Genesco Inc. — Q3 FY2012 Form 10-Q
Reporting period: Quarter and nine months ended October 29, 2011; comparisons are to the corresponding prior-year periods. Amounts are in U.S. dollars unless stated otherwise. The filing is unaudited.
Business context and period
Genesco sells footwear, apparel, headwear and accessories through retail, e-commerce and wholesale businesses. At quarter-end it operated 2,387 stores in the U.S., Puerto Rico, Canada, the U.K. and Ireland. Its six reportable segments include Journeys, Underground Station, Schuh, Lids Sports, Johnston & Murphy and Licensed Brands.
The June 2011 Schuh acquisition expanded the business into the U.K. and Ireland. Acquisition-related revenue makes reported year-over-year growth less representative of organic growth.
Financial performance and liquidity
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Net sales | $616.5 million | $464.8 million | $1,568.6 million | $1,229.3 million |
| Earnings from operations | $45.9 million | $26.7 million | $73.1 million | $37.8 million |
| Net earnings | $26.1 million | $16.9 million | $40.5 million | $22.4 million |
| Diluted EPS | $1.09 | $0.72 | $1.70 | $0.93 |
- Q3 gross margin was 50.6%, down from 50.9%; selling and administrative expense was 43.1% of sales, down from 44.7%. For the nine months, gross margin was 50.8% versus 51.2%, while selling and administrative expense was 46.0% versus 47.5% of sales.
- Operating cash flow was $12.9 million for the nine months, compared with $24.2 million a year earlier. Capital expenditures were $37.6 million; acquisitions used $91.6 million. Cash declined $19.9 million from fiscal year-end to $36.1 million.
- At October 29, cash was $36.1 million, working capital $316.3 million and total debt $147.9 million, including $102.8 million of revolver borrowings and $45.1 million of U.K. term loans. The revolver had $299.1 million of excess availability, including Tranche A-1; the company was not subject to its financial covenant at quarter-end. The Schuh group was in compliance with its U.K. facility covenants.
- Inventory was $544.1 million, up from $359.7 million at January 29, largely reflecting seasonal holiday inventory, growth in Lids Team Sports and the Schuh acquisition. The company reported $8.3 million of discontinued-operations costs expected to be paid over the next twelve months.
Material changes and management commentary
- Q3 sales rose 32.6%; the filing attributes $91.9 million of quarterly sales to businesses acquired in the prior twelve months, including $78.2 million from Schuh. Nine-month sales rose 27.6%, including $174.1 million from acquired businesses.
- Journeys Q3 comparable-store sales increased 15%, and operating income rose 32.1%. Lids Sports sales increased 21.5% and operating income 54.8%, supported by comparable sales growth, acquired businesses and store expansion. Johnston & Murphy operating income nearly doubled. Underground Station narrowed its operating loss as comparable sales improved and unprofitable stores were closed.
- Licensed Brands’ nine-month sales declined 0.8% and operating income fell 20.9%, reflecting weaker Dockers sales, lower gross margin and higher advertising and freight costs.
- Schuh contributed Q3 operating income of $4.4 million, including $2.9 million of compensation expense tied to deferred acquisition payments. The company also recorded $7.4 million of Schuh acquisition costs in the first nine months.
- Interest expense increased to $1.9 million in Q3 and $3.5 million for the nine months, primarily because of acquisition-related revolver and term-loan borrowings. Effective tax rates rose to 40.6% for Q3 and 40.4% for the nine months; management attributed the higher rates partly to Schuh-related items treated as permanent differences.
Outlook, risks and unusual items
- Management expected cash on hand, operating cash flow and facility availability to cover working-capital and capital needs for the foreseeable future. Fiscal 2012 capital expenditures were projected at approximately $55.5 million, including store openings and renovations. No earnings or sales guidance is provided in the supplied filing text.
- Management planned to continue opening stores at a slower pace. It intended to close underperforming Underground Station stores and seek rent relief while assessing that chain’s prospects.
- Key risks include weak consumer demand, changing fashion trends, competition, supply or distribution disruption, wholesale-customer credit and buying patterns, foreign-exchange and input-cost movements, acquisition integration, seasonal timing, and store leasing and execution.
- The 2010 network intrusion remained a significant contingency: Visa and MasterCard asserted claims against acquiring banks totaling approximately $15.4 million, which may be indemnifiable by Genesco. The company disputed the claims; further claims were possible.
- Environmental and other legal matters include a $13.2 million accrued environmental provision at quarter-end. A Village of Garden City action includes alleged historical and future remediation costs; the company disputes the Village’s estimates. The filing also describes California class actions, with settlement in principle for two, and other litigation. Management cautioned that estimates and outcomes could change.
- Restructuring and other charges were $0.3 million in Q3 and $1.9 million year to date, versus $2.1 million and $6.6 million in the respective prior-year periods. The current-year amounts included store impairments, network-intrusion expenses and legal matters.
- Management identified a reasonably possible $7.2 million reduction in gross uncertain-tax-position liabilities within twelve months due to statute expirations. Disclosure controls were considered effective; Schuh’s systems and processes were being integrated and excluded from the company’s year-end internal-control assessment.
Important facts for investors to verify
- How much of sales and profit growth reflects same-store and underlying business performance versus Schuh and other acquisitions.
- Whether holiday inventory converts to sales without elevated markdowns, and whether operating cash flow improves after seasonal working-capital needs.
- Schuh’s ongoing operating performance, acquisition integration, deferred-payment compensation and the final purchase-price allocation.
- Available revolver capacity, borrowing-base constraints, debt service and compliance with the U.K. facility’s financial covenants.
- Resolution and potential financial exposure from the payment-card claims, environmental matters and other litigation.