Genesco has had an impressive run over the past six months as its shares have beaten the S&P 500 by 5.4%. The stock now trades at $34.52, marking a 12.5% gain. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Genesco, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Genesco Will Underperform?
We’re glad investors have benefited from the price increase, but we're sitting this one out for now. Here are three reasons there are better opportunities than GCO and a stock we'd rather own.
1. Same-Store Sales Falling Behind Peers
We can better understand Consumer Discretionary - Footwear companies by analyzing their same-store sales. 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 3.8% year-on-year growth. This performance was underwhelming and suggests it might have to change its strategy or pricing, which can disrupt operations. 
2. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Genesco’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Genesco’s $521.4 million of debt exceeds the $105.4 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $79.96 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
We see the value of companies helping consumers, but in the case of Genesco, we’re out. With its shares topping the market in recent months, the stock trades at 15.8× forward P/E (or $34.52 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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