Genesco Inc. — Q1 Fiscal 2021 Form 10-Q
Reporting period: Three months ended May 2, 2020; unaudited. Comparisons are with the three months ended May 4, 2019 unless noted. Genesco operates footwear retail, e-commerce and wholesale businesses, including Journeys, Schuh, Johnston & Murphy and licensed brands. It operated 1,479 stores at quarter-end.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $279.2 million | $495.7 million |
| Gross margin | $120.1 million; 43.0% | $244.9 million; 49.4% |
| Operating income (loss) | $(156.0) million; (55.9)% margin | $9.1 million; 1.8% margin |
| Continuing operations income (loss) before tax | $(156.8) million | $9.3 million |
| Net income (loss) | $(134.8) million | $6.3 million |
| Diluted earnings (loss) per share | $(9.55) | $0.36 |
| Net cash used in operating activities | $(27.8) million | $(34.7) million |
- Sales fell 43.7%, primarily because stores closed during the second half of the quarter amid COVID-19, with lower wholesale sales and unfavorable exchange rates also contributing. Comparable direct sales were up 64%; the company did not report overall comparable sales, deeming total sales more meaningful during widespread closures.
- Gross margin contracted 6.4 percentage points. Management cited higher e-commerce shipping and warehouse costs, inventory reserves, greater sale-product mix at Schuh and increased markdowns at Johnston & Murphy.
- Selling and administrative expense declined 20.1% to $189.0 million, but rose to 67.7% of sales from 47.7% as lower revenue reduced expense leverage. Expense reductions and approximately $7.0 million of payroll tax credits helped lower costs.
- Results included a $79.3 million non-cash Schuh goodwill impairment and $7.9 million of net asset impairment and other charges, including $5.3 million for trademarks and $3.0 million for store assets, partly offset by a $0.4 million Togast earnout release. A $2.4 million additional allowance for doubtful accounts and approximately $1.8 million in inventory reserves were also recorded.
Segments and balance sheet
- Journeys sales declined 47.9% to $168.9 million; operating loss was $37.1 million versus $19.0 million of income.
- Schuh sales declined 38.6% to $47.2 million; operating loss widened to $15.1 million from $5.4 million. Its goodwill was fully impaired.
- Johnston & Murphy sales declined 48.0% to $38.8 million; it reported a $9.6 million operating loss versus $5.1 million of income.
- Licensed Brands sales rose 21.0% to $24.3 million, mainly due to the Togast acquisition, but shifted to a $2.5 million operating loss from $0.4 million of income.
- At May 2, cash and equivalents were $238.6 million, working capital was $305.0 million, and total debt was $222.7 million, versus $14.4 million of debt at February 1, 2020. Total current liabilities were $430.0 million; operating lease liabilities totaled about $780.1 million, current and long-term combined.
- Operating cash outflow was $27.8 million; investing cash outflow was $6.6 million. Financing provided $191.2 million, primarily from revolving-credit borrowing. Cash rose $157.2 million to $238.6 million. The company attributed working-capital support in part to extended supplier terms and limited rent payments during store closures.
Liquidity, outlook and risks
- Genesco borrowed $184.6 million under its U.S. revolving facility and £19.0 million (about $23.7 million) under Schuh’s U.K. facility as precautionary liquidity measures. The U.S. debt carried an average 2.26% interest rate and matured in January 2023; the U.K. facility was due in September 2020 and had financial covenants. Genesco guaranteed Schuh’s obligations.
- On June 5, 2020, after quarter-end, the company amended its credit facility, increasing total capacity to $350 million, including a $17.5 million FILO tranche; pricing, covenants and reporting terms also changed. Management said available cash, operating cash flow and credit facilities should meet near-term liquidity needs.
- As of June 6, the company said it was operating close to 1,000 locations and anticipated reopening close to 85% of stores by June-end. Reopening pace, customer traffic and demand remained uncertain. The filing provides no earnings or sales guidance.
- Fiscal 2021 capital expenditures were expected to be approximately $30 million, including store openings and renovations, technology and warehouse projects; planned capital spending had been reduced by more than 50% amid the pandemic.
- Management identified risks from renewed or prolonged closures, weaker consumer spending, reduced mall traffic, supply-chain disruption, staffing challenges, rent and lease obligations, inventory and receivable recovery, and further impairments or deferred-tax valuation allowances. Significant landlord concessions had not been confirmed; rent expense continued to be recognized while payments were withheld for periods when stores were closed.
- The company recorded a $2.0 million U.K. deferred-tax valuation allowance adjustment and said it did not expect to recognize tax benefits on anticipated U.K. losses. It reported a 14.1% effective tax rate, affected by the non-deductible goodwill impairment and foreign losses for which no benefit was recognized.
- Legal and contingent matters include environmental obligations, with $1.5 million accrued for environmental contingencies, and a disputed IRS proposed $4.2 million employer shared-responsibility payment for 2017; Genesco said it believed it had no liability and had made no accrual. It also guaranteed 36 leases related to the divested Lids Sports Group, with estimated maximum future payments of $19.5 million.
Most important facts for investors to verify
- Store reopening progress, comparable direct sales, traffic and the durability of demand after reopening.
- Cash burn, revolver availability, compliance with U.S. and Schuh facility covenants, and the terms and availability of the amended $350 million facility.
- Potential additional goodwill, store-asset, trademark, inventory and receivable impairments, plus recoverability of deferred tax assets.
- Whether landlord concessions are secured and how rent deferrals, supplier payment extensions and CARES Act-related credits affect cash flow.
- Resolution of the IRS matter, environmental exposures and contingent Lids lease guarantees.