UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended October 29, 2022
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to
Commission File No. 1-3083
Genesco Inc.
(Exact name of registrant as specified in its charter)
Tennessee
62-0211340
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
535 Marriott Drive
37214
Nashville,
(Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (615) 367-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1.00 par value
GCO
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer; an accelerated filer; a non-accelerated filer; a smaller reporting company; or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒
As of November 25, 2022, there were 12,609,875 shares of the registrant's common stock outstanding.
INDEX
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - October 29, 2022, January 29, 2022 and October 30, 2021
4
Condensed Consolidated Statements of Operations - Three and Nine Months ended October 29, 2022 and October 30, 2021
5
Condensed Consolidated Statements of Comprehensive Income - Three and Nine Months ended October 29, 2022 and October 30, 2021
6
Condensed Consolidated Statements of Cash Flows - Nine Months ended October 29, 2022 and October 30, 2021
7
Condensed Consolidated Statements of Equity - Three and Nine Months ended October 29, 2022 and October 30, 2021
8
Notes to Condensed Consolidated Financial Statements
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
18
Item 3. Quantitative and Qualitative Disclosures about Market Risk
26
Item 4. Controls and Procedures
Part II. Other Information
27
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
28
Signature
29
2
cautionary notice regarding forward-looking statements
Statements in this Quarterly Report on Form 10-Q include certain forward-looking statements, which include statements regarding our intent, belief or expectations and all statements other than those made solely with respect to historical fact. Actual results could differ materially from those reflected by the forward-looking statements in this Quarterly Report on Form 10-Q and a number of factors may adversely affect the forward-looking statements and our future results, liquidity, capital resources or prospects. These include, but are not limited to, risks related to public health and safety issues, including, for example, risks related to COVID-19; disruptions to our business, sales, supply chain and financial results; the level of consumer spending on our merchandise and interest in our brands and in general, the level and timing of promotional activity necessary to maintain inventories at appropriate levels; our ability to pass on price increases to our customers; the timing and amount of any share repurchases by us; risks related to doing business internationally, including the manufacturing of a portion of our products in China; the imposition of tariffs on products imported by us or our vendors as well as the ability and costs to move production of products in response to tariffs; our ability to obtain from suppliers products that are in-demand on a timely basis and effectively manage disruptions in product supply or distribution; unfavorable trends in fuel costs, foreign exchange rates, foreign labor and material costs; a disruption in shipping or increase in cost of our imported products, and other factors affecting the cost of products; our dependence on third-party vendors and licensors for the products we sell; the effects of the withdrawal of the United Kingdom ("U.K.") from the European Union ("Brexit"), impacts of the Russia-Ukraine war, and other sources of market weakness in the U.K. and the Republic of Ireland (the “ROI”); the effectiveness of our omnichannel initiatives; costs associated with changes in minimum wage and overtime requirements; wage pressure in the U.S. and the U.K.; labor shortages; the effects of inflation, including our ability to pass increased cost on to consumers; effects resulting from wars and other military operations; the evolving regulatory landscape related to our use of social media; the establishment and protection of our intellectual property; weakness in the consumer economy and retail industry; competition and fashion trends in our markets, including trends with respect to the popularity of casual and dress footwear; weakness in shopping mall traffic; any failure to increase sales at our existing stores, given our high fixed expense cost structure, and in our e-commerce businesses; risks related to the potential for terrorist events; changes in buying patterns by significant wholesale customers; changes in consumer preferences; our ability to continue to complete and integrate acquisitions; our ability to expand our business and diversify our product base; impairment of goodwill in connection with acquisitions; payment related risks that could increase our operating cost, expose us to fraud or theft, subject us to potential liability and disrupt our business; retained liabilities associated with divestitures of businesses including potential liabilities under leases as the prior tenant or as a guarantor of certain leases; and changes in the timing of holidays or in the onset of seasonal weather affecting period-to-period sales comparisons. Additional factors that could cause differences from expectations include our ability to open additional retail stores, renew leases in existing stores, control or lower occupancy costs, to conduct required remodeling or refurbishment on schedule and at expected expense levels; realize anticipated cost savings, including rent savings; realize any anticipated tax benefits in both the amount and timeframe anticipated, and achieve expected digital gains and gain market share; deterioration in the performance of individual businesses or of our market value relative to our book value, resulting in impairments of fixed assets, operating lease right of use assets or intangible assets or other adverse financial consequences and the timing and amount of such impairments or other consequences; unexpected changes to the market for our shares or for the retail sector in general; our ability to meet our sustainability, stewardship, emission and diversity, equity and inclusion related ESG projections, goals and commitments; costs and reputational harm as a result of disruptions in our business or information technology systems either by security breaches and incidents or by potential problems associated with the implementation of new or upgraded systems, and the cost and outcome of litigation, investigations and environmental matters that involve us. For a full discussion of risk factors, see Item 1A, "Risk Factors".
Readers are cautioned not to place undue reliance on forward-looking statements as such statements speak only as of the date they were made and involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements. The most important factors which could cause our actual results to differ from our forward-looking statements are set forth in our description of risk factors in Item 1A contained in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022, which should be read in conjunction with the forward-looking statements in this Quarterly Report on Form 10-Q. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement.
The events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. As a result, our actual results may differ materially from the results contemplated by these forward-looking statements.
We maintain a website at www.genesco.com where investors and other interested parties may obtain, free of charge, press releases and other information as well as gain access to our periodic filings with the Securities and Exchange Commission (“SEC”). The information contained on this website should not be considered to be a part of this or any other report filed with or furnished to the SEC.
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Genesco Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
Assets
October 29, 2022
January 29, 2022
October 30, 2021
Current Assets:
Cash
$
32,113
320,525
282,764
Accounts receivable, net of allowances of $5,910 at October 29, 2022,
$4,656 at January 29, 2022 and $4,947 at October 30, 2021
48,670
39,509
36,991
Inventories
563,490
278,200
339,198
Prepaids and other current assets
37,575
71,564
85,476
Total current assets
681,848
709,798
744,429
Property and equipment, net
221,207
216,308
207,489
Operating lease right of use assets
483,403
543,789
573,842
Non-current prepaid income taxes
52,319
—
Goodwill
37,903
38,556
38,864
Other intangibles
26,208
29,855
30,592
Deferred income taxes
12,168
1,466
Other noncurrent assets
21,937
22,327
21,593
Total Assets
1,536,993
1,562,099
1,616,809
Liabilities and Equity
Current Liabilities:
Accounts payable
223,404
152,484
196,024
Current portion - long-term debt
3,484
Current portion - operating lease liabilities
136,294
145,088
144,453
Other accrued liabilities
82,193
134,156
133,569
Total current liabilities
445,375
431,728
474,046
Long-term debt
85,904
15,679
15,610
Long-term operating lease liabilities
413,096
471,878
490,330
Other long-term liabilities
33,275
40,346
44,399
Total liabilities
977,650
959,631
1,024,385
Commitments and contingent liabilities
Equity
Non-redeemable preferred stock
817
827
Common equity:
Common stock, $1 par value:
Authorized: 80,000,000 shares
Issued common stock
13,101
14,256
15,071
Additional paid-in capital
301,692
291,444
288,813
Retained earnings
307,921
350,206
339,447
Accumulated other comprehensive loss
(46,331
)
(36,408
(33,877
Treasury shares, at cost (488,464 shares)
(17,857
Total equity
559,343
602,468
592,424
Total Liabilities and Equity
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
Three Months Ended
Nine Months Ended
Net sales
603,788
600,546
1,659,868
1,694,424
Cost of sales
309,981
305,345
860,303
869,039
Gross margin
293,807
295,201
799,565
825,385
Selling and administrative expenses
267,734
251,131
756,318
743,147
Asset impairments and other, net
314
(154
10,054
Operating income
26,073
43,756
43,401
72,184
Other components of net periodic benefit cost
50
55
198
72
Interest expense, net
906
585
1,608
1,931
Earnings from continuing operations before income taxes
25,117
43,116
41,595
70,181
Income tax expense
4,693
10,135
8,551
17,432
Earnings from continuing operations
20,424
32,981
33,044
52,749
Loss from discontinued operations, net of tax
(48
(86
(78
(39
Net Earnings
20,376
32,895
32,966
52,710
Basic earnings per common share:
Continuing operations
1.68
2.30
2.61
3.69
Discontinued operations
(0.01
Net earnings
3.68
Diluted earnings per common share:
1.66
2.26
2.56
3.60
1.65
2.25
Weighted average shares outstanding:
Basic
12,138
14,314
12,637
14,313
Diluted
12,326
14,616
12,901
14,643
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
Other comprehensive income (loss):
Postretirement liability adjustments, net of tax
13
21
76
(2
Foreign currency translation adjustments
(4,420
(470
(9,999
1,184
Total other comprehensive income (loss)
(4,407
(449
(9,923
1,182
Comprehensive Income
15,969
32,446
23,043
53,892
Condensed Consolidated Statements of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation and amortization
31,901
32,258
(10,728
(11,101
Impairment of long-lived assets
542
2,049
Share-based compensation expense
10,464
6,476
Other
999
1,103
Changes in working capital and other assets and liabilities, net of acquisitions/dispositions:
Accounts receivable
(10,224
(5,458
(293,904
(48,131
33,133
44,711
70,312
46,314
(45,194
53,515
Other assets and liabilities
(64,237
(22,332
Net cash provided by (used in) operating activities
(243,970
152,114
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
(39,845
(34,507
Proceeds from asset sales
12
74
Net cash used in investing activities
(34,421
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility
212,086
25,279
Payments on revolving credit facility
(136,375
(42,935
Shares repurchased related to share repurchase plan
(77,470
(28,474
Shares repurchased related to taxes for share-based awards
(3,942
(4,076
Change in overdraft balances
4,052
(459
(35
Net cash used in financing activities
(1,647
(50,700
Effect of foreign exchange rate fluctuations on cash
(2,950
680
Net increase (decrease) in cash
(288,412
67,673
Cash at beginning of period
215,091
Cash at end of period
Supplemental information:
Interest paid
1,276
1,714
Income taxes paid (refunded)
33,941
(20,916
Cash paid for amounts included in measurement of operating lease liabilities
135,116
152,240
Operating lease assets obtained in exchange for new operating lease liabilities
71,598
68,773
Condensed Consolidated Statements of Equity
Non-RedeemablePreferredStock
CommonStock
AdditionalPaid-InCapital
RetainedEarnings
AccumulatedOtherComprehensiveLoss
TreasuryShares
TotalEquity
Balance January 30, 2021
1,009
15,438
282,308
320,920
(35,059
566,759
8,878
Other comprehensive income
1,458
1,912
(181
176
1
Balance May 1, 2021
828
15,444
284,396
329,798
(33,601
579,008
10,937
173
2,055
Restricted stock issuance
219
(219
Restricted shares withheld for taxes
(64
64
Balance July 31, 2021
15,597
286,298
336,659
(33,428
588,097
2,509
Shares repurchased
(522
(30,107
(30,629
Other comprehensive loss
(1
(4
Balance October 30, 2021
Balance January 29, 2022
4,947
(3,817
3,239
78
(104
(6,396
(6,500
(9
(13
23
Balance April 30, 2022
818
14,217
294,628
348,757
(40,225
600,338
7,643
(1,699
3,549
239
(239
(826
(44,596
(45,422
(72
(3,875
Balance July 30, 2022
13,557
298,010
307,929
(41,924
560,533
3,676
(67
(451
(20,317
(20,768
(3
Balance October 29, 2022
9
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 1
Summary of Significant Accounting Policies
Basis of Presentation
The Condensed Consolidated Financial Statements and Notes contained in this report are unaudited but reflect all adjustments, including normal recurring adjustments, necessary for a fair presentation of the results for the interim periods of the fiscal year ending January 28, 2023 ("Fiscal 2023") and of the fiscal year ended January 29, 2022 ("Fiscal 2022"). All subsidiaries are consolidated in the Condensed Consolidated Financial Statements. All significant intercompany transactions and accounts have been eliminated. The results of operations for any interim period are not necessarily indicative of results for the full year. The Condensed Consolidated Financial Statements and the related Notes have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. The Condensed Consolidated Balance Sheet as of January 29, 2022 has been derived from the audited financial statements at that date. These Condensed Consolidated Financial Statements should be read in conjunction with our Consolidated Financial Statements and Notes for Fiscal 2022, which are contained in our Annual Report on Form 10-K as filed with the SEC on March 23, 2022.
Nature of Operations
Genesco Inc. and its subsidiaries (collectively the "Company", "Genesco," "we", "our", or "us") business includes the sourcing and design, marketing and distribution of footwear and accessories through retail stores in the U.S., Puerto Rico and Canada primarily under the Journeys®, Journeys Kidz®, Little Burgundy® and Johnston & Murphy® banners and under the Schuh® banner in the United Kingdom (“U.K.”) and the Republic of Ireland (“ROI”); through catalogs and e-commerce websites including the following: journeys.com, journeyskidz.com, journeys.ca, littleburgundyshoes.com, schuh.co.uk, schuh.ie, schuh.eu, johnstonmurphy.com, johnstonmurphy.ca, nashvilleshoewarehouse.com and dockersshoes.com and at wholesale, primarily under our Johnston & Murphy brand, the licensed Levi's® brand, the licensed Dockers® brand, the licensed G.H. Bass® brand and other brands that we license for footwear. At October 29, 2022, we operated 1,404 retail stores in the U.S., Puerto Rico, Canada, the U.K. and the ROI.
During the three and nine months ended October 29, 2022 and October 30, 2021, we operated four reportable business segments (not including corporate): (i) Journeys Group, comprised of the Journeys, Journeys Kidz and Little Burgundy retail footwear chains and e-commerce operations; (ii) Schuh Group, comprised of the Schuh retail footwear chain and e-commerce operations; (iii) Johnston & Murphy Group, comprised of Johnston & Murphy retail operations, e-commerce operations and wholesale distribution of products under the Johnston & Murphy brand; and (iv) Licensed Brands, comprised of the licensed Dockers, Levi's, and G.H. Bass brands, as well as other brands we license for footwear.
Selling and Administrative Expenses
Wholesale costs of distribution are included in selling and administrative expenses on the Condensed Consolidated Statements of Operations in the amount of $3.7 million and $2.7 million for the third quarters of Fiscal 2023 and Fiscal 2022, respectively, and $9.5 million and $9.9 million for the first nine months of Fiscal 2023 and Fiscal 2022, respectively.
Retail occupancy costs recorded in selling and administrative expense were $77.5 million and $75.0 million for the third quarters of Fiscal 2023 and Fiscal 2022, respectively, and $231.8 million and $220.9 million for the first nine months of Fiscal 2023 and Fiscal 2022, respectively. Fiscal 2022 included COVID-related rent credits and government property tax relief.
Advertising Costs
Advertising costs were $31.3 million and $27.0 million for the third quarters of Fiscal 2023 and Fiscal 2022, respectively, and $81.4 million and $71.6 million for the first nine months of Fiscal 2023 and Fiscal 2022, respectively.
Vendor Allowances
Vendor reimbursements of cooperative advertising costs recognized as a reduction of selling and administrative expenses were $5.0 million and $2.3 million for the third quarters of Fiscal 2023 and Fiscal 2022, respectively, and $11.7 million and $7.7 million for the first nine months of Fiscal 2023 and Fiscal 2022, respectively. During the first nine months of each of Fiscal 2023 and Fiscal 2022, our cooperative advertising reimbursements received were not in excess of the costs incurred.
Summary of Significant Accounting Policies, Continued
Income Taxes
In the fourth quarter of Fiscal 2021, we implemented tax strategies allowed under the 5-year carryback provisions in the CARES Act which we believed would 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 adjusted the presentation of the outstanding refund to non-current prepaid income taxes on the Condensed Consolidated Balance Sheets for Fiscal 2023.
COVID-19 Pandemic
The COVID-19 pandemic has created significant public health concerns as well as economic disruption, uncertainty, and volatility which may negatively affect our business operations. As a result, if the pandemic persists or worsens, our accounting estimates and assumptions could be impacted in subsequent interim reports and upon final determination at year-end, and it is reasonably possible such changes could be significant.
New Accounting Pronouncements
We do not currently have any new accounting pronouncements pending adoption.
Note 2
Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill by segment were as follows:
JourneysGroup
LicensedBrandsGroup
TotalGoodwill
Balance, January 29, 2022
10,087
28,469
Effect of foreign currency exchange rates
(637
(16
(653
Balance, October 29, 2022
9,450
28,453
Other intangibles by major classes were as follows:
Trademarks
Customer Lists
Total
Oct. 29, 2022
Jan. 29,2022
Gross other intangibles
22,713
25,935
6,393
6,586
400
29,506
32,921
Accumulated amortization
(2,898
(2,666
(400
(3,298
(3,066
Net Other Intangibles
3,495
3,920
11
Note 3
Asset Impairments and Other Charges
Asset impairment and other charges for the first nine months ended October 29, 2022 are not considered material.
We recorded pretax charges of $0.3 million in the third quarter of Fiscal 2022, including $0.1 million for professional fees related to actions of an activist shareholder and $0.2 for retail store asset impairments. We recorded charges of $10.1 million in the first nine months of Fiscal 2022, including $8.6 million for professional fees related to actions of an activist shareholder and $2.0 million for retail store asset impairments, partially offset by a $0.6 million insurance gain.
Note 4
Wholesale finished goods
71,425
28,432
Retail merchandise
492,065
249,768
Total Inventories
Note 5
Fair Value
Fair Value of Financial Instruments
The carrying amounts and fair values of our financial instruments at October 29, 2022 and January 29, 2022 are as follows:
Fair Values
CarryingAmount
FairValue
U.S. Revolver Borrowings
85,716
U.K. Revolver Borrowings
3,413
Debt fair values were determined using a discounted cash flow analysis based on current market interest rates for similar types of financial instruments and would be classified in Level 2 within the fair value hierarchy.
As of October 29, 2022, we have $10.5 million of investments held and used which were measured using Level 1 inputs within the fair value hierarchy.
Note 6
Earnings Per Share
Weighted-average number of shares used to calculate earnings per share are as follows:
(Shares in thousands)
Weighted-average number of shares - basic
Common stock equivalents
188
302
264
330
Weighted-average number of shares - diluted
We repurchased 451,343 shares during the third quarter of Fiscal 2023 at a cost of $20.8 million, or $46.01 per share and repurchased 1,380,272 shares during the first nine months of Fiscal 2023 at a cost of $72.7 million, or $52.66 per share. We accrued $4.8 million of share repurchases in the fourth quarter of Fiscal 2022 due to timing of the cash settlement which are included on the Condensed Consolidated Statements of Cash Flows for the nine months ended October 29, 2022. We have $34.1 million remaining as of October 29, 2022 under our expanded share repurchase authorization announced in February 2022. We repurchased 521,693 shares during the third quarter and first nine months of Fiscal 2022 at a cost of $30.6 million, or $58.71 per share. We accrued $2.1 million for share repurchases as of October 30, 2021. During the fourth quarter of Fiscal 2023, through December 7, 2022, we have not repurchased any shares.
Note 7
Long-Term Debt
U.S. revolver borrowings
U.K. revolver borrowings
Total long-term debt
89,388
Current portion
Total Noncurrent Portion of Long-Term Debt
The revolver borrowings outstanding under the Credit Facility as of October 29, 2022 included $72.2 million U.S. revolver borrowings and $13.7 million (£11.8 million) related to Genesco (UK) Limited. In addition, revolver borrowings outstanding under Schuh's Facility Letter were $3.5 million (£3.0 million). We were in compliance with all the relevant terms and conditions of the Credit Facility and Facility Letter as of October 29, 2022. Excess availability under the Credit Facility was $237.0 million at October 29, 2022.
On November 2, 2022, Schuh entered into a facility agreement (the "Facility Agreement") with Lloyds Bank PLC ("Lloyds") for a £19.0 million revolving credit facility. The Facility Agreement expires November 2, 2025, with options to request two one-year extensions to this termination date subject to lender approval, and bears interest at 2.35% over the Bank of England Base Rate. This Facility Agreement replaces Schuh's Facility Letter that would have expired in October 2023. The Facility Agreement includes certain financial covenants specific to Schuh. Following certain customary events of default outlined in the Facility Agreement, payment of outstanding amounts due may be accelerated or the commitments may be terminated. The Facility Agreement is secured by charges over all of the assets of Schuh, and Schuh's subsidiary, Schuh (ROI) Limited. Pursuant to a Guarantee in favor of Lloyds in its capacity as security trustee, Genesco Inc. has guaranteed the obligations of Schuh under the Facility Agreement and certain existing ancillary facilities on an unsecured basis.
Note 8
Legal Proceedings
Environmental Matters
The Company has legacy obligations including environmental monitoring and reporting costs related to: (i) a 2016 Consent Judgment entered into with the United States Environmental Protection Agency involving the site of a knitting mill operated by a former subsidiary of ours from 1965 to 1969 in Garden City, New York; and (ii) a 2010 Consent Decree with the Michigan Department of Natural Resources and Environment relating to our former Volunteer Leather Company facility in Whitehall, Michigan. We do not expect that future obligations related to either of these sites will have a material effect on our consolidated financial condition or results of operations.
Accrual for Environmental Contingencies
Related to all outstanding environmental contingencies, we had accrued $1.4 million as of each of October 29, 2022, January 29, 2022 and October 30, 2021. All such provisions reflect our estimates of the most likely cost (undiscounted, including both current and noncurrent portions) of resolving the contingencies, based on facts and circumstances as of the time they were made. There is no assurance that relevant facts and circumstances will not change, necessitating future changes to the provisions. Such contingent liabilities are included in the liability arising from provision for discontinued operations on the accompanying Condensed Consolidated Balance Sheets because they relate to former facilities operated by us. We have made pretax accruals for certain of these contingencies which were not material for the first nine months of Fiscal 2023 or Fiscal 2022. These charges are included in loss from discontinued operations, net in the Condensed Consolidated Statements of Operations and represent changes in estimates.
In addition to the matters specifically described in this Note, we are a party to other legal and regulatory proceedings and claims arising in the ordinary course of our business. While management does not believe that our liability with respect to any of these other matters is likely to have a material effect on our condensed consolidated financial statements, legal proceedings are subject to inherent uncertainties, and unfavorable rulings could have a material adverse impact on our condensed consolidated financial statements.
Note 9
Commitments
As part of our Licensed Brands business, we have a commitment to Samsung C&T America, Inc. (“Samsung”) related to the ultimate sale and valuation of inventories owned by Samsung. If product is sold below Samsung’s cost, we are required to pay to Samsung the difference between the sales price and its cost. At October 29, 2022, the inventory owned by Samsung had a historical cost of $19.8 million. As of October 29, 2022, we believe that we have appropriately accounted for any differences between the fair value of the Samsung inventory and Samsung's historical cost.
14
Note 10
Business Segment Information
Three Months Ended October 29, 2022
SchuhGroup
Johnston& MurphyGroup
LicensedBrands
Corporate& Other
Consolidated
Sales
380,619
104,809
79,614
40,661
605,703
Intercompany sales
(1,915
Net sales to external customers
38,746
Operating income (loss)
27,083
5,912
3,494
(1,927
(8,489
(50
(906
Earnings (loss) from continuing operations before income taxes
(9,445
Total assets (1)
841,021
206,996
193,039
72,586
223,351
6,849
1,485
1,092
214
1,032
10,672
4,638
2,405
1,719
370
1,708
10,840
(1) Of our $704.6 million of long-lived assets, $89.3 million and $18.5 million relate to long-lived assets in the U.K. and Canada, respectively.
Three Months Ended October 30, 2021
379,927
119,791
66,835
34,154
600,707
(161
33,993
Segment operating income (loss)
43,403
9,701
1,641
(132
(10,543
44,070
Asset impairments and other (1)
(314
(10,857
(55
(585
(11,497
Total assets (2)
760,370
229,347
131,378
53,310
442,404
7,160
1,675
1,148
266
375
10,624
4,645
718
1,104
270
8,225
14,962
(1) Asset impairments and other includes a $0.1 million charge for professional fees related to the actions of an activist shareholder and a $0.2 million charge for retail store asset impairments, which includes $0.2 million in Journeys Group.
(2) Of our $781.3 million of long-lived assets, $120.3 million and $29.1 million relate to long-lived assets in the U.K. and Canada, respectively.
15
Business Segment Information, Continued
Nine Months Ended October 29, 2022
1,016,396
294,486
225,448
126,442
1,662,772
(2,904
Net sales to external customers(1)
123,538
51,235
5,260
7,256
2,551
(23,055
43,247
Asset impairments and other(2)
154
(22,901
(198
(1,608
(24,707
21,060
4,607
3,271
692
2,271
15,539
6,278
5,528
1,033
11,467
39,845
(1) Net sales in North America and in the United Kingdom, which includes the Republic of Ireland, accounted for 82% and 18%, respectively, of our net sales for the nine months ended October 29, 2022.
(2) Asset impairments and other includes a $0.5 million charge for asset impairments, which includes $0.2 million in Journeys Group, $0.2 million in Schuh Group and $0.1 million in Licensed Brands, partially offset by a $0.7 million gain on the termination of the pension plan.
Nine Months Ended October 30, 2021
1,102,750
294,581
176,756
120,952
1,695,039
(615
120,337
106,895
9,477
2,412
3,420
(39,966
82,238
(10,054
(50,020
Interest expense
(1,931
(52,023
21,549
5,356
3,460
820
1,073
18,418
1,945
3,666
750
9,728
34,507
16
(1) Net sales in North America and in the United Kingdom, which includes the Republic of Ireland, accounted for 83% and 17%, respectively, of our net sales for the nine months ended October 30, 2021.
(2) Asset impairments and other includes an $8.6 million charge for professional fees related to the actions of an activist shareholder and a $2.0 million charge for retail store asset impairments, which includes $1.0 million in Journeys Group, $0.8 million in Schuh Group and $0.2 million in the Johnston & Murphy Group, partially offset by a $0.6 million insurance gain.
17
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 January 29, 2022, 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 increased 1% to $603.8 million for the third quarter of Fiscal 2023 compared to $600.5 million for the third quarter of Fiscal 2022. The sales increase was driven by increased wholesale sales and a total comparable sales increase of 3%, partially offset by the unfavorable impact of $21.1 million in sales due primarily to foreign exchange pressure on the Schuh business from the strengthening dollar. Johnston & Murphy Group sales increased 19% and Licensed Brands sales increased 14%, while Journeys Group sales were flat and Schuh Group sales decreased 13% for the third quarter of Fiscal 2023 compared to the third quarter of Fiscal 2022. Without the impact of foreign exchange, Schuh's sales increased 4% on a local currency basis for the third quarter of Fiscal 2023.
Gross margin as a percentage of net sales decreased to 48.7% during the third quarter of Fiscal 2023, compared to 49.2% for the third quarter of Fiscal 2022. This reflects decreased gross margin as a percentage of net sales in all of our operating business units due primarily to a more normalized promotional environment for all retail divisions, except Johnston & Murphy where a decrease in inventory reserves last year as the brand began to recover from the pandemic make a difficult comparison this year, and increased freight expense as well as better than anticipated loyalty program sign-ups at Schuh as new members used their sign-up incentives, which should provide long-term growth. Altogether, freight and logistics costs put approximately $3.3 million of pressure on total gross margin comparison of the third quarter of Fiscal 2023 to the third quarter of Fiscal 2022.
Selling and administrative expenses as a percentage of net sales increased to 44.3% of net sales during the third quarter of Fiscal 2023 from 41.8% for the third quarter of Fiscal 2022, reflecting increased expenses as a percentage of net sales at Journeys Group, Schuh Group and Licensed Brands, partially offset by decreased expenses as a percentage of net sales at Johnston & Murphy Group. The overall increase in expenses as a percentage of net sales is due in large part to one-time benefits for rent credits and government relief in the third quarter last year. Excluding these one-time benefits last year, deleverage in marketing expenses, compensation expense and selling salaries more than offset leverage from decreased occupancy and performance-based compensation expenses.
Operating margin was 4.3% for the third quarter of Fiscal 2023 compared to 7.3% in the third quarter of Fiscal 2022, reflecting decreased operating margin in all our operating business units, except Johnston & Murphy Group. The decrease in operating margin for the third quarter this year compared to the third quarter last year was driven by decreased gross margin as a percentage of net sales, reflecting the more normalized promotional environment and increased freight expense, and increased expenses as a percentage of net sales, reflecting the one-time benefits for rent credits and government relief in the prior year.
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 January 29, 2022. 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 January 29, 2022. There have been no other significant changes in our definition of significant accounting policies or critical accounting estimates since the end of Fiscal 2022.
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 direct 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. We have disclosed comparable sales for the second and third quarters of Fiscal 2023 but did not disclose comparable sales for the first quarter and first nine months of Fiscal 2023 due to the impact of the COVID-19 pandemic and related extensive store closures during the first quarter of Fiscal 2022. We believe that overall sales is a more meaningful metric during the first quarter and first nine months of Fiscal 2023.
Results of Operations – Third Quarter of Fiscal 2023 Compared to Third Quarter of Fiscal 2022
Gross margin decreased 0.5% to $293.8 million in the third quarter of Fiscal 2023 from $295.2 million in the third quarter of Fiscal 2022 and decreased as a percentage of net sales from 49.2% to 48.7%. This reflects decreased gross margin as a percentage of net sales in all of our operating business units due primarily to a more normalized promotional environment for all retail divisions, except Johnston & Murphy where a decrease in inventory reserves last year as the brand began to recover from the pandemic make a difficult comparison this year, and increased freight expense, as well as better than anticipated loyalty program sign-ups at Schuh as new members used their sign-up incentives, which should provide long-term growth. Altogether, freight and logistics costs put approximately $3.3 million of pressure on total gross margin comparison of the third quarter of Fiscal 2023 to the third quarter of Fiscal 2022.
Selling and administrative expenses in the third quarter of Fiscal 2023 increased 6.6% and increased as a percentage of net sales from 41.8% to 44.3%, reflecting increased expenses as a percentage of net sales at Journeys Group, Schuh Group and Licensed Brands, partially offset by decreased expenses as a percentage of net sales at Johnston & Murphy Group. The overall increase in expenses as a percentage of net sales is due in large part to one-time benefits for rent credits and government relief in the third quarter last year. Excluding these one-time benefits last year, deleverage in marketing expenses, compensation expense and selling salaries more than offset leverage from decreased occupancy and performance-based compensation expenses. Explanations of the changes in results of operations are provided by business segment in discussions following these introductory paragraphs.
Earnings from continuing operations before income taxes (“pretax earnings”) for the third quarter of Fiscal 2023 were $25.1 million compared to $43.1 million for the third quarter of Fiscal 2022. Pretax earnings for the third quarter of Fiscal 2022 included asset impairments and other charges of $0.3 million for professional fees related to the actions of an activist shareholder and retail store asset impairments.
We recorded an effective income tax rate of 18.7% and 23.5% in the third quarter of Fiscal 2023 and Fiscal 2022, respectively. The lower tax rate for the third quarter this year compared to the third quarter last year reflects a reduction in the effective tax rate that we expect for jurisdictions in which we are profitable.
Net earnings for the third quarter of Fiscal 2023 were $20.4 million, or $1.65 diluted earnings per share compared to $32.9 million, or $2.25 diluted earnings per share, for the third quarter of Fiscal 2022.
Journeys Group
%Change
(dollars in thousands)
0.2
%
(37.6
)%
Operating margin
7.1
11.4
19
Net sales from Journeys Group increased 0.2% to $380.6 million for the third quarter of Fiscal 2023, compared to $379.9 million for the third quarter of Fiscal 2022 primarily due to a total comparable sales increase of 1% driven by increased e-commerce sales, while the average number of stores decreased 1% for the third quarter this year. Journeys Group operated 1,123 stores at the end of the third quarter of Fiscal 2023, including 230 Journeys Kidz stores, 45 Journeys stores in Canada and 35 Little Burgundy stores in Canada, compared to 1,137 stores at the end of the third quarter of last year, including 229 Journeys Kidz stores, 47 Journeys stores in Canada and 37 Little Burgundy stores in Canada.
Journeys Group had operating income of $27.1 million for the third quarter of Fiscal 2023 compared to $43.4 million for the third quarter of Fiscal 2022. The decrease of 37.6% in operating income for Journeys Group was due to (i) decreased gross margin as a percentage of net sales reflecting increased markdowns with a return to a more normalized promotional environment and (ii) increased selling and administrative expenses as a percentage of net sales reflecting the deleverage of expenses, especially marketing and selling salaries as sales were effectively flat for the third quarter this year compared to the third quarter last year, as well as one-time benefits for rent credits in the third quarter last year.
Schuh Group
(12.5
(39.1
5.6
8.1
Net sales from Schuh Group decreased 12.5% to $104.8 million for the third quarter of Fiscal 2023 compared to $119.8 million for the third quarter of Fiscal 2022, primarily due to an unfavorable impact of $19.7 million due to changes in foreign exchange rates, partially offset by increased total comparable sales of 3% driven by increased comparable store sales. Without the impact of foreign exchange, Schuh's sales increased 4% on a local currency basis for the third quarter of Fiscal 2023. Schuh Group operated 122 stores at the end of the third quarter of Fiscal 2023, compared to 123 stores at the end of the third quarter of Fiscal 2022.
Schuh Group had operating income of $5.9 million for the third quarter of Fiscal 2023 compared to $9.7 million for the third quarter of Fiscal 2022. The 39.1% decrease in operating income for Schuh Group reflects (i) decreased gross margin as a percentage of net sales reflecting a return to a more normalized promotional environment and better than anticipated loyalty program sign-ups as new members used their sign-up incentives, which should provide long-term growth and (ii) increased selling and administrative expenses as a percentage of net sales for the third quarter of Fiscal 2023 compared to the third quarter of Fiscal 2022, reflecting more normalized operating expenses due to the one-time benefits for rent credits and government property tax relief and other government relief related to the COVID-19 pandemic in the U.K. in the third quarter last year. Excluding these one-time benefits last year, decreased occupancy and marketing expenses more than offset deleverage in selling salaries and professional fees. In addition, operating income included an unfavorable impact of $1.1 million due to changes in foreign exchange rates compared to last year.
Johnston & Murphy Group
19.1
112.9
4.4
2.5
Johnston & Murphy Group net sales increased 19.1% to $79.6 million for the third quarter of Fiscal 2023 from $66.8 million for the third quarter of Fiscal 2022, primarily due to a 20% increase in comparable sales and increased wholesale sales. Johnston & Murphy has repositioned its brand to offer more casual and comfortable footwear and apparel in this post-pandemic environment, which in addition to recovery from the pandemic, has fueled top line growth. Retail operations accounted for 72.9% of Johnston & Murphy Group's sales in the third quarter of Fiscal 2023, down from 75.4% in the third quarter of Fiscal 2022. The store count for Johnston & Murphy retail operations at the end of the third quarter of Fiscal 2023 was 159 stores, including six stores in Canada, compared to 174 stores, including eight stores in Canada, at the end of the third quarter of Fiscal 2022.
20
Johnston & Murphy Group operating income of $3.5 million for the third quarter of Fiscal 2023 increased 112.9% compared to $1.6 million in the third quarter of Fiscal 2022. The increase was primarily due to (i) increased net sales and (ii) decreased selling and administrative expenses due to greater leverage of expenses as a result of revenue growth, partially offset by increased marketing expense. Gross margin decreased as a percentage of net sales as increased freight and logistics costs as well as a difficult comparison to last year with the decrease in inventory reserves as the brand began to recover from the pandemic, more than offset otherwise increased gross margin.
Licensed Brands
14.0
Operating loss
NM
(5.0
(0.4
Licensed Brands' net sales increased 14.0% to $38.7 million for the third quarter of Fiscal 2023 from $34.0 million for the third quarter of Fiscal 2022 primarily reflecting an increase in sales of Dockers footwear.
Licensed Brands' operating loss was $1.9 million for the third quarter of Fiscal 2023 compared to a loss of $0.1 million in the third quarter of Fiscal 2022. The increase in operating loss was primarily due to (i) decreased gross margin as a percentage of net sales driven by increased freight and logistics costs more than offsetting a favorable sales mix and (ii) increased selling and administrative expenses as a percentage of net sales reflecting deleverage of expenses as a result of the change in sales mix, partially offset by decreased performance-based compensation expense.
Corporate, Interest Expenses and Other Charges
Corporate and other expense for the third quarter of Fiscal 2023 was $8.5 million compared to $10.9 million for the third quarter of Fiscal 2022. Corporate expense in the third quarter of Fiscal 2022 included a $0.3 million charge in asset impairment and other charges for professional fees related to the actions of an activist shareholder and retail store asset impairments. The corporate expense decrease, excluding asset impairment and other charges, primarily reflected decreased performance-based compensation expense.
Net interest expense increased 54.9% to $0.9 million for the third quarter of Fiscal 2023 compared to net interest expense of $0.6 million for the third quarter of Fiscal 2022 primarily reflecting increased average borrowings in the third quarter this year along with increased interest rates this year.
Results of Operations – Nine Months of Fiscal 2023 Compared to Nine Months of Fiscal 2022
Our net sales in the first nine months of Fiscal 2023 decreased 2.0% to $1.660 billion compared to $1.694 billion in the first nine months of Fiscal 2022. The sales decrease was driven by an unfavorable impact of $41.5 million in sales due primarily to foreign exchange pressure on the Schuh business from the strengthening dollar and decreased comparable direct sales, partially offset by increased sales in the wholesale channel.
Gross margin decreased 3.1% to $799.6 million in the first nine months of Fiscal 2023 from $825.4 million in the first nine months of Fiscal 2022 and decreased as a percentage of net sales from 48.7% to 48.2%, reflecting decreased gross margin as a percentage of net sales in Journeys Group, Johnston & Murphy Group and Licensed Brands, partially offset by increased gross margin as a percentage of net sales in Schuh Group. The overall decrease in gross margin as a percentage of net sales is primarily due to increased markdowns in our Journeys business and increased freight and logistics costs as well as the decrease in inventory reserves in the Johnston & Murphy business last year making for difficult comparisons this year, partially offset by lower shipping and warehouse expense as a result of lower e-commerce penetration. Altogether, freight and logistics costs put approximately $14.7 million of pressure on total gross margin comparison of the first nine months of Fiscal 2023 to the first nine months of Fiscal 2022.
Selling and administrative expenses in the first nine months of Fiscal 2023 increased 1.8% and increased as a percentage of net sales from 43.9% to 45.6%, reflecting increased expenses as a percentage of net sales at Journeys Group, Schuh Group and Licensed Brands, partially offset by decreased expenses as a percentage of net sales at Johnston & Murphy Group. The overall increase in expenses as a percentage of net sales is due to more normalized occupancy expense as a result of the one-time benefits for rent credits and government tax relief related to the COVID-19 pandemic in the U.K. in the first nine months last year, as well as increased selling salaries and compensation and marketing expenses, partially offset by decreased performance-based compensation expense. Explanations of the changes in results of operations are provided by business segment in discussions following these introductory paragraphs.
Pretax earnings for the first nine months of Fiscal 2023 were $41.6 million compared to $70.2 million for the first nine months of Fiscal 2022. Pretax earnings for the first nine months of Fiscal 2023 included an asset impairment and other gain of $0.2 million for a gain on the termination of the pension plan, partially offset by asset impairments. Pretax earnings for the first nine months of Fiscal 2022 included asset impairments and other charges of $10.1 million for professional fees related to the actions of an activist shareholder and retail store asset impairments, partially offset by an insurance gain.
We recorded an effective income tax rate of 20.6% and 24.8% in the first nine months of Fiscal 2023 and Fiscal 2022, respectively. The tax rate for the first nine months of Fiscal 2023 is lower than Fiscal 2022, reflecting a reduction in the effective tax rate we expect for jurisdictions in which we are profitable combined with the impact of foreign activity for which we have historically been unable to recognize a tax benefit.
Net earnings for the first nine months of Fiscal 2023 were $33.0 million, or $2.56 diluted earnings per share compared to $52.7 million, or $3.60 diluted earnings per share, for the first nine months of Fiscal 2022.
(7.8
(52.1
5.0
9.7
Net sales from Journeys Group decreased 7.8% to $1.0 billion for the first nine months of Fiscal 2023, compared to $1.1 billion for the first nine months of Fiscal 2022, primarily due to decreased store sales and decreased digital comparable sales. We believe the Journeys consumer benefitted most from the government stimulus in the first nine months of Fiscal 2022 and is currently more affected by the U.S. macro-economic environment than customers of our other North American businesses.
Journeys Group had operating income of $51.2 million for the first nine months of Fiscal 2023 compared to $106.9 million for the first nine months of Fiscal 2022. The decrease of 52.1% in operating income for Journeys Group was due to (i) decreased net sales, (ii) decreased gross margin as a percentage of net sales reflecting increased markdowns with a return to a more normalized promotional environment and lower initial mark-ons, partially offset by lower shipping and warehouse expense and (iii) increased selling and administrative expenses as a percentage of net sales reflecting the deleverage of expenses, especially selling salaries, occupancy and marketing expenses as a result of decreased revenue in the first nine months this year, partially offset by decreased performance-based compensation expense.
(0.0
(44.5
1.8
3.2
Net sales from Schuh Group were effectively flat at $294.5 million for the first nine months of Fiscal 2023 compared to $294.6 million for the first nine months of Fiscal 2022. Store sales increased as Schuh stores were only open 73% of possible days in the first nine months of Fiscal 2022 versus 100% of possible days in the first nine months of Fiscal 2023, offset by an unfavorable impact of $38.7 million due to changes in foreign exchange rates and decreased digital comparable sales. Schuh stores benefitted from pent up demand as the U.K. economy further re-opened this year and more people resumed normal pre-pandemic activities.
Schuh Group had operating income of $5.3 million for the first nine months of Fiscal 2023 compared to $9.5 million for the first nine months of Fiscal 2022. The decrease of 44.5% in operating income for Schuh Group reflects increased selling and administrative expenses as a percentage of net sales for the first nine months of Fiscal 2023 compared to the first nine months of Fiscal 2022, reflecting more normalized operating expenses due to the one-time benefits for rent credits and government property tax relief and other government relief related to the COVID-19 pandemic in the U.K. in the first nine months last year. Excluding these one-time benefits last year, decreased occupancy, marketing and performance-based compensation expenses more than offset the deleverage in selling salaries. In addition, operating income included an unfavorable impact of $1.3 million due to changes in foreign exchange rates compared to last year. Gross margin increased as a percentage of net sales, reflecting decreased shipping and warehouse expense driven by lower e-commerce penetration.
22
27.5
200.8
1.4
Johnston & Murphy Group net sales increased 27.5% to $225.4 million for the first nine months of Fiscal 2023 from $176.8 million for the first nine months of Fiscal 2022, primarily due to increased wholesale sales, store sales and e-commerce sales. Johnston & Murphy has repositioned its brand to offer more casual and comfortable footwear and apparel in this post-pandemic environment, which in addition to recovery from the pandemic, has fueled top line growth. Retail operations accounted for 73.0% of Johnston & Murphy Group's sales in the first nine months of Fiscal 2023, down from 77.1% in the first nine months of Fiscal 2022.
Johnston & Murphy Group operating income increased to $7.3 million for the first nine months of Fiscal 2023 compared to $2.4 million in the first nine months of Fiscal 2022. The increase of 200.8% was primarily due to (i) increased net sales and (ii) decreased selling and administrative expenses as a percentage of net sales due to greater leverage of expenses as a result of revenue growth, especially occupancy expense, selling salaries and compensation, partially offset by increased marketing expense. Gross margin as a percentage of net sales decreased for the first nine months of Fiscal 2023 compared to the first nine months of Fiscal 2022 reflecting increased freight and logistic costs and the channel mix of more wholesale sales as well as a difficult comparison to last year with the decrease in inventory reserves last year as the brand began to recover from the pandemic, partially offset by price increases and decreased retail markdowns.
2.7
(25.4
2.1
2.8
Licensed Brands' net sales increased 2.7% to $123.5 million for the first nine months of Fiscal 2023, from $120.3 million for the first nine months of Fiscal 2022 primarily reflecting an increase in sales of private label and Dockers footwear, partially offset by repositioning the distribution of the mix of the Levi's brand to rely less on the value channel.
Licensed Brands' operating income was $2.6 million for the first nine months of Fiscal 2023 compared to $3.4 million in the first nine months of Fiscal 2022. The 25.4% decrease in operating income was primarily due to (i) a decrease in gross margin as a percentage of net sales due to increased freight and logistics costs partially offset by favorable changes in sales mix and (ii) increased selling and administrative expenses as a percentage of net sales reflecting deleverage of expenses as a result of changes in sales mix, partially offset by decreased shipping and warehouse and performance-based compensation expenses.
Corporate and other expense for the first nine months of Fiscal 2023 was $22.9 million compared to $50.0 million for the first nine months of Fiscal 2022. Corporate expense in the first nine months of Fiscal 2023 included a gain of $0.2 million in asset impairment and other charges from a gain on the termination of the pension plan, partially offset by asset impairments. Corporate expense in the first nine months of Fiscal 2022 included a $10.1 million charge in asset impairment and other charges for professional fees related to the actions of an activist shareholder and retail store asset impairments, partially offset by an insurance gain. The corporate expense decrease, excluding asset impairment and other charges, primarily reflected decreased performance-based compensation expense.
Net interest expense decreased to $1.6 million for the first nine months of Fiscal 2023 compared to net interest expense of $1.9 million for the first nine months of Fiscal 2022.
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.
Cash flow changes:
Increase(Decrease)
(in thousands)
(396,084
(5,424
49,053
(3,630
Net increase (decrease) in cash and cash equivalents
(356,085
Reasons for the major variances in cash used in the table above are as follows:
Cash used in operating activities was $396.1 million higher for the first nine months of Fiscal 2023 compared to the first nine months of Fiscal 2022, reflecting primarily the following factors:
Cash used in investing activities was $5.4 million higher for the first nine months of Fiscal 2023 as compared to the first nine months of Fiscal 2022 reflecting increased capital expenditures primarily related to investments in retail stores, partially offset by decreased capital expenditures for digital and omnichannel initiatives.
Cash used in financing activities was $49.1 million lower for the first nine months of Fiscal 2023 as compared to the first nine months of Fiscal 2022 reflecting increased borrowings this year compared to the same period last year, partially offset by share repurchases and the payment of Fiscal 2022 share repurchase accruals of $77.5 million in the first nine months of Fiscal 2023 compared to share repurchases of $28.5 million in the first nine months of Fiscal 2022.
Sources of Liquidity and Future Capital Needs
We have three principal sources of liquidity: cash flow from operations, cash and cash equivalents on hand and our credit facilities discussed in Item 8, Note 9, "Long-Term Debt", to our Consolidated Financial Statements included in our Annual Report on Form 10-K for Fiscal 2022.
As of October 29, 2022, we have borrowed $85.9 million under our Credit Facility, which includes $72.2 million in U.S. revolver borrowings and $13.7 million (£11.8 million) in Genesco (UK) Limited. In addition, we borrowed $3.5 million (£3.0 million) under our Schuh Facility Letter. We were in compliance with all the relevant terms and conditions of the Credit Facility and Facility Letter as of October 29, 2022.
On November 2, 2022, Schuh entered into a facility agreement (the "Facility Agreement") with Lloyds Bank PLC ("Lloyds") for a £19.0 million revolving credit facility. The Facility Agreement expires November 2, 2025, with options to request two one-year extensions to this termination date subject to lender approval, and bears interest at 2.35% over the Bank of England Base Rate. This Facility Agreement replaces Schuh's Facility Letter that would have expired in October 2023.
24
We believe that cash on hand, cash provided by operations and borrowings under our amended Credit Facility and the new Schuh Facility Agreement will be sufficient to support our liquidity needs in Fiscal 2023 and the foreseeable future.
During the remainder of Fiscal 2023, we expect our primary cash requirements to be directed towards funding operating activities. We expect our end of year cash balance to return to a more normalized level. While the timing and amount of any common stock repurchases will depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions, we will also consider returning cash to our shareholders through opportunistic share repurchases pursuant to our repurchase authorization described in more detail below.
Contractual Obligations
Our contractual obligations at October 29, 2022 decreased 11% compared to January 29, 2022, primarily due to decreased operating lease obligations, partially offset by increased long-term debt and purchase obligations.
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 2022 Form 10-K. We also do not currently have any off-balance sheet arrangements.
Capital Expenditures
Total capital expenditures in Fiscal 2023 are expected to be approximately $50 million to $55 million of which approximately 54% is for new stores and remodels and 46% is for computer hardware, software and warehouse enhancements for initiatives to drive traffic and omni-channel capabilities. Planned capital expenditures excludes approximately $11 million, or $9 million net of tenant allowances, for the new corporate headquarters building. In January of Fiscal 2022, as part of our continuing efforts to optimize our distribution center footprint, we sold a distribution warehouse for $20 million.
Common Stock Repurchases
We repurchased 451,343 shares during the third quarter of Fiscal 2023 at a cost of $20.8 million, or $46.01 per share and repurchased 1,380,272 shares during the first nine months of Fiscal 2023 at a cost of $72.7 million, or $52.66 per share. There were $4.8 million share repurchases accrued in the fourth quarter of Fiscal 2022 included on the Condensed Consolidated Statements of Cash Flows for the nine months ended October 29, 2022. We have $34.1 million remaining as of October 29, 2022 under our expanded share repurchase authorization announced in February 2022. We repurchased 521,693 shares during the third quarter and first nine months of Fiscal 2022 at a cost of $30.6 million, or $58.71 per share. During the fourth quarter of Fiscal 2023, through December 7, 2022, we have not repurchased any shares.
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 8, "Legal Proceedings", to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Descriptions of recently issued accounting pronouncements, if any, and the accounting pronouncements adopted by us during the third quarter of Fiscal 2023 are included in Note 1 to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
25
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 January 29, 2022. 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 October 29, 2022, 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 third quarter of Fiscal 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
We incorporate by reference the information regarding legal proceedings in Item 1, Note 8, “Legal Proceedings”, to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
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 January 29, 2022, and in the Quarterly Report on Form 10-Q for the quarter ended October 29, 2022 (the “Quarterly Report”), which could materially affect our business, financial condition or future results. The risks described in this report, in our Annual Report and the Quarterly 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.
Repurchases (shown in thousands except share and per share amounts):
ISSUER PURCHASES OF EQUITY SECURITIES
Period
(a) TotalNumber ofSharesPurchased
(b) AveragePricePaidper Share
(c) TotalNumber ofSharesPurchased as Partof PubliclyAnnouncedPlans orPrograms
(d) MaximumNumber(or ApproximateDollar Value)of Shares thatMay Yet BePurchasedUnder thePlans orPrograms
August 2022
7-31-22 to 8-27-22
54,904
September 2022
8-28-22 to 9-24-22(1)
431,343
46.24
34,961
October 2022
9-25-22 to 10-29-22 (1)
20,000
41.20
34,137
9-25-22 to 10-29-22 (2)
1,518
41.79
452,861
46.00
451,343
(1) Share repurchases were made pursuant to a $100.0 million share repurchase program approved by the Board of Directors in September 2019. In February 2022, the Board of Directors approved an additional $100.0 million be added to the prior authorization. We expect to implement the balance of the repurchase program through purchases made from time to time either in the open market or through private transactions, in accordance with the regulations of the SEC and other applicable legal requirements.
(2) These shares represent shares withheld from vested restricted stock to satisfy the minimum withholding requirement for federal and state taxes.
Exhibit Index
(3.1)
Second Amended and Restated Bylaws of Genesco Inc. Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed November 1, 2022 (file No. 1-3083)
(3.2)
Second Amended and Restated Bylaws of Genesco Inc., redlined for amendments effective October 27, 2022. Incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed November 1, 2022 (file No. 1-3083)
(3.3)
Restated Charter of Genesco Inc., as amended.
(3.4)
Restated Charter of Genesco Inc., as amended, redlined for amendments effective June 23, 2022.
(31.1)
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2)
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1)
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(32.2)
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document (The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.)
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
By:
/s/ Thomas A. George
Thomas A. George
Senior Vice President - Finance and
Chief Financial Officer
Date: December 8, 2022