Fun Times at Other Industry Retailers

At almost the same time Abercrombie & Fitch (owner of Hollister), Tilly’s, The Buckle, and Genesco (owner of the Journeys chain) released, in early June, 10-Qs for their quarters that ended April 30th.

I was going to do my usual thing and review each one separately.  But I was busy, too much time passed and honestly, there’s so much sameness to what our industry’s retailers are saying that I wasn’t sure anybody would want to read four separate reports.  Hell, I didn’t even want to.

So what I’ve done is gone through the 10-Qs and collected a few observations and some summary data.  It is, I think, enough.

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What a Specialty Retailer Might Learn From Genesco

I’m not really that interested in doing a full analysis of Genesco. Mostly because I doubt you’re that interested in reading it. But Journeys, owned by Genesco is 813 stores and the Journeys group of stores is over 1,000 in the U.S. and Canada so we can hardly not pay attention to what they’re up to.

 For the year ended January 29th, Genesco’s revenues were almost $1.8 billion. Of that, Journeys represented $804 million, or 45%.  Their hat retail business, Lids, is the second largest piece of their business. It has 985 stores. It and Journeys represent 80% of Genesco’s total revenue.

I did a more thorough analysis of Genesco a while ago. The approach to retail and the strategy I highlighted in that article is still very interesting to read about, and one of the reasons I don’t feel the need to go in depth here. If you want you can also view the press release on their fourth quarter and year end results. 
Genesco wants a brand leadership position for all their businesses. They want to be number one and have a reason to believe that their position is hard to duplicate. They believe they are number one in teen fashion footwear in Journeys, and number one in headwear through Lids.
In Lids, they believe that what makes their position hard to duplicate is that they will always been the competitor with the largest localized assortment. In a college town, to use their example, they will have every permutation and combination of logoed product that the college offers. 
They talked about teenagers migrating away from athletic footwear into “brown shoes” that still have an athletic base and construction. Their sense is that these kinds of cycles last years and that they are still very early in this one.
We’ve all heard about that trend before, but let’s consider the implications. First, Journeys, or other large retailers, don’t care whether the kids want skate shoes, or brown shoes, or ballet slippers as long as they can get the ones the kids want. Second, if you are in the skate shoe, or athletic shoe business you’d better be able to transition to the so called brown shoe market. That will depend on your existing market position (that is, how your customers perceive your brand) and whether you have the resources and manufacturing relationships to pull it off. I can imagine it is hard for some action sports brands to follow this brown shoe trend for either or both of those reasons.
Genesco goes right on to discuss that as Journeys is the biggest retailer in the space they have very strong relationships with vendors. One part of “very strong relationships,” of course, is that they can get better prices. Wonder if the vendors like that part of “very strong relationships.” Anything for volume I guess.
Genesco notes that these strong relationships give them access to exclusive product “on a preferred basis” and to special make up product as well. It seemed like they were talking about two different things there, but I’m not sure I understand the distinction between exclusive product and special make up.
Saying it as bluntly as anybody I’ve studied has, they note that “The economics improve with national scale.” Part of the reason that’s true is because you have to be big to afford the management and inventory systems that make local assortment management possible with a couple of thousand stores.
Genesco is refreshingly honest about rolling up the little guys in fragmented industries and using their size to compete. It was probably eight years at the Surf Summit in Cabo when I stood up and asked a panel of specialty retailers what they would do when there were 5,000 branded stores competing with them. Boy was I wrong. There are way more than 5,000. But the specialty retailers who are still standing can’t compete on price or national scale.
They can take a cue from Genesco and compete on localization by digging deep into their customers’ preferences. Resist the temptation to select product according to terms, margin, discount or because the rep’s an old friend (this is where having a strong balance sheet comes in). Buy what you know you can sell to your customer based on solid information. That’s what Genesco strives to do.       



Genesco’s Take on The Retail Business

Genesco, the owner of Journey’s, reported its results for the quarter and year ended January 10th in early March. A couple of days later they made an investor presentation that discussed these results. I’ll talk briefly about their numbers, but what really caught my attention was their discussion of the retail environment and their retail strategy.

Genesco operates 2,270 retail stores in the United States and Canada. 90% of their revenues are retail and 10% wholesale. Revenues for the year were $1.57 billion, up only slightly from the previous year’s $1.55 billion. Earnings for the year were $28.8 million compared to $150.8 million the prior year, but there was a huge legal settlement that accounted for $124 million of the difference. The company says that adjusting for that settlement and some other non operating items, earnings from continuing operations grew from $40.8 to $43.1 million. Net earnings per share declined from $1.87 to $1.81.

Comparable store sales were flat in the 4th quarter compared to the same quarter the previous year. The Hat World group increased by 6% and Journey’s declined by 3% in the quarter.
The Journey’s group represents 48% of the year’s sales. Hat World group is 30%. However, they each generated about the same level of operating income during the year. The Journeys group, which includes Journeys, Journeys Kidz, and Shi by Journeys includes 1,025 stores of which 819 are Journeys. The Hat World group had 921 stores at fiscal year end.
Genesco is looking at “very modest” store growth in Journeys. They say they don’t want to have happen to them what has happened to other retailers who have over extended themselves on their store count. They mention Footlocker, The Gap, and Starbucks as retailers who are closing stores because they got a bit overextended. They might have mentioned PacSun as being over extended as well. They plan to open only 50 net new stores over the next five years across the whole company. The majority will be in the Hat World group.
If you can’t grow stores, you’d better improve your comparable store sales and control costs. One of the trends they think may be favorable to them is “a shift out of athletic shoes into brown.” They say they are only seeing hints of it now, but should know in the spring. That should get our attention don’t you think? Would it be completely a surprise given the number of athletic shoes and shoe brands out there? Yes, there can be too much of a good thing and markets can become saturated.
They also note that they have another wave of store leases coming up for renewal. They expect to get lower costs and more favorable terms when those leases are renegotiated. Overall, they expect that with very modest store growth and comparable store sales growing by only two to three percent, they can expand operating margins from the current five to eight percent and grow earnings per share by 15% to 20% annually. Obviously, they see a lot of opportunity in reducing costs and operating efficiently.
The other thing that’s happening, as they describe in discussing their hat, uniform and sport apparel business, is that they “…are consolidating the industry. The mom and pops are going out of business or they are credit constrained and can’t stay fresh.” That sounds the slightest bit familiar.
The hat business, by the way does include stores that just sell hats. But it also includes stores, under the Lids name, where you can buy branded sports apparel of all kinds and the uniforms that you need, for example, for school sports. They go very deep in their hats, apparel and uniform stores, and the merchandise mix favors the local teams.
President and CEO Robert Dennis talked about how the economics of their hat and hat related business has changed as they have gone from 150 to 800 stores since he got there. The difference, he says, “is enormous.” There is tremendous leverage with landlords, the leagues from whom you license product, vendors, and infrastructure.
He notes that the team sports business is highly fragmented with perhaps 5,000 dealers, and Genesco’s business in this area is already the second largest even though it’s small. He doesn’t quite know whether to characterize their strategy in this space as a rollup or displacement. But he notes that when, for example, a five store chain has a lease coming up for renewal, it will find Genesco on their landlord’s doorstep taking over that space. Wonder who the landlord would rather have as a tenant? He also characterizes most of these small players’ systems as being “from the dark ages.” That, I’m afraid has the ring of familiarity as well.
Action sports is kind of in the hat business, but we’re sure not interested in selling uniforms and team jerseys. But Genesco’s description of this retail environment and how they take advantage of it has to sound at least a little familiar as well. Larger retailers in our space are certainly taking advantage of the same pressure points Genesco is, and we can’t expect it to stop.
I wrote not too long ago about Billabong’s retail strategy. They might agree with Genesco executives about how the retail environment is evolving.
My own expectation is that due to some of the pressures on core store described above, their numbers will tend to decline until we have just the right number to service the enthusiasts who are truly prepared to pay extra for expert advice and service in a community based environment. I don’t know how many stores that is or how long it takes, but when it happens, we will have come full circle in the action sports core store business; because that’s how it use to be.