Genesco Inc. — Fiscal 2020 Third-Quarter 10-Q
Reporting period: Three and nine months ended November 2, 2019, compared with the periods ended November 3, 2018. Genesco sells footwear and accessories through Journeys, Schuh, Johnston & Murphy and licensed-brand businesses, online and wholesale. It operated 1,492 stores. The Lids Sports Group sale closed February 2, 2019; prior-year results include Lids as discontinued operations.
Financial results
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $537.3 million, down 0.5% | $1,519.5 million, up 0.4% |
| Comparable sales | Up 3% (same-store up 1%; direct sales up 19%) | Up 4% (same-store up 2%; direct sales up 18%) |
| Gross margin | $264.2 million; 49.2%, versus 48.5% | $745.6 million; 49.1%, versus 48.3% |
| Operating income | $25.9 million, versus $26.4 million | $38.0 million, versus $31.2 million |
| Continuing-operations earnings | $19.0 million; diluted EPS $1.31 | $26.2 million; diluted EPS $1.63 |
| Net earnings, including discontinued operations | $18.9 million; diluted EPS $1.30, versus $14.4 million and $0.73 | $25.8 million; diluted EPS $1.60, versus $12.0 million and $0.62 |
| Operating cash flow | $40.9 million | $2.8 million, versus $58.3 million |
Quarterly operating margin was 4.8%, versus 4.9%; nine-month operating margin was approximately 2.5%, versus 2.1%. The nine-month effective tax rate increased to 30.0% from 23.9%. The prior-year net earnings comparison is affected by substantially larger Lids-related discontinued-operation losses in 2018; continuing-operations earnings provide a more comparable view.
Segments and notable changes
- Journeys: Third-quarter sales rose 2.7% and operating income rose 17.3%; comparable sales increased 4%. Nine-month operating income rose 32.5% to $59.3 million.
- Schuh: Third-quarter sales declined 2.8% as reported, but increased 2% excluding currency effects; operating income rose 3.9%. Nine-month sales declined 4.3% as reported and operating loss widened to $1.0 million.
- Johnston & Murphy: Third-quarter sales fell 8.8% and operating income fell 26.8%. Nine-month sales fell 4.1%; operating income was down 3.0% to $10.3 million.
- Licensed Brands: Third-quarter sales fell 10.8%; nine-month sales fell 16.8%, primarily reflecting lower Dockers sales and the Bass license closeout. The Dockers license expired November 30, 2019, with the parties continuing to operate under its terms while discussing future arrangements.
Cash, debt and liquidity
- Cash and cash equivalents were $55.8 million at November 2, 2019, versus $167.4 million at February 2, 2019. Nine-month cash from operations was $2.8 million; investing activities provided $77.3 million, including proceeds from the Lids sale; financing activities used $191.3 million, primarily reflecting $189.2 million of share repurchases.
- Long-term debt, including its current portion, was $79.5 million. Revolver borrowings were $62.4 million, with $9.4 million of letters of credit outstanding. Credit-facility excess availability was $203.2 million; the company was not required to meet its fixed-charge coverage covenant at quarter-end.
- Working capital was $152.3 million. The company cautions that its comparison with prior periods is affected by adoption of lease accounting: the current balance includes $145.8 million of current lease liabilities.
- Operating lease liabilities totaled $809.0 million, including current and long-term portions. Adoption of ASC 842 added lease assets and liabilities and reduced opening retained earnings by $4.2 million, net of tax; the company said adoption did not materially affect earnings, liquidity or debt-covenant compliance.
Outlook, risks and unusual items
- No specific earnings or sales guidance is provided in the supplied filing text. Fiscal 2020 capital expenditures were expected to be approximately $40 million, including about $37 million for retail projects and store renovations. Management expected cash, operations and credit facilities to support seasonal working capital, capital spending and repurchases.
- Management cited consumer demand, promotional activity, tariffs and supply disruption, fashion trends, foreign exchange and Brexit-related uncertainty, wage and occupancy costs, competition and the shift to online shopping among factors that could affect results.
- Quarter and year-to-date impairment charges were $0.8 million and $1.8 million, respectively. The company repurchased 4.57 million shares for $189.4 million in the first nine months; approximately $89.7 million remained under the then-current $100 million authorization as of December 6, 2019.
- Environmental contingencies accrued at quarter-end were approximately $1.7 million. The company also remained contingently liable on 40 Lids-related leases, with estimated maximum future payments of $22.6 million, although the buyer agreed to indemnify it. The proposed settlement of two wage-and-hour matters was $0.4 million in fees and costs plus up to $0.8 million in class payments, subject to court approval. An IRS inquiry concerning a proposed $12.3 million ACA payment was closed with no liability.
- After quarter-end, Schuh amended and restated its UK credit agreement, with facilities scheduled to expire in January 2020 and Genesco providing an unsecured guarantee. The filing also identifies covenant requirements under the agreement.
Important facts for investors to verify
- Whether Journeys’ comparable-sales and margin momentum can offset weaker Johnston & Murphy, Licensed Brands and nine-month Schuh performance.
- Inventory levels and seasonal cash conversion: inventory was $473.9 million at November 2, up from $366.7 million at fiscal year-end, while nine-month operating cash flow was only $2.8 million.
- The status and terms of the Dockers license after its stated expiration, and the performance of Schuh under its amended borrowing arrangements.
- The financial effect of the $189.2 million in repurchases on cash, share count, and capacity to fund operations and investment.
- Potential changes in lease, environmental, retained divestiture and other legal exposures; the filing notes that outcomes and estimates can change.