Lids Store Taking Time To Turnaround, But Journeys Gives Genesco 7% Upside

In a report published Friday, Macquarie analysts Laurent Vasilescu and Stephanie Wakeham initiate coverage Genesco Inc. (NYSE: GCO) with a Neutral rating and a $69.00 price target, which represents a 7 percent potential upside. The experts note that, while the Journeys concept is certainly delivering, the Lids concept’s turnaround is taking time and pressuring margins.

Positive Journey

The firm is positive on Journeys, as the concept, which accounts for 41 percent of total revenue, has managed to increase its top line over time. Comps have also surged faster than its peers’. While growth is expected to continue into the back half of 2015, management guided for a slight deceleration in growth rates.

From a product point of view, the company holds a portfolio of key brands like Nike Inc (NYSE: NKE)’s Chuck Taylor, VF Corp (NYSE: VFC)’s Vans and Wolverine World Wide, Inc. (NYSE: WWW)’s Sperry.

But A Lid on Margins

Despite the positivity expressed above, Macquarie remains Neutral regarding Genesco as the analysts “are not sure how long the turnaround at Lids (32 percent of revenues) will actually take.”

Although overall comps have been positive over the past few years, they have been mostly driven by increased promotional activity, which, in time, pressures margins. The experts have proven that ASPs and unit change year-over-year have had a strong negative correlation for three years now.

“When ASPs are up for Lids, units are down, and vice versa [and] This is leading to deteriorating operating margins for the concept,” they explain. The firm assures it would need to see both these metrics move up before they become more constructive on the name.