Genesco Inc. — Q3 Fiscal 2013 Form 10-Q
Reporting period: Third quarter and first nine months ended October 27, 2012; comparative periods ended October 29, 2011. Financial statements are unaudited. Genesco operates footwear and sports merchandise retail, e-commerce and wholesale businesses, with 2,448 stores at quarter-end.
Financial performance
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Net sales | $664.5 million | $616.5 million | $1,808.1 million | $1,568.6 million |
| Gross margin | $334.3 million; 50.3% | $310.5 million; 50.4% | $914.0 million; 50.6% | $793.0 million; 50.6% |
| Operating earnings | $52.4 million | $45.9 million | $105.3 million | $73.1 million |
| Continuing operations earnings | $41.0 million | $26.2 million | $72.3 million | $41.5 million |
| Net earnings | $40.9 million | $26.1 million | $72.0 million | $40.5 million |
| Diluted EPS | $1.70 | $1.09 | $2.98 | $1.70 |
Q3 selling and administrative expenses rose 6.6% but declined to 42.4% of sales from 42.9%. Nine-month expenses rose 12.5% and declined to 44.7% of sales from 45.8%. The company includes buying, merchandising and occupancy costs in selling and administrative expenses, so its gross margin may not be comparable with retailers that include these costs in cost of sales.
Cash flow and liquidity: Nine-month operating cash flow was $6.6 million, down from $12.9 million. Inventory increases used $159.7 million of cash and accounts receivable increases used $18.4 million, partly offset by a $67.3 million cash inflow from accounts payable. Capital expenditures were $52.9 million. Cash was $39.9 million at October 27, 2012, versus $53.8 million at January 28, 2012. Working capital was $377.8 million.
Debt: Total debt, including current maturities, was $91.9 million ($63.9 million in revolver borrowings and $28.0 million in U.K. term loans), compared with $40.7 million at January 28, 2012 and $147.9 million a year earlier. Cash less debt was approximately $52.0 million net debt. Revolver availability was $307.9 million; the company reported compliance with applicable covenants. It said cash, operating cash flow and available credit should cover foreseeable working capital and capital requirements.
Changes and business drivers
- Q3 sales increased 7.8%; nine-month sales increased 15.3%, partly reflecting Schuh, acquired in June 2011. Q3 sales growth also reflected Journeys, Johnston & Murphy and Licensed Brands.
- Journeys Q3 sales rose 9.7%, with comparable sales up 8%; operating earnings increased 31.3%. Nine-month operating earnings rose 54.0%.
- Schuh Q3 sales rose 17.9%, but operating earnings fell to $2.7 million from $4.4 million. Schuh recorded a nine-month operating loss of $0.8 million, including acquisition-related compensation and contingent bonus costs.
- Lids Q3 sales were nearly flat; comparable sales fell 5%, partly due to weaker fitted-hat sales. Nine-month operating earnings rose 14.3% despite flat comparable sales.
- Johnston & Murphy Q3 sales increased 10.2%; Licensed Brands sales increased 7.2%. Their Q3 operating earnings grew 6.0% and 0.6%, respectively.
Outlook, risks and unusual items
- No specific earnings or sales guidance is provided in the supplied filing text. Fiscal 2013 capital expenditures were expected to be approximately $80.9 million, including planned store openings and about 116 major renovations.
- The Q3 effective tax rate was 19.8%, versus 40.6% a year earlier; the nine-month rate was 28.9%, versus 40.4%. Management attributed the lower rates mainly to reversals and a favorable settlement involving uncertain tax positions.
- Schuh acquisition-related deferred purchase price compensation was $3.0 million in Q3 and $8.9 million year to date. Schuh also recorded contingent bonus expense of $4.2 million in Q3 and $9.5 million year to date.
- The company held $14.0 million of goodwill related to Lids Team Sports, which had performed below expectations. Testing indicated fair value exceeded carrying value by about $1.2 million, but the filing highlights sensitivity to assumptions and possible impairment.
- Environmental liabilities accrued for former facilities totaled $11.8 million. The company disputes approximately $15.6 million in payment-card network intrusion claims and has recorded no liability for them. It also reports patent and wage-and-hour litigation without accruals; outcomes remain uncertain.
- Management cited consumer demand, fashion trends, competition, supply and distribution disruptions, foreign exchange and costs, acquisition integration, store execution, impairment risk, pension costs, and litigation and environmental matters as risks.
Important facts for investors to verify
- Whether holiday-season inventory converts to sales and cash, given the substantial seasonal inventory build and low nine-month operating cash flow.
- Schuh’s underlying profitability after contingent bonus and deferred compensation expenses, and the basis for future acquisition-related payments.
- Journeys’ sales and margin momentum and whether Lids can address declining comparable sales and fitted-hat weakness.
- The basis and tax-period impact of the lower effective tax rate, including whether favorable uncertain-tax-position items recur.
- Developments in the $15.6 million payment-card claims, environmental matters, and other unaccrued litigation, as well as Lids Team Sports goodwill testing.
- Actual capital spending, credit-facility availability and debt levels relative to management’s expectations.