Genesco H2 2025 Key to Future – Another Conservative Position (NYSE:GCO)

of Genesco (NYSE:GCO) 2Q25 results were not wildly out of line with the company’s guidance for the year, with comparable numbers improving slightly from 1Q25. However, the market would have expected a faster recovery because stocks fell nearly 12% the day after the earnings release.

The company still struggles to find the right assortment for its customers as the fashion cycle challenges its core category, vulcanized shoes (brands like Vans and Converse). It resorted to clearance sales, hurting its gross margins. The second half of fiscal 2025 should bring new assortments to stores.

The company’s shares are now trading at about the same price as in the previous articles in March 2024 and June 2024. The valuation is similar to a binary bet, with a very positive outcome if the economy improves, but potential business continuity challenges if the economy does not improve. This almost automatically makes the stock unattractive to conservative long-term holders. The bet is on the economy and not the company, as Genesco has not demonstrated that it can control the controllable and adapt to the circumstances (mainly by improving the assortment).

For the reasons above, I think Genesco stock is still a holding from a conservative, capital safety perspective. Some readers might find it a more attractive speculation, mainly as a leveraged bet on an economic improvement.

2Q24 results

Better comparables: Genesco saw comparables down 2%, stores down 4% and online sales up 8%. The main losers were department store chain Schuh (down 2%) and Johnston and Murphy (down 5%). The Journeys Group saw sales fall by just 1%.

This represents sequentially better comparables than 5% in 1Q25. However, the company also posted negative 2% comparables in Q224, improving from a 5% decline in Q124, only to deteriorate thereafter. This means that the comparable improvement could be a seasonal factor.

Digital growth may not create margin: Digital sales continue to grow (8% in 2Q25 and 6% in 1H25). These sales help support total and comparable sales (representing more than 20% of revenue; an 8% increase is similar to a 2% improvement in aggregate comparables). However, digital sales do not always improve the margin, given that they can be generated with expensive digital advertising. In fact, despite flat sales for 1H25, Schuh’s operating profits fell to $2 million from $7.5 million last year (the group is most exposed to digital sales).

The assortment problem: The company’s problem continues to be assortment. On the one hand, the important vulcanized categories (brands like Vans or Converse) continue to be contested. On the other hand, the consumer is more careful about where they spend their money. Both issues should be addressed from the assortment, in one case expanding other categories, in the second bringing more value or entry-priced products.

Genesco addressed this issue relatively late. For example, this quarter Schuh had to make liquidation sales that hurt its gross margins (as discussed on the call, segment margins are not disclosed separately). Genesco brought in a new Chief Merchandise Officer in 1Q25 and a new Chief Marketing Officer in 2Q25, so change may be on the way, but it should have happened sooner as the retailer has more freedom to adapt product range than a wholesale brand.

Hope for 3Q25: On the other hand, Genesco management commented that both July (belonging to the 2Q25 quarter) and August (belonging to the 3Q25 quarter) recorded positive comparables compared to last year. The company is confident that its new cargo strategy will begin to bear fruit in 2H25.

Readers should remember that the second half represents the majority of Genesco’s sales (as it includes the back-to-school and holiday season).

Risky capital allocation: Genesco used nearly $10 million in cash to buy back shares in T225. That may not sound like much, but the company has $77 million in debt versus $45 million in cash. Generally, retailers should not have debt because their business is already suffering from operational leverage. With declining comparables, nearing operating losses and positive net debt, share buybacks do not appear to be a priority. It reduces the company’s protection if the recession becomes more pronounced.

Valuation is unattractive to long-term holders, attractive to speculators

Genesco’s valuation hasn’t changed much since I started writing about the company in March 2024. It still has a market cap of about $300 million. Compared to that, the company’s 2018 average operating income of $73 million looks incredibly attractive. If Genesco can recover, then its current price is extremely cheap.

The company trades at this valuation because the difference between massive losses and massive profits is very small. The difference between operating income of $94 million in FY23 and operating profit of “just” $15 million in FY24 (adjusted for goodwill impairment) was just 2.5% of sales.

Therefore, Genesco stock is similar to a currency. Let’s say the economy recovers and the company improves its operations simply because of higher traffic and higher consumer income. In this case, the company will generate a lot of operating income compared to its current market capitalization. However, let’s assume the economy continues to be challenging and consumers are more careful about their spending. In this case, Genesco may not only not generate sufficient operating income, but also suffer liquidity risks because it does not have significant cash reserves.

The future of the company depends on the economy because it has not yet demonstrated its ability to control the controllable. The challenging environment has been around since mid-2022, but the company is only now introducing assortment changes, nearly two years later. This speaks of a lack of initiative.

In addition, the company’s assortment transition is necessary but risky. The company is well known for its vulcanized range and as it moves into other categories it may find more competition or alienating its core customer base.

In short, Genesco lacks the basic feature of a long-term investment, which is safety of capital. Already close to operating losses and with no cash reserves, the company can only sustain the current negative environment for some time before reaching financial trouble. The current assortment transition is necessary but increases short-term inventory risks, putting more pressure on the company’s finances.

As a speculative bet, Genesco may be more interesting to some readers. Stocks offer a relatively binary outcome between an improving economy that leads to much higher operating profits through operating leverage, or a stagnant or worsening economy that puts the company’s viability at risk.

It follows a conservative long-term approach and therefore I think Genesco is still a Hold at current prices.