GCO

Business Context and Reporting Period

Company: Genesco Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: January 31, 2009 (Fiscal 2009)
Business Overview: Genesco is a leading retailer of branded footwear and licensed headwear, and a wholesaler of branded footwear. The company operates five reportable segments: Journeys Group, Underground Station Group, Hat World Group, Johnston & Murphy Group, and Licensed Brands (primarily Dockers). As of January 31, 2009, the company operated 2,234 retail stores across the U.S., Puerto Rico, and Canada.

Key Financial Metrics

Material Changes vs. Prior Period

• Significant Litigation Gain: The dramatic increase in earnings from operations and net earnings was primarily driven by a $204.1 million gain from the settlement of merger-related litigation with The Finish Line, Inc. and UBS. This settlement included a $175 million cash payment and a 12% equity stake in The Finish Line (distributed to shareholders).
• Revenue Growth: Net sales increased 3.3% year-over-year, driven by growth in Journeys Group (+6.5%), Hat World Group (+7.0%), and Licensed Brands (+4.2%). This was partially offset by declines in Underground Station Group (-10.6%) and Johnston & Murphy Group (-7.5%).
• Expense Reduction: Selling and administrative expenses decreased as a percentage of net sales (46.0% vs. 46.4%) largely due to a reduction in merger-related litigation expenses ($8.0 million in 2009 vs. $27.6 million in 2008).
• Debt Reduction: Long-term debt decreased by approximately $36.7 million, aided by cash proceeds from the litigation settlement used to pay down revolver borrowings.

Guidance, Outlook, and Risks

• Store Expansion Strategy: Due to economic conditions, Genesco plans to slow the pace of new store openings in Fiscal 2010, targeting a net increase of no more than 15 stores (compared to 59 in Fiscal 2009). The company plans to open up to 72 new stores and close 57.
• Capital Expenditures: Total capital expenditures for Fiscal 2010 are expected to be approximately $48.6 million, down from $49.4 million in Fiscal 2009.
• Liquidity and Debt: The company expects cash on hand and operating cash flows to be sufficient for working capital and capital expenditures. However, holders of $86.2 million in 4 1/8% Convertible Subordinated Debentures have the option to require redemption in June 2010. Management expects adequate liquidity to meet this obligation.
• Key Risks:
  • Economic Conditions: Poor economic conditions and reduced consumer spending on discretionary items could significantly harm results.
  • Environmental Liabilities: The company has accrued $16.0 million for environmental remediation related to former facilities. Future costs could exceed estimates.
  • Goodwill Impairment: Deterioration in market value or operating performance could require impairment charges on $111.7 million of goodwill.
  • Supply Chain: Reliance on imported products exposes the company to shipping disruptions, currency fluctuations, and trade restrictions.

Investor Verification Checklist

• Litigation Settlement Impact: Verify the sustainability of earnings by excluding the one-time $204.1 million litigation gain to assess core operational performance.
• Debt Redemption: Confirm the company's ability to fund the potential $86.2 million debenture redemption in June 2010 given current cash flows and credit facility availability.
• Environmental Accruals: Monitor the status of the New York State and Whitehall, Michigan environmental proceedings, as future costs could exceed the current $16.0 million accrual.
• Comparable Store Sales: Review segment-specific comparable store sales trends, particularly the 10% decline in Johnston & Murphy retail operations and flat sales in Underground Station.
• Store Closure Costs: Assess the impact of planned store closures (57 stores) and the associated restructuring charges on future margins.