Business Context and Reporting Period
Company: Genesco Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 2, 2002 (Third Quarter of Fiscal 2003)
Business Overview: Genesco designs, sources, markets, and distributes footwear under brands including Johnston & Murphy and Dockers. It operates approximately 980 retail stores (Journeys, Jarman, Underground Station, Johnston & Murphy) and wholesale operations. The company recently closed its last manufacturing plant and exited the Nautica footwear license.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Nov 2, 2002 | 9 Months Ended Nov 2, 2002 |
|---|---|---|
| Net Sales | $213,157 | $578,592 |
| Gross Margin | $100,839 | $273,838 |
| Gross Margin % | 47.3% | 47.3% |
| Net Earnings | $10,107 | $22,272 |
| Diluted EPS | $0.41 | $0.92 |
| Cash and Equivalents | $10,260 | $10,260 |
| Working Capital | $160,431 | $160,431 |
| Long-Term Debt | $103,245 | $103,245 |
| Net Cash Used in Operating Activities | ($18,522) | ($7,392) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 14.9% in the third quarter and 10.5% for the nine-month period compared to the prior year, driven primarily by retail expansion.
- Profitability: Net earnings rose 38.8% in the quarter ($10.1M vs. $7.3M) and 2.1% for the nine months ($22.3M vs. $21.8M). The prior year quarter included a $0.7M environmental charge.
- Segment Performance:
- Journeys: Sales up 17.1% (quarter) due to a 22% increase in average stores operated.
- Jarman: Sales up 23.1% (quarter); turned an operating loss of $0.3M into a profit of $2.6M.
- Johnston & Murphy: Sales declined 1.1% (quarter) due to a 17% drop in wholesale sales, though retail sales grew. Operating income fell 65% due to higher advertising expenses.
- Licensed Brands: Sales up 25.2% (quarter) driven by Dockers Footwear growth.
- Inventory Build: Inventories increased by $56.9 million over the nine-month period to support seasonal retail growth and the addition of 72 new stores.
Outlook, Risks, and Management Commentary
- Capital Expenditures: Total CapEx for Fiscal 2003 is projected at $37.1 million, including $20.6 million for retail store openings/renovations and $13.8 million for a new distribution center.
- Liquidity: The company maintains a $75 million revolving credit facility with $63.3 million available. Management expects cash on hand and operations to fund planned expenditures.
- Restructuring: The company completed the closure of its manufacturing plant in the third quarter. Remaining costs for prior restructurings and discontinued operations are estimated at $3.3 million over the next 12 months.
- Stock Repurchases: The company has repurchased 7.0 million shares to date under authorizations totaling 7.5 million shares. Approximately 515,100 shares remain available for repurchase.
- Risks: Key risks include consumer demand fluctuations, pricing pressure, supply chain disruptions during the transition to the new distribution center, and environmental litigation (specifically regarding the Whitehall, Michigan facility and New York State proceedings).
Investor Verification Checklist
- Inventory Levels: Verify the $199.8 million inventory balance against upcoming holiday sales forecasts to assess potential markdown risks.
- Wholesale Trends: Monitor Johnston & Murphy wholesale sales, which declined 17% in the quarter, to determine if this is a temporary shift or a structural decline.
- Environmental Liabilities: Review the status of the Whitehall, Michigan settlement ($3.35M paid) and New York State proceedings to ensure reserves are adequate.
- Cash Flow Seasonality: Confirm that the negative operating cash flow of $7.4M for the nine months aligns with historical seasonal patterns and will reverse in the fourth quarter.
- Debt Covenants: Verify continued compliance with the revolving credit agreement's financial ratios (tangible net worth, fixed charge coverage, debt to EBITDAR).