The past six months have been a windfall for Genesco’s shareholders. The company’s stock price has jumped 53.8%, hitting $41.32 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Genesco, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
We’re happy investors have made money, but we're swiping left on Genesco for now. Here are three reasons why GCO doesn't excite us and a stock we'd rather own.
Why Do We Think Genesco Will Underperform?
Spanning a broad range of styles, brands, and prices, Genesco (NYSE:GCO) sells footwear, apparel, and accessories through multiple brands and banners.
1. Shrinking Same-Store Sales Indicate Waning Demand
In addition to reported revenue, same-store sales are a useful data point for analyzing Footwear companies. This metric measures the change in sales at brick-and-mortar locations that have existed for at least a year, giving visibility into Genesco’s underlying demand characteristics.
Over the last two years, Genesco’s same-store sales averaged 1.4% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Genesco might have to close some locations or change its strategy and pricing, which can disrupt operations. 
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Genesco, its EPS declined by 41.7% annually over the last five years while its revenue grew by 1.1%. This tells us the company became less profitable on a per-share basis as it expanded.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Genesco’s $572.2 million of debt exceeds the $33.58 million of cash on its balance sheet. Furthermore, its 9× net-debt-to-EBITDA ratio (based on its EBITDA of $63.02 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Genesco could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Genesco can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Genesco doesn’t pass our quality test. After the recent surge, the stock trades at 15.5× forward price-to-earnings (or $41.32 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at Yum! Brands, an all-weather company that owns household favorite Taco Bell.
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