Genesco Inc. — Q3 FY2022 Form 10-Q
Reporting period: Three and nine months ended October 30, 2021. Genesco operates footwear and accessories retail, e-commerce and wholesale businesses, including Journeys, Schuh, Johnston & Murphy and Licensed Brands. It operated 1,434 stores at quarter-end. Results are unaudited.
Financial performance and condition
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Net sales | $600.5 million | $479.3 million | $1,694.4 million | $1,149.7 million |
| Gross margin | $295.2 million; 49.2% | $225.5 million; 47.1% | $825.4 million; 48.7% | $512.6 million; 44.6% |
| Operating income (loss) | $43.8 million; 7.3% margin | $8.2 million; 1.7% margin | $72.2 million | $(169.8) million |
| Net earnings (loss) | $32.9 million; diluted EPS $2.25 | $7.5 million; diluted EPS $0.52 | $52.7 million; diluted EPS $3.60 | $(146.3) million; diluted EPS $(10.31) |
| Net cash from operations | Not reported by quarter | Not reported by quarter | $152.1 million | $51.3 million |
- Q3 sales rose 25.3%; nine-month sales rose 47.4%. Management attributed growth mainly to store reopenings and stronger store sales, back-to-school demand, wholesale growth, foreign exchange, and digital comparable sales growth of 7% in Q3 and 4% year to date. Stores were open about 99% of possible days in Q3 versus 95% a year earlier; year-to-date, 95% versus 71%.
- Q3 selling and administrative expense was $251.1 million, or 41.8% of sales versus 44.0% a year earlier. Operating leverage and lower occupancy costs contributed; higher performance-based compensation and marketing costs partly offset the improvement.
- At October 30, cash was $282.8 million, long-term debt was $15.6 million, and total equity was $592.4 million. Cash was $115.1 million and debt $32.9 million at October 31, 2020. Operating lease liabilities totaled $634.8 million ($144.5 million current and $490.3 million long term).
- Nine-month investing cash use was $34.4 million, including $34.5 million of capital expenditures; financing cash use was $50.7 million, including $30.6 million of share repurchases. Cash increased $67.7 million during the period.
- Inventory was $339.2 million at quarter-end, up from $291.0 million at January 30, 2021 and down from $370.7 million a year earlier.
Material changes and segment results
- All four operating groups reported higher Q3 sales year over year. Journeys sales rose 19.6% and operating income was $43.4 million; Schuh sales rose 33.1% and operating income was $9.7 million; Johnston & Murphy sales rose 68.5% and returned to $1.6 million operating income from an $11.1 million loss; Licensed Brands sales rose 6.5% but shifted to a $0.1 million operating loss from $0.8 million income.
- Gross-margin improvement reflected fewer markdowns, better initial margins and less promotional activity. Supply-chain freight and logistics costs partly offset gains, including an estimated $4.1 million increase in Q3 cost of sales.
- Year-to-date results improved substantially from the prior-year pandemic-affected period, which included a $79.3 million Schuh goodwill impairment and $16.0 million of other impairment and related charges. FY2022 nine-month results included $10.1 million of asset impairment and other charges, including $8.6 million of activist-shareholder-related professional fees, $2.0 million of store impairments, and a $0.6 million insurance gain.
Outlook, risks and contingencies
- The filing gives no specific revenue or earnings guidance. Management said cash on hand, operating cash flow and available credit facilities should be sufficient for near-term liquidity needs. It expected to receive the balance of approximately $55 million in CARES Act-related tax refunds over the remainder of FY2022, potentially extending into FY2023; approximately $26 million had been received by quarter-end.
- FY2022 capital expenditures were expected to be approximately $35–$40 million, primarily for technology, software and warehouse enhancements. This excludes approximately $13 million, net of tenant allowance, for the new headquarters building.
- Management cited evolving COVID-19 impacts, possible renewed store disruption, consumer demand uncertainty, supply-chain interruptions and freight costs, inflation and wage pressure, staffing, foreign exchange, and promotional and inventory risks. It noted that these factors could adversely affect sales, margins, earnings and liquidity.
- The company had borrowed $15.6 million under its U.S. revolving credit facility, had repaid the $17.5 million FILO tranche, and reported compliance with credit-facility terms. It had $59.0 million remaining under its $100 million share repurchase authorization after repurchasing 521,693 shares for $30.6 million year to date.
- Environmental contingencies accrued were $1.4 million. A Togast-related commitment requires Genesco to cover certain shortfalls if Samsung-owned inventory sells below cost; that inventory had a historical cost of $6.9 million. Management said other ordinary-course legal matters were not expected to have a material effect, while noting legal outcomes are uncertain.
Important facts for investors to verify
- Whether sales and margin gains persist as comparisons normalize and the effects of store reopening diminish.
- Whether freight, logistics and other supply-chain costs, inventory levels and availability affect future gross margins and sales.
- The timing and receipt of remaining tax refunds, and the company’s liquidity and borrowing needs through the seasonal fourth quarter.
- The amount and timing of future repurchases, planned capital expenditures and potential performance-based compensation payments.
- Developments in COVID-19, consumer spending, lease negotiations, environmental matters and the activist-shareholder-related costs.