Business Context and Reporting Period
Company: Genesco Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 30, 2010 (Third Quarter of Fiscal 2011)
Business Overview: Genesco designs, sources, markets, and distributes footwear and accessories through retail stores (Journeys, Lids, Johnston & Murphy, etc.) and wholesale channels. As of October 30, 2010, the company operated 2,311 retail stores across the U.S., Puerto Rico, and Canada.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Oct 30, 2010 | Nine Months Ended Oct 30, 2010 |
|---|---|---|
| Net Sales | $464,838 | $1,229,345 |
| Gross Margin | $236,741 (50.9%) | $628,856 (51.2%) |
| Earnings from Operations | $26,679 | $37,808 |
| Net Earnings | $16,917 | $22,350 |
| Diluted EPS (Continuing Ops) | $0.72 | $0.97 |
| Cash and Cash Equivalents | $24,574 | $24,574 |
| Working Capital | $281,039 | $281,039 |
| Long-Term Debt | $30,400 | $30,400 |
| Net Cash Provided by Operating Activities | $14,653 | $24,226 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 19.1% in the third quarter and 12.2% for the nine-month period compared to the prior year. This was driven primarily by a 44.4% increase in the Lids Sports Group (due to acquisitions and comparable store sales) and growth in the Journeys Group (8.9%) and Licensed Brands (20.9%).
- Profitability: Net earnings rose 48% in the third quarter ($16.9M vs. $11.4M) and significantly for the nine-month period ($22.4M vs. $3.0M). The prior year's nine-month results were negatively impacted by a $5.1M loss on early debt retirement and higher restructuring charges.
- Operating Expenses: Selling and administrative expenses decreased as a percentage of net sales in the third quarter (44.7% vs. 45.9%) due to expense leverage across most segments.
- Inventory: Inventories increased significantly to $450.9M (from $291.0M at the start of the fiscal year) to support holiday sales, resulting in a $136.7M cash outflow for inventory in the nine-month period.
- Debt: Long-term debt increased to $30.4M due to revolver borrowings, up from $0 at the beginning of the fiscal year. Interest expense decreased significantly due to the conversion of 4 1/8% Debentures in the prior fiscal year.
Guidance, Outlook, Risks, and Unusual Items
- Network Intrusion (Critical Risk): The company disclosed a criminal intrusion into its computer network processing payment card transactions for Journeys, Journeys Kidz, Shi by Journeys, Johnston & Murphy, and some Underground Station stores. The extent of the compromise is unknown, and the company is investigating potential customer data loss. This poses risks of litigation, reputational harm, and investigation costs.
- Acquisitions: In the third quarter, Genesco completed acquisitions totaling $56.7M, including Anaconda Sports, Keuka Footwear, and Sports Avenue (48 stores), contributing to the Lids Sports and Licensed Brands segments.
- Restructuring Charges: The company recorded $2.1M in asset impairment charges in the third quarter and $6.6M for the nine-month period, primarily related to retail store asset impairments.
- Environmental Contingencies: An accrued provision of $16.7M exists for environmental remediation related to discontinued operations (e.g., former tannery sites). The company expects to incur additional costs but believes current reserves are adequate.
- Capital Allocation: The company repurchased 864,000 shares for $24.8M during the nine-month period. Total capital expenditures for Fiscal 2011 are expected to be approximately $32.7M.
- Outlook: Management expects cash on hand and operating cash flows to be sufficient for working capital and capital expenditures. However, they note risks related to the consumer economy, the Holiday selling season, and the network intrusion.
Investor Verification Checklist
- Network Intrusion Impact: Monitor updates regarding the scope of the data breach, potential litigation costs, and any impact on customer trust or sales.
- Inventory Levels: Verify that the significant increase in inventory ($450.9M) aligns with sales velocity to avoid future markdowns or impairment charges.
- Acquisition Integration: Assess the performance of recent acquisitions (Sports Avenue, Anaconda Sports) to ensure they meet projected synergies.
- Environmental Liabilities: Review the status of the $16.7M environmental provision and any new developments in the New York or Michigan remediation cases.
- Debt Covenants: Confirm continued compliance with credit facility covenants, specifically the Adjusted Excess Availability requirement, given the seasonal nature of working capital.