Genesco 10-Q Q2 FY13
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended July 28, 2012
 
o
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.)
 
 
 
Genesco Park, 1415 Murfreesboro Road
Nashville, Tennessee
 
37217-2895
(Address of principal executive offices)
 
(Zip Code)
 
Registrant's telephone number, including area code: (615) 367-7000
 
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 and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer; an accelerated filer; a non-accelerated filer; or a smaller reporting company. See definitions of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one:)
 
Large accelerated filer
 
x
 
Accelerated filer
o
 
 
 
 
Non-accelerated filer
 
o   (Do not check if smaller reporting company.)
 
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)    Yes  o    No  x
As of August 31, 2012, 24,292,044 shares of the registrant's common stock were outstanding.
 




Table of Contents

INDEX
 
 
 
 



2

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

Genesco Inc.
and Subsidiaries
Condensed Consolidated Balance Sheets
(In Thousands, except share amounts)

Assets
July 28,
2012

 
January 28,
2012

 
Recast July 30,
2011(1)

Current Assets:
 
 
 
 
 
Cash and cash equivalents
$
47,222

 
$
53,790

 
$
35,582

Accounts receivable, net of allowances of $6,071 at July 28, 2012,
 
 
 
 
 
$6,900 at January 28, 2012 and $4,876 at July 30, 2011
45,709

 
43,713

 
43,305

Inventories
555,626

 
435,113

 
474,951

Deferred income taxes
22,685

 
22,541

 
32,034

Prepaids and other current assets
57,990

 
40,155

 
59,841

Total current assets
729,232

 
595,312

 
645,713

 
 
 
 
 
 
Property and equipment:
 
 
 
 
 
Land
6,119

 
6,118

 
6,172

Buildings and building equipment
20,336

 
20,260

 
20,359

Computer hardware, software and equipment
122,881

 
116,920

 
106,902

Furniture and fixtures
137,063

 
127,949

 
120,628

Construction in progress
11,388

 
7,158

 
9,175

Improvements to leased property
305,891

 
299,775

 
292,799

Property and equipment, at cost
603,678

 
578,180

 
556,035

Accumulated depreciation
(372,150
)
 
(350,491
)
 
(327,557
)
Property and equipment, net
231,528

 
227,689

 
228,478

Deferred income taxes
26,740

 
28,152

 
17,653

Goodwill
269,310

 
259,759

 
260,363

Trademarks, net of accumulated amortization of
 
 
 
 
 
$2,787 at July 28, 2012, $2,246 at January 28, 2012 and
 
 
 
 
 
$1,712 at July 30, 2011
77,768

 
78,276

 
79,891

Other intangibles, net of accumulated amortization of
 
 
 
 
 
$15,406 at July 28, 2012, $13,645 at January 28, 2012 and
 
 
 
 
 
$11,857 at July 30, 2011
13,177

 
14,808

 
16,342

Other noncurrent assets
33,203

 
33,269

 
30,136

Total Assets
$
1,380,958

 
$
1,237,265

 
$
1,278,576


(1) Certain previously reported July 30, 2011 balances have been recast to reflect the effects of finalizing the allocation of the Schuh purchase price. See Note 2 for additional information.





3



Genesco Inc.
and Subsidiaries
Condensed Consolidated Balance Sheets
(In Thousands, except share amounts)

Liabilities and Equity
July 28, 2012

 
January 28, 2012

 
Recast July 30,
2011(1)

Current Liabilities:
 
 
 
 
 
Accounts payable
$
212,938

 
$
138,938

 
$
197,653

Accrued employee compensation
50,587

 
53,029

 
41,804

Accrued other taxes
23,436

 
26,293

 
18,361

Accrued income taxes
2,778

 
16,390

 
1,263

Current portion – long-term debt
5,497

 
8,773

 
5,113

Other accrued liabilities
65,141

 
52,789

 
48,616

Provision for discontinued operations
7,511

 
8,250

 
9,308

Total current liabilities
367,888

 
304,462

 
322,118

Long-term debt
95,001

 
31,931

 
159,406

Pension liability
24,470

 
22,201

 
13,143

Deferred rent and other long-term liabilities
151,600

 
156,794

 
126,430

Provision for discontinued operations
4,267

 
4,267

 
4,363

Total liabilities
643,226

 
519,655

 
625,460

Commitments and contingent liabilities
 
 
 
 
 
Equity
 
 
 
 
 
Non-redeemable preferred stock
4,066

 
4,957

 
5,160

Common equity:
 
 
 
 
 
Common stock, $1 par value:
 
 
 
 
 
Authorized: 80,000,000 shares
 
 
 
 
 
Issued/Outstanding:
 
 
 
 
 
July 28, 2012 – 24,782,586/24,294,122
 
 
 
 
 
January 28, 2012 – 24,757,826/24,269,362
 
 
 
 
 
July 30, 2011 – 24,651,206/24,162,742
24,783

 
24,758

 
24,651

Additional paid-in capital
164,032

 
149,479

 
141,440

Retained earnings
593,409

 
586,990

 
519,527

Accumulated other comprehensive loss
(32,825
)
 
(32,966
)
 
(22,272
)
Treasury shares, at cost
(17,857
)
 
(17,857
)
 
(17,857
)
Total Genesco equity
735,608

 
715,361

 
650,649

Noncontrolling interest – non-redeemable
2,124

 
2,249

 
2,467

Total equity
737,732

 
717,610

 
653,116

Total Liabilities and Equity
$
1,380,958

 
$
1,237,265

 
$
1,278,576


(1) Certain previously reported July 30, 2011 balances have been recast to reflect the effects of finalizing the allocation of the Schuh purchase price. See Note 2 for additional information.

The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

4


Genesco Inc.
and Subsidiaries
Condensed Consolidated Statements of Operations
(In Thousands, except per share amounts)

 
Three Months Ended
Six Months Ended
 
July 28, 2012

 
July 30, 2011

July 28, 2012

 
July 30, 2011

Net sales
$
543,522

 
$
470,591

$
1,143,666

 
$
952,093

Cost of sales
269,294

 
233,307

560,135

 
467,267

Selling and administrative expenses
256,869

 
235,286

530,030

 
456,059

Asset impairments and other, net
404

 
347

539

 
1,591

Earnings from operations
16,955

 
1,651

52,962

 
27,176

Interest expense, net:
 
 
 
 
 
 
Interest expense
1,217

 
1,097

2,349

 
1,613

Interest income
(10
)
 
(16
)
(25
)
 
(18
)
Total interest expense, net
1,207

 
1,081

2,324

 
1,595

Earnings from continuing operations before income taxes
15,748

 
570

50,638

 
25,581

Income tax expense
5,187

 
220

19,286

 
10,256

Earnings from continuing operations
10,561

 
350

31,352

 
15,325

Provision for discontinued operations, net
(41
)
 
(742
)
(218
)
 
(924
)
Net Earnings (Loss)
$
10,520

 
$
(392
)
$
31,134

 
$
14,401

 
 
 
 
 
 
 
Basic earnings (loss) per common share:
 
 
 
 
 
 
Continuing operations
$
0.44

 
$
0.01

$
1.32

 
$
0.66

Discontinued operations
0.00

 
(0.03
)
(0.01
)
 
(0.04
)
     Net earnings (loss)
$
0.44

 
$
(0.02
)
$
1.31

 
$
0.62

Diluted earnings (loss) per common share:
 
 
 
 
 
 
Continuing operations
$
0.44

 
$
0.01

$
1.29

 
$
0.65

Discontinued operations
(0.01
)
 
(0.03
)
0.00

 
(0.04
)
    Net earnings (loss)
$
0.43

 
$
(0.02
)
$
1.29

 
$
0.61


The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.


5


Genesco Inc.
and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(In Thousands)

 
Three Months Ended
Six Months Ended
 
July 28, 2012

 
July 30, 2011

July 28, 2012

 
July 30, 2011

Net earnings (loss)
$
10,520

 
$
(392
)
$
31,134

 
$
14,401

Other comprehensive (loss) income:
 
 
 
 
 
 
Gain (loss) on foreign currency forward contract,
 
 
 
 
 
 
net of tax of $0.0 million for each period
(9
)
 
9

(20
)
 
63

Foreign currency translation adjustments
(4,169
)
 
1,387

161

 
1,970

Total other comprehensive (loss) income
(4,178
)
 
1,396

141

 
2,033

Comprehensive income
$
6,342

 
$
1,004

$
31,275

 
$
16,434


The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.


6


Genesco Inc.
and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In Thousands)

 
Three Months Ended
Six Months Ended
 
July 28,
2012

 
July 30,
2011

July 28,
2012

 
July 30,
2011

CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net earnings (loss)
$
10,520

 
$
(392
)
$
31,134

 
$
14,401

Adjustments to reconcile net earnings (loss) to net cash
 
 
 
 
 
 
used in operating activities:
 
 
 
 
 
 
Depreciation and amortization
15,291

 
13,002

30,544

 
25,204

Amortization of deferred note expense and debt discount
198

 
165

396

 
311

Deferred income taxes
1,657

 
1,531

(2,204
)
 
318

(Recoveries) Provision for losses on accounts receivable
(592
)
 
435

855

 
676

Impairment of long-lived assets
391

 
313

437

 
1,060

Restricted stock and share-based compensation
2,444

 
1,641

4,655

 
3,237

Provision for discontinued operations
67

 
1,224

360

 
1,524

Tax benefit of stock options exercised
(2,340
)
 
(3,558
)
(4,666
)
 
(3,558
)
Other
281

 
240

639

 
589

Effect on cash from changes in working capital and other
 
 
 
 
 
 
assets and liabilities, before acquisitions:
 
 
 
 
 
 
  Accounts receivable
2,474

 
5,085

(2,864
)
 
5,498

  Inventories
(109,802
)
 
(69,738
)
(118,708
)
 
(81,804
)
  Prepaids and other current assets
(15,048
)
 
(17,884
)
(17,763
)
 
(18,473
)
  Accounts payable
55,981

 
53,567

64,386

 
67,279

  Other accrued liabilities
10,636

 
(6,018
)
(9,325
)
 
(25,746
)
  Other assets and liabilities
(1,225
)
 
(9,791
)
631

 
(8,696
)
Net cash used in operating activities
(29,067
)
 
(30,178
)
(21,493
)
 
(18,180
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
Capital expenditures
(18,415
)
 
(13,616
)
(32,533
)
 
(23,213
)
 Acquisitions, net of cash acquired
(10,797
)
 
(87,402
)
(10,797
)
 
(87,402
)
Proceeds from asset sales
21

 
23

38

 
23

Net cash used in investing activities
(29,191
)
 
(100,995
)
(43,292
)
 
(110,592
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
Payments of capital leases

 


 
(21
)
Payments of long-term debt
(6,404
)
 
(16,074
)
(7,597
)
 
(16,074
)
Borrowings under revolving credit facility
156,400

 
151,000

190,700

 
151,000

Payments on revolving credit facility
(84,600
)
 
(33,519
)
(123,900
)
 
(33,519
)
Tax benefit of stock options and restricted stock exercised
2,340

 
3,558

4,666

 
3,558

 Share repurchases
(20,227
)
 

(20,227
)
 

Change in overdraft balances
4,058

 
455

9,612

 
(2,823
)
Dividends paid on non-redeemable preferred stock
(35
)
 
(49
)
(81
)
 
(98
)
Exercise of stock options

 
5,470

4,783

 
7,309

Other
(1
)
 
(846
)

 
(912
)
Net cash provided by financing activities
51,531

 
109,995

57,956

 
108,420

Effect of foreign exchange rate fluctuations on cash
(875
)
 

261

 

Net Decrease in Cash and Cash Equivalents
(7,602
)
 
(21,178
)
(6,568
)
 
(20,352
)
Cash and cash equivalents at beginning of period
54,824

 
56,760

53,790

 
55,934

Cash and cash equivalents at end of period
$
47,222

 
$
35,582

$
47,222

 
$
35,582

Supplemental Cash Flow Information:
 
 
 
 
 
 
Net cash paid for:
 
 
 
 
 
 
Interest
$
850

 
$
1,539

$
1,709

 
$
1,824

Income taxes
27,528

 
26,439

44,913

 
38,573

 
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.

7


Genesco Inc.
and Subsidiaries
Condensed Consolidated Statements of Equity
(In Thousands)

 
Total
Non-Redeemable
Preferred
Stock

 
Common
Stock

 
Additional
Paid-In
Capital

 
Retained
Earnings

 
Accumulated
Other
Comprehensive Loss

 
Treasury
Stock

 
Non Controlling
Interest
Non-Redeemable

 
Total
Equity

Balance January 29, 2011
$
5,183

 
$
24,163

 
$
131,910

 
$
505,224

 
$
(24,305
)
 
$
(17,857
)
 
$
2,503

 
$
626,821

Net earnings

 

 

 
81,959

 

 

 

 
81,959

Other comprehensive loss

 

 

 

 
(8,661
)
 

 

 
(8,661
)
Dividends paid on non-redeemable preferred stock

 

 

 
(193
)
 

 

 

 
(193
)
Exercise of stock options

 
390

 
9,297

 

 

 

 

 
9,687

Issue shares – Employee Stock Purchase Plan

 
3

 
130

 

 

 

 

 
133

Employee and non-employee restricted stock

 

 
7,659

 

 

 

 

 
7,659

Share-based compensation

 

 
1

 

 

 

 

 
1

Restricted stock issuance

 
304

 
(304
)
 

 

 

 

 

Restricted shares withheld for taxes

 
(93
)
 
(4,034
)
 

 

 

 

 
(4,127
)
Tax benefit of stock options and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
restricted stock exercises

 

 
4,585

 

 

 

 

 
4,585

Other
(226
)
 
(9
)
 
235

 

 

 

 

 

Noncontrolling interest – loss

 

 

 

 

 

 
(254
)
 
(254
)
Balance January 28, 2012
4,957

 
24,758

 
149,479

 
586,990

 
(32,966
)
 
(17,857
)
 
2,249

 
717,610

Net earnings

 

 

 
31,134

 

 

 

 
31,134

Other comprehensive income

 

 

 

 
141

 

 

 
141

Dividends paid on non-redeemable preferred stock

 

 

 
(81
)
 

 

 

 
(81
)
Exercise of stock options

 
222

 
4,561

 

 

 

 

 
4,783

Employee and non-employee restricted stock

 

 
4,655

 

 

 

 

 
4,655

Restricted stock issuance

 
194

 
(194
)
 

 

 

 

 

Restricted shares withheld for taxes

 
(71
)
 

 
(4,154
)
 

 

 

 
(4,225
)
Tax benefit of stock options and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
restricted stock exercised

 

 
4,666

 

 

 

 

 
4,666

Shares repurchased

 
(346
)
 

 
(20,480
)
 

 

 

 
(20,826
)
Other
(891
)
 
26

 
865

 

 

 

 

 

Noncontrolling interest – loss

 

 

 

 

 

 
(125
)
 
(125
)
Balance July 28, 2012
$
4,066

 
$
24,783

 
$
164,032

 
$
593,409

 
$
(32,825
)
 
$
(17,857
)
 
$
2,124

 
$
737,732


The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.


8

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies

Interim Statements
The condensed consolidated financial statements and footnotes contained in this report are unaudited but reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for the interim periods of the fiscal year ending February 2, 2013 ("Fiscal 2013") and of the fiscal year ended January 28, 2012 ("Fiscal 2012"). The results of operations for any interim period are not necessarily indicative of results for the full year. The interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K.

Nature of Operations
The Company's business includes the design and sourcing, marketing and distribution of footwear and accessories through retail stores in the U.S., Puerto Rico and Canada primarily under the Journeys, Journeys Kidz, Shi by Journeys, Underground by Journeys and Johnston & Murphy banners and under the Schuh banner in the United Kingdom and the Republic of Ireland; through e-commerce websites including journeys.com, journeyskidz.com, shibyjourneys.com, undergroundbyjourneys.com, schuh.co.uk and johnstonmurphy.com, and at wholesale, primarily under the Company's Johnston & Murphy brand, the Dockers brand, the SureGrip brand and other brands that the Company licenses for men's footwear. The Company's business also includes Lids Sports Group, which operates headwear and accessory stores in the U.S. and Canada primarily under the Lids, Hat World and Hat Shack banners; the Lids Locker Room business, consisting of sports-oriented fan shops featuring a broad array of licensed merchandise such as apparel, hats and accessories, sports decor and novelty products, operating primarily under the Lids Locker Room, Sports Fan-Attic and Sports Avenue banners; certain e-commerce operations and an athletic team dealer business operating as Lids Team Sports. Including both the footwear businesses and the Lids Sports business, at July 28, 2012, the Company operated 2,404 retail stores in the U.S., Puerto Rico, Canada, the United Kingdom and the Republic of Ireland.

Principles of Consolidation
All subsidiaries are consolidated in the condensed consolidated financial statements. All significant intercompany transactions and accounts have been eliminated.

Financial Statement Reclassifications and Recasting
The Condensed Consolidated Balance Sheet at July 30, 2011 has been derived from the Consolidated Financial Statements at that date as recast to reflect the effects of finalizing the allocation of the Schuh purchase price, but does not include all the notes required by generally accepted accounting principles for complete financial statements. As a result of the change in total assets for the period ended July 30, 2011, total segment assets in Note 9 for Schuh Group and Corporate and Other have been recast by $5.9 million and $11.8 million, respectively. For additional information, refer to the Consolidated Financial Statements and related notes for the year ended January 28, 2012 included in the Company's Annual Report on Form 10-K.






9

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

Certain reclassifications have been made to conform prior years' data to the current year presentation.
The Company integrated the Underground Station operations into the Journeys Group in the first quarter of Fiscal 2013. The former Underground Station stores will be a subset of Journeys Group under the brand "Underground by Journeys." Journeys Group segment net sales, operating income, total assets, depreciation and amortization and capital expenditures have been restated by $17.4 million, $(2.9) million, $28.3 million, $0.4 million and $0.1 million, respectively, for the three months ended July 30, 2011 and $43.2 million, $(1.8) million, $28.3 million, $0.9 million and $0.1 million, respectively, for the six months ended July 30, 2011 as a result of combining Underground Station Group with the Journeys Group segment to conform to current year presentation (See Note 9).

Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant areas requiring management estimates or judgments include the following key financial areas:

Inventory Valuation
The Company values its inventories at the lower of cost or market.

In its footwear wholesale operations, its Schuh Group segment and its Lids Sports Group wholesale operations, except for the Anaconda Sports wholesale division, cost is determined using the first-in, first-out (“FIFO”) method. Market value is determined using a system of analysis which evaluates inventory at the stock number level based on factors such as inventory turn, average selling price, inventory level, and selling prices reflected in future orders. The Company provides reserves when the inventory has not been marked down to market value based on current selling prices or when the inventory is not turning and is not expected to turn at levels satisfactory to the Company.

The Lids Sports Group retail segment and its Anaconda Sports wholesale division employ the moving average cost method for valuing inventories and apply freight using an allocation method. The Company provides a valuation allowance for slow-moving inventory based on negative margins and estimated shrink based on historical experience and specific analysis, where appropriate.

In its retail operations, other than the Schuh Group and Lids Sports Group retail segments, the Company employs the retail inventory method, applying average cost-to-retail ratios to the retail value of inventories. Under the retail inventory method, valuing inventory at the lower of cost or market is achieved as markdowns are taken or accrued as a reduction of the retail value of inventories.



10

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

Inherent in the retail inventory method are subjective judgments and estimates, including merchandise mark-on, markups, markdowns, and shrinkage. These judgments and estimates, coupled with the fact that the retail inventory method is an averaging process, could produce a range of cost figures. To reduce the risk of inaccuracy and to ensure consistent presentation, the Company employs the retail inventory method in multiple subclasses of inventory with similar gross margins, and analyzes markdown requirements at the stock number level based on factors such as inventory turn, average selling price, and inventory age. In addition, the Company accrues markdowns as necessary. These additional markdown accruals reflect all of the above factors as well as current agreements to return products to vendors and vendor agreements to provide markdown support. In addition to markdown provisions, the Company maintains provisions for shrinkage and damaged goods based on historical rates.

Inherent in the analysis of both wholesale and retail inventory valuation are subjective judgments about current market conditions, fashion trends, and overall economic conditions. Failure to make appropriate conclusions regarding these factors may result in an overstatement or understatement of inventory value.

Impairment of Long-Lived Assets
The Company periodically assesses the realizability of its long-lived assets and evaluates such assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Asset impairment is determined to exist if estimated future cash flows, undiscounted and without interest charges, are less than the carrying amount. Inherent in the analysis of impairment are subjective judgments about future cash flows. Failure to make appropriate conclusions regarding these judgments may result in an overstatement or understatement of the value of long-lived assets. See also Notes 3 and 5.
The goodwill impairment test involves a two step process. The first step is a comparison of the fair value and carrying value of the reporting unit with which the goodwill is associated. The Company estimates fair value using the best information available and computes the fair value by an equal weighting of the results arrived by a market approach and an income approach utilizing discounted cash flow projections. The income approach uses a projection of a business unit’s estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects current market conditions. A key assumption in the Company’s fair value estimate is the weighted average cost of capital utilized for discounting its cash flow projections in its income approach. The Company believes the rate it used in its annual test, which is completed in the fourth quarter each year, was consistent with the risks inherent in its business and with industry discount rates. The projection uses management’s best estimates of economic and market conditions over the projected period including growth rates in sales, costs, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements.

If the carrying value of the reporting unit is higher than its fair value, there is an indication that impairment may exist and the second step must be performed to measure the amount of impairment loss. The amount of impairment is determined by comparing the implied fair value of reporting

11

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

unit goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. Specifically, the Company would allocate the fair value to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, the Company would record an impairment charge for the difference.

Environmental and Other Contingencies
The Company is subject to certain loss contingencies related to environmental proceedings and other legal matters. The Company has made pretax accruals for certain of these contingencies, including approximately $0.1 million and $1.2 million in the second quarter of Fiscal 2013 and 2012, respectively, and $0.4 million and $1.6 million in the first six months of Fiscal 2013 and 2012, respectively. These charges are included in provision for discontinued operations, net in the Condensed Consolidated Statements of Operations because they relate to former facilities operated by the Company. The Company monitors these matters on an ongoing basis and, on a quarterly basis, management reviews the Company’s reserves and accruals, adjusting provisions as management deems necessary in view of changes in available information. Changes in estimates of liability are reported in the periods when they occur. Consequently, management believes that its reserve in relation to each proceeding is a best estimate of probable loss connected to the proceeding, or in cases in which no best estimate is possible, the minimum amount in the range of estimated losses, based upon its analysis of the facts and circumstances as of the close of the most recent fiscal quarter. However, because of uncertainties and risks inherent in litigation generally and in environmental proceedings in particular, there can be no assurance that future developments will not require additional reserves, that some or all reserves will be adequate or that the amounts of any such additional reserves or any such inadequacy will not have a material adverse effect upon the Company’s financial condition or results of operations. See also Notes 3 and 8.

Revenue Recognition
Retail sales are recorded at the point of sale and are net of estimated returns and exclude sales and value added taxes. Catalog and internet sales are recorded at estimated time of delivery to the customer and are net of estimated returns and exclude sales taxes. Wholesale revenue is recorded net of estimated returns and allowances for markdowns, damages and miscellaneous claims when the related goods have been shipped and legal title has passed to the customer. Shipping and handling costs charged to customers are included in net sales. Estimated returns are based on historical returns and claims. Actual amounts of markdowns have not differed materially from estimates. Actual returns and claims in any future period may differ from historical experience.

Income Taxes
As part of the process of preparing Condensed Consolidated Financial Statements, the Company is required to estimate its income taxes in each of the tax jurisdictions in which it operates. This process involves estimating actual current tax obligations together with assessing temporary differences resulting from differing treatment of certain items for tax and accounting purposes,
such as depreciation of property and equipment and valuation of inventories. These temporary differences result in deferred tax assets and liabilities, which are included within the Condensed Consolidated Balance Sheets. The Company then assesses the likelihood that its deferred tax assets

12

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

will be recovered from future taxable income. Actual results could differ from this assessment if adequate taxable income is not generated in future periods. To the extent the Company believes that recovery of an asset is at risk, valuation allowances are established. To the extent valuation allowances are established or increased in a period, the Company includes an expense within the tax provision in the Condensed Consolidated Statements of Operations. These deferred tax valuation allowances may be released in future years when management considers that it is more likely than not that some portion or all of the deferred tax assets will be realized. In making such a determination, management will need to periodically evaluate whether or not all available evidence, such as future taxable income and reversal of temporary differences, tax planning strategies, and recent results of operations, provides sufficient positive evidence to offset any potential negative evidence that may exist at such time. In the event the deferred tax valuation allowance is released, the Company would record an income tax benefit for the portion or all of the deferred tax valuation allowance released. At July 28, 2012, the Company had a deferred tax valuation allowance of $3.5 million.

The Company recorded an effective income tax rate of 32.9% in the second quarter of Fiscal 2013 compared to 38.6% for the same period last year and 38.1% and 40.1% for the first six months of Fiscal 2013 and 2012, respectively. This year's tax rate is lower due to a tax rate reduction in the UK and increases in certain state tax credits.

Income tax reserves for certain tax positions are determined using the methodology required by the Income Tax Topic of the Accounting Standards Codification ("Codification"). This methodology requires companies to assess each income tax position taken using a two step process. A determination is first made as to whether it is more likely than not that the position will be sustained, based upon the technical merits, upon examination by the taxing authorities. If the tax position is expected to meet the more likely than not criteria, the benefit recorded for the tax position equals the largest amount that is greater than 50% likely to be realized upon ultimate settlement of the respective tax position. Uncertain tax positions require determinations and estimated liabilities to be made based on provisions of the tax law which may be subject to change or varying interpretation. If the Company’s determinations and estimates prove to be inaccurate, the resulting adjustments could be material to its future financial results. The Company believes it is reasonably possible that there will be an $8.0 million decrease in the gross tax liability for uncertain tax positions within the next 12 months based upon the expiration of statutes of limitation in various tax jurisdictions and potential settlements.

Postretirement Benefits Plan Accounting
Full-time employees who had at least 1,000 hours of service in calendar year 2004, except employees in the Lids Sports Group and Schuh Group segments, are covered by a defined benefit pension plan. The Company froze the defined benefit pension plan effective January 1, 2005. The Company also provides certain former employees with limited medical and life insurance benefits. The Company funds at least the minimum amount required by the Employee Retirement Income Security Act.






13

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

As required by the Compensation – Retirement Benefits Topic of the Codification, the Company is required to recognize the overfunded or underfunded status of postretirement benefit plans as an asset or liability in their Condensed Consolidated Balance Sheets and to recognize changes in that funded status in accumulated other comprehensive loss, net of tax, in the year in which the changes occur.

The Company accounts for the defined benefit pension plans using the Compensation-Retirement Benefits Topic of the Codification. As permitted under this topic, pension expense is recognized on an accrual basis over employees’ approximate service periods. The calculation of pension expense and the corresponding liability requires the use of a number of critical assumptions, including the expected long-term rate of return on plan assets and the assumed discount rate, as well as the recognition of actuarial gains and losses. Changes in these assumptions can result in different expense and liability amounts, and future actual experience can differ from these assumptions.

Share-Based Compensation
The Company has share-based compensation plans covering certain members of management and non-employee directors. The Company recognizes compensation expense for share-based payments based on the fair value of the awards as required by the Compensation – Stock Compensation Topic of the Codification. There was no share-based compensation expense related to stock options for the second quarter and first six months of Fiscal 2013 and 2012. The Company has not issued any new stock option awards since the first quarter of Fiscal 2008. For the second quarter of Fiscal 2013 and 2012, restricted stock expense was $2.5 million and $1.6 million, respectively. For the first six months of Fiscal 2013 and 2012, restricted stock expense was $4.7 million and $3.2 million, respectively. The fair value of employee restricted stock is determined based on the closing price of the Company’s stock on the date of the grant. The benefits of tax deductions in excess of recognized compensation expense are reported as a financing cash flow.

During the three months and six months ended July 28, 2012, the Company issued 194,232 shares of employee restricted stock at a grant date fair value of $57.58 per share which vest over a four-year term. For the three months and six months ended July 28, 2012, the Company issued 9,888 shares and 10,224 shares of director restricted stock at a weighted average price of $64.70 and $65.06, respectively, which vest on the first anniversary of the grant date. During the three months and six months ended July 30, 2011, the Company issued 289,407 shares of employee restricted stock at a grant date fair value of $45.14 per share which vest over a four-year term. For the three
months and six months ended July 30, 2011, the Company issued 14,643 shares of director restricted stock at a weighted average price of $43.01 which vest on the first anniversary of the grant date.

Cash and Cash Equivalents
Included in cash and cash equivalents at July 28, 2012, January 28, 2012 and July 30, 2011 are cash equivalents of $0.1 million, $0.2 million and $0.1 million, respectively. Cash equivalents are highly-liquid financial instruments having an original maturity of three months or less. At July 28, 2012, substantially all of the Company’s domestic cash was invested in deposit accounts at FDIC-insured banks. All of the Company’s domestic deposit account balances are currently FDIC insured as a

14

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued
result of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The majority of payments due from banks for domestic customer credit card transactions process within 24 - 48 hours and are accordingly classified as cash and cash equivalents.

At July 28, 2012, January 28, 2012 and July 30, 201l, outstanding checks drawn on zero-balance accounts at certain domestic banks exceeded book cash balances at those banks by approximately $48.6 million , $39.0 million and $33.3 million, respectively. These amounts are included in accounts payable.

Concentration of Credit Risk and Allowances on Accounts Receivable
The Company’s footwear wholesale businesses sell primarily to independent retailers and department stores across the United States. Receivables arising from these sales are not collateralized. Customer credit risk is affected by conditions or occurrences within the economy and the retail industry as well as by customer specific factors. The Company’s Lids Team Sports wholesale business sells primarily to colleges and high school athletic teams and their fan bases. Including both footwear wholesale and Lids Team Sports wholesale business receivables, one customer accounted for 8% of the Company’s total trade receivables balance, while no other customer accounted for more than 6% of the Company’s total trade receivables balance as of July 28, 2012.

The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information, as well as customer specific factors. The Company also establishes allowances for sales returns, customer deductions and co-op advertising based on specific circumstances, historical trends and projected probable outcomes.

Property and Equipment
Property and equipment are recorded at cost and depreciated or amortized over the estimated useful life of related assets. Depreciation and amortization expense are computed principally by the straight-line method over the following estimated useful lives:

Buildings and building equipment
20-45 years
Computer hardware, software and equipment
3-10 years
Furniture and fixtures
10 years

Leases
Leasehold improvements and properties under capital leases are amortized on the straight-line method over the shorter of their useful lives or their related lease terms and the charge to earnings is included in selling and administrative expenses in the Condensed Consolidated Statements of Operations.

Certain leases include rent increases during the initial lease term. For these leases, the Company recognizes the related rental expense on a straight-line basis over the term of the lease (which includes any rent holidays and the pre-opening period of construction, renovation, fixturing and merchandise placement) and records the difference between the amounts charged to operations and amounts paid as deferred rent.


15

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

The Company occasionally receives reimbursements from landlords to be used towards construction of the store the Company intends to lease. Leasehold improvements are recorded at their gross costs including items reimbursed by landlords. The reimbursements are amortized as a reduction
of rent expense over the initial lease term. Tenant allowances of $18.4 million, $17.6 million and $17.4 million at July 28, 2012, January 28, 2012 and July 30, 2011, respectively, and deferred rent of $35.8 million, $35.2 million and $34.0 million at July 28, 2012, January 28, 2012 and July 30, 2011, respectively, are included in deferred rent and other long-term liabilities on the Condensed Consolidated Balance Sheets.

Goodwill and Other Intangibles
Under the provisions of the Intangibles – Goodwill and Other Topic of the Codification, goodwill and intangible assets with indefinite lives are not amortized, but are tested at least annually, during the fourth quarter, for impairment. The Company will update the tests between annual tests if events or circumstances occur that would more likely than not reduce the fair value of the business unit with which the goodwill is associated below its carrying amount. It is also required that intangible assets with finite lives be amortized over their respective lives to their estimated residual values, and reviewed for impairment in accordance with the Property, Plant and Equipment Topic of the Codification.

Intangible assets of the Company with indefinite lives are primarily goodwill and identifiable trademarks acquired in connection with the acquisition of Schuh Group Ltd. in June 2011 and Hat World Corporation in April 2004. The Condensed Consolidated Balance Sheets include goodwill of $168.5 million for the Lids Sports Group, $100.0 million for the Schuh Group and $0.8 million for Licensed Brands at July 28, 2012, $159.1 million for the Lids Sports Group, $99.9 million for the Schuh Group and $0.8 million for Licensed Brands at January 28, 2012 and $155.4 million for the Lids Sports Group, $104.2 million for the Schuh Group and $0.8 million for Licensed Brands at July 30, 2011. The Company tests for impairment of intangible assets with an indefinite life, at a minimum on an annual basis, relying on a number of factors including operating results, business plans, projected future cash flows and observable market data. The impairment test for identifiable assets not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying amount. The Company has not had an impairment charge for intangible assets.

Identifiable intangible assets of the Company with finite lives are trademarks, customer lists, in-place leases, non-compete agreements and a vendor contract acquired in connection with the acquisitions of Hat World, Inc. in April 2004, Hat Shack, Inc. in January 2007, Impact Sports in November 2008, Great Plains Sports in September 2009, Sports Fan-Attic in November 2009, Brand Innovators in May 2010, Anaconda Sports in August 2010, Keuka Footwear in August 2010, Sports Avenue in October 2010 and Schuh in June 201l. They are subject to amortization based upon their estimated useful lives. Finite-lived intangible assets are evaluated for impairment using a process similar to that used to evaluate other definite-lived long-lived assets, a comparison of the fair value of the intangible asset with its carrying amount. An impairment loss is recognized for the amount by which the carrying value exceeds the fair value of the asset.



16

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

Fair Value of Financial Instruments
The carrying amounts and fair values of the Company’s financial instruments at July 28, 2012 and January 28, 2012 are:

Fair Values
 
 
 
 
 
 
 
In thousands
July 28,
2012
 
January 28,
2012
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
U.S. Revolver Borrowings
$
71,800

 
$
72,074

 
$
5,000

 
$
5,021

UK Term Loans
28,697

 
28,726

 
35,704

 
35,387


Debt fair values were determined using the income approach which is generally measured 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 as defined in Note 5.

Carrying amounts reported on the Condensed Consolidated Balance Sheets for cash, cash equivalents, receivables and accounts payable approximate fair value due to the short-term maturity of these instruments.

Cost of Sales
For the Company’s retail operations, the cost of sales includes actual product cost, the cost of transportation to the Company’s warehouses from suppliers and the cost of transportation from the Company’s warehouses to the stores. Additionally, the cost of its distribution facilities allocated to its retail operations is included in cost of sales.

For the Company’s wholesale operations, the cost of sales includes the actual product cost and the cost of transportation to the Company’s warehouses from suppliers.

Selling and Administrative Expenses
Selling and administrative expenses include all operating costs of the Company excluding (i) those related to the transportation of products from the supplier to the warehouse, (ii) for its retail operations, those related to the transportation of products from the warehouse to the store and (iii) costs of its distribution facilities which are allocated to its retail operations. Wholesale and unallocated retail costs of distribution are included in selling and administrative expenses in the amounts of $1.8 million and $1.9 million for the second quarters of Fiscal 2013 and 2012, respectively, and $3.8 million and $4.3 million for the first six months of Fiscal 2013 and 2012, respectively.

Gift Cards
The Company has a gift card program that began in calendar 1999 for its Lids Sports operations and calendar 2000 for its footwear operations. The gift cards issued to date do not expire. As such, the Company recognizes income when: (i) the gift card is redeemed by the customer; or (ii) the likelihood of the gift card being redeemed by the customer for the purchase of goods in the future is remote and there are no related escheat laws (referred to as “breakage”). The gift card breakage

17

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

rate is based upon historical redemption patterns and income is recognized for unredeemed gift cards in proportion to those historical redemption patterns.

Gift card breakage is recognized in revenues each period. Gift card breakage recognized as revenue was $0.1 million for each of the second quarters of Fiscal 2013 and 2012 and $0.2 million for each of the first six months of Fiscal 2013 and 2012. The Condensed Consolidated Balance Sheets include an accrued liability for gift cards of $9.4 million, $10.4 million and $7.3 million at July 28, 2012, January 28, 2012 and July 30, 2011, respectively.

Buying, Merchandising and Occupancy Costs
The Company records buying, merchandising and occupancy costs in selling and administrative expense. Because the Company does not include these costs in cost of sales, the Company’s gross margin may not be comparable to other retailers that include these costs in the calculation of gross margin.

Shipping and Handling Costs
Shipping and handling costs related to inventory purchased from suppliers are included in the cost of inventory and are charged to cost of sales in the period that the inventory is sold. All other shipping and handling costs are charged to cost of sales in the period incurred except for wholesale and unallocated retail costs of distribution, which are included in selling and administrative expenses.

Preopening Costs
Costs associated with the opening of new stores are expensed as incurred, and are included in selling and administrative expenses on the accompanying Condensed Consolidated Statements of Operations.

Store Closings and Exit Costs
From time to time, the Company makes strategic decisions to close stores or exit locations or activities. If stores or operating activities to be closed or exited constitute components, as defined by the Property, Plant and Equipment Topic of the Codification, and will not result in a migration of customers and cash flows, these closures will be considered discontinued operations when the related assets meet the criteria to be classified as held for sale, or at the cease-use date, whichever occurs first. The results of operations of discontinued operations are presented retroactively, net of tax, as a separate component on the Condensed Consolidated Statements of Operations, if material individually or cumulatively. To date, no store closings meeting the discontinued operations criteria have been material individually or cumulatively.

Assets related to planned store closures or other exit activities are reflected as assets held for sale and recorded at the lower of carrying value or fair value less costs to sell when the required criteria, as defined by the Property, Plant and Equipment Topic of the Codification, are satisfied. Depreciation ceases on the date that the held for sale criteria are met.

Assets related to planned store closures or other exit activities that do not meet the criteria to be classified as held for sale are evaluated for impairment in accordance with the Company’s normal

18

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

impairment policy, but with consideration given to revised estimates of future cash flows. In any event, the remaining depreciable useful lives are evaluated and adjusted as necessary.

Exit costs related to anticipated lease termination costs, severance benefits and other expected charges are accrued for and recognized in accordance with the Exit or Disposal Cost Obligations Topic of the Codification.

Advertising Costs
Advertising costs are predominantly expensed as incurred. Advertising costs were $10.4 million and $8.4 million for the second quarter of Fiscal 2013 and 2012, respectively, and $21.1 million and $18.1 million for the first six months of Fiscal 2013 and 2012, respectively. Direct response advertising costs for catalogs are capitalized in accordance with the Other Assets and Deferred Costs Topic for Capitalized Advertising Costs of the Codification. Such costs are amortized over the estimated future period as revenues are realized from such advertising, not to exceed six months. The Condensed Consolidated Balance Sheets include prepaid assets for direct response advertising costs of $1.7 million, $1.1 million and $1.4 million at July 28, 2012, January 28, 2012 and July 30, 2011.

Consideration to Resellers
The Company does not have any written buy-down programs with retailers, but the Company has provided certain retailers with markdown allowances for obsolete and slow moving products that are in the retailer’s inventory. The Company estimates these allowances and provides for them as reductions to revenues at the time revenues are recorded. Markdowns are negotiated with retailers and changes are made to the estimates as agreements are reached. Actual amounts for markdowns have not differed materially from estimates.

Cooperative Advertising
Cooperative advertising funds are made available to all of the Company’s wholesale customers. In order for retailers to receive reimbursement under such programs, the retailer must meet specified advertising guidelines and provide appropriate documentation of expenses to be reimbursed. The Company’s cooperative advertising agreements require that wholesale customers present documentation or other evidence of specific advertisements or display materials used for the Company’s products by submitting the actual print advertisements presented in catalogs, newspaper inserts or other advertising circulars, or by permitting physical inspection of displays. Additionally, the Company’s cooperative advertising agreements require that the amount of reimbursement requested for such advertising or materials be supported by invoices or other evidence of the actual costs incurred by the retailer. The Company accounts for these cooperative advertising costs as selling and administrative expenses, in accordance with the Revenue Recognition Topic for Customer Payments and Incentives of the Codification.

Cooperative advertising costs recognized in selling and administrative expenses were $0.7 million and $0.8 million for the second quarter of Fiscal 2013 and 2012, respectively, and $1.7 million for each of the first six months of Fiscal 2013 and 2012. During the first six months of Fiscal 2013 and 2012, the Company’s cooperative advertising reimbursements paid did not exceed the fair value of the benefits received under those agreements.


19

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

Vendor Allowances
From time to time, the Company negotiates allowances from its vendors for markdowns taken or expected to be taken. These markdowns are typically negotiated on specific merchandise and for specific amounts. These specific allowances are recognized as a reduction in cost of sales in the period in which the markdowns are taken. Markdown allowances not attached to specific inventory on hand or already sold are applied to concurrent or future purchases from each respective vendor.

The Company receives support from some of its vendors in the form of reimbursements for cooperative advertising and catalog costs for the launch and promotion of certain products. The reimbursements are agreed upon with vendors and represent specific, incremental, identifiable costs incurred by the Company in selling the vendor’s specific products. Such costs and the related reimbursements are accumulated and monitored on an individual vendor basis, pursuant to the respective cooperative advertising agreements with vendors. Such cooperative advertising reimbursements are recorded as a reduction of selling and administrative expenses in the same period in which the associated expense is incurred. If the amount of cash consideration received exceeds the costs being reimbursed, such excess amount would be recorded as a reduction of cost of sales.

Vendor reimbursements of cooperative advertising costs recognized as a reduction of selling and administrative expenses were $0.7 million and $0.9 million for the second quarter of Fiscal 2013 and 2012, respectively, and $1.6 million and $1.8 million for the first six months of Fiscal 2013 and 2012, respectively. During the first six months of Fiscal 2013 and 2012, the Company’s cooperative advertising reimbursements received were not in excess of the costs incurred.

Environmental Costs
Environmental expenditures relating to current operations are expensed or capitalized as appropriate. Expenditures relating to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated and are evaluated independently of any future claims for recovery. Generally, the timing of these accruals coincides with completion of a feasibility study or the Company's commitment to a formal plan of action. Costs of future expenditures for environmental remediation obligations are not discounted to their present value.

Earnings Per Common Share
Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities to issue common stock were exercised or converted to common stock (see Note 7).


20

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

Other Comprehensive Income
The Comprehensive Income Topic of the Codification requires, among other things, the Company’s pension liability adjustment, postretirement liability adjustment, unrealized gains or losses on foreign currency forward contracts and foreign currency translation adjustments to be included in other comprehensive income net of tax. Accumulated other comprehensive loss at July 28, 2012 consisted of $29.6 million of cumulative pension liability adjustments, net of tax, a cumulative post retirement liability adjustment of $0.3 million, net of tax, and a foreign currency translation adjustment of $2.9 million.

Business Segments
The Segment Reporting Topic of the Codification requires that companies disclose “operating segments” based on the way management disaggregates the Company’s operations for making internal operating decisions (see Note 9).

Derivative Instruments and Hedging Activities
The Derivatives and Hedging Topic of the Codification requires an entity to recognize all derivatives as either assets or liabilities in the Condensed Consolidated Balance Sheet and to measure those instruments at fair value. Under certain conditions, a derivative may be specifically designated as a fair value hedge or a cash flow hedge. The accounting for changes in the fair value of a derivative are recorded each period in current earnings or in other comprehensive income depending on the intended use of the derivative and the resulting designation. In prior periods, the Company entered into a small amount of foreign currency forward exchange contracts in order to reduce exposure to foreign currency exchange rate fluctuations in connection with inventory purchase commitments for its Johnston & Murphy Group.

There were no such contracts outstanding at July 28, 2012, January 28, 2012 and July 30, 2011. For the six months ended July 28, 2012, the Company recorded an unrealized loss on foreign currency forward contracts of less than $0.1 million in accumulated other comprehensive loss, before taxes. The Company monitors the credit quality of the major international, national and regional financial institutions with which it enters into such contracts.

The Company estimates that the majority of net hedging losses related to forward exchange contracts will be reclassified from accumulated other comprehensive loss into earnings through higher cost of sales over the succeeding year.


21

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

New Accounting Principles
In June 2011, FASB issued Accounting Standards Update No. 2011-05, an update to the FASB Codification Comprehensive Income Topic, which amends the existing accounting standards related to the presentation of comprehensive income in a company's financial statements. This update requires that all non-owner changes in shareholders' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two statement approach, the first statement would present total net earnings and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. Under either presentation alternative, reclassification adjustments and the effect of those adjustments on net earnings and other comprehensive income must be presented in the respective statement or statements, as applicable. The Company adopted this update for the first quarter of Fiscal 2013 and has included a separate statement of comprehensive income in its Condensed Consolidated Financial Statements. The adoption did not have a significant impact on the Company’s results of operations or financial position.


22

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 2
Acquisitions and Intangible Assets

Schuh Acquisition
On June 23, 2011, the Company, through its newly-formed, wholly-owned subsidiary Genesco (UK) Limited (“Genesco UK”), completed the acquisition of all the outstanding shares of Schuh Group Ltd. (“Schuh”) for a total purchase price of approximately £100.0 million, less £29.5 million outstanding under existing Schuh credit facilities, which remain in place, less a £1.9 million working capital adjustment and plus £6.2 million net cash acquired, with £5.0 million withheld and payable in June 2013. The Company financed the acquisition with borrowings under its existing credit facility and the balance from cash on hand. The purchase agreement also provides for deferred purchase price payments totaling £25 million, payable £15 million and £10 million on the third and fourth anniversaries of the closing, respectively, subject to the payees’ not having terminated their employment with Schuh under certain specified circumstances. This amount will be recorded as compensation expense and not reported as a component of the cost of the acquisition.

Headquartered in Scotland, Schuh is a specialty retailer of casual and athletic footwear sold through 69 retail stores in the United Kingdom and the Republic of Ireland and 14 concessions in Republic apparel stores as of July 28, 2012. The Company completed the acquisition in order to enhance its strategic development and prospects for growth and provide the Company with an established retail presence in the United Kingdom and improved insight into global fashion trends. The results of Schuh’s operations for the three months ended July 28, 2012 include net sales of $81.2 million and an operating loss of $(0.5) million, and for the six months ended July 28, 2012 include net sales of $151.5 million and an operating loss of $(3.5) million, and have been included in the Company’s Condensed Consolidated Financial Statements for the three months and six months ended July 28, 2012. During the three months and six months ended July 28, 2012, compensation expense related to the Schuh acquisition deferred purchase price obligation was $2.9 million and $5.9 million, respectively. This expense is included in the operating loss for the Schuh Group segment.

23

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 2
Acquisitions and Intangible Assets, Continued

The acquisition has been accounted for using the purchase method in accordance with the amended Business Combinations Topic of the Codification. Accordingly, the total purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values at acquisition as follows (amounts in thousands):

        
At June 23, 2011
Cash
$
24,836

Accounts Receivable
4,673

Inventories
32,179

Other current assets
7,565

Property and equipment
30,314

Other non-current assets
6,977

Deferred taxes
4,197

Trademarks
27,224

Other intangibles
4,995

Goodwill
102,907

Accounts payable
(16,196
)
Other current liabilities
(24,718
)
Long-term debt (includes current portion)
(62,562
)
Other non-current liabilities
(26,637
)
Net Assets Acquired
$
115,754


The trademarks acquired include the concept names and are deemed to have an indefinite life. Other intangibles include a $1.7 million customer list, a $2.5 million asset to reflect the adjustment of acquired leases to market and a vendor contract of $0.8 million. The weighted average amortization period for the asset to adjust acquired leases to market is 2.7 years. The weighted average amortization period for customer lists is 4.6 years.

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisition of Schuh includes the expected purchasing synergies and other benefits that result from combining the Schuh business with the Company, improved insight into global fashion trends, any intangible assets that do not qualify for separate recognition and an acquired assembled workforce. The goodwill related to the Schuh acquisition is not deductible for tax purposes.


24

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 2
Acquisitions and Intangible Assets, Continued

The following pro forma information presents the results of operations of the Company as if the Schuh acquisition had taken place at the beginning of Fiscal 2011 or January 31, 2010. Pro forma adjustments have been made to reflect additional interest expense from the $89.0 million in debt associated with the acquisition, interest expense on the acquired debt, amortization of intangible assets and the related income tax effects.

 
Six Months Ended -
Pro forma

In thousands, except per share data
July 30, 2011

Net sales
$
1,044,373

Earnings from continuing operations
16,284

Earnings per share:
 
Basic
$
0.70

Diluted
$
0.69


The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have occurred had the Schuh acquisition occurred at the beginning of Fiscal 2011.

Intangible Assets
Other intangibles by major classes were as follows:

 
Leases
 
Customer Lists
 
Other*
 
Total
(In Thousands)
Jul. 28,
2012

Jan. 28,
2012

 
Jul. 28,
2012

Jan. 28,
2012

 
Jul. 28,
2012

Jan. 28,
2012

 
Jul. 28,
2012

Jan. 28,
2012

Gross other intangibles
$
12,366

$
12,390

 
$
14,105

$
14,062

 
$
2,112

$
2,001

 
$
28,583

$
28,453

Accumulated amortization
(10,131
)
(9,477
)
 
(4,285
)
(3,292
)
 
(990
)
(876
)
 
(15,406
)
(13,645
)
Net Other Intangibles
$
2,235

$
2,913

 
$
9,820

$
10,770

 
$
1,122

$
1,125

 
$
13,177

$
14,808


*Includes non-compete agreements, vendor contract and backlog.

The amortization of intangibles, including trademarks, was $0.9 million and $0.8 million for the second quarter of Fiscal 2013 and 2012, respectively, and $1.7 million and $1.5 million for the first six months of Fiscal 2013 and 2012, respectively. The amortization of intangibles, including trademarks, will be $4.6 million, $4.2 million, $3.1 million, $2.1 million and $1.6 million for Fiscal 2013, 2014, 2015, 2016 and 2017, respectively.


25

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 3
Asset Impairments and Other Charges and Discontinued Operations

Asset Impairments and Other Charges

In accordance with Company policy, assets are determined to be impaired when the revised estimated future cash flows are insufficient to recover the carrying costs. Impairment charges represent the excess of the carrying value over the fair value of those assets.

Asset impairment charges are reflected as a reduction of the net carrying value of property and equipment, and in asset impairments and other, net in the accompanying Condensed Consolidated Statements of Operations.

The Company recorded a pretax charge to earnings of $0.4 million in the second quarter of Fiscal 2013, primarily for retail store asset impairments. The Company recorded a pretax charge to earnings of $0.5 million in the first six months of Fiscal 2013, including $0.4 million for retail store asset impairments and $0.1 million for network intrusion expenses.

The Company recorded a pretax charge to earnings of $0.3 million in the second quarter of Fiscal 2012, primarily for retail store asset impairments. The Company recorded a pretax charge to earnings of $1.6 million in the first six months of Fiscal 2012, including $1.1 million for retail store asset impairments, $0.4 million for network intrusion expenses and $0.1 million for other legal matters.

Discontinued Operations

Accrued Provision for Discontinued Operations
 
In thousands
Facility
Shutdown
Costs

Balance January 29, 2011
$
15,035

Additional provision Fiscal 2012
1,692

Charges and adjustments, net
(4,210
)
Balance January 28, 2012
12,517

Additional provision Fiscal 2013
360

Charges and adjustments, net
(1,099
)
Balance July 28, 2012*
11,778

Current provision for discontinued operations
7,511

Total Noncurrent Provision for Discontinued Operations    
$
4,267


*Includes a $12.3 million environmental provision, including $8.0 million in current provision for discontinued operations.


26

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 4
Inventories
            
In thousands
July 28,
2012

 
January 28,
2012

Raw materials
$
28,735

 
$
30,636

Wholesale finished goods
48,562

 
53,453

Retail merchandise
478,329

 
351,024

Total Inventories
$
555,626

 
$
435,113


Note 5
Fair Value

The Fair Value Measurements and Disclosures Topic of the Codification defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. This Topic defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.


27

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 5
Fair Value, Continued

The following table presents the Company’s assets (which excludes the Company's pension plan assets) and liabilities measured at fair value on a nonrecurring basis as of July 28, 2012 aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):
 
Long-Lived Assets
Held and Used

 
Level 1

 
Level 2

 
Level 3

 
Total
Losses

Measured as of April 28, 2012
$
47

 
$

 
$

 
$
47

 
$
46

Measured as of July 28, 2012
$
54

 
$

 
$

 
$
54

 
$
391


In accordance with the Property, Plant and Equipment Topic of the Codification, the Company recorded $0.4 million and $0.4 million of impairment charges as a result of the fair value measurement of its long-lived assets held and used on a nonrecurring basis during the three months and six months ended July 28, 2012. These charges are reflected in asset impairments and other, net on the Condensed Consolidated Statements of Operations.

The Company used a discounted cash flow model to estimate the fair value of these long-lived assets. Discount rate and growth rate assumptions are derived from current economic conditions, expectations of management and projected trends of current operating results. As a result, the Company has determined that the majority of the inputs used to value its long-lived assets held and used are unobservable inputs that fall within Level 3 of the fair value hierarchy.

Note 6
Defined Benefit Pension Plans and Other Benefit Plans

Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Benefits
 
Three Months Ended
 
Three Months Ended
In thousands
July 28,
2012

 
July 30,
2011

 
July 28,
2012

 
July 30,
2011

Service cost
$
88

 
$
63

 
$
89

 
$
42

Interest cost
1,239

 
1,400

 
39

 
43

Expected return on plan assets
(1,750
)
 
(1,952
)
 

 

Amortization:
 
 
 
 
 
 
 
Prior service cost
1

 
1

 

 

Losses
1,478

 
1,162

 
21

 
20

Net amortization
1,479

 
1,163

 
21

 
20

Net Periodic Benefit Cost
$
1,056

 
$
674

 
$
149

 
$
105









28

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 6
Defined Benefit Pension Plans and Other Benefit Plans, Continued

Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Benefits
 
Six Months Ended
 
Six Months Ended
In thousands
July 28,
2012

 
July 30,
2011

 
July 28,
2012

 
July 30,
2011

Service cost
$
176

 
$
126

 
$
178

 
$
84

Interest cost
2,483

 
2,798

 
78

 
86

Expected return on plan assets
(3,504
)
 
(3,904
)
 

 

Amortization:
 
 
 
 
 
 
 
Prior service cost
2

 
2

 

 

Losses
3,076

 
2,403

 
42

 
40

Net amortization
3,078

 
2,405

 
42

 
40

Net Periodic Benefit Cost
$
2,233

 
$
1,425

 
$
298

 
$
210


There is no cash contribution required for the Plan in 2012.


29

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 7
Earnings Per Share


For the Three Months Ended

For the Three Months Ended

July 28, 2012

July 30, 2011
(In thousands, except
     per share amounts)
Income
(Numerator)

Shares
(Denominator)

Per Share
Amount

Income
(Numerator)

Shares
(Denominator)

Per Share
Amount












Earnings from continuing operations
$
10,561






$
350

















Less: Preferred stock dividends
(35
)





(49
)
















Basic EPS from continuing operations











Income available to











common shareholders
10,526


23,778


$
0.44


301


23,126


$
.01













Effect of Dilutive Securities from
continuing operations











Options


297






460



Convertible
preferred stock(1)











Employees' preferred stock(2)


48






49















Diluted EPS











Income available to common











shareholders plus assumed











conversions
$
10,526


24,123


$
0.44


$
301


23,635


$
.01


(1)
The amount of the dividend on the convertible preferred stock per common share obtainable on conversion of the convertible preferred stock was higher than basic earnings per share for all periods presented. Therefore, conversion of the convertible preferred stock was not reflected in diluted earnings per share because it would have been antidilutive. The shares convertible to common stock for Series 1, 3 and 4 preferred stock would have been 13,502, 18,198 and 4,920, respectively, as of July 28, 2012.

(2)
The Company's Employees' Subordinated Convertible Preferred Stock is convertible one for one to the Company's common stock. Because there are no dividends paid on this stock, these shares are assumed to be converted for the second quarter ended July 28, 2012 and July 30, 2011.











30

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 7
Earnings Per Share, Continued

 
For the Six Months Ended
 
For the Six Months Ended
 
July 28, 2012
 
July 30, 2011
(In thousands, except
per share amounts)
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
 
 
 
 
 
 
 
 
 
 
 
 
Earnings from continuing operations
$
31,352

 
 
 
 
 
$
15,325

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less: Preferred stock dividends
(81
)
 
 
 
 
 
(98
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS from continuing operations
 
 
 
 
 
 
 
 
 
 
 
Income available to
 
 
 
 
 
 
 
 
 
 
 
common shareholders
31,271

 
23,687

 
$
1.32

 
15,227

 
23,033

 
$
0.66

 
 
 
 
 
 
 
 
 
 
 
 
Effect of Dilutive Securities from
continuing operations
 
 
 
 
 
 
 
 
 
 
 
Options
 
 
415

 
 
 
 
 
506

 
 
Convertible
preferred stock(1)
21

 
18

 
 
 

 

 
 
Employees' preferred stock(2)
 
 
48

 
 
 
 
 
49

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS
 
 
 
 
 
 
 
 
 
 
 
Income available to common
 
 
 
 
 
 
 
 
 
 
 
shareholders plus assumed
 
 
 
 
 
 
 
 
 
 
 
conversions
$
31,292

 
24,168

 
$
1.29

 
$
15,227

 
23,588

 
$
0.65


(1)
The amount of the dividend on the convertible preferred stock per common share obtainable on conversion of the convertible preferred stock was less than basic earnings per share for Series 3 preferred stock for the six months ended July 28, 2012. Therefore, conversion of Series 3 preferred shares was included in diluted earnings per share for the six months ended July 28, 2012. The amount of the dividend on the convertible preferred stock per common share obtainable on conversion of the convertible preferred stock was higher than basic earnings per share for Series 1 and 4 preferred stock for the six months ended July 28, 2012 and for all preferred stocks for the six months ended July 30, 2011. Therefore, conversion of the Series 1 and 4 convertible preferred stocks for the six months ended July 28, 2012 and all preferred stocks for the six months ended July 30, 2011 were not reflected in diluted earnings per share because it would have been antidilutive. The shares convertible to common stock for Series 1, 3 and 4 preferred stock would have been 13,502, 18,198 and 4,920, respectively, as of July 28, 2012.

(2)
The Company's Employees' Subordinated Convertible Preferred Stock is convertible one for one to the Company's common stock. Because there are no dividends paid on this stock, these shares are assumed to be converted for the six months ended July 28, 2012 and July 30, 2011.

The Company repurchased 346,398 shares during the six months ended July 28, 2012 for $20.8 million of which $0.6 million was not paid in the second quarter but included in other accrued liabilities in the Condensed Consolidated Balance Sheets. The Company did not repurchase any shares during the six months ended July 30, 2011.

31

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 8
Legal Proceedings

Environmental Matters
New York State Environmental Matters
In August 1997, the New York State Department of Environmental Conservation (“NYSDEC”) and the Company entered into a consent order whereby the Company assumed responsibility for conducting a remedial investigation and feasibility study (“RIFS”) and implementing an interim remedial measure (“IRM”) with regard to the site of a knitting mill operated by a former subsidiary of the Company from 1965 to 1969. The Company undertook the IRM and RIFS voluntarily, without admitting liability or accepting responsibility for any future remediation of the site. The Company has completed the IRM and the RIFS. In the course of preparing the RIFS, the Company identified remedial alternatives with estimated undiscounted costs ranging from $0 million to $24.0 million, excluding amounts previously expended or provided for by the Company. The United States Environmental Protection Agency (“EPA”), which has assumed primary regulatory responsibility for the site from NYSDEC, issued a Record of Decision in September 2007. The Record of Decision requires a remedy of a combination of groundwater extraction and treatment and in-site chemical oxidation at an estimated present cost of approximately $10.7 million.

In July 2009, the Company agreed to a Consent Order with the EPA requiring the Company to perform certain remediation actions, operations, maintenance and monitoring at the site. In September 2009, a Consent Judgment embodying the Consent Order was filed in the U.S. District Court for the Eastern District of New York.    

The Village of Garden City, New York, has additionally asserted that the Company is liable for the costs associated with enhanced treatment required by the impact of the groundwater plume from the site on two public water supply wells, including historical costs ranging from approximately $1.8 million to in excess of $2.5 million, and future operation and maintenance costs which the Village estimates at $126,400 annually while the enhanced treatment continues. On December 14, 2007, the Village filed a complaint against the Company and the owner of the property under the Resource Conservation and Recovery Act (“RCRA”), the Safe Drinking Water Act, and the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) as well as a number of state law theories in the U.S. District Court for the Eastern District of New York, seeking an injunction requiring the defendants to remediate contamination from the site and to establish their liability for future costs that may be incurred in connection with it, which the complaint alleges could exceed $41 million, undiscounted, over a 70-year period. The Company has not verified the estimates of either historic or future costs asserted by the Village, but believes that an estimate of future costs based on a 70-year remediation period is unreasonable given the expected remedial period reflected in the EPA's Record of Decision. On May 23, 2008, the Company filed a motion to dismiss the Village's complaint on grounds including applicable statutes of limitation and preemption of certain claims by the NYSDEC's and the EPA's diligent prosecution of remediation. On January 27, 2009, the Court granted the motion to dismiss all counts of the plaintiff's complaint except for the CERCLA claim and a state law claim for indemnity for costs incurred after November 27, 2000. On September 23, 2009, on a motion for reconsideration by the Village, the Court reinstated the claims for injunctive relief under RCRA and for equitable relief under certain of the state law theories. The Company intends to continue to defend the action.

In December 2005, the EPA notified the Company that it considers the Company a potentially responsible party (“PRP”) with respect to contamination at two Superfund sites in upstate New York. The sites were used as landfills for process wastes generated by a glue manufacturer, which acquired tannery wastes from several tanners, allegedly including the Company's Whitehall tannery, for use as raw materials in the

32

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 8
Legal Proceedings, Continued

gluemaking process. The Company has no records indicating that it ever provided raw materials to the gluemaking operation and has not been able to establish whether the EPA's substantive allegations are accurate. The Company, together with other tannery PRPs, has entered into cost sharing agreements and Consent Decrees with the EPA with respect to both sites. Based upon the current estimates of the cost of remediation, the Company's share is expected to be less than $250,000 in total for the two sites. While there is no assurance that the Company's share of the actual cost of remediation will not exceed the estimate, the Company does not presently expect that its aggregate exposure with respect to these two landfill sites will have a material adverse effect on its financial condition or results of operations.

Whitehall Environmental Matters
The Company has performed sampling and analysis of soil, sediments, surface water, groundwater and waste management areas at the Company's former Volunteer Leather Company facility in Whitehall, Michigan.

In October 2010, the Company and the Michigan Department of Natural Resources and Environment entered into a Consent Decree providing for implementation of a remedial Work Plan for the facility site designed to bring the site into compliance with applicable regulatory standards. The Work Plan's implementation is substantially complete and the Company expects, based on its present understanding of the condition of the site, that its future obligations with respect to the site will be limited to periodic monitoring and that future costs related to the site should not have a material effect on its financial condition or results of operations.

Accrual for Environmental Contingencies
Related to all outstanding environmental contingencies, the Company had accrued $12.3 million as of July 28, 2012, $13.0 million as of January 28, 2012 and $14.2 million as of July 30, 2011. All such provisions reflect the Company's 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 it relates to former facilities operated by the Company. The Company has made pretax accruals for certain of these contingencies, including approximately $0.1 million and $1.2 million reflected in the second quarter of Fiscal 2013 and 2012, respectively, and $0.4 million and $1.6 million reflected in the first six months of Fiscal 2013 and 2012, respectively. These charges are included in provision for discontinued operations, net in the Condensed Consolidated Statements of Operations and represent changes in estimates.

California Action
On March 3, 2011, there was filed in the U.S. District Court for the Eastern District of California a putative class action styled Fraser v. Genesco Inc. On March 4, 2011, there was filed in the Superior Court of California for the County of San Francisco a putative class action styled Pabst v. Genesco Inc. et al. The Pabst action was removed to the U.S. District Court for the Northern District of California on April 1, 2011. Both complaints allege that the Company's retail stores in California violated the California Song-Beverly Credit Card Act of 1971 and other California law through customer information collection practices, and both seek civil penalties, damages, restitution, injunctive and declaratory relief, attorneys' fees, and other relief. The Company and plaintiffs' counsel have reached an agreement to settle both actions. The court approved the settlement on August 24, 2012. The Company expects that the settlement will not have a material effect on its financial condition or results of operations.

33

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 8
Legal Proceedings, Continued

Other Matters
On December 10, 2010, the Company announced that it had suffered a criminal intrusion into the portion of its computer network that processes payments for transactions in certain of its retail stores. Visa, Inc. and MasterCard Worldwide have asserted claims against the Company's acquiring banks totaling approximately $15.4 million in connection with the intrusion, which amounts may be indemnifiable by the Company. The Company disputes the validity of these claims and intends to contest them vigorously and thus has no accrual. There can be no assurance that additional claims related to the intrusion will not be asserted by these or other parties in the future, but the Company does not currently expect any potential additional claims to have a material effect on its financial condition or results of operations.

On January 5, 2012, a patent infringement action against the Company and numerous other defendants was filed in the U.S. District Court for the Eastern District of Texas, GeoTag, Inc. v. Circle K Store, Inc., et al., alleging that features of certain of the Company's e-commerce websites infringe U.S. Patent No. 5,930,474, entitled “Internet Organizer for Accessing Geographically and Topically Based Information.” The plaintiff seeks relief including damages for the alleged infringement, costs, expenses and pre- and post-judgment interest and injunctive relief. The Company disputes the validity of the claim and intends to defend the matter and thus has no accrual.

On May 14, 2012, a putative class and collective action, Maro v. Hat World, Inc., was filed in the U.S. District Court for the Northern District of Illinois. The action alleges that the Company failed to pay the plaintiff and other, similarly situated retail store employees of Hat World, Inc., for time spent making bank deposits of store collections, and seeks to recover unpaid wages, liquidated damages, statutory penalties, attorneys fees, and costs pursuant to the federal Fair Labor Standards Act, the Illinois Minimum Wage Law and the Illinois Wage Payment and Collection Act. On July 16, 2012 and July 30, 2012, additional putative class and collective actions, Chavez v. Hat World, Inc. and Dismukes v. Hat World, Inc., were filed in the same court, alleging that certain Hat World employees were misclassified as exempt from overtime pay, and seeking similar relief. The Chavez and Dismukes actions have been consolidated. The Company disputes the material allegations in these complaints and intends to defend the matters and thus has no accrual.

In addition to the matters specifically described in this Note, the Company is a party to other legal and regulatory proceedings and claims arising in the ordinary course of its business. While management does not believe that the Company's liability with respect to any of these other matters is likely to have a material effect on its financial position or results of operations, legal proceedings are subject to inherent uncertainties and unfavorable rulings could have a material adverse impact on the Company's business and results of operations.





34

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 9
Business Segment Information

During the six months ended July 28, 2012, the Company operated five reportable business segments (not including corporate): (i) Journeys Group, comprised of the Journeys, Journeys Kidz, Shi by Journeys and Underground by Journeys retail footwear chains, catalog and e-commerce operations; (ii) Schuh Group, acquired in June 2011, comprised of the Schuh retail footwear chain and e-commerce operations; (iii) Lids Sports Group, comprised primarily of the Lids, Hat World and Hat Shack retail headwear stores, the Lids Locker Room and Lids Clubhouse fan shops (operated under various trade names), the Lids Team Sports business and certain e-commerce operations; (iv) Johnston & Murphy Group, comprised of Johnston & Murphy retail operations, catalog and e-commerce operations and wholesale distribution; and (v) Licensed Brands, comprised of Dockers® Footwear, sourced and marketed under a license from Levi Strauss & Company, SureGrip® Footwear and other brands.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

The Company's reportable segments are based on management's organization of the segments in order to make operating decisions and assess performance along types of products sold. Journeys Group, Schuh Group and Lids Sports Group sell primarily branded products from other companies while Johnston & Murphy Group and Licensed Brands sell primarily the Company's owned and licensed brands. As a result of combining the Underground Station Group with Journeys Group in the first quarter of Fiscal 2013, Journeys Group segment sales, operating income, total assets, depreciation and amortization and capital expenditures have been restated for the three months and six months ended July 30, 2011 to conform to the current year presentation.

Corporate assets include cash, prepaid rent expense, prepaid income taxes, deferred income taxes, deferred note expense and corporate fixed assets. The Company charges allocated retail costs of distribution to each segment. The Company does not allocate certain costs to each segment in order to make decisions and assess performance. These costs include corporate overhead, interest expense, interest income, asset impairment charges and other, including major litigation.


35

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 9
Business Segment Information, Continued
Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
July 28, 2012
Journeys
Group    
 
Schuh Group
 
Lids Sports
Group
 
Johnston
& Murphy
Group
 
Licensed
Brands
 
Corporate
& Other
 
Consolidated
In thousands
 
 
 
 
 
 
Sales
$
209,439

 
$
81,156

 
$
182,598

 
$
48,286

 
$
22,307

 
$
513

 
$
544,299

Intercompany Sales

 

 
(719
)
 
(7
)
 
(51
)
 

 
(777
)
Net sales to external customers
$
209,439

 
$
81,156

 
$
181,879

 
$
48,279

 
$
22,256

 
$
513

 
$
543,522

Segment operating income (loss)
$
2,065

 
$
(545
)
 
$
20,571

 
$
1,814

 
$
1,427

 
$
(7,973
)
 
$
17,359

Asset Impairments and other*

 

 

 

 

 
(404
)
 
(404
)
Earnings (loss) from operations
2,065

 
(545
)
 
20,571

 
1,814

 
1,427

 
(8,377
)
 
16,955

Interest expense

 

 

 

 

 
(1,217
)
 
(1,217
)
Interest income

 

 

 

 

 
10

 
10

Earnings (loss) from continuing
operations before income taxes
$
2,065

 
$
(545
)
 
$
20,571

 
$
1,814

 
$
1,427

 
$
(9,584
)
 
$
15,748

Total assets**
$
336,788

 
$
221,257

 
$
527,555

 
$
84,353