Genesco Inc. — Form 10-Q Summary
Business and period: Genesco operates footwear and accessories retail, e-commerce and wholesale businesses, including Journeys, Schuh, Lids Sports, Johnston & Murphy and Licensed Brands. It operated approximately 2,800 stores and leased departments. This filing covers the quarter and six months ended August 1, 2015 (fiscal 2016); comparisons are with the periods ended August 2, 2014. Unaudited results may not indicate full-year performance.
Key financial results
Amounts are in millions except per-share data. Percentages and changes are based on the filing’s reported figures.
| Metric | Quarter 2015 | Quarter 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $655.5 | $615.5 | $1,316.1 | $1,244.3 |
| Gross margin | 48.8% | 49.0% | 49.1% | 49.6% |
| Selling and administrative expenses as % of sales | 46.7% | 47.2% | 46.6% | 46.9% |
| Operating earnings | $12.5 | $10.1 | $28.8 | $33.8 |
| Continuing-operations pretax earnings | $11.6 | $9.3 | $27.2 | $32.3 |
| Net earnings | $7.5 | $4.7 | $17.4 | $18.7 |
| Diluted EPS | $0.32 | $0.20 | $0.73 | $0.79 |
| Cash from (used in) operating activities | $(94.7) | $(24.3) | $(95.2) | $7.9 |
Liquidity and debt: At August 1, 2015, cash was $49.0 million, working capital was $516.3 million and total debt, including current maturities, was $113.5 million, compared with $29.2 million of debt at January 31, 2015. Cash declined $63.9 million during the first half. Inventory rose $136.7 million from fiscal year-end to $734.8 million, principally reflecting seasonal retail stock build. Management said cash, operating cash flow and credit-facility availability should fund foreseeable working capital and capital expenditure needs. Revolver availability was reported at $360.1 million; the company was in compliance with applicable UK facility covenants.
Changes and operating performance
- Quarterly sales rose 6.5%, with comparable sales up 7%. Six-month sales increased 5.8%, with comparable sales up 6%. Sales grew in all segments except Licensed Brands.
- Quarterly net earnings improved, supported by higher sales and a lower effective tax rate (34.4% versus 48.7%). For the first half, operating earnings and net earnings declined despite sales growth; the six-month effective tax rate was 35.5% versus 41.6%.
- Journeys’ quarter sales increased 4.4% and operating earnings rose 35.3% to $9.2 million. Schuh sales grew 3.4% and it returned to operating profit of $4.9 million from a loss, with lower acquisition-related compensation expense and no contingent bonus accrual.
- Lids sales grew 11.5% in the quarter, but operating earnings fell 34.0% to $5.6 million; for the first half, operating earnings dropped 86.8% to $2.2 million. Management cited promotions to clear excess inventory, lower gross margin, higher shipping and warehouse costs, and expense from store growth.
- Johnston & Murphy quarterly sales grew 10.6% and returned to operating profit. Licensed Brands sales fell 9.7% and operating earnings fell 38.2%; Dockers sales were constrained by credit-related limitations affecting a customer.
- First-half operating cash flow deteriorated by $103.1 million year over year, mainly from working-capital changes, acquisition-related payments and taxes. The company reported approximately $73 million of Schuh contingent bonus, deferred purchase-price and other acquisition-related payments during the half.
Outlook, risks and unusual items
- No earnings or sales guidance is provided in the supplied filing text. Fiscal 2016 capital expenditures were expected to be approximately $118 million, including about $103 million for retail projects and $15 million for wholesale and other purposes. Planned retail activity included new store openings and approximately 150 major renovations.
- Asset impairment and other charges were $1.2 million for the quarter and $3.8 million for the first half, including network-intrusion expenses, retail store impairments and legal costs. The first-half prior-year amount was $0.3 million, partly because a $3.4 million lease-termination gain offset charges. Fiscal 2015 also included a $5.7 million first-quarter charge from an amendment to the EVA incentive plan.
- Environmental contingencies included a $14.1 million accrued provision at August 1, 2015. The company disclosed disputed claims and uncertain future remediation costs, including New York matters; approximately $10.5 million of discontinued-operation costs were expected to be paid within 12 months. Additional reserves may be required.
- Other exposures include a California wage-and-hour/PAGA action the company intends to defend, ongoing litigation related to a prior payment-card network intrusion, customer credit risk, foreign exchange, fashion and consumer-demand shifts, and possible asset impairment. The filing reports no material change to previously disclosed risk factors.
- The company repurchased 424,384 shares for $27.5 million during the first half; $33.4 million remained under its $75 million authorization. Foreign cash of approximately $17.4 million was intended to remain invested outside the United States; repatriation could trigger U.S. taxes.
Important facts for investors to verify
- Whether Lids’ inventory-clearing promotions and margin pressure improve, and whether its store expansion produces adequate returns.
- Whether the seasonal inventory build converts to sales and operating cash flow; first-half operating cash flow was negative $95.2 million.
- Debt, revolver utilization and liquidity after seasonal needs, planned capital spending, share repurchases and the acquisition-related payments.
- Progress and potential changes in environmental accruals, the New York remediation matters, and other legal or network-intrusion costs.
- Whether Dockers customer credit restrictions persist and how the new Bass license affects Licensed Brands’ sales and expenses.
- Assumptions underlying Schuh and Lids Team Sports goodwill valuations and the potential for future impairment.