GCO

Genesco Inc. 10-Q Summary: Quarter Ended May 2, 2009

Business Context and Reporting Period

This report covers the first quarter of Fiscal 2010 ended May 2, 2009. Genesco Inc. is a leading retailer of branded footwear and headwear, operating five reportable segments: Journeys Group, Underground Station Group, Hat World Group, Johnston & Murphy Group, and Licensed Brands (primarily Dockers). The company operates approximately 2,236 retail stores across the U.S., Puerto Rico, and Canada.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 3.8% year-over-year, driven by a 12.6% increase in Hat World Group sales, a 15.4% increase in Licensed Brands, and a 4.8% increase in Journeys Group. These gains were partially offset by a 15.5% decline in Johnston & Murphy Group sales and a 7.8% decline in Underground Station Group sales.
• Profitability Decline: Operating earnings dropped significantly from $203.2 million to $2.9 million. The prior year included a one-time $204.1 million gain from the settlement of merger-related litigation with The Finish Line, which is absent in the current period.
• Debt Reduction: Long-term debt decreased by approximately $62 million (from $113.7 million at Jan 31, 2009 to $51.6 million at May 2, 2009) following the exchange of $56.4 million in convertible debentures for common stock. This transaction resulted in a $5.1 million loss on early retirement of debt.
• Restructuring Charges: The company recorded $5.0 million in restructuring and other charges, primarily for asset impairments ($4.5 million), compared to $2.2 million in the prior year.

Outlook, Risks, and Management Commentary

• Guidance and Strategy: Management intends to slow the pace of new store openings and focus on inventory management and cash flow due to economic conditions. Capital expenditures for Fiscal 2010 are expected to be up to $48.6 million.
• Liquidity: The company maintains a $200 million revolving credit facility with $163.7 million in net availability as of May 2, 2009. Management expects cash from operations to be sufficient to repay seasonal borrowings by year-end.
• Risks: Key risks include continuing weakness in the consumer economy, disruptions in financial markets, and potential impairments of fixed or intangible assets if market value deteriorates further. The company also faces environmental contingencies, with an accrued provision of $16.1 million related to discontinued operations.
• Unusual Items: The prior year's results were heavily skewed by the litigation settlement gain. The current year includes a non-cash accounting adjustment (FSP APB 14-1) affecting convertible debt interest expense.

Investor Verification Checklist

• Debt Conversion Impact: Verify the long-term implications of the $56.4 million debt-to-equity swap on future interest expenses and share dilution.
• Johnston & Murphy Performance: Investigate the 15.5% sales decline and 95.7% drop in operating earnings for this segment, specifically regarding wholesale customer bankruptcies and markdowns.
• Environmental Liabilities: Review the $16.1 million accrued provision for discontinued operations (primarily environmental) and the status of ongoing negotiations with the EPA and Village of Garden City.
• Comparable Store Sales: Confirm the sustainability of the 12.6% sales growth in Hat World and 4.8% in Journeys against the backdrop of a recessionary economy.
• Credit Facility Covenants: Monitor "Adjusted Excess Availability" to ensure it remains above the $20 million threshold to avoid triggering fixed charge coverage ratio covenants.