Genesco Inc. — Q3 FY2024 Form 10-Q
Reporting period: Quarter ended October 28, 2023; fiscal year ending February 3, 2024 is a 53-week year. Financial statements are unaudited. Amounts below are in U.S. dollars unless noted.
Business context and key financial results
Genesco designs, sources, markets and distributes footwear and accessories through retail, e-commerce and wholesale channels. Its four reportable segments are Journeys, Schuh, Johnston & Murphy, and Genesco Brands. It operated 1,360 stores at quarter-end.
| Metric | Q3 FY2024 | Q3 FY2023 | Nine months FY2024 | Nine months FY2023 |
|---|---|---|---|---|
| Net sales | $579.3M | $603.8M | $1,585.7M | $1,659.9M |
| Gross margin | $278.4M; 48.1% | $293.8M; 48.7% | $756.8M; 47.7% | $799.6M; 48.2% |
| Operating income (loss) | $10.9M | $26.1M | $(50.8)M | $43.4M |
| Continuing operations earnings (loss) | $6.6M | $20.4M | $(43.9)M | $33.0M |
| Net earnings (loss) | $6.5M; diluted EPS $0.60 | $20.4M; diluted EPS $1.65 | $(44.0)M; diluted EPS $(3.88) | $33.0M; diluted EPS $2.56 |
| Net interest expense | $2.2M | $0.9M | $6.2M | $1.6M |
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $(23.5)M, investing cash flow $(49.7)M and financing cash flow $47.2M; cash decreased $26.3M to $21.7M.
- Capital expenditures were $49.7M for the nine months. Inventory was $516.7M at October 28, up from $458.0M at fiscal year-end; the company described the seasonal build ahead of holiday sales.
- Revolver debt totaled $128.2M, compared with $44.9M at January 28, 2023. Cash less reported debt was a net debt position of approximately $106.5M. Excess availability under the U.S. Credit Facility was $203.4M; the company reported compliance with relevant credit terms.
- Operating lease liabilities totaled $522.2M, including current and long-term portions. The company expects cash on hand, operating cash flow and credit facilities to meet liquidity needs in FY2024 and the foreseeable future.
Material changes and management commentary
- Q3 sales declined 4.1%; comparable sales fell 4%, with same-store sales down 7% and comparable direct sales up 8%. E-commerce comparables rose 8%. For the nine months, sales declined 4.5% and comparable sales fell 4%.
- Q3 segment sales: Journeys decreased 8%, Schuh increased 13% (5% in local currency), Johnston & Murphy increased 2%, and Genesco Brands decreased 22%. Journeys’ Q3 operating income fell to $12.0M from $27.1M. Nine-month Journeys reported an operating loss of $21.3M, while Schuh and Johnston & Murphy operating income improved.
- Management cited weaker Journeys store demand, inflation and economic uncertainty affecting discretionary spending, promotional activity, warmer October weather delaying fall selling, and ERP implementation disruption at branded businesses. Companywide Q3 comparable e-commerce sales growth partly offset weaker stores and wholesale.
- Gross margin and operating margin weakened: Q3 operating margin was 1.9% versus 4.3% a year earlier. Management attributed pressure to lower sales, Journeys promotions, higher shipping and warehouse costs, and expense deleverage; some offsets included Schuh distribution efficiencies and improved Genesco Brands product mix and pricing.
Outlook, unusual items, risks and contingencies
- A $28.5M non-cash goodwill impairment was recorded in Q2 against the Togast reporting unit within Genesco Brands Group. It followed impairment indicators tied to an unresolved licensor renewal dispute; valuation forecasts excluded cash flows from the disputed license after the current contract term. Genesco Brands goodwill was reduced to zero.
- Management expects FY2024 capital expenditures of approximately $55M–$60M, about 57% for new stores and remodels and 43% for technology and warehouse enhancements. It expects significant cost savings in FY2024 and FY2025, with a significant portion expected from Journeys.
- Approximately 75 of 100 planned Journeys store closures had been completed by quarter-end; the remainder were targeted for completion by fiscal year-end. Management is also reviewing costs and seeking to make occupancy costs more variable.
- An estimated $55M of net tax refunds was expected under CARES Act carryback provisions; about $26M had been received. The IRS is auditing periods related to the remaining refund, delaying expected receipt. The outstanding amount is recorded as non-current prepaid income taxes; timing remains uncertain.
- Samsung-owned inventory under a Genesco Brands commitment had historical cost of $14.4M. Genesco stated it had appropriately accounted for any difference between fair value and Samsung’s cost; the commitment could require payment if products sell below cost.
- Environmental contingency accruals were $1.6M at quarter-end. Management did not expect obligations at the identified legacy sites to materially affect consolidated results, but noted legal proceedings carry inherent uncertainty.
- Key disclosed risks include consumer and retail weakness, fashion and promotional trends, supplier and shipping disruption, inflation and labor costs, foreign exchange, license renewal, ERP/IT disruption, store execution, and litigation. The filing reports disclosure controls were effective; wholesale inventory controls were updated following implementation of a new inventory system.
Important facts for investors to verify
- Progress and financial effects of the Journeys closures, cost-saving program, and efforts to improve Journeys comparable sales and margins.
- Status and renewal outcome of the disputed Genesco Brands license, including any effect on sales, cash flows, or further asset impairment.
- Holiday-period demand, inventory levels and markdown exposure, especially after the seasonal inventory build and warmer-weather sales delay.
- Timing and ultimate amount of the outstanding IRS refund, plus revolver borrowings, interest expense and facility availability.
- Whether the ERP-related disruption and higher shipping, warehouse and operating costs persist, and whether projected capital spending and savings are achieved.