Genesco Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, the three months ended April 28, 2012; comparative quarter ended April 30, 2011. Financial statements are unaudited. Genesco operated 2,386 stores across the U.S., Puerto Rico, Canada, the U.K. and Ireland.
Financial performance and position
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $600.1 million | $481.5 million | +24.6% |
| Gross profit / gross margin | $309.3 million / 51.5% | $247.5 million / 51.4% | +24.9% / +0.1 percentage point |
| Selling and administrative expense | $273.2 million / 45.5% of sales | $220.8 million / 45.9% of sales | +23.7%; improved rate |
| Operating earnings / margin | $36.0 million / 6.0% | $25.5 million / 5.3% | +41.1% |
| Continuing earnings before tax | $34.9 million | $25.0 million | +39.5% |
| Net earnings | $20.6 million | $14.8 million | +39.3% |
| Diluted EPS | $0.85 | $0.63 | +$0.22 |
| Operating cash flow | $7.6 million | $12.0 million | Down $4.4 million |
Effective tax rate was 40.4%, versus 40.1%. Net earnings included a $0.2 million provision for discontinued operations. Comprehensive income was $24.9 million, including $4.3 million of other comprehensive income, primarily foreign currency translation.
At April 28, 2012, cash was $54.8 million, working capital $314.3 million, total assets $1.26 billion and total equity $751.8 million. Total debt was $35.7 million, all related to U.K. term loans; there were no revolver borrowings. The company reported $291.5 million of excess availability under its main credit facility and compliance with Schuh’s UK facility covenants. Current assets were $613.6 million and current liabilities $299.2 million.
Cash from operations was below net earnings, reflecting working-capital uses, including higher receivables and inventory and lower cash flow from accounts payable and accrued liabilities. Capital expenditures were $14.1 million; cash increased $1.0 million to $54.8 million. Inventory was $445.2 million, up from $435.1 million at January 28, 2012.
Material changes and segment results
- Sales growth included $70.3 million from Schuh, acquired in June 2011. The company also reported growth in each legacy segment.
- Journeys sales rose 12.5% and operating earnings 44.8%; comparable sales increased 12%, supported by higher average price and lower markdowns.
- Lids Sports sales rose 7.9% and operating earnings 36.9%; comparable sales increased 4%.
- Johnston & Murphy sales rose 7.0% and operating earnings 38.5%; higher wholesale sales contributed.
- Licensed Brands sales increased 8.0%, while operating earnings rose 1.8% and margin declined to 10.8% from 11.4%.
- Schuh recorded $70.3 million in sales and a $3.0 million operating loss, including $3.0 million of deferred purchase-price compensation expense and $2.5 million of contingent-bonus accruals, as described in management’s discussion.
- Interest expense increased to $1.1 million from $0.5 million, primarily reflecting debt assumed with Schuh. Asset impairment and other charges fell to $0.1 million from $1.2 million.
Outlook, risks and unusual items
- Management said available cash, operating cash flow and credit-facility availability should cover working capital and capital expenditures for the foreseeable future. The filing gives no specific earnings or sales guidance.
- Fiscal 2013 capital expenditures were expected to total approximately $92.5 million, including planned store openings and about 148 major renovations.
- Risks highlighted include consumer weakness, changing fashion preferences and markdowns, competitive pressure, supply or distribution disruption, foreign exchange and input costs, acquisition integration, seasonal timing, and store-opening and lease-renewal execution.
- Payment-card networks asserted approximately $15.4 million in claims related to the 2010 network intrusion. Genesco disputes the claims and recorded no accrual; it said the claims were not currently expected to have a material effect, but further claims may arise.
- Environmental liabilities for former facilities were accrued at $12.5 million. The company cautioned that estimates may change. A New York site matter includes a Village claim alleging future costs that could exceed $41 million over 70 years; Genesco disputes the estimate and continues to defend the matter.
- Other matters include a patent infringement suit and employment-related class actions. The company said the disclosed California settlements were not expected to have a material effect. Management reported no material change in previously disclosed risk factors, and disclosure controls were effective.
Important facts for investors to verify
- How much of reported growth and future performance reflects Schuh versus organic and comparable-store sales, and whether Schuh can move from an operating loss to profitability.
- Whether inventory and receivables growth, vendor payment patterns and seasonal working-capital needs affect cash generation and liquidity.
- The status and potential exposure from the $15.4 million payment-card claims, environmental proceedings and other litigation, including whether accruals remain adequate.
- Progress against the $92.5 million capital-spending plan and planned store openings, renovations and expected returns.
- Schuh’s deferred and contingent purchase-price obligations, facility covenants and the assumptions underlying reported debt and credit availability.