Business Context and Reporting Period
Company: Genesco Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: January 29, 2011 (Fiscal 2011)
Business Overview: Genesco is a leading retailer and wholesaler of branded footwear, apparel, and accessories. The company operates five reportable segments: Journeys Group (youth footwear), Underground Station Group (urban footwear), Lids Sports Group (headwear and sports apparel), Johnston & Murphy Group (men's dress footwear), and Licensed Brands (primarily Dockers footwear). As of January 29, 2011, the company operated 2,309 retail stores across the U.S., Puerto Rico, and Canada.
Key Financial Metrics
| Metric | Fiscal 2011 | Fiscal 2010 |
|---|---|---|
| Net Sales | $1,789.8 million | $1,574.4 million |
| Gross Margin | $901.8 million (50.4% of sales) | $795.9 million (50.6% of sales) |
| Earnings from Operations | $86.1 million | $60.4 million |
| Net Earnings | $53.2 million | $28.8 million |
| Diluted EPS (Net Earnings) | $2.24 | $1.30 |
| Cash and Cash Equivalents | $55.9 million | $82.1 million |
| Working Capital | $278.7 million | $280.4 million |
| Long-Term Debt | $0 | $0 |
| Capital Expenditures | $29.3 million | $33.8 million |
Liquidity: The company maintains a $300 million revolving credit facility with $235.2 million in net availability as of January 29, 2011. There were no revolver borrowings outstanding at year-end.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 13.7% to $1.79 billion, driven by a 30% increase in Lids Sports Group sales (due to acquisitions and comparable store sales growth), a 7% increase in Journeys Group, and an 11% increase in Johnston & Murphy Group. This was partially offset by a 5% decline in Underground Station Group sales.
- Profitability: Earnings from operations increased 42.5% to $86.1 million. Operating margins improved to 4.8% from 3.8% in the prior year, primarily due to increased earnings across most segments and a reduction in the Underground Station Group's operating loss.
- Restructuring Charges: The company recorded $8.6 million in restructuring and other charges in Fiscal 2011, down from $13.5 million in Fiscal 2010. The 2011 charge included $7.2 million for retail store asset impairments and $1.3 million related to a computer network intrusion.
- Debt Retirement: The company had no long-term debt outstanding at the end of Fiscal 2011 or 2010, having retired all convertible debentures in Fiscal 2010.
Guidance, Outlook, and Risks
Outlook and Strategy: Management plans to open approximately 84 new retail stores and close 72 stores in Fiscal 2012, resulting in a net increase of approximately 12 stores. Capital expenditures for Fiscal 2012 are expected to be approximately $55.9 million. The company continues to focus on inventory management and cash flow while selectively expanding its store base.
Material Risks and Contingencies:
- Network Intrusion: In December 2010, the company suffered a criminal intrusion into its payment processing network. While contained, potential future claims and liability remain a risk.
- Environmental Liabilities: The company has accrued $15.5 million for environmental remediation related to former facilities. Significant proceedings include a New York State site with estimated costs up to $24 million and a Michigan site with estimated costs of $4.9 million.
- Legal Proceedings: Two putative class actions were filed in March 2011 in California alleging violations of credit card information collection laws.
- Economic Sensitivity: The business is highly seasonal and dependent on consumer spending on discretionary items. Poor economic conditions could lead to inventory markdowns and reduced demand.
Investor Verification Checklist
- Comparable Store Sales: Verify the sustainability of the 7% comparable store sales increase in Journeys Group and 9% increase in Lids Sports Group.
- Underground Station Turnaround: Monitor the strategy to close underperforming stores and secure rent relief, as this segment continues to operate at a loss.
- Environmental Accruals: Review the adequacy of the $15.5 million environmental provision, particularly regarding the New York State litigation where the Village of Garden City claims costs could exceed $41 million.
- Network Intrusion Costs: Track any emerging legal claims or costs associated with the December 2010 data breach.
- Acquisition Integration: Assess the performance of recent acquisitions (Sports Avenue, Brand Innovators, Anaconda Sports) included in the Lids Sports Group results.