Genesco Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2016, ended October 31, 2015; comparative periods ended November 1, 2014. The interim financial statements are unaudited. Genesco operates footwear and accessories businesses and Lids Sports Group; it had 2,817 stores and leased departments at quarter-end.
Key financial results
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Net sales | $773.9M | $722.9M | $2,090.0M | $1,967.2M |
| Gross margin | $373.9M; 48.3% | $358.5M; 49.6% | $1,020.3M; 48.8% | $976.2M; 49.6% |
| Operating earnings | $52.1M; 6.7% of sales | $46.6M; 6.4% | $80.8M; 3.9% | $80.4M; 4.1% |
| Continuing-operations earnings | $32.9M | $28.8M | $50.4M | $47.6M |
| Net earnings | $32.5M | $28.7M | $49.9M | $47.3M |
| Diluted EPS | $1.42 | $1.21 | $2.13 | $2.00 |
| Operating cash flow | $19.2M | $1.0M | $(75.9)M | $8.9M |
| Capital expenditures | $31.5M | $32.6M | $77.8M | $85.3M |
Q3 sales rose 7.1%, including 7% comparable-sales growth. For the first nine months, sales rose 6.2%, including 6% comparable-sales growth. Gross margin percentage declined in both comparisons; selling and administrative expense fell as a share of sales to 41.6% in Q3 from 43.0%, and to 44.8% year to date from 45.5%. The effective tax rate was 35.2% for Q3 and 35.3% year to date, versus 25.6% and 32.9%, respectively, largely reflecting the prior-year favorable resolution of Schuh tax positions.
Segment trends
- Journeys: Q3 sales +6.0% and operating earnings +11.1%; year-to-date sales +5.6% and operating earnings +18.0%, helped by comparable sales and improved margin.
- Schuh: Q3 sales approximately flat, with operating earnings rising to $8.6M from $3.9M. Year-to-date sales were flat and operating earnings were $10.9M versus a $1.4M loss; prior-year acquisition-related bonus and compensation costs affected comparison.
- Lids Sports: Q3 sales +12.2%, but operating earnings fell 45.3% to $4.7M. Year-to-date sales +11.0%, while operating earnings fell 72.6% to $6.9M. Promotional activity to clear excess inventory, lower average hat prices, and higher shipping and warehouse costs pressured margins.
- Johnston & Murphy: Q3 sales +6.7% and operating earnings +2.9%; year-to-date sales +7.2% and earnings +10.3%.
- Licensed Brands: Q3 sales +5.2% and operating earnings +8.5%; year-to-date sales fell 3.0% and earnings fell 11.2%, including Dockers weakness and Bass launch costs.
Liquidity, debt, and capital allocation
At October 31, 2015, cash was $28.1M, working capital $552.5M, and total debt $215.1M, compared with $112.9M cash and $29.2M debt at January 31, 2015. Debt included $148.8M of U.S. revolver borrowings, $39.3M of U.K. term loans, and $27.0M of U.K. revolver borrowings. Revolver borrowings increased in part to fund seasonal needs and share repurchases. The company reported $237.6M of excess availability under its credit facility and compliance with U.K. facility covenants; it was not required to meet the U.S. facility’s fixed-charge coverage covenant at quarter-end.
Year-to-date operating cash use of $75.9M reflected seasonal inventory investment, acquisition-related and other payments, and income taxes. Inventory increased $181.5M from fiscal year-end, primarily for holiday selling. Management said cash, operating cash flow, and credit availability should cover working capital and capital needs for the foreseeable future. The company repurchased 2.13M shares for $129.0M in the first nine months, including 1.71M shares for $101.5M in Q3; $21.5M remained under the September 2015 authorization.
Outlook, risks, and unusual items
- No specific sales or earnings guidance is stated in the supplied filing text. Fiscal 2016 capital expenditures were expected to be approximately $110M, including approximately $103M for retail projects and $7M for wholesale and other needs. Planned activity included new store openings and about 164 major renovations.
- Management identified consumer demand, fashion trends, competition, inventory management, Lids performance, foreign exchange, supply and distribution disruptions, store occupancy costs, acquisitions, and IT/security incidents as risks. It highlighted the need to improve Lids performance and right-size its inventory.
- Current-period unusual charges included $4.0M of asset impairment and other costs for the first nine months, mainly network-intrusion expenses, retail store impairments, and legal matters. Discontinued-operations provisions were $15.2M, including a $14.5M environmental provision; approximately $10.9M of discontinued-operation costs were expected to be paid over the next twelve months.
- Environmental matters include New York remediation and claims, including a Village estimate of more than $41M of potential costs over 70 years that the company disputes as unreasonable; Genesco had not verified the Village’s estimates. A separate EPA demand sought approximately $2.2M for a former Gloversville site, with insurance subject to a $0.5M retention and other terms. A California employee action was pending; the company said it intended to defend it. The filing cautions that contingencies and litigation outcomes are uncertain.
- After quarter-end, Genesco acquired the 37-store Little Burgundy chain in Canada and amended its credit agreement to increase the Canadian revolving subfacility. The filing does not provide purchase-price details in the supplied text.
- Disclosure controls were reported effective, with no material change in internal control during the quarter. The company reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Lids can reduce excess inventory and recover operating margin without relying on heavy promotions.
- Holiday-period sales, inventory turns, and subsequent cash generation, given the seasonal inventory build and negative nine-month operating cash flow.
- Debt and revolver usage after substantial repurchases, and the remaining repurchase authorization.
- Developments, insurance coverage, and potential exposure from environmental and employment-related claims.
- Little Burgundy acquisition terms, integration plans, and the effect of the increased Canadian credit facility.