Genesco (NYSE:GCO) released strong third-quarter earnings Nov 30. Unfortunately, it spooked investors by also announcing that November's same-store sales declined by 4% compared to a 12% increase in the same quarter last year. Hurricane Sandy was responsible for approximately half the decline. Even Thanksgiving weekend produced mediocre low-single-digit same-store sales growth. People weren't buying shoes Black Friday and the news knocked its stock down 8.7%. Long-term investors shouldn't look a gift horse in the month. Its stock was just marked down and that's a good thing.
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How Low Can It Go?
Genesco's stock hit a 52-week high of $78.97 on April 27. It's since lost 30% of its value and quite possibly will lose more in the next few trading sessions. Regardless of what actually happens in Q4, Genesco has six consecutive positive quarterly earnings surprises. In the Q3 conference call it indicated that its same-store sales growth in the final quarter of the year will be flat due to: same-sales increased by 12% in the fourth quarter of 2011; it won't fully make up for the business lost during Sandy; and its Lids segment is proving a more difficult fix than originally thought. The top-line might not be completely positive but its earnings seem to be doing fine despite some chinks in the armor. It raised its guidance for fiscal 2013 on the low-end from $4.88 per share to $5.00, which means it expects Q4 adjusted earnings of $2.08, 11 cents higher year-over-year. A 6% increase might not seem like much, but its 2013 earnings will be close to a company best. As Warren Buffett likes to say, "Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."
The four brands that make up this group represent a large portion of Genesco's store locations. It finished the first nine months of fiscal 2013 with 1,157 retail units, just three more than at the end of fiscal 2012 in January. Genesco's been undergoing a program of store openings and closings to maximize productivity and profitability; it seems to be working. In the first nine months of 2013 its same-store sales increased 9% year-over-year, revenues increased 10%, and operating income grew 54% to $64.4 million on the strength of a 240 basis point improvement in its operating margin. Genesco's Journeys Group accounted for 46.2% of its overall operating profit in the first nine months of the year, up from 36.9% a year ago. Without Journeys and Lids, its business wouldn't be nearly as attractive, although its Johnston & Murphy division does make excellent dress shoes.
Several things are hurting the hat retailer's growth, not the least of which is an NHL strike that appears will go an entire season. While Genesco's expansion of the Lids brand into Canada has met with success, the NHL strike is significantly affecting revenues north of the border. Canadians love hockey in a way Americans never will and one way to protest an absence of hockey is to not buy any merchandise. Though a negative presently, when the NHL finally gets back to playing, the fans will likely jump back into the arena, creating a snapback in revenue. Speaking of which, snapback hats have become a big item in headwear; the one-size-fits-all nature of the hats has lots of retailers selling them, cutting into Lids' business. Management expects that this trend will fade over time and sized hats will take back their rightful place in the hat business. Genesco specializes in a difficult to manage businesse where logistics and inventory management are the key to success. When you don't have to worry about hat sizes it makes it much easier for almost anyone to sell them. Despite these setbacks, Lids is still its most consistently-profitable segment with operating margins around 10%. Since January, Lids has opened 45 stores and is now within 110 units of matching the Journeys Group. I expect Lids to surpass Journeys Group in terms of the number of units by the end of fiscal 2016. Given the segment's profitability, it will become an even bigger part of Genesco's overall business.
The Bottom Line
Genesco's storied history includes the one-time ownership of both Bonwit Teller and Tiffany (NYSE:TIF). In the 1950s and 1960s it had become more of an apparel company than a footwear manufacturer and for a time that was profitable. Its most successful years, however, have usually been when it focused on footwear. That, I expect, will change as Lids sells more Nike (NYSE:NKE) and VF Corp (NYSE:VFC) licensed sports apparel. On the direct sales (catalog and e-commerce) front, Genesco has seen its revenues grow from 2% of overall revenue in Q3 2011 to 6% in this year's third quarter. Another two years and it will hit 10%, the level brick and mortar retailers need to reach at a minimum in order to be successful. With higher margins online, I expect profitability to continue to climb.
When a stock gets marked down as Genesco did Nov. 30 it's a good idea to take advantage of the sale because it won't last long.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.