Genesco Inc. — Form 10-Q Summary
Business context and reporting period. This filing covers the quarter and nine months ended October 29, 2016, in fiscal 2017. Genesco operates footwear and accessories businesses, including Journeys, Schuh, Lids, Johnston & Murphy and licensed brands, through retail, e-commerce and wholesale channels. It operated 2,806 stores and leased departments at quarter-end. Results are unaudited.
Financial results
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Net sales | $710.8m | $773.9m | $1,985.2m | $2,090.0m |
| Gross margin | 50.0% | 48.3% | 50.4% | 48.8% |
| Operating earnings | $40.3m | $52.1m | $78.3m | $80.8m |
| Net earnings | $25.9m | $32.5m | $50.9m | $49.9m |
| Diluted EPS | $1.30 | $1.42 | $2.49 | $2.13 |
| Cash from operations | $(36.5)m | $19.2m | $(5.8)m | $(75.9)m |
Q3 selling and administrative expense was 44.3% of sales, versus 41.6% a year earlier; operating earnings declined despite improved gross margin. For the nine-month period, S&A was 46.6% of sales versus 44.8%. Q3 comparable sales fell 3%; nine-month comparable sales fell 1%.
At October 29, 2016, cash was $30.5m, working capital $522.3m, and total debt including current maturities $226.2m. Debt was $111.8m at January 30, 2016. Cash was $133.3m at that fiscal year-end. The company reported $202.9m of excess availability under its revolving credit facility and stated it was in compliance with the Schuh facility covenants. Nine-month capital expenditures were $65.5m; share repurchases used $133.3m.
Material changes and drivers
- Q3 sales fell 8.2%, primarily reflecting the prior-year Lids Team Sports business, sold in fiscal 2016. Schuh sales were also reduced by $16.0m from foreign exchange; comparable sales were flat at Schuh.
- Journeys Q3 comparable sales declined 8%, and operating earnings fell 34.1% to $25.7m. Management cited weaker footwear unit sales, fashion shifts, markdowns and deleveraging of store costs. It expected supply-chain lead times to constrain availability of newly favored products through at least the balance of fiscal 2017.
- Lids Q3 sales declined 18.9%, largely due to the Team Sports sale, while comparable sales increased 2%. Operating earnings rose 73.7% to $8.2m, aided by a higher-margin mix and lower promotional and distribution costs.
- Johnston & Murphy Q3 sales grew 2.4% and operating earnings 6.1%. Licensed Brands sales rose 4.5%, but operating earnings fell 19.6%, with lower margins and higher freight and warehouse expenses.
- Nine-month net earnings increased modestly while operating earnings declined. Lower tax expense and non-recurring gains contributed: the period included an $8.9m gain related to settlement of network-intrusion litigation and a $2.5m Lids Team Sports sale-related gain. The prior-year period included $4.0m of impairment and other charges.
Outlook, risks and unusual items
- Management expected cash on hand, operating cash flow and credit availability to fund seasonal working capital, capital expenditures and repurchases for the foreseeable future. No full-year earnings or sales guidance is provided in the supplied filing text.
- Fiscal 2017 capital expenditures were expected to be approximately $110m–$120m, including planned store openings and renovations.
- A pension buyout offer was made to eligible terminated vested participants. Completion was expected in Q4; the company estimated a possible one-time charge of $1.5m–$3.0m, depending on participation.
- On December 5, 2016, after quarter-end, Genesco agreed to sell its SureGrip business, which had $13.0m of sales in the nine months ended October 29, 2016. Closing was expected by year-end, subject to customary conditions.
- Environmental liabilities included a $10.0m payment to settle claims by a New York village; total environmental accruals were $3.9m at quarter-end. The filing cautions that legal and environmental outcomes remain uncertain.
- Key risks cited include fashion and consumer-demand shifts, promotional intensity, mall traffic, wholesale customer credit and concentration, supply disruptions, foreign exchange (including Brexit-related uncertainty), litigation and environmental matters, and potential asset impairments. Schuh sales and operating earnings were reduced by $29.4m and $1.9m, respectively, from foreign exchange in the first nine months.
Important facts for investors to verify
- Whether Journeys’ product availability and comparable-sales weakness improved after the filing, and the impact on margins and earnings.
- How much of the sales decline reflects the Lids Team Sports divestiture and currency effects versus underlying demand.
- Seasonal inventory and working-capital needs, cash generation, and revolver borrowing levels after quarter-end.
- Completion and final accounting for the pension buyout and SureGrip sale, including any resulting charges or proceeds.
- Whether environmental and other legal reserves remain adequate, and how repurchases affect liquidity and leverage.