Genesco Inc. — Q3 Fiscal 2023 Form 10-Q
Reporting period: Quarter ended October 29, 2022; year-to-date figures cover the nine months ended that date. Comparative period is the quarter or nine months ended October 30, 2021. Financial statements are unaudited.
Business context
Genesco designs, sources, markets and distributes footwear and accessories through retail stores, e-commerce and wholesale. Its four operating segments are Journeys, Schuh, Johnston & Murphy and Licensed Brands. The company operated 1,404 stores at quarter-end.
Key financial metrics
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Net sales | $603.8 million | $600.5 million | $1,659.9 million | $1,694.4 million |
| Gross margin | $293.8 million; 48.7% | $295.2 million; 49.2% | $799.6 million; 48.2% | $825.4 million; 48.7% |
| Operating income | $26.1 million | $43.8 million | $43.4 million | $72.2 million |
| Net earnings | $20.4 million | $32.9 million | $33.0 million | $52.7 million |
| Diluted EPS | $1.65 | $2.25 | $2.56 | $3.60 |
| Selling and administrative expense as % of sales | 44.3% | 41.8% | 45.6% | 43.9% |
For the nine months, operating cash flow was negative $244.0 million, versus positive $152.1 million a year earlier. Capital expenditures were $39.8 million. Cash declined to $32.1 million from $320.5 million at January 29, 2022; inventory rose to $563.5 million from $278.2 million. Revolver borrowings totaled $89.4 million, compared with $15.7 million at fiscal year-end. Genesco reported $237.0 million of excess availability under its Credit Facility and compliance with relevant facility terms at October 29, 2022.
Material changes and management commentary
- Q3 sales increased about 1%, while nine-month sales declined about 2%. Management attributed sales pressure in part to unfavorable foreign exchange, including a $21.1 million Q3 impact and $41.5 million year-to-date impact, primarily related to Schuh.
- Q3 comparable sales rose 3% overall. Q3 segment sales increased 19% at Johnston & Murphy and 14% at Licensed Brands, were flat at Journeys, and fell 13% at Schuh as reported; Schuh sales increased 4% in local currency.
- Year-to-date Journeys sales fell 7.8% and operating income fell 52.1%; management cited weaker sales, markdowns and expense deleverage. Johnston & Murphy sales rose 27.5% and operating income rose 200.8%, supported by growth across retail, e-commerce and wholesale. Schuh year-to-date sales were flat and operating income declined 44.5%.
- Lower gross margin reflected a more normalized promotional environment and higher freight and logistics costs. Freight and logistics pressured gross margin by approximately $3.3 million in Q3 and $14.7 million year to date. Selling expense comparisons also reflected prior-year rent credits and government relief, as well as higher selling salaries, compensation and marketing costs.
- Operating cash use largely reflected inventory rebuilding after supply-chain disruptions, payment of prior-year incentive compensation, and income taxes paid versus a prior-year refund. Management noted that operating cash flow is typically generated principally in the fourth quarter due to seasonality.
Outlook, risks and unusual items
- Management said cash on hand, operating cash flow and available credit facilities should support liquidity needs in Fiscal 2023 and the foreseeable future, and expects year-end cash to return to a more normalized level. No earnings or sales guidance is provided in the supplied filing text.
- Fiscal 2023 capital expenditures are expected to be approximately $50 million to $55 million. This excludes approximately $11 million, or $9 million net of tenant allowances, for a new corporate headquarters building.
- The IRS will audit periods related to the remaining CARES Act carryback tax refund. Genesco said it believes the positions supporting the refund have technical merit, but expects the audit to extend the timing; the outstanding amount was reclassified as non-current prepaid income taxes. The filing does not state the precise remaining refund amount.
- After quarter-end, Schuh entered a £19 million revolving credit facility with Lloyds, expiring November 2, 2025, with options to request two one-year extensions subject to lender approval. Genesco guaranteed Schuh’s obligations on an unsecured basis.
- Genesco repurchased 1.38 million shares for $72.7 million during the first nine months and had $34.1 million remaining under its repurchase authorization at quarter-end. It reported no repurchases through December 7, 2022.
- Environmental contingencies were accrued at $1.4 million. Genesco stated that it did not expect the identified environmental matters to materially affect its financial condition or results, while noting legal proceedings carry inherent uncertainty. Other risks cited include consumer spending, promotions and inventory management, inflation and labor costs, supply-chain and shipping disruption, foreign exchange, and U.K./ROI market weakness.
Investor facts to verify
- Inventory levels, aging and sell-through, and the expected effect of holiday demand and markdowns on cash generation and gross margin.
- Whether foreign-exchange movements, freight costs and promotional intensity continue to pressure Schuh and consolidated profitability.
- The timing and amount of the outstanding tax refund following the IRS audit, and any consequences for liquidity.
- Availability and covenant terms of the U.S. and U.K. facilities, including the new Schuh agreement and Genesco guarantee.
- Capital spending and share-repurchase pace relative to seasonal cash needs and the company’s stated liquidity expectations.