for.” He added, “In the last two fiscal years Journeys has delivered record sales and earnings as the preeminent provider of fashion footwear to teens. And with the change in assortment, we feel we should be back on track to be doing so once again.”
At Lids Sports Group, sales dropped 18.9 percent to $200.3 million due to the sale of Lids Team Sports. Same-store sales improved 2 percent, fueled by the favorable MLB playoff and World Series lineups, particularly the Cubs triumph. The gains came despite a positive 12-percent comparison from last year, when Lids increased its promotional activity to right-size inventory. Gross margin on the Lids retail businesses was up 400 basis points as it anniversaried promotional activity and benefited from more full-price selling. Added Dennis, “For the third quarter in a row we reaped the benefit of the numerous initiatives we executed to improve the Lids business during FY16.”
At Schuh Group, its U.K. chain that’s similar to Journeys, sales slumped 11.4 percent to $90.1 million. Same-store sales were flat. Operating earnings were down 23.5 percent to $6.6 million. Schuh rebounded with positive comps in September and October after adjusting its promotional cadence, but profits were impacted by the strength in the U.S. dollar against the pound.
At Johnston & Murphy Group, sales increased 2.8 percent to $72.1 million with a 1-percent comp gain. Johnston & Murphy’s operating earnings improved 6.1 percent to $4.9 million. In its Licensed Brands segment, primarily Dockers footwear, sales rose 4.5 percent to $34.1 million; operating earnings were down 19.6 percent to $2.7 million.
Margins Up
Gross margin companywide for the third quarter improved 170 basis points to 50 percent. Lids improved 790 basis points, partly reflecting the sale of the lower-margin Lids Team Sports business. Lids retail business also improved 410 basis points due to a lower level of promotions this year and much stronger full-price selling. Journeys gross margin decreased 120 basis points, largely due to additional markdowns required to clean inventory levels. Gross margins improved at Johnston & Murphy, but were down at Schuh. Total SG&A expense increased 270 basis points to 44.3 percent for the third quarter, largely due to the sale of Lids Team Sports.
For the current fourth quarter, consolidated comps are down 2 percent through November 29. Comp sales at stores are down 4 percent, with direct rising 9 percent. Dennis, however, said the fourth-quarter figures underscore “very strong” Lids results offsetting weaker results in the rest of the businesses. “The Chicago Cubs’ dramatic win over the Cleveland Indians in game seven and the end of the plus-100-year World Series drought provided Lids with an unusually strong start to the quarter,” noted Dennis.
Lids comps are up 15 percent in the fourth quarter to date, led by record-breaking sales in many stores serving fans in the local Chicago market. Online sales were boosted by sales to displaced Cub fans throughout the country. The strength in Cubs merchandise offset weaker comps in the rest of Lids’ businesses so far during the quarter. Dennis added, “Also, while the Cubs’ victory is expected to continue to drive sales through the balance of the quarter for Lids, it will have less impact than the gains immediately following the Series.”
In other segments, comps were down 12 percent quarter to date at Journeys, off 6 percent at Schuh and flat at Johnston & Murphy.
Journeys is being hurt by not only the ongoing fashion rotation at the retailer, but the persistent warm weather in November that has impacted boot sales. Stated Dennis, “The newness in our fashion athletic assortment continues to perform well. However, it just isn’t enough to offset the softness in boots as this athletic product represents a much smaller percentages of the mix right now in Q4. But this trend does bode well for spring and the new fiscal year.” The weather is also impacting knit hats at Lids, as well as boots and other cold-weather products at Johnston & Murphy.
During Black Friday weekend, comps improved slightly from the quarter-to-date trend for all its footwear business, but fashion footwear became “incredibly promotional” as competitors moved to clear excess fall and winter inventory. Schuh has likewise faced heightened promotions from competitors. Added Dennis, “Overall it looks like it will be a very promotional season for the category if these trends continue through the holiday.”
Genesco reiterated expectations for adjusted EPS for the year in the range of $3.80 to $4.00, which compares to $4.29 a year ago.
Photo courtesy Journeys