Genesco Inc. — Q1 Fiscal 2020 Form 10-Q
Reporting period: Three months ended May 4, 2019, compared with the three months ended May 5, 2018. Unaudited results. Genesco sells footwear and accessories through retail, e-commerce and wholesale operations; it operated 1,504 stores at quarter-end. The Lids Sports Group sale closed February 2, 2019, and its prior-year results are presented as discontinued operations.
Financial performance and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $495.7 million | $486.2 million |
| Gross margin | 49.4% | 49.0% |
| Operating income | $9.1 million; 1.8% margin | $3.7 million; 0.8% margin |
| Continuing-operations earnings | $6.5 million; diluted EPS $0.36 | $1.9 million; diluted EPS $0.10 |
| Net earnings (loss) | $6.3 million | $(2.3) million |
| Operating cash flow | $(34.7) million | $0.8 million |
| Cash and cash equivalents at quarter-end | $156.7 million | $30.9 million |
| Long-term debt, including current portion | $73.7 million | $105.7 million |
- Sales rose 1.9%; excluding foreign-exchange effects, management said they would have risen 3%. Comparable sales increased 5%, including 4% same-store growth and 15% comparable direct-sales growth.
- Net cash decreased $10.7 million. Investing activities provided $99.1 million, mainly from Lids sale proceeds; financing activities used $75.3 million, including $80.0 million of share repurchases.
- At May 4, the company reported $829.2 million of operating lease liabilities following adoption of ASC 842. Adoption also added lease right-of-use assets; the company said the standard did not materially affect earnings, liquidity or debt-covenant compliance. The resulting working-capital figure is not directly comparable with prior periods.
Material changes and segment trends
- Journeys sales increased 5.8% to $324.0 million; operating income rose 46.1% to $19.0 million, supported by stronger comparable sales, fewer markdowns and expense leverage.
- Schuh sales declined 4.3% to $76.8 million, including a $5.5 million unfavorable foreign-exchange effect; operating loss narrowed slightly to $5.4 million. Comparable sales increased 2%, while promotional activity pressured gross margin.
- Johnston & Murphy sales decreased 1.3% to $74.7 million, mainly due to a 7% decline in wholesale sales; operating income increased 4.9% to $5.1 million.
- Licensed Brands sales fell 16.5% to $20.1 million, primarily due to lower Dockers sales and the Bass license closeout; operating income increased to $0.4 million.
- Net interest changed from $1.0 million expense to $0.2 million income, reflecting higher cash investments after the Lids sale and lower average revolver borrowings.
- Fiscal 2019’s comparative net loss included $4.2 million of after-tax discontinued-operations loss for Lids in the quarter; the larger $98.3 million after-tax loss on the Lids sale was recorded in the prior fiscal fourth quarter.
Outlook, risks and contingencies
- No full-year sales or earnings guidance is stated in the provided filing text. Genesco expected approximately $45 million of Fiscal 2020 capital expenditures and said cash, operating cash flow, Lids proceeds and credit availability should fund working capital, capital spending and planned repurchases.
- The amended revolving credit facility has $275 million of commitments and matures January 2023. At May 4, borrowings were $59.8 million and letters of credit $10.8 million; excess availability was $162.1 million. The company was not required to meet the facility’s springing fixed-charge coverage covenant at quarter-end.
- The board approved a new $100 million repurchase authorization in May. Through June 12, the company had repurchased a further 862,331 shares for $37.7 million, with $61.4 million remaining under that authorization.
- Management identified risks including consumer and mall weakness, promotional pressure, fashion shifts, competition and online sales, tariffs and supply disruption, wage and occupancy costs, foreign exchange and Brexit-related uncertainty, and potential asset impairment. The filing says there were no material changes to previously disclosed risk factors.
- Schuh announced plans to close its three German stores on May 31, 2019. Genesco also noted sensitivity of Schuh goodwill valuation to assumptions about discount rates and revenue growth, though it reported no impairment indicators for the quarter.
- The IRS proposed a $12.3 million employer shared-responsibility payment for 2016. Genesco disputed the proposed liability, citing reporting-file errors, and recorded no accrual because it did not consider the payment probable.
- Genesco remained contingently liable on 68 Lids lease guarantees with estimated maximum future payments of $27.8 million; the purchaser agreed to indemnify the company. Environmental provisions totaled approximately $1.8 million. A proposed settlement of wage-and-hour cases included up to $1.2 million in class-member payments plus $0.4 million in legal and administrative costs, subject to court approval.
Important facts for investors to verify
- Whether continuing comparable-sales growth and margin improvement persist, particularly at Journeys, and whether weakness in Schuh, wholesale and Licensed Brands continues.
- How seasonal working-capital needs affect cash generation after the quarter’s $34.7 million operating cash outflow, and how much of reported cash is available for U.S. use given foreign-cash reinvestment intentions.
- Whether share repurchases, capital spending and debt usage remain consistent with liquidity and the company’s credit-facility requirements.
- How lease costs and liabilities under ASC 842 affect future reported results and balance-sheet comparisons.
- Resolution of the IRS proposal, Lids lease guarantees, environmental matters and wage-and-hour settlements, including any change in estimated exposure.