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Genesco Slides on Q4 Earnings & Sales Miss, Guides FY17

Zacks Equity Research

Genesco Inc. GCO lost 3.6% after posting lower-than-expected fourth-quarter fiscal 2016 results, ending the fiscal on a dismal note.

Impacted by significant gross margin pressure, quarterly adjusted earnings fell 8.3% year over year to $2.11 per share, falling short of the Zacks Consensus Estimate by a couple of cents.

Including one-time items, this branded footwear, apparel, and accessories retailer and wholesaler’s earnings came in at $2.15 per share, down 1.4% year over year.

Quarter in Detail

Net sales of this Zacks Rank #3 (Hold) company advanced 4.4% to $932 million, while it missed the Zacks Consensus Estimate of $941 million. The year-over-year increase was driven by improved consolidated comparable-store sales (comps).

Genesco reported a 4% rise in consolidated comps, driven by growth at all the segments, except for Schuh Group. The improvement in consolidated comps was backed by strong trends in the company’s direct businesses (via eCommerce) coupled with robust comps at its stores.

The company reported a 2% increase in store comps. On the other hand, comps via the eCommerce platform witnessed a 21% rise.

On a segmental basis, the company recorded an increase of 5% in the Journeys Group, 3% in the Lids Sports Group and 6% in the Johnston & Murphy Group, partly offset by a 2% comps decline at Schuh Group.

Gross profit dipped 0.2% to $424.2 million with the gross margin contracting 210 basis points (bps) to 45.4%. The gross margin contraction was a result of soft margins across nearly all business segments, except for Johnston & Murphy.

Lids Sports Group witnessed the maximum margin contraction on account of Genesco’s meticulous efforts to optimize inventory levels at the segment. Also, heightened promotional activity in the holiday season caused higher markdowns which weighed on margins at Schuh Group.

Adjusted operating income plunged 16.2% year over year to $74.4 million in the quarter, while operating margin slashed 190 bps to 8%, as gross margin pressure eclipsed the improvement in selling, general and administrative (SG&A) expenses.  

Financials

Genesco ended the year with approximately $133.3 million of cash and cash equivalents, $97.9 million of long-term debt (excluding current maturities), and $958.5 million of shareholders’ equity. As of Jan 30, 2016, inventories totaled $530.6 million compared with $598.2 million as of Jan 31, 2015.

Also, the company repurchased nearly 2.4 million shares for $145 million during the quarter, while it incurred $23 million as net capital expenditure over the same time frame.

Outlook

Genesco witnessed modest comps growth in the beginning of the first quarter of fiscal 2017, with consolidated comps for the quarter through Mar 5, 2016 improving 3%. Delayed receipts of tax refunds from customers weighed on fourth-quarter end and early February sales, which was however recovered later in February.

Owing to the solid start to fiscal 2017, modest comps growth, expected margin recovery at the Lids Sports Group and constant strength noted in Johnston & Murphy Group, this company is optimistic about achieving sustained growth. Consequently, management issued an impressive outlook for fiscal 2017.

Based on 1%–2% comps growth anticipation, the company envisions fiscal 2017 adjusted earnings in the range of $4.80–$4.90 per share, reflecting a 12%–14% improvement over fiscal 2016.

Stocks to Consider

Better-stocks in the same industry include American Eagle Outfitters, Inc. AEO, Destination XL Group, Inc. DXLG and Express Inc. EXPR, each carrying a Zacks Rank #1 (Strong Buy).

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