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Sales at Journeys Lead Genesco, as Company Lays Out Tariff-Avoidance Plan

Footwear is king at Genesco following the sale of its Lids hat business in February.

Solid comps and accelerating sales at Journeys boosted GCO stock from $40.28 to $45.79 after the release of its first quarter FY2020 results Friday, an increase of more than 12 percent. By close of trading Monday, the stock was trading at $46.29.

In a Nutshell: Genesco was able to beat both EPS and sales expectations for the first quarter on solid comparable sales for its footwear businesses, which posted positive growth for the eighth consecutive quarter. The cash influx from Genesco’s $100 million sale of Lids to FanzzLids Holdings in February was put to use in a $26.4 million stock buyback program executed during the quarter, of which an estimated $52.7 million of the initial authorization remains.

Genesco said its business was minimally affected by the late tax return season and a cold, wet start to the spring—circumstances that vexed competitor and brick-and-mortar footwear powerhouse Foot Locker, according to its most recent financial report. The retailer said refunds were “at a sufficient level” to fuel positive comparable sales for its brands and that the inventory mix at Journeys was strong enough to buck cold-weather trends.

However, Genesco chairman, president and CEO, Rob Dennis, saved his most dire warnings for the looming threats of both Brexit and an increase in tariffs proposed by the Trump administration on Chinese goods, including footwear. In the U.K., where Genesco operates 118 Schuh (pronounced “shoe”) stores, the group said continued uncertainty surrounding Brexit continues to depress consumer sentiment as shoppers increasingly limit purchases to essentials and bargains.

In the United States, the threat of tariffs could leave Genesco’s footwear business exposed, too. According to Dennis, Journeys (which made up 65 percent of the group’s total sales last year) has around 30 percent to 40 percent exposure to additional tariffs on Chinese goods. However, if the new tranche is approved, Dennis said, Genesco would have options at the ready to limit its impact.

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“These options include moving production out of China and into other countries, working with our vendors, agents and factories to absorb a portion of these additional tariffs, and looking for further efficiencies in the supply chain,” Dennis explained during Genesco’s first-quarter conference call. “We would expect our third-party vendors to undertake similar actions and obviously currency movements could further mitigate the impact. So with all the moving parts and pieces, it’s too early to quantify the full impact, which under any circumstances won’t be a factor until the back part of the year.”

In the meantime, Dennis added, Genesco would be looking to pull forward fall products and expedite deliveries wherever possible to avoid potential duties.

Sales: Revenue for Genesco increased by 2 percent in the first quarter to $496 million, beating analyst expectations of around $480 million in sales and up from the $486 million earned in the comparable period last year. Direct sales were up 15 percent for the group, and first quarter comparable sales increased by 5 percent, including a 4 percent increase in Genesco’s brick-and-mortar business.

Comparable store sales at Journeys were also up 8 percent in Q1 and Johnston and Murphy followed suit with an increase of 7 percent. Schuh’s comparable sales, on the other hand, fell by 8 percent in an even tougher retail climate.

Genesco expects comparable sales to be up 1 percent to 2 percent for the year, in keeping with its previous guidance.

Earnings: Better-than-expected earnings were a highlight for the company in the first quarter, earning 33 cents per share on $5.9 million in income from continuing operations. Genesco’s first-quarter earnings beat both the 30 cents expected by analysts and the 10 cents it earned in Q1 last year.

Genesco still kept to its EPS range of $3.35 to $3.75 for the fiscal year, although the company said it now expects earnings will end up on the higher side of the range.

CEO’s Take: Calling the company “footwear-focused,” Dennis praised Genesco’s results amid a challenging retail environment.

“Fiscal 2020 is off to a good start with improved results in every business. In our first quarter as a footwear-focused company following the recent sale of the Lids Sports Group, we delivered top and bottom line results that exceeded expectations,” Dennis said. “Our overall performance was fueled by the continued strength of our Journeys business, as the momentum from the successful back-to-school and holiday seasons carried over into the new year.  The combination of strong consolidated comparable sales, which included positive store and digital comps, higher gross margins and the benefits from our recent cost reduction efforts drove earnings per share well ahead of our projection and up meaningfully compared with last year.”