Genesco Inc. (GCO)

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Genesco Inc. (GCO)

Q4 2009 Earnings Call

March 5, 2009 8:30 am ET


Robert Dennis – President & CEO

James Gulmi – SVP Finance & CFO
Hal Pennington – Chairman


Jeffrey Klinefelter – Piper Jaffrey

Scott Krasic – CL King

Mitch Kummetz – Robert W. Baird

Chris Svezia – Susquehanna Financial

Jillian Caruthers – Johnson Rice & Company

Ken Stumphouzer – Sterne Agee



Good day everyone and welcome to the Genesco fourth quarter fiscal year 2009 release conference call. (Operator Instructions) At this time for opening remarks and introductions I would like to turn the call over to Mr. Robert Dennis, President, and Chief Executive Officer of Genesco; please go ahead sir.

Robert Dennis

Good morning. Thank you for joining us for our fourth quarter fiscal 2009 conference call. Participating with me on the call today are Hal Pennington our Chairman and James Gulmi, our Chief Financial Officer.

As always we will make some forward-looking statements in this call. They reflect our expectations as of today but actual results could be materially different. We refer you to our earnings release and to our recent SEC filings including the 10-Q for the third quarter for some of the factors that could cause differences from our expectations. And for those listening to the replay of this call on the internet, some of these factors can be read on the opening stream.

Sales in the fourth quarter were choppy. The early part of the quarter was weak and the weakness continued until a few days before Christmas. Sales then accelerated through early January when they softened dramatically again. All in, we ended with total sales down 3% and comp sales down 5% for the quarter, a bit below our mid January expectation that comps might be down between 1% and 4%.

This choppiness has continued into the new fiscal year but so far in a direction that we like. Comps were up 7% for February. Needless to say we hope that this at last represents a sustainable trend but we aren’t planning on it at this point. Given the large swings in the fourth quarter along with all the negative news on the economic front, we are remaining quite cautious about near-term sales.

A primary focus for us in the fourth quarter as it progressed was inventory management. We made it a priority to enter the new year with clean inventories given the sales uncertainties. We feel good about the results of that initiative. When we finished the year inventories were a little less then 2% above last year’s end levels.

Inventory per square foot was down 7%. The inventory we have on hand is exceptionally fresh and we have the capacity to buy into a trend if we see one. Earnings from continuing operations with the adjustments we break out in the press release were $1.06 per share for the quarter versus $1.01 last year. This year’s number reflects operating income that was short of what was reflected in our earnings expectations when we updated mid January due primarily to the end of January’s shortfall on sales and the promotional activities to ensure clean inventory more then offset by a lower tax rate.

That was a relatively good if disappointing end to a year that began on a strong positive note and indeed continued strong into the early third quarter. Even with the severe disruption to the economy in the second half we achieved slightly positive comps for the company for the year. Total sales for the company were up 3.3% to $1.55 billion and adjusted EPS was $1.81 versus $1.84 last year.

The Journeys groups comps were up 1%, Hat World’s comps were up 2%, Underground Station’s comps were flat. Our licensed brands division had another record year in sales and earnings. Only Johnston & Murphy had a negative comp sales result with comps down 10%. Of course Johnston & Murphy’s customers tend to be extremely sensitive to the financial markets and have been hit particularly hard by this recession.

We think these are solid results given the economic climate and that they highlight the essential strength of our business model. With a seasoned management team that has survived more then one business cycle, a strong financial position, and a leadership position in our market niches, we expect to emerge from the downturn with a stronger competitive position, then when we went into it.

As we have pointed out before current conditions carry a number of opportunities for long-term improvement for us. The first of these silver linings involves the real estate market. We are being much more selective and limiting our new store growth to the highest quality must have locations. This electivity and the increasing supply of mall space as other retailers slow store openings and close stores, is already enabling us to negotiate better deals.

This is a significant reversal of leverage in the developer retailer relationship of recent years when occupancy cost has been one of our more significant strategic challenges. We are fortunate that market forces have enhanced our ability to negotiate for improved occupancy costs at a time in our lease renewal cycle when it really matters. Forty-five percent of our store base or 1,008 stores are either up for renewal for kick out in the next three years.

In the current year we have 313 stores or 14% of our store base up for renewal or kick out. Second stepping back for the time being from our aggressive new store growth of recent years allows us to focus on construction costs. This focus in combination with the fact that landlords are more flexible on remodeling with lease renewals means that we should see continued material reductions in capital expenditures further enhancing our cash flows and strengthening our balance sheet.

Longer-term of course we will also see correspondingly lower depreciation and the process improvement will drive proportionately more savings as we resume a more normal growth rate in the future. Third the competitive landscape is likely to be much cleaner when this is over. It is likely that a number of retailers especially small independent operators will not survive. We expect to be a relative beneficiary of consolidation and see real potential to increase our market share.

With all that in mind I want to say a few words about our approach to this upcoming year. We are assuming that the economy will not improve near-term and consumer demand will not begin to recover before the second half at the very earliest. We recognize the possibility that this recession might extend well into our next fiscal year and indeed the news that comes at us daily seems to make this scenario increasingly likely.

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