Genesco Inc. — FY2017 Form 10-K Summary
Business context and reporting period. Genesco is a footwear, headwear and sports apparel retailer and wholesaler operating Journeys, Schuh, Lids Sports Group, Johnston & Murphy and Licensed Brands. The filing covers the 52-week fiscal year ended January 28, 2017; figures below are in U.S. dollars. The company operated 2,794 stores and leased departments at year-end.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $2.868 billion | $3.022 billion |
| Gross profit / gross margin | $1.418 billion / 49.4% | $1.443 billion / 47.8% |
| Operating earnings / margin | $142.0 million / 4.9% | $151.3 million / 5.0% |
| Continuing-operations earnings | $97.9 million | $95.4 million |
| Net earnings / diluted EPS | $97.4 million / $4.83 | $94.6 million / $4.11 |
| Cash from operations | $161.5 million | $145.1 million |
| Capital expenditures | $94.0 million | $100.7 million |
| Cash and cash equivalents | $48.3 million | $133.3 million |
| Total debt, including current maturities | $82.9 million | $111.8 million |
| Working capital / current ratio | $428.8 million / 2.4 | $476.5 million / 2.5 |
Operating cash flow less capital expenditures was approximately $67.5 million in FY2017. The company reported total assets of $1.449 billion and common equity of $920.0 million at year-end. It repurchased 2.16 million shares for $133.3 million during FY2017, a significant use of cash. No cash dividend has been paid on common stock since 1973.
Fourth-quarter results
FY2017 fourth-quarter sales were $883.2 million, versus $932.2 million in the prior-year quarter. Net earnings were $46.5 million versus $44.7 million, and diluted EPS was $2.39 versus $2.06.
Segment results
- Journeys: Sales were essentially flat at $1.252 billion; comparable sales fell 4%. Operating earnings declined 32% to $85.9 million, with margin falling to 6.9%, reflecting markdowns and unleveraged store expenses.
- Lids Sports Group: Sales decreased 13% to $847.5 million, primarily reflecting the prior-year sale of Lids Team Sports; comparable sales rose 3%. Operating earnings increased to $41.6 million from $17.0 million, aided by improved gross margin and lower shipping and warehouse expense.
- Schuh: Sales fell 8% to $372.9 million, including a $49.3 million adverse foreign-exchange translation impact. Operating earnings increased 7% to $20.5 million; currency reduced operating earnings by $4.1 million.
- Johnston & Murphy: Sales rose 4% to $289.3 million and operating earnings rose 11% to $19.7 million.
- Licensed Brands: Sales fell 3% to $106.4 million and operating earnings fell 51% to $4.6 million, reflecting weaker Dockers/Chaps demand and costs associated with the G.H. Bass launch.
Changes, outlook and material items
- Sales declined 5.1% year over year. Management attributed the decrease principally to the Lids Team Sports divestiture and British pound depreciation; sales excluding Lids Team Sports declined less than 1%.
- Gross margin expanded 1.6 percentage points, but selling and administrative expenses rose as a share of sales from 42.5% to 44.5%; operating margin consequently declined slightly.
- Net income and diluted EPS increased despite lower sales and operating earnings, with the lower effective tax rate (35.4% versus 37.1%) and fewer weighted-average shares contributing. EPS comparisons also reflect substantial share repurchases.
- FY2017 included a $12.3 million pretax gain on the SureGrip sale, a $2.4 million gain from final Lids Team Sports sale adjustments, and a $9.0 million Visa litigation settlement gain (reported within asset impairment and other items). Offsetting items included $6.4 million of store impairment charges and a $2.5 million pension settlement charge.
- Cash declined by $85.0 million during the year, principally reflecting financing cash outflows, including share repurchases. The company had $49.9 million of borrowings under its revolving credit facility and $33.0 million of UK term and revolving loans at year-end. Revolver excess availability was $298.2 million; management said existing cash, operating cash flow and facilities should meet anticipated FY2018 needs.
- FY2018 capital expenditures were forecast at approximately $135–$145 million, including a Journeys warehouse expansion and major store renovations. The filing’s headline plan states approximately 101 store openings and 133 closures; the detailed capital-expenditure store-opening list appears to imply a different total, which investors should reconcile.
- Management identified consumer demand, fashion execution, mall traffic, promotional intensity, labor and occupancy costs, foreign exchange and Brexit-related uncertainty, imported-product sourcing and costs, cybersecurity/payment-card exposure, and litigation and environmental obligations as significant risks. The filing gives no clear consolidated FY2018 sales or earnings guidance.
Risks, contingencies and investor verification
- Environmental contingencies were accrued at $4.4 million at year-end, down from $14.5 million a year earlier, following the $10.0 million Garden City settlement payment. The company cautioned that estimates may change. A separate Gloversville settlement required $1.5 million, with insurance reimbursement agreed for 75%, subject to a $500,000 retention.
- Outstanding employment matters include a putative Ohio wage-and-hour class/collective action filed in February 2017 and a California labor action; Genesco disputes the allegations and intends to defend them.
- The company had $271.2 million of goodwill, largely associated with Lids and Schuh, and recognized $6.4 million of retail asset impairment charges in FY2017. Goodwill impairment depends on estimated future cash flows and other assumptions.
- Verify the FY2018 store-opening totals across the filing; assess the effect of share repurchases and one-time gains on reported EPS; monitor Journeys comparable sales, inventory and markdown reserves; and review liquidity, debt availability, foreign-exchange exposure and the outcome of legal and environmental matters.