Genesco Inc.'s (NYSE:GCO) Shares Climb 31% But Its Business Is Yet to Catch Up

The Genesco Inc. (NYSE:GCO) share price has done very well over the last month, posting an excellent gain of 31%. Notwithstanding the latest gain, the annual share price return of 7.4% isn't as impressive.

Even after such a large jump in price, there still wouldn't be many who think Genesco's price-to-sales (or "P/S") ratio of 0.2x is worth a mention when the median P/S in the United States' Specialty Retail industry is similar at about 0.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Genesco

How Has Genesco Performed Recently?

Genesco hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Genesco will help you uncover what's on the horizon.

Is There Some Revenue Growth Forecasted For Genesco?

The only time you'd be comfortable seeing a P/S like Genesco's is when the company's growth is tracking the industry closely.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 2.0%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 12% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue growth is heading into negative territory, declining 1.5% over the next year. With the industry predicted to deliver 3.6% growth, that's a disappointing outcome.

With this in consideration, we think it doesn't make sense that Genesco's P/S is closely matching its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

The Final Word

Its shares have lifted substantially and now Genesco's P/S is back within range of the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

It appears that Genesco currently trades on a higher than expected P/S for a company whose revenues are forecast to decline. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If the declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Genesco with six simple checks.

If these risks are making you reconsider your opinion on Genesco, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com