Business Context and Reporting Period
Company: GENESCO INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 2, 1998 (First Quarter of Fiscal 1999)
Business Overview: Genesco manufactures, sources, markets, and distributes footwear under brands including Johnston & Murphy, Dockers, Nautica, and Laredo. It also operates retail chains (Journeys, Boot Factory) and a leather tanning division (Volunteer Leather).
Key Financial Metrics
| Metric (in thousands) | Q1 1999 (May 2, 1998) | Q1 1998 (May 3, 1997) |
|---|---|---|
| Net Sales | $133,808 | $114,185 |
| Gross Profit | $57,821 | $47,872 |
| Gross Margin % | 43.2% | 41.9% |
| Operating Income | $5,837 | $4,441 |
| Net Earnings | $3,788 | $2,182 |
| Diluted EPS | $0.14 | $0.08 |
| Cash & Short-term Investments | $127,702 | $26,421 |
| Working Capital | $138,549 | $110,139 |
| Total Debt (Current + Long-term) | $178,500 | $75,000 |
| Net Cash Flow | $78,426 | $(16,954) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 17.2% year-over-year, driven by a 22.2% increase in retail sales and a 9.2% increase in wholesale/manufacturing sales. Pro forma for the divestiture of the western boot business, sales increased 23.1%.
- Profitability: Net earnings rose 73.6% to $3.8 million, aided by a $281,000 income tax benefit and improved gross margins (up 130 basis points).
- Liquidity Surge: Cash and short-term investments jumped from $49.3 million to $127.7 million. This was primarily due to the issuance of $103.5 million in convertible subordinated notes in April 1998.
- Debt Restructuring: The company issued $103.5 million in 5.5% convertible notes and used proceeds to redeem $75 million in 10.375% senior notes. This resulted in a $3.7 million extraordinary loss (to be recognized in Q2) but lowered the overall interest rate burden.
- Operating Cash Flow: Cash used in operations was $13.9 million, slightly higher than the $13.3 million used in the prior year, due to increased working capital needs for new store openings.
Guidance, Outlook, and Risks
Management Commentary & Strategy
- Boot Divestiture: Genesco is exiting the western boot business due to market weakness. An agreement was reached on June 12, 1998, to sell assets to Texas Boot Inc., including the 26-store Boot Factory chain. The transaction is expected to close in Q2 1999.
- Accelerated Growth Plan: To offset the loss of leased departments at Mercantile Stores (due to Dillard's acquisition), Genesco plans to open 51 additional Journeys stores and 5 Johnston & Murphy stores over the next two years.
- Restructuring: The company expects to eliminate approximately 640 jobs in Fiscal 1999 related to the boot divestiture and plant closures (including the Iuka, MS plant).
Risks and Contingencies
- Environmental Litigation: Ongoing proceedings in New York (Gloversville) with estimated remediation costs of $10 million; outcome is uncertain. Additional potential liabilities exist in Michigan regarding lake sediment cleanup.
- Year 2000 Compliance: Estimated total cost of $22 million to upgrade systems. The company expects to complete modifications by July 31, 1999.
- Market Risks: Declining demand for military leather footwear and softness in the general retail environment.
Investor Verification Checklist
- Debt Refinancing Impact: Verify the timing and accounting treatment of the $3.7 million extraordinary loss related to the early retirement of senior notes (expected in Q2).
- Boot Divestiture Closure: Confirm the closing date of the Texas Boot Inc. transaction and the final proceeds received versus the $17.3 million charge already taken.
- Environmental Reserves: Monitor developments in the New York Gloversville litigation to assess if the current reserves are sufficient against the $10 million estimated cost.
- Store Opening Execution: Track the progress of the accelerated store opening plan (51 Journeys stores) to ensure it offsets the loss of Mercantile lease revenue.
- Preferred Stock Dividends: Note that dividend arrearages of $1.35 million were paid on May 28, 1998, clearing the default status on preferred stock.