Genesco Inc. — Fiscal 2013 Form 10-K
Reporting period: Fiscal year ended February 2, 2013, a 53-week year, compared with 52 weeks in Fiscal 2012. The fourth quarter comprised 14 weeks versus 13 weeks in the prior-year quarter. The company operates footwear, headwear and sports merchandise retail, e-commerce and wholesale businesses, with 2,459 stores at year-end.
Financial performance
| Metric | Fiscal 2013 | Fiscal 2012 |
|---|---|---|
| Net sales | $2.605 billion | $2.292 billion |
| Gross margin | 49.8% | 50.1% |
| Operating earnings / margin | $168.0 million / 6.4% | $143.9 million / 6.3% |
| Pretax earnings | $162.9 million | $138.8 million |
| Net earnings | $110.5 million | $82.0 million |
| Diluted EPS | $4.60 | $3.43 |
| Cash from operations | $123.2 million | $145.0 million |
| Capital expenditures | $71.7 million | $49.5 million |
| Cash and cash equivalents at year-end | $59.8 million | $53.8 million |
| Long-term debt, including current maturities | $50.7 million | $40.7 million |
| Working capital / current ratio | $406.2 million / 2.5 | $290.9 million / 2.0 |
Sales rose 13.6% (12.1% excluding the additional week). Growth reflected a full year of Schuh results, positive comparable sales at Journeys, Schuh and Johnston & Murphy, and higher Licensed Brands sales; Lids’ comparable sales declined. Gross margin rate fell 0.3 percentage points, while selling and administrative expenses declined as a share of sales, helping lift operating margin. Cash from operations decreased by $21.8 million, primarily amid higher inventory and changes in payables and accrued liabilities. Operating cash flow less capital expenditures was approximately $51.5 million, versus $95.5 million in Fiscal 2012.
Fourth-quarter results
Fourth-quarter sales were $796.7 million versus $723.4 million. Pretax earnings were $61.2 million versus $69.2 million; net earnings were $38.5 million versus $41.5 million, and diluted EPS was $1.62 versus $1.72. The quarter included $16.1 million of asset-impairment and other charges, primarily related to the payment-card network intrusion. The extra week affects comparability.
Segments and material changes
- Journeys: Sales increased 9.0% to $1.111 billion; operating income rose 29.7% to $106.9 million, with a 9.6% margin. Comparable sales including direct channels increased 6%.
- Lids Sports: Sales increased 4.2% to $791.3 million and operating income increased 4.2% to $85.8 million; margin remained 10.8%. Store comparable sales fell 4%, while direct comparable sales rose 9%. Management cited shifting demand toward adjustable hats and increased competition.
- Schuh: Sales increased 74.5% to $370.5 million because Fiscal 2013 included a full year versus about seven months in Fiscal 2012. Operating income declined to $7.9 million from $11.7 million; results included $12.1 million of deferred purchase-price compensation expense and $15.8 million of contingent-bonus accruals.
- Johnston & Murphy: Sales rose 10.0% to $221.9 million and operating income rose 15.0% to $15.7 million; margin was 7.1%. Wholesale sales increased 21%.
- Licensed Brands: Sales rose 11.3% to $108.5 million and operating income rose 6.4% to $10.1 million; margin eased to 9.3% from 9.7%.
Liquidity, outlook and risks
At year-end, borrowings were $27.7 million under the $375 million revolving facility and $23.0 million in U.K. term loans; revolver availability was $292.8 million. The company reported compliance with applicable debt covenants and said cash, operating cash flow and facility availability should fund Fiscal 2014 working capital and capital needs. Management planned approximately $119.9 million of Fiscal 2014 capital expenditures, approximately 165 store openings and 33 closures (about 132 net additions). These are operating plans, not earnings guidance; the filing provides no numerical earnings forecast.
Key risks include discretionary consumer demand, fashion and inventory-markdown risk, intense retail competition, dependence on third-party and imported merchandise, foreign exchange and European market exposure, seasonal sales concentration, store expansion and lease execution, distribution and information-system disruptions, and acquisition integration. The company recorded a $15.4 million charge related to disputed payment-card network intrusion claims of approximately $15.6 million and filed suit seeking recovery of $13.3 million from Visa entities. Environmental contingencies were accrued at $11.9 million; related litigation includes a Village of Garden City claim alleging future costs that could exceed $41 million over 70 years, an estimate Genesco disputes. Other patent, intellectual-property and employee wage/class-action matters remain pending. The company states outcomes are uncertain and adverse rulings could be material.
Most important facts for investors to verify
- How much of sales and earnings growth reflected the extra fiscal week, acquired Schuh results and underlying comparable-sales performance.
- Whether elevated inventory and slower-than-expected sales result in markdowns or further pressure on operating cash flow and gross margin.
- Schuh’s ongoing profitability after deferred purchase-price compensation and contingent-bonus accruals, and the timing and amount of future payments.
- The final cost and recovery prospects associated with the payment-card intrusion claims and the pending Visa litigation.
- Environmental reserve adequacy and potential exposure in the New York proceedings, together with developments in other litigation.
- Execution and funding of planned Fiscal 2014 store expansion and capital spending, including the effect on cash, debt and facility availability.