GCO

Business Context and Reporting Period

Company: GENESCO INC.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended November 1, 1997 (Fiscal 1998).
Business Overview: Genesco manufactures, sources, markets, and distributes footwear under brands including Johnston & Murphy, Laredo, Code West, Larry Mahan, Dockers, and Nautica. It also operates the Volunteer Leather division and retail chains including Jarman, Journeys, and Boot Factory.

Key Financial Metrics

Note: Working Capital calculated as Total Current Assets ($188,010) minus Total Current Liabilities ($61,442).

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 18.5% in the quarter and 16.5% for the nine months compared to the prior year. Retail sales drove this growth with a 28.5% quarterly increase, while wholesale/manufacturing sales grew only 5.1% due to weakness in the western boot market.
• Profitability: Net earnings rose 58% in the quarter and 75% for the nine months. This improvement is partly due to the absence of a $1.7 million restructuring charge recorded in the prior year's third quarter.
• Cash Flow: Net cash used in operations was $17.0 million for the nine months ended Nov 1, 1997, compared to $0.7 million used in the prior year. This increase was primarily due to higher inventory and receivables required to support the opening of 72 new retail stores.
• Inventory: Inventories increased to $128.6 million (up from $95.9 million at Feb 1, 1997), reflecting seasonal buildup and stock for new store openings.

Guidance, Outlook, and Risks

• Western Boot Market: Management notes continued weakness in the western boot market, leading to declining sales and erosion of the retail customer base. The company is reviewing options including further capacity reductions, divestiture, or strategic alliances.
• Capital Expenditures: Total capital expenditures for Fiscal 1998 are expected to be approximately $26.3 million, primarily for opening 98 new retail stores and renovations.
• Liquidity: The company entered a new $65 million revolving credit agreement in September 1997. As of Nov 1, 1997, $8.6 million was used for letters of credit, leaving $56.4 million available.
• Year 2000 Compliance: The company estimates a total cost of $22 million to address Year 2000 issues, with completion targeted by July 31, 1999.
• Legal and Environmental: Significant contingencies include New York State environmental proceedings (Gloversville and Johnstown) with estimated remediation costs of $10.0 million for Gloversville. Management does not currently expect a material effect but notes uncertainties.
• Dividends: The company is in arrears on preferred stock dividends totaling approximately $1.2 million and is unable to predict when dividends will be reinstated due to a deficit in the pool of available net earnings.

Investor Verification Checklist

• Western Boot Segment Viability: Verify the extent of the decline in western boot sales and the effectiveness of the restructuring plan to mitigate losses.
• Inventory Levels: Assess the risk of inventory obsolescence given the $32.8 million increase in inventory and the noted "lower than anticipated sales in certain product styles."
• Environmental Liabilities: Monitor the outcome of the Gloversville environmental litigation and the potential for costs exceeding the current $10.0 million estimate.
• Preferred Stock Arrears: Confirm the status of the $1.2 million in preferred dividend arrearages and the company's ability to return to dividend payments.
• Year 2000 Costs: Track the actual costs incurred for Year 2000 compliance against the $22 million estimate to ensure no budget overruns impact liquidity.