Business Context and Reporting Period
Company: GENESCO INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 2, 1997 (Second Quarter of Fiscal 1998)
Business Overview: Genesco manufactures, sources, markets, and distributes footwear under brands including Johnston & Murphy, Laredo, Code West, Larry Mahan, Dockers, and Nautica. The company also operates the Volunteer Leather division and a retail network including Jarman, Journeys, and Johnston & Murphy stores.
Key Financial Metrics
| Metric (in thousands) | Q2 1997 | Q2 1996 | 6 Months 1997 | 6 Months 1996 |
|---|---|---|---|---|
| Net Sales | $120,024 | $102,955 | $234,209 | $203,174 |
| Gross Margin % | 40.9% | 39.6% | 41.4% | 40.1% |
| Net Earnings | $4,133 | $2,073 | $6,315 | $3,039 |
| Earnings Per Share (Diluted) | $0.15 | $0.08 | $0.23 | $0.11 |
| Cash & Short-term Investments | $17,624 | $30,560 | $17,624 | $30,560 |
| Long-term Debt | $75,000 | $75,000 | $75,000 | $75,000 |
| Working Capital | $117,819 | $110,561 | $117,819 | $110,561 |
| Current Ratio | 3.0x | 3.1x | 3.0x | 3.1x |
Cash Flow (Six Months Ended Aug 2, 1997):
- Net cash used in operations: $(16,206) thousand
- Net cash used in investing activities: $(12,345) thousand
- Net cash provided by financing activities: $2,800 thousand
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 16.6% in Q2 and 15.3% for the six-month period compared to the prior year. This was driven primarily by a 29.2% increase in footwear retail sales, offsetting a 2.4% decline in wholesale/manufacturing sales.
- Profitability: Net earnings more than doubled in Q2 ($4.1M vs $2.1M) and the six-month period ($6.3M vs $3.0M). Pretax earnings included a net restructuring gain of $0.3 million.
- Segment Performance:
- Retail: Operating income surged 76.7% in Q2 due to a 13% increase in comparable store sales and a 17% increase in store count (556 stores vs 475 last year).
- Wholesale/Manufacturing: Operating income declined 37.9% in Q2 due to weakness in the western boot market and lower tanned leather sales (impacted by military contract delays).
- Liquidity: Cash and short-term investments decreased from $43.4 million (Feb 1, 1997) to $17.6 million (Aug 2, 1997). This reduction was primarily due to a $27.6 million increase in inventories to support new store openings and seasonal demand.
Guidance, Outlook, Risks, and Unusual Items
- Restructuring: The company recorded a net gain of $0.3 million in Q2, comprising a $1.1 million restructuring gain (from selling facilities and canceling leases faster than expected) and $0.8 million in asset impairment charges related to excess equipment in western boot plants.
- Capital Expenditures: Total CapEx for Fiscal 1998 is expected to be approximately $26.4 million, with $18.0 million allocated for opening 98 new retail stores and renovations.
- Legal Contingencies (Significant Risk):
- Preferred Shareholder Settlement: A settlement involving the issuance of 525,495 shares (market value $6.7 million) was consummated in June 1997. The company recorded this as a capital transaction. However, the SEC staff has indicated this should have been expensed. There is a possibility the company may need to revise financial statements to reflect a $6.7 million charge to earnings.
- Environmental: The company is a defendant in New York State environmental proceedings (Gloversville and Johnstown). The Gloversville site remediation is estimated at $10.0 million, though liability is shared with other parties. The company is unable to predict the final outcome or liability extent.
- Dividends: The company is in arrears on preferred stock dividends totaling approximately $1.1 million. The indenture for senior notes prohibits common dividends until the preferred dividend pool is positive (currently an $82.0 million deficit).
- Outlook: Management expects cash on hand and operations to fund capital needs through Fiscal 1998. However, the western boot market continues to weaken, potentially requiring further capacity adjustments.
Investor Verification Checklist
- SEC Accounting Dispute: Verify the status of discussions with the SEC regarding the $6.7 million preferred shareholder settlement and the potential for a retroactive earnings charge.
- Environmental Liability: Monitor developments in the New York State environmental proceedings, specifically the Gloversville action, to assess potential exposure beyond current reserves.
- Western Boot Market: Assess the sustainability of the decline in western boot sales and the effectiveness of the manufacturing restructuring in mitigating losses in that segment.
- Inventory Levels: Review inventory turnover rates given the significant $27.6 million increase in inventory to ensure it aligns with sales velocity and does not lead to future markdowns.
- Preferred Dividend Arrears: Confirm the timeline for clearing the $1.1 million preferred dividend arrearage to enable future common stock dividends.