Shares of Genesco Inc. GCO jumped 10.3% after the company posted spectacular third-quarter fiscal 2016 results, wherein both the top and bottom lines exceeded expectations and improved year over year.
Quarterly adjusted earnings of this retailer and wholesaler of branded footwear, apparel, and accessories, came in at $1.40 per share, surpassing the Zacks Consensus Estimate of $1.30 and increasing 9.4% year over year. The bottom line was driven by robust sales growth, partly offset by gross margin pressure.
On a reported basis, including one-time items, the company’s earnings per share from continuing operations were $1.43, compared with $1.21 recorded in the year-ago quarter.
Quarter in Detail
Net sales of this Zacks Rank #2 (Buy) company advanced nearly 7% to $773.9 million, and also came in ahead of the Zacks Consensus Estimate of $761.5 million. The year-over-year increase in the top line was driven by improved consolidated comparable-store sales (comps). Management stated that results benefitted from solid full-price selling, promotional activities and effective implementation of the company’s strategy of rightsizing the Lids Sports Group’s inventory levels.
Genesco reported a 7% rise in consolidated comps, driven by comps growth at all segments. 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 6% increase in store comps. On the other hand, comps via the eCommerce platform witnessed a 25% rise.
On a segment basis, the company recorded an increase of 6% in the Journeys Group, 12% in the Lids Sports Group, 2% in the Schuh Group and 5% in the Johnston & Murphy Group.
However, Genesco revealed that it witnessed a sluggish start to the fourth quarter, which was compensated by strength noted during the Black Friday weekend. Consolidated comps for the fourth quarter as of Dec 1, were up 6%.
Gross profit for the quarter grew 4.3% to $373.9 million. However, gross margin contracted 130 basis points (bps) to 48.3%. Genesco has been striving to optimize inventory levels in the Lids Sports Group, which resulted in higher costs. This led to a fall in gross margin owing to subdued margins in the group.
Adjusted operating income went up 7% year over year to $52.2 million in the quarter, while operating margin remained flat at 6.7%, as gross margin pressure weighed on the improvement in selling, general and administrative (SG&A) expenses.
Financials
Genesco ended the quarter with approximately $28.1 million of cash and cash equivalents, $199.7 million of long-term debt (excluding current maturities), and $930.4 million of shareholders’ equity. As of Oct 31, 2015, inventories totaled $779.9 million compared with $737.6 million as of Nov 1, 2014.
Also, the company repurchased nearly 1.7 million shares for $101.5 million during the quarter, while it incurred $32 million as capital expenditure over the same time frame.
Outlook
Though comps picked up in the Black Friday weekend, the same remained soft in the beginning of the fourth quarter, owing to warm weather. Given this volatility and promotional headwinds in the retail environment, together with the company’s efforts to position the Lids Sporting Group for a fresh start, management updated its outlook for fiscal 2016.
The company now envisions fiscal 2016 adjusted earnings in the range of $4.50–$4.60 per share, compared to $4.70–$4.80 per share predicted earlier. However, comps for fiscal 2016 are now expected to rise in the range of 5%–6%, slightly up from the previous forecast of 4%–5% growth.
Other Stocks to Consider
Other well-ranked stocks in the same industry worth considering include Abercrombie & Fitch Co. ANF and Express Inc. EXPR, each with a Zacks Rank #1 (Strong Buy), and Foot Locker, Inc. FL, carrying a Zacks Rank #2.
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