Business Context and Reporting Period
Company: Genesco Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 3, 2001 (Third Quarter of Fiscal 2002)
Business Overview: Genesco manufactures, sources, markets, and distributes footwear under brands including Johnston & Murphy and Dockers. It operates retail chains (Journeys, Jarman, Underground Station) and wholesale operations. The company recently exited the Nautica footwear license and discontinued its Volunteer Leather segment.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Nov 3, 2001 |
Three Months Ended Oct 28, 2000 |
Nine Months Ended Nov 3, 2001 |
Nine Months Ended Oct 28, 2000 |
|---|---|---|---|---|
| Net Sales | $185,772 | $176,086 | $524,233 | $465,973 |
| Gross Margin | $85,958 | $82,662 | $246,420 | $219,934 |
| Gross Margin % | 46.3% | 46.9% | 47.0% | 47.2% |
| Operating Income | $15,027 | $16,420 | $41,678 | $39,165 |
| Net Earnings | $7,283 | $8,785 | $21,804 | $17,308 |
| Diluted EPS | $0.30 | $0.36 | $0.90 | $0.74 |
| Cash & Short-term Investments | $9,926 | $16,060 | $9,926 | $16,060 |
| Long-term Debt | $103,245 | $103,500 | $103,245 | $103,500 |
| Working Capital | $152,976 | $132,747 | $152,976 | $132,747 |
Note: Gross Margin calculated as Net Sales minus Cost of Sales. Working Capital calculated as Total Current Assets minus Total Current Liabilities.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 5.5% in the third quarter and 12.5% for the nine-month period compared to the prior year, driven primarily by the Journeys retail segment.
- Profitability Decline (Q3): Despite revenue growth, Net Earnings decreased 17.1% in the third quarter ($7.3M vs $8.8M) due to a $0.7M net-of-tax charge for environmental cleanup costs related to the former Volunteer Leather tannery and lower operating margins in the Johnston & Murphy and Jarman segments.
- Profitability Increase (9 Months): Net Earnings increased 25.9% for the nine-month period ($21.8M vs $17.3M), aided by a $0.3M restructuring gain from the Nautica license termination and strong performance in Journeys.
- Cash Flow: Net cash used in operating activities was $23.4M for the nine months ended Nov 3, 2001, compared to $11.5M used in the prior year. This increase in cash usage was driven by a $49.5M increase in inventory levels to support new store openings and seasonal demand.
- Segment Performance:
- Journeys: Sales up 23.3% (Q3) and 31.5% (9 months); Operating income up 16.4% (Q3) and 33.8% (9 months).
- Johnston & Murphy: Sales down 13.2% (Q3) and 7.8% (9 months); Operating income down 50.8% (Q3) and 32.6% (9 months) due to decreased comparable store sales and wholesale volume.
- Jarman: Reported an operating loss of $0.3M in Q3 compared to $1.9M income in the prior year, attributed to higher markdowns.
Guidance, Outlook, Risks, and Unusual Items
- Accounting Correction: The company corrected erroneous entries regarding the timing of Johnston & Murphy wholesale shipments. This reduced nine-month net revenues by approximately $183,000 and net earnings by $35,000. The company is reviewing potential impacts on Fiscal 2001 results but does not expect material adjustments for prior years.
- Restructuring & Discontinued Operations:
- Nautica: License terminated Jan 31, 2001. Remaining costs of $0.2M expected to be incurred by year-end.
- Volunteer Leather: Discontinued operations. A $3.35M settlement was reached with the Michigan Department of Environmental Quality for sediment removal. An additional $1.1M charge was recorded in Q3.
- Capital Expenditures: Total CapEx for Fiscal 2002 is expected to be approximately $46.4M. This includes $28.3M for retail store openings/renovations and $16.0M-$18.0M for a new distribution center in Tennessee.
- Liquidity: The company maintains a $75M revolving credit facility with $65.7M available as of Nov 3, 2001. Management expects cash on hand and operations to fund capital needs through Fiscal 2002.
- Risks:
- Environmental: Ongoing proceedings in New York and Michigan regarding former facilities. While reserves are deemed adequate, future developments could require additional reserves.
- Market: Exposure to consumer demand fluctuations, fashion trends, and potential economic weakness affecting the holiday season.
- Concentration: Two customers account for 26% of trade accounts receivable.
Investor Verification Checklist
- Inventory Levels: Verify the rationale for the $49.5M increase in inventory and assess the risk of future markdowns given the decline in Johnston & Murphy sales.
- Johnston & Murphy Performance: Investigate the causes of the 13.2% sales decline and 50.8% operating income drop in this key segment.
- Environmental Liabilities: Review the status of the Michigan sediment removal settlement and New York environmental proceedings to ensure reserves are sufficient.
- Accounting Controls: Confirm the scope of the internal inquiry into shipment timing errors and the effectiveness of new controls implemented.
- Cash Flow Sustainability: Monitor the ability to generate positive operating cash flow in the fourth quarter to offset the significant cash burn in the first nine months.