Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 decreased 3.6% to $535.3 million for the second quarter of Fiscal 2023 compared to $555.2 million for the second quarter of Fiscal 2022. The sales decrease was driven by decreased comparable sales as we continued to anniversary the significant government stimulus distributed a year ago, and by the unfavorable impact of $15.5 million in sales due primarily to foreign exchange pressure on the Schuh business from the strengthening dollar, partially offset by increased sales in the wholesale channel. Journeys Group sales decreased 7%, Schuh Group sales decreased 4% and Licensed Brands sales decreased 10%, while Johnston & Murphy Group sales increased 22% for the second quarter of Fiscal 2023 compared to the second quarter of Fiscal 2022.
Gross margin as a percentage of net sales decreased to 47.5% during the second quarter of Fiscal 2023, compared to 49.1% for the second quarter of Fiscal 2022. This reflects decreased gross margin as a percentage of net sales in all of our operating business units except Schuh Group, primarily due to increased markdowns in our Journeys business and increased freight and logistics costs in our Johnston & Murphy business. In addition, the decrease in inventory reserves in the second quarter last year at Johnston & Murphy as the brand began to recover from the pandemic making for a difficult comparison this year.
Selling and administrative expenses as a percentage of net sales increased to 45.8% of net sales during the second quarter of Fiscal 2023 from 45.5% for the second 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 second quarter last year. Excluding these one-time benefits last year, decreased performance-based compensation expense more than offset the deleverage in selling salaries and marketing expenses.
Operating margin was 1.7% for the second quarter of Fiscal 2023 compared to 2.3% in the second quarter of Fiscal 2022, reflecting decreased operating margin in all our operating business units. The decrease in operating margin for the second quarter this year compared to the second quarter last year was driven by decreased gross margin as a percentage of net sales, reflecting the increased markdowns at Journeys and increased freight and logistics costs at Johnston & Murphy, and increased expenses as a percentage of net sales, reflecting the one-time benefits for rent credits and government relief in the prior year, partially offset by lower impairment charges and charges for professional fees related to the actions of an activist shareholder in the second quarter of Fiscal 2022.
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.
16
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 quarter of Fiscal 2023 but did not disclose comparable sales for the first quarter and first six 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 six months of Fiscal 2023.
Results of Operations – Second Quarter of Fiscal 2023 Compared to Second Quarter of Fiscal 2022
Our net sales in the second quarter of Fiscal 2023 decreased 3.6% to $535.3 million compared to $555.2 million in the second quarter of Fiscal 2022. The sales decrease was driven by a 2% decrease in comparable sales as we continued to anniversary the significant government stimulus distributed a year ago, and by the unfavorable impact of $15.5 million in sales due primarily to foreign exchange pressure on the Schuh business from the strengthening dollar, partially offset by increased sales in the wholesale channel.
Gross margin decreased 6.7% to $254.3 million in the second quarter of Fiscal 2023 from $272.5 million in the second quarter of Fiscal 2022 and decreased as a percentage of net sales from 49.1% to 47.5%. This reflects decreased gross margin as a percentage of net sales in all of our operating business units except Schuh Group, primarily due to increased markdowns in our Journeys business and increased freight and logistics costs in our Johnston & Murphy business. In addition, the decrease in inventory reserves in the second quarter last year at Johnston & Murphy as the brand began to recover from the pandemic making for a difficult comparison this year.
Selling and administrative expenses in the second quarter of Fiscal 2023 decreased 2.9% but increased as a percentage of net sales from 45.5% to 45.8%, 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 second quarter last year. Excluding these one-time benefits last year, decreased performance-based compensation expense more than offset the deleverage in selling salaries and marketing 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 second quarter of Fiscal 2023 were $8.6 million compared to $12.2 million for the second quarter of Fiscal 2022. Pretax earnings for the second quarter of Fiscal 2023 included asset impairment and other charges of $0.1 million for asset impairments. Pretax earnings for the second quarter of Fiscal 2022 included asset impairments and other charges of $7.1 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 11.3% and 11.1% in the second quarter of Fiscal 2023 and Fiscal 2022, respectively.
Net earnings for the second quarter of Fiscal 2023 were $7.6 million, or $0.59 diluted earnings per share compared to $10.9 million, or $0.75 diluted earnings per share, for the second quarter of Fiscal 2022.
17
Journeys Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
July 30, 2022 |
|
|
July 31, 2021 |
|
|
% Change |
|
|
|
(dollars in thousands) |
|
|
|
|
Net sales |
|
$ |
321,332 |
|
|
$ |
346,275 |
|
|
|
(7.2 |
)% |
Operating income |
|
$ |
9,222 |
|
|
$ |
30,368 |
|
|
|
(69.6 |
)% |
Operating margin |
|
|
2.9 |
% |
|
|
8.8 |
% |
|
|
|
Net sales from Journeys Group decreased 7.2% to $321.3 million for the second quarter of Fiscal 2023, compared to $346.3 million for the second quarter of Fiscal 2022, primarily due to a decrease of 8% in total comparable sales. We believe the Journeys consumer benefitted most from the government stimulus in the second quarter of Fiscal 2022 and is currently more affected by the U.S. macro-economic environment than customers of several of our other divisions. Journeys Group operated 1,131 stores at the end of the second quarter of Fiscal 2023, including 230 Journeys Kidz stores, 46 Journeys stores in Canada and 36 Little Burgundy stores in Canada, compared to 1,142 stores at the end of the second quarter of last year, including 230 Journeys Kidz stores, 47 Journeys stores in Canada and 37 Little Burgundy stores in Canada.
Journeys Group had operating income of $9.2 million for the second quarter of Fiscal 2023 compared to $30.4 million for the second quarter of Fiscal 2022. The decrease of 69.6% 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 (ii) increased selling and administrative expenses as a percentage of net sales reflecting the deleverage of expenses, especially selling salaries, marketing and occupancy as a result of decreased revenue in the second quarter this year, partially offset by decreased performance-based compensation expense.
Schuh Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
July 30, 2022 |
|
|
July 31, 2021 |
|
|
% Change |
|
|
|
(dollars in thousands) |
|
|
|
|
Net sales |
|
$ |
101,518 |
|
|
$ |
106,079 |
|
|
|
(4.3 |
)% |
Operating income |
|
$ |
2,094 |
|
|
$ |
3,623 |
|
|
|
(42.2 |
)% |
Operating margin |
|
|
2.1 |
% |
|
|
3.4 |
% |
|
|
|
Net sales from Schuh Group decreased 4.3% to $101.5 million for the second quarter of Fiscal 2023 compared to $106.1 million for the second quarter of Fiscal 2022, primarily due to an unfavorable impact of $14.3 million due to changes in foreign exchange rates, partially offset by increased total comparable sales of 9% driven by increased store sales as store traffic continued to increase in the second quarter this year. Schuh stores benefitted from a better inventory position and pent up demand as the U.K. economy further re-opened this year and more people resumed normal pre-pandemic activities. Schuh Group operated 122 stores at the end of the second quarter of Fiscal 2023, compared to 123 stores at the end of the second quarter of Fiscal 2022.
Schuh Group had operating income of $2.1 million for the second quarter of Fiscal 2023 compared to $3.6 million for the second quarter of Fiscal 2022. The 42.2% decrease in operating income for Schuh Group reflects increased selling and administrative expenses as a percentage of net sales for the second quarter of Fiscal 2023 compared to the second 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 second quarter last year. Excluding these one-time benefits last year, decreased performance-based compensation, occupancy and marketing expenses more than offset deleverage in selling salaries. In addition, operating income included an unfavorable impact of $0.3 million due to changes in foreign exchange rates compared to last year. Gross margin increased as a percentage of net sales, reflecting lower e-commerce penetration in the second quarter of Fiscal 2023.
Johnston & Murphy Group
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|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
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|
|
|
|
|
July 30, 2022 |
|
|
July 31, 2021 |
|
|
% Change |
|
|
|
(dollars in thousands) |
|
|
|
|
Net sales |
|
$ |
74,818 |
|
|
$ |
61,159 |
|
|
|
22.3 |
% |
Operating income |
|
$ |
3,212 |
|
|
$ |
3,951 |
|
|
|
(18.7 |
)% |
Operating margin |
|
|
4.3 |
% |
|
|
6.5 |
% |
|
|
|
Johnston & Murphy Group net sales increased 22.3% to $74.8 million for the second quarter of Fiscal 2023 from $61.2 million for the second quarter of Fiscal 2022, primarily due to a 17% increase in comparable sales and increased wholesale sales. Johnston & Murphy has repositioned
18
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 75.4% of Johnston & Murphy Group's sales in the second quarter of Fiscal 2023, down from 81.1% in the second quarter of Fiscal 2022. The store count for Johnston & Murphy retail operations at the end of the second 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 second quarter of Fiscal 2022.
Johnston & Murphy Group operating income of $3.2 million for the second quarter of Fiscal 2023 decreased 18.7% compared to $4.0 million in the second quarter of Fiscal 2022. The decrease was primarily due to decreased gross margin as a percentage of net sales reflecting increased freight and logistics costs 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. Selling and administrative expenses decreased as a percentage of net sales due to greater leverage of expenses as a result of revenue growth, partially offset by increased marketing expense.
Licensed Brands
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
July 30, 2022 |
|
|
July 31, 2021 |
|
|
% Change |
|
|
|
(dollars in thousands) |
|
|
|
|
Net sales |
|
$ |
37,664 |
|
|
$ |
41,670 |
|
|
|
(9.6 |
)% |
Operating income |
|
$ |
685 |
|
|
$ |
991 |
|
|
|
(30.9 |
)% |
Operating margin |
|
|
1.8 |
% |
|
|
2.4 |
% |
|
|
|
Licensed Brands' net sales decreased 9.6% to $37.7 million for the second quarter of Fiscal 2023, from $41.7 million for the second quarter of Fiscal 2022 as we reposition the distribution of the mix of the Levi's brand to rely less on the value channel.
Licensed Brands' operating income was $0.7 million for the second quarter of Fiscal 2023 compared to $1.0 million in the second quarter of Fiscal 2022. The 30.9% decrease in operating income was primarily due to (i) decreased net sales, (ii) decreased gross margin as a percentage of net sales driven by sales mix and increased freight and logistics costs and (iii) 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, shipping and warehouse expense and royalty expense.
Corporate, Interest Expenses and Other Charges
Corporate and other expense for the second quarter of Fiscal 2023 was $6.1 million compared to $26.0 million for the second quarter of Fiscal 2022. Corporate expense in the second quarter of Fiscal 2023 included a $0.1 million charge in asset impairment and other charges for asset impairments. Corporate expense in the second quarter of Fiscal 2022 included a $7.1 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 $0.4 million for the second quarter of Fiscal 2023 compared to net interest expense of $0.6 million for the second quarter of Fiscal 2022 primarily reflecting decreased average borrowings in the second quarter this year.
Results of Operations – Six Months of Fiscal 2023 Compared to Six Months of Fiscal 2022
Our net sales in the first six months of Fiscal 2023 decreased 3.5% to $1.056 billion compared to $1.094 billion in the first six months of Fiscal 2022. The sales decrease was driven by decreased comparable direct sales and by the unfavorable impact of $20.4 million in sales due primarily to foreign exchange pressure on the Schuh business from the strengthening dollar, partially offset by increased sales in the wholesale channel.
Gross margin decreased 4.6% to $505.8 million in the first six months of Fiscal 2023 from $530.2 million in the first six months of Fiscal 2022 and decreased as a percentage of net sales from 48.5% to 47.9%, reflecting decreased gross margin as a percentage of net sales in Journeys Group and Johnston & Murphy Group, partially offset by increased gross margin as a percentage of net sales in Schuh Group and Licensed Brands. 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.
Selling and administrative expenses in the first six months of Fiscal 2023 decreased 0.7% but increased as a percentage of net sales from 45.0% to 46.3%, reflecting increased expenses as a percentage of net sales at Journeys Group and Schuh Group, partially offset by decreased expenses as a percentage of net sales at Johnston & Murphy Group and Licensed Brands. 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
19
COVID-19 pandemic in the U.K. in the first six 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 six months of Fiscal 2023 were $16.5 million compared to $27.1 million for the first six months of Fiscal 2022. Pretax earnings for the first six 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 six months of Fiscal 2022 included asset impairments and other charges of $9.7 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 23.4% and 27.0% in the first six months of Fiscal 2023 and Fiscal 2022, respectively. The tax rate for the first six 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 six months of Fiscal 2023 were $12.6 million, or $0.95 diluted earnings per share compared to $19.8 million, or $1.35 diluted earnings per share, for the first six months of Fiscal 2022.
Journeys Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
July 30, 2022 |
|
|
July 31, 2021 |
|
|
% Change |
|
|
|
(dollars in thousands) |
|
|
|
|
Net sales |
|
$ |
635,777 |
|
|
$ |
722,823 |
|
|
|
(12.0 |
)% |
Operating income |
|
$ |
24,152 |
|
|
$ |
63,492 |
|
|
|
(62.0 |
)% |
Operating margin |
|
|
3.8 |
% |
|
|
8.8 |
% |
|
|
|
Net sales from Journeys Group decreased 12.0% to $635.8 million for the first six months of Fiscal 2023, compared to $722.8 million for the first six 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 six months of Fiscal 2022 and is currently more affected by the U.S. macro-economic environment than customers of several of our other divisions.
Journeys Group had operating income of $24.2 million for the first six months of Fiscal 2023 compared to $63.5 million for the first six months of Fiscal 2022. The decrease of 62.0% 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 six months this year, partially offset by decreased performance-based compensation expense.
Schuh Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
July 30, 2022 |
|
|
July 31, 2021 |
|
|
% Change |
|
|
|
(dollars in thousands) |
|
|
|
|
Net sales |
|
$ |
189,677 |
|
|
$ |
174,790 |
|
|
|
8.5 |
% |
Operating loss |
|
$ |
(652 |
) |
|
$ |
(224 |
) |
|
|
(191.1 |
)% |
Operating margin |
|
|
(0.3 |
)% |
|
|
(0.1 |
)% |
|
|
|
Net sales from Schuh Group increased 8.5% to $189.7 million for the first six months of Fiscal 2023 compared to $174.8 million for the first six months of Fiscal 2022, primarily due to increased store sales as Schuh stores were only open 59% of possible days in the first six months of Fiscal 2022 versus 100% of possible days in the first six months of Fiscal 2023, partially offset by decreased digital comparable sales and an unfavorable impact of $19.0 million due to changes in foreign exchange rates. 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 an operating loss of $0.7 million for the first six months of Fiscal 2023 compared to an operating loss of $0.2 million for the first six months of Fiscal 2022. The increased loss this year reflects increased selling and administrative expenses as a percentage of net sales for the first six months of Fiscal 2023 compared to the first six 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 six months last year. Excluding these one-time benefits last year, decreased occupancy, marketing and performance-based compensation
20
expenses more than offset the deleverage in selling salaries. In addition, operating income included an unfavorable impact of $0.2 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 and less promotional activity in the first six months of Fiscal 2023.
Johnston & Murphy Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
July 30, 2022 |
|
|
July 31, 2021 |
|
|
% Change |
|
|
|
(dollars in thousands) |
|
|
|
|
Net sales |
|
$ |
145,834 |
|
|
$ |
109,921 |
|
|
|
32.7 |
% |
Operating income |
|
$ |
3,762 |
|
|
$ |
771 |
|
|
|
387.9 |
% |
Operating margin |
|
|
2.6 |
% |
|
|
0.7 |
% |
|
|
|
Johnston & Murphy Group net sales increased 32.7% to $145.8 million for the first six months of Fiscal 2023 from $109.9 million for the first six months of Fiscal 2022, primarily due to increased store sales, wholesale 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 six months of Fiscal 2023, down from 78.2% in the first six months of Fiscal 2022.
Johnston & Murphy Group operating income of $3.8 million for the first six months of Fiscal 2023 improved $3.0 million compared to $0.8 million in the first six months of Fiscal 2022. The increase 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 six months of Fiscal 2023 compared to the first six 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.
Licensed Brands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
July 30, 2022 |
|
|
July 31, 2021 |
|
|
% Change |
|
|
|
(dollars in thousands) |
|
|
|
|
Net sales |
|
$ |
84,792 |
|
|
$ |
86,344 |
|
|
|
(1.8 |
)% |
Operating income |
|
$ |
4,478 |
|
|
$ |
3,552 |
|
|
|
26.1 |
% |
Operating margin |
|
|
5.3 |
% |
|
|
4.1 |
% |
|
|
|
Licensed Brands' net sales decreased 1.8% to $84.8 million for the first six months of Fiscal 2023, from $86.3 million for the first six months of Fiscal 2022 as we reposition the distribution of the mix of the Levi's brand to rely less on the value channel.
Licensed Brands' operating income was $4.5 million for the first six months of Fiscal 2023 compared to $3.6 million in the first six months of Fiscal 2022. The 26.1% increase in operating income was primarily due to (i) increased gross margin as a percentage of net sales as sales mix and increased freight and logistics costs were more than offset by fewer closeout sales as compared to last year and (ii) decreased selling and administrative expenses as a percentage of net sales reflecting leverage of expenses as a result of a favorable sales mix, partially offset by increased bad debt and compensation expenses.
Corporate, Interest Expenses and Other Charges
Corporate and other expense for the first six months of Fiscal 2023 was $14.4 million compared to $39.2 million for the first six months of Fiscal 2022. Corporate expense in the first six 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 six months of Fiscal 2022 included a $9.7 million charge in asset impairment and other charges for professional fees related to the actions of an activist shareholder and retail store asset impairments, 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 $0.7 million for the first six months of Fiscal 2023 compared to net interest expense of $1.3 million for the first six months of Fiscal 2022 primarily reflecting decreased average borrowings in the first six months this year.
21
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
Cash flow changes: |
|
July 30, 2022 |
|
|
July 31, 2021 |
|
|
Increase (Decrease) |
|
(in thousands) |
|
|
|
Net cash provided by (used in) operating activities |
|
$ |
(224,211 |
) |
|
$ |
125,775 |
|
|
$ |
(349,986 |
) |
Net cash used in investing activities |
|
|
(29,005 |
) |
|
|
(19,462 |
) |
|
|
(9,543 |
) |
Net cash used in financing activities |
|
|
(20,736 |
) |
|
|
(18,119 |
) |
|
|
(2,617 |
) |
Effect of foreign exchange rate fluctuations on cash |
|
|
(1,634 |
) |
|
|
754 |
|
|
|
(2,388 |
) |
Net increase (decrease) in cash and cash equivalents |
|
$ |
(275,586 |
) |
|
$ |
88,948 |
|
|
$ |
(364,534 |
) |
Reasons for the major variances in cash used in the table above are as follows:
Cash used in operating activities was $350.0 million higher for the first six months of Fiscal 2023 compared to the first six months of Fiscal 2022, reflecting primarily the following factors:
•a $199.4 million decrease in cash flow from changes in inventory, primarily reflecting increased inventory growth in all of our business units in the first six months of Fiscal 2023 as we rebuilt inventory following the significant supply chain disruptions resulting from the pandemic;
•a $103.6 million decrease in cash flow from changes in other accrued liabilities, primarily reflecting the payment of Fiscal 2022 performance-based compensation accruals in the first six months of Fiscal 2023 and significantly lower performance-based compensation accruals for the first six months of Fiscal 2023 compared to Fiscal 2022; and
•a $67.3 million decrease in cash flow from changes in prepaids and other current assets, primarily reflecting income taxes paid in the first six months of Fiscal 2023 compared to a tax refund in the first six months of Fiscal 2022; partially offset by
•a $34.6 million increase in cash flow from changes in accounts payable, primarily reflecting changes in buying patterns in the first six months of Fiscal 2023 and the increase in inventory.
Cash used in investing activities was $9.5 million higher for the first six months of Fiscal 2023 as compared to the first six months of Fiscal 2022 reflecting increased capital expenditures primarily related to the new corporate headquarters building and investments in retail stores, partially offset by decreased capital expenditures for digital and omnichannel initiatives.
Cash used in financing activities was $2.6 million higher for the first six months of Fiscal 2023 as compared to the first six months of Fiscal 2022 reflecting share repurchases this year and the payment of Fiscal 2022 share repurchase accruals in the first six months of Fiscal 2023, partially offset by increased borrowings this year compared to the same period last year.
Sources of Liquidity and Future Capital Needs
We have three principal sources of liquidity: cash flow from operations, cash 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 July 30, 2022, we have borrowed $48.9 million under our Credit Facility, which includes $34.5 million in U.S. revolver borrowings and $14.4 million (£11.8 million) in Genesco (UK) Limited. We were in compliance with all the relevant terms and conditions of the Credit Facility and Facility Letter as of July 30, 2022.
We believe that cash on hand, cash provided by operations and borrowings under our amended Credit Facility and the Schuh Facility Letter 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, including the acquisition of inventory, and other working capital obligations including those related to taxes. 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.
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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 refunds in Fiscal 2022. We expect to receive the balance in Fiscal 2023.
Contractual Obligations
Our contractual obligations at July 30, 2022 decreased 16% 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 58% is for new stores and remodels and 42% is for computer hardware, software and warehouse enhancements for initiatives to drive traffic and omni-channel capabilities. Planned capital expenditures excludes approximately $10 million, or $8 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 826,034 shares during the second quarter of Fiscal 2023 at a cost of $45.4 million, or $54.99 per share and repurchased 928,929 shares during the first six months of Fiscal 2023 at a cost of $51.9 million, or $55.90 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 six months ended July 30, 2022, offset by a $0.4 million accrual of share repurchases in the second quarter of Fiscal 2023. We have $54.9 million remaining as of July 30, 2022 under our expanded share repurchase authorization announced in February 2022. We did not repurchase any shares during the second quarter or first six months of Fiscal 2022. During the third quarter of Fiscal 2023, through September 7, 2022, we have repurchased 142,627 shares at a cost of $6.5 million, or $45.75 per share.
Environmental and Other Contingencies
We are subject to certain loss contingencies related to environmental proceedings and other legal matters, including those disclosed in Item 1, Note 8, "Legal Proceedings", to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
New Accounting Pronouncements
Descriptions of recently issued accounting pronouncements, if any, and the accounting pronouncements adopted by us during the second quarter of Fiscal 2023 are included in Note 1 to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
23