10-Q
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 August 1, 2015
 
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:
 
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 Exchange Act.)    Yes  o    No  x
As of August 28, 2015, 23,785,302 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
August 1, 2015

 
January 31, 2015

 
August 2, 2014

Current Assets:
 
 
 
 
 
  Cash and cash equivalents
$
48,997

 
$
112,867

 
$
59,303

  Accounts receivable, net of allowances of $4,304 at August 1, 2015,
 
 
 
 
 
$4,191 at January 31, 2015 and $4,597 at August 2, 2014
58,385

 
55,263

 
54,142

  Inventories
734,803

 
598,145

 
669,388

  Deferred income taxes
29,192

 
28,293

 
23,491

  Prepaids and other current assets
70,644

 
53,090

 
72,923

Total current assets
942,021

 
847,658

 
879,247

 
 
 
 
 
 
Property and equipment:
 
 
 
 
 
Land
8,303

 
7,653

 
6,250

Buildings and building equipment
34,803

 
32,872

 
20,498

Computer hardware, software and equipment
170,304

 
164,512

 
141,301

Furniture and fixtures
198,580

 
192,078

 
184,290

Construction in progress
41,731

 
25,587

 
44,123

Improvements to leased property
349,962

 
349,087

 
343,767

Property and equipment, at cost
803,683

 
771,789

 
740,229

Accumulated depreciation
(493,268
)
 
(466,037
)
 
(443,822
)
Property and equipment, net
310,415

 
305,752

 
296,407

Deferred income taxes
30

 
31

 
668

Goodwill
300,230

 
296,865

 
293,610

Trademarks, net of accumulated amortization of $5,451 at August 1,
 
 
 
 
 
    2015, $5,054 at January 31, 2015 and $4,660 at August 2, 2014
82,651

 
82,263

 
78,008

Other intangibles, net of accumulated amortization of $24,853 at
 
 
 
 
 
August 1, 2015, $23,389 at January 31, 2015 and $22,151 at
 
 
 
 
 
August 2, 2014
10,274

 
11,585

 
8,306

Other noncurrent assets
38,680

 
38,933

 
24,591

Total Assets
$
1,684,301

 
$
1,583,087

 
$
1,580,837









3


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

Liabilities and Equity
August 1, 2015

 
January 31, 2015

 
August 2, 2014

Current Liabilities:
 
 
 
 
 
  Accounts payable
$
271,021

 
$
176,307

 
$
237,777

  Accrued employee compensation
25,296

 
88,030

 
81,003

  Accrued other taxes
24,289

 
33,965

 
22,359

  Accrued income taxes
58

 
12,921

 
55

  Current portion – long-term debt
18,764

 
13,152

 
29,284

  Other accrued liabilities
75,860

 
71,036

 
61,804

  Provision for discontinued operations
10,483

 
10,505

 
7,770

Total current liabilities
425,771

 
405,916

 
440,052

Long-term debt
94,694

 
16,003

 
47,083

Pension liability
21,686

 
22,184

 
8,793

Deferred rent and other long-term liabilities
141,888

 
135,953

 
134,829

Provision for discontinued operations
4,247

 
4,254

 
4,789

Total liabilities
688,286

 
584,310

 
635,546

Commitments and contingent liabilities

 

 

Equity:
 
 
 
 
 
Non-redeemable preferred stock
1,266

 
1,274

 
1,299

Common equity:
 
 
 
 
 
Common stock, $1 par value:
 
 
 
 
 
Authorized: 80,000,000 shares
 
 
 
 
 
Issued/Outstanding:
 
 
 
 
 
August 1, 2015 – 24,273,736/23,785,272
 
 
 
 
 
January 31, 2015 – 24,515,362/24,026,898
 
 
 
 
 
August 2, 2014 – 24,580,700/24,092,236
24,274

 
24,515

 
24,581

Additional paid-in capital
216,155

 
208,888

 
201,692

Retained earnings
806,498

 
820,563

 
746,075

Accumulated other comprehensive loss
(36,157
)
 
(40,576
)
 
(12,500
)
Treasury shares, at cost (488,464 shares)
(17,857
)
 
(17,857
)
 
(17,857
)
Total Genesco equity
994,179

 
996,807

 
943,290

Noncontrolling interest – non-redeemable
1,836

 
1,970

 
2,001

Total equity
996,015

 
998,777

 
945,291

Total Liabilities and Equity
$
1,684,301

 
$
1,583,087

 
$
1,580,837


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
 
August 1, 2015

 
August 2, 2014

August 1, 2015

 
August 2, 2014

Net sales
$
655,525

 
$
615,474

$
1,316,122

 
$
1,244,299

Cost of sales
335,434

 
313,729

669,698

 
626,610

Selling and administrative expenses
306,422

 
290,239

613,855

 
583,576

Asset impairments and other, net
1,173

 
1,422

3,819

 
311

Earnings from operations
12,496

 
10,084

28,750

 
33,802

Interest expense, net:
 
 
 
 
 
 
Interest expense
945

 
800

1,605

 
1,533

Interest income
(17
)
 
(18
)
(32
)
 
(50
)
Total interest expense, net
928

 
782

1,573

 
1,483

Earnings from continuing operations before income taxes
11,568

 
9,302

27,177

 
32,319

Income tax expense
3,975

 
4,534

9,639

 
13,453

Earnings from continuing operations
7,593

 
4,768

17,538

 
18,866

Provision for discontinued operations, net
(73
)
 
(74
)
(140
)
 
(199
)
Net Earnings
$
7,520

 
$
4,694

$
17,398

 
$
18,667

 
 
 
 
 
 
 
Basic earnings per common share:
 
 
 
 
 
 
Continuing operations
$
0.32

 
$
0.20

$
0.74

 
$
0.81

Discontinued operations
0.00

 
0.00

0.00

 
(0.01
)
     Net earnings
$
0.32

 
$
0.20

$
0.74

 
$
0.80

Diluted earnings per common share:
 
 
 
 
 
 
Continuing operations
$
0.32

 
$
0.20

$
0.74

 
$
0.80

Discontinued operations
0.00

 
0.00

(0.01
)
 
(0.01
)
    Net earnings
$
0.32

 
$
0.20

$
0.73

 
$
0.79


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
 
August 1, 2015

 
August 2, 2014

August 1, 2015

 
August 2, 2014

Net earnings
$
7,520

 
$
4,694

$
17,398

 
$
18,667

Other comprehensive income (loss):
 
 
 
 
 
 
Pension liability adjustments, net of tax of $0.5 million and $1.0 million for the three and six months ended August 1, 2015 and $0.3 million and $0.7 million for the three and six months ended August 2, 2014
727

 
521

1,552

 
1,107

Postretirement liability adjustments, net of tax of $0.0 million and ($0.3 million) for the three and six months ended August 1, 2015 and $0.0 million for the three and six months ended August 2, 2014
29

 
15

(405
)
 
33

Foreign currency translation adjustments
(695
)
 
(96
)
3,272

 
3,127

Total other comprehensive income
61

 
440

4,419

 
4,267

Comprehensive income
$
7,581

 
$
5,134

$
21,817

 
$
22,934


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
 
August 1, 2015

 
August 2, 2014

August 1, 2015

 
August 2, 2014

CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net earnings
$
7,520

 
$
4,694

$
17,398

 
$
18,667

Adjustments to reconcile net earnings to net cash
 
 
 
 
 
 
(used in) provided by operating activities:
 
 
 
 
 
 
Depreciation and amortization
19,382

 
18,389

38,875

 
35,749

Amortization of deferred note expense and debt discount
210

 
172

382

 
345

Deferred income taxes
5,447

 
3,286

3,815

 
1,609

Recoveries on accounts receivable
(13
)
 
(51
)
(64
)
 
(238
)
Impairment of long-lived assets
931

 
418

1,697

 
1,242

Restricted stock expense
3,409

 
3,278

6,900

 
6,508

Provision for discontinued operations
120

 
122

231

 
328

Tax benefit of stock options and restricted stock
(15
)
 
(2,178
)
(59
)
 
(3,098
)
Other
632

 
418

762

 
462

Effect on cash from changes in working capital and other
 
 
 
 
 
 
assets and liabilities, net of acquisitions:
 
 
 
 
 
 
  Accounts receivable
2,191

 
(338
)
(2,822
)
 
(1,132
)
  Inventories
(99,105
)
 
(78,631
)
(135,727
)
 
(97,120
)
  Prepaids and other current assets
(12,965
)
 
(13,430
)
(17,239
)
 
(18,260
)
  Accounts payable
37,727

 
59,884

78,919

 
86,329

  Other accrued liabilities
(60,357
)
 
25,733

(89,497
)
 
19,167

  Other assets and liabilities
209

 
(46,068
)
1,261

 
(42,694
)
Net cash (used in) provided by operating activities
(94,677
)
 
(24,302
)
(95,168
)
 
7,864

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
  Capital expenditures
(21,871
)
 
(32,927
)
(46,271
)
 
(52,737
)
  Acquisitions, net of cash acquired

 
(3,233
)

 
(3,233
)
  Proceeds from asset sales
15

 
7

34

 
156

Net cash used in investing activities
(21,856
)
 
(36,153
)
(46,237
)
 
(55,814
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
  Payments of long-term debt
(10,842
)
 
(6,242
)
(12,604
)
 
(7,698
)
  Proceeds from issuance of long-term debt
27,417

 
23,820

27,417

 
23,820

  Borrowings under revolving credit facility
82,140

 
55,200

82,140

 
83,200

  Payments on revolving credit facility
(13,400
)
 
(34,000
)
(13,400
)
 
(62,000
)
  Tax benefit of stock options and restricted stock
15

 
2,178

59

 
3,098

  Share repurchases
(21,695
)
 

(21,695
)
 

  Change in overdraft balances
10,486

 
6,935

15,179

 
5,586

  Additions to deferred note expense
(639
)
 

(639
)
 

  Exercise of stock options
211

 
180

576

 
1,687

  Other

 
(9
)

 
(42
)
Net cash provided by financing activities
73,693

 
48,062

77,033

 
47,651

Effect of foreign exchange rate fluctuations on cash
1,951

 
(186
)
502

 
155

Net Decrease in Cash and Cash Equivalents
(40,889
)
 
(12,579
)
(63,870
)
 
(144
)
Cash and cash equivalents at beginning of period
89,886

 
71,882

112,867

 
59,447

Cash and cash equivalents at end of period
$
48,997

 
$
59,303

$
48,997

 
$
59,303

Supplemental Cash Flow Information:
 
 
 
 
 
 
Net cash paid for:
 
 
 
 
 
 
Interest
$
444

 
$
793

$
925

 
$
1,294

Income taxes
21,212

 
19,155

33,782

 
24,977

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
Shares

 
Non Controlling
Interest
Non-Redeemable

 
Total
Equity

Balance February 1, 2014
$
1,305

 
$
24,408

 
$
190,568

 
$
734,533

 
$
(16,767
)
 
$
(17,857
)
 
$
1,933

 
$
918,123

Net earnings

 

 

 
97,725

 

 

 

 
97,725

Other comprehensive loss

 

 

 

 
(23,809
)
 

 

 
(23,809
)
Exercise of stock options

 
69

 
1,749

 

 

 

 

 
1,818

Issue shares – Employee Stock Purchase Plan

 
3

 
188

 

 

 

 

 
191

Employee and non-employee restricted stock

 

 
13,392

 

 

 

 

 
13,392

Restricted stock issuance

 
202

 
(202
)
 

 

 

 

 

Restricted shares withheld for taxes

 
(88
)
 
88

 
(7,125
)
 

 

 

 
(7,125
)
Tax benefit of stock options and restricted stock exercised

 

 
3,061

 

 

 

 

 
3,061

Shares repurchased

 
(65
)
 

 
(4,570
)
 

 

 

 
(4,635
)
Other
(31
)
 
(14
)
 
44

 

 

 

 

 
(1
)
Noncontrolling interest – gain

 

 

 

 

 

 
37

 
37

Balance January 31, 2015
1,274

 
24,515

 
208,888

 
820,563

 
(40,576
)
 
(17,857
)
 
1,970

 
998,777

Net earnings

 

 

 
17,398

 

 

 

 
17,398

Other comprehensive income

 

 

 

 
4,419

 

 

 
4,419

Exercise of stock options

 
16

 
560

 

 

 

 

 
576

Employee and non-employee restricted stock

 

 
6,900

 

 

 

 

 
6,900

Restricted stock issuance

 
239

 
(239
)
 

 

 

 

 

Restricted shares withheld for taxes

 
(66
)
 
66

 
(4,408
)
 

 

 

 
(4,408
)
Tax benefit of stock options and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
restricted stock exercised

 

 
(34
)
 

 

 

 

 
(34
)
Shares repurchased

 
(424
)
 

 
(27,055
)
 

 

 

 
(27,479
)
Other
(8
)
 
(6
)
 
14

 

 

 

 

 

Noncontrolling interest – loss

 

 

 

 

 

 
(134
)
 
(134
)
Balance August 1, 2015
$
1,266

 
$
24,274

 
$
216,155

 
$
806,498

 
$
(36,157
)
 
$
(17,857
)
 
$
1,836

 
$
996,015


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 Notes 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 January 30, 2016 ("Fiscal 2016") and of the fiscal year ended January 31, 2015 ("Fiscal 2015"). 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 Genesco Inc.'s Annual Report on Form 10-K.

Nature of Operations
Genesco Inc. and its subsidiaries (collectively, the "Company") 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, the Republic of Ireland and Germany; through e-commerce websites including journeys.com, journeyskidz.com, shibyjourneys.com, schuh.co.uk, johnstonmurphy.com and trask.com and catalogs, and at wholesale, primarily under the Company's Johnston & Murphy brand, the Trask brand, the licensed Dockers brand and other brands that the Company licenses for footwear, and the Company's SureGrip® line of slip-resistant, occupational 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 banner; the Lids Locker Room and Lids Clubhouse businesses, 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 under various trade names; licensed team merchandise departments in Macy's department stores operated under the name Locker Room by Lids and on macys.com, under a license agreement with Macy's; certain e-commerce operations including lids.com, lids.ca, lidslockerroom.com and lidsclubhouse.com; and an athletic team dealer business operating as Lids Team Sports. Including both the footwear businesses and the Lids Sports Group business, at August 1, 2015, the Company operated 2,800 retail stores and leased departments in the U.S., Puerto Rico, Canada, the United Kingdom, the Republic of Ireland and Germany.
During the six months ended August 1, 2015 and August 2, 2014, 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, e-commerce operations and catalog; (ii) Schuh Group, comprised of the Schuh retail footwear chain and e-commerce operations; (iii) Lids Sports Group, comprised as described in the preceding paragraph; (iv) Johnston & Murphy Group, comprised of Johnston & Murphy retail operations, e-commerce and catalog operations and wholesale distribution of products under the Johnston & Murphy and Trask brands; and (v) Licensed Brands, comprised of Dockers® Footwear, sourced and marketed under a license from Levi Strauss & Company; SureGrip®Footwear, occupational footwear primarily sold directly to consumers; and other brands.  





9

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


Note 1
Summary of Significant Accounting Policies, Continued

Principles of Consolidation
All subsidiaries are consolidated in the Condensed Consolidated Financial Statements. All significant intercompany transactions and accounts have been eliminated.

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, cost is determined using the first-in, first-out 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 employs 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.

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




10

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


Note 1
Summary of Significant Accounting Policies, Continued

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, other than goodwill, 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 performing a qualitative assessment, on a reporting unit level, based on current circumstances. If the results of the qualitative assessment indicate that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, a two-step impairment test will not be performed. However, if the results of the qualitative assessment indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then a two-step impairment test is performed. Alternatively, the Company may elect to bypass the qualitative assessment and proceed directly to the two-step impairment test, on a reporting unit level basis. The first step is a comparison of the fair value and carrying value of the business unit with which the goodwill is associated. The Company estimates fair value using the best information available, and computes the fair value derived by an income approach utilizing discounted cash flow projections. The income approach uses a projection of a reporting 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 latest test, which was completed in the second quarter of Fiscal 2016 for Lids Team Sports, 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.




11

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


Note 1
Summary of Significant Accounting Policies, Continued

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
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 of the reporting unit 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 $0.2 million for the second quarter of Fiscal 2016 and 2015, respectively, and $0.2 million and $0.4 million for the first six months of Fiscal 2016 and 2015, 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, cash flows, or results of operations. See also Notes 3 and 9.

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 and value added 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. Historically, actual amounts of markdowns have not differed materially from estimates. Actual returns and claims in any future period may differ from historical experience.





12

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


Note 1
Summary of Significant Accounting Policies, Continued

Income Taxes
As part of the process of preparing the 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 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 will be recovered from future taxable income or other sources. 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 August 1, 2015, the Company had a deferred tax valuation allowance of $4.6 million.

Income tax reserves for uncertain 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 recorded an effective income tax rate of 34.4% in the second quarter of Fiscal 2016 compared to 48.7% for the same period last year and 35.5% and 41.6% for the first six months of Fiscal 2016 and 2015, respectively. The lower tax rate in Fiscal 2016 reflects expectations of increased earnings in lower tax jurisdictions driven by expectations of increased earnings at Schuh due to no contingent bonus accruals and reduced deferred purchase price expense this year versus last year. In addition, the higher rate in Fiscal 2015 was also due to alternative minimum tax for prior years in Puerto Rico included in Fiscal 2015's second quarter tax expenses.



13

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


Note 1
Summary of Significant Accounting Policies, Continued

Postretirement Benefits Plan Accounting
Full-time employees who had at least 1000 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 medical and life insurance benefits. The Company funds at least the minimum amount required by the Employee Retirement Income Security Act.

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 its 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 recognizes pension expense 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.

The Company utilizes a calculated value of assets, which is an averaging method that recognizes changes in the fair values of assets over a period of five years. Accounting principles generally accepted in the United States require that the Company recognize a portion of these losses when they exceed a calculated threshold. These losses might be recognized as a component of pension expense in future years and would be amortized over the average future service of employees, which is currently approximately six years.


Cash and Cash Equivalents
The Company had total available cash and cash equivalents of $49.0 million, $112.9 million and $59.3 million as of August 1, 2015, January 31, 2015 and August 2, 2014, respectively, of which approximately $17.4 million, $25.2 million and $25.9 million was held by the Company's foreign subsidiaries as of August 1, 2015, January 31, 2015 and August 2, 2014, respectively. The Company's strategic plan does not require the repatriation of foreign cash in order to fund its operations in the U.S., and it is the Company's current intention to permanently reinvest its foreign cash and cash equivalents outside of the U.S. If the Company were to repatriate foreign cash to the U.S., it would be required to accrue and pay U.S. taxes in accordance with applicable U.S. tax rules and regulations as a result of the repatriation. There were no cash equivalents included in cash and cash equivalents at August 1, 2015, January 31, 2015 and August 2, 2014. Cash equivalents are highly-liquid financial instruments having an original maturity of three months or less.
At August 1, 2015, substantially all of the Company’s domestic cash was invested in deposit accounts at FDIC-insured banks. The majority of payments due from banks for domestic customer credit


14

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


Note 1
Summary of Significant Accounting Policies, Continued
card transactions process within 24 - 48 hours and are accordingly classified as cash and cash equivalents in the Condensed Consolidated Balance Sheets.

At August 1, 2015, January 31, 2015 and August 2, 2014, outstanding checks drawn on zero-balance accounts at certain domestic banks exceeded book cash balances at those banks by approximately $60.8 million, $45.6 million and $47.7 million, respectively. These amounts are included in accounts payable in the Condensed Consolidated Balance Sheets.

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 6% and one customer accounted for 5% of the Company’s total trade receivables balance, while no other customer accounted for more than 4% of the Company’s total trade receivables balance as of August 1, 2015.

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

Depreciation expense related to property and equipment was approximately $18.7 million and $17.7 million for the three months ended August 1, 2015 and August 2, 2014, respectively, and $37.5 million and $34.3 million for the six months ended August 1, 2015 and August 2, 2014, respectively.

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.




15

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


Note 1
Summary of Significant Accounting Policies, Continued

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.

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 $23.2 million, $23.5 million and $24.8 million at August 1, 2015, January 31, 2015 and August 2, 2014, respectively, and deferred rent of $46.9 million, $45.0 million and $44.0 million at August 1, 2015, January 31, 2015 and August 2, 2014, respectively, are included in deferred rent and other long-term liabilities on the Condensed Consolidated Balance Sheets.

Acquisition
Acquisitions are accounted for using the Business Combinations Topic of the Codification. The total purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values at acquisition.

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 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, net of amortization, acquired in connection with the acquisition of Schuh Group Ltd. in June 2011 and Hat World Corporation in April 2004 and various other small acquisitions. The Condensed Consolidated Balance Sheets include goodwill of $199.8 million for the Lids Sports Group, $99.6 million for the Schuh Group and $0.8 million for Licensed Brands at August 1, 2015, $200.1 million for the Lids Sports Group, $96.0 million for the Schuh Group and $0.8 million for Licensed Brands at January 31, 2015 and $185.5 million for the Lids Sports Group, $107.3 million for the Schuh Group and $0.8 million for Licensed Brands at August 2, 2014. The Company tests for impairment of intangible assets with an indefinite life, 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.




16

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


Note 1
Summary of Significant Accounting Policies, Continued

In connection with acquisitions, the Company records goodwill on its Condensed Consolidated Balance Sheets. This asset is not amortized but is subject to an impairment assessment at least annually, based on projected future cash flows from the acquired business discounted at a rate commensurate with the risk the Company considers to be inherent in its current business model. The Company performs the impairment test annually as of the close of its fiscal year, or more frequently if events or circumstances indicate that the value of the asset might be impaired.

As a result of the various acquisitions comprising the Lids Team Sports team dealer business, the Company carries goodwill related to such acquisitions at a value of $18.0 million on its Condensed Consolidated Balance Sheets related to such acquisitions. Because the team dealer business to which the goodwill relates had performed below the Company's expectations, the Company performed impairment testing as of August 1, 2015. The Company found that the result of the impairment test, which valued the business at approximately $10.9 million in excess of its carrying value, indicated no impairment at that time. The Company may determine in connection with the test to be performed as of the end of the current fiscal year or in future impairment tests that some or all of the carrying value of the goodwill may be impaired. Such a finding would require a write-off of the amount of the carrying value that is impaired, which would reduce the Company's profitability in the period of the impairment charge. Holding all other assumptions constant as of the measurement date, the Company noted that an increase in the weighted average cost of capital of 100 basis points would reduce the fair value of the Lids Team Sports business by $6.4 million. Furthermore, the Company noted that a decrease in projected annual revenue growth by one percent would reduce the fair value of the Lids Team Sports business by $0.4 million. However, if other assumptions do not remain constant, the fair value of the Lids Team Sports business may decrease by a greater amount.

Identifiable intangible assets of the Company with finite lives are trademarks, customer lists, in-place leases, non-compete agreements and a vendor contract. 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.

Fair Value of Financial Instruments
The carrying amounts and fair values of the Company’s financial instruments at August 1, 2015 and January 31, 2015 are:

Fair Values
 
 
 
 
 
 
 
In thousands
August 1, 2015
 
January 31, 2015
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
U.S. Revolver Borrowings
$
41,137

 
$
41,081

 
$

 
$

UK Term Loans
44,956

 
45,026

 
29,155

 
29,126

UK Revolver Borrowings
27,365

 
27,232

 

 


17

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


Note 1
Summary of Significant Accounting Policies, Continued

Debt fair values were estimated 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 costs of distribution are included in selling and administrative expenses on the Condensed Consolidated Statements of Operations in the amounts of $2.2 million and $2.3 million for the second quarters of Fiscal 2016 and 2015, respectively, and $4.6 million for each of the first six months of Fiscal 2016 and 2015.

EVA Incentive Plan
Under the Company's EVA Incentive Plan, bonus awards in excess of a specified cap in any one year are retained and paid over three subsequent years, subject to reduction or elimination by deteriorating financial performance and historically were subject to forfeiture if the participant voluntarily resigns from employment with the Company. As a result, the bonus awards were subject to service conditions that resulted in recognition of expense over the period of service by the respective employee. During the first quarter of Fiscal 2015, the Company amended the plan to remove the future service requirement for the payment of the retained bonuses. As a result, the bonus expense that would have been deferred under the previous plan terms is now recognized in the first year of service. The Company recorded a $5.7 million charge to earnings in the first quarter of Fiscal 2015 in connection with the amendment related to bonus amounts previously deferred to future years.

Gift Cards
The Company has a gift card program that began in calendar year 1999 for its Lids Sports operations and calendar year 2000 for its footwear operations, excluding Schuh Group. The gift cards issued to date do not expire. As such, the Company recognizes income when: (i) the gift card is redeemed


18

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


Note 1
Summary of Significant Accounting Policies, Continued

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 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 for which financial statements are updated. Gift card breakage recognized as revenue was $0.1 million for each of the second quarters of Fiscal 2016 and 2015 and $0.3 million for each of the first six months of Fiscal 2016 and 2015. The Condensed Consolidated Balance Sheets include an accrued liability for gift cards of $14.1 million, $15.8 million and $12.6 million at August 1, 2015, January 31, 2015 and August 2, 2014, respectively.

Buying, Merchandising and Occupancy Costs
The Company records buying, merchandising and occupancy costs in selling and administrative expense on the Condensed Consolidated Statements of Operations. 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. Retail store occupancy costs recorded in selling and administrative expense were $107.6 million and $102.9 million for the second quarters of Fiscal 2016 and 2015, respectively, and $213.5 million and $203.7 million for the first six months of Fiscal 2016 and 2015, respectively.

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 on the Condensed Consolidated Statements of Operations.

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. Under the provisions of the new Property, Plant, and Equipment Topic of the Codification, which the Company adopted in the first quarter of Fiscal 2015, the definition of a discontinued operation was amended. A discontinued operation may include a component of an entity or a group of components of an entity that represent a strategic shift that has or will have a major effect on an entity's operation or financial results. If stores or operating activities to be closed or exited constitute
a component or group of components that represent a strategic shift in the Company's operations, these closures will be considered discontinued operations. The results of operations of discontinued operations are presented retroactively, net of tax, as a separate component on the Condensed



19

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


Note 1
Summary of Significant Accounting Policies, Continued

Consolidated Statements of Operations. In each of the years presented, no store closings have met the discontinued operations criteria.

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 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 $14.9 million and $14.8 million for the second quarters of Fiscal 2016 and 2015, respectively, and $32.1 million and $29.6 million for the first six months of Fiscal 2016 and 2015, 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 $1.8 million, $2.3 million and $1.7 million at August 1, 2015, January 31, 2015 and August 2, 2014, respectively.

Consideration to Resellers
In its wholesale businesses, 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 most of the Company’s wholesale footwear 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

20

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


Note 1
Summary of Significant Accounting Policies, Continued

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 on the Condensed Consolidated Statements of Operations were $0.7 million for each of the second quarters of Fiscal 2016 and 2015 and $1.7 million for each of the first six months of Fiscal 2016 and 2015. During the first six months of Fiscal 2016 and 2015, the Company’s cooperative advertising reimbursements paid did not exceed the fair value of the benefits received under those agreements.

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 $0.5 million and $0.7 million for the second quarters of Fiscal 2016 and 2015, respectively, and $1.6 million and $1.3 million for the first six months of Fiscal 2016 and 2015, respectively. During the first six months of Fiscal 2016 and 2015, the Company’s cooperative advertising reimbursements received were not in excess of the costs incurred.

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 8).

Foreign Currency Translation
The functional currency of the Company's foreign operations is the applicable local currency. The translation of the applicable foreign currency into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date. Income and expense accounts are translated at monthly average exchange rates. The unearned gains and losses resulting

21

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


Note 1
Summary of Significant Accounting Policies, Continued

from such translation are included as a separate component of accumulated other comprehensive loss within shareholders' equity. Gains and losses from certain foreign currency transactions are reported as an item of income and resulted in a net loss of $1.4 million and $1.5 million for the second quarter and first six months of Fiscal 2016, respectively, and a net gain of $0.0 million and $(0.2) million for the second quarter and first six months of Fiscal 2015, respectively.

Share-Based Compensation
The Company has share-based compensation 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. The Company has not granted any stock options since the first quarter of Fiscal 2008.

The fair value of employee restricted stock is determined based on the closing price of the Company's stock on the date of grant. The benefits of tax deductions in excess of recognized compensation expense are reported as a financing cash flow.

Other Comprehensive Income
The Comprehensive Income Topic of the Codification requires, among other things, the Company’s pension liability adjustment, postretirement liability adjustment and foreign currency translation adjustments to be included in other comprehensive income net of tax. Accumulated other comprehensive loss at August 1, 2015 consisted of $21.3 million of cumulative pension liability adjustments, net of tax, a cumulative post-retirement liability adjustment of $1.9 million, net of tax, and a cumulative foreign currency translation adjustment of $13.0 million.





















22

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


Note 1
Summary of Significant Accounting Policies, Continued

The following table summarizes the components of accumulated other comprehensive income for the six months ended August 1, 2015:

 
 
Foreign Currency Translation
Unrecognized Pension/Postretirement Benefit Costs
Total Accumulated Other Comprehensive Income (Loss)
(In thousands)
 
 
 
 
Balance January 31, 2015
 
$
(16,247
)
$
(24,329
)
$
(40,576
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
  Foreign currency translation adjustment
 
3,944


3,944

  Loss on intra-entity foreign currency transactions
 
 
 
 
    (long-term investment nature)
 
(672
)

(672
)
  Net actuarial loss
 

(762
)
(762
)
Amounts reclassified from AOCI:
 
 
 
 
  Amortization of net actuarial loss (1)
 

2,650

2,650

Income tax expense
 

741

741

Current period other comprehensive income, net of tax
 
3,272

1,147

4,419

Balance August 1, 2015
 
$
(12,975
)
$
(23,182
)
$
(36,157
)

(1) Amount is included in net periodic benefit cost, which is recorded in selling and administrative expense on the Condensed Consolidated Statements of Operations.

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 10).

New Accounting Principles
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)". ASU No. 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and merges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, however, in August 2015, the FASB deferred this ASU for one year. The amendment is to be applied either retrospectively to each prior reporting period presented or with the cumulative effect recognized at the date of initial adoption as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets on the balance sheet).



23

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


Note 1
Summary of Significant Accounting Policies, Continued

Early adoption is not permitted. The Company is currently assessing the impact the adoption of ASU 2014-09 will have on its Consolidated Financial Statements and related disclosures, including which transition method will be adopted.


Note 2
Intangible Assets

Other intangibles by major classes were as follows:

 
Leases
 
Customer Lists
 
Other*
 
Total
(In Thousands)
Aug. 1, 2015

Jan. 31, 2015

 
Aug. 1, 2015

Jan. 31, 2015

 
Aug. 1, 2015

Jan. 31, 2015

 
Aug. 1, 2015

Jan. 31, 2015

Gross other intangibles
$
13,695

$
13,616

 
$
18,305

$
18,244

 
$
3,127

$
3,114

 
$
35,127

$
34,974

Accumulated amortization
(12,674
)
(12,301
)
 
(10,353
)
(9,424
)
 
(1,826
)
(1,664
)
 
(24,853
)
(23,389
)
Net Other Intangibles
$
1,021

$
1,315

 
$
7,952

$
8,820

 
$
1,301

$
1,450

 
$
10,274

$
11,585


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

The amortization of intangibles, including trademarks, was $0.8 million for each of the second quarters of Fiscal 2016 and 2015 and $1.5 million for each of the first six months of Fiscal 2016 and 2015. The amortization of intangibles, including trademarks, is expected to be $2.9 million, $2.4 million, $1.7 million, $1.5 million and $0.7 million for Fiscal 2016, 2017, 2018, 2019 and 2020, respectively.

24

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 (other than goodwill and intangibles) 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 in the accompanying Condensed Consolidated Balance Sheets, and in asset impairments and other, net in the accompanying Condensed Consolidated Statements of Operations.

The Company recorded pretax charges of $1.2 million in the second quarter of Fiscal 2016, including a $0.9 million charge for retail store asset impairments and a $0.2 million charge for network intrusion expenses. The Company recorded pretax charges of $3.8 million in the first six months of Fiscal 2016, including charges of $2.0 million for network intrusion expenses, a $1.7 million charge for retail store asset impairments and a $0.1 million charge for other legal matters.

The Company recorded pretax charges of $1.4 million in the second quarter of Fiscal 2015, including a $0.6 million charge for network intrusion expenses, a $0.6 million charge for other legal matters and a $0.4 million charge for retail store asset impairments, partially offset by a $(0.2) million gain on a lease termination. The Company recorded pretax charges of $0.3 million in the first six months of Fiscal 2015, including charges of $1.8 million for network intrusion expenses, $1.2 million for retail store asset impairments and $0.6 million for other legal matters, partially offset by a $(3.4) million gain on a lease termination of a Lids store.

Discontinued Operations

Accrued Provision for Discontinued Operations
 
In thousands
Facility
Shutdown
Costs

Balance February 1, 2014
$
11,375

Additional provision Fiscal 2015
2,711

Charges and adjustments, net
673

Balance January 31, 2015
14,759

Additional provision Fiscal 2016
232

Charges and adjustments, net
(261
)
Balance August 1, 2015*
14,730

Current provision for discontinued operations
10,483

Total Noncurrent Provision for Discontinued Operations    
$
4,247


*Includes a $14.1 million environmental provision, including $10.5 million in current provision for discontinued operations.

25

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


Note 4
Inventories
            
In thousands
August 1, 2015

 
January 31, 2015

Raw materials
$
37,176

 
$
32,941

Wholesale finished goods
68,455

 
65,785

Retail merchandise
629,172

 
499,419

Total Inventories
$
734,803

 
$
598,145


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 U.S. 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 (i.e., 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.


26

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 August 1, 2015 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 May 2, 2015
$
67

 
$

 
$

 
$
67

 
$
766

Measured as of August 1, 2015
632

 

 

 
632

 
931

  Sub-total asset impairment YTD
 
 
 
 
 
 
 
 
$
1,697


In accordance with the Property, Plant and Equipment Topic of the Codification, the Company recorded $0.9 million and $1.7 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 and six months ended August 1, 2015, respectively. 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.


27

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




Note 6
Long-Term Debt
 
In thousands
August 1, 2015
 
January 31, 2015
U.S. revolver borrowings
$
41,137

 
$

UK term loans
44,956

 
29,155

UK revolver borrowings
27,365

 

Total long-term debt
113,458

 
29,155

Current portion
18,764

 
13,152

Total Noncurrent Portion of Long-Term Debt
$
94,694

 
$
16,003


Long-term debt maturing during each of the next five years ending in January each year is $13.1 million, $15.6 million, $3.5 million, $43.1 million and $38.1 million, respectively.

The Company had $41.1 million of revolver borrowings outstanding under the Credit Facility at August 1, 2015, which includes $15.6 million (£10.0 million) related to Genesco (UK) Limited, and had $45.0 million in term loans outstanding and $27.4 million in revolver loans outstanding under the U.K. Credit Facilities (described below) at August 1, 2015. The Company had outstanding letters of credit of $14.4 million under the Credit Facility at August 1, 2015. These letters of credit support product purchases and lease and insurance indemnifications.
U.K. Credit Facility

In May 2015, Schuh Group Limited entered into a Form of Amended and Restated Facilities Agreement and Working Capital Facility Letter which replaced the former A, B and C term loans with a new Facility A of £17.5 million and a Facility B of £11.6 million (which was the former Facility C loan) as well as provided an additional revolving credit facility, Facility C, of £22.5 million and a working capital facility of £2.5 million. The Facility A loan bears interest at LIBOR plus 1.8% per annum with quarterly payments through April 2017. The Facility B loan bears interest at LIBOR plus 2.5% per annum with quarterly payments through September 2019. The Facility C bears interest at LIBOR plus 2.2% per annum and expires in September 2019.

The UK Credit Facilities contain certain covenants at the Schuh level including a minimum interest coverage covenant of 4.50x and thereafter, a maximum leverage covenant initially set at 2.25x declining over time at various rates to 1.75x beginning in April 2017 and a minimum cash flow coverage of 1.00x. The Company was in compliance with all the covenants at August 1, 2015. The UK Credit Facilities are secured by a pledge of all the assets of Schuh and its subsidiaries.



28

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




Note 7
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
August 1, 2015

 
August 2, 2014

 
August 1, 2015

 
August 2, 2014

Service cost
$
112

 
$
113

 
$
209

 
$
130

Interest cost
1,062

 
1,163

 
62

 
55

Expected return on plan assets
(1,446
)
 
(1,517
)
 

 

Amortization:
 
 
 
 
 
 
 
Losses
1,197

 
860

 
48

 
24

Net amortization
1,197

 
860

 
48

 
24

Net Periodic Benefit Cost
$
925

 
$
619

 
$
319

 
$
209


Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Benefits
 
Six Months Ended
 
Six Months Ended
In thousands
August 1, 2015

 
August 2, 2014

 
August 1, 2015

 
August 2, 2014

Service cost
$
225

 
$
225

 
$
419

 
$
266

Interest cost
2,140

 
2,338

 
123

 
116

Expected return on plan assets
(2,895
)
 
(3,035
)
 

 

Amortization:
 
 
 
 
 
 
 
Losses
2,554

 
1,826

 
96

 
53

Net amortization
2,554

 
1,826

 
96

 
53

Net Periodic Benefit Cost
$
2,024

 
$
1,354

 
$
638

 
$
435



There is no cash contribution required for the pension plan in 2015.


29

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


Note 8
Earnings Per Share


For the Three Months Ended

For the Three Months Ended

August 1, 2015

August 2, 2014
(In thousands, except
     per share amounts)
Income
(Numerator)

Shares
(Denominator)

Per Share
Amount

Income
(Numerator)

Shares
(Denominator)

Per Share
Amount












Earnings from continuing operations
$
7,593






$
4,768

















Less: Preferred stock dividends























Basic EPS from continuing operations











Income available to











common shareholders
7,593


23,538


$
0.32


4,768


23,496


$
0.20













Effect of Dilutive Securities from
continuing operations











Dilutive share-based awards


33






80



Employees' preferred stock(1)


45






46















Diluted EPS from continuing operations











Income available to common











shareholders plus assumed











conversions
$
7,593


23,616


$
0.32


$
4,768


23,622


$
0.20


(1)
The Company's Employees' Subordinated Convertible Preferred Stock is convertible one for one to the Company's common stock. Because no dividends are paid on this stock, these shares are assumed to be converted in the diluted earnings per share calculations for the second quarters ended August 1, 2015 and August 2, 2014.

30

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


Note 8
Earnings Per Share, Continued

 
For the Six Months Ended
 
For the Six Months Ended
 
August 1, 2015
 
August 2, 2014
(In thousands, except
     per share amounts)
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
 
 
 
 
 
 
 
 
 
 
 
 
Earnings from continuing operations
$
17,538

 
 
 
 
 
$
18,866

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less: Preferred stock dividends

 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS from continuing operations
 
 
 
 
 
 
 
 
 
 
 
Income available to
 
 
 
 
 
 
 
 
 
 
 
common shareholders
17,538

 
23,544

 
$
0.74

 
18,866

 
23,432

 
$
0.81

 
 
 
 
 
 
 
 
 
 
 
 
Effect of Dilutive Securities from
continuing operations
 
 
 
 
 
 
 
 
 
 
 
Dilutive share-based awards
 
 
106

 
 
 
 
 
179

 
 
Employees' preferred stock(1)
 
 
45

 
 
 
 
 
46

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS from continuing operations
 
 
 
 
 
 
 
 
 
 
 
Income available to common
 
 
 
 
 
 
 
 
 
 
 
shareholders plus assumed
 
 
 
 
 
 
 
 
 
 
 
conversions
$
17,538

 
23,695

 
$
0.74

 
$
18,866

 
23,657

 
$
0.80


(1)
The Company's Employees' Subordinated Convertible Preferred Stock is convertible one for one to the Company's common stock. Because no dividends are paid on this stock, these shares are assumed to be converted in the diluted earnings per share calculations for the first six months ended August 1, 2015 and August 2, 2014.

The Company repurchased 424,384 shares of common stock during the three and six months ended August 1, 2015 for $27.5 million of which $5.8 million was not paid in the second quarter but included in other accrued liabilities in the Condensed Consolidated Balance Sheets. The Company has $33.4 million remaining under its current $75.0 million share repurchase authorization. The Company did not repurchase any shares during the three and six months ended August 2, 2014.












31

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


Note 9
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 $0.0 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 (the "2007 ROD") in September 2007. The 2007 ROD requires a remedy of a combination of groundwater extraction and treatment and in-situ 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.    

In April 2015, the EPA issued a proposal to amend the 2007 ROD by eliminating the separate ground-water extraction and treatment systems and the use of in-situ oxidation from the remedy adopted in the 2007 ROD. The proposal, which is subject to public comment and final approval by the EPA, would continue the operation and maintenance of the existing wellhead treatment systems on wells operated by the Village of Garden City, New York (the "Village").

The Village 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

32

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


Note 9
Legal Proceedings, Continued

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 if an acceptable settlement agreement cannot be reached.

In April 2015, the Company received from EPA a Notice of Potential Liability and Demand for Costs pursuant to CERCLA regarding the site in Gloversville, New York of a former leather tannery operated by the Company and by other, unrelated parties. The Notice demanded payment of approximately $2.2 million of response costs claimed by EPA to have been incurred to conduct assessments and removal activities at the site. The Company has requested additional information on the basis for EPA's assertion that the Company is a potentially responsible party with regard to the site and is assessing the claims asserted in the notice. The Company's environmental insurance carrier is providing coverage of the matter subject to a $500,000 self-insured retention and the other terms and conditions of the insurance policy, subject to a standard reservation of rights.

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 $14.1 million as of August 1, 2015 and January 31, 2015 and accrued $11.9 million as of August 2, 2014. 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 they relate to former facilities operated by the Company. The Company has made pretax accruals for certain of these contingencies, including approximately $0.1 million and $0.2 million for the second quarters of Fiscal 2016 and 2015, respectively, and approximately $0.2 million and $0.4 million reflected in the first six months of Fiscal 2016 and 2015, respectively. These charges are included in provision for discontinued operations, net in the Condensed Consolidated Statements of Operations and represent changes in estimates.





33

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


Note 9
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., MasterCard Worldwide and American Express Travel Related Services Company, Inc. asserted claims totaling approximately $15.6 million in connection with the intrusion and the claims of two of the claimants have been collected by withholding payment card receivables of the Company. In the fourth quarter of Fiscal 2013, the Company recorded a $15.4 million charge to earnings in connection with the disputed liability. On March 7, 2013, the Company filed an action in the U.S. District Court for the Middle District of Tennessee against Visa U.S.A. Inc., Visa Inc. and Visa International Service Association seeking to recover $13.3 million in non-compliance fines and issuer reimbursement assessments collected from the Company in connection with the intrusion. The Company does not currently expect any future claims in connection with the intrusion to have a material effect on its financial condition, cash flows, or results of operations.

On May 17, 2013, a former employee filed a putative class and representative action, Garcia v. Genesco, Inc., in the Superior Court of California for the County of Ventura, alleging various claims under the California Labor Code, including failure to provide meal and rest periods, failure to timely pay wages, failure to provide accurate itemized wage statements, and unfair competition and violation of the Private Attorneys’ General Act of 2004, and seeking unspecified damages and penalties. On August 30, 2013, the Company removed the action to the United States District Court for the Central District of California. The Company has reached an agreement to settle the matter. The court granted final approval of the settlement on May 8, 2015 and dismissed the case.

On April 30, 2015, an employee of a subsidiary of the Company filed an action, Stewart v. Hat World, Inc., et al., under the California Labor Code Private Attorneys General Act on behalf of herself, the State of California, and other non-exempt, hourly-paid employees of the subsidiary in California, seeking unspecified damages and penalties for various alleged violations of the California Labor Code, including failure to pay for all hours worked, minimum wage and overtime violations, failure to provide required meal and rest periods, failure to timely pay wages, failure to provide complete and accurate wage statements, and failure to provide full reimbursement of business-related costs and expenses incurred in the course of employment. The Company disputes the material allegations in the complaint and intends to defend the matter.

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 statements, legal proceedings are subject to inherent uncertainties and unfavorable rulings could have a material adverse impact on the Company's financial statements.


34

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


Note 10
Business Segment Information

During the six months ended August 1, 2015 and August 2, 2014, 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, e-commerce operations and catalog; (ii) Schuh Group, comprised of the Schuh retail footwear chain and e-commerce operations; (iii) Lids Sports Group, comprised primarily of the Lids retail headwear stores, the Lids Locker Room and Lids Clubhouse fan shops (operated under various trade names), licensed team merchandise departments in Macy's department stores operated under the name of Locker Room by Lids under a license agreement with Macy's, the Lids Team Sports business and certain e-commerce operations; (iv) Johnston & Murphy Group, comprised of Johnston & Murphy retail operations, e-commerce operations, catalog and wholesale distribution of products under the Johnston & Murphy and Trask brands; and (v) Licensed Brands, comprised of Dockers Footwear, sourced and marketed under a license from Levi Strauss & Company; SureGrip Footwear, occupational footwear primarily sold directly to consumers; and other brands.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 1).

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.

Corporate assets include cash, domestic 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 and major lease terminations.


35

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


Note 10
Business Segment Information, Continued

Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
August 1, 2015
Journeys Group
 
Schuh Group
 
Lids Sports
Group
 
Johnston
& Murphy
Group
 
Licensed
Brands
 
Corporate
& Other
 
Consolidated
In thousands
 
 
 
 
 
 
Sales
$
247,177

 
$
103,204

 
$
222,425

 
$
60,822

 
$
22,150

 
$
162

 
$
655,940

Intercompany Sales

 

 
(207
)
 

 
(208
)
 

 
(415
)
Net sales to external customers
$
247,177

 
$
103,204

 
$
222,218

 
$
60,822

 
$
21,942

 
$
162

 
$
655,525

Segment operating income (loss)
$
9,228

 
$
4,892

 
$
5,593

 
$
846

 
$
1,158

 
$
(8,048
)
 
$
13,669

Asset Impairments and other*

 

 

 

 

 
(1,173
)
 
(1,173
)
Earnings (loss) from operations
9,228

 
4,892

 
5,593

 
846

 
1,158

 
(9,221
)
 
12,496

Interest expense

 

 

 

 

 
(945
)
 
(945
)
Interest income

 

 

 

 

 
17

 
17

Earnings (loss) from continuing
operations before income taxes
$
9,228

 
$
4,892

 
$
5,593

 
$
846

 
$
1,158

 
$
(10,149
)
 
$
11,568

Total assets**
$
387,714

 
$
266,461