Genesco Inc. — Fiscal 2020 Form 10-K
Business context and period. Genesco is a footwear retailer and wholesaler operating Journeys, Schuh, Johnston & Murphy and Licensed Brands. Fiscal 2020 was the 52-week year ended February 1, 2020; the fourth quarter is the three months ended that date. Results generally reflect continuing operations unless noted. The Lids Sports Group sale closed February 2, 2019, and its results are reported as discontinued operations in prior periods.
Financial performance
| Metric | Fiscal 2020 | Fiscal 2019 |
|---|---|---|
| Net sales | $2,197.1 million | $2,188.6 million |
| Gross margin | $1,063.1 million; 48.4% | $1,047.1 million; 47.8% |
| Operating income | $83.3 million; 3.8% of sales | $81.8 million; 3.7% of sales |
| Continuing-operations earnings | $61.8 million; diluted EPS $3.94 | $51.2 million; diluted EPS $2.63 |
| Net earnings (loss) | $61.4 million; diluted EPS $3.92 | $(51.9) million; diluted EPS $(2.66) |
| Cash from operating activities | $117.2 million | $237.1 million |
| Cash and cash equivalents | $81.4 million | $167.4 million |
| Long-term debt, including current maturities | $14.4 million | $65.7 million |
Fiscal 2020 sales grew 0.4% (1% excluding foreign-exchange effects); comparable sales rose 3%, with stores up 1% and direct sales up 18%. Selling and administrative expenses were 44.0% of sales in both years. The effective tax rate declined to 25.1% from 34.5%.
Fourth quarter: Sales were $677.6 million versus $675.5 million. Earnings from continuing operations were $35.5 million versus $29.7 million; diluted continuing-operations EPS was $2.49 versus $1.53. Net earnings were $35.6 million versus a $64.0 million net loss, which included a substantial Lids-related discontinued-operations loss.
Segments
- Journeys: sales $1,460.3 million, up 2.8%; operating income $114.9 million, up 14.0%; comparable sales up 4%.
- Schuh: sales $373.9 million, down 2.3% (including $12.8 million of adverse currency translation); operating income $4.7 million, up 23.7%; comparable sales up 2%.
- Johnston & Murphy: sales $300.9 million, down 3.9%; operating income $17.7 million, down 13.2%; comparable sales down 2%.
- Licensed Brands: sales $61.9 million, down 14.8%; operating loss $0.7 million. Lower Dockers sales were a primary factor.
Liquidity, capital allocation and material changes
- Operating cash flow fell by $119.9 million year over year. The comparison is affected by prior-year discontinued operations and working-capital movements; fiscal 2020 investing cash flow included proceeds from the Lids headquarters sale and lower capital expenditures.
- Cash declined by $85.9 million during the year. Net cash used in financing was $256.5 million, including $189.4 million of share repurchases; Genesco repurchased 4.57 million shares.
- Working capital was $146.2 million and the current ratio was 1.4, versus $454.8 million and 2.6 in fiscal 2019. Fiscal 2020 working capital includes the current operating-lease liability of $142.7 million following adoption of lease accounting; prior-period lease accounting was not recast.
- Operating lease liabilities totaled $790.6 million at year-end. Total undiscounted operating-lease payments were $926.4 million. The new lease standard added $795.6 million of right-of-use assets and $855.3 million of lease liabilities at adoption.
- Genesco acquired Togast for $33.5 million cash in January 2020, with potential additional earnout payments tied to performance. It also entered a new U.S. Levi’s footwear license agreement.
- Fiscal 2020 included $13.4 million of asset impairment and other charges, including an $11.5 million pension-plan termination settlement and $3.1 million of store asset impairments, partly offset by gains. Fiscal 2019’s net loss chiefly reflected the Lids divestiture and discontinued operations.
Outlook, risks and contingencies
The filing provides no quantified fiscal 2021 earnings or sales guidance. Management expected lower fiscal 2021 capital expenditures because of COVID-19 and warned that planned store openings could be delayed and closures could change. Genesco closed North American stores on March 18, 2020, U.K. and Ireland stores on March 23, and U.K. e-commerce on March 26; North American e-commerce remained open. Management stated the pandemic’s future financial impact could not be reasonably estimated.
After year-end, Genesco borrowed $184.3 million under its U.S. credit facility and £19.0 million under its U.K. facility as precautionary liquidity measures. As of April 1, 2020, remaining availability under the U.S. facility was approximately $50 million. The company announced expense, capital and planned-inventory reductions, and furloughed store and U.K. distribution employees. Management cautioned that extended closures could require additional credit and that pandemic effects could trigger impairments or revisions to goodwill, long-lived-asset and deferred-tax-asset estimates.
- Principal risks include prolonged store closures and lower discretionary spending; supply-chain disruption; mall traffic and fashion shifts; tariffs and sourcing costs; foreign exchange and Brexit-related uncertainty; competition and digital execution; and labor, occupancy and freight costs.
- Schuh goodwill was $84.1 million and passed its annual impairment test with estimated fair value only $8.2 million above carrying value. The filing disclosed sensitivity to discount-rate and revenue-growth assumptions; pandemic-related deterioration could increase impairment risk.
- Environmental contingencies accrued were $1.5 million. A proposed $4.2 million IRS employer shared-responsibility payment remained disputed; the company had not accrued it and said it did not believe it owed the amount. Former Lids leases carry estimated maximum guaranteed future payments of $20.6 million.
- Genesco reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Subsequent-period sales, cash burn, store reopening progress and liquidity availability during the COVID-19 disruption, including compliance with credit-facility terms.
- Whether fiscal 2020’s improved gross margin and earnings continue, particularly at Journeys, and whether Johnston & Murphy and Licensed Brands stabilize.
- Schuh’s operating performance and goodwill valuation assumptions, along with any pandemic-related store or lease impairments.
- Cash-flow comparability, the effect of lease accounting on liquidity measures, and the sustainability of repurchases given the sharply reduced cash balance.
- Resolution of the IRS notice, environmental matters, and any continuing obligations or guarantees associated with the Lids divestiture.