Genesco's Assortment Bet For H2 2025 Is Risky, The Stock Is Still A Hold

seekingalpha06-30 15:30

Genesco's 1Q25 results show flat to down revenues, with margins protected by store closures.The company plans to incrementally pivot away from brands like Vans and Converse in the second half of the ...

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The company's low seasonal quarter is relatively unimportant compared to the second half, and management provided strategic guidance for that period as it tries to pivot away from brands like Vans and Converse. This article covers Genesco's (NYSE:GCO) 1Q25 results and earnings call. I started covering Genesco in March 2024 with a Hold rating. Despite some positive aspects for the company, namely long-standing management, a relatively niche position, and a low multiple of pre-pandemic earnings, I considered the stock not opportunistic, given the consumer's challenges and a lack of balance sheet strength. Since then, the company's stock has been flattish, and I do not see any meaningful fundamental improvements. I expect the stock's second and third quarters to be volatile as the company tests a new assortment strategy on its flagship chains. For that reason, I maintain my Hold rating. Flat to down 1Q25 results The company's fiscal year started with some negative to flat results. Revenues were down 5%, with Journeys down 5%, Schuh down 7%, J&M down 3%, and GBG down 5%. The company reported that figure for comparable sales, too, but the store footprint was down 5%, so in my opinion, comparables are flattish actually. Gross margins were basically flat, something understandable given that Genesco does not record occupancy and labor on CoGS. SG&A was down on an absolute basis (thanks to closing stores) but still delivered 220 basis points, which meant that operational losses grew $10 million YoY to $32 million. We should remember that Q1 is a slow seasonal quarter for the company, and being a B&M retailer with falling sales, operating losses are higher than what can be expected in future quarters (especially in 2H). Data by YCharts A risky turnaround bet into 2H25 The company's Q2 is more important than Q1, and the company guided for similar performance in terms of YoY comparable revenue declines. Margins should improve a little YoY thanks to Q2 receiving an extra week from back-to-school season this year, compared to 2Q24. However, the company's make-or-break season is clearly 2H, which includes back-to-school and the holidays. For this season, Genesco is preparing a strategic change in its two flagship chains, Journeys and Schuh, which account for 80% of sales. Journeys brought a new CEO at the beginning of the year and replaced its Chief Merchandise and Chief Marketing officers (as reported on the call). Both chains are known for catering to teenagers, particularly girls, with fashion-oriented footwear. Customers can find more sneakers, streetwear-style shoes, and boots. Some staple brands for the chain are Vans and Converse. Athletic shoes (like Nike or Adidas for runners) are a less important component. However, the company has been highlighting weakness in Vans and Converse demand. These brands are grouped under the banner vulcanized footwear in the earnings call (they are called like that to separate from the athletic shoes generally manufactured with contact cement techniques). Vans' weakness is no surprise, as its parent VF Corporation (VFC) recently posted sales down 25% YoY for the brand. Nike (NKE) reported earnings this week, with Converse down 18%. The sector is clearly suffering. For this reason, Genesco is trying to pivot away from these brands and into different assortment. For example, the New Arrivals section of Journey's website gives more space to New Balance (a casual sportswear brand) and Crocs than to Vans and Converse. I believe this pivot might be the right choice, but it is dangerous. The company risks losing its position as a fashion-focused footwear retailer for teenagers and becoming another athletic-like footwear retailer. Of course, the company is not bringing in Nike or Hoka shoes for runners, and management may claim that New Balance is now in fashion, but the move still seems dangerous. The new assortment will be rolled out for the back-to-school season, starting at the end of Q2. This means that Q2 will contain important information on the potential of the turnaround for the all-important second half. Revisiting the valuation under uncertainty Today, Genesco has a market cap of $300 million and a stock price of close to $26. Data by YCharts On the call, management reaffirmed guidance for the year of sales down 2/3% and flat margins on both operating and gross levels. The result would be an EPS of between $0.6 and $1. A price of close to $26 seems rather high compared to the above. However, I believe the comparison is not fair for two reasons. First, the company has significant operating leverage; a comparable revenue increase of 5% next fiscal year would mean the company can go from a current TTM EBT loss of about $25 million to an EBT profit of $42 million. Second, the company's guidance is of little use when it is planning to make an important assortment pivot in the second half. Despite management's best intentions, predicting how customers will react to this change is difficult. Being the most important time of the year, if the assortment is well received, Genesco will probably post much better numbers for FY25, whereas they will be worse if the assortment is a flop. Under this uncertain scenario, I would compare the data to the results needed to justify the current price. First, the consumer does not seem to be in a better position than a few quarters ago. Second, the company is making a significant assortment transition that is risky. Third, the company's balance sheet has less than $30 million of average cash across the past few quarters. Debt is not high at a current $60 million, but means the company has no cushion to survive a prolonged economic downturn or an assortment mistake that requires clearance sales. Compared to these relatively gloomy data points, the stock requires that the company has a good second half. If it doesn't, the company will continue to post losses for FY25. Further, it will face an inventory problem from the new assortment. This means, in my opinion, that the stock already discounts at least a part of the positive scenario and provides little protection for the negative scenarios.  For that reason, I continue to believe the stock is a Hold. For 2Q25, I will pay a lot of attention to comments on how the new assortment is doing in the early back-to-school season.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2447557675"}