Genesco Misses Street, Lids Turnaround Ups Margin Pressure

Nashville, Tenn.-based Genesco Inc.’s stock is plummeting today after the release of first-quarter earnings that showed an earnings decline of 29 percent year-over-year, 37 percent adjusted.

CEO Robert Dennis blamed the losses on expected gross margin pressure from the Lids Sports Group turnaround, investment in growing segments that are “primarily second-half contributors” and expenses related to the firm’s e-commerce business. Genesco now expects that its rebound efforts for Lids will create even more margin pressure than was originally anticipated and has adjusted down its EPS guidance for fiscal 2016.

Dennis also called out Journeys as the firm’s top-performing division.

Net Income: Genesco’s net earnings for Q1, ended May 2, 2015, were $9.9 million, down 29 percent compared with the year-ago quarter’s net earnings of $14 million.

EPS: Earnings per diluted share were 42 cents, down 18 cents from the prior year’s Q1 EPS of 60 cents per share.

Net Revenue: Net sales for the quarter were up 5 percent, to $661 million, from $629 million in the year-ago period.

Adjustments: Earnings, adjusted for one-time gains and costs, including payments related to the Schuh Group Limited acquisition, were $12.2 million, or 51 cents per diluted share. Adjusted earnings in the prior year’s first quarter were $19.3 million, or 81 cents per diluted share.

Hit, Miss or Beat: Genesco’s Q1 results missed Wall Street’s forecasts for both revenues and EPS. Analysts polled by Yahoo Finance had predicted revenues of $666 million and EPS of 67 cents.

Executive Insights: “Journeys’ performance was once again the highlight of this quarter. Despite challenges from the West Coast ports, Journeys delivered a solid comp, benefiting from continued strength in casual footwear, plus newness on the fashion athletic side, which is particularly important as we transitioned into spring and summer …”

On Lids: “I want to reinforce our conviction [about] Lids Sports Group. We are seeking to capture a significant strategic opportunity represented by becoming the leading omnichannel provider of licensed sports merchandise in the U.S. The road to this compelling strategic goal has been bumpy, and it is likely to remain bumpy for the next several quarters …”
— CEO Robert Dennis, on the May 29 conference call

Looking Ahead: Genesco now expects fiscal 2016 adjusted earnings per share in the range of $4.70 to $4.80, compared with fiscal 2015’s adjusted earnings per share of $4.74, and its previously announced range of $5.10 to $5.20 for fiscal 2016. Consistent with prior guidance, these expectations do not include expected non-cash asset impairments and other charges, which are estimated in the range of $7.7 million to $8.2 million pretax, or 20 cents to 22 cents per share, after tax, in fiscal 2016. The guidance assumes comparable-sales increases in the 3 percent to 4 percent range for the full fiscal year.

Analyst Insights: “Given intra-quarter chatter and the stock’s underperformance [year-to-date], we are not overly surprised by the Q1 print or guidance reduction. We still believe the underlying fundamentals are good (Journeys’ and Lids Sports Group competitive positioning) and that the crux of the issues is transitory. As painful as the current year is turning out, we remain constructive for long-term investors.”
— Steven Marotta, CL King & Associates analyst, May 29 note

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