Genesco Inc. 10-Q Summary: Quarter Ended July 31, 2010
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Genesco Inc., a Tennessee corporation, for the quarter ended July 31, 2010 (Fiscal 2011 Q2). Genesco designs, sources, markets, and distributes footwear and accessories through retail stores (Journeys, Lids, Johnston & Murphy, etc.), e-commerce, and wholesale channels. As of July 31, 2010, the company operated 2,264 retail stores across the U.S., Puerto Rico, and Canada.
Key Financial Metrics
| Metric | Q2 2010 | Q2 2009 | 6 Months 2010 | 6 Months 2009 |
|---|---|---|---|---|
| Net Sales | $363.7 million | $334.7 million | $764.5 million | $705.0 million |
| Gross Margin % | 50.6% | 50.8% | 51.3% | 50.9% |
| Operating Income (Loss) | $(3.4) million | $(2.9) million | $11.1 million | $(0.9) million |
| Net Earnings (Loss) | $(3.2) million | $(2.7) million | $5.4 million | $(8.5) million |
| Diluted EPS | $(0.14) | $(0.13) | $0.22 | $(0.42) |
| Cash and Equivalents | $49.0 million | $21.5 million | $49.0 million | $21.5 million |
| Long-Term Debt | $0 | $53.0 million | $0 | $53.0 million |
| Working Capital | $273.5 million | $262.6 million | $273.5 million | $262.6 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 8.7% in Q2 and 8.4% for the six months, driven primarily by a 22% sales increase in the Lids Sports Group and growth in Licensed Brands, partially offset by an 8% decline in the Underground Station Group.
- Profitability: The company reported a net loss of $3.2 million for Q2 2010, compared to a $2.7 million loss in Q2 2009. However, for the six-month period, the company turned a loss of $8.5 million in 2009 into a net profit of $5.4 million in 2010.
- Debt Elimination: Long-term debt was reduced to zero following the conversion of $56.4 million in 4 1/8% Debentures to common stock in the prior fiscal year. Consequently, interest expense dropped significantly (75.8% decrease in Q2).
- Inventory Build: Inventories increased by $86.4 million from the prior year-end to $377.4 million, reflecting seasonal build-up for Back-to-School sales and increased purchases in the Journeys and Lids segments.
- Restructuring Charges: The company recorded $2.0 million in restructuring charges for Q2 2010 (primarily asset impairments), compared to $3.3 million in Q2 2009.
Outlook, Risks, and Management Commentary
- Segment Performance: The Lids Sports Group remains the strongest performer with 21.8% sales growth and $12.0 million in operating earnings. The Journeys Group reported a loss of $4.5 million due to increased markdowns and bonus expenses. The Underground Station Group continues to struggle with store closures and declining sales.
- Capital Allocation: The company repurchased 408,400 shares of common stock for $11.2 million during the first six months of 2010. Total capital expenditures for Fiscal 2011 are projected at $38.9 million, focused on new store openings and renovations.
- Liquidity: Cash flow from operations was $9.6 million for the six months ended July 31, 2010, a decrease from $33.5 million in the prior year, largely due to higher inventory purchases. The company has no revolving credit borrowings outstanding and $192.7 million in net availability under its credit facility.
- Environmental Contingencies: The company maintains an accrual of $16.7 million for environmental remediation related to discontinued operations (primarily New York and Michigan sites). Management believes these reserves are adequate but notes inherent uncertainties in litigation outcomes.
- Risks: Key risks include consumer economic weakness, fashion trend volatility, supply chain disruptions (specifically from China), and potential additional environmental liabilities.
Investor Verification Checklist
- Inventory Valuation: Verify the adequacy of inventory reserves given the $86 million increase in stock levels and the company's reliance on markdowns to manage slow-moving goods.
- Environmental Accruals: Review the $16.7 million provision for discontinued operations, specifically the New York State and Whitehall, Michigan remediation costs, for potential future increases.
- Underground Station Turnaround: Assess the strategy for the Underground Station segment, which continues to report significant operating losses and store closures.
- Debt Covenant Compliance: Confirm that the company remains in compliance with its credit facility covenants, specifically the Adjusted Excess Availability requirement, though currently well above the threshold.
- Comparable Store Sales: Monitor the sustainability of comparable store sales growth in the Lids and Journeys segments, which drove the overall revenue increase.