Genesco Inc. — Form 10-Q Summary
Reporting period: Fiscal 2014 third quarter ended November 2, 2013, and the nine months then ended. Comparative 2012 results were restated. Genesco operated 2,537 retail stores across its footwear and sports merchandise businesses.
Financial performance
| Metric | Q3 FY2014 | Q3 FY2013, restated | Nine months FY2014 | Nine months FY2013, restated |
|---|---|---|---|---|
| Net sales | $666.3 million | $664.5 million | $1,832.5 million | $1,808.1 million |
| Gross margin | 49.8% | 50.3% | 49.8% | 50.6% |
| Operating earnings | $47.0 million | $54.2 million | $88.2 million | $107.1 million |
| Continuing-operations earnings | $27.8 million | $42.2 million | $50.8 million | $74.0 million |
| Net earnings | $27.8 million | $42.1 million | $50.5 million | $73.7 million |
| Diluted EPS | $1.18 | $1.76 | $2.14 | $3.05 |
| Operating cash flow | $8.6 million | $28.1 million | $25.0 million | $6.6 million |
Q3 sales increased 0.3%, while comparable sales fell 1%. Operating earnings declined as gross margin contracted and selling and administrative expenses rose as a percentage of sales, to 42.6% from 42.1%. For the nine months, sales rose 1.3%, but operating earnings and net earnings fell materially. The effective tax rate increased to 39.3% from 20.2% in Q3 and to 40.2% from 28.5% year to date; prior-year rates benefited from releases of uncertain-tax-position reserves and a favorable state tax settlement.
Segment trends, Q3: Journeys sales fell 6.5% and operating earnings fell 16.1%; Schuh sales were nearly flat, but operating earnings fell 46.0%; Lids sales rose 7.2%, while operating earnings fell 33.6%; Johnston & Murphy sales rose 16.2% and operating earnings rose 53.5%; Licensed Brands sales fell 2.5%, while operating earnings rose 10.2%. Schuh recorded a $4.1 million operating loss for the first nine months, compared with $1.7 million of earnings a year earlier. Lids year-to-date operating earnings fell 37.5%.
Cash, debt and liquidity
- At November 2, cash was $32.3 million, working capital was $459.6 million, and total debt including current maturities was $98.0 million ($79.0 million revolving borrowings and $19.0 million UK term loans). Cash was $59.8 million and debt $50.7 million at February 2, 2013.
- Nine-month operating cash flow was $25.0 million; investing cash outflow was $87.6 million, including $75.7 million of capital expenditures. Financing provided $35.9 million. Cash declined $27.5 million from fiscal year-end.
- Inventory increased $186.8 million from February 2, primarily to support holiday sales. Management attributed improved year-to-date operating cash flow versus the prior year chiefly to higher accounts payable cash flow, partly offset by inventory investment and lower earnings.
- Credit-facility excess availability was $281.5 million; the company reported compliance with UK facility covenants and was not required to meet the revolving facility’s fixed-charge coverage covenant. Management said cash, operating cash flow and facility availability should cover foreseeable working capital and capital needs.
Outlook, significant items and risks
- No earnings guidance was provided in the supplied filing text. Fiscal 2014 capital expenditures were expected to be approximately $115 million, including about $103 million for retail investment. Planned openings included approximately 40 Journeys, 20 Journeys Kidz, 19 Schuh, 13 Johnston & Murphy and 103 Lids Sports Group stores; approximately 95 major store renovations were also planned.
- The nine-month results included an $8.3 million gain from termination of a New York City Journeys lease, partly offset by impairments, network-intrusion expenses and legal charges. Q3 included $1.5 million of asset impairment and other charges. Schuh acquisition-related compensation expense was $3.0 million in Q3 and $8.7 million year to date.
- The company restated prior financial statements after determining that retained EVA Incentive Plan bonuses should be expensed over the three-year service period rather than entirely when awarded. The restatement did not affect revenue, total cash flows or debt-covenant compliance. Management reported that the related material weakness in internal control had been remediated; disclosure controls were reported effective.
- Environmental liabilities for former facilities were accrued at $11.9 million. The New York site matter includes disputed claims and potentially substantial remediation costs; management cautioned that estimates may change. Other disclosed matters include payment-card claims related to a 2010 network intrusion, patent disputes and employment litigation.
- Management identified risks including weak consumer demand, fashion and product-mix changes, promotional pressure, competition, supply or distribution disruption, foreign exchange and input costs, store execution, acquisitions, systems or security incidents, and litigation or environmental outcomes. Two customers represented 8% and 7% of trade receivables, respectively.
Key facts for investors to verify
- Whether comparable-sales trends and margin pressure—especially at Journeys, Schuh and Lids—improve in subsequent periods.
- Whether holiday inventory converts to sales and cash without elevated markdowns, and whether the seasonal working-capital build reverses as expected.
- How much of reported year-to-date operating performance depends on the $8.3 million lease-termination gain and Schuh-related compensation and bonus accruals.
- Progress and costs related to environmental, network-intrusion and other legal matters, and the adequacy of recorded reserves.
- Execution of planned capital spending and store openings, alongside debt levels, revolver availability and the remaining $65.5 million share-repurchase authorization.
- That comparative figures are the restated amounts and that the EVA bonus accounting correction and related control remediation remain appropriately reflected.