Business context and reporting period
Genesco Inc. filed this unaudited Form 10-Q for the first quarter of Fiscal 2017, the three months ended April 30, 2016, compared with the three months ended May 2, 2015. The retailer and wholesaler operated 2,833 stores and leased departments across North America and Europe. Its five reportable segments were Journeys, Schuh, Lids Sports, Johnston & Murphy, and Licensed Brands.
Financial performance and liquidity
- Revenue: Net sales were $648.8 million, down 1.8% year over year. Comparable sales increased 1%.
- Margins and operating results: Gross profit increased 1.0% to $329.7 million; gross margin rose to 50.8% from 49.4%. Selling and administrative expense rose 0.3% and increased to 47.5% of sales from 46.5%. Operating earnings were $17.9 million versus $16.3 million; operating margin was approximately 2.8% versus 2.5%.
- Profit and EPS: Continuing-operations earnings were $10.6 million versus $9.9 million. Net earnings were $10.4 million versus $9.9 million. Diluted EPS was $0.50 versus $0.42. The effective tax rate was 37.0%, compared with 36.3%.
- Cash flow: Operating activities provided $18.5 million, compared with $0.5 million used in the prior-year quarter. Capital expenditures were $17.4 million. Cash and cash equivalents fell $90.5 million during the quarter to $42.8 million, with share repurchases a significant financing cash outflow.
- Debt and liquidity: Total debt, including current maturities, was $115.9 million, versus $111.8 million at January 30, 2016. Working capital was $424.4 million. Revolver borrowings were $62.7 million under the U.S. facility and $25.6 million under the U.K. facility; U.K. term loans were $27.9 million. Credit-facility excess availability was $282.9 million, and the company reported compliance with applicable covenants.
- Capital returns: Genesco repurchased approximately 1.1 million shares for $73.4 million during the quarter. In May 2016, the board approved a new $100 million repurchase authorization.
Material changes versus the prior comparable period
- Sales declined primarily because Lids Team Sports was sold in the fourth quarter of Fiscal 2016. Lids Sports sales fell 13.1%, but the segment moved from a $3.4 million operating loss to $6.0 million operating earnings; comparable sales rose 2%.
- Journeys sales increased 5.6%, reflecting Little Burgundy and comparable-sales growth, but operating earnings fell 19.7% to $19.6 million amid markdowns, shipping and warehouse costs, and higher store expenses.
- Schuh sales fell 3.7%, including an adverse $3.5 million foreign-exchange effect and a 5% comparable-sales decline. Its operating loss remained $2.7 million.
- Johnston & Murphy sales rose 5.4% and operating earnings rose 21.8% to $4.8 million. Licensed Brands sales fell 3.6% and operating earnings fell 38.7% to $1.9 million.
- Operating earnings improved despite lower sales and higher impairment charges: $3.6 million in the current quarter, mainly retail-store impairments, versus $2.6 million in the prior-year quarter, which included network-intrusion costs.
- Net interest expense increased to $1.1 million from $0.6 million, reflecting higher revolver borrowings. Diluted EPS improvement also benefited from fewer shares outstanding following repurchases.
Outlook, management commentary, risks, and unusual items
- Management expected cash on hand, operating cash flow, and credit-facility availability to fund working capital, capital expenditures, and repurchases during Fiscal 2017. The filing did not provide a full-year revenue or earnings forecast.
- Fiscal 2017 capital expenditures were expected to be approximately $125 million–$135 million, including planned store openings and about 228 major renovations. The company expected approximately $11.4 million of discontinued-operation costs to be paid over the next 12 months.
- In May 2016, Genesco reached a Visa settlement and expected to recognize a $9.0 million pretax gain in the second quarter of Fiscal 2017.
- Environmental contingencies totaled $14.5 million accrued at April 30, 2016. The Village of Garden City asserted historical and future remediation claims; Genesco had an agreement in principle to settle, subject to acceptable EPA documentation and definitive agreements. The company stated it did not expect the matter to have a material effect, but noted litigation and environmental uncertainties.
- Other disclosed matters included a demand for approximately $2.2 million in EPA response costs at a former site (with insurer defense subject to policy terms), employment and e-commerce lawsuits, and other ordinary-course claims. The company disputed certain claims and intended to defend them.
- Management cited consumer and retail weakness, promotional activity, fashion trends, competition, foreign exchange, the U.K. EU-membership referendum, wage costs, supply and distribution disruption, and IT security or implementation issues as risks to results. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether comparable-sales trends and segment profitability persist, particularly Journeys markdown pressure, Schuh’s comparable-sales decline, and the Lids improvement following the divestiture.
- How the $73.4 million share repurchase and seasonal working-capital needs affect cash, borrowings, and future repurchase capacity.
- Whether planned Fiscal 2017 capital expenditures and store openings proceed as expected, and whether management provides subsequent full-year earnings guidance.
- The timing and final terms of the Visa settlement gain, and developments in environmental accruals and other legal proceedings.
- Potential effects of currency movements and the U.K. EU referendum on Schuh and consolidated results.