Genesco Inc. — Form 10-Q Summary
Business context and reporting period. This unaudited filing covers the third quarter and first nine months of fiscal 2015, ended November 1, 2014, compared with periods ended November 2, 2013. Genesco sells footwear and accessories through Journeys, Schuh, Lids Sports Group, Johnston & Murphy and Licensed Brands, including retail, e-commerce and wholesale channels. It operated 2,837 stores and leased departments at quarter-end. Amounts below are in millions except per-share data.
Key financial metrics
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Net sales | $722.9 | $666.3 | $1,967.2 | $1,832.5 |
| Gross profit / gross margin | $358.5 / 49.6% | $332.2 / 49.8% | $976.2 / 49.6% | $913.4 / 49.8% |
| Earnings from operations | $46.6 | $47.0 | $80.4 | $88.2 |
| Continuing-operations earnings | $28.8 | $27.8 | $47.6 | $50.8 |
| Net earnings | $28.7 | $27.8 | $47.3 | $50.5 |
| Diluted EPS | $1.21 | $1.18 | $2.00 | $2.14 |
| Operating cash flow | $1.0 | $8.6 | $8.9 | $25.0 |
Third-quarter comparable sales increased 3%; nine-month comparable sales increased 2%. Selling and administrative expense was 43.0% of sales in Q3 versus 42.6% a year earlier, and 45.5% for the nine months versus 45.3%. Genesco notes that buying, merchandising and occupancy costs are included in SG&A rather than cost of sales, limiting gross-margin comparability with some retailers.
- Cash flow and investment: Nine-month investing cash use was $120.0, including $85.3 of capital expenditures and $34.9 for acquisitions. Financing provided $89.8. Cash declined $21.4 to $38.0.
- Liquidity: Working capital was $446.3 at November 1, 2014. Management said cash, operating cash flow and credit availability should cover working capital and capital expenditures for the foreseeable future.
- Debt: Total debt was $115.0, comprising $62.2 of revolver borrowings and $52.8 of U.K. term loans; $35.3 was classified as current. Credit-facility excess availability was $322.3, and the company was not required to meet its fixed-charge covenant at quarter-end.
- Inventory: Inventory was $737.6, up $170.3 from February 1, primarily reflecting purchases to support holiday sales.
Material changes versus prior periods
- Q3 sales rose 8.5%, while operating earnings slipped to $46.6 from $47.0. Net earnings increased modestly, aided by a lower effective tax rate of 25.6% versus 39.3%; diluted EPS rose to $1.21 from $1.18.
- For the first nine months, sales increased 7.4%, but operating earnings fell to $80.4 from $88.2 and diluted EPS declined to $2.00 from $2.14. The lower effective tax rate, 32.9% versus 40.2%, partly offset pretax weakness.
- Q3 segment sales grew at Journeys (+8.1%), Schuh (+10.2%), Lids (+10.5%) and Johnston & Murphy (+6.9%); Licensed Brands declined 2.1%. Lids operating earnings fell 28.3%, Johnston & Murphy fell 6.8%, and Licensed Brands fell 25.0%; Journeys rose 8.6% and Schuh rose to $3.9 from $1.9.
- Nine-month Lids operating earnings fell 29.0% and Johnston & Murphy fell 17.8%. Schuh reduced its operating loss to $1.4 from $4.1, while Journeys earnings rose 9.5%.
- Cash from operations declined to $8.9 from $25.0 for the nine months. Management attributed much of the change to a $45.6 decrease in cash flow from accounts payable, partly offset by improved inventory-related cash flow.
- Debt increased from $33.7 at February 1, 2014, reflecting revolver use and additional U.K. term borrowing. The company also completed $34.9 of acquisitions during the nine-month period, primarily small Lids businesses.
Outlook, management commentary, risks and unusual items
- Fiscal 2015 capital expenditures were expected to be approximately $136, including approximately $126 for retail investment. Planned activity included about 16 Journeys, 19 Journeys Kidz, 13 Schuh, eight Johnston & Murphy and 218 Lids stores or leased departments, plus approximately 127 major renovations. No clear full-year sales or earnings guidance is provided in the filing text.
- Q3 included a $7.1 pretax write-off of a Schuh-related tax indemnification asset after formerly uncertain tax positions were favorably resolved. The resolution also contributed to the lower tax rate. The company recorded a $5.7 expense in Q1 after changing its EVA incentive plan to accelerate recognition of retained bonuses.
- Schuh results included acquisition-related deferred purchase-price compensation expense of $6.3 for the nine months and $8.8 of accruals for contingent employee bonuses. These obligations depend on specified conditions, including employee service or performance.
- Q3 asset impairment and other charges were $1.0, including network-intrusion costs and store impairments. Nine-month net charges were $1.3, including intrusion, impairment and legal costs, partly offset by a $3.4 lease-termination gain. Prior-year nine-month results included a $8.3 lease-termination gain.
- Environmental provisions for former facilities totaled $11.9, included in discontinued-operations liabilities. A New York site matter includes claims by a municipality alleging potentially substantial historical and future costs; Genesco disputes aspects of the estimates and says it will defend the action if settlement is not reached. The company cautions that environmental and litigation reserves may need revision.
- Other risks identified include consumer demand and fashion shifts, promotional pressure and margin erosion, mall traffic, competition, vendor and customer credit exposure, acquisition integration, supply and distribution disruptions, foreign exchange, technology and cybersecurity incidents, and litigation. A 1% Canadian-dollar exchange-rate change would affect earnings by approximately $0.4 on intercompany loans; the company was exploring ways to reduce that exposure.
Most important facts for investors to verify
- Whether sales growth converts into stronger operating earnings, especially given weaker Lids and Johnston & Murphy margins and increased promotional activity.
- Holiday-season sell-through and markdowns relative to the elevated inventory balance.
- Cash generation, accounts-payable trends, seasonal borrowing and remaining facility availability as capital spending and acquisitions continue.
- The performance and integration of Lids acquisitions, and the terms and future expense impact of Schuh deferred purchase-price and bonus obligations.
- Whether the tax benefit and indemnification-asset write-off are nonrecurring and how future effective tax rates compare with this period.
- Developments in environmental and other legal matters, including the adequacy of the $11.9 environmental provision and any further network-intrusion costs.
- Progress on planned capital expenditures and store openings, and the impact of currency movements on U.K. and Canadian operations.