Genesco Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2015, ended August 2, 2014; comparisons are with the corresponding periods of fiscal 2014. Genesco operates footwear and accessories businesses, including Journeys, Schuh, Lids Sports Group, Johnston & Murphy and Licensed Brands, with 2,674 stores and leased departments at quarter-end.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Net sales | $615.5 million | $574.7 million | $1,244.3 million | $1,166.1 million |
| Gross margin | 49.0% | 49.2% | 49.6% | 49.8% |
| Operating earnings | $10.1 million | $15.5 million | $33.8 million | $41.3 million |
| Net earnings | $4.7 million | $8.3 million | $18.7 million | $22.8 million |
| Diluted EPS | $0.20 | $0.35 | $0.79 | $0.96 |
- Q2 sales rose 7.1%, with comparable sales up 2%; six-month sales rose 6.7%, with comparable sales up 1%.
- Q2 gross profit increased 6.7% to $301.7 million, while selling and administrative expenses rose 5.8% but declined as a share of sales to 47.2% from 47.7%.
- Q2 pretax earnings were $9.3 million versus $14.4 million. The effective tax rate increased to 48.7% from 41.2%, including $0.8 million of prior-year Puerto Rico alternative minimum tax. Six-month tax rates were 41.6% and 41.2%.
- Operating performance varied by segment in Q2: Journeys earnings increased to $6.8 million; Schuh narrowed its operating loss to $0.2 million; Lids earnings fell 33% to $8.5 million; Johnston & Murphy moved to a $0.4 million operating loss; and Licensed Brands earnings increased to $1.9 million.
Cash flow, liquidity and debt
- Six-month operating cash flow was $7.9 million, down from $16.5 million. Investing used $55.8 million, including $52.7 million of capital expenditures; financing provided $47.7 million. Cash was $59.3 million at quarter-end.
- Working capital was $439.2 million. Inventory was $669.4 million, up from $567.3 million at fiscal year-end, reflecting seasonal and other purchasing increases.
- Total debt was $76.4 million, compared with $33.7 million at February 1, 2014 and $73.1 million a year earlier. Debt included $21.2 million of revolver borrowings and $55.2 million of U.K. term loans. Revolver availability was $364.2 million; the company was not required to meet its springing fixed-charge covenant at quarter-end.
- Management said cash, operating cash flow and credit-facility availability should fund working capital and capital needs for the foreseeable future. Cash flow is seasonal, with operating cash historically generated principally in the fourth quarter.
Material changes, outlook and risks
- The earnings comparison was affected by an $8.3 million lease-termination gain recorded in the prior-year quarter. Current-quarter asset impairment and other charges were $1.4 million, including network-intrusion, legal and store-impairment costs, partly offset by a lease-termination gain. In the first six months, a $3.4 million lease-termination gain partly offset other charges.
- A first-quarter amendment to the EVA incentive plan caused a $5.7 million charge for previously deferred bonuses to be recognized sooner. Schuh results also included deferred purchase-price compensation expense and contingent employee-bonus accruals.
- Fiscal 2015 capital expenditures were expected to total approximately $147 million, including about $135 million for retail projects and $12 million for wholesale and other purposes. Plans included approximately 25 Journeys stores, 25 Journeys Kidz stores, 14 Schuh stores, eight Johnston & Murphy locations and 249 Lids stores or leased departments, plus major renovations.
- Key risks cited include consumer demand and fashion shifts, promotional pressure and comparable-sales weakness, mall traffic, competition, product supply and cost changes, foreign exchange, execution of store expansion and omnichannel initiatives, IT security and systems disruptions, acquisitions, and litigation and environmental matters. Management noted Lids’ negative comparable sales and promotional pressures, and weaker operating results at Lids and Johnston & Murphy.
- Environmental provisions were $11.9 million, included in discontinued-operations liabilities. The company disclosed ongoing environmental proceedings and other legal matters; future outcomes or revised estimates could require additional reserves. The filing reported no material change to previously disclosed risk factors.
- No specific earnings or sales guidance was provided in the supplied filing text. The company was evaluating the newly issued revenue-recognition standard.
Investor verification points
- Check whether sales growth converts into improved operating earnings, particularly at Lids and Johnston & Murphy, and whether comparable-sales trends strengthen.
- Assess inventory growth, seasonal cash requirements, capital spending and the effect of vendor payment terms on operating cash flow.
- Monitor debt, revolver availability, covenant headroom and the maturity and repayment terms of Schuh’s U.K. loans.
- Verify the impact of the prior-year lease gain, current unusual charges, Schuh-related compensation accruals and the elevated quarterly tax rate when comparing earnings.
- Track environmental and other legal exposures, including the adequacy of the $11.9 million environmental provision and developments related to the network intrusion.