Business Context and Reporting Period
Company: Genesco Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 4, 2002 (First Quarter of Fiscal 2003)
Business Overview: Genesco manufactures, sources, markets, and distributes footwear, primarily under the Johnston & Murphy and Dockers brands. The company operates approximately 940 retail stores (including Journeys, Journeys Kidz, Jarman, Underground Station, and Johnston & Murphy) and leased departments. The company ended its Nautica footwear license in January 2001 and is in the process of closing its remaining manufacturing plant.
Key Financial Metrics
| Metric (in thousands) | Q1 2003 (Ended May 4, 2002) | Q1 2002 (Ended May 5, 2001) |
|---|---|---|
| Net Sales | $190,593 | $171,662 |
| Gross Margin | $90,148 | $81,841 |
| Gross Margin % | 47.3% | 47.7% |
| Operating Income | $14,922 | $14,885 |
| Net Earnings | $8,202 | $8,338 |
| Diluted EPS | $0.33 | $0.34 |
| Cash from Operations | $14,381 | $(24,504) |
| Cash and Equivalents (End of Period) | $44,266 | $34,133 |
| Long-Term Debt | $103,245 | $103,500 |
| Working Capital | $152,254 | $155,885 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 11.0% year-over-year, driven primarily by a 13.8% increase in the Journeys segment (due to a 25% increase in average store count) and a 32.4% increase in the Jarman segment (driven by comparable store sales and store count growth).
- Profitability: Despite revenue growth, Net Earnings decreased slightly by 1.6% ($8.2M vs $8.3M). Operating income remained relatively flat ($14.9M vs $14.9M) as higher sales were offset by increased selling and administrative expenses (up 12.4%) and lower gross margin percentages due to increased markdowns.
- Cash Flow Improvement: Cash provided by operating activities improved significantly to $14.4M from a use of $24.5M in the prior year. This $38.9M swing was primarily due to tighter inventory control (reducing inventory growth by $12.1M) and increased accounts payable.
- Capital Expenditures: Capital expenditures increased to $17.4M from $6.4M, largely due to retail store openings and construction of a new distribution center.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Restructuring: The company is closing its Johnston & Murphy manufacturing plant (expected Q3 Fiscal 2003) and reducing headquarters staff by 40 positions. A pretax charge of $5.4M was recorded in the prior fiscal year for this initiative.
- Capital Needs: Total capital expenditures for Fiscal 2003 are expected to be approximately $43.1M, including $25.2M for retail expansion (approx. 148 new stores/renovations) and $13.9M for a new distribution center. Management expects cash on hand and operations to fund these needs.
- Dividends and Buybacks: The company has $24.6M available for common stock payments. It has repurchased 6.7M shares since 1999 but made no repurchases in Q1 2003. Approximately 501,100 shares remain under current buyback authorization.
Risks and Contingencies
- Environmental Litigation: The company is involved in environmental proceedings in New York and Michigan. A settlement of $3.35M was paid in Q1 2003 regarding the Whitehall, Michigan site. The company believes it has adequately reserved for known liabilities but notes uncertainty regarding future remediation costs.
- Market Risks: The company hedges foreign currency exposure (Euro) with forward contracts ($13.5M outstanding). A 10% adverse change in exchange rates would decrease fair value by approximately $0.7M. Interest rate risk is low as long-term debt is fixed-rate.
- Customer Concentration: Two customers accounted for 24% of trade receivables as of May 4, 2002.
Investor Verification Checklist
- Inventory Levels: Verify the sustainability of the improved cash flow from operations, which was heavily driven by a reduction in inventory growth compared to the prior year.
- Restructuring Costs: Monitor the execution of the Johnston & Murphy plant closure and the associated $5.4M charge impact on future quarters.
- Capital Expenditure Execution: Track the completion of the new distribution center and the opening of ~90 Journeys stores to ensure they align with the $43.1M budget.
- Environmental Reserves: Review future filings for updates on the New York and Michigan environmental proceedings to ensure reserves remain adequate.
- Margin Pressure: Assess whether the trend of increased markdowns and lower gross margin percentages (47.3% vs 47.7%) persists in subsequent quarters.