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OFFON

GENESCO INC.

(GCO)
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GENESCO : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

06/10/2021 | 10:28am EDT

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 30, 2021, 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 92.9% to $538.7 million for the first quarter of Fiscal 2022 compared to $279.2 million for the first quarter of Fiscal 2021. This sales increase was driven by increased store sales resulting from the reopening of stores that were closed in the back half of the first quarter of Fiscal 2021 due to the COVID-19 pandemic, digital comparable growth of 43% and increased wholesale sales. Stores were open approximately 90% of possible days in the first quarter of Fiscal 2022 as compared to 50% in the first quarter of Fiscal 2021. We have not disclosed comparable sales for the first quarter of Fiscal 2022, as we believe that overall sales is a more meaningful metric during this period due to the impact of the COVID-19 pandemic. See below, under the heading "Comparable Sales", for our definition of comparable sales.

Journeys Group sales increased 123%, Schuh Group sales increased 46%, Johnston & Murphy Group sales increased 26% and Licensed Brands sales increased 84% during the first quarter of Fiscal 2022 compared to the same quarter of Fiscal 2021. Gross margin as a percentage of net sales increased to 47.8% during the first quarter of Fiscal 2022, compared to 43.0% for the first quarter last year. This reflects increased gross margin as a percentage of net sales in all of our business units primarily due to fewer markdowns at Journeys Group, lower shipping and warehouse expense, a higher mix of full price product at Schuh Group and the mix of our businesses. The lower shipping and warehouse expense in the first quarter this year is a result of reduced e-commerce penetration in Fiscal 2022 as well as the ability to leverage fixed warehouse expenses as a result of higher revenue. Selling and administrative expenses as a percentage of net sales decreased to 44.5% of net sales during the first quarter of Fiscal 2022 from 67.7% for the first quarter of Fiscal 2021, reflecting decreased expenses as a percentage of net sales in all of our operating business units. The decrease in expenses this year was primarily due to greater leverage of fixed expenses as a result of the significant increase in revenue as well as reduced occupancy expense, partially offset by increased performance based compensation expense. The reduction in occupancy expense is driven in part by rent abatement agreements with landlords and government relief programs and rent reductions. Operating margin was 2.9% for the first quarter of Fiscal 2022 compared to (55.9)% in the first quarter of Fiscal 2021, reflecting increased operating margin in all of our operating business units as a result of the increased gross margin as a percentage of net sales and decreased expenses as a percentage of net sales.


Significant Developments

COVID-19 Update

In March 2020, the World Health Organization categorized the outbreak of COVID-19 as a pandemic. As a result, and in consideration of the health and well-being of our employees, customers and communities, and in support of efforts to contain the spread of the virus, we have taken several precautionary measures and adjusted our operational needs, including:



  • On March 18, 2020, we temporarily closed our North American retail stores.


   •  On March 19, 2020, we borrowed $150.0 million under our Credit Facility as a
      precautionary measure to ensure funds were available to meet our obligations
      for a substantial period of time in response to the COVID-19 pandemic that
      caused public health officials to recommend precautions that would mitigate
      the spread of the virus, including "stay-at-home" orders and similar
      mandates and warning the public against congregating in heavily populated
      areas such as malls and shopping centers.  We paid down the $150.0 million
      on September 10, 2020.


   •  On March 19, 2020, Schuh entered into an Amendment and Restatement Agreement
      (the "U.K. A&R Agreement") with Lloyds Bank which amended and restated the
      Amendment and Restatement Agreement dated April 26, 2017. The U.K. A&R
      Agreement included only a Facility C revolving credit agreement of £19.0
      million, bore interest at LIBOR plus 2.2% per annum and expired in September
      2020. In March 2020, we borrowed £19.0 million as a precautionary measure in
      response to the COVID-19 pandemic. The U.K. A&R Agreement was replaced with
      the Facility Letter in October 2020 and the outstanding borrowings in the
      amount of £19.0 million were repaid.


  • On March 23, 2020, we temporarily closed our stores in the U.K. and the ROI.


   •  On March 26, 2020, we temporarily closed our U.K. e-commerce business.
      Effective April 3, 2020, our U.K.-based Schuh business announced that it had
      reopened its e-commerce operations in compliance with government health and
      safety practices.


   •  On March 27, 2020, we announced that we were adjusting our operational
      needs, including a significant reduction of expense, capital and planned
      inventory receipts. As part of these measures, we made the decision to
      temporarily reduce compensation for the executive team and select employees
      and reduced the cash compensation for our Board of Directors. In addition,
      we furloughed all of our full-time store employees in North America and our
      store and distribution center employees in the U.K. We also furloughed
      employees and reduced headcount in our corporate offices, call centers and
      distribution centers. In the aggregate, these actions resulted in a
      temporary reduction of our workforce by 90%.


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   •  During a portion of the first and second quarters of Fiscal 2021, we
      extended payment terms with suppliers, managed inventory by reducing future
      receipts and reduced planned capital expenditures by over 50%. For new
      receipts as of August 1, 2020, we have restored contractual payment terms
      with suppliers.


   •  On June 5, 2020, we entered into a Second Amendment to our Credit Facility
      to, among other things, increase the Total Commitments (as defined in the
      Credit Facility) for the revolving loans from $275.0 million to $332.5
      million, establish a First-in, Last-out ("FILO") tranche of indebtedness of
      $17.5 million, for $350.0 million of total capacity.


   •  On June 25, 2020, our Board of Directors considered the Company's financial
      results to date and that more than 90% of the Company's stores were expected
      to be reopened by June 30, 2020, and decided to restore going forward a
      portion of the compensation of the executive team and select employees whose
      compensation had been reduced on March 27, 2020. In addition, the cash
      compensation of our Board of Directors, which had also been reduced on March
      27, 2020 was partially restored.


   •  In October 2020, our Board of Directors restored going forward the remaining
      portion of the compensation of the executive team and select employees whose
      compensation had been reduced on March 27, 2020 as well as the compensation
      of the Board of Directors.


   •  On October 9, 2020, Schuh entered into the Facility Letter with Lloyds under
      the U.K.'s Coronavirus Large Business Interruption Loan Scheme pursuant to
      which Lloyds made available a RCF of £19.0 million for the purpose of
      refinancing Schuh's existing indebtedness with Lloyds. The RCF expires in
      October 2023 and bears interest at 2.5% over the Bank of England Base
      Rate. As of May 1, 2021, we have borrowed $11.1 million or £8.0 million
      under the Facility Letter.


   •  During the fourth quarter of Fiscal 2021, another lockdown in the U.K. and
      the ROI disrupted the Schuh Group business with stores closed for
      approximately 80% of possible days in the first quarter of Fiscal 2022.


   •  In December 2020, the Company returned the compensation to select employees
      other than the executive team whose compensation had been reduced on March
      27, 2020.


   •  As of May 27, 2021, all stores in the U.K. and ROI had re-opened and only
      stores in Ontario and Nova Scotia, Canada remain closed. These stores are
      currently expected to re-open in mid-June this year.



As of May 27, 2021, we were operating in 96% of our locations, including approximately 1,100 Journeys, 160 Johnston & Murphy and 123 Schuh locations. All store locations are operating under enhanced measures to ensure the health and safety of employees and customers, including providing hand sanitizer in multiple locations throughout each store for customer and employee use, enhanced cleaning and sanitation protocols, reconfigured sales floors to promote physical distancing and modified employee and customer interactions to limit contact. In Journeys stores, it is recommended for employees and customers to wear masks. In most of the Schuh stores and all of the Johnston & Murphy shops and factory stores, employees and customers are still required to wear masks.

As a result of the economic and business impact of the COVID-19 pandemic, we revised certain accounting estimates and judgments as discussed in the following paragraphs. Given the ongoing and evolving economic and business impact of the COVID-19 pandemic, we may be required to further revise certain accounting estimates and judgments such as, but not limited to, those related to the valuation of inventory, goodwill, long-lived assets and deferred tax assets, which could have a material adverse effect on our financial position and results of operations.

Since the first quarter of Fiscal 2021, we have withheld certain contractual rent payments generally correlating with time periods when our stores were closed and/or correlating with sales declines from Fiscal 2020. We continue to recognize rent expense in accordance with the contractual terms. We have been working with landlords in various markets seeking commercially reasonable lease concessions given the current environment, and while some agreements have been reached, a number of negotiations remain ongoing. In cases where the agreements do not result in a substantial increase in the rights of the lessor or the obligation of the lessee such that the total cash flows of the modified lease are substantially the same or less than the total cash flows of the existing lease, we have not reevaluated the contract terms. For these lease agreements, we have recognized a reduction in variable rent expense in the period that the concession was granted. During the quarter ended May 1, 2021, we have recognized approximately $6.1 million in rent savings.

On March 27, 2020, the U.S. government enacted the CARES Act, which among other things, provided employer payroll tax credits for wages paid to employees who were unable to work during the COVID-19 pandemic and options to defer payroll tax payments. Based on our evaluation of the CARES Act, we qualified for certain employer payroll tax credits as well as the deferral of payroll and other tax payments in the future, which were treated as government subsidies to offset related operating expenses. During the first quarter of Fiscal 2022 and Fiscal 2021, qualified payroll tax credits reduced our selling and administrative expenses by approximately $0.7 million and $7.0 million, respectively, on our Condensed Consolidated Statements of Operations. We intend to defer qualified payroll and other tax payments as permitted by the CARES Act. Savings from the government program in the U.K. have provided property tax relief for the first quarter of Fiscal 2022 and Fiscal 2021 of approximately $4.7 million and $1.6 million, respectively.

Asset Impairment and Other Charges

We recorded pretax charges of $2.7 million in the first quarter of Fiscal 2022, including $2.3 million for professional fees related to the actions of an activist shareholder and $0.4 million for retail store asset impairments.




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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 30, 2021. 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 30, 2021. There have been no other significant changes in our definition of significant accounting policies or critical accounting estimates since the end of Fiscal 2021.

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 (loss) 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 in this report 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 not disclosed comparable sales for the first quarter of Fiscal 2022, as we believe that overall sales are a more meaningful metric during this period due to the impact of the COVID-19 pandemic.

Results of Operations - First Quarter of Fiscal 2022 Compared to First Quarter of Fiscal 2021

Our net sales in the first quarter of Fiscal 2022 increased 92.9% to $538.7 million compared to $279.2 million in the first quarter of Fiscal 2021, driven by increased store sales resulting from the reopening of stores that were closed in the back half of the first quarter of Fiscal 2021 due to the COVID-19 pandemic, digital comparable growth of 43% and increased wholesale sales. Stores were open approximately 90% of possible days in the first quarter of Fiscal 2022 as compared to 50% in the first quarter of Fiscal 2021.

Gross margin increased 114.5% to $257.7 million in the first quarter of Fiscal 2022 from $120.1 million in the first quarter of Fiscal 2021 and increased as a percentage of net sales from 43.0% to 47.8%, reflecting increased gross margin as a percentage of net sales in all of our operating business units primarily due to fewer markdowns at Journeys Group, lower shipping and warehouse expense, a higher mix of full price product at Schuh Group and the mix of our businesses. The lower shipping and warehouse expense in the first quarter this year is a result of reduced e-commerce penetration in Fiscal 2022 as well as the ability to leverage fixed warehouse expenses as a result of higher revenue.

Selling and administrative expenses in the first quarter of Fiscal 2022 increased 26.7% but decreased as a percentage of net sales from 67.7% to 44.5%, reflecting decreased expenses as a percentage of net sales in all of our operating business units. The decrease in expenses in Fiscal 2022 was primarily due to greater leverage of fixed expenses as a result of the significant increase in revenue as well as reduced occupancy expense, partially offset by increased performance based compensation expense. The reduction in occupancy expense is driven in part by rent abatement agreements with landlords and government relief programs and rent reductions. 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 first quarter of Fiscal 2022 were $14.8 million compared to a loss from continuing operations before income taxes ("pretax loss") of $(156.8) million for the first quarter of Fiscal 2021. Pretax earnings for the first quarter of Fiscal 2022 included asset impairments and other charges of $2.7 million for professional fees related to the actions of an activist shareholder and retail store asset impairments. The pretax loss for the first quarter of Fiscal 2021 included a goodwill impairment charge of $79.3 million and asset impairments and other charges of $7.9 million for retail store and intangible asset impairments, partially offset by the release of an earn-out related to the Togast acquisition.

We recorded an effective income tax rate of 40.1% and 14.1% in the first quarter of Fiscal 2022 and Fiscal 2021, respectively. The tax rate for the first quarter of Fiscal 2022 is higher than Fiscal 2021 primarily due to the inability to recognize a tax benefit for certain foreign losses and a higher mix of earnings in jurisdictions where we generate taxable income. Additionally, the tax rate for the first quarter of Fiscal 2021 was unusually low due primarily to the non-deductibility of the Schuh Group goodwill impairment charge as well as the inability to recognize a tax benefit for certain foreign losses.


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Net earnings for the first quarter of Fiscal 2022 were $8.9 million, or $0.60 diluted earnings per share compared to a net loss of $(134.8) million, or ($9.55) diluted loss per share for the first quarter of Fiscal 2021.

Journeys Group

                                Three Months Ended
                                                                     %
                            May 1, 2021       May 2, 2020       Change
                              (dollars in thousands)
Net sales                 $     376,548     $     168,925        122.9 %

Operating income (loss) $ 33,124 $ (37,083 ) NM Operating margin

                    8.8 %           (22.0 )%




Net sales from Journeys Group increased 122.9% to $376.5 million for the first quarter of Fiscal 2022, compared to $168.9 million for the first quarter of Fiscal 2021, primarily due to increased store sales, resulting from the reopening of stores that were closed in the back half of the first quarter of Fiscal 2021 due to the COVID-19 pandemic, and increased digital comparable sales. Journeys Group operated 1,143 stores at the end of the first quarter of Fiscal 2022, including 230 Journeys Kidz stores, 47 Journeys stores in Canada and 37 Little Burgundy stores in Canada, compared to 1,171 stores at the end of the first quarter of last year, including 233 Journeys Kidz stores, 46 Journeys stores in Canada and 39 Little Burgundy stores in Canada.

Journeys Group had operating income of $33.1 million for the first quarter of Fiscal 2022 compared to a loss of $(37.1) million for the first quarter of Fiscal 2021. The increase of $70.2 million in operating income for Journeys Group was due to (i) increased net sales, (ii) increased gross margin as a percentage of net sales, reflecting decreased markdowns and decreased shipping and warehouse expense and (iii) decreased selling and administrative expenses as a percentage of net sales due to greater leverage of fixed expenses as a result of the increased revenue, partially offset by increased performance based compensation expense.

Schuh Group

                          Three Months Ended
                                                               %
                     May 1, 2021        May 2, 2020       Change
                        (dollars in thousands)
Net sales          $      68,711      $      47,165         45.7 %
Operating loss     $      (3,847 )    $     (15,086 )       74.5 %
Operating margin            (5.6 )%           (32.0 )%



Net sales from Schuh Group increased 45.7% to $68.7 million for the first quarter of Fiscal 2022 compared to $47.2 million for the first quarter of Fiscal 2021, primarily due to increased digital comparable sales and the favorable impact of $6.6 million due to changes in foreign exchange rates, partially offset by decreased store sales. Stores were open for less than 20% of the possible operating days during the first quarter of Fiscal 2022 due to government mandated lockdowns that began during the fourth quarter of Fiscal 2021 and were lifted throughout April and May 2021. Schuh Group operated 123 stores at the end of the first quarter of Fiscal 2022, compared to 127 stores at the end of the first quarter of last year.

Schuh Group had an operating loss of $3.8 million for the first quarter of Fiscal 2022 compared to an operating loss of $15.1 million for the first quarter of Fiscal 2021. The decrease in operating loss this year reflects (i) increased net sales, (ii) increased gross margin as a percentage of net sales, reflecting a higher mix of full price product, partially offset by increased shipping and warehouse expense and (iii) decreased selling and administrative expenses as a percentage of net sales, reflecting decreased occupancy expense primarily as a result of rent abatement agreements with our landlords and savings from the government program in the U.K. providing property tax relief, grant income from the U.K. and ROI governments and reduced expenses and greater leverage of fixed expenses as a result of the increased revenue, partially offset by increased marketing 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


                          Three Months Ended
                                                               %
                     May 1, 2021        May 2, 2020       Change
                        (dollars in thousands)
Net sales          $      48,762      $      38,849         25.5 %
Operating loss     $      (3,180 )    $      (9,584 )       66.8 %
Operating margin            (6.5 )%           (24.7 )%




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Johnston & Murphy Group net sales increased 25.5% to $48.8 million for the first quarter of Fiscal 2022 from $38.8 million for the first quarter of Fiscal 2021, primarily due to increased store sales, resulting from the reopening of stores closed in the back half of the first quarter of Fiscal 2021 due to the COVID-19 pandemic, and increased digital comparable sales and increased wholesale sales. Retail operations accounted for 74.5% of Johnston & Murphy Group's sales in the first quarter of Fiscal 2022, up from 71.9% in the first quarter of last year. The store count for Johnston & Murphy retail operations at the end of the first quarter of Fiscal 2022 was 178 stores, including eight stores in Canada, compared to 181 stores, including eight stores in Canada, at the end of the first quarter of Fiscal 2021.

Johnston & Murphy Group had an operating loss of $3.2 million for the first quarter of Fiscal 2022 compared to an operating loss of $9.6 million for the first quarter of Fiscal 2021. The decrease in the loss was primarily due to (i) increased net sales, (ii) increased gross margin as a percentage of net sales reflecting decreased shipping and warehouse expense and a higher mix of retail product and (iii) decreased selling and administrative expenses as a percentage of net sales due to reduced expenses and greater leverage of fixed expenses as a result of the increased revenue.

Licensed Brands

                                Three Months Ended
                                                                     %
                            May 1, 2021       May 2, 2020       Change
                              (dollars in thousands)
Net sales                 $      44,674     $      24,293         83.9 %
Operating income (loss)   $       2,561     $      (2,501 )         NM
Operating margin                    5.7 %           (10.3 )%



Licensed Brands' net sales increased 83.9% to $44.7 million for the first quarter of Fiscal 2022, from $24.3 million for the first quarter of Fiscal 2021, reflecting increased sales in all of our licensed brands as customers began to recover from the pandemic and we were able to drive more orders.

Licensed Brands' operating income was $2.6 million for the first quarter of Fiscal 2022 compared to an operating loss of $2.5 million in the first quarter of Fiscal 2021. The $5.1 million increase in operating income was primarily due to (i) increased net sales, (ii) increased gross margin as a percentage of net sales as the prior year gross margin was impacted by pre-acquisition royalty and commission cost and (iii) decreased selling and administrative expenses as a percentage of net sales reflecting decreased bad debt, compensation and shipping expenses, partially offset by increased royalty and performance based compensation expenses.

Corporate, Interest Expenses and Other Charges

Corporate and other expense for the first quarter of Fiscal 2022 was $13.1 million compared to $12.5 million for first quarter of Fiscal 2021. Corporate expense in the first quarter of Fiscal 2022 included a $2.7 million charge in asset impairment and other charges for professional fees related to the actions of an activist shareholder and retail store asset impairments. Corporate expense in the first quarter of Fiscal 2021 included a $7.9 million charge in asset impairment and other charges for retail store and intangible asset impairments, partially offset by the release of an earnout related to the Togast acquisition. The corporate expense increase, excluding asset impairment and other charges, reflected increased performance based compensation expense among other things.

Net interest expense decreased to $0.7 million for the first quarter of Fiscal 2022 compared to net interest expense of $0.9 million for the first quarter of Fiscal 2021 primarily reflecting decreased average borrowings in the first quarter this year.

Liquidity and Capital Resources

The impacts of the COVID-19 pandemic have adversely affected our results of operations. In response to the business disruption caused by the COVID-19 pandemic, we have taken actions described above in the "COVID-19 Update" section of Management's Discussion and Analysis of Financial Condition and Results of Operations.


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