Business Context and Reporting Period
Company: Genesco Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 30, 2011 (First Quarter of Fiscal 2012)
Business Overview: Genesco designs, sources, markets, and distributes footwear and accessories through retail stores (Journeys, Lids, Johnston & Murphy, etc.) and wholesale channels. As of April 30, 2011, the company operated 2,291 retail stores across the U.S., Puerto Rico, and Canada.
Key Financial Metrics
| Metric (in thousands) | Q1 2012 (Ended Apr 30, 2011) | Q1 2011 (Ended May 1, 2010) |
|---|---|---|
| Net Sales | $481,502 | $400,853 |
| Gross Margin | $247,542 (51.4%) | $208,071 (51.9%) |
| Earnings from Operations | $25,525 | $14,551 |
| Net Earnings | $14,793 | $8,616 |
| Diluted EPS | $0.63 | $0.36 |
| Cash from Operating Activities | $11,998 | $35,902 |
| Cash and Cash Equivalents | $56,760 | $105,399 |
| Long-Term Debt | $0 | $0 |
| Working Capital | $299,526 | $293,582 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 20.1% year-over-year, driven primarily by a 41.4% surge in the Lids Sports Group (aided by acquisitions and strong MLB/NBA sales) and a 14.7% increase in the Journeys Group.
- Profitability: Earnings from operations rose 75.4% to $25.5 million. Operating margins improved across most segments due to comparable store sales growth and expense leverage, despite a slight decline in gross margin percentage (51.9% to 51.4%).
- Cash Flow: Net cash provided by operating activities decreased significantly by $23.9 million to $12.0 million. This was primarily due to increased bonus and income tax payments ($24.0 million impact) and higher inventory purchases ($7.5 million impact) to support sales growth.
- Segment Performance:
- Lids Sports Group: Sales up 41.4%; Operating income up 48.8%.
- Journeys Group: Sales up 14.7%; Operating income up 93.6%.
- Underground Station Group: Sales down 1.0% due to store closures, but operating income up 76.7% due to cost reductions.
- Licensed Brands: Sales up 2.9%, but operating income down 27.1% due to increased advertising and freight costs.
Guidance, Outlook, Risks, and Unusual Items
- Capital Expenditures: Total capital expenditures for Fiscal 2012 are expected to be approximately $55.4 million, including retail store openings and renovations. The company plans to open stores at a slower pace.
- Liquidity: The company maintains a $300 million Credit Facility with $247.1 million in net availability as of April 30, 2011. No borrowings were outstanding during the quarter.
- Unusual Items:
- Restructuring Charges: A pretax charge of $1.2 million was recorded, including $0.7 million for retail store asset impairments and $0.4 million for network intrusion costs.
- Network Intrusion: Following a December 2010 criminal intrusion into payment processing systems, Visa imposed $10,000 in penalties. The company disputes potential additional claims, though future material costs cannot be ruled out.
- Risks and Contingencies:
- Environmental: The company has accrued $15.2 million for environmental contingencies, primarily related to a former knitting mill site in New York and a tannery in Michigan. Future costs could exceed estimates.
- Legal: Putative class actions were filed in California regarding credit card information collection practices. The company intends to defend vigorously.
- Market Risks: Exposure to consumer economy weakness, fashion trends, and potential disruptions in the NFL season affecting Lids Sports.
Investor Verification Checklist
- Inventory Levels: Verify the sustainability of the $12.1 million increase in inventory and its impact on future cash flow and markdown risks.
- Network Intrusion Costs: Monitor for any additional litigation costs or penalties arising from the December 2010 data breach beyond the initial $10,000 Visa penalty.
- Environmental Accruals: Review the adequacy of the $15.2 million environmental provision, particularly regarding the New York State Superfund site remediation costs.
- Comparable Store Sales: Assess the durability of the 15% comparable store sales increase in the Journeys Group and 16% increase in Lids Sports Group.
- Underground Station Turnaround: Evaluate the long-term viability of the Underground Station segment given the 1% sales decline and ongoing store closures.