GCO - Genesco: Weak Results And Future Outlook

2023-12-11 01:12:42 ET

Summary

• Genesco recently reported weak Q3 FY24 results, with declining sales and margins under pressure.
• The company is facing challenges due to macroeconomic headwinds and decreased consumer spending.
• Technical analysis suggests that the stock price may continue its downtrend, making it risky to invest in GCO.

Genesco ( GCO ) is a retailer of footwear and apparel. GCO recently posted weak Q3 FY24 results. Its margins were under pressure, and sales growth struggled due to macroeconomic headwinds. I believe its margins might continue to remain under pressure, and considering the adverse market environment, it might struggle to grow its revenues. Hence, considering these factors, investing in GCO can be risky. Hence, I assign a hold rating on GCO.

Financial Analysis

GCO recently posted its Q3 FY24 results . The net sales for Q3 FY24 were $579.3 million, a decline of 4% compared to Q3 FY23. The major reason for the drop was a weak performance in its Journeys Group and Genesco Brands Group segments. The Journey and Genesco Brands Group sales declined by 8.2% and 21.5% in Q3 FY24 compared to Q3 FY23. Decreased spending due to inflationary pressures affected the company's sales. Its gross profit margin for Q3 FY24 was 48.1%, which was 48.7% in Q3 FY23. The decline in margins was due to increased warehouse costs and increased promotional activity.

The net earnings declined to $6.5 million in Q3 FY24, which was $20.3 million in Q3 FY23. The effect of the challenging retail environment can be seen in the results. The decreased consumer spending is still affecting the company. Although there are some positives, like the hike in the interest rates being stopped, even the current rates are high, which will continue to affect them. So, to tackle the decreased consumer spending, the management might have to spend heavily on promotional activities, which can pressure its margins. In addition, its long-term debt at the end of October 2023 was $128.1 million, which was $85.9 million in October 2022. The increase in debt becomes even more concerning because of the adverse market conditions. Looking at the macroeconomic headwinds, I believe they might continue to struggle to boost their sales. The management's sales guidance also shows weakness. They expect their FY24 sales to be down around 2% compared to FY23. So, considering the weak outlook, pressure on margins, and increased debt, GCO can be risky.

Technical Analysis

GCO is trading at $30.9. The previous week's candle broke out of the resistance zone of $34, but it turned out to be a fake-out. The stock immediately reversed after crossing the $34 level, which shows that sellers are active. Hence, one should avoid buying it right now as I believe, looking at the recent candles, that the stock price might continue its downtrend. Even if it breaks the $34 level, there is one more barrier that it needs to break, and that is its 200 ema, which is at $42.3. So, buying GCO right now can be risky as there are two major barriers to the stock price, and the most recent candles are proof of this. Hence, making any new buying positions in the stock might be risky. So it would be better to avoid it.

Should One Invest In GCO?

First, look at GCO's valuations. GCO has a P/E [FWD] ratio of 18.48x compared to the sector median of 15.33x and has an EV / EBITDA [FWD] ratio of 11.95x compared to the sector median of 9.87x. Considering its current performance and future outlook, I think GCO doesn't deserve to trade at a higher valuation. Its EPS [FWD] is around $1.75, and I believe it can trade around a P/E of 15.3. So, this gives us a share price of $26.8. So, I believe GCO doesn't provide much value right now. Hence, considering factors like weak results, weak technical chart, high valuation, and weak outlook, I think investing in GCO can be risky. Hence, I assign a hold rating on GCO.

Risk

Rapid changes in consumer tastes are a challenge for the industry in which they work. For their footwear and apparel to remain popular and develop and choose new lines and styles that attract a wide range of consumers, they must accurately recognize and interpret shifting consumer trends and preferences and act quickly to address them. Demand and market acceptability for both new and old items are unpredictable and rely on large-scale investments in product design, development, and innovation, continuous dedication to product quality, and large-scale, persistent marketing initiatives and costs. They often have to judge product designs and marketing budgets months ahead of when real public acceptance can be measured to gauge their response to predicted shifting consumer trends and preferences. As a result, they might not be able to develop new items that are accepted by the market in response to changing customer trends and preferences. They risk having excess inventory, higher-than-normal markdowns, returns, order cancellations, or the inability to sell their product profitably if they are unable to recognize and analyze shifting consumer preferences and trends or to promptly develop or source products that meet market acceptance in response to these changes.

Bottom Line

Its quarterly results showed weakness, and I believe its sales and margins might continue to remain under pressure due to macroeconomic headwinds. Additionally, its weak outlook and high valuation make it unattractive. Hence, considering these factors, I assign a hold rating on GCO.

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