Genesco Inc. Form 10-K Summary
Business context and reporting period. Genesco is a footwear and accessories retailer and wholesaler operating Journeys, Schuh, Johnston & Murphy and Licensed Brands. Fiscal 2019 ended February 2, 2019 and comprised 52 weeks; Fiscal 2018 comprised 53 weeks. Unless stated otherwise, figures below are for continuing operations. Genesco completed the sale of Lids Sports Group at fiscal year-end and presents it as discontinued operations.
Financial performance
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Net sales | $2,188.6 million | $2,127.5 million |
| Gross margin | $1,047.1 million; 47.8% | $1,011.4 million; 47.5% |
| Selling and administrative expense | $962.1 million; 44.0% of sales | $929.2 million; 43.7% of sales |
| Earnings from operations | $81.8 million; 3.7% of sales | $74.4 million; 3.5% of sales |
| Continuing-operations earnings | $51.2 million; diluted EPS $2.63 | $36.7 million; diluted EPS $1.90 |
| Net earnings (loss) | $(51.9) million; diluted EPS $(2.66) | $(111.8) million; diluted EPS $(5.80) |
| Net cash from operating activities | $237.1 million | $164.6 million |
| Cash and cash equivalents at year-end | $167.4 million | $39.9 million |
| Long-term debt, including current maturities | $65.7 million | $88.4 million |
| Working capital / current ratio | $454.8 million / 2.6 | $438.0 million / 2.7 |
Fiscal 2019 capital expenditures were $57.2 million including discontinued operations; continuing-operations segment reporting shows $41.8 million. Cash flows include Lids results and therefore are not directly comparable to continuing-operations earnings. Gross margin presentation excludes buying, merchandising and occupancy costs, which are included in SG&A.
Material changes and segment trends
- Sales rose 2.9% despite the extra week in Fiscal 2018. Journeys sales grew 6.8%, with comparable sales up 8%; operating earnings increased 36.0% to $100.8 million.
- Schuh sales fell 5.2%, comparable sales declined 8%, and operating earnings fell 81.3% to $3.8 million. Promotional activity, weaker sales and expense deleverage pressured results.
- Johnston & Murphy sales increased 3.0% and operating earnings rose 5.3% to $20.4 million. Comparable sales increased 7%, partly offset by a 7% decline in wholesale sales.
- Licensed Brands sales declined 19.2% to $72.6 million and the segment reported a $0.5 million operating loss, primarily due to lower Dockers sales and the Bass license closeout.
- Net loss improved from the prior year, but both years’ net losses were driven by discontinued operations. Fiscal 2019 included a $126.3 million pretax loss on the Lids sale and a $5.7 million Lids trademark impairment; Fiscal 2018 included a $182.2 million Lids goodwill impairment.
- Operating cash flow increased by $72.5 million, supported in part by changes in accounts payable and accrued liabilities. Cash used for investing fell as capital spending decreased.
Outlook, risks and unusual items
- Outlook: Management expected approximately $45 million of Fiscal 2020 capital expenditures. Store plans were approximately 31 openings and 40 closures; the filing gives no clear earnings or revenue guidance. Management stated that cash, operating cash flow and credit facilities were expected to fund working capital, capital spending and repurchases.
- Liquidity and debt: The amended revolving credit facility totals $275 million and matures January 2023. At year-end, revolver borrowings were $56.8 million, UK term loans were $9.0 million, letters of credit were $11.2 million, and reported excess availability was $151.4 million. The company was not subject to the facility’s fixed-charge coverage test at year-end.
- Lids divestiture: The sale price was $100 million cash, subject to working-capital and other adjustments; proceeds were recorded as a receivable at year-end and received February 4, 2019. Genesco retained guarantees on 71 Lids leases, with estimated maximum future payments of $29.6 million, and will provide transition services for up to six months. The buyer’s indemnities may not eliminate Genesco’s contingent exposure.
- Lease accounting: Genesco estimated that adoption of the new lease standard in Fiscal 2020 would add approximately $750–$850 million of operating lease right-of-use assets and liabilities to the balance sheet, without a material income-statement impact expected. Contractual operating lease commitments were $1.10 billion.
- Goodwill and pension: Schuh continued to underperform; its year-end impairment test showed fair value only $10.8 million above carrying value. A 100-basis-point increase in discount rate would reduce estimated fair value by $11.4 million, all else equal. The board authorized termination of the defined-benefit pension plan in March 2019, with completion expected by the end of Fiscal 2020; final costs could differ from estimates.
- Other risks and contingencies: Risks include changing fashion and consumer demand, mall traffic and e-commerce competition, UK/Brexit and currency exposure, tariffs and overseas sourcing, wage and occupancy costs, cybersecurity, and wholesale-customer credit concentration. The Dockers footwear license was due to expire November 30, 2019; Fiscal 2019 Dockers sales were approximately $56 million. Environmental contingencies were accrued at $1.8 million. The IRS proposed a $12.3 million employer health-coverage payment for 2016; the company said it was investigating, did not consider the liability probable, and recorded no accrual.
- Other notable items: Fiscal 2019 included $3.2 million of asset impairment and other charges and a $0.6 million loss on early retirement of debt. The effective tax rate on continuing operations declined to 34.5% from 46.8%, primarily reflecting the lower federal corporate tax rate, partly offset by foreign losses and valuation allowances.
Important facts for investors to verify
- Whether Journeys’ comparable-sales momentum can offset Schuh’s continued weakness and margin pressure.
- Final Lids sale adjustments, proceeds accounting and any remaining lease-guarantee or indemnification exposure.
- Fiscal 2020 store, capital-spending and share-repurchase plans, including the effect of the new lease standard.
- Renewal outcome and economics of the Dockers license, and any further impairment risk for Schuh goodwill.
- Resolution of the IRS proposed payment, labor litigation and environmental matters, and any related changes to accruals.
- How reported cash generation compares with cash flow excluding discontinued operations; the filing does not separately report discontinued-operations cash flows.