The share price of Genesco, the U.S.-based owner of Journeys, Schuh, Lids and other retail banners, tumbled by 22.8 percent after the company revised down its guidance for 2017 following weaker-than-expected results for its first quarter ended April 29, 2017. Net income dropped by 90.6 percent from the year-ago quarter to $1 million, while sales inched down by 0.8 percent to $643.4 million.
The company now expects adjusted diluted earnings per share for the full-year to arrive in the range of $3.90 to $4.05, instead of its previously issued guidance range of $4.40 to $4.55.
Genesco's chief executive, Robert Dennis, said in a conference call with analysts that the company expects many of the specific factors that made the first quarter difficult to improve in the course of the year. However, it is lowering its outlook because it expects it will take longer than anticipated to emerge from the fashion rotation at Journeys. In addition, it is taking a more conservative attitude about sales prospects for its brick-and-mortar stores given the very low level of mall traffic in the U.S. during the past few months. Sales were also more concentrated than expected in the digital retail channel.
Dennis noted that the month of February was “very challenging” in the U.S. due to a delay in income tax refunds by the U.S. government, which also affected Foot Locker and other U.S. retailers. Trends improved in March, until an Easter shift led April to turn in the strongest month of the quarter. The lower-than-expected sales in Genesco's U.S. retail operations were partly offset by stronger sales at the Schuh Group's stores in the U.K.
Consolidated comparable sales, including same-store sales and comparable e-commerce and catalog sales, were down by 1.0 percent in the quarter. Among its segments, the U.K.-based Schuh Group was the shining star, with an increase of 10.0 percent in comparable sales. Dennis said this gain was driven by consumer demand for the latest must-have fashion athletic products. This, along with an improved gross margin, led to a meaningful profit improvement for the quarter. In the Journeys Group, comparable sales dipped by 5.0 percent, while they inched up by 1.0 percent in the Lids Sports Group. They were down by 3.0 percent in the Johnston & Murphy segment.
Overall, the company's gross margin declined by 1.2 percentage points to 49.6 percent. Genesco attributed this to declining margins in Journeys and Lids stores, along with higher e-commerce sales, which ate away at gross margins with the higher associated shipping and picking costs as well.
For 2017, Genesco now expects total sales to grow by between 1.0 percent and 2.0 percent, with consolidated comparable sales in a range from flat to up by 1.0 percent. It also anticipates that the pressure on Lids' and Journeys' gross margin will lessen for the rest of the year and that Journeys' comparable sales will improve as it measures against the negative comparable sales experienced last summer. Gross margins are expected to be flat to down a little overall.
Speaking earlier this week at the Baird Global Consumer, Technology & Services Conference, Dennis said he expected Genesco to operate “significantly fewer” stores over the next five years, unless it can negotiate reduced rents with landlords because of declining traffic in the shopping malls.
The company operates 2,750 retail stores and leased departments throughout the U.S., Canada and the U.K., and more than half of the leases are due for renewal within three years. Dennis said that traffic has been declining in U.S. malls – even in mid-tier and premium malls lately - over the last four or five quarters. As a result, the company has been able to obtain huge reductions in rents in some cases.