Genesco Inc. — Q1 FY2014 Form 10-Q
Reporting period: Three months ended May 4, 2013; comparative period ended April 28, 2012. Genesco operates footwear, apparel, headwear and accessories businesses through five reportable segments and had 2,458 stores at quarter-end. Results are unaudited.
Financial performance
| Metric | Q1 FY2014 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $591.4 million | $600.1 million | Down 1.5% |
| Gross profit / gross margin | $298.6 million / 50.5% | $306.7 million / 51.1% | Margin down 0.6 percentage points |
| Operating earnings | $32.3 million | $36.0 million | Down 10.4% |
| Continuing-operations pretax earnings | $31.2 million | $34.9 million | Down 10.5% |
| Net earnings | $18.4 million | $20.6 million | Down 10.8% |
| Diluted EPS | $0.77 | $0.85 | Down $0.08 |
| Operating cash flow | $23.5 million | $7.6 million | Up $15.9 million |
| Capital expenditures | $17.8 million | $14.1 million | Up $3.7 million |
Margins and expenses: Selling and administrative expense fell 2.0% to $265.0 million and declined from 45.1% to 44.8% of sales. Net interest expense was $1.0 million, down 7%. The effective tax rate was 40.8%, versus 40.4%. Lower gross margin and reduced operating earnings more than offset lower selling and administrative expenses.
Cash, liquidity and debt: Cash was $39.7 million, down from $59.8 million at February 2, 2013. Working capital was $410.3 million. Total debt, including current maturities, was $53.3 million ($32.1 million revolver and $21.2 million UK term loans), compared with $50.7 million at fiscal year-end. Cash less debt was approximately negative $13.6 million. Revolver availability was $294.0 million; the company was in compliance with UK facility covenants and was not required to meet the U.S. facility’s fixed-charge coverage covenant. Management said liquidity sources should cover foreseeable working capital and capital needs.
Operating cash flow increased, principally due to working-capital movements, including accounts payable, receivables and inventory; lower accrued bonus liabilities partly offset the increase. Investing cash use was $17.8 million, primarily capital expenditures. Financing cash use was $25.1 million, including share repurchases and preferred-stock redemptions. Cash declined by $20.1 million over the quarter.
Segment performance and changes
- Journeys: Sales fell 2.5% to $257.1 million; operating earnings fell 6.5% to $23.6 million. Comparable sales declined 2%.
- Schuh: Sales fell 2.8% to $68.3 million; operating loss widened slightly to $3.0 million. Comparable sales declined 11%, with lower initial mark-ons and increased promotions. The company planned to close 11 concessions by fiscal year-end.
- Lids Sports: Sales fell 2.9% to $177.9 million; operating earnings dropped 34.7% to $12.5 million. Comparable sales declined 6%, reflecting lower fitted-hat demand, cheaper snap-back styles, price competition and weaker margins.
- Johnston & Murphy: Sales rose 13.6% to $58.4 million, but operating earnings fell 3.9% to $3.9 million amid lower gross margin and costs to develop a planned new line.
- Licensed Brands: Sales fell 6.1% to $29.4 million and operating earnings fell 13.4% to $2.9 million, mainly due to lower Dockers sales and higher advertising and freight costs.
Overall sales declined in all segments except Johnston & Murphy. Corporate and other expense declined to $7.6 million from $12.9 million, largely reflecting lower bonus accruals. Reported operating earnings included $1.3 million of impairment and other charges; the Schuh segment also recorded $2.9 million of compensation expense for its deferred purchase-price obligation.
Outlook, risks and unusual items
- No specific revenue or earnings-per-share guidance was provided. Management expected cash on hand, operating cash flow and credit-facility availability to fund FY2014 seasonal working capital and capital expenditures.
- FY2014 capital expenditures were expected to be approximately $119.3 million, including about $104.8 million for retail expansion and renovations and $14.5 million for wholesale and other purposes. Planned openings included approximately 32 Journeys, 20 Journeys Kidz, 22 Schuh, 15 Johnston & Murphy and 87 Lids Sports Group stores.
- The company repurchased 189,300 common shares for $11.2 million and had $47.0 million remaining under its $75.0 million authorization. It also completed mandatory preferred-stock redemptions costing $1.5 million; those preferred issues were converted or redeemed, ending their annual dividend requirement.
- Asset impairment and other charges were $1.3 million, including $1.2 million for retail-store impairments and $0.1 million of network-intrusion expenses. The filing also describes a $15.4 million charge recorded in Q4 FY2013 related to disputed payment-card intrusion claims; Genesco sued Visa seeking recovery of $13.3 million in assessments and fines.
- Environmental liabilities for former facilities totaled $11.9 million. The New York site has significant remediation and litigation uncertainty; the Village of Garden City has alleged potentially substantial historical and long-term costs, which the company disputes. Other pending matters include patent, intellectual-property and wage-and-hour cases. Management cautioned that litigation and environmental outcomes could require additional reserves.
- Key risks include consumer weakness, fashion and product-mix changes, competition, supply or distribution disruptions, foreign exchange and input costs, store execution, impairment risk, IT security incidents, and litigation and environmental outcomes. The company identified no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether weak comparable sales and lower margins at Schuh and Lids persist, and whether the planned concession exits improve Schuh performance.
- Execution and returns on the substantial FY2014 store-opening, renovation and systems-investment program.
- Cash conversion and seasonal inventory needs, particularly given the cash decline, higher debt and reliance on working-capital movements to lift operating cash flow.
- Progress and potential additional exposure in the New York environmental matter, payment-card intrusion dispute and other litigation.
- Whether the $11.9 million environmental provision and the company’s impairment assumptions remain adequate as new information becomes available.