Genesco Inc: Form 10-Q for the period ended May 4, 2024

This section discusses management’s view of the financial condition, results of operations and cash flows of the Company. This section should be read in conjunction with the information contained in our Annual Report on Form 10-K for the fiscal year ended February 3, 2024, including the Risk Factors section, and information contained elsewhere in this Quarterly Report on Form 10-Q, including the Condensed Consolidated Financial Statements and notes to those financial statements. The results of operations for any interim period may not necessarily be indicative of the results that may be expected for any future interim period or the entire fiscal year.

Summary of Results of Operations

Our net sales decreased 5.3% to $457.6 million in the first quarter of Fiscal 2025 compared to $483.3 million in the first quarter of Fiscal 2024. The sales decrease compared to last year's first quarter was driven by a decline in store sales in all of our retail businesses, decreased wholesale sales primarily reflecting the repositioning of the Genesco Brands Group business to a more refined portfolio of licenses and the impact of net store closings, partially offset by a 3% increase in comparable e-commerce sales for the total Company and a $2.5 million favorable impact in sales due to changes in foreign exchange rates. Our sales for the first quarter of Fiscal 2025 included approximately $9.2 million due to moving a week of sales from the second quarter last year to the first quarter this year related to last year's 53-week calendar shift. The consumer environment remains choppy with consumers continuing to show a willingness to shop when there's a reason and shopping almost exclusively for key footwear items and brands. In addition, ongoing inflationary pressures continue to impact discretionary spending behavior. Journeys Group sales decreased 5%, Schuh Group sales decreased 1%, Johnston & Murphy Group sales decreased 4% and Genesco Brands Group sales decreased 25%, or an aggregate of $8.8 million for the first quarter of Fiscal 2025 compared to the first quarter of Fiscal 2024. Schuh's sales decreased 4% on a local currency basis for the first quarter of Fiscal 2025. Total comparable sales decreased 5% for the first quarter of Fiscal 2025, with same store sales down 7% and comparable e-commerce sales up 3%.

Gross margin decreased 5.5% to $216.3 million in the first quarter of Fiscal 2025 from $228.8 million in the first quarter of Fiscal 2024 and was flat as a percentage of net sales at 47.3% reflecting increased gross margin as a percentage of net sales in Journeys Group and Johnston & Murphy Group, partially offset by decreased gross margin as a percentage of net sales in Schuh Group and Genesco Brands Group. The flat gross margin as a percentage of net sales reflects lower markdowns at Journeys as a result of disciplined inventory management and a greater mix of direct-to-consumer sales, offset by decreased gross margin at Schuh reflecting product mix pressure and decreased gross margin at Genesco Brands reflecting a $1.6 million inventory provision for a distribution model transition.

Selling and administrative expenses in the first quarter of Fiscal 2025 decreased 1.5% to $247.8 million from $251.5 million compared to the first quarter of Fiscal 2024, reflecting the impact of our cost savings initiatives, including net store closures. Selling and administrative expenses increased as a percentage of net sales in the first quarter of Fiscal 2025 compared to the first quarter of Fiscal 2024 from 52.0% to 54.2%, reflecting increased expenses as a percentage of net sales in all of our operating business units except Genesco Brands Group. The overall increase in expenses as a percentage of net sales reflects the deleverage of expenses, especially occupancy expense, selling salaries, professional fees and depreciation expense, primarily as a result of decreased revenue in the first quarter of Fiscal 2025.

Operating margin was a loss of 7.0% in the first quarter of Fiscal 2025 compared to a loss of 4.8% in the first quarter of Fiscal 2024 reflecting decreased operating margin in all of our operating business units. The decrease in operating margin for the first quarter this year compared to the first quarter last year was impacted by decreased net sales and increased expenses as a percentage of net sales, while gross margin as a percentage of net sales remained flat.

The loss from continuing operations before income taxes (“pretax loss”) for the first quarter of Fiscal 2025 was $33.1 million compared to a pretax loss of $24.7 million for the first quarter of Fiscal 2024. The pretax loss for the first quarter of Fiscal 2025 included a $1.6 million charge for a distribution model transition in the Genesco Brands Group and asset impairment and other charges of $0.6 million for severance and asset impairments. The pretax loss for the first quarter of Fiscal 2024 included asset impairment and other charges of $0.3 million for asset impairments.

We had an effective income tax rate of 26.7% and 23.7% in the first quarter of Fiscal 2025 and Fiscal 2024, respectively. The higher tax rate for the first quarter this year compared to the first quarter last year reflects an increase in the applicable statutory tax rate in our U.K. jurisdiction from 24% to 25% and an increase in the amount of foreign losses for which we are unable to recognize a tax benefit.

The net loss in the first quarter of Fiscal 2025 was $24.3 million, or $2.23 diluted loss per share, compared to a net loss of $18.9 million, or $1.60 diluted loss per share, in the first quarter of Fiscal 2024.

Critical Accounting Estimates

We discuss our critical accounting estimates in Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations", in our Annual Report on Form 10-K for the fiscal year ended February 3, 2024. We describe our significant accounting policies in Note 1, "Summary of Significant Accounting Policies", of the Notes to Consolidated Financial Statements included in our Annual Report on

Form 10-K for the fiscal year ended February 3, 2024. There have been no other significant changes in our definition of significant accounting policies or critical accounting estimates since the end of Fiscal 2024.

Key Performance Indicators

In assessing the performance of our business, we consider a variety of performance and financial measures. The key performance indicators we use to evaluate the financial condition and operating performance of our business are comparable sales, net sales, gross margin, operating income and operating margin. These key performance indicators should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the U.S. GAAP financial measures presented herein. These measures may not be comparable to similarly titled performance indicators used by other companies.

Comparable Sales

We consider comparable sales to be an important indicator of our current performance, and investors may find it useful as such. Comparable sales results are important to achieve leveraging of our costs, including occupancy, selling salaries, depreciation, etc. Comparable sales also have a direct impact on our total net revenue, cash and working capital. We define "comparable sales" as sales from stores open longer than one year, beginning with the first day a store has comparable sales (which we refer to as "same store sales"), and sales from websites operated longer than one year and direct mail catalog sales (which we refer to in this report as "comparable e-commerce sales"). Temporarily closed stores are excluded from the comparable sales calculation if closed for more than seven days. Expanded stores are excluded from the comparable sales calculation until the first day an expanded store has comparable prior year sales. Current year foreign exchange rates are applied to both current year and prior year comparable sales to achieve a consistent basis for comparison.

Results of Operations – First Quarter of Fiscal 2025 Compared to First Quarter of Fiscal 2024

Journeys Group

(dollars in thousands)

Net sales from Journeys Group decreased 4.7% to $259.4 million in the first quarter of Fiscal 2025, compared to $272.2 million in the first quarter of Fiscal 2024, primarily due to a total comparable sales decrease of 5% driven by decreased store sales, partially offset by increased e-commerce sales, and a 6% decrease in the average number of stores in the first quarter this year. We've experienced pressure on Journeys' core product assortment including boots and vulcanized product. We believe the Journeys consumer continues to be pressured by inflation and has chosen to conserve discretionary spending and primarily shop for key footwear items and brands. We closed 17 Journeys Group stores in the first quarter of Fiscal 2025 and continue to evaluate up to 50 Journeys store closures in Fiscal 2025. Journeys Group operated 1,047 stores at the end of the first quarter of Fiscal 2025, including 221 Journeys Kidz stores, 39 Journeys stores in Canada and 31 Little Burgundy stores in Canada, compared to 1,115 stores at the end of the first quarter of last year, including 232 Journeys Kidz stores, 42 Journeys stores in Canada and 34 Little Burgundy stores in Canada.

Journeys Group had an operating loss of $18.8 million in the first quarter of Fiscal 2025 compared to an operating loss of $18.4 million in the first quarter of Fiscal 2024. The increase in the operating loss for Journeys Group was due to (i) decreased net sales and (ii) increased selling and administrative expenses as a percentage of net sales reflecting the deleverage of expenses, especially occupancy expense, depreciation expense and selling salaries as a result of the decreased revenue in the first quarter of Fiscal 2025. In absolute dollars, selling and administrative expenses decreased 3.1%, which demonstrates the impact of our cost savings initiatives and closing underperforming stores. Gross margin as a percentage of net sales increased for the first quarter of Fiscal 2025, reflecting lower markdowns as a result of disciplined inventory management, partially offset by decreased initial mark-ons driven by a shift in brand mix.

Schuh Group

(dollars in thousands)

Net sales from Schuh Group decreased 0.8% to $92.3 million in the first quarter of Fiscal 2025 compared to $93.1 million in the first quarter of Fiscal 2024, primarily due to decreased total comparable sales of 7% driven by decreased store sales and e-commerce sales, partially offset by a favorable impact of $2.5 million due to changes in foreign exchange rates. Schuh continued to contend with a challenging U.K. macro environment in the first quarter this year and unseasonable weather to start the spring selling season. In addition, Schuh Group sales in the first quarter of Fiscal 2025 compares against strong sales growth in the first quarters of Fiscal 2024 and Fiscal 2023. Just like the Journeys consumer, the U.K. consumer is more discriminating and key-item focused in their purchases. Schuh's e-commerce business remains a key channel for consumer engagement, accounting for approximately 40% of its sales in the first quarter of Fiscal 2025. Schuh's sales decreased 4% on a local currency basis for the first quarter of Fiscal 2025. Schuh Group operated 122 stores at the end of the first quarter of Fiscal 2025, compared to 123 stores at the end of the first quarter of Fiscal 2024.

Schuh Group had an operating loss of $5.9 million in the first quarter of Fiscal 2025 compared to an operating loss of $1.8 million in the first quarter of Fiscal 2024. The $4.1 million increase in operating loss compared to last year reflects (i) decreased net sales, (ii) decreased gross margin as a percentage of net sales reflecting a brand mix shift and (iii) increased selling and administrative expenses as a percentage of net sales, reflecting increased marketing, depreciation and compensation expenses. In addition, the operating loss included an unfavorable impact of $0.2 million due to changes in foreign exchange rates compared to last year.

Johnston & Murphy Group

(dollars in thousands)

Johnston & Murphy Group net sales decreased 4.1% to $79.2 million for the first quarter of Fiscal 2025 from $82.6 million for the first quarter of Fiscal 2024, primarily due to a 3% decrease in comparable sales, reflecting decreased store sales and e-commerce sales with the slower start to spring selling, and decreased wholesale sales as well as a 3% decrease in the average number of stores in the first quarter this year. In addition, Johnston & Murphy Group sales in the first quarter of Fiscal 2025 compares against strong sales growth in the first quarters of Fiscal 2024 and Fiscal 2023. Johnston & Murphy just launched its new marketing campaign, "Not Your Dad's Shoe Company" which continues to showcase the repositioning of the business to a more casual, modern lifestyle brand. The brand's apparel and accessories continued to resonate well with its consumers in the first quarter this year. Retail operations accounted for 74.0% of Johnston & Murphy Group's sales in the first quarter of Fiscal 2025, up from 72.9% in the first quarter of Fiscal 2024. The store count for Johnston & Murphy retail operations at the end of the first quarter of Fiscal 2025 was 152 stores, including five stores in Canada, compared to 158 stores, including six stores in Canada, at the end of the first quarter of Fiscal 2024.

Johnston & Murphy Group had operating income of $2.4 million for the first quarter of Fiscal 2025 compared to $4.8 million in the first quarter of Fiscal 2024. The decrease in operating income compared to last year reflects (i) decreased net sales and (ii) increased selling and administrative expenses as a percentage of net sales for the first quarter of Fiscal 2025, reflecting the deleverage of expenses, especially marketing expense, occupancy expense and selling salaries as a result of decreased revenue in the first quarter of Fiscal 2025, partially offset by decreased performance-based compensation. Gross margin as a percentage of net sales increased for the first quarter of Fiscal 2025, reflecting lower warehouse costs.

Genesco Brands Group

(dollars in thousands)

Genesco Brands' net sales decreased 24.9% to $26.6 million for the first quarter of Fiscal 2025 from $35.4 million for the first quarter of Fiscal 2024 due primarily to the repositioning of the business to a more refined portfolio of licenses, partially offset by increased sales of Dockers footwear.

Genesco Brands' operating loss was $1.0 million in the first quarter of Fiscal 2025 compared to essentially breakeven in the first quarter of Fiscal 2024. The increased operating loss was primarily due to (i) decreased net sales and (ii) decreased gross margin as a percentage of net sales reflecting a $1.6 million inventory provision for a distribution model transition, partially offset by a brand sales mix shift. Selling and administrative expenses decreased as a percentage of net sales in the first quarter of Fiscal 2025 reflecting decreased royalty expense, bad debt expense, warehouse costs and marketing expenses, partially offset by increased performance-based compensation expense and compensation expense.

Corporate, Interest Expenses and Other Charges

Corporate and other expense for the first quarter of Fiscal 2025 was $8.8 million compared to $7.6 million for the first quarter of Fiscal 2024. Corporate expense in the first quarter of Fiscal 2025 included a $0.6 million charge in asset impairment and other charges for severance and asset impairments. Corporate expense in the first quarter of Fiscal 2024 included a $0.3 million charge in asset impairment and other charges for asset impairments. The corporate expense increase, excluding asset impairment and other charges, primarily reflects an increase in professional fees in the first quarter this year compared to the first quarter last year.

Net interest expense decreased 46.1% to $0.9 million in the first quarter of Fiscal 2025 compared to $1.7 million in the first quarter of Fiscal 2024 primarily reflecting decreased average borrowings in the first quarter this year compared to the first quarter last year.

Liquidity and Capital Resources

Working Capital

Our business is seasonal, with our investment in working capital normally reaching peaks in the summer and fall of each year in anticipation of the back-to-school and holiday selling seasons. Historically, cash flows from operations typically have been generated principally in the fourth quarter of each fiscal year.

(in thousands)

Reasons for the major variances in cash provided by (used in) the table above are as follows:

Cash used in operating activities was $26.7 million lower in the first three months of Fiscal 2025 compared to the first three months of Fiscal 2024, reflecting primarily the following factors:

• a $16.9 million increase in cash flow from changes in accounts receivable, primarily reflecting decreased wholesale sales in the Genesco Brands Group; and
• a $9.9 million increase in cash flow from changes in prepaids and other current assets and a $9.9 million increase in cash flow from changes in other assets and liabilities, primarily reflecting changes in timing of rent payments in the first three months this year compared to the first three months last year; partially offset by
• a $6.2 million decrease in cash flow from changes in accounts payable, primarily reflecting changes in buying patterns in the first quarter of Fiscal 2025; and
• a $5.5 million decrease in net earnings.

Cash used in investing activities was $10.8 million lower for the first three months of Fiscal 2025 as compared to the first three months of Fiscal 2024 reflecting decreased capital expenditures primarily related to investments in retail stores and omni-channel capabilities.

Cash provided by financing activities was $37.5 million lower in the first three months of Fiscal 2025 as compared to the first three months of Fiscal 2024 reflecting decreased net borrowings partially offset by decreased share repurchases this year compared to the same period last year.

Sources of Liquidity and Future Capital Needs

We have three principal sources of liquidity: cash flow from operations, cash on hand and our credit facilities discussed in Item 8, Note 8, "Long-Term Debt", to our Consolidated Financial Statements included in our Annual Report on Form 10-K for Fiscal 2024.

As of May 4, 2024, we have borrowed $56.3 million U.S. revolver borrowings and $3.1 million (C$4.3 million) related to GCO Canada ULC. We were in compliance with all the relevant terms and conditions of the Credit Facility and the Facility Agreement as of May 4, 2024.

We believe that cash on hand, cash provided by operations and borrowings under our Credit Facility and the Facility Agreement will be sufficient to support our liquidity needs in Fiscal 2025 and the foreseeable future.

In the fourth quarter of Fiscal 2021, we implemented tax strategies allowed under the 5-year carryback provisions in the CARES Act which we believe will generate approximately $55 million of net tax refunds. We received approximately $26 million of such net tax refunds in Fiscal 2022 and anticipated receipt of the remaining outstanding net tax refund in Fiscal 2023. However, in the third quarter of Fiscal 2023, we were notified the IRS would conduct an audit of the periods related to the outstanding net tax refund. While we do not believe any uncertainty with the technical merits of the positions generating the net tax refunds exists, we do anticipate the timing of the net tax refund will be extended as a result of the audit process. Accordingly, we have recorded the outstanding refund to non-current prepaid income taxes on the Condensed Consolidated Balance Sheets as of May 4, 2024.

Contractual Obligations

Our contractual obligations at May 4, 2024 increased 1% compared to February 3, 2024, primarily due to increased long-term debt, partially offset by decreased lease obligations and purchase obligations.

Capital Expenditures

Total capital expenditures in Fiscal 2025 are expected to be approximately $52 million to $57 million of which approximately 61% is for new stores and remodels and 39% is for computer hardware, software and warehouse enhancements for initiatives to drive traffic and omni-channel capabilities. We do not currently have any longer-term capital expenditures or other cash requirements other than as set forth above and in the contractual obligations table as disclosed in Item 7 of our Fiscal 2024 Form 10-K. We also do not currently have any off-balance sheet arrangements.

Common Stock Repurchases

We did not repurchase any shares during the first quarter of Fiscal 2025. We have $52.1 million remaining as of May 4, 2024 under our expanded share repurchase authorization announced in June 2023. We repurchased 255,000 shares during the first quarter of Fiscal 2024 at a cost of $9.2 million, or $35.96 per share. During the second quarter of Fiscal 2025, through June 12, 2024, we have repurchased 7,700 shares at a cost of $0.2 million, or $24.90 per share.

Environmental and Other Contingencies

We are subject to certain loss contingencies related to environmental proceedings and other legal matters, including those disclosed in Item 1, Note 7, "Legal Proceedings", to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

New Accounting Pronouncements

Descriptions of recently issued accounting pronouncements, if any, and the accounting pronouncements adopted by us during the first quarter of Fiscal 2025 are included in Note 1 to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

We incorporate by reference the information regarding market risk appearing in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Financial Market Risk” in our Annual Report on Form 10-K for the fiscal year ended February 3, 2024. There have been no material changes to our exposure to market risks from those disclosed in the Form 10-K.

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures designed to ensure that information required to be disclosed by us, including our consolidated subsidiaries, in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is made known to the officers who certify our financial reports and to other members of senior management. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving desired objectives.

Based on their evaluation as of May 4, 2024, the principal executive officer and principal financial officer of the Company have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within time periods specified in SEC rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our first quarter of Fiscal 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

You should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in the Annual Report on Form 10-K for the fiscal year ended February 3, 2024, which could materially affect our business, financial condition or future results. The risks described in this report, and in our Annual Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.