Genesco Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended July 29, 2017 (fiscal 2018), compared with periods ended July 30, 2016. Financial statements are unaudited. Genesco operates footwear and accessories retail, e-commerce and wholesale businesses, including Journeys, Schuh, Lids Sports Group and Johnston & Murphy; it operated 2,745 stores and leased departments at quarter-end.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $616.5 million | $625.6 million | $1,259.9 million | $1,274.4 million |
| Operating earnings (loss) | ($2.0) million | $20.0 million | $0.8 million | $37.9 million |
| Continuing-operations earnings (loss) | ($3.9) million | $14.5 million | ($2.9) million | $25.1 million |
| Net earnings (loss) | ($3.9) million | $14.6 million | ($3.1) million | $25.0 million |
| Diluted EPS | ($0.21) | $0.72 | ($0.16) | $1.21 |
| Gross margin | 49.7% | 50.3% | 49.6% | 50.6% |
| Selling and administrative expense / sales | 50.0% | 48.4% | 49.6% | 47.9% |
- Q2 sales declined 1.4%; comparable sales were flat, with same-store sales down 2% and comparable direct sales up 30%. Excluding prior-year SureGrip sales and foreign-exchange effects, total sales were flat.
- Six-month sales fell 1.1%; comparable sales were flat, with same-store sales down 3% and comparable direct sales up 29%. Excluding SureGrip and foreign-exchange effects, sales would have increased 1%.
- Q2 operating results included only $0.1 million of impairment charges, while the prior-year quarter included a $7.9 million net gain in asset impairments and other, primarily the network-intrusion litigation settlement, plus a $2.5 million gain related to the Lids Team Sports sale. These prior-year items materially affect comparisons.
- Q2 segment performance was uneven: Journeys sales rose 2.7% but recorded a $2.2 million operating loss; Lids sales fell 4.6% and operating earnings fell 57% to $3.0 million; Schuh sales rose 0.7% and earnings fell 20% to $4.5 million. Johnston & Murphy sales were nearly flat and earnings fell 31% to $1.5 million. Licensed Brands sales fell 34% and recorded a $1.1 million operating loss, partly reflecting the SureGrip divestiture.
- For the six months, Lids operating earnings fell 91% to $1.3 million and Journeys earnings fell 78% to $5.3 million. Schuh earnings rose 27% to $3.9 million. Management cited promotional activity, weaker comparable sales, expense deleverage and higher shipping, technology and store costs among the pressures.
Cash flow, balance sheet and liquidity
- Operating cash flow was negative $24.8 million for the first six months, versus positive $34.1 million in the prior-year period. The filing attributes the deterioration chiefly to lower earnings and less favorable cash movements in accounts payable and prepaids. Capital expenditures were $67.3 million, up from $40.7 million.
- Cash was $43.5 million at July 29, 2017. Working capital was $485.6 million. Inventory was $670.1 million, up $106.4 million from January 28, 2017, reflecting seasonal needs.
- Total debt, including current maturities, was $190.9 million, versus $82.9 million at January 28, 2017. Revolver borrowings were $162.3 million; the company also had $11.8 million of UK term loans and $16.8 million of UK revolver borrowings. Credit-facility excess availability was $226.5 million; the company reported compliance with applicable UK covenants and was not required to meet the U.S. facility’s fixed-charge coverage covenant.
- Management said cash, operating cash flow and credit facilities should fund working capital, capital expenditures and repurchases during FY2018. The business is seasonal, with historically stronger operating cash generation in the fourth quarter.
Outlook, risks and other notable items
- FY2018 capital expenditures were expected to be approximately $135–$140 million, including $125–$130 million for retail and a $33 million Journeys warehouse expansion. Plans included approximately 235 major store renovations and new store openings across several banners.
- No full-year sales or earnings guidance is stated in the supplied filing text. Management anticipates fewer store openings over time, selective closures and continued investment in omnichannel technology and infrastructure.
- Management tested goodwill recoverability for Lids and Schuh after adverse trends, missed projections and a lower share price. It concluded impairment was not more likely than not at quarter-end, but warned that weaker long-term assumptions, further share-price declines or higher discount rates could lead to future impairment.
- Key risks include fashion and consumer-demand shifts, mall traffic and online competition, promotional intensity, labor costs, wholesale customer credit and buying patterns, supply disruption, foreign exchange and Brexit-related effects, IT/security incidents, and litigation or environmental exposure. The filing identifies no material changes to previously reported risk factors.
- The tax rate included $2.2 million of expense associated with adopting share-based compensation accounting guidance; management said this reduced EPS by $0.11. Tax rates were also affected by a $0.5 million favorable return-to-provision adjustment.
- Environmental contingencies accrued were $3.2 million. The company paid $1.5 million in May 2017 to settle an EPA claim, with its insurer agreeing to reimburse 75% subject to a $500,000 retention. Several putative wage-and-hour class or collective actions were pending; Genesco disputes the allegations and intends to defend them.
Important facts for investors to verify
- Whether comparable-sales trends, particularly store sales, improve and whether direct-commerce growth can offset store weakness.
- Whether Lids and Journeys restore operating profitability and whether management’s cost, promotional and store-footprint actions are effective.
- How seasonal inventory, elevated capital spending and operating cash use affect revolver borrowing and liquidity through the remainder of FY2018.
- Whether Lids or Schuh results, market valuation or updated assumptions trigger goodwill impairment in a future period.
- Potential outcomes and costs of wage-and-hour litigation and environmental matters, and the impact of foreign-exchange movements on Schuh and consolidated results.