Genesco Inc. — Q2 Fiscal 2021 Form 10-Q
Reporting period: Three and six months ended August 1, 2020; comparisons are with the periods ended August 3, 2019. Amounts are in U.S. dollars unless noted. Results were materially affected by COVID-19 store closures, reduced traffic and demand, and changes in shopping and school patterns.
Business context
Genesco sells footwear and accessories through Journeys, Schuh and Johnston & Murphy retail and digital businesses, and through Licensed Brands and wholesale operations. It operated 1,476 stores at August 1, 2020. The company said 96% of locations were operating as of September 4, 2020.
Financial results and liquidity
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $391.2 million | $486.6 million | $670.4 million | $982.2 million |
| Gross margin | $167.0 million; 42.7% | $236.5 million; 48.6% | $287.1 million; 42.8% | $481.4 million; 49.0% |
| Operating income (loss) | $(22.0) million | $3.0 million | $(178.0) million | $12.0 million |
| Net earnings (loss) | $(19.0) million; diluted EPS $(1.34) | $0.6 million; diluted EPS $0.04 | $(153.8) million; diluted EPS $(10.87) | $6.9 million; diluted EPS $0.41 |
| Net cash from (used in) operating activities | Not separately stated | Not separately stated | $46.6 million | $(38.1) million |
- Q2 sales declined 19.6%; six-month sales declined 31.7%. Digital comparable sales grew 144% in Q2 and 105% for the six-month period. Retail comparable sales were not reported for Q2 because closures made overall sales a more meaningful measure.
- Q2 operating margin was (5.6)%, versus 0.6% a year earlier. Six-month selling and administrative expense fell 19.7% in dollars but rose to 56.1% of sales from 47.7%, reflecting the smaller sales base.
- At August 1, cash was $299.1 million, working capital was $286.8 million, and total debt was $210.9 million, including $24.9 million of current U.K. borrowings. Long-term operating lease liabilities totaled $793.1 million.
- Six-month operating cash flow included working-capital effects, including reduced rent payments and changes in payables and other liabilities. Investing cash flow was $(10.5) million; financing cash flow was $179.2 million, principally reflecting revolver borrowings.
Material changes and unusual items
- Q2 gross margin fell 5.9 percentage points, primarily due to higher shipping and warehouse costs as e-commerce grew, significant Johnston & Murphy inventory reserves, and increased Schuh promotions.
- First-half results included a $79.3 million goodwill impairment that fully impaired Schuh Group goodwill, plus a $5.3 million trademark impairment and $4.8 million of retail-store impairments. Q2 included $1.7 million of retail-store impairments.
- Segment sales in Q2 changed as follows: Journeys down 12.2%, Schuh down 22.4%, Johnston & Murphy down 64.2%, and Licensed Brands up 61.9%, primarily reflecting the Togast acquisition. Journeys remained profitable in Q2; the other three segments reported operating losses.
- CARES Act and other government payroll tax credits reduced Q2 selling and administrative expense by approximately $3.8 million; foreign property-tax relief was approximately $3.9 million in Q2. The company expected an additional approximately $10.2 million of property-tax relief through early FY2022.
Outlook, management commentary and risks
- The filing does not provide full-year sales or earnings guidance. FY2021 capital expenditures were estimated at $25 million to $30 million.
- Management said cash on hand, operating cash flow and available credit were expected to support near-term liquidity. The company had expanded its U.S. credit facility to $350 million of total capacity. On September 10, 2020, after quarter-end, it repaid $150 million of facility borrowings and $4 million related to GCO Canada.
- The U.K. Schuh revolving facility of £19 million was due to expire in September 2020; the company said it was finalizing replacement financing. Schuh’s facility includes interest-coverage and leverage covenants and is guaranteed by Genesco.
- COVID-19 risks include renewed or prolonged closures, weaker consumer demand and mall traffic, delayed school activity, supply-chain disruption, inventory markdowns, rent and lease disputes, and further asset or deferred-tax-asset impairments. Landlord concession negotiations remained ongoing; the company had withheld certain rent payments while continuing to recognize contractual rent expense.
- Contingencies include a contested U.K. landlord claim seeking £845,500 plus fees and interest; the associated rent, service charges and insurance were accrued. Genesco reported no accrual for a proposed $4.2 million IRS employer payment, which it disputes. Environmental contingencies accrued were $1.5 million. Genesco also remained guarantor on 34 former Lids leases, with estimated maximum future payments of $17.9 million.
Important facts for investors to verify
- Subsequent filings and results for store reopening trends, digital sales, consumer demand and any renewed COVID-19-related restrictions.
- Replacement financing for Schuh’s expired U.K. facility, covenant compliance, and the effect of post-quarter debt repayments on liquidity.
- Whether inventory reserves, impairments, landlord concessions and deferred tax asset valuations require further adjustments.
- Resolution and potential financial exposure from the U.K. landlord claim, IRS inquiry, environmental matters and Lids lease guarantees.