Genesco Inc. 10-Q Summary: Quarter Ended August 1, 2009
Business Context and Reporting Period
This filing covers the quarterly report (Form 10-Q) for Genesco Inc., a Tennessee corporation, for the three and six months ended August 1, 2009 (Fiscal 2010). Genesco operates five reportable segments: Journeys Group, Underground Station Group, Hat World Group, Johnston & Murphy Group, and Licensed Brands (primarily Dockers). The company operates approximately 2,241 retail stores and distributes footwear wholesale.
Key Financial Metrics
| Metric | Three Months Ended Aug 1, 2009 | Six Months Ended Aug 1, 2009 |
|---|---|---|
| Net Sales | $334.7 million | $705.0 million |
| Gross Margin | $169.9 million (50.8% of sales) | $359.2 million (50.9% of sales) |
| Operating Income (Loss) | $(2.0) million | $0.9 million |
| Net Loss | $(2.7) million | $(8.5) million |
| Diluted EPS (Loss) | $(0.13) | $(0.42) |
| Cash and Equivalents | $21.5 million | $21.5 million |
| Long-Term Debt | $53.0 million | $53.0 million |
| Working Capital | $262.6 million | $262.6 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 5.2% in the quarter and 0.7% for the six months compared to the prior year. This was driven by declines in the Journeys, Underground Station, Johnston & Murphy, and Licensed Brands segments, partially offset by growth in the Hat World Group.
- Profitability Shift: The company reported a net loss of $2.7 million for the quarter, a significant improvement from the $10.8 million net loss in the same period last year. The prior year's loss included a $5.4 million charge for environmental liabilities. The six-month loss of $8.5 million contrasts sharply with the $118.6 million net earnings in the prior year, which included a $204.1 million gain from the settlement of merger-related litigation with The Finish Line.
- Debt Reduction: Long-term debt decreased significantly from $113.7 million at the start of the fiscal year to $53.0 million. This reduction resulted from the exchange of $56.4 million in convertible debentures for common stock in April 2009, which also triggered a $5.1 million loss on early retirement of debt.
- Cash Flow: Operating cash flow for the six months was $33.5 million, down $143.7 million from the prior year, primarily due to the absence of the merger settlement proceeds received last year.
Guidance, Outlook, and Risks
- Outlook: Management intends to slow the pace of new store openings and focus on inventory management and cash flow due to economic conditions. Capital expenditures for Fiscal 2010 are expected to be up to $48.4 million.
- Liquidity: The company maintains a $200 million revolving credit facility with $165.4 million in net availability. Management expects cash from operations to be sufficient to repay borrowings by year-end.
- Key Risks:
- Environmental Contingencies: The company has accrued $16.1 million for environmental remediation related to discontinued operations (New York and Michigan sites). Future costs could exceed estimates.
- Consumer Economy: Continued weakness in the consumer economy and disruptions in financial markets may affect sales and margins.
- Debt Redemption: Holders of the remaining $29.8 million in convertible debentures have the option to require redemption in June 2010.
Investor Verification Checklist
- Verify the status and potential cost escalation of the $16.1 million environmental provision for discontinued operations.
- Monitor the company's ability to refinance or redeem the remaining $29.8 million in convertible debentures due in June 2010.
- Assess the impact of the 5.2% sales decline and negative comparable store sales trends in the Journeys and Underground Station segments on future profitability.
- Review the effectiveness of inventory management strategies given the $332.9 million inventory balance and seasonal working capital needs.
- Confirm the timeline and cost implications of the planned 100+ store renovations and new openings in Fiscal 2010.