GCO

Business Context and Reporting Period

Company: Genesco Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended May 1, 2004 (First Quarter of Fiscal 2005)
Business Overview: Genesco is a leading retailer and wholesaler of branded footwear and headwear. As of May 1, 2004, the company operated 1,547 retail stores and leased departments. Key segments include Journeys, Underground Station Group, Hat World/Lids, Johnston & Murphy, and Dockers Footwear.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 17.0% year-over-year, driven primarily by the acquisition of Hat World Corporation (contributing $18.1 million in one month) and a 6% increase in comparable store sales.
• Profitability: Net earnings increased 74.5% to $5.8 million. Operating income rose 52.0% to $11.3 million, aided by improved gross margins (up 340 basis points) due to decreased markdowns and the Hat World acquisition.
• Debt Structure: Total debt increased significantly from $103.2 million to $190.3 million. This reflects a new $100.0 million term loan and $4.0 million in revolver borrowings utilized to fund the Hat World acquisition.
• Cash Flow: Operating cash flow decreased sharply by $12.7 million to $0.9 million. This was primarily due to a $14.1 million increase in inventory (seasonal buildup and Hat World acquisition) and a $6.6 million decrease in cash flow from accounts payable.
• Balance Sheet: Total assets grew from $416.0 million to $575.1 million, largely due to the addition of Hat World's assets, including $98.5 million in goodwill and $47.3 million in trademarks.

Guidance, Outlook, and Risks

• Acquisition Integration: The company completed the acquisition of Hat World Corporation on April 1, 2004, for approximately $180.1 million. Management expects this to enhance strategic development and growth prospects.
• Capital Expenditures: Total capital expenditures for Fiscal 2005 are projected at approximately $40.3 million, focused on opening new stores (approx. 50 Journeys, 25 Underground Station, 46 Lids) and renovations.
• Liquidity: Management expects cash on hand and operating cash flows to be sufficient to fund planned capital expenditures and working capital needs. The company has $64.9 million remaining availability under its revolving credit facility.
• Restructuring: The company recorded a $0.1 million charge for lease terminations of six Jarman stores, part of a plan to close 48 stores in Fiscal 2005.
• Risks: Key risks include consumer demand fluctuations, fashion trends, integration of Hat World, foreign exchange rates (hedged via forward contracts), and environmental/legal contingencies (including a New York State environmental proceeding and patent litigation).

Investor Verification Checklist

• Inventory Levels: Verify the sustainability of the $48.0 million increase in inventory, which includes $35.5 million from the Hat World acquisition and seasonal buildup.
• Debt Covenants: Confirm continued compliance with the new credit facility covenants, specifically the debt-to-EBITDAR and fixed charge coverage ratios.
• Comparable Store Sales: Monitor the 6% comparable store sales increase to ensure it is not solely driven by the Hat World acquisition but reflects organic growth in core segments like Journeys.
• Wholesale Performance: Review the 22% decline in Johnston & Murphy wholesale sales and the 8.9% decline in Dockers Footwear sales to assess the impact of strategic shifts toward private label competition.
• Environmental Liabilities: Assess the adequacy of reserves for the New York State environmental proceeding, where total costs are estimated between $5.1 million and $5.3 million.