Genesco Inc. — Q1 Fiscal 2016 Form 10-Q
Business context and reporting period. The filing covers the three months ended May 2, 2015, compared with the three months ended May 3, 2014. Genesco operates footwear and sports merchandise retail, e-commerce and wholesale businesses, including Journeys, Schuh, Lids, Johnston & Murphy and Licensed Brands. It operated 2,805 stores and leased departments at quarter-end. Results are unaudited.
Key financial results
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $660.6 million | $628.8 million | +5.1% |
| Comparable sales | +4% | Not stated here | — |
| Gross profit / margin | $326.3 million / 49.4% | $315.9 million / 50.2% | Profit +3.3%; margin down 0.8 percentage point |
| Selling and administrative expenses | $307.4 million / 46.5% of sales | $293.3 million / 46.6% of sales | Expense +4.8% |
| Operating earnings | $16.3 million | $23.7 million | Down $7.5 million |
| Continuing operations earnings | $9.9 million | $14.1 million | Down 29.5% |
| Net earnings / diluted EPS | $9.9 million / $0.42 | $14.0 million / $0.59 | Down 29.3% / $0.17 |
| Operating cash flow | $(0.5) million | $32.2 million | Down $32.7 million |
| Capital expenditures | $24.4 million | $19.8 million | Up $4.6 million |
Balance sheet and liquidity at May 2, 2015. Cash was $89.9 million, working capital $451.3 million, and total debt $27.8 million, all compared with $112.9 million, $441.7 million and $29.2 million, respectively, at January 31, 2015. The company had no borrowings under its U.S. revolving facility, $14.8 million of letters of credit outstanding and $385.2 million of excess availability. It reported $1.62 billion in total assets and $599.4 million in total liabilities.
Material changes and segment performance
- Journeys: Sales rose 6.3% to $278.6 million; operating earnings increased 24.1% to $24.4 million. Comparable sales grew 5%.
- Schuh: Sales declined 3.3% to $78.6 million, primarily reflecting a $9.3 million foreign-exchange impact. Operating loss narrowed to $2.7 million from $5.1 million; comparable sales increased 4%.
- Lids Sports Group: Sales increased 9.0% to $206.3 million, but the segment shifted from $8.1 million operating earnings to a $3.4 million operating loss. Promotional activity, lower gross margin, higher shipping and warehouse costs, and costs associated with store growth weighed on results.
- Johnston & Murphy: Sales rose 4.7% to $66.4 million, while operating earnings fell 11.5% to $4.0 million, reflecting markdowns, sales mix and higher occupancy and selling costs.
- Licensed Brands: Sales fell 5.8% to $30.6 million and operating earnings fell 14.1% to $3.0 million. Dockers sales were affected by limitations on sales to a particular customer, expected to continue during the year.
Gross margin pressure in Schuh, Lids and Johnston & Murphy offset gains in Journeys and Licensed Brands. The effective tax rate declined to 36.3% from 38.7%. The prior-year quarter included a $5.7 million expense from an EVA incentive-plan amendment; Schuh also had higher deferred purchase-price and contingent-bonus expenses. These items partly explain year-over-year segment comparisons.
Outlook, risks and unusual items
- Management said cash on hand, operating cash flow and credit-facility availability should be sufficient for fiscal 2016 working capital and capital needs. Planned fiscal 2016 capital expenditures are approximately $130 million, including about $109 million for retail and $21 million for wholesale and other purposes.
- The company expects approximately $72 million in Schuh earn-out, deferred purchase-price and other acquisition-related payments, and approximately $10.5 million in discontinued-operation costs during the next 12 months.
- Q1 operating cash flow was negative as inventory and other working-capital needs absorbed cash. Management attributed the year-over-year decline in operating cash flow mainly to inventory investment, Schuh-related payments and higher income-tax payments, partly offset by increased accounts payable.
- Q1 asset-impairment and other charges totaled $2.6 million, including $1.8 million for network-intrusion expenses, $0.8 million for retail-store impairments and $0.1 million for other legal matters. The prior-year quarter included a $3.2 million Lids lease-termination gain, partly offset by other charges.
- Environmental contingencies included a $14.1 million accrual. New York matters include a Village claim involving historical costs and asserted future remediation costs; the company disputes the Village’s long-term cost estimate. EPA separately demanded about $2.2 million for a former tannery site; environmental insurance applies subject to a $500,000 retention and policy terms. A new California employee action was filed; the company disputes the allegations. A separate California employee matter received final settlement approval in May 2015.
- Key stated risks include consumer demand and fashion trends, competition, Lids performance initiatives, inventory and margin management, supply and distribution disruptions, foreign exchange and input costs, information-technology disruptions, impairments, and litigation and environmental matters. Management reported effective disclosure controls and no material changes in internal control during the quarter.
- As a subsequent event, Schuh entered into amended financing arrangements in May 2015, including term facilities and additional revolving and working-capital facilities. The filing provides the terms but does not state that the new facilities were drawn.
Important facts for investors to verify
- Whether Lids’ sales growth and expanded store base can translate into restored operating profitability, and the costs and results of its performance initiatives.
- Whether inventory growth, markdowns and promotional activity pressure future gross margins or cash generation.
- The timing and funding of the projected Schuh-related payments and fiscal 2016 capital spending, alongside seasonal working-capital needs.
- Developments in environmental claims and the adequacy of the $14.1 million accrual, including the Gloversville demand and New York remediation process.
- How foreign-exchange movements affect Schuh and consolidated comparisons, and whether the planned Schuh refinancing changes borrowing costs or liquidity.