On Tuesday, Genesco Inc . (NYSE:GCO) experienced a downgrade by B.Riley from Buy to Neutral, with a significant price target adjustment to $31 from the previous $43. The revision comes ahead of the company's fourth-quarter earnings release scheduled for this Friday, March 8, 2024. The downgrade reflects a lowered next twelve months (NTM) EBITDA estimate, dropping from $85 million to $61 million, which also influenced the reduced price target. B.Riley maintains the 4.5x NTM EBITDA valuation multiple used in their previous price target.
The firm's analyst cited several factors contributing to the revised outlook, including an anticipated delay in the investment thesis realization, initially set forth on December 14. The inflection point for Genesco's stock performance is now expected to extend by six to twelve months longer than initially projected. Additionally, a deeper bottoming process is likely to occur within the next six months, more so than previously anticipated.
Genesco had already lowered its fourth-quarter earnings guidance earlier this year, on January 8, in advance of its participation at the ICR conference. At that time, the company pointed to softer and more volatile demand trends and a more promotional environment within the footwear sector, including for brands not typically engaged in heavy promotions.
The analyst also expressed concern over the Journeys division's potential challenges in the first half of 2024, as footwear lead times restrict retailers' ability to swiftly adapt to market changes. Decisions made approximately six months prior may not align optimally with the spring season's product assortment. These factors, combined with the ongoing soft demand and promotional pressures, are expected to lead to a trough in Genesco's trailing twelve months (TTM) EBITDA at around $53 million, as opposed to the previously estimated $78 million.
Furthermore, B.Riley would not be surprised if Genesco announces additional store closures, which could be seen as a positive development in the longer term. Despite the downgrade, the firm still holds a belief that new leadership at Journeys will eventually have a beneficial impact, although their full influence may not be evident until the fourth quarter of 2024 or the first half of 2025.
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