Genesco Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months of fiscal 2014, ended August 3, 2013. The company operates footwear and accessories businesses and Lids Sports Group, with 2,488 stores across the U.S., Canada, Puerto Rico, the U.K. and Ireland. Prior-year comparison figures are restated where indicated.
Financial performance
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Net sales | $574.7 million | $543.5 million | $1,166.1 million | $1,143.7 million |
| Gross margin | 49.2% | 50.2% | 49.8% | 50.7% |
| Operating earnings | $15.5 million | $15.8 million | $41.3 million | $52.8 million |
| Continuing-operations earnings before tax | $14.4 million | $14.6 million | $39.1 million | $50.5 million |
| Net earnings | $8.3 million | $10.0 million | $22.8 million | $31.5 million |
| Diluted EPS | $0.35 | $0.40 | $0.96 | $1.28 |
| Cash from operating activities | $(7.0) million | $(29.1) million | $16.5 million | $(21.5) million |
Second-quarter sales rose 5.7%, but comparable sales fell 2%; first-half sales rose 2.0%, while comparable sales fell 3%. Gross margin and operating performance weakened in both periods. The effective tax rate rose to 41.2% from 31.6% in Q2 and to 41.2% from 37.1% year to date; management attributed the prior-year lower rates to state tax credits.
Second-quarter sales increased across all business units, but results varied: Lids operating earnings fell 36.3%, Journeys fell 27.0%, and Schuh shifted to an operating loss of $1.4 million. Johnston & Murphy sales grew 10.3% while operating earnings declined 3.0%. For the first half, Schuh’s operating loss widened to $6.1 million and Lids operating earnings declined 39.3%.
Balance sheet, liquidity and debt
- At August 3, 2013, cash was $46.0 million, working capital was $424.5 million and total debt, including current maturities, was $73.1 million. At February 2, 2013, those figures were $59.8 million, $407.1 million and $50.7 million, respectively.
- Debt comprised $53.8 million of U.S. revolver borrowings and $19.3 million of U.K. term loans. Revolver availability was $308.5 million; the company reported compliance with its U.K. facility covenants and was not required to meet the U.S. facility’s financial covenant at period-end.
- First-half operating cash flow improved by $38.0 million year over year, primarily because accounts payable provided $58.3 million more cash, partly offset by lower earnings and changes in other liabilities. Inventory increased $123.4 million from fiscal year-end.
- First-half capital expenditures were $37.2 million. Fiscal 2014 capital expenditures were expected to be approximately $120 million. Management said cash, operations and credit availability should cover fiscal 2014 working capital and capital needs.
Material changes, outlook and risks
- One-time item: Results included an $8.3 million gain from terminating a New York City Journeys lease. This was included in a net $7.1 million Q2 gain in “asset impairments and other,” partly offset by legal, network-intrusion and store-impairment charges. The first-half net gain in that line was $5.8 million.
- Schuh costs and trading: Schuh results included acquisition-related deferred purchase-price compensation expense ($2.8 million in Q2; $5.7 million year to date) and contingent bonus accruals. Management cited promotional activity, weak comparable sales and new-store costs as pressures.
- Restatement and controls: The company determined that retained EVA incentive-plan bonuses should be expensed over their three-year service period, rather than fully in the year determined. It intends to restate fiscal 2011–2013 and certain prior quarterly statements. The filing says the correction did not affect total revenue, total cash flows or debt-covenant compliance. A material weakness related to this accounting made disclosure controls ineffective as of August 3; new controls were implemented, but their ongoing effectiveness remained to be tested.
- Contingencies: Environmental provisions totaled $11.9 million. The filing describes environmental and other litigation, including a Village of Garden City claim with alleged potential costs exceeding $41 million over 70 years, which the company considers unreasonable. The company is also pursuing recovery of $13.3 million in payment-card intrusion assessments and fines; it recorded a $15.4 million charge in fiscal 2013 in connection with the disputed liability.
- Risks and commentary: Management highlighted consumer demand and fashion trends, competition, seasonal timing, product supply and cost pressures, foreign exchange, store execution, acquisition integration, pension assumptions, IT/security incidents and litigation. The filing provides a fiscal-year capital spending and store-opening plan, but no earnings or sales guidance.
Investor verification priorities
- Review the planned restatement filings and assess the effect of the EVA bonus accounting correction on each affected period.
- Track remediation and independent testing of the material weakness in internal controls.
- Assess whether comparable-sales weakness, margin compression and lower Lids and Schuh profitability persist.
- Verify inventory growth, seasonal working-capital needs, vendor payment-term effects and continued revolver availability.
- Monitor the $11.9 million environmental reserve and developments in the payment-card intrusion, labor, patent and other legal matters.
- Separate recurring operating performance from the one-time lease-termination gain and Schuh-related compensation costs.