Genesco Inc. — Q1 Fiscal 2019 Form 10-Q
Reporting period: Three months ended May 5, 2018; unaudited. Comparisons are with the three months ended April 29, 2017, except balance-sheet comparisons, which are identified separately. Genesco operates footwear and accessories retail, e-commerce and wholesale businesses, as well as Lids Sports Group.
Financial performance and position
| Metric | Q1 FY2019 | Comparable period |
|---|---|---|
| Net sales | $645.0 million | $643.4 million |
| Gross profit / gross margin | $321.8 million / 49.9% | $318.9 million / 49.6% |
| Selling and administrative expenses | $322.1 million / 49.9% of sales | $316.0 million / 49.1% of sales |
| Operating income (loss) | $(1.8) million | $2.8 million |
| Continuing-operations income (loss) before tax | $(2.9) million | $1.6 million |
| Net income (loss); diluted EPS | $(2.3) million; $(0.12) | $0.9 million; $0.05 |
| Operating cash flow | $0.8 million | $(18.0) million |
| Capital expenditures | $19.5 million | $30.3 million |
Comparable sales decreased 1% overall, comprising a 2% decline in same-store sales and a 10% increase in comparable direct sales. Excluding foreign-exchange effects, total sales decreased 1%. The reported effective tax rate was 20.3%, versus 38.3% a year earlier.
- Segment sales and operating results: Journeys sales rose 7.8% to $306.1 million and operating income rose to $13.6 million from $7.5 million. Schuh sales rose 5.0% to $80.3 million, but its operating loss widened to $5.6 million from $0.7 million. Lids sales fell 10.3% to $158.7 million and its operating loss widened to $5.4 million from $1.8 million. Johnston & Murphy sales rose 4.0% to $75.7 million and operating income rose to $5.0 million from $3.8 million. Licensed Brands sales fell 27.1% to $24.1 million and operating income fell to $0.3 million from $2.3 million.
- Cash and liquidity: Cash was $30.9 million at May 5, 2018, down from $39.9 million at February 3, 2018 and $43.4 million at April 29, 2017. Working capital was $465.5 million. Operating cash flow improved by $18.8 million year over year, but investing used $18.8 million and financing provided $9.4 million; cash decreased $9.1 million during the quarter.
- Debt and facilities: Long-term debt, including current maturities, totaled $105.7 million, versus $88.4 million at February 3, 2018 and $138.0 million a year earlier. The revolving credit facility provides up to $400 million and expires January 2023. Revolver borrowings were $77.7 million, with $11.3 million of letters of credit outstanding; reported excess availability was $274.8 million. The company reported compliance with applicable UK facility covenants and was not required to meet the U.S. facility’s fixed-charge coverage covenant at quarter-end.
Material changes and notable items
- Despite a slight increase in reported sales, operating results shifted from income to loss. Management cited higher selling and administrative expenses as a percentage of sales, particularly selling salaries, benefits and bonus accruals; segment results were mixed.
- Q1 FY2019 included $1.6 million of pretax asset impairment and other charges, including $1.3 million of retail-store impairments and $0.3 million for legal and other matters; the prior-year quarter included $0.1 million of impairment charges.
- Genesco adopted ASC 606 using the modified retrospective method, recording a $4.4 million opening retained-earnings adjustment. Adoption increased reported Q1 net earnings by $0.7 million versus the unaudited no-adoption comparison, primarily through expense timing; comparative-period results were not restated.
- Foreign-currency translation contributed to a $7.9 million other comprehensive loss for the quarter. Schuh sales benefited by $8.7 million from exchange rates, while its operating loss was adversely affected by $0.6 million.
- The company announced a formal process to explore selling Lids Sports Group, following a strategic review focused on its footwear businesses. No completed sale or transaction terms are reported in this filing.
Outlook, risks and contingencies
- Management expected cash on hand, operating cash flow and credit-facility availability to fund working capital, capital expenditures and share repurchases for the foreseeable future. Fiscal 2019 capital expenditures were estimated at $70–$75 million, including approximately $40–$45 million for retail and approximately $30 million for omni-channel, IT and distribution initiatives.
- The company’s profit-enhancement initiative targets annualized expense reductions of $35–$40 million. The filing does not provide a quantified full-year earnings or sales forecast.
- Management identified risks including promotional activity and inventory management, weak consumer or mall traffic, online competition, fashion trends, wage and overtime costs, tariffs and product-supply disruption, foreign-exchange movements and Brexit-related uncertainty, and the timing and terms of a potential Lids sale.
- Environmental liabilities for former facilities were accrued at $2.9 million. The filing also describes wage-and-hour and other legal proceedings; management disputes material allegations and intends to defend them. It cautions that litigation and environmental outcomes are uncertain and additional provisions may be required.
- The company expected a material balance-sheet impact from adopting the new lease-accounting standard because of its significant lease commitments. It also noted that retail operations are seasonal and cash flows have historically been generated principally in the fourth quarter.
Important facts for investors to verify
- Progress, timing, terms and financial implications of the proposed Lids Sports Group sale.
- Whether comparable-sales trends and performance in Schuh and Lids improve, and whether Journeys’ stronger results persist.
- Delivery and timing of the $35–$40 million expense-reduction target and the $70–$75 million capital-expenditure plan.
- Seasonal inventory, operating cash flow, revolver borrowings and facility availability as the year progresses.
- Potential changes in environmental and employment-litigation exposures, and the effects of lease adoption, currency movements and tax estimates.