Genesco Inc. — FY2016 Form 10-K Summary
Business context and reporting period. Genesco is a footwear, apparel, headwear and accessories retailer and wholesaler operating Journeys, Schuh, Lids, Johnston & Murphy and licensed brands. This annual filing covers the 52 weeks ended January 30, 2016; it is not a standalone fourth-quarter filing. Genesco operated 2,852 stores and leased departments at year-end.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $3.022 billion | $2.860 billion |
| Gross margin | $1.443 billion; 47.8% of sales | $1.400 billion; 49.0% |
| Earnings from operations | $151.3 million; 5.0% of sales | $167.3 million; 5.8% |
| Continuing-operations earnings | $95.4 million; diluted EPS $4.15 | $99.4 million; diluted EPS $4.19 |
| Net earnings | $94.6 million; diluted EPS $4.11 | $97.7 million; diluted EPS $4.12 |
| Operating cash flow | $145.1 million | $189.8 million |
| Capital expenditures | $100.7 million | $103.1 million |
| Cash and cash equivalents at year-end | $133.3 million | $112.9 million |
| Working capital / current ratio | $476.5 million / 2.5 | $441.7 million / 2.1 |
| Total debt, including current maturities | $112.1 million | $29.2 million |
Sales grew 5.7%, but operating earnings and net earnings declined. Gross margin contracted by 1.2 percentage points; S&A declined as a share of sales from 43.0% to 42.5%. Genesco records buying, merchandising and occupancy costs in S&A, so its gross-margin presentation may not be directly comparable with retailers that include those costs in cost of sales.
Segment trends
- Journeys: Sales rose 6.1%; operating earnings increased 10.0% to $126.2 million, with a 10.1% margin. Comparable sales rose 5%.
- Schuh: Sales were nearly flat, affected by a $33 million foreign-exchange translation headwind; operating earnings rose to $19.1 million from $10.1 million, partly because acquisition-related compensation costs fell.
- Lids Sports: Sales increased 8.1%, but operating earnings fell 65.2% to $17.0 million and margin fell to 1.7%. Promotions to clear excess inventory lowered average hat prices 7% despite 14% growth in comparable store hat units.
- Johnston & Murphy: Sales rose 7.3% and operating earnings increased 19.6% to $17.8 million.
- Licensed Brands: Sales declined 0.3% and operating earnings fell 11.7% to $9.2 million, reflecting Bass footwear launch costs and other expense increases.
Material changes, liquidity and unusual items
- Operating cash flow fell $44.7 million, largely due to cash uses in accrued liabilities and acquisition-related payments; lower inventory provided a partial offset. Inventory declined $68.4 million year over year.
- Debt increased alongside share repurchases, the Little Burgundy acquisition and Schuh-related payments. The company had $58.3 million of revolver borrowings, $13.5 million of letters of credit and reported $279.3 million of excess availability under its credit facility at year-end. Management said cash, operating cash flow and credit availability should cover FY2017 needs.
- Genesco repurchased 2.38 million shares for $144.9 million in FY2016. The company reported $40.9 million remaining under its $100 million authorization as of March 29, 2016.
- Genesco acquired the Canadian Little Burgundy chain for $35.1 million and sold Lids Team Sports in January 2016, recognizing a $4.7 million pretax gain. The buyer later proposed a $2.4 million purchase-price adjustment, which was reflected in FY2016 results and remained under review.
- FY2016 included $7.9 million of asset impairment and other charges, including store impairments, asset write-downs and network-intrusion expenses. FY2015 included a $7.1 million indemnification-asset write-off and a $5.7 million charge from an EVA incentive-plan amendment.
- Environmental-contingency accruals totaled $14.5 million at year-end. For a New York site, the Village of Garden City alleged potential costs exceeding $41 million over 70 years; Genesco reached an agreement in principle for a lump-sum payment, subject to final documentation and an acceptable EPA work statement. EPA separately demanded about $2.2 million for a former Gloversville site; insurance coverage is subject to a $0.5 million retention and other terms.
Outlook, risks and contingencies
Genesco forecast FY2017 capital expenditures of approximately $125–$135 million, including retail expansion and major store renovations. It planned approximately 130 store openings and 56 closures, and expected its liquidity sources to fund working capital, capital expenditures and share repurchases. The filing provides no FY2017 earnings or revenue guidance.
Key risks include discretionary consumer demand, fashion and inventory-markdown exposure, intense competition and online-shopping shifts, reliance on third-party and overseas suppliers, foreign-exchange movements, store execution and occupancy costs, and dependence on distribution and information systems. The company had not implemented and certified EMV payment technology by the October 2015 liability-shift date and warned it could bear certain costs from fraudulent card use until certification, which it expected in FY2018. Litigation also includes a California labor action and a March 2016 lawsuit alleging website inaccessibility under the ADA. Pension expense and funding depend on market returns and actuarial assumptions; the pension liability was $10.0 million at year-end.
Management said it expected pension expense to decrease by approximately $3.9 million in FY2017. It also expected lease-accounting changes to have a material balance-sheet effect because of the company’s many lease contracts. The company’s annual and interim results are seasonal, with a significant share of sales and operating earnings typically generated in the fourth quarter.
Important facts for investors to verify
- Whether Lids can restore margins after heavy promotional activity and inventory clearance.
- Whether sales growth converts into stronger operating cash flow, given the FY2016 decline and substantial planned capital spending and buybacks.
- The final purchase-price adjustment for Lids Team Sports and the completed Little Burgundy integration.
- Progress on EMV certification and any resulting payment-card costs, as well as the outcomes and adequacy of accruals for environmental and other legal matters.
- How store expansion, lease commitments and new lease-accounting requirements affect returns, liquidity and reported leverage.