Genesco Inc. — Form 10-Q Summary
Reporting period: Fiscal 2019 second quarter ended August 4, 2018, with six-month results compared with the corresponding prior-year periods. Genesco operates footwear and accessories retail, e-commerce and wholesale businesses, including Journeys, Schuh, Lids Sports Group and Johnston & Murphy. The company reported 2,657 stores and leased departments.
Financial results
| Metric | Three months ended Aug. 4, 2018 | Six months ended Aug. 4, 2018 |
|---|---|---|
| Net sales | $653.9 million, up 6.1% | $1,298.9 million, up 3.1% |
| Gross margin | 49.2%, versus 49.7% | 49.5%, versus 49.6% |
| Selling and administrative expenses | 48.8% of sales, versus 50.0% | 49.4% of sales, versus 49.6% |
| Operating income (loss) | $1.4 million, versus $(2.0) million | $(0.5) million, versus $0.8 million |
| Net income (loss) | $(0.015) million, or $0.00 diluted EPS, versus $(3.9) million, or $(0.21) EPS | $(2.3) million, or $(0.12) diluted EPS, versus $(3.1) million, or $(0.16) EPS |
| Operating cash flow | Not separately highlighted for the quarter | $43.0 million, versus cash use of $24.8 million |
| Capital expenditures | Not separately highlighted for the quarter | $31.1 million, versus $67.3 million |
Quarterly comparable sales increased 3% (same-store sales up 2%; comparable direct sales up 7%). Six-month comparable sales increased 1% (same-store sales flat; comparable direct sales up 9%). Reported sales comparisons benefited from the prior fiscal year’s 53-week calendar: management attributed approximately $21 million of second-quarter and $33 million of six-month sales to the calendar shift. Consequently, reported growth exceeded underlying comparable-sales growth.
Cash and cash equivalents were $49.8 million at quarter-end. Working capital was $456.2 million. Total debt, including current maturities, was approximately $83.3 million, down from $88.4 million at February 3, 2018 and $190.9 million a year earlier. The company had $60.7 million of U.S. credit-facility borrowings, $12.9 million of U.K. revolver borrowings and $9.7 million of U.K. term loans outstanding. Credit-facility excess availability was $325.8 million; the company reported compliance with its covenants.
Material changes and business drivers
- Journeys: Second-quarter sales rose 17.8% to $305.0 million, with comparable sales up 10%; operating income improved to $7.7 million from a $2.2 million loss. Growth included about $20 million from the calendar shift.
- Schuh: Second-quarter sales were nearly flat at $98.2 million, while comparable sales fell 7%; operating income declined to $1.1 million from $4.5 million. Six-month operating results moved to a $4.6 million loss from $3.9 million income, reflecting promotions and expense deleverage.
- Lids Sports Group: Second-quarter sales fell 7.4% to $166.9 million and operating income fell to $1.2 million from $3.0 million. Six-month sales declined 8.8%, and the segment recorded a $4.2 million operating loss versus $1.3 million income.
- Johnston & Murphy: Second-quarter sales increased 5.5%, but operating income fell 40% to $0.9 million, primarily reflecting wholesale markdowns. Six-month operating income increased 10.6% to $5.9 million.
- Licensed Brands: Second-quarter sales rose 4.3%, but six-month sales fell 17.4%, primarily due to weaker Dockers footwear; the G.H. Bass license had been terminated in January 2018.
Quarterly pretax results improved to $0.3 million income from a $3.3 million loss, while six-month pretax results weakened to a $2.6 million loss from a $1.6 million loss. Second-quarter net results were near break-even after discontinued-operations charges. Net interest expense declined year over year in both periods, reflecting lower average revolver borrowings.
Outlook, commentary and risks
- Management said cash on hand, operating cash flow and available credit were expected to fund working capital, capital spending and planned repurchases for the foreseeable future. Fiscal 2019 capital expenditures were projected at $60–$65 million. No specific earnings or sales guidance is provided in the supplied filing text.
- The company was exploring a sale of Lids Sports Group, announced in February 2018, to focus on its footwear businesses. Completion, timing and terms remained uncertain.
- A profit-enhancement initiative targeted $35–$40 million of annualized expense reductions to lower store fixed costs and improve e-commerce efficiency. The company also anticipated fewer new stores over time and selective closures.
- ASC 606 was adopted using the modified retrospective method, with a $4.4 million opening retained-earnings adjustment. For the quarter, the company reported a $0.015 million net loss; the filing’s comparison excluding ASC 606 shows $1.8 million net income. The standard primarily changed gift-card breakage timing and required direct-mail advertising costs to be expensed when incurred. Comparisons with prior periods are therefore not fully on the same accounting basis.
- Second-quarter charges included $0.9 million of store impairments and $0.6 million of legal and other matters, partly offset by a $0.5 million Hurricane Maria-related gain. Six-month asset impairment and other charges totaled $2.6 million.
- Risks cited include promotional pressure and fashion-driven demand, mall traffic and online competition, tariffs, foreign exchange and Brexit-related effects, wage and labor costs, supply disruptions, and the uncertain Lids sale. Environmental contingencies accrued were $3.0 million. Wage-and-hour litigation included proposed settlements subject to documentation and court approval; the company said it did not expect those settlements to be material.
Important facts for investors to verify
- Whether Lids Sports Group was ultimately sold, and the transaction’s proceeds, timing and impact on reported results.
- How much reported sales growth reflected the 53-week calendar shift versus comparable demand, particularly at Journeys.
- Whether Schuh and Lids reversed their comparable-sales declines and operating losses, and how promotional activity affected margins.
- The cash-flow and earnings effects of seasonal inventory, adoption of ASC 606 and the company’s expense-reduction initiative.
- Progress toward the $60–$65 million capital-spending plan, credit-facility availability and resolution or re-estimation of legal and environmental contingencies.