Genesco Inc. — Q1 FY2024 Form 10-Q
Business context and period: The filing covers the three months ended April 29, 2023; the comparable period ended April 30, 2022. Genesco sells footwear and accessories through retail, e-commerce and wholesale operations, including Journeys, Schuh, Johnston & Murphy and Genesco Brands Group. It operated 1,396 stores at quarter-end. Interim results may not indicate full-year performance.
Financial results and liquidity
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Net sales | $483.3 million | $520.7 million |
| Gross margin | $228.8 million; 47.3% | $251.4 million; 48.3% |
| Operating income (loss) | $(23.0) million; (4.8%) margin | $8.2 million; 1.6% margin |
| Net earnings (loss) | $(18.9) million | $4.9 million |
| Diluted EPS from continuing operations | $(1.60) | $0.37 |
| Net cash used in operating activities | $(60.4) million | $(92.1) million |
- Selling and administrative expense rose 3.3% to $251.5 million, increasing from 46.8% to 52.0% of sales as lower revenue reduced expense leverage. Net interest expense rose to $1.7 million from $0.3 million.
- Cash and cash equivalents were $31.8 million. Current assets were $598.9 million and current liabilities $351.6 million. Inventory was $470.8 million.
- Long-term debt was $118.2 million, up from $44.9 million at January 28, 2023. Revolver excess availability was $205.3 million; the company reported compliance with credit-facility terms.
- Cash used in investing activities was $17.1 million, including $17.2 million of capital expenditures. Financing provided $61.8 million, principally reflecting net revolver borrowings.
- Operating lease liabilities totaled $531.2 million, including current and long-term portions.
Material changes and segment performance
- Sales fell 7.2%; comparable sales declined 5%, with same-store sales down 8% and comparable direct sales up 8%. E-commerce sales increased 5%.
- Journeys: Sales declined 13.4% to $272.2 million; operating results shifted from $14.9 million income to an $18.4 million loss. Management cited weaker store traffic and demand, consumer trade-down and increased markdowns.
- Schuh: Sales increased 5.6% to $93.1 million, or 13% in local currency; operating loss narrowed to $1.8 million from $2.7 million. Foreign exchange reduced sales by $6.8 million.
- Johnston & Murphy: Sales rose 16.3% to $82.6 million and operating income increased to $4.8 million from $0.6 million, supported by comparable-sales growth and improved expense leverage.
- Genesco Brands Group: Sales declined 24.9% to $35.4 million; results moved from $3.8 million operating income to approximately breakeven. Last year benefited from retailer replenishment following supply-chain constraints.
- Operating cash use improved year over year, mainly because the prior-year quarter included a much larger inventory build. Cash nevertheless declined $16.2 million during the quarter.
Outlook, risks and unusual items
- Management expects to close more than 100 Journeys stores in FY2024, versus the prior plan of 60, and anticipates significant cost savings in FY2024 and FY2025, mostly from Journeys. It is reviewing its cost structure and seeking more variable occupancy costs.
- FY2024 capital expenditures are expected to be approximately $50–$55 million: about 53% for technology and warehouse initiatives and 47% for new stores and remodels. The filing provides no earnings or sales guidance.
- Management believes cash, operating cash flow and available credit will support liquidity needs in FY2024 and the foreseeable future. Cash flow is seasonal, with working-capital investment typically peaking in summer and fall.
- An expected approximately $55 million net tax refund under CARES Act carryback provisions remains subject to an IRS audit; approximately $26 million had been received in FY2022. The remaining refund is recorded as a non-current prepaid income tax, and management expects the audit to extend timing.
- The company is in discussions with a licensor about renewal of a Genesco Brands Group license. Goodwill valuation assumes current licenses renew in the normal course; failure to renew a material license could trigger impairment assessment.
- Environmental contingencies accrued were $1.7 million. Management does not expect obligations at two former facilities to materially affect consolidated results, but notes legal proceedings carry inherent uncertainty. A Samsung inventory commitment relates to $15.9 million of inventory; management considers any cost-versus-fair-value differences appropriately accounted for.
- Other identified risks include consumer and retail weakness, promotional pressure, inflation and wage costs, supply and shipping disruption, foreign exchange, competition and fashion trends, store traffic, and execution of store closures and cost savings. Management reported disclosure controls effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether Journeys sales and margins stabilize as merchandise assortment changes and planned store closures proceed.
- Progress and timing of announced cost savings, and whether capital spending and store actions affect liquidity as expected.
- Revolver borrowing levels, availability and interest costs, alongside seasonal operating cash needs.
- Timing and outcome of the IRS audit and collection of the remaining tax refund.
- Renewal of the relevant Genesco Brands Group license and any resulting goodwill impairment assessment.
- Whether continued share repurchases remain consistent with the company’s liquidity needs; $9.2 million was spent on repurchases in the quarter, with $25.0 million remaining under authorization at April 29, 2023.