Genesco Crashes

The Nashville-based specialty retailer falls post-earnings announcement

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Sep 07, 2016
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Genesco (GCO, Financialreported its second-quarter earnings on Thursday. The retailer reported 4.57% loss to $625,557 in its sales but a whopping 94% growth to $14,578 in profits. Despite this, Genesco lost almost half a billion dollars ($494 million) in valuation at market close. The company’s shares dropped by 33% from $72.6 to $48.79 in one day.

Valuations

According to GuruFocus data, Genesco had a trailing 12 month price-earnings (P/E) ratio of 12 times (industry median of 20), price-book (P/B) value ratio of 1.12 times (industry median of 1.6) and price-sales (P/S) ratio of 0.38 times (industry median of 0.6).

The retailer had not provided any dividend payouts to its shareholders but has been an active buyer of its shares in recent years. Genesco had a share buyback ratio of 3.2%. Buyback ratio is calculated by buyback spent over market capitalization.

(Read about Buyback Ratio)

Genesco’s annual average total return from 2010 to present is at 8.56% while the Standard & Poor's 500 returned 12.49%.

Genesco

Founded as the Jarman Shoe Company in 1924 as a footwear manufacturer, the company changed its name to the General Shoe Company in the 1930s and became a public company in 1939. The company took its current name, Genesco, in 1959.

In its annual filing, the company claimed to be a leading retailer and wholesaler of branded footwear, apparel and accessories. Genesco has five business segments: Journey’s Group, Schuh Group, Lids Sports Group, Johnston & Murphy Group and Licensed Brands.

Genesco ended its fiscal year 2016 on Jan. 30. As of January, Genesco had a three-year average store growth of 5.1% to 2,852 stores and leased departments located primarily in the U.S., Puerto Rico, Canada, United Kingdom, Ireland and Germany.

Genesco also operates its 13 online websites: www.journeys.com, www.journeyskidz.com, www.shibyjourneys.com, www.schuh.co.uk, www.littleburgundyshoes.com, www.johnstonmurphy.com, www.lids.com, www.lids.ca, www.lidslockerroom.com, www.lidsclubhouse.com, www.trask.com, www.suregripfootwear.com and www.dockersshoes.com.

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(Journey’s, Company Website)

Journeys Group

In Genesco’s filing, the Journeys Group segment includes Journeys, Journeys Kidz, Shi by Journeys, Little Burgundy and Underground by Journeys retail stores, catalog and ecommerce operations. The Journeys segment sells footwear and accessories between ages 5 and mid-30s.

In fiscal year 2016, Journeys Group had the second-most stores in the five business segments. It carried 43% (1,222) of the total Genesco stores. Journeys also delivered 41% ($1.25 million) of Genesco’s total sales of $3 million. The segment also had the highest margin among the group with 10%.

In the first half of 2016, the Journeys segment grew 3.91% to $546 million compared to the first half of last year. The segment delivered comparable sales of -1% for the period.

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(Schuh, Company Website)

Schuh Group

Schuh Group sells a broad range of branded casual and athletic footwear for ages 5 to 30-year-old men and women. Schuh Group was acquired in fiscal year 2011 for approximately 100 million pounds sterling, which was subject to closing adjustments at that time. Schuh Group had a total of 92 retail stores and concessions in the U.K. and Ireland at the time of acquisition.

In fiscal year 2016, the Schuh segment had 125 stores and contributed 13% ($405.7 million) to Genesco’s total sales. The segment also had a margin of 4.7%. In the first half of 2016, the Schuh segment grew -5% to $172.6 million compared to the same period last year. The segment delivered comparable sales of -3% for the period.

02May2017153324.jpg

(Lids, Company Website)

Lids Sports Group

In its filing, Lids Sports Group includes stores and kiosks that sell licensed and branded headwear to men and women primarily in the early teens and mid-20s age group. The segment has the most stores at 47% (1,332 stores) of Genesco’s total as of January.

In fiscal year 2016, Lids Sports contributed 32% ($975.5 million) to Genesco’s total sales. The segment has a small margin of 1.75%. In the first half of this year, Lids Sports lost a disappointing 14% to $368 million compared to the year prior. Interestingly, the segment delivered comparable sales of 1% for the period.

02May2017153325.jpg

(Johnston & Murphy, Company Website)

Johnston & Murphy

Johnston & Murphy retail shops sell a broad range of men’s footwear, apparel and accessories. The segment had about 173 stores as of January. In fiscal year 2016, Johnston & Murphy contributed 9% ($278.6 million) to Genesco’s total sales with a margin of 6.4%. In the first half of this year, the segment grew by 6% to $135 million compared to the first half of 2015. The segment delivered comparable sales of 4% for the period.

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(Dockers® footwear, Company Website)

Licensed Brands

In its filing, the Licensed Brands segment markets casual and dress casual footwear under the licensed Dockers® brand to men aged 30 to 55 through many of the same national retail chains that carry Dockers slacks and sportswear and in department and specialty stores. The segment also comprised of Dockers® footwear and SureGrip® Footwear.

In fiscal year 2016, Licensed Brands contributed 3.6% ($109.8 million) to Genseco’s total sales with a margin of 8.4%. In the first half of 2016, the segment grew -2% to $51.6 million compared to the year previous.

02May2017153326.jpg

(SureGrip® Footwear, Company Website)

Cash, debt and book value

As of July 30, Genesco had total cash of $41.4 million. Further, the retailer had a total debt of $135.6 million resulting in a debt-equity ratio of 0.15. Genesco also had 23% of its total assets $1.58 billion in goodwill and intangibles with a book value of $886.9 million.

Cash flow

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(Genesco’s FY 2016 Cash Flow, Annual Filing)

As can be observed in Genesco’s annual filing, the company suffered a 24% decline in its operational cash flow in fiscal year 2016. As highlighted by red ink above in the operating activities section, the cash flow reduction was brought by increase in deferred income taxes expense and the one-time gain on sale of Lids Team Sports.

In terms of Genesco’s working capital, the $52.7 million cash flow reduction in fiscal year 2016’s Other Accrued and Other Assets and Liabilities was related to the Schuh (acquisition) contingent bonus, deferred purchase price and other acquisition-related payments and an increase in income tax payments. There was also a $25.1 million cash flow reduction in accounts payable section that was related to changes in buying patterns and payment terms negotiated with individual vendors. In contrast, the $58.8 million increase in cash flow from inventory reflects a reduction in Lids Sports Group inventory, partially offset primarily by an increase in Journeys Group inventory.

Genesco allocated $100.7 million in capital expenditures leaving it with $44.5 million in free cash flow. The company also spent $35 million in acquisitions and had reduced its debt and obligations in its revolving credit facility by $336 million.

The company also allotted $137.6 million in share buybacks. This share buyback expenditure in fiscal year 2016 was the company’s highest allotment in the recent decade. Genesco had performed this buyback with an annual P/E ratio of 17 times.

02May2017153327.jpg

(Gurufocus Interactive Chart, Gurufocus)

As can be observed in the GuruFocus Interactive Chart, Genesco had gone a bit earlier than it wanted to when it purchased most of its shares between the $60 to $80 range last year.

DuPont analysis

According to DuPont analysis, ROE is affected by three things: operating efficiency, which is measured by profit margin; asset use efficiency, which is measured by total asset turnover; and financial leverage, which is measured by the equity multiplier.

(Read more: DuPont Analysis Definition | Investopedia)

02May2017153327.jpg

(DuPont Return on Equity Analysis, Tabulated Data from Morningstar)

As shown in the graph above, Genesco demonstrated stability in its business operations for the past decade. Only during the great recession when its profitability declined and resulted in depressed return on equity figure.

Outlook

02May2017153328.jpg

(Genesco shares, Google Finance)

Genesco’s shares seemed to have received a solid punishment given its results and also its executive commentary.

"Our comparable sales were challenged during the second quarter particularly in July with the emergence of a fashion rotation at Journeys. We experienced a sudden shift away from many of the core styles that have fueled Journeys' strong performances in recent years. We were able to offset the effect this headwind had on our bottom line through a meaningful improvement in Lids Sports Group and continued strength at Johnston & Murphy combined with share repurchases over the past year.

"The third quarter is off to a difficult start driven largely by the impact of the fashion shift at Journeys during the height of the back-to-school season and challenges at Schuh. Comparable sales for the third quarter through Saturday, Aug. 27 are down (5%) from the same period last year.

"Based on our comparable sales trend and expectations for sustained challenges due to the fashion rotation at Journeys and conditions at Schuh, we are lowering our full year outlook. We now expect adjusted diluted earnings per share for the fiscal year ending Jan. 28, 2017, in the range of $3.80 to $4.00, compared to our previously issued guidance range of $4.80 to $4.90." –Â Robert J. Dennis, Genesco chariman, president and CEO

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The revision reflected a -19.6% change in earnings per share expectation. Nonetheless, Genesco’s shares would still currently be trading at a 12.6 times its revised earnings outlook for fiscal year 2017.

Conclusion

The market trashed Genesco’s shares when it heard about this change in outlook. It was not the outstanding 94% growth in profits (year on year) that was reflected on its shares, but the -19.6% change in its profit outlook for fiscal year 2017. Nonetheless, comparing this profit target to its fiscal year 2016 performance would indicate -5.11% reduction on its diluted earnings.

Genesco has three-year sales and profit growth averages of 5% and -5%.

If I were to value Genesco’s shares right now, I would rely on its industry median multiple (both for earnings and book value). On average, this would provide a value of $73 a share. This would mean that Genesco would eventually go back up (about 49%) where it once was prior to its earnings announcement.

The intrinsic value may be too optimistic in this case, so giving it a 20% margin of safety would still yield a $58 a share price valuation for Genesco. Nonetheless, losing a third of market capitalization just from one earnings announcement while retaining a healthy balance sheet and maintaining a possibly mediocre sales growth and steady cash flow just indicates an episode of the market’s irrationality that can be used as an opportunity for value seekers.

Disclosure: I am long Genesco.

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