Genesco Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended August 3, 2019 (fiscal 2020). Unaudited results; comparisons are to the periods ended August 4, 2018 unless stated otherwise.
Business context
Genesco designs, sources, markets and distributes footwear and accessories through Journeys, Schuh, Johnston & Murphy, Licensed Brands, e-commerce and wholesale channels. It operated 1,494 stores. Lids Sports Group was sold on February 2, 2019; prior-year results are presented as discontinued operations.
Financial performance
| Metric | Q2 FY2020 | Six months FY2020 |
|---|---|---|
| Net sales | $486.6 million; flat | $982.2 million; up 0.9% |
| Comparable sales | Up 3% | Up 4% |
| Gross margin | $236.5 million; 48.6% of sales, versus 47.5% | $481.4 million; 49.0% of sales, versus 48.2% |
| Operating income | $3.0 million; 0.6% margin | $12.0 million |
| Continuing-operations earnings | $0.8 million; diluted EPS $0.05 | $7.3 million; diluted EPS $0.43 |
| Net earnings | $0.6 million; diluted EPS $0.04 | $6.9 million; diluted EPS $0.41 |
| Operating cash flow | Not separately highlighted | $(38.1) million, versus $43.0 million provided |
Q2 selling and administrative expenses were $231.8 million, or 47.6% of sales, versus 47.3% a year earlier. Net interest expense fell to $0.3 million in Q2 and $0.2 million for the six months. The six-month effective tax rate was 39.7%; Q2’s rate was 70.7%, affected by foreign losses for which no tax benefit was recognized and a $0.2 million uncertain tax position.
Liquidity, debt and capital allocation
- At August 3, cash was $58.0 million, working capital was $172.9 million, and long-term debt including its current portion was $75.1 million. Working capital includes $141.2 million of current operating lease liabilities newly recognized under ASC 842.
- Operating lease liabilities totaled $812.3 million on the balance sheet; undiscounted future minimum payments were $959.2 million. Adoption of ASC 842 added lease assets and liabilities but management said it did not materially affect earnings, liquidity or debt covenant compliance.
- Revolver borrowings were $60.2 million, with $10.5 million of letters of credit outstanding and $204.3 million of excess availability. The company was not required to meet the facility’s fixed-charge coverage covenant at quarter-end.
- Six-month investing cash flow was $85.5 million, reflecting proceeds from the Lids sale; financing cash outflow was $156.0 million, primarily including $145.4 million of share repurchases. The company repurchased 3.42 million shares for $148.1 million during the six months and a further 857,750 shares for $30.0 million through August 30, 2019.
Material changes and segment trends
- Journeys was the strongest contributor: Q2 sales rose 3.3% and operating income increased 61.0% to $11.3 million; six-month operating income increased 51.3% to $30.3 million.
- Schuh remained weak: Q2 sales fell 5.8% (flat comparable sales) and operating income was only $0.04 million; its six-month operating loss widened to $5.4 million. Currency translation reduced six-month Schuh sales by $10.2 million.
- Johnston & Murphy Q2 sales declined 1.7%, while operating income rose 112.3% to $1.5 million. Wholesale sales were down 8% in the quarter.
- Licensed Brands sales fell 24.5% in Q2, primarily due to the Bass license closeout and lower Dockers sales. The Dockers license was due to expire November 30, 2019.
- Foreign exchange reduced reported sales growth; excluding lower exchange rates, Q2 sales would have increased 1% and six-month sales 2%. Comparable direct sales rose 20% in Q2 and 17% for the six months.
Outlook, risks and unusual items
- No specific revenue or earnings forecast is provided in the supplied filing text. Management expected cash, operating cash flow, Lids-sale proceeds and credit availability to fund seasonal working capital, capital expenditures and repurchases for the foreseeable future.
- Fiscal 2020 capital expenditures were expected to be approximately $45 million, including planned store openings, renovations and technology investments.
- Management cited risks including tariffs and supply-chain disruption, consumer and mall traffic weakness, fashion and promotional pressures, wage and occupancy costs, Brexit and currency effects, online competition, and possible impairments or stranded costs.
- Q2 included $1.8 million of pretax asset impairment and other charges, including $1.0 million for lease terminations and $0.7 million for store impairments. Six-month charges were $1.0 million, principally store impairments.
- The Lids sale generated $93.8 million cash proceeds. Genesco retained contingent exposure on 48 Lids leases, with estimated maximum future payments of $25.0 million, although the purchaser agreed to indemnify the company.
- An IRS proposed employer health-care payment of $12.3 million for 2016 was reduced to $60,750 after the company disputed the assessment. Environmental liabilities accrued were $1.7 million. Proposed wage-and-hour class settlements were subject to court approval; the company did not expect them to be material.
- The company’s board approved termination of its pension plan effective June 30, 2019. Management reported disclosure controls were effective and no material changes in internal control during the quarter.
Important facts for investors to verify
- Whether Journeys’ sales and margin strength can offset continued Schuh losses and shrinking Licensed Brands sales.
- How inventory levels, seasonal cash needs and operating cash flow develop after the six-month cash outflow and substantial repurchases.
- Remaining credit-facility availability, debt and covenant headroom, including the effect of seasonal borrowing.
- Execution and returns from the planned $45 million capital program, and the remaining share-repurchase authorization.
- Potential costs from retained Lids lease guarantees, environmental matters and other legal contingencies.