Business Context and Reporting Period
Company: Genesco Inc.
Filing Type: Form 10-K (Annual Report)
Fiscal Year End: February 1, 2014 (52 weeks)
Business Overview: Genesco is a leading retailer and wholesaler of branded footwear, apparel, and accessories. The company operates five reportable segments: Journeys Group, Schuh Group, Lids Sports Group, Johnston & Murphy Group, and Licensed Brands. As of February 1, 2014, the company operated 2,568 retail stores and leased departments across the U.S., Puerto Rico, Canada, the U.K., and Ireland.
Key Financial Metrics
| Metric | Fiscal 2014 | Fiscal 2013 |
|---|---|---|
| Net Sales | $2.62 billion | $2.60 billion |
| Gross Margin | $1.30 billion (49.5% of sales) | $1.30 billion (49.9% of sales) |
| Earnings from Operations | $163.4 million (6.2% of sales) | $169.9 million (6.5% of sales) |
| Net Earnings | $92.7 million | $112.4 million |
| Diluted EPS | $3.92 | $4.68 |
| Operating Cash Flow | $140.0 million | $123.2 million |
| Long-Term Debt | $33.7 million | $50.7 million |
| Working Capital | $451.3 million | $407.1 million |
| Cash and Equivalents | $59.4 million | $59.8 million |
Material Changes vs. Prior Period
- Revenue: Net sales increased 0.8% year-over-year. This growth was driven by increases in Lids Sports Group (+3.8%), Johnston & Murphy Group (+10.9%), and Licensed Brands (+1.2%), partially offset by declines in Journeys Group (-2.6%) and Schuh Group (-1.6%).
- Profitability: Operating income decreased 3.8% to $163.4 million. The decline was primarily due to decreased earnings in the Journeys, Schuh, and Lids Sports segments, offset by improvements in Johnston & Murphy and Licensed Brands.
- Comparable Sales: Journeys Group same-store sales decreased 2%. Lids Sports Group same-store sales decreased 1%. Schuh Group same-store sales decreased 9%. Conversely, Johnston & Murphy Group same-store sales increased 7%.
- Debt: Long-term debt decreased significantly from $50.7 million to $33.7 million, primarily due to payments on U.K. term loans associated with the Schuh acquisition.
- Unusual Items: Fiscal 2014 included a net pretax charge of $1.3 million for asset impairments and other charges (including network intrusion expenses and legal matters), compared to $17.0 million in Fiscal 2013.
Guidance, Outlook, and Risks
Outlook and Strategy: Management plans to open approximately 344 new retail stores and close 47 stores in Fiscal 2015. Capital expenditures for Fiscal 2015 are expected to be approximately $149 million. The company intends to permanently reinvest foreign cash and does not expect to repatriate funds.
Management Commentary: The company noted that gross margin decreased as a percentage of net sales, reflecting margin decreases in Schuh, Lids Sports, and Licensed Brands. Selling and administrative expenses increased as a percentage of sales in all segments except Licensed Brands.
Risks and Contingencies:
- Legal Proceedings: The company is involved in environmental remediation proceedings (New York and Michigan) with an accrued liability of $11.9 million. A 2010 network intrusion resulted in a $15.4 million charge in Fiscal 2013; the company is litigating to recover $13.3 million in fines.
- Goodwill Impairment: The company holds $288.1 million in goodwill. While no impairment was recorded in Fiscal 2014, the company notes that deterioration in market value or operating performance could trigger future impairment charges.
- Operational Risks: Risks include consumer spending levels, fashion trends, supply chain disruptions (heavy reliance on imports), and foreign exchange rate fluctuations affecting the Schuh Group.
Key Facts for Investor Verification
- Segment Performance Disparity: Verify the sustainability of the 10.9% sales growth in Johnston & Murphy versus the 9% same-store sales decline in the Schuh Group.
- Inventory Levels: Inventory increased by $58.4 million year-over-year to $567.3 million. Investors should monitor if this reflects strategic buildup or slower-than-expected sales.
- Legal Exposure: Review the status of the Village of Garden City lawsuit regarding environmental costs, where the plaintiff alleges future costs could exceed $41 million over 70 years, though the company disputes this estimate.
- Debt Covenants: Confirm continued compliance with the U.K. Credit Facility covenants (minimum interest coverage of 4.50x and maximum leverage of 2.25x) given the Schuh Group's performance.
- Share Repurchases: The company repurchased $20.7 million of stock in Fiscal 2014 and has $65.5 million remaining under its current authorization.