Genesco Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months of fiscal 2017, ended July 30, 2016. Comparisons are with the periods ended August 1, 2015 unless stated otherwise. Figures are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
Genesco operates footwear and accessories retail, e-commerce and wholesale businesses, including Journeys, Schuh, Lids, Johnston & Murphy and licensed brands. It operated 2,805 stores and leased departments at quarter-end. The Lids Team Sports business was sold in the prior fiscal fourth quarter, affecting year-over-year comparisons.
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Net sales | $625.6 | $655.5 | $1,274.4 | $1,316.1 |
| Comparable sales | -1% | — | Flat | — |
| Gross margin | 50.3% | 48.8% | 50.6% | 49.1% |
| Operating earnings | $20.0 | $12.5 | $37.9 | $28.8 |
| Continuing operations earnings | $14.5 | $7.6 | $25.1 | $17.5 |
| Diluted EPS | $0.72 | $0.32 | $1.21 | $0.73 |
Quarterly revenue fell 4.6%; six-month revenue declined 3.2%. The reported decline primarily reflected the Lids Team Sports divestiture and unfavorable currency translation at Schuh. Gross margin rate improved, but selling and administrative expenses rose as a share of sales to 48.4% in Q2 and 47.9% for the half year, from 46.7% and 46.6%, respectively. Six-month operating earnings and EPS comparisons also benefited from unusual items described below.
Segment performance and material changes
- Journeys: Q2 sales rose 2%, but operating earnings fell 51% to $4.5 million; comparable sales declined 4%. Management cited weaker footwear units, limited supply of newly popular styles and difficulty leveraging store costs.
- Schuh: Q2 sales decreased 6%, including a $9.9 million currency headwind; comparable sales fell 1%. Operating earnings rose 16% to $5.7 million, partly because prior-year results included acquisition-related compensation expense.
- Lids Sports: Q2 sales fell 15%, largely reflecting the Team Sports sale; comparable sales were flat. Operating earnings rose 28% to $7.1 million, supported by higher gross margin and lower shipping, warehouse and promotional costs.
- Johnston & Murphy: Q2 sales rose 7%, with comparable sales up 3%; operating earnings increased to $2.3 million from $0.8 million.
- Licensed Brands: Q2 sales were nearly flat, but operating earnings fell 80% to $0.2 million amid margin pressure, higher compensation and freight costs, and Bass business start-up expenses.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $30.6 million, versus cash used of $95.2 million a year earlier. Capital expenditures were $40.7 million, so operating cash flow less capital expenditures was negative $10.1 million.
- Cash was $41.5 million at July 30, 2016, versus $133.3 million at January 30, 2016. Working capital was $441.5 million, down from $476.5 million at fiscal year-end.
- Inventory was $663.7 million, up $134.0 million from January 30, reflecting seasonal increases in most retail businesses.
- Total debt, including current maturities, was $135.6 million, compared with $111.8 million at January 30. Debt comprised $94.3 million of U.S. revolver borrowings, $19.2 million of U.K. revolver borrowings and $22.0 million of U.K. term loans.
- Credit-facility excess availability was $293.9 million; the company reported compliance with applicable covenants. Management said cash, operating cash flow and borrowing capacity were expected to fund working capital, capital expenditures and repurchases during fiscal 2017.
- The company repurchased 1.41 million shares for $93.4 million in the first half and had $80.0 million remaining under its $100 million authorization.
Outlook, unusual items and risks
- No full-year sales or earnings guidance is provided in the filing text. Fiscal 2017 capital expenditures were expected to be approximately $110–$120 million, including plans to open stores and complete about 197 major renovations.
- Management warned that Journeys comparable sales could remain pressured through at least the balance of fiscal 2017 because supply-chain lead times may limit availability of newly sought-after styles.
- Q2 results included a $9.0 million gain from settlement of Visa-related network-intrusion litigation, partly offset by $1.0 million of store impairment charges. The company also recognized a $2.5 million gain from final working-capital adjustments on the Lids Team Sports sale. The tax rate benefited from reversal of charges related to a formerly uncertain tax position after a tax assessment was vacated.
- The company expects a $1.0–$4.0 million one-time pension settlement charge in fiscal Q4, depending on participant acceptance of an anticipated buyout offer.
- Environmental contingencies included a $14.3 million accrued provision at quarter-end. A $10.0 million payment to settle the Village of Garden City claims was made in August 2016; the company said the settlement and related consent judgment were not expected to materially affect results or financial condition.
- Key risks cited include consumer and retail weakness, mall traffic, fashion shifts and markdowns, labor and occupancy costs, supplier and distribution disruption, foreign exchange and Brexit effects, sports-related demand, cybersecurity, litigation and environmental matters. Management said risk factors were not materially changed from its latest annual report.
Important facts for investors to verify
- How much reported earnings growth depended on the Visa litigation gain, divestiture gain and tax-rate benefit, and how underlying segment profitability is trending.
- Whether Journeys can replenish in-demand products and recover comparable sales without greater markdowns or continued margin pressure.
- How seasonal inventory, buybacks and capital spending affect cash, debt and borrowing availability through the remainder of the year.
- The final cost and timing of the pension buyout and environmental obligations, including the August settlement payment.
- Whether planned store openings and renovations deliver expected returns amid currency, consumer-demand and mall-traffic risks.