Business Context and Reporting Period
Genesco Inc. filed this unaudited Form 10-Q for the quarter ended July 28, 2012, the second quarter of fiscal 2013. The specialty retailer operated 2,404 stores across the U.S., Puerto Rico, Canada, the U.K. and Ireland, with footwear, headwear and sports merchandise businesses. Comparisons are with the quarter and six months ended July 30, 2011; Schuh was acquired in June 2011, so the prior-year comparison includes only about six weeks of Schuh results.
Financial Performance and Position
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Net sales | $543.5 million | $470.6 million | $1,143.7 million | $952.1 million |
| Gross margin | 50.5% | 50.4% | 51.0% | 50.9% |
| Earnings from operations | $17.0 million | $1.7 million | $53.0 million | $27.2 million |
| Net earnings (loss) | $10.5 million | $(0.4) million | $31.1 million | $14.4 million |
| Diluted EPS | $0.43 | $(0.02) | $1.29 | $0.61 |
| Cash used in operating activities | $(29.1) million | $(30.2) million | $(21.5) million | $(18.2) million |
Quarterly sales rose 15.5%; six-month sales rose 20.1%. Selling and administrative expense fell as a share of sales to 47.3% from 50.0% in the quarter and to 46.3% from 47.9% for six months. The company reported lower Q2 taxes: its effective rate was 32.9%, versus 38.6% a year earlier, attributed to a U.K. tax-rate reduction and increased state tax credits.
At July 28, 2012, cash was $47.2 million, working capital $361.3 million, and total debt, including current maturities, $100.5 million ($71.8 million U.S. revolver and $28.7 million U.K. term loans). Revolver availability was $292.8 million; the company was in compliance with applicable covenants. Inventories were $555.6 million, up $120.5 million from January 28, 2012, largely reflecting seasonal purchasing. Total assets were $1.381 billion and total equity $737.7 million.
Material Changes and Segment Trends
- Q2 Journeys sales increased 7.6%, with comparable sales up 6%; the segment returned to operating profit of $2.1 million from a $3.9 million loss, helped by lower markdowns and expense leverage.
- Lids Sports sales grew 2.5% and operating income rose 13.6% to $20.6 million. Johnston & Murphy sales grew 5.9%, but operating income fell 15.8% to $1.8 million, reflecting weaker margin and more off-price sales. Licensed Brands sales rose 20.2% and operating income rose 43.6% to $1.4 million.
- Schuh contributed $81.2 million of Q2 sales and recorded a $0.5 million operating loss; its six-month sales were $151.5 million with a $3.5 million operating loss. Results include acquisition-related deferred purchase-price and contingent-bonus compensation expense.
- Six-month operating cash use increased to $21.5 million from $18.2 million, primarily due to the larger seasonal inventory outflow, partly offset by improved earnings and accrued-liability movements. Investing used $43.3 million, including $32.5 million of capital expenditures.
- The company repurchased 346,398 shares for $20.8 million during the first six months. Debt increased from $40.7 million at January 28, 2012, principally due to revolver borrowing.
Outlook, Commentary, Risks and Unusual Items
No specific earnings or sales guidance is stated in the supplied filing text. Management expected cash on hand, operating cash flow and credit facilities to fund fiscal 2013 working capital and capital needs. Planned fiscal 2013 capital expenditures were approximately $92.3 million, including store openings, renovations and systems investment. Management noted that operating cash flow is seasonal and historically strongest in the fourth quarter.
Key risks include discretionary consumer demand and economic weakness, fashion and markdown execution, supply and distribution disruptions, foreign exchange and input costs, acquisition integration, store-opening and lease-renewal costs, and potential impairment. Management said risk factors had not materially changed from the prior annual report.
Environmental provisions for former facilities totaled $12.3 million at quarter-end. A New York site matter includes an EPA remedy estimated at a present cost of about $10.7 million; a municipality has asserted substantially higher historical and long-term costs, which Genesco disputes. Payment-card networks asserted approximately $15.4 million of claims relating to a prior network intrusion; Genesco disputes them and recorded no accrual. The filing also describes employment class actions and a patent action, which the company intends to defend without accrual. A California customer-information class-action settlement was approved after quarter-end; the company expected no material financial effect. The company also disclosed that an $8.0 million decrease in gross uncertain-tax liabilities was reasonably possible within 12 months.
Most Important Facts for Investors to Verify
- Whether sales and margin gains persist after separating organic performance from Schuh’s fuller-year contribution and acquisition-related compensation costs.
- Inventory levels, seasonal operating cash flow, and whether cash conversion improves in the second half.
- Debt, revolver availability and covenant headroom as seasonal borrowing and planned capital spending continue.
- Schuh’s operating performance and the eventual amount of deferred purchase-price and contingent-bonus expenses.
- Potential changes to environmental reserves, payment-card intrusion claims, and other litigation or tax contingencies.
- Execution and funding of the $92.3 million fiscal 2013 capital-expenditure plan and planned store openings.