Business Context and Reporting Period
Company: Genesco Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and Six Months ended August 2, 2003 (Fiscal 2004)
Business Overview: Genesco designs, sources, markets, and distributes footwear under brands including Johnston & Murphy and Dockers. It operates retail chains including Journeys, Journeys Kidz, Underground Station, and Jarman.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Aug 2, 2003 |
3 Months Ended Aug 3, 2002 |
6 Months Ended Aug 2, 2003 |
6 Months Ended Aug 3, 2002 |
|---|---|---|---|---|
| Net Sales | $179,478 | $174,842 | $372,224 | $365,435 |
| Gross Margin | $83,489 | $82,851 | $171,581 | $172,999 |
| Gross Margin % | 46.5% | 47.4% | 46.1% | 47.3% |
| Operating Income | $3,357 | $8,185 | $10,796 | $23,107 |
| Net Earnings (Loss) | $(891) | $3,963 | $2,446 | $12,165 |
| Diluted EPS | $(0.04) | $0.17 | $0.10 | $0.51 |
| Cash from Operations | $1,277 | $(3,251) | $7,509 | $11,130 |
| Long-Term Debt | $86,250 | $103,245 | $86,250 | $103,245 |
| Cash & Equivalents | $32,968 | $32,214 | $32,968 | $32,214 |
Material Changes vs. Prior Period
- Profitability Decline: Net earnings dropped significantly year-over-year. The second quarter recorded a net loss of $0.9 million compared to $4.0 million in the prior year. For the six-month period, net earnings fell to $2.4 million from $12.2 million.
- Debt Restructuring: The company issued $86.3 million in 4 1/8% Convertible Subordinated Debentures due 2023. Proceeds were used to redeem $103.2 million of 5 1/2% Convertible Subordinated Notes due 2005. This resulted in a $2.6 million loss on early retirement of debt recognized in the second quarter.
- Margin Compression: Gross margin percentage decreased from 47.4% to 46.5% in the quarter and from 47.3% to 46.1% for the six months. This was driven by increased markdowns, changes in product mix, and higher product costs due to the appreciation of the Euro.
- Segment Performance:
- Journeys: Sales increased 6.3% (quarter) and 7.1% (six months) due to store count growth, though operating income declined due to lower comparable store sales and margin pressure.
- Johnston & Murphy: Sales were flat (-0.4%) in the quarter and down 2.8% for six months. Operating income plummeted 87.3% in the quarter due to wholesale declines and Euro-related cost increases.
- Dockers Footwear: Sales declined 12.0% in the quarter and 16.2% for six months, resulting in an operating loss for the quarter.
- Working Capital: Inventories increased by $44.8 million compared to the prior fiscal year-end, primarily due to seasonal retail build-up and new store openings. Accounts receivable decreased $4.5 million due to lower wholesale sales.
Outlook, Risks, and Management Commentary
- Foreign Exchange Risk: Management anticipates that the rapid appreciation of the Euro will increase product costs for the Johnston & Murphy division in Fiscal 2004. They estimate this will have an adverse effect on pretax earnings in the range of $5.1 million to $6.1 million for the year, assuming demand and exchange rates remain near current levels.
- Capital Expenditures: Total capital expenditures for Fiscal 2004 are expected to be approximately $23.3 million, primarily for opening new retail stores (Journeys, Underground Station, Johnston & Murphy) and renovations.
- Liquidity: The company expects cash on hand and operating cash flow to be sufficient to fund planned expenditures. A $75 million revolving credit facility is available, with $68.2 million currently available after letters of credit.
- Legal and Environmental:
- SEC Matter: The company is cooperating with an SEC investigation regarding accounting errors in fiscal 2001. The staff recommended a cease and desist proceeding but not monetary fines. Management does not expect a material adverse impact.
- Environmental: Ongoing remediation efforts in New York and Michigan. Management believes reserves are adequate but notes uncertainty regarding future liabilities.
Investor Verification Checklist
- Debt Refinancing Impact: Verify the long-term interest savings from replacing the 5.5% notes with 4.125% debentures against the one-time $2.6 million charge.
- Euro Hedging Effectiveness: Assess the sufficiency of the $17.8 million in forward contracts to mitigate the projected $5.1–$6.1 million earnings hit from currency appreciation.
- Inventory Levels: Monitor the $213.4 million inventory balance to ensure it aligns with sales trends and does not require significant future markdowns.
- Wholesale Channel Health: Investigate the 11% decline in Johnston & Murphy wholesale unit sales and the 15% decline in Dockers unit sales to determine if these are temporary or structural.
- SEC Resolution: Track the status of the SEC cease and desist proceeding to confirm no additional penalties or restatements are required.