Jefferies Downgrades Genesco To Hold

Jefferies Downgrades Genesco To Hold

Jefferies lowered its rating on Genesco Inc. to “hold” from “buy” due to expectations that Journeys’ sales will moderate in part due to expectations that Vans’ recently-robust gains will also show some moderation. The investment firm also cited risks around a Lids’ sale and the stock’s run up so far this year.

The price target was trimmed to $43 from $48 previously. On Tuesday, shares of Genesco were down $2.50, or 6.2 percent, to $37.95.

“While we see LT oppty at GCO, most of the central aspects of our Buy thesis have come to fruition (re-acceleration at Journeys, exploration of portfolio monetization) and we think catalysts are more limited over the NT,” Jefferies’ team, led by Janine Stichter, wrote in a note. “Meanwhile, we see added NT risk as some expectation for a Lids sale (which is not a certainty) is factored into the shares & the slowdown at Schuh may limit margin upside.”

Jefferies noted that the stock has run up 25 percent year-to-date with multiples back toward its historic average.

On Journeys, Jefferies noted that the chain has seen its comps revive (up 11 percent in Q417 from 4 percent in Q317 and ahead 6 percent Q118) due to a resurgence of Vans as well as other retro styles, plus weather-driven strong boot sales.

But Stichter feels the strength at Journeys is already reflected in the stock and Journeys’ comp cycle has peaked. In particular, the analyst noted that while demand for Vans remains strong, Google Search Interest on the brand shows it has peaked. Product availability has also proliferated with Google search showing the brand showing up at many non-core retailers such as Shoe Carnival, Famous Footwear, Foot Locker, Dick’s, Free People and Kohl’s.

Jefferies said Journeys should maintain positive comps through the year with a boost from “plenty of smaller product trends.” These include increased allocations of brands such as Fila K-Swiss that are benefiting from ’90s nostalgia; strength in casual athletic styles, including a recent resurgence in New Balance; as well as ongoing momentum in Adidas and Puma. Stichter wrote, “However, in our view none of these trends have the blowout potential of Vans, implying that peak comp performance is now likely in the past.”

Jefferies also pointed to Genesco’s officials concerns that social media is shortening trend cycles.

On Lids, Jefferies sees the business stabilizing with same-store sales down 7 percent in the first quarter versus down 14 percent in the fourth quarter and facing easy comparisons going forward. But a lack of a major product trend should limit the size the recovery in the near term. The analysts wrote, “While in the past major product trends (snapback hats, trucker hats, visors, dad hats) have helped support comp growth for Lids, near term, we expect the lack of a dominant hat trend to limit the magnitude of the division’s inflection.”

Also, Jefferies noted that NFL merchandise declines should moderate as many temporary issues, including player injuries, politics, major market team losses, impacted demand. But surveys are showing that interest in the NFL remains down and parents are concerned about having their kids play football due to concussion risks. Lids also faces strong competition from Fanatics, which operates the online stores for many of the major sports leagues.

Finally on Lids, Jefferies said that while it’s likely that Lids will be divested due to pressure from activist shareholders, a deal might not get done because the valuation may come in lower than Genesco’s target. Jefferies cited Fanatics as the most likely strategic buyer and said private equity buyers may arrive while also noting that interest in buyouts of mall-based retailers has lessened with the foot traffic issues facing malls. In mid-February, Genesco announced plans to explore divesting Lids.

Other risks at Genesco include a deceleration of trends at Schuh, Genesco’s U.K.-based footwear chain, over the last two quarters and margin pressures due to the shifts towards e-commerce and higher wages

Jefferies also lowered its FY19 EPS estimate to $3.15 from $3.25. That compares to guidance of $3.05-$3.45 and consensus of $3.19. Wrote Jefferies, “While we think that guidance and consensus are achievable, we would note that there is some risk to the guide, given management has already guided that 2Q is unlikely to be EPS positive, despite a $20M favorable sales shift. This put a lot of onus on the back half, which will be pressured by a $20M negative sales shift in 3Q and the lapping progressively more challenging compares in 4Q.”

The FY20 estimate is now $3.45, down from $3.50 previously and consensus of $3.54.

Photo courtesy Journeys