GCO

Business Context and Reporting Period

Company: GENESCO INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 5, 2001 (First Quarter of Fiscal 2002)
Business Overview: Genesco manufactures, sources, markets, and distributes footwear under brands including Johnston & Murphy and Dockers. It operates retail chains (Journeys, Jarman, Underground Station) and wholesale operations. The company recently terminated its Nautica footwear license (effective Jan 31, 2001) and has discontinued its Volunteer Leather segment.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 17.2% year-over-year, driven primarily by the Journeys segment (+38.3%) and Jarman segment (+19.3%).
• Profitability: Net earnings rose 39.9% to $8.3 million. Gross margin percentage improved to 47.8% from 46.6%.
• Cash Flow Deterioration: Net cash used in operating activities increased significantly to $24.5 million (from $3.0 million usage). This was primarily due to a $12.7 million increase in inventory (seasonal buildup and new store support) and a $20.4 million decrease in accounts payable/accrued liabilities (payments of incentive compensation and taxes).
• Segment Performance:
  • Journeys: Sales up 38.3% and operating income up 54.7% due to store count growth and comparable store sales increases.
  • Johnston & Murphy: Sales declined 6.0% and operating income dropped 27.3% due to weaker wholesale and retail sales.
  • Licensed Brands: Operating income surged 79.7% despite Nautica sales declines, offset by strong Dockers performance.

Guidance, Outlook, and Risks

• Fiscal 2002 Guidance:
  • Net sales growth expected in the range of 15-20%.
  • Same-store sales increase expected in the mid-single digit range.
  • Management expects to meet First Call earnings expectations of $1.74 per share.
  • Capital expenditures projected at approximately $54.0 million, including $22.0-$24.0 million for a new distribution center.
• Restructuring & Discontinued Operations:
  • Nautica: License terminated; company expects to sell remaining inventory in H1 2002 with projected sales of $6.0-$7.0 million and operating losses of $0.9-$1.4 million.
  • Volunteer Leather: Divestiture completed; remaining costs of approximately $1.7 million expected to be incurred in the next 12 months.
• Risks & Contingencies:
  • Environmental: Ongoing proceedings in New York and Michigan (Volunteer Leather site). Company has reserved approximately $2.6 million for these matters but notes uncertainty regarding future costs.
  • Market Risk: Exposure to foreign currency fluctuations (hedged via forward contracts) and potential disruptions in leather supply due to cattle diseases.
  • Liquidity: While cash on hand is sufficient for current needs, the company may borrow for seasonal working capital. $55.0 million remains available under the revolving credit agreement.

Investor Verification Checklist

• Inventory Levels: Verify the sustainability of the $12.7 million inventory increase and the risk of markdowns, particularly in the Johnston & Murphy segment where sales missed plans.
• Nautica Wind-down: Monitor the actual realization of the projected $6.0-$7.0 million in Nautica sales and the associated operating losses in the second quarter.
• Environmental Reserves: Review updates on the New York and Michigan environmental proceedings to ensure the $2.6 million reserve remains adequate.
• Capital Expenditures: Track progress and costs of the new distribution center ($22.0-$24.0 million) to ensure it stays within budget and does not strain liquidity.
• Johnston & Murphy Turnaround: Assess whether the decline in wholesale and retail sales for this core brand is a temporary trend or a structural issue.