Genesco Inc. — Form 10-Q Summary
Reporting period: First quarter of Fiscal 2015, the three months ended May 3, 2014; comparisons are with the three months ended May 4, 2013. Financial statements are unaudited. Genesco operated 2,573 stores across its footwear and Lids businesses.
Financial performance and liquidity
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $628.8 million | $591.4 million | +6.3% |
| Gross margin | 50.2% | 50.5% | Down 0.3 percentage points |
| Selling and administrative expense / sales | 46.6% | 45.9% | Up 0.7 percentage points |
| Operating earnings | $23.7 million | $25.7 million | Down 7.8% |
| Continuing-operations earnings | $14.1 million | $14.5 million | Down 2.8% |
| Net earnings | $14.0 million | $14.4 million | Down 3.0% |
| Diluted EPS | $0.59 | $0.61 | Lower |
| Operating cash flow | $32.2 million | $23.5 million | Up $8.7 million |
| Capital expenditures | $19.8 million | $17.8 million | Up $2.0 million |
Cash and cash equivalents were $71.9 million at May 3, 2014, versus $39.7 million a year earlier; working capital was $474.8 million. Total debt, including current maturities, was $33.1 million, consisting of UK term loans; there were no revolving-credit borrowings. The company reported $373.3 million of excess availability under its $400 million credit facility and $14.7 million of letters of credit outstanding. Total assets were $1.48 billion and total equity was $941.5 million.
Inventory was $587.2 million, up $18.5 million from February 1, 2014, principally reflecting higher Lids retail inventory. Operating cash flow benefited from accounts-payable and accrued-liability movements, while inventory and prepaid-asset changes were cash uses. Cash flow less capital expenditures was approximately $12.4 million, compared with $5.7 million in the prior-year quarter.
Material changes and segment results
Comparable sales increased 1% overall. Sales rose in all business units, but operating performance weakened overall amid lower gross margin and higher selling and administrative costs as a share of sales.
- Journeys: Sales increased 1.9% to $262.1 million; operating earnings fell 11.4% to $19.7 million. The company attributed much of the decline to higher expenses, including $4.9 million of bonus expense tied to the EVA plan amendment.
- Schuh: Sales increased 19.0% to $81.3 million, reflecting store growth and favorable currency translation, partly offset by a 1% comparable-sales decline. Operating loss widened to $5.1 million from $4.6 million.
- Lids Sports Group: Sales increased 6.4% to $189.3 million, while operating earnings fell 24.6% to $8.1 million. Management cited increased promotions, sales mix and rent expense.
- Johnston & Murphy: Sales increased 8.5% to $63.4 million and operating earnings increased 16.8% to $4.5 million.
- Licensed Brands: Sales increased 10.6% to $32.5 million and operating earnings increased 20.5% to $3.5 million.
The effective tax rate declined to 38.7% from 41.2%, primarily because a greater share of earnings came from lower-tax jurisdictions. Net interest expense declined 32.5% to $0.7 million, primarily due to lower average borrowings.
Outlook, unusual items and risks
- Outlook: The filing provides no specific earnings or sales guidance. Management expected cash on hand, operating cash flow and credit-facility availability to cover Fiscal 2015 working capital and capital needs. Planned Fiscal 2015 capital expenditures were approximately $149 million, including about $134 million for retail expansion and renovations, and $15 million for wholesale and other purposes. Plans included opening approximately 25 Journeys, 25 Journeys Kidz, 15 Schuh, 10 Johnston & Murphy and 268 Lids stores or leased departments.
- Incentive-plan change: An EVA Incentive Plan amendment removed future service requirements for certain retained bonuses, accelerating recognition of $5.7 million of expense into Q1 FY2015.
- Asset impairments and other: The quarter included a net pretax gain of $1.1 million, including a $3.2 million Lids lease-termination gain, partly offset by $1.2 million of network-intrusion expenses and $0.8 million of retail-store impairments. The prior-year quarter included a $1.3 million net charge.
- Acquisition-related costs: Schuh results included $3.1 million of deferred purchase-price compensation expense and $1.4 million of contingent-bonus accruals; the prior-year amounts were $2.9 million and $1.0 million, respectively.
- Contingencies: Environmental liabilities accrued were $11.9 million, including $7.7 million classified as current. The company described ongoing New York environmental litigation and employment-related claims; it cautioned that litigation and environmental outcomes could require additional reserves. Management expected approximately $7.8 million of discontinued-operations costs to be paid over the next 12 months.
- Other risks: Management highlighted consumer demand and fashion trends, competitive pressures, inventory and margin management, supply and distribution disruptions, foreign exchange and input costs, store and lease execution, impairment risk, litigation and environmental matters, and information-technology disruptions. The filing reported no material changes to previously disclosed risk factors.
- Seasonality and cash: The business is seasonal, with inventory and receivables typically peaking in spring and fall and operating cash flow historically strongest in the fourth quarter. Approximately $17.6 million of cash was held by foreign subsidiaries, which the company intended to reinvest outside the U.S.
Important facts for investors to verify
- Whether comparable-sales momentum and margins improve, particularly at Journeys and Lids, and whether planned store growth produces adequate returns.
- How much of the operating-cash-flow increase reflects sustainable operations versus timing of payables, accrued liabilities, inventory and taxes.
- Execution and funding of the approximately $149 million Fiscal 2015 capital-expenditure plan, alongside seasonal working-capital needs.
- Whether the $11.9 million environmental accrual and other legal reserves remain adequate as proceedings progress.
- Potential effects of Schuh-related purchase-price and bonus obligations, foreign-exchange movements, and future asset impairments.
- Credit-facility availability and covenant thresholds; the company was not required to meet the minimum fixed-charge coverage covenant at quarter-end because availability exceeded the stated trigger.