Genesco: Key Earnings, Stock Is Cheap, Technicals Suggest Caution

Footwear styles in the shoe rack.

ANNVIPS

Holiday spending is tracking soft so far this season, per BofA. While Black Friday and Cyber Monday were record-breaking, it comes amid high inflation and increasing credit card usage by Americans. What’s more, retailers have had to discount prices to move inventory, potentially hurting margins. So, there is some pain in the discretionary space.

A Soft Spending Stretch Ahead Of The Holidays Vs. Last Year

A Soft Spending Stretch Ahead of the Holidays Vs Last Year

BofA Global Research

According to CFRA Research, Genesco Inc (NYSE:GCO) operates as a retailer and wholesaler of footwear, apparel, and accessories. The company operates through four segments: Journeys Group, Schuh Group, Johnston & Murphy Group, and Licensed Brands. The Journeys Group segment offers footwear and accessories through the Journeys, Journeys Kidz, and Little Burgundy retail chains, as well as through e-commerce and catalogs for young men, women, and children.

The Tennessee-based $683 million market cap Specialty Retail industry company within the Consumer Discretionary sector trades at a low 6.9 trailing 12-month GAAP price-to-earnings ratio and does not pay a dividend, according to The Wall Street Journal. Macro risks weigh with this small consumer stock as we head into what should be a tough first half of 2023.

On valuation, CFRA research data shows reduced per-share profits ahead. With significant operating leverage working against the firm, its profitability is less than what is seen among its competitors. Notice that 2022 operating margins are just 6.1% for Genesco versus an industry average of 9.8%. Its net margin and return on capital are also weak compared to its market.

Seeking Alpha has a solid B+ valuation rating on GCO, but the company guided down in its most recent earnings report. Over the last two years, GCO has beaten EPS estimates 100% of the time and features a strong sales beat rate trend while missing top-line estimates in the latest report. With a forward operating P/E near 8, below its 5-year average of 11.3, shares look cheap despite the bleak macro situation. Also consider that earnings are expected to rebound in 2024. Using a $7.49 2024 earnings figure, the stock trades at less than 7 times earnings.

GCO: Earnings, Revenue, Key Profitability Ratios

GCO: Earnings, Revenue, Key Profitability Ratios

CFRA

Looking ahead, data provided by Wall Street Horizon shows a confirmed Q3 2023 earnings date of Friday, December 2 before market open with a conference call immediately after results cross the wires. You can listen live here. Genesco will also report same-store sales for the quarter.

Corporate Event Calendar

Corporate Event Calendar

Wall Street Horizon

The Options Angle

Digging deeper into the earnings and options pricing situation, data from Option Research & Technology Services (ORATS) show a consensus drop in per-share profits from $2.36 a year ago to just $1.57 in its upcoming earnings report. That’s a large 33% year-on-year decline as revenues are seen as falling by more than 1%. Shares traded sharply lower following its September quarterly report despite the company beating on bottom-line estimates.

Options traders have priced in a 9.9% post-earnings stock price swing when assessing the at-the-money straddle on the earliest-expiring options. That is about in line with previous earnings reports where there was liquidity in option pricing. Overall implied volatility is high at 68.3% per ORATS. With large recent earnings-related moves, the high options pricing might be even to the cheap side with a more than 12% average earnings move following the previous three earnings reports.

GCO: Options Traders See Volatility Ahead

GCO: Options Traders See Volatility Ahead

ORATS

The Technical Take

With a low valuation and a volatile earnings reaction history, how does the chart shape up ahead of Friday’s key report? I see near-term bearish risks. Notice in the chart below that GCO failed to remain above its falling 200-day moving average in August, and now makes another approach to that key point. I see a gap near $56 that has confluence with the 200dma – another layer of potential profit-taking by the longs. So, there’s limited upside. Moreover, I see significant bearish overhead supply in the $60 to $65 range as indicated by the volume-by-price reading on the left.

Look for support in the $48 to $50 zone. Overall, I would buy on a dip into the low $40s if we get that post-earnings, but the chart is largely unappealing.

GCO: Shares Weak In 2022, Overhead Supply Apparent

GCO: Shares Weak In 2022, Overhead Supply Apparent

Stockcharts.com

The Bottom Line

GCO has a good valuation and is dependent on an earnings recovery in the coming quarters. The technical chart is lackluster, and I expect high volatility post-earnings on Friday with this small retailer. I think it is a decent long-term holding based on valuation, while its near-term chart warrants caution.

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