Genesco Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of Fiscal 2021, ended October 31, 2020; comparable periods ended November 2, 2019. Financial statements are unaudited. Genesco operates footwear retail, e-commerce and wholesale businesses, including Journeys, Schuh, Johnston & Murphy and Licensed Brands. It operated 1,476 stores at quarter-end.
Financial performance and liquidity
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Net sales | $479.3 million | $537.3 million | $1,149.7 million | $1,519.5 million |
| Gross margin | $225.5 million; 47.1% | $264.2 million; 49.2% | $512.6 million; 44.6% | $745.6 million; 49.1% |
| Operating income (loss) | $8.2 million; 1.7% margin | $25.9 million; 4.8% margin | $(169.8) million | $38.0 million |
| Net earnings (loss) | $7.5 million; diluted EPS $0.52 | $18.9 million; diluted EPS $1.30 | $(146.3) million; diluted loss per share $10.31 | $25.8 million; diluted EPS $1.60 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $51.3 million | $2.8 million |
- Q3 sales fell 10.8%; digital comparable sales grew 62%. Nine-month sales fell 24.3%, while digital comparable sales grew 88%. Management said total sales are a more meaningful measure than comparable sales during the pandemic.
- Q3 operating performance included $6.4 million of retail store impairment charges. Nine-month results included a $79.3 million Schuh goodwill impairment and $16.0 million in asset impairment and other charges, including retail-store and trademark impairments.
- At October 31, cash was $115.1 million, working capital was $151.3 million, and long-term debt was $32.9 million. Debt was primarily revolving-credit borrowings; the company reported $350 million of total U.S. facility capacity and $9.7 million of outstanding letters of credit. Schuh had an additional £19 million facility available but had not borrowed under it.
- Operating lease liabilities totaled approximately $756.7 million ($196.6 million current and $560.1 million long-term), separate from reported debt. Nine-month capital expenditures were $18.2 million.
- Cash increased $33.6 million during the first nine months. Investing cash use was $18.1 million, versus $77.3 million provided in the prior-year period, which included proceeds from the Lids Sports Group sale. Financing cash use was $1.8 million, compared with $191.3 million in the prior year, which included share repurchases.
Material changes and business drivers
- Q3 sales and earnings declined amid store closures, reduced traffic, weaker back-to-school demand and pressure on wholesale sales. Store operations were open 95% of days in the quarter; as of December 4, 2020, the company said 97% of locations were operating.
- Q3 sales by segment: Journeys decreased 10.5% to $317.7 million; Schuh decreased 3.1% to $90.0 million; Johnston & Murphy decreased 45.5% to $39.7 million; Licensed Brands increased 90.9% to $31.9 million, mainly reflecting the Togast acquisition.
- Johnston & Murphy reported a Q3 operating loss of $11.1 million, versus $3.7 million of income a year earlier, reflecting much lower sales, markdowns and inventory reserves, and reduced expense leverage. Journeys and Schuh remained profitable in the quarter.
- Nine-month selling and administrative expenses declined 16.8% in dollars but rose to 51.1% of sales from 46.5%, as lower sales outweighed cost reductions. Gross margin pressure reflected e-commerce shipping and warehouse costs, promotions and inventory reserves.
- Nine-month cash from operations improved year over year, partly due to lower inventory and reduced rent payments. The company noted that cash flows from operations are historically strongest in the fourth quarter because of seasonality.
Outlook, risks and unusual items
- Management said cash on hand, operating cash flow and available credit facilities should support near-term liquidity. It expected to use CARES Act tax carryback provisions in Q4, which it said could generate significant cash inflows in Fiscal 2022; these are expectations, not assured proceeds.
- Fiscal 2021 capital expenditures were estimated at $25–$30 million, including store openings and renovations and technology, warehouse and omnichannel investments. The filing provides no clear revenue or earnings guidance.
- COVID-19 remained the principal uncertainty: renewed closures or restrictions, weak consumer demand and mall traffic, supply-chain disruption, inventory valuation, and landlords’ willingness to grant concessions could further affect sales, margins, cash and asset values. The company warned that further impairments or deferred-tax-asset valuation allowances may be required.
- Q3 results included rent savings of approximately $8.2 million, including $7.0 million of abatements relating to prior quarters. Payroll-tax credits and other government relief also reduced expenses; UK property-tax relief was reported at $3.9 million for the quarter. These items supported reported results.
- The company withheld certain rent payments while continuing to recognize contractual rent expense; landlord negotiations remained ongoing. A Schuh landlord’s remaining disputed claim was £406,100, and the company said the related unpaid amounts had been accrued.
- Other disclosed exposures include $1.4 million accrued for environmental contingencies and guarantees on 23 former Lids leases with estimated maximum future payments of $16.0 million. The company said it did not expect the environmental matters or Lids guarantees to have a material effect, while noting legal proceedings carry uncertainty.
Important facts for investors to verify
- Whether renewed COVID-19 restrictions, store closures or changing shopping patterns materially affect sales, traffic and the reported 97% store-operating level.
- Whether digital growth can offset weaker store and wholesale demand without further pressuring gross margin through fulfillment costs, markdowns or inventory reserves.
- Whether landlord concessions, government relief and CARES Act tax benefits continue, and whether expected tax-carryback cash inflows materialize.
- Liquidity and borrowing availability under the amended credit facilities, including applicable covenants, collateral and lease-related cash obligations.
- Whether further goodwill, trademark, store-asset or deferred-tax-asset impairments are required, and the progress and outcome of the disputed Schuh rent claim.