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Genesco Downgraded to Strong Sell

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Zacks Investment Research downgraded Genesco Inc (GCO - Free Report) to a Zacks Rank #5 (Strong Sell) on Sep 28. Disappointing second quarter fiscal 2014 results and a tempered fiscal 2014 outlook led to the downgrade.

Why the Downgrade?

On Aug 29, Genesco reported dismal second quarter of fiscal 2014 (ending Aug 3, 2013) results. Though earnings of 56 cents per share grew 12% year over year, it missed the Zacks Consensus Estimate by 9.7%. We believe a challenging sales environment and lower comparable store sales (comps) growth led to the earnings miss.

Genesco’s sales increased 5.7% year over year to $574.7 million, but missed the Zacks Consensus Estimate by 13.7%. Comparable store sales declined 2% in the quarter due to lower consumer traffic. The comparable store sales improvement of 7% in Johnston & Murphy Retail was more than offset by the decline in comps in The Lids Sports Group, Journeys Group and Schuh Group.

Lower-than-expected sales were due to challenging retail/sales environment as consumers were more conscious about their spending habits and avoided unnecessary expenses.

The restrained consumer spending environment in the U.S. emanated from the recent hike in payroll taxes and higher gas prices. Besides taxes, weak pay and a tepid rate of hiring also curbed consumer spending leading to lackluster sales. Moreover, the company believes the gloomy consumer spending environment will not improve much in the next few quarters.

Genesco also began the back-to-school (August-September) on a disappointing note; recording a comp sales decline of 3% as of Aug 24. Based on a sluggish start to the third quarter, Genesco expects comparable store sales to fall about 1%-2% in the third quarter fiscal 2014.

Genesco also reduced its guidance for fiscal 2014 and now expects adjusted earnings per share in the range of $5.20 to $5.30 per share compared with the prior range of $5.57 to $5.67 per share. The company expects comparable store sales increase in the low single-digit range for fiscal 2014.

This footwear retailer witnessed sharp downward estimate revisions after announcing its second quarter fiscal 2014 results. All the estimates for the third quarter and fiscal 2014 declined over the past 60 days. The Zacks Consensus Estimate for the third quarter decreased 11.4% and that for fiscal 2014 went down 7.2% over the last 60 days.

Like Genesco, other retailers like Abercrombie & Fitch Co (ANF - Free Report) , Aeropostale Inc and American Eagle Outfitters Inc (AEO - Free Report) have reported declines in comparable store sales and expect continued weakness in back-to-school sales.

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