Business Context and Reporting Period
Company: Genesco Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 31, 2009 (Third Quarter of Fiscal 2010)
Business Overview: Genesco is a leading retailer of branded footwear and licensed headwear, operating approximately 2,243 retail stores in the U.S., Puerto Rico, and Canada. The company operates five reportable segments: Journeys Group, Underground Station Group, Hat World Group, Johnston & Murphy Group, and Licensed Brands (primarily Dockers).
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Oct 31, 2009 | Nine Months Ended Oct 31, 2009 |
|---|---|---|
| Net Sales | $390,302 | $1,095,326 |
| Gross Margin | $200,166 | $559,333 |
| Gross Margin % | 51.3% | 51.1% |
| Earnings from Operations | $19,253 | $20,160 |
| Net Earnings | $11,443 | $2,959 |
| Diluted EPS | $0.50 | $0.13 |
| Cash and Cash Equivalents | $23,620 | $23,620 |
| Long-Term Debt | $29,042 | $29,042 |
| Working Capital | $258,617 | $258,617 |
Note: Nine-month Net Earnings were significantly impacted by a $5.1 million loss on early retirement of debt and $10.9 million in restructuring charges.
Material Changes vs. Prior Period
- Revenue: Net sales increased 0.1% in the third quarter compared to the prior year, driven by a 13.5% increase in the Hat World Group (partially due to the Impact Sports acquisition) which offset declines in other segments. For the nine months, sales decreased 0.4%.
- Profitability: Net earnings for the third quarter increased 27.6% to $11.4 million compared to $9.0 million in the prior year. However, nine-month net earnings plummeted to $3.0 million from $127.6 million in the prior year. The prior year's nine-month results included a $204.1 million gain from the settlement of merger-related litigation with The Finish Line, which is not present in the current period.
- Debt Reduction: Long-term debt decreased significantly from $113.7 million at January 31, 2009, to $29.0 million at October 31, 2009. This reduction was primarily due to the conversion of $56.4 million of 4 1/8% Convertible Subordinated Debentures into common stock in the first quarter of Fiscal 2010.
- Restructuring Charges: The company recorded $2.6 million in restructuring charges for the quarter and $10.9 million for the nine months, primarily related to asset impairments and lease terminations.
Guidance, Outlook, and Risks
- Outlook: Management intends to slow the pace of new store openings and focus on inventory management and cash flow until economic conditions improve. Total capital expenditures for Fiscal 2010 are expected to be approximately $41.9 million.
- Liquidity: The company maintains a $200 million revolving credit facility with $188.4 million in net availability as of October 31, 2009. No revolver borrowings were outstanding at period end. Management forecasts that cash from operations will be sufficient to repay any seasonal borrowings by year-end.
- Subsequent Events: Following the quarter end, the company induced the conversion of an additional $21.04 million of debentures and redeemed the remaining balance ($8.775 million) by December 3, 2009, effectively eliminating long-term debt. The company also acquired Sports Fan-Attic in November 2009.
- Risks: Key risks include continuing weakness in the consumer economy, inability of customers to obtain credit, fashion trends, and environmental contingencies. The company has accrued $16.1 million for environmental remediation costs related to discontinued operations.
Investor Verification Checklist
- Debt Elimination: Verify the complete conversion and redemption of the 4 1/8% Convertible Subordinated Debentures occurring in November and December 2009, as this fundamentally alters the capital structure and interest expense profile.
- Comparable Store Sales: Review segment-specific comparable store sales data, particularly the declines in the Journeys Group (-2%) and Underground Station Group (-6%), to assess organic growth trends.
- Environmental Liabilities: Monitor the $16.1 million accrued provision for discontinued operations, specifically regarding the New York State and Whitehall, Michigan environmental matters, for potential future cost increases.
- Inventory Levels: Assess the $52.6 million increase in inventory from the beginning of the fiscal year to ensure alignment with sales growth and to evaluate potential markdown risks.
- Segment Performance: Analyze the divergence between the Hat World Group's strong performance (driven by acquisitions) and the Licensed Brands segment's 20.1% sales decline in the quarter.