Business Context and Reporting Period
Company: GENESCO INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 28, 2000 (Third Quarter of Fiscal 2001)
Business Overview: Genesco manufactures, sources, markets, and distributes footwear under brands including Johnston & Murphy, Dockers, and Nautica. The company operates retail chains (Journeys, Jarman, Underground Station, Stone & Co.) and wholesale distribution. In the second quarter of Fiscal 2001, the company divested its Volunteer Leather business, which is now reported as discontinued operations.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Oct 28, 2000 | Nine Months Ended Oct 28, 2000 | Nine Months Ended Oct 30, 1999 |
|---|---|---|---|
| Net Sales | $175,593 | $464,350 | $384,270 |
| Gross Margin | $82,168 | $218,309 | $178,041 |
| Gross Margin % | 46.8% | 47.0% | 46.3% |
| Operating Income | $16,420 | $39,165 | $27,736 |
| Net Earnings | $8,785 | $17,308 | $14,447 |
| Diluted EPS | $0.36 | $0.74 | $0.60 |
| Cash & Short-Term Investments | $16,060 | $16,060 | $38,543 |
| Long-Term Debt | $103,500 | $103,500 | $103,500 |
| Working Capital | $132,747 | $132,747 | $135,185 |
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 25.5% in the third quarter and 20.8% for the nine-month period compared to the prior year. This growth was driven by store expansion and comparable store sales increases across all segments.
- Profitability: Net earnings rose 41.4% in the third quarter and 19.8% for the nine-month period. Operating margins improved slightly due to better gross margins and controlled selling/administrative expenses relative to sales.
- Cash Flow: Operating cash flow turned negative, using $11.5 million for the nine months ended Oct 28, 2000, compared to providing $12.5 million in the prior year. This shift was primarily due to a $44.6 million increase in inventory to support new store openings and a $13.0 million increase in accounts receivable.
- Discontinued Operations: The company recorded a $3.0 million net charge related to the divestiture of the Volunteer Leather business in the nine-month period, which reduced net earnings.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Expenditures: Total capital expenditures for Fiscal 2001 are expected to be approximately $34.8 million, primarily for opening 101 Journeys stores, 15 Johnston & Murphy stores, and 52 Jarman Retail stores.
- Liquidity: Management expects cash on hand and operating cash flows to be sufficient to fund capital expenditures and restructuring costs through Fiscal 2001. The company has $57.8 million available under its revolving credit agreement.
- Share Repurchases: The company has repurchased 6.4 million shares at a cost of $60.4 million under authorizations totaling 6.8 million shares.
Risks and Contingencies
- Environmental Litigation: The company is involved in proceedings in New York and Michigan regarding hazardous material disposal and groundwater contamination. While management does not expect a material effect, outcomes are uncertain. A $2.2 million to $2.6 million cost estimate exists for a remedial investigation in New York.
- Market Risks: The company hedges foreign currency exposure (Italian Lira) but faces risks from changes in consumer demand, particularly during the holiday season, and potential softening of the economy affecting receivables collectibility.
- Accounting Changes: The company is preparing for the adoption of SFAS No. 133 regarding derivative instruments, though the impact is not currently estimable.
Investor Verification Checklist
- Inventory Levels: Verify the necessity of the $44.6 million inventory increase against actual sales velocity and new store opening schedules to assess obsolescence risk.
- Accounts Receivable: Review the $13.0 million increase in receivables and the lengthening of days sales outstanding to ensure credit quality remains stable.
- Environmental Reserves: Confirm the adequacy of reserves for the New York and Michigan environmental proceedings, specifically the $2.2 million to $2.6 million estimate for the New York site.
- Discontinued Operations: Ensure the $3.0 million charge for the Volunteer Leather divestiture is fully accounted for and that no further significant costs are expected beyond the $2.2 million projected for the next 12 months.
- Capital Expenditure Execution: Monitor the ability to open the planned 168 new stores within the $34.8 million budget without impacting liquidity.