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Genesco Blames Port Congestion for ‘Running Four to Six Weeks Behind’

While Genesco got a slight boost to close its third-quarter when it climbed back to profitability, the footwear company appears to have put itself on the right track into 2021 with net income of $89.9 million in the holiday period. Adjusted earnings came in at $2.76 per share, well ahead of Wall Street’s anticipation of $1.96 per share.

Now, Genesco’s focus is back on improving its top line, which declined 6 percent to $637 million but still beat estimates of $617 million. 

In a Nutshell: In the company’s fourth-quarter earnings call, Genesco board chair, president and CEO Mimi Vaughn touched on how the recent port congestions have impacted operations, revealing that the company’s supply chain was running “about four to six weeks behind,” starting a domino effect over the holidays that will affect businesses until the summer. 

“But we feel like we will manage through that,” Vaughn said. “This is a much lower-volume time for our company. When we get to the high-volume part of the year with back-to-school and with holiday, the supply chain ought to be in much better shape.”

Journeys Group, the biggest retailer under the Genesco umbrella with 1,159 stores, saw its share of sales increase from 69 percent to 73 percent, while U.K.-based retailer Schuh remained at 17 percent. Vaughn noted that Journeys is “extraordinarily well-positioned among its competition” due to the retailer’s differentiation of casual and fashion-athletic footwear offerings.

Genesco’s Johnston & Murphy took the biggest hit for the company due to the work-from-home trend and lack of social gatherings throughout 2020 that pared demand for its dressier fare, with a decline of 42 percent in sales and shrinking share of 13 percent to 8 percent of total sales.

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“For the upcoming year, J&M has focused 90 percent of new product development on the expansion of his casual offering to include casual athletic, leisure, rugged outdoor and performance,” said Vaughn. “We brought in a new head of product development who brings a successful track record developing casual brands to aid in these efforts. As the customer returns to work and socializing, which we hope will be sooner than later, J&Ms assortment will be ready for the post-pandemic lifestyle and further buoyed by J&M’s core customers’ increased level of savings during the pandemic.”

Inventories decreased 20 percent in the fourth quarter on a year-over-year basis to $291 million, from $365.3 million last year.

Fourth-quarter gross margin this year was 45.8 percent, down 110 basis points, compared with 46.9 percent last year. The decrease as a percentage of sales is due primarily to higher shipping and warehouse expense in all of the company’s retail divisions driven by the increase in e-commerce penetration, increased closeouts at Johnston & Murphy wholesale and higher markdowns at Johnston & Murphy retail, and to the mix of Genesco’s businesses.

Despite the gross margin decline, the metric narrowed for the third consecutive quarter, and the sequential improvement was driven by an increase at Journeys due to strong full price selling.

Genesco closed 16 stores in the quarter, now operating 1,460 stores compared with 1,480 stores at the end of 2019. The company closed nine Journeys stores, four Schuh stores and three Johnston and Murphy stores, while opening no new locations.

For 2021, Genesco projects it will open 16 stores and close 36 stores, with 15 of the openings and 22 of the closings belonging to Journeys. Johnston & Murphy will open the other store, but close 10 more.

Cash and cash equivalents as of Jan. 30, 2021, were $215.1 million, compared with $81.4 million on Feb. 1, 2020. Total debt to close the year was $33 million, compared with $14.4 million at the end of last year’s fourth quarter.

Capital expenditures totaled $6 million in the quarter, primarily related to the footwear company’s digital and omnichannel initiatives. Projected capital expenditures for 2021 will range in between $35 million and $40 million, with 74 percent focused on omnichannel, distribution centers and IT, and 26 percent focused on store remodelings.

Due to the continued uncertainty stemming from Covid-19, Genesco is not providing any form of quarterly or yearly guidance at this time for 2021 (labeled Fiscal Year 2022 by Genesco).

Net Sales: Net sales for the fourth quarter decreased 6 percent to $636.8 million from $677.5 million in the year-ago period. This sales decrease was driven by continued pressure at Johnston & Murphy and the impact from store closures during the quarter, partially offset by the company’s overall digital growth. Stores were open about 90 percent of possible days.

Comparable sales at Genesco increased 1 percent across all brands, with same-store brick-and-mortar sales declining 10 percent, while the company’s overall digital growth totaled 55 percent.

Across all channels, overall sales were flat at Journeys, down 13 percent at Schuh, and down 42 percent at Johnston & Murphy while sales were up 84 percent at the company’s Licensed Brands division due to the Togast acquisition in the fourth quarter of 2019. With Togast, Genesco gained the license to sell Levi’s footwear in it stores.

Full-year net sales declined 19 percent to $1.8 billion from $2.2 billion last year. This sales dip was driven by the impact from store closures during the year, lower store comps and sales pressure at Johnston & Murphy, partially offset by digital comp growth of 74 percent that amounted to nearly $450 million in sales.

Sales were down 16 percent at Journeys, 18 percent at Schuh and 49 percent at Johnston & Murphy while sales were up 61 percent at the Licensed Brands division.

Genesco has not disclosed comparable sales for fiscal 2021 as it believes that overall sales is a more meaningful metric to measure the business and the impact of Covid-19.

Net Earnings: Net income for Genesco for the quarter topped $89.9 million, popping 152.8 percent from fourth-quarter earnings of $35.5 million to close 2019.

Earnings per diluted share came in at $6.20 for the three months ended Jan. 30, compared to earnings per diluted share of $2.49 in the fourth quarter last year. When adjusting for income tax expenses and store asset impairments, diluted earnings came in at $2.76 per share, compared to earnings from continuing operations per diluted share of $3.09 last year.

The quarterly income represented a great turnaround for Genesco to close the year, in which the footwear company saw a net loss of $56.4 million for 2020 on a diluted loss of $3.97 per share. Conversely, Genesco took in a $61.4 net profit in 2019. Adjusted for the excluded items, Genesco saw losses of $1.18 per share for the year.

CEO’s Take: Vaughn noted that the e-commerce operation is “highly profitable,” but sees plenty of opportunity for physical retail to still power Genesco’s top line as more wholesalers close stores.

“There has been a lot of fall out, as you know, on both sides of the Atlantic, but particularly in the U.K.—a lot of brands and retailers that we would, we would count as competitors,” Vaughn said. “And so we’ve seen some regional competitors closed, department stores close, anywhere that there are footwear points of distribution, that close, we have an opportunity to pick up that market share, we saw that when we came out of the Great Recession. That allows us the opportunity to really drive the economics within our four walls as well.”