Genesco Inc. — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended February 3, 2018. FY2018 included 53 weeks, compared with 52 weeks in FY2017. The fourth quarter included 14 weeks versus 13 weeks in the prior-year quarter.
Business context and results
Genesco operates specialty footwear, headwear and sports merchandise retail and wholesale businesses, including Journeys, Schuh, Lids Sports Group, Johnston & Murphy and Licensed Brands. It operated 2,694 stores and leased departments at year-end.
- Revenue: $2.907 billion, up 1.3% year over year. Excluding the extra week, foreign exchange and the prior-year business sale, sales increased 1%.
- Profitability: Gross margin was $1.416 billion, or 48.7% of sales, down from 49.4%. Selling and administrative expense rose to 45.5% of sales from 44.5%. Reported operating loss was $96.2 million, including a $182.2 million goodwill impairment charge. Pretax loss was $101.7 million; net loss was $111.8 million, or $5.82 per diluted share.
- Cash flow and investment: Operating cash flow was $164.6 million. Capital expenditures were $127.9 million, implying approximately $36.7 million of operating cash flow less capital expenditures. Cash and equivalents ended at $39.9 million.
- Debt and liquidity: Long-term debt, including current maturities, was $88.4 million, versus $82.9 million a year earlier. Working capital was $438.0 million and the current ratio was 2.7. The company reported $263.3 million of excess availability under its revolving facility and was not subject to its fixed-charge coverage covenant at year-end.
- Fourth quarter: Sales were $930.4 million versus $883.2 million. Net earnings were $56.0 million versus $46.5 million; diluted EPS was $2.90 versus $2.39. The periods had different week counts.
Material changes versus FY2017
- Sales increased modestly, but gross margin and expense leverage weakened; reported operating results swung from $142.0 million of operating income to a $96.2 million loss, principally due to the Lids goodwill impairment.
- Lids sales fell 8% and operating earnings declined 72% to $11.7 million; comparable sales decreased 7%. The company fully impaired Lids goodwill after sustained share-price and market-capitalization declines, operating underperformance and heightened competition.
- Journeys and Schuh sales grew 6% and 8%, respectively, but operating earnings declined 11% and 2%. Johnston & Murphy sales grew 5% and operating earnings grew 2%. Licensed Brands sales declined 16% and the segment recorded a small operating loss.
- Operating cash flow was nearly flat year over year, while capital expenditures increased to $127.9 million from $94.0 million. Share repurchases dropped to $16.2 million from $133.3 million.
Outlook, commentary and risks
- Management expects approximately $75 million of FY2019 capital expenditures and is targeting $35–$40 million in annualized expense reductions through a profit-enhancement initiative. It planned approximately 55 store openings and 92 closures overall.
- Genesco began a formal process to explore a sale of Lids Sports Group, with no transaction decision made and no assurance a sale or other strategic alternative will result. Management said it intends to focus on its footwear businesses.
- Dockers footwear sales were approximately $70 million in FY2018; the license term expires November 30, 2018. The Bass footwear license was terminated in January 2018, and management expected Licensed Brands sales to decline in FY2019.
- Management expects continued gross-margin pressure as e-commerce grows. Key risks include discretionary consumer demand, mall traffic and online competition, fashion and sports-related demand, inventory markdowns, sourcing and freight costs, foreign exchange, tariffs, labor costs, cybersecurity and litigation.
- Tax reform resulted in $9.8 million of one-time income tax expense, including a provisional $4.5 million transition-tax charge and $5.3 million of deferred-tax remeasurement expense. The effective tax rate was negative 9.6%, affected by the largely nondeductible goodwill impairment.
- Environmental contingencies accrued were $3.0 million. Several wage-and-hour class or collective actions remained pending; the company disputed the allegations. The company reported unqualified audit opinions and effective internal control over financial reporting.
Most important facts for investors to verify
- Whether the Lids sale process results in a transaction, and the terms, timing and operating effects if it does.
- Whether the $35–$40 million cost-savings target is achieved and whether margin performance improves despite e-commerce-related cost pressure.
- Renewal or expiration outcome for the Dockers license and the resulting effect on Licensed Brands revenue and earnings.
- FY2019 comparable sales, store closures and openings, and actual capital spending versus the stated plan.
- Tax-reform estimates, environmental accrual adequacy, and the financial exposure from pending employment-related litigation.