Genesco Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2019, ended November 3, 2018; comparisons are to periods ended October 28, 2017. Amounts are in U.S. dollars.
Business context
Genesco sells footwear, apparel, headwear and accessories through retail, e-commerce, catalog and wholesale channels. Its five reportable segments are Journeys, Schuh, Lids Sports Group, Johnston & Murphy and Licensed Brands. The company operated 2,653 stores and leased departments at quarter-end. It was exploring a sale of Lids Sports Group.
Financial performance
- Third-quarter sales: $713.1 million, down 0.5%. Comparable sales rose 4% (same-store sales +4%; comparable direct sales +9%). Management said the prior-year calendar shift moved approximately $20 million of back-to-school sales out of this quarter.
- Third-quarter profitability: Gross margin was 49.5%, versus 49.4%; selling and administrative expenses were 45.9% of sales, versus 45.0%. Operating income was $19.5 million (2.7% margin), compared with an operating loss of $152.4 million (21.3% negative margin) a year earlier. The prior-year period included a $182.2 million non-cash Lids goodwill impairment.
- Third-quarter earnings: Net income was $14.4 million, or $0.73 diluted EPS, versus a net loss of $164.8 million, or $8.56 diluted loss per share. Net interest expense declined to $0.8 million from $1.5 million.
- First nine months: Sales were $2.012 billion, up 1.8%; comparable sales rose 2%. Gross margin was 49.5%, flat year over year, while selling and administrative expenses increased to 48.1% of sales from 47.9%. Operating income was $19.0 million versus a loss of $151.5 million; net income was $12.0 million, or $0.62 diluted EPS, versus a net loss of $167.9 million, or $8.74 diluted loss per share. The comparison is significantly affected by the prior-year goodwill impairment.
- Segment trends, third quarter: Journeys sales rose 3.7% and operating income rose 3.9%; Schuh sales fell 5.8% and operating income fell 40.4%; Lids sales fell 4.5% and reported a $0.4 million operating loss; Johnston & Murphy sales rose 7.6% while operating income slipped 1.4%; Licensed Brands sales fell 28.4% and recorded a $0.2 million operating loss.
- Cash flow and investment: Nine-month operating cash flow was $58.3 million, versus cash used of $12.5 million. Investing activities used $45.4 million, including $47.2 million of capital expenditures. Cash increased $13.5 million to $53.4 million.
- Liquidity and debt: Working capital was $470.8 million. Total debt, including current maturities, was $81.8 million, versus $88.4 million at fiscal year-end and $223.6 million a year earlier. Revolving-credit availability was $330.7 million; the company reported compliance with applicable credit-facility covenants.
- Inventory: $666.2 million at quarter-end, up $123.5 million from February 3, 2018, primarily reflecting seasonal retail inventory build, partly offset by decreases in wholesale inventory.
Material changes, outlook and risks
- Genesco adopted ASC 606 using the modified retrospective method, adding $4.4 million to opening retained earnings. Prior-year results were not restated. For the first nine months, adoption reduced reported net income by $2.4 million compared with the company’s estimate of results without adoption, largely due to the timing of direct-mail advertising expense.
- The company recorded a $5.7 million non-cash impairment of its Canadian Lids trademark in the quarter. Schuh goodwill testing found no impairment, but its estimated fair value exceeded carrying value by only about $16.4 million; management identified sensitivity to revenue-growth and discount-rate assumptions.
- Management expected fiscal 2019 capital expenditures of approximately $60 million and said cash, operating cash flow and credit availability should fund working capital, investment and stock repurchases. The company also described a profit-enhancement initiative targeting $35–$40 million of annualized expense reductions. No specific earnings guidance is provided in the supplied filing text.
- The Lids sale process may result in additional impairment or asset write-downs; the filing does not state that a sale had been completed. Management’s strategy emphasizes footwear businesses, fewer new stores overall, and investment in omni-channel capabilities.
- Key risks include weak retail and mall traffic, promotional activity and margin pressure, fashion and consumer-demand changes, competition including online and vendor competition, tariffs on imports (including products from China), foreign exchange and U.K. market exposure, and execution of the Lids sale process. The company also disclosed wage-and-hour litigation and environmental contingencies; it stated that the proposed settlement of two wage cases remained subject to documentation and court approval.
- Genesco expected lease-accounting changes in fiscal 2020 to have a material impact on its balance sheet because of its significant lease portfolio. The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Investor facts to verify
- Progress, terms and potential impairment consequences of the Lids Sports Group sale process.
- Schuh’s comparable-sales and operating trends, and the assumptions supporting its goodwill valuation.
- Inventory quality, seasonal sell-through, promotional requirements and the effect on gross margins and cash flow.
- Credit-facility availability and covenant headroom as seasonal working-capital needs change.
- Impact of tariffs, foreign exchange and the U.K. market on costs, sales and profitability.
- Final outcomes and cash costs for disclosed wage-and-hour and environmental matters, and the balance-sheet effect of lease-accounting adoption.