Genesco Inc. — Form 10-Q Summary
Reporting period: Fiscal 2018 third quarter ended October 28, 2017, with comparisons to the quarter ended October 29, 2016. The nine-month period is also covered. Figures below are in millions except per-share data and percentages.
Business context and results
Genesco operates footwear and accessories retail, e-commerce and wholesale businesses, including Journeys, Schuh, Lids Sports Group, Johnston & Murphy and Licensed Brands. It operated 2,727 stores and leased departments at quarter-end.
- Third quarter: Sales rose 0.8% to $716.8 million. Comparable sales increased 1%, comprising a 2% decline in same-store sales and 24% growth in comparable direct sales.
- Nine months: Sales declined 0.4% to $1,976.6 million; comparable sales were flat, with same-store sales down 3% and comparable direct sales up 27%.
Financial and liquidity metrics
- Third-quarter earnings: Gross margin was $354.0 million, or 49.4% of sales, versus $355.6 million and 50.0% a year earlier. Selling and administrative expenses were $322.7 million, or 45.0% of sales, versus 44.3%. Operating loss was $152.4 million, including a $182.2 million non-cash goodwill impairment. Net loss was $164.8 million, or $8.56 per diluted share, compared with net income of $25.9 million, or $1.30 per diluted share.
- Nine-month earnings: Gross margin was $979.4 million, or 49.5% of sales, versus $1,001.0 million and 50.4%. Selling and administrative expenses were $947.2 million, or 47.9% of sales, versus 46.6%. Operating loss was $151.6 million; net loss was $167.9 million, or $8.74 per diluted share, compared with net income of $50.9 million, or $2.49 per diluted share.
- Cash flow and investment: Operating cash flow used $12.5 million in the first nine months, compared with $2.2 million used a year earlier. Capital expenditures were $104.1 million, versus $65.5 million. Cash was $50.7 million at October 28, 2017.
- Liquidity and debt: Working capital was $495.8 million. Total debt, including current maturities, was $223.6 million, compared with $82.9 million at fiscal year-end and $226.2 million a year earlier. Revolver availability was $193.4 million; the company reported compliance with its UK credit-facility covenants and was not required to meet the U.S. facility’s fixed-charge coverage covenant at quarter-end.
- Inventory: $697.9 million, up $134.3 million from January 28, 2017, primarily reflecting seasonal increases.
Material changes and management commentary
- The company fully impaired Lids Sports Group goodwill, recording a $182.2 million charge after identifying sustained share-price and market-capitalization declines, operating underperformance—particularly at Lids—and greater competition in licensed sports. No trademark impairment was recorded.
- Lids was a notable operating weakness: third-quarter sales fell 9.5% and operating income fell 75.6% to $2.0 million; nine-month sales fell 5.3% and operating income fell 84.8% to $3.2 million. Management cited weaker comparable sales, promotions, lower margins and expense deleverage.
- Journeys sales grew, but operating income declined; Schuh sales and operating income increased. Johnston & Murphy sales rose, while nine-month operating income declined. Licensed Brands sales and earnings declined, partly reflecting the sale of SureGrip and weaker dress-casual wholesale demand.
- The effective tax rate was negative in the current periods, principally because $107.6 million of the goodwill impairment was nondeductible. Management also reported $2.2 million of nine-month tax expense related to share-based compensation accounting changes.
Outlook, risks and contingencies
- Management provided no earnings guidance in the supplied filing text. It expected cash, operating cash flow and credit availability to fund working capital, capital expenditures and repurchases for the foreseeable future.
- Fiscal 2018 capital expenditures were expected to be approximately $130–$135 million, including warehouse expansion, store openings and about 243 major store renovations. The company expected to pay approximately $1.8 million of discontinued-operation costs over the next 12 months.
- Key risks cited include weak consumer demand and mall traffic, online and other competition, promotional pressure, fashion and inventory execution, labor costs, supplier and distribution disruptions, foreign exchange, Brexit, sports-related demand, and potential further asset impairments.
- Third-quarter asset impairment and other charges included $0.9 million related to Hurricane Maria and $0.5 million of store impairments. Environmental contingencies accrued totaled $2.9 million. The filing also describes wage-and-hour and employment-related claims, which the company disputes and intends to defend; outcomes remain uncertain.
Important facts for investors to verify
- Whether Lids sales, comparable trends and operating profitability stabilize after the reported deterioration and goodwill write-off.
- How seasonal inventory converts to sales and operating cash flow, given the inventory increase and cash use in the first nine months.
- Revolver availability, borrowing levels and covenant headroom as seasonal funding needs change.
- Whether planned capital spending and store renovations deliver expected returns, and whether additional impairment indicators emerge.
- Updates on employment and environmental matters, and the effects of tax and accounting changes on reported results.