Genesco Inc. — Q2 FY2024 Form 10-Q
Business context and period. The quarter ended July 29, 2023; the filing also reports the six months ended that date. Genesco designs, sources, markets and sells footwear and accessories through retail, e-commerce and wholesale businesses, including Journeys, Schuh, Johnston & Murphy and licensed brands. It operated 1,375 stores. Fiscal 2024 is a 53-week year ending February 3, 2024.
Financial performance
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Net sales | $523.0 million | $535.3 million | $1,006.4 million | $1,056.1 million |
| Gross margin | $249.5 million; 47.7% | $254.3 million; 47.5% | $478.3 million; 47.5% | $505.8 million; 47.9% |
| Operating income (loss) | $(38.6) million | $9.1 million | $(61.6) million | $17.3 million |
| Net income (loss) | $(31.7) million | $7.6 million | $(50.6) million | $12.6 million |
| Diluted EPS | $(2.79) | $0.59 | $(4.37) | $0.95 |
| Net interest expense | $2.4 million | $0.4 million | $4.0 million | $0.7 million |
- Quarterly S&A expense rose 5.9% to $259.5 million and increased to 49.6% of sales from 45.8%, primarily reflecting sales deleverage, compensation and IT costs. Six-month S&A rose 4.6% and reached 50.8% of sales versus 46.3%.
- Cash used in operating activities was $25.1 million for the first six months, compared with $224.2 million a year earlier. Investing cash use was $35.2 million, including $35.3 million of capital expenditures. Financing provided $49.1 million, largely reflecting net revolving-credit borrowings.
- Cash was $37.4 million at July 29, 2023, versus $48.0 million at fiscal year-end. Inventory was $491.1 million. Revolver debt was $131.5 million, up from $44.9 million at fiscal year-end; unused credit availability was $193.0 million. The company reported compliance with its credit facilities.
- Total assets were $1.495 billion and total liabilities $961.7 million. Operating lease liabilities were $540.8 million combined current and long-term.
Changes and business drivers
- Quarterly sales declined 2.3%; comparable sales fell 2%, with same-store sales down 6% and comparable direct sales up 14%. Six-month sales declined 4.7%; comparable sales fell 4%, with same-store sales down 7% and comparable direct sales up 11%.
- Journeys was the main weakness: quarterly sales fell 10.6% and the segment recorded a $14.9 million operating loss, versus $9.2 million income a year earlier. Management cited weaker store demand, consumer trade-down and higher markdowns.
- Schuh quarterly sales increased 21% and operating income rose to $8.4 million from $2.1 million. Johnston & Murphy sales rose 4%, while operating income declined 17% to $2.7 million. Genesco Brands sales fell 6.6%, though quarterly operating income improved to $1.9 million.
- For the six months, Schuh and Johnston & Murphy sales increased 13.8% and 10.0%, respectively; Genesco Brands sales declined 16.8%. Journeys sales declined 12.0%.
Outlook, risks and unusual items
- A non-cash goodwill impairment charge of $28.5 million was recorded in Q2, fully impairing goodwill attributed to the Togast reporting unit. The valuation reflected a continuing dispute with a Genesco Brands Group licensor and excluded cash flows for the disputed license beyond its current contract term.
- Separately, the filing says Levi Strauss & Co. disputes renewal of the footwear license beyond November 30, 2024 and declines to make a contractual buyout payment. Genesco disputes that position; the outcome is uncertain.
- Management expects to close approximately 100 Journeys stores in FY2024 and anticipates significant cost savings in FY2024 and FY2025, primarily from Journeys. FY2024 capital expenditures are expected to be approximately $50–$55 million, mainly for stores, remodels, technology and warehouse enhancements.
- Management believes cash, operating cash flow and available credit will meet liquidity needs in FY2024 and the foreseeable future. The business is seasonal, with working-capital needs typically peaking in summer and fall and operating cash flow historically strongest in Q4.
- An expected tax refund remains delayed because of an IRS audit; the outstanding amount is recorded as non-current prepaid income taxes. The filing does not provide a clear remaining refund value here.
- Principal risks include weak discretionary spending and store traffic, Journeys’ sales and margin pressure, inflation and labor costs, promotional activity, supply-chain and foreign-exchange exposure, lease and occupancy costs, and the licensor dispute. Environmental contingencies accrued were $1.7 million; management did not expect the identified site obligations to materially affect results.
Investor facts to verify
- Progress and financial effect of the Levi’s license dispute, and whether any renewal or buyout resolution changes the Togast valuation or brand outlook.
- Journeys’ sales, markdowns, store closures and delivery of the projected FY2024–FY2025 cost savings.
- Debt, interest expense, revolving-credit availability and seasonal liquidity needs as the company enters the second half.
- Status and timing of the IRS-audited tax refund and any change in the amount ultimately recoverable.
- Whether comparable e-commerce growth and improved Schuh and Johnston & Murphy results can offset continued weakness in Journeys and wholesale sales.