Genesco Inc. 10-Q Summary: Quarter Ended July 30, 2011
Business Context and Reporting Period
This report covers the second quarter of Fiscal 2012 ended July 30, 2011. Genesco Inc. operates retail and wholesale footwear and headwear businesses through six segments: Journeys Group, Underground Station Group, Schuh Group (acquired June 2011), Lids Sports Group, Johnston & Murphy Group, and Licensed Brands. As of July 30, 2011, the company operated 2,380 retail stores across the U.S., Canada, the U.K., and Ireland.
Key Financial Metrics
| Metric | Three Months Ended July 30, 2011 | Six Months Ended July 30, 2011 |
|---|---|---|
| Net Sales | $470.6 million | $952.1 million |
| Gross Margin | 50.4% of sales | 50.9% of sales |
| Operating Income | $1.7 million | $27.2 million |
| Net Earnings (Loss) | $(0.4) million | $14.4 million |
| Diluted EPS (Net) | $(0.02) | $0.61 |
| Cash and Equivalents | $35.6 million | $35.6 million |
| Working Capital | $310.4 million | $310.4 million |
| Total Debt (Long-term + Current) | $164.5 million | $164.5 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 29.4% in the quarter and 24.5% for the six-month period compared to the prior year. Growth was driven by the acquisition of Schuh Group ($34.0 million in sales), a 34% increase in Lids Sports Group sales, and double-digit growth in Journeys and Johnston & Murphy segments.
- Profitability: Operating income improved significantly from a loss of $3.4 million in the prior year quarter to $1.7 million. This was aided by improved operating margins in Lids Sports and Johnston & Murphy, offsetting losses in Journeys and Underground Station.
- Debt Structure: Long-term debt increased from zero to $164.5 million, primarily due to $117.5 million in revolver borrowings and $47.0 million in U.K. term loans to finance the Schuh acquisition.
- Cash Flow: Operating cash flow turned negative, using $18.2 million for the six months ended July 30, 2011, compared to providing $9.6 million in the prior year period. This was due to seasonal inventory build-up ($81.8 million increase) and increased payments for bonuses and taxes.
Guidance, Outlook, and Risks
- Acquisition Integration: The Schuh acquisition is expected to enhance global fashion insights and provide a retail presence in the U.K. and Ireland. Pro forma results for the six months ended July 30, 2011, show diluted EPS of $0.69.
- Capital Expenditures: Total capital expenditures for Fiscal 2012 are projected at approximately $63.0 million, focused on opening new stores (including 20 Journeys and 43 Lids stores) and renovations.
- Legal and Environmental Contingencies: The company has accrued $14.2 million for environmental remediation related to discontinued operations. There are ongoing legal proceedings regarding a December 2010 network intrusion and California class actions regarding credit card data collection.
- Liquidity: Management expects cash on hand, operating cash flows, and availability under the $405 million Credit Facility (with $204.2 million excess availability) to be sufficient for working capital and capital needs.
Investor Verification Checklist
- Verify the integration progress and performance of the newly acquired Schuh Group against pro forma expectations.
- Monitor the impact of the network intrusion on future legal costs and potential liability beyond the current accruals.
- Assess the sustainability of inventory levels, which rose significantly to support seasonal sales, and the resulting cash flow pressure.
- Review the performance of the Licensed Brands segment, which saw a 14% sales decline due to retailer shifts toward private labels.
- Confirm compliance with debt covenants, specifically the "Excess Availability" thresholds under the amended Credit Facility.