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Journeys Consumers ‘Squeezed by Inflation,’ Genesco CEO Says

Genesco saw second-quarter net sales dip 4 percent to $535.3 million on net earnings of $7.6 million, largely held back by a bumpy summer for its largest retail banner, Journeys, which experienced a 7 percent sales decline to $321.3 million.

Excluding the impact of lower exchange rates, net sales at Genesco decreased 1 percent for the quarter. Company stock plummeted more than 16 percent on Thursday after the earnings report.

In a Nutshell: The owner of footwear retailers Journeys, Johnston & Murphy and Schuh revised its guidance downward for its current fiscal year, which it refers to fiscal 2023.

Sales are now expected to be down 3 percent to flat—a range of approximately $2.35 billion to $2.41 billion—whereas prior guidance listed Genesco sales as increasing 1 percent to 3 percent to $2.45 billion to $2.49 billion. Adjusted diluted earnings per share are expected in the range of $6.25 to $7.00, versus the prior forecast for adjusted diluted earnings per share to be end up between $7.00 and $7.75.

“While trends improved throughout the second quarter, and the start of back-to-school [in the context of] stimulus comparisons became less pronounced, they didn’t reach levels contemplated in our initial projections, which we attribute primarily to the impact on the consumer from inflation,” said Tom George, Genesco chief financial officer. “The reduction in our full-year sales guidance is coming mainly from Journeys…We have also adopted a more conservative outlook for our businesses that serve a more cost-conscious consumer, and in the U.K., where the consumer is increasingly facing economic headwinds, including higher consumer prices and higher fuel costs.”

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Gross margin guidance remains unchanged, as Genesco expects margins to decline versus last year by 60 basis points to 80 basis points, mainly due to increased markdown activity.

Journey’s sales decreased 7 percent in the second quarter, but have since reaccelerated in August “and are nicely up above last year,” according to Mimi Vaughn, Genesco board chair, president and CEO.

However, Genesco expected an even sharper acceleration given the company’s improved inventory position and its anticipation of a “normal” back to school this year.

“We are seeing some evidence of the Journeys consumer getting squeezed by inflation, making fewer trips to the mall, waiting for tax-free events to shop, delaying purchases until the time of need and trading down to more affordable price point footwear,” Vaughn said in a quarterly earnings call. “The strength of Journeys’ vendor relationships and the breadth of its assortment have allowed the team to quickly pivot its current offering to more accessibly priced products that aligns with the current more budget-conscious consumer.”

Inventories across Genesco increased 55 percent in the second quarter of fiscal 2023 to $507.2 million, up from $326.5 million in the year-ago period, as outsized stimulus demand and supply chain limitations resulted in extremely low inventory last year. Even when compared to fiscal 2020, inventories increased 14 percent.

“Part of the increase at Journeys is we elected to receive and carry over some winter product, which was late in arriving as it consists of core inline styles that will give us a head start on back-to-school and holiday sales,” George said. “We are pleased with the quality and level of inventory except for J&M, where much of the increase is in transit. We are still chasing product.”

Second quarter gross margin this year was 47.5 percent, down 160 basis points (1.6 percentage points) compared with 49.1 percent in the year-ago period. The decrease is due primarily to increased markdowns in the Journeys business as they returned to a more normalized promotional environment and higher freight and logistics costs in the Johnston & Murphy business. Johnston & Murphy had a difficult comparison to last year as the brand showed significant recovery in the prior-year quarter, which drove major reductions in inventory reserves.

In total, freight costs are expected to amount to $14 million to $15 million for the year, George said.

“A good amount of that is air freight and we would expect in future periods—maybe next year and outward—that we shouldn’t need that same level of air freight,” George said.

Cash and cash equivalents at July 30, 2022, were $44.9 million, compared with $304 million at July 31, 2021. Total debt at the end of the second quarter was $48.9 million. The footwear seller’s $288 million decrease in net cash position over the past 12 months was driven primarily by inventory replenishment totaling $150 million and significant share repurchases totaling $135 million.

Net Sales: Net sales for the second quarter of fiscal 2023 decreased 4 percent to $535.3 million from $555.2 million in the second quarter of fiscal 2022. Excluding the impact of lower exchange rates, net sales decreased 1 percent for the quarter.

The sales decrease compared to last year was driven by lower comparable sales, as the company continued to anniversary the significant stimulus distributed a year ago.

Digital sales were down versus last year, with e-commerce sales shrinking to 18 percent of total retail sales, from 19 percent in the year-ago period.

At Journeys, sales were down 7 percent to $321.3 million from $346.3 million in the prior-year period. Schuh saw sales declines of 4 percent to $101.5 million from $106.1 million in the year-ago quarter. The company’s licensed brands saw a 10 percent sales dip in the quarter to $37.7 million, down from $41.7 million in the fiscal 2022 quarter, as Genesco repositioned its distribution mix.

The Johnston & Murphy’s sales jumped 22 percent to $74.8 million from $61.2 million in the prior-year period.

On a comparable basis, Journeys group saw same-store sales decrease 8 percent, while Schuh saw a 9 percent sales jump. Johnston & Murphy’s comparable same-store sales soared 17 percent. Total comparable sales for Genesco dipped 2 percent.

Net Earnings: Genesco’s net earnings totaled $7.6 million in the second quarter, down from $10.9 million generated in last year’s period. The company reported earnings per diluted share of 59 cents for the three months ended July 30, 2022, compared to 74 cents in the second quarter last year.

Adjusted for earnings from continuing operations were $7.7 million in fiscal 2023, compared to $15.3 million in the second quarter of last year. Adjusted reported second quarter earnings per diluted share of 59 cents, compared to $1.05 last year.

Genesco’s operating income for the second quarter was $9.1 million, compared with $12.9 million in the second quarter last year. Adjusted operating income was $10 million this year compared to $21.1 million in the year-ago period.

CEO’s Take: Vaughn also shared some color on Genesco’s off-mall plans for Journey.

“This initiative was developed to take advantage of the pronounced shift in traffic to more local, neighborhood, community and power shopping centers,” Vaughn said. “Journeys consumer research also told us its target consumers visit local non-mall shopping centers several times per month and enjoy shopping closer to home. After piloting and analyzing results of some initial locations, we signed more than 25 of these off-mall sites, which are larger than our mall locations and can carry a full assortment of adult and kids products. We opened five of these locations so far and plan on opening another 10 by fiscal year end. Given that Journeys is predominantly mall based, we believe this is a meaningful opportunity.”

She also noted that Schuh recently opened a new distribution center in Ireland to better support omnichannel sales in the market post-Brexit.