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Late Inventory Gives Journeys Back-to-School ‘Head Start’

Shifting exchange rates, elevated costs and a more promotional environment are all impacting Genesco’s full-year calculations.

Unlike other retailers, the company saw its stock price climb Thursday after reporting its first-quarter earnings, even as it revealed a 3 percent year-over-year sales decline and lowered its full-year revenue growth projections. By the end of the day, its share price had grown 8.6 percent.

In a Nutshell: In light of “current economic conditions,” the company is not anticipating the factors that have recently produced a strong full-price selling environment will continue “at the same level,” Mimi Vaughn, Genesco board chair, president and CEO, noted.

“It’s certainly hard to be a consumer and not look at food prices and gas prices,” she said on a call with investors. “And so, we think that there may be a mindset shift on the part of the consumer. And so, as we think about reintroducing some promotional activity, we basically give offers to our best customers, and really think about how do we induce them to come back for repeat purchases. And we think that will likely be appropriate as we go through the year. We haven’t seen a whole lot of that just yet, but we’re just being prudent in thinking that that will happen.”

Though the company has seen improvements in deliveries, senior vice president and chief financial officer Tom George said it expects freight and logistics costs in its branded business will remain “elevated” the rest of the year, “beyond what we had in our forecasts.”

Ultimately, however, George said Genesco lowered its full-year revenue growth forecast from between 2 percent and 4 percent to 1 percent to 3 percent “in large part” because of the lower U.K. exchange rate. The company kept its full-year forecast for adjusted diluted earnings per share at between $7.00 and $7.75.

Journeys led Genesco’s revenue slump with sales down 16 percent. Already facing a tough year-over-year comparison—the retail chain was the company’s biggest beneficiary of government stimulus a year ago—a lack of inventory “held back” its performance, Vaughn said.

More specifically, the retail chain didn’t obtain enough winter product to fill late-season demand in February, she noted, while spring styles were slow in arriving due to supply chain disruption. Forty percent of Journeys’ first-quarter inventory arrived last month—Genesco’s fiscal first quarter ends April 30—with “much of that coming toward the latter part of the month,” Vaughn added. “Now,” however, Journeys is in a “considerably improved inventory position,” the CEO said.

Journeys’ average selling price and average transaction size, meanwhile, benefitted from year-over-year growth and price increases and “strong” full-price selling upheld last year’s “healthy” gross margin gains, Vaughn said.

“Coming out of the pandemic, we have seen a real shift into casual away from retro athletic, fashion athletic as we call that,” she added. “It’s actually a positive for gross margins. Many of the casual brands that we carry have a better margin profile than some of the athletic brands that we do carry.”

The revenue decline at Journeys was partially offset by growth of 28 percent—35 percent on a constant-currency basis—at Schuh. Compared to three years ago, sales grew 14 percent. Stores that were open the entire quarter versus a fifth of the time a year ago were “a big contributor” to its success, Vaughn said. She also cited increased access to “higher-tiered styles from several key vendors,” a better inventory position and pent-up demand as other drivers.

At Johnston & Murphy, top-line revenue grew 45 percent year over year, “well above expectations,” Vaughn said. Sales, she added, were on par with three years ago despite it ending the period with inventory levels down roughly 30 percent comparatively. The brand continued to expand its focus on non-dress styles with casual athletic and casual now accounting for almost 80 percent of footwear sales. George attributed Johnston & Murphy’s growth to “the positive reaction to its assortment,” growth at higher-end retail partners and the reopening of the economy.

Genesco’s licensed brands saw revenue growth of 5 percent.

Inventories increased 33 percent year over year to $401 million. Versus the same period in 2019, inventories grew 9 percent. The largest increase occurred at Journeys, as the company chose to receive and carry over late-arriving winter product that George said will give it a “head start” on back-to-school and holiday sales.

“It’s really great core product and we were able to get it at last year’s prices,” Vaughn said. “This year’s prices are not going to be as favorable as last year’s prices…. We expect that we can have a very positive margin profile with those.”

Net Sales: Genesco recorded $521 million in net sales during the three months ended April 30, a 3 percent decrease from the prior year. Compared to the same period in 2019, it grew revenue 5 percent despite operating 90 fewer stores.

The retailer attributed the year-over-year decline to decreased comparable direct sales. Increased sales in its wholesale and store channels—its Schuh business was only open 19 percent of possible days in the first quarter last year—partially offset this.

Comparable direct sales dropped 26 percent year over year after increasing 43 percent last year. E-commerce revenue fell 29 percent against the first quarter of last year, but grew 74 percent on a three-year stack. This year, they represented 19 percent of retail sales. Last year they accounted for 25 percent, while three years ago they made up 11 percent of retail sales.

Net Earnings: The retailer’s first-quarter gross margin climbed 50 basis points year over year to 48.3 percent, “primarily” due to lower shipping and warehouse expense as a result of lower e-commerce penetration, increased full-priced selling and price increases and despite a channel-mix impact from increased wholesale sales and increased freight and logistics costs. Compared to three years ago, its gross margin fell 110 basis points.

Genesco’s GAAP operating income came in at $8.2 million, a 47 percent decline from $15.5 million in the first quarter of last year and a 9 percent increase versus three years ago. Its non-GAAP operating income fell 50 percent year over year to $9.5 million. Its adjusted operating margin was 1.8 percent of sales in the first quarter, down from 3.5 percent in 2021 and up from 1.7 percent in 2019.

Its adjusted earnings were $5.9 million, or 44 cents per share, in the first quarter, down from $11.6 million, or 79 cents, a year ago.

CEO’s Take: “Covid provided the opening to transform our business at a much more rapid rate,” Vaughn said. “We are taking advantage of the market opportunities the pandemic presented and we continue to strategically align ourselves toward future growth in all our channels.”

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