Journeys was once again the star for Genesco in its second-quarter earnings report, recording positive same-store sales for the ninth quarter—and Genesco chairman, president and CEO, Bob Dennis, said there are already positive signs for a tenth.
In a Nutshell: Following the release of its most recent financial statement Friday, Genesco stock jumped 15 percent to $41.80 before falling back down to a more modest gain of 5 percent as the day progressed. Investors were pleased with the footwear company’s comparable sales results and its resilience to the macroeconomic pressures, including both Brexit and the trade war between the United States and China.
Genesco elaborated on the company’s plans to address these concerns in the future after providing some details in the first quarter, though uncertainty is still a major factor in both scenarios.
“On an annual basis, currently about one-third of our merchandise is imported from China, with approximately 10 percent from direct imports and the remaining amount imported by our third-party vendors,” Mimi Vaughn, Genesco’s chief operating officer, said in the company’s conference call on Friday. “Since most of this product is leather shoes, the tariffs, unfortunately, went into effect at the start of September versus in mid-December. We pulled forward as much inventory as we could for receipt ahead of Sept. 1 and have been working with our vendors to share the now higher cost. The devaluation of the Chinese yuan is also helping lessen the near-term impact.”
Vaughn also revealed that Genesco’s projections put the ongoing bottom-line impact of these tariffs to be in the ballpark of $1 million, though she said the effect would be limited since it occurred in the back half of the year. Still, Vaughn held that the company remains well prepared to continue to reduce its exposure to volatility in Chinese imports throughout the next fiscal year.
Admittedly, Vaughn said Genesco may have a hard time accurately measuring the impacts of additional duties on its vendors, as Journeys currently sources roughly 30 percent to 40 percent of its products from China and suppliers may attempt to pass down higher costs.
Genesco’s footwear retail business in the U.K., Schuh, is also under pressure due to the reduction in consumer spending related to Brexit uncertainty. Schuh was flat in the quarter, although Genesco appeared pleased with that result in the midst of the “incessant Brexit back and forth and prolonged uncertainty.” Genesco said its Schuh team has a plan for both a “hard” and a “soft” Brexit, including the possibility of setting up a “mini distribution center” in Ireland to be its hub to the European Union on the British Isles.
Sales: Genesco recorded flat net sales at $487 million in the second quarter, below the analyst expectation of $489.27 million. Comparable sales, company-wide, increased by 3 percent and same-store sales at Journeys increased by 4 percent, year-over-year. Direct-to-consumer penetration increased from 8.9 percent last year to 10.4 percent in the current quarter and the brand group said it had increased its marketing expenses in an effort to spur further growth for the channel.
Dennis was also able to provide some color on the styles and categories that led to the positive results in the second quarter.
“Strong full-price selling of seasonal footwear including sandals contributed to Journeys’ Q2 sales and margin gains, as did the ongoing success of fashion athletic styles,” Dennis explained. “As usual, the retro and casual product that were bestsellers this year were different from a year ago, as the Journeys merchants continue to showcase their ability to adeptly manage the fashion rotation that is an inherent part of the business.”
Taking into account the positive first half, Genesco has raised its comparable sales projection from a range of 1 percent to 2 percent to a range of 2 percent to 3 percent.
Earnings: Analysts expected very little in terms of earnings for the second quarter, especially considering the comp from last year was $0.00. Genesco improved upon that by recording a second-quarter EPS of 5 cents, above analyst expectations of a loss of 1 cent. The brand said the results could have been even more improved if not for a GAAP reduction of 15 cents regarding “lease terminations and asset impairment charges.”
Genesco also raised its earnings outlook from a range of $3.35 to $3.75 to a range of $3.80 to $4.20, and Dennis said he expects the company to come down somewhere in the middle of the new range.
CEO’s Take: “In addition to our team’s ability to execute, there are several reasons we are optimistic about our future,” Dennis said. “Our company is anchored by well-known brands with strong consumer connections and loyalty, positioning us well in today’s volatile retail world. Bolstering our confidence is the fact that we were early to invest in digital and omnichannel infrastructures and today enjoy advanced capabilities allowing us to connect with and serve our customers whenever and however they choose.”