Genesco's Profits Soar, Ups Outlook

Genesco Inc. (GCO - Snapshot Report), a retailer and wholesaler of branded footwear, apparel, and accessories, posted fiscal 2013 second quarter earnings of 50 cents per share, ahead of the Zacks Consensus Estimate of 27 cents. Quarterly earnings jumped 127.3% from 22 cents reported in the year-ago quarter. Robust sales growth along with solid operating expense leverage led to the company’s quarterly beat.

On a reported basis, the company’s earnings were 44 cents per share compared with 1 cent per share in the second quarter of fiscal 2012.

The Quarter in Detail

Net sales climbed 15% year over year to $543.5 million and surpassed the Zacks Consensus Estimate of $534 million, driven by the inclusion of sales from Schuh Group and a 4% rise in comparable store sales (comps) for the quarter. This upside in comps mainly came from a 2% rise in Lids Sports Group's comps, 6% growth in Journeys Group’s comps and an increase of 2% in Johnston & Murphy Retail’s comps. Additionally, comps for the Schuh Group in July – the first month of its inclusion in the company’s comps – ascended 9%.

Selling and administrative expenses reflected a 9.2% increase compared to the year-ago quarter, taking the aggregate to $256.9 million. However, as a percentage of sales selling and administrative expenses improved, contracting 270 basis points to 47.3% compared with 50.0% in the second quarter of fiscal 2012.

Consequently, operating income rose significantly in the quarter to $17 million compared with $1.7 million in the previous year. Operating margin expanded 270 basis points to 3.1% from 0.3% reported in the second quarter of the prior year.

Financials

Genesco ended the second quarter of fiscal 2013 with $47.2 million of cash and cash equivalents, $95.0 million of long-term debt and $737.7 million of shareholders equity. As of July 28, 2012, inventories totaled $555.6 million compared with $475.0 million as of July 30, 2011.

During the second quarter, the company authorized the buy back of up to $75 million of its common shares, replacing the $35 million authorization remaining under its share repurchase program that was approved in October 2010. Following the announcement, to date, the company has bought back nearly 346,000 shares valued at approximately $21.5 million. Of this, about 346,000 shares were repurchased in the second quarter for a total cost of $20.8 million.

Stores Update

In the reported quarter, Genesco opened about 21 new retail outlets and shuttered nearly 15 stores. Additionally, the company acquired a total of 12 retail units. Consequently, the company’s store base expanded to a total of 2,404 stores as of July 28, 2012, compared with 2,386 stores as of April 28, 2012.

Outlook Raised

Bolstered by the company’s second quarter performance, management stepped up its guidance for fiscal 2013, pulling up the earnings per share expectations to $4.88 – $5.00 from the previous range of $4.70 – $4.82. The raised guidance also reflects a 19% to 22% increase from $4.09 per share reported in fiscal 2012.

Our Take

Nashville-based specialty retailer, Genesco sells footwear, headwear, sports apparel and accessories in the U.S., Canada, the United Kingdom and the Republic of Ireland. Its principal brands Journeys, Journeys Kidz, Shi by Journeys, Underground by Journeys, Schuh, Lids, Lids Locker Room, Johnston & Murphy, compete with assorted apparel store chains like Collective Brands Inc. (PSS) and Weyco Group Inc. (WEYS).

Genesco currently retains a Zacks #3 Rank, implying a short-term ‘Hold’ rating. However, the long term recommendation for this Apparel chain is ‘Outperform’.