Shareholders of Genesco would probably like to forget the past six months even happened. The stock dropped 32% and now trades at $25.62. This might have investors contemplating their next move.
Is now the time to buy Genesco, or should you be careful about including it in 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?
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why you should be careful with GCO and a stock we'd rather own.
1. Flat Same-Store Sales Indicate Weak Demand
Investors interested in Footwear companies should track same-store sales in addition to reported revenue. 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 failed to grow its same-store sales. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Genesco might have to change its strategy and pricing, which can disrupt operations. 
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
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. Over the last few years, Genesco’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
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 burned through $33.06 million of cash over the last year, and its $637.4 million of debt exceeds the $21.75 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Genesco’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Genesco until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
We see the value of companies helping consumers, but in the case of Genesco, we’re out. After the recent drawdown, the stock trades at 16.2× forward P/E (or $25.62 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. We’d suggest looking at the most entrenched endpoint security platform on the market.
Stocks We Would Buy Instead of Genesco
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