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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended August 3, 2019
 
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
 
37217-2895
Nashville,
Tennessee
 
(Zip Code)
(Address of principal executive offices)
 
Registrant's telephone number, including area code: (615) 367-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1.00 par value
GCO
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer; an accelerated filer; a non-accelerated filer; a smaller reporting company; or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer
 
 
Accelerated filer
 
 
 
 
Non-accelerated filer
 
 
Smaller reporting company
Emerging growth company
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.


Table of Contents

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes      No  
As of August 30, 2019, 14,998,860 shares of the registrant's common stock were outstanding.
 


Table of Contents

INDEX
 
 
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds



3

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 3,
2019

 
February 2,
2019

 
August 4,
2018

Current Assets:
 
 
 
 
 
  Cash and cash equivalents
$
57,965

 
$
167,355

 
$
49,786

  Accounts receivable, net of allowances of $2,462 at Aug. 3, 2019,
 
 
 
 
 
$2,894 at Feb. 2, 2019 and $4,340 at Aug. 4, 2018
26,626

 
132,390

 
30,912

  Inventories
444,706

 
366,667

 
436,721

  Prepaids and other current assets
45,040

 
64,634

 
64,624

  Current assets - discontinued operations

 

 
192,312

Total current assets
574,337

 
731,046

 
774,355

 
 
 
 
 
 
Property and equipment:
 
 
 
 
 
Land
7,785

 
7,953

 
7,939

Buildings and building equipment
81,695

 
82,621

 
82,242

Computer hardware, software and equipment
136,262

 
138,147

 
125,740

Furniture and fixtures
128,854

 
129,625

 
127,483

Construction in progress
9,646

 
5,920

 
19,372

Improvements to leased property
334,229

 
341,134

 
337,561

Property and equipment, at cost
698,471

 
705,400

 
700,337

Accumulated depreciation
(436,547
)
 
(428,025
)
 
(413,049
)
Property and equipment, net
261,924

 
277,375

 
287,288

Operating lease right of use asset
754,537

 

 

Goodwill
87,126

 
93,081

 
92,648

Trademarks, net of accumulated amortization of zero at Aug. 3, 2019,
 
 
 
 
 
   Feb. 2, 2019 and Aug. 4, 2018
29,286

 
30,904

 
30,835

Other intangibles, net of accumulated amortization of $1,675 at
 
 
 
 
 
Aug. 3, 2019, $4,680 at Feb. 2, 2019 and $4,514 at Aug. 4, 2018
273

 
943

 
1,098

Deferred income taxes
23,185

 
21,335

 
23,126

Other noncurrent assets
24,859

 
26,397

 
25,095

Non-current assets - discontinued operations

 

 
133,351

Total Assets
$
1,755,527

 
$
1,181,081

 
$
1,367,796










4


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

Liabilities and Equity
August 3,
2019

 
February 2,
2019

 
August 4,
2018

Current Liabilities:
 
 
 
 
 
  Accounts payable
$
157,822

 
$
158,603

 
$
174,814

  Accrued employee compensation
32,552

 
43,246

 
26,316

  Accrued other taxes
12,774

 
17,389

 
18,048

  Accrued income taxes
72

 
2,133

 
68

  Current portion – long-term debt
14,896

 
8,992

 
1,625

  Current portion - operating lease liability
141,233

 

 

  Other accrued liabilities
41,593

 
45,313

 
37,540

  Provision for discontinued operations
520

 
553

 
1,939

  Current liabilities - discontinued operations

 

 
57,769

Total current liabilities
401,462

 
276,229

 
318,119

Long-term debt
60,244

 
56,751

 
81,712

Long-term operating lease liability
671,047

 

 

Other long-term liabilities
36,307

 
108,704

 
117,297

Provision for discontinued operations
1,846

 
1,846

 
1,701

Non-current liabilities - discontinued operations

 

 
24,809

Total liabilities
1,170,906

 
443,530

 
543,638

Commitments and contingent liabilities

 

 

Equity:
 
 
 
 
 
Non-redeemable preferred stock
1,010

 
1,060

 
1,064

Common equity:
 
 
 
 
 
Common stock, $1 par value:
 
 
 
 
 
Authorized: 80,000,000 shares
 
 
 
 
 
Issued/Outstanding:
 
 
 
 
 
Aug. 3, 2019 – 16,345,074/15,856,610
 
 
 
 
 
February 2, 2019 – 19,591,048/19,102,584
 
 
 
 
 
Aug. 4, 2018 – 20,683,842/20,195,378
16,345

 
19,591

 
20,684

Additional paid-in capital
268,882

 
264,138

 
257,295

Retained earnings
364,396

 
508,555

 
603,536

Accumulated other comprehensive loss
(48,155
)
 
(37,936
)
 
(42,744
)
Treasury shares, at cost (488,464 shares)
(17,857
)
 
(17,857
)
 
(17,857
)
Total Genesco equity
584,621

 
737,551

 
821,978

Noncontrolling interest – non-redeemable

 

 
2,180

Total equity
584,621

 
737,551

 
824,158

Total Liabilities and Equity
$
1,755,527

 
$
1,181,081

 
$
1,367,796


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

5


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

 
Three Months Ended
Six Months Ended
 
August 3,
2019

 
August 4,
2018

August 3,
2019

 
August 4,
2018

Net sales
$
486,573

 
$
487,015

$
982,224

 
$
973,234

Cost of sales
250,040

 
255,546

500,783

 
503,759

Selling and administrative expenses
231,796

 
230,423

468,351

 
463,599

Asset impairments and other, net
1,775

 
(29
)
1,044

 
1,089

Operating income
2,962

 
1,075

12,046

 
4,787

Other components net periodic benefit cost
(93
)
 
(29
)
(179
)
 
(37
)
Interest expense, net:
 
 
 
 
 
 
Interest expense
835

 
1,113

1,683

 
2,160

Interest income
(488
)
 
(10
)
(1,502
)
 
(29
)
Total interest expense, net
347

 
1,103

181

 
2,131

Earnings from continuing operations before income taxes
2,708

 
1

12,044

 
2,693

Income tax expense
1,915

 
26

4,781

 
862

Earnings (loss) from continuing operations
793

 
(25
)
7,263

 
1,831

(Loss) earnings from discontinued operations, net of tax
(216
)
 
10

(340
)
 
(4,177
)
Net Earnings (Loss)
$
577

 
$
(15
)
$
6,923

 
$
(2,346
)
 
 
 
 
 
 
 
Basic earnings (loss) per common share:
 
 
 
 
 
 
Continuing operations
$
0.05

 
$
0.00

$
0.43

 
$
0.09

Discontinued operations
(0.01
)
 
0.00

(0.02
)
 
(0.21
)
     Net earnings (loss)
$
0.04

 
$
0.00

$
0.41

 
$
(0.12
)
Diluted earnings (loss) per common share:
 
 
 
 
 
 
Continuing operations
$
0.05

 
$
0.00

$
0.43

 
$
0.09

Discontinued operations
(0.01
)
 
0.00

(0.02
)
 
(0.21
)
    Net earnings (loss)
$
0.04

 
$
0.00

$
0.41

 
$
(0.12
)

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


6


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

 
Three Months Ended
Six Months Ended
 
August 3,
2019

 
August 4,
2018

August 3,
2019

 
August 4,
2018

Net earnings (loss)
$
577

 
$
(15
)
$
6,923

 
$
(2,346
)
Other comprehensive income (loss):
 
 
 
 
 
 
Pension liability adjustments, net of tax of $0.0 million for the three and six months ended Aug. 3, 2019 and $0.1 million for both the three and six months ended Aug. 4, 2018
51

 
145

106

 
285

Postretirement liability adjustments, net of tax of $0.0 million and $0.1 million for the three and six months ended Aug. 3, 2019, respectively, and $0.0 million for both the three and six months ended Aug. 4, 2018
(166
)
 
11

(333
)
 
37

Foreign currency translation adjustments
(11,072
)
 
(6,010
)
(9,992
)
 
(13,874
)
Total other comprehensive loss
(11,187
)
 
(5,854
)
(10,219
)
 
(13,552
)
Comprehensive loss
$
(10,610
)
 
$
(5,869
)
$
(3,296
)
 
$
(15,898
)

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


7


Genesco Inc.
and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
 
 
Three Months Ended
Six Months Ended
 
August 3,
2019

 
August 4,
2018

August 3,
2019

 
August 4,
2018

CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net earnings (loss)
$
577

 
$
(15
)
$
6,923

 
$
(2,346
)
Adjustments to reconcile net earnings (loss) to net cash provided by
 
 
 
 
 
 
 (used in) operating activities:
 
 
 
 
 
 
Depreciation and amortization
12,315

 
19,225

25,118

 
38,918

Amortization of deferred note expense and debt discount
108

 
148

217

 
301

Deferred income taxes
741

 
1,596

(1,285
)
 
50

Provision (recoveries) on accounts receivable
30

 
(120
)
91

 
(103
)
Gain on sale of business

 

86

 

Impairment of long-lived assets
731

 
928

1,038

 
2,202

Restricted stock expense
2,629

 
3,368

4,868

 
6,722

Provision for discontinued operations
292

 
246

380

 
277

Other
309

 
959

775

 
1,571

Effect on cash from changes in working capital and other
 
 
 
 
 
 
assets and liabilities, net of acquisitions:
 
 
 
 
 
 
  Accounts receivable
6,293

 
11,491

2,594

 
2,096

  Inventories
(80,484
)
 
(55,594
)
(82,091
)
 
(70,857
)
  Prepaids and other current assets
(2,498
)
 
(8,138
)
1,658

 
(10,846
)
  Accounts payable
53,669

 
58,739

20,864

 
72,988

  Other accrued liabilities
2,627

 
8,184

(19,661
)
 
12

  Other assets and liabilities
(711
)
 
1,219

317

 
2,057

Net cash provided by (used in) operating activities
(3,372
)
 
42,236

(38,108
)
 
43,042

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
  Capital expenditures
(6,510
)
 
(11,593
)
(13,251
)
 
(31,126
)
  Other investing activities
23

 

23

 
633

  Proceeds from sale of business and asset sales
(7,171
)
 
218

98,707

 
274

Net cash provided by (used in) investing activities
(13,658
)
 
(11,375
)
85,479

 
(30,219
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
  Payments of long-term debt
(382
)
 
(410
)
(789
)
 
(840
)
  Borrowings under revolving credit facility
21,475

 
86,779

49,832

 
205,996

  Payments on revolving credit facility
(18,084
)
 
(106,652
)
(37,203
)
 
(205,019
)
  Share repurchases related to share repurchase program
(65,297
)
 

(145,361
)
 

  Restricted shares withheld for taxes
(2,209
)
 
(2,433
)
(2,209
)
 
(2,433
)
  Change in overdraft balances
(16,180
)
 
11,195

(20,218
)
 
3,673

  Additions to deferred note cost

 
(29
)

 
(359
)
  Other

 
(44
)

 
(3,209
)
Net cash used in financing activities
(80,677
)
 
(11,594
)
(155,948
)
 
(2,191
)
Effect of foreign exchange rate fluctuations on cash
(983
)
 
(361
)
(813
)
 
(783
)
Net Increase (Decrease) in Cash and Cash Equivalents
(98,690
)
 
18,906

(109,390
)
 
9,849

Cash and cash equivalents at beginning of period(1)
156,655

 
30,880

167,355

 
39,937

Cash and cash equivalents at end of period(1)
$
57,965

 
$
49,786

$
57,965

 
$
49,786

Supplemental Cash Flow Information:
 
 
 
 
 
 
Net cash paid for:
 
 
 
 
 
 
Interest
$
817

 
$
1,105

$
1,507

 
$
1,724

Income taxes
3,527

 
9,431

3,794

 
9,961

(1) The cash flows related to discontinued operations have not been segregated and are included in the Condensed Consolidated Cash Flows for the three and six months ended August 4, 2018.

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

8


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

 

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 3, 2018
$
1,052

 
$
20,392

 
$
250,877

 
$
603,902

 
$
(29,192
)
 
$
(17,857
)
 
$
1,530

 
$
830,704

Cumulative adjustment from ASC 606, net of tax

 

 

 
4,413

 

 

 

 
4,413

Net loss

 

 

 
(2,331
)
 

 

 

 
(2,331
)
Other comprehensive loss

 

 

 

 
(7,698
)
 

 

 
(7,698
)
Employee and non-employee restricted stock

 

 
3,354

 

 

 

 

 
3,354

Restricted stock issuance

 
14

 
(14
)
 

 

 

 

 

Other
(12
)
 
(2
)
 
13

 

 

 

 

 
(1
)
Noncontrolling interest – earnings

 

 

 

 

 

 
398

 
398

Balance May 5, 2018
1,040

 
20,404

 
254,230

 
605,984

 
(36,890
)
 
(17,857
)
 
1,928

 
828,839

Net loss

 

 

 
(15
)
 

 

 

 
(15
)
Other comprehensive loss

 

 

 

 
(5,854
)
 

 

 
(5,854
)
Employee and non-employee restricted stock

 

 
3,368

 

 

 

 

 
3,368

Restricted stock issuance

 
375

 
(375
)
 

 

 

 

 

Restricted shares withheld for taxes

 
(61
)
 
61

 
(2,433
)
 

 

 

 
(2,433
)
Other
24

 
(34
)
 
11

 

 

 

 

 
1

Noncontrolling interest – earnings

 

 

 

 

 

 
252

 
252

Balance August 4, 2018
$
1,064

 
$
20,684

 
$
257,295

 
$
603,536

 
$
(42,744
)
 
$
(17,857
)
 
$
2,180

 
$
824,158

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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 2, 2019
$
1,060

 
$
19,591

 
$
264,138

 
$
508,555

 
$
(37,936
)
 
$
(17,857
)
 
$

 
$
737,551

Cumulative adjustment from ASC 842, net of tax

 

 

 
(4,208
)
 

 

 

 
(4,208
)
Net earnings
 
 

 

 
6,346

 

 

 

 
6,346

Other comprehensive earnings

 

 

 

 
968

 

 

 
968

Employee and non-employee restricted stock

 

 
2,239

 

 

 

 

 
2,239

Shares repurchased

 
(1,809
)
 

 
(78,162
)
 

 

 

 
(79,971
)
Other
(48
)
 
(29
)
 
78

 

 

 

 

 
1

Balance May 4, 2019
1,012

 
17,753

 
266,455

 
432,531

 
(36,968
)
 
(17,857
)
 

 
662,926

Net earnings

 

 

 
577

 

 

 

 
577

Other comprehensive loss

 

 

 

 
(11,187
)
 

 

 
(11,187
)
Employee and non-employee restricted stock

 

 
2,629

 

 

 

 

 
2,629

Shares repurchased

 
(1,611
)
 

 
(66,503
)
 

 

 

 
(68,114
)
Restricted stock issuance

 
285

 
(285
)
 

 

 

 

 

Restricted shares withheld for taxes

 
(56
)
 
56

 
(2,209
)
 

 

 

 
(2,209
)
Other
(2
)
 
(26
)
 
27

 

 

 

 

 
(1
)
Balance August 3, 2019
$
1,010

 
$
16,345

 
$
268,882

 
$
364,396

 
$
(48,155
)
 
$
(17,857
)
 
$

 
$
584,621


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


9

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

Note 1
Summary of Significant Accounting Policies

Basis of Presentation
The Condensed Consolidated Financial Statements and Notes contained in this report are unaudited but reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for the interim periods of the fiscal year ending February 1, 2020 ("Fiscal 2020") and of the fiscal year ended February 2, 2019 ("Fiscal 2019"). The results of operations for any interim period are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") have been condensed or omitted. The Condensed Consolidated Balance Sheet as of February 2, 2019 has been derived from the audited financial statements at that date. These Condensed Consolidated Financial Statements should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto for Fiscal 2019, which are contained in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission ("SEC") on April 3, 2019.

Nature of Operations
Genesco Inc. and its subsidiaries (collectively, the "Company") business includes the sourcing and design, marketing and distribution of footwear and accessories through retail stores in the U.S., Puerto Rico and Canada primarily under the Journeys, Journeys Kidz, Little Burgundy and Johnston & Murphy banners and under the Schuh banner in the United Kingdom and the Republic of Ireland; through catalogs and e-commerce websites including the following: journeys.com, journeyskidz.com, journeys.ca, schuh.co.uk, littleburgundyshoes.com, johnstonmurphy.com, johnstonmurphy.ca and trask.com, 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. At August 3, 2019, the Company operated 1,494 retail stores in the U.S., Puerto Rico, Canada, the United Kingdom and the Republic of Ireland.

On February 2, 2019, the Company completed the sale of its Lids Sports Group business. As a result, the Company reported the operating results of this business in loss from discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for the three and six months ended August 4, 2018. In addition, the related assets and liabilities as of August 4, 2018 have been reported as assets and liabilities of discontinued operations in the Condensed Consolidated Balance Sheets. The cash flows related to discontinued operations have not been segregated, and are included in the Condensed Consolidated Statements of Cash Flows for the three and six months ended August 4, 2018. Unless otherwise noted, discussion within these notes to the condensed consolidated financial statements relates to continuing operations. See Note 3 for additional information related to discontinued operations.
During the three and six months ended August 3, 2019 and August 4, 2018, the Company operated four reportable business segments (not including corporate): (i) Journeys Group, comprised of the Journeys, Journeys Kidz and Little Burgundy retail footwear chains, e-commerce and catalog operations; (ii) Schuh Group, comprised of the Schuh retail footwear chain and e-commerce operations; (iii) Johnston & Murphy Group, comprised of Johnston & Murphy retail operations, e-commerce operations, catalog, Trask e-commerce operations and wholesale distribution of products under the Johnston & Murphy® and H.S. Trask® brands; and (iv) Licensed Brands, comprised of


10

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

Note 1
Summary of Significant Accounting Policies, Continued
Dockers® Footwear, sourced and marketed under a license from Levi Strauss & Company; and other brands.  

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

Revenue Recognition
In accordance with ASC 606, revenue shall be recognized upon satisfaction of all contractual performance obligations and transfer of control to the customer. Revenue is measured as the amount of consideration the Company expects to be entitled to in exchange for corresponding goods. The majority of the Company's sales are single performance obligation arrangements for retail sale transactions for which the transaction price is equivalent to the stated price of the product, net of any stated discounts applicable at a point in time. Each sales transaction results in an implicit contract with the customer to deliver a product at the point of sale. Revenue from retail sales is recognized at the point of sale, is net of estimated returns, and excludes sales and value added taxes. Revenue from catalog and internet sales is recognized at estimated time of delivery to the customer, is net of estimated returns, and excludes 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. Actual amounts of markdowns have not differed materially from estimates. Shipping and handling costs charged to
customers are included in net sales. The Company elected the practical expedient within ASC 606 related to taxes that are assessed by a governmental authority, which allows for the exclusion of sales and value added tax from transaction price.

A provision for estimated returns is provided through a reduction of sales and cost of goods sold in the period that the related sales are recorded. Estimated returns are based on historical returns and claims. Actual returns and claims in any future period may differ from historical experience. Revenue from gift cards is deferred and recognized upon the redemption of the cards. These cards have no expiration date. Income from unredeemed cards is recognized on the Condensed Consolidated Statements of Operations within net sales in proportion to the pattern of rights exercised by the customer in future periods. The Company performs an evaluation of historical redemption patterns from the date of original issuance to estimate future period redemption activity.

The Condensed Consolidated Balance Sheets include an accrued liability for gift cards of $3.8 million, $5.1 million and $3.8 million at August 3, 2019, February 2, 2019 and August 4, 2018, respectively. Gift card breakage recognized as revenue was $0.1 million and $0.2 million for the second quarters of Fiscal 2020 and Fiscal 2019, respectively, and $0.3 million for each of the first six months of Fiscal 2020 and Fiscal 2019. During the six months ended August 3, 2019, the Company recognized $2.4 million of gift card redemptions and gift card breakage revenue that were included in the gift card liability as of February 2, 2019.





11

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

Note 1
Summary of Significant Accounting Policies, Continued

Cash and Cash Equivalents
The Company had total available cash and cash equivalents of $58.0 million, $167.4 million and $49.8 million as of August 3, 2019, February 2, 2019 and August 4, 2018, respectively, of which approximately $10.8 million, $20.8 million and $11.3 million was held by the Company's foreign subsidiaries as of August 3, 2019, February 2, 2019 and August 4, 2018, 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 indefinitely 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 $17.5 million and $127.2 million in cash equivalents at August 3, 2019 and February 2, 2019, respectively, and no cash equivalents included in cash and cash equivalents at August 4, 2018. The Company's cash equivalents at August 3, 2019 and February 2, 2019 were invested in institutional money market funds which invest exclusively in highly rated, short-term securities that are issued, guaranteed or collateralized by the U.S. government or by U.S. government agencies and instrumentalities.

At August 3, 2019, substantially all of the Company’s domestic cash was invested in institutional money market funds. The majority of payments due from banks for domestic customer credit card transactions process within 24 - 48 hours and are accordingly classified as cash and cash equivalents in the Condensed Consolidated Balance Sheets.

At August 3, 2019, February 2, 2019 and August 4, 2018, outstanding checks drawn on zero-balance accounts at certain domestic banks exceeded book cash balances at those banks by approximately $9.4 million, $29.6 million and $17.8 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 department stores and independent retailers 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. In the footwear wholesale businesses, one customer accounted for 24%, one customer accounted for 11%, two customers each accounted for 7% and no other customer accounted for more than 6% of the Company’s total trade receivables balance as of August 3, 2019.

Asset Retirement Obligations
The Condensed Consolidated Balance Sheets include asset retirement obligations related to leases of $10.2 million, $10.9 million and $10.7 million as of August 3, 2019, February 2, 2019 and August 4, 2018, respectively.




12

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

Note 1
Summary of Significant Accounting Policies, Continued

Fair Value of Financial Instruments
The carrying amounts and fair values of the Company’s financial instruments at August 3, 2019 and February 2, 2019 are as follows:

Fair Values
 
 
 
 
 
 
 
In Thousands
August 3, 2019
 
February 2, 2019
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
U.S. Credit Facility Borrowings
$
60,249

 
$
60,538

 
$
56,773

 
$
56,861

UK Term Loans
7,595

 
7,624

 
8,970

 
9,063

UK Revolver Borrowings
7,296

 
7,343

 

 



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.

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 from the warehouse to the customer 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 amount of $1.3 million for each of the second quarters of Fiscal 2020 and Fiscal 2019, and $2.7 million and $2.8 million for the first six months of Fiscal 2020 and Fiscal 2019, 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 occupancy costs recorded in selling and administrative expense were $85.9 million and $83.5 million for the second quarters of Fiscal 2020 and Fiscal 2019, respectively, and $169.1 million and $168.0 million for the first six months of Fiscal 2020 and Fiscal 2019, respectively.

Advertising Costs
Advertising costs are predominantly expensed as incurred. Advertising costs were $16.5 million and $15.3 million for the second quarters of Fiscal 2020 and Fiscal 2019, respectively, and $30.2 million and $29.8 million for the first six months of Fiscal 2020 and Fiscal 2019, respectively.

13

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

Note 1
Summary of Significant Accounting Policies, Continued

Cooperative Advertising
Cooperative advertising costs recognized in selling and administrative expenses on the Condensed Consolidated Statements of Operations were $0.5 million and $0.2 million for the second quarters of Fiscal 2020 and Fiscal 2019, respectively, and $1.2 million and $1.0 million for the first six months of Fiscal 2020 and Fiscal 2019, respectively. During the first six months of Fiscal 2020 and Fiscal 2019, the Company’s cooperative advertising reimbursements paid did not exceed the fair value of the benefits received under those agreements.

Vendor Allowances
Vendor reimbursements of cooperative advertising costs recognized as a reduction of selling and administrative expenses were $2.3 million and $1.7 million for the second quarters of Fiscal 2020 and Fiscal 2019, respectively, and $4.2 million and $3.4 million for the first six months of Fiscal 2020 and Fiscal 2019, respectively. During the first six months of Fiscal 2020 and Fiscal 2019, the Company’s cooperative advertising reimbursements received were not in excess of the costs incurred.

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 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 gain of $(0.2) million for the second quarter of Fiscal 2020 and a net loss of $0.3 million for the second quarter of Fiscal 2019, and a net loss of $0.1 million and $0.6 million for the first six months of Fiscal 2020 and Fiscal 2019, respectively.

Other Comprehensive Income
ASC 220 requires, among other things, the Company’s pension liability adjustment, postretirement liability adjustment and foreign currency translation adjustment to be included in other comprehensive income net of tax. Accumulated other comprehensive loss at August 3, 2019 consisted of $5.9 million of cumulative pension liability adjustments, net of tax, a cumulative post-retirement liability adjustment of $(1.5) million, net of tax, and a cumulative foreign currency translation adjustment of $43.7 million.











14

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 loss ("AOCI") for the six months ended August 3, 2019:

In Thousands
Foreign Currency
Translation
Unrecognized
Pension
Postretirement
Benefit Costs
Total Accumulated
Other
Comprehensive
Income (Loss)
 
 
 
 
Balance February 2, 2019
$(33,752)
$(4,184)
$(37,936)
Other comprehensive income (loss) before reclassifications:
 
 
 
  Foreign currency translation adjustment
(9,869
)

(9,869
)
  Loss on intra-entity foreign currency transactions
 
 
 
    (long-term investment nature)
(123
)

(123
)
Amounts reclassified from AOCI:
 
 
 
  Amortization of net actuarial loss and prior service cost (1)

(307
)
(307
)
Income tax expense

(80
)
(80
)
Current period other comprehensive loss, net of tax
(9,992
)
(227
)
(10,219
)
Balance August 3, 2019
$(43,744)
$(4,411)
$(48,155)

(1) Amount is included in other components of net periodic benefit cost on the Condensed Consolidated Statements of Operations.

Income Taxes
The Company recorded an effective income tax rate of 70.7% and 2,600.0% in the second quarters of Fiscal 2020 and Fiscal 2019, respectively, and 39.7% and 32.0% in the first six months of Fiscal 2020 and Fiscal 2019, respectively. The tax rate for the second quarter and first six months of Fiscal 2020 and 2019 reflects the inability to recognize a tax benefit for certain foreign losses. The tax rate for the second quarter and six months of Fiscal 2020 also includes an uncertain tax position of $0.2 million. The tax rates were also impacted by $(0.1) million of tax benefit for the second quarter and first six months of Fiscal 2020 and $0.5 million of tax expense for the second quarter and first six months of Fiscal 2019 due to the impact of ASU 2016-09 related to the vesting of restricted stock.

New Accounting Pronouncements
New Accounting Pronouncements Recently Adopted
The Company adopted ASU 2016-02, " Leases (Topic 842)", ("ASC 842"), as of February 3, 2019, using the optional transition method provided by ASU 2018-11, "Leases (Topic 842): Targeted Improvements". The optional transition approach provides a method for recording existing leases at adoption by allowing a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption, as opposed to the modified or full retrospective transition methods that require restating prior comparative periods. Additionally, the Company elected the “package of practical expedients”, which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company


15

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

Note 1
Summary of Significant Accounting Policies, Continued

also elected the practical expedient to not separate lease and non-lease components for its store and equipment leases.
 
Adoption of the new standard resulted in the recording of additional net operating lease right of use assets and operating lease liabilities of $795.6 million and $855.3 million, respectively, as of February 3, 2019. The operating lease right of use asset is inclusive of the impairments recorded upon adoption for store operating lease right of use assets, which totaled $4.8 million and resulted in a decrease to retained earnings of $4.2 million, net of tax. Right of use assets are recorded based upon the present value of remaining operating lease liabilities adjusted for deferred rent, including tenant allowances from landlords. The standard did not materially impact net earnings or liquidity. The standard did not have an impact on covenant compliance under the Company’s current debt agreements. Financial results for reporting periods beginning after February 3, 2019 are presented in accordance with ASC 842, while prior periods will continue to be reported in accordance with the Company’s historical accounting for leases under ASC Topic 840: "Leases (Topic 840)" and therefore have not been adjusted to conform to Topic 842. For additional information regarding leases, see Note 6.

New Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which requires entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. The FASB has subsequently issued updates to the standard to provide additional clarification on specific topics. This guidance will be effective for the Company in the first quarter of the year ending January 30, 2021 ("Fiscal 2021") with early adoption permitted. The Company is evaluating the impact that adopting this guidance will have on the Company’s Condensed Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-14, to improve the effectiveness of disclosures in the notes to financial statements for employers that sponsor defined benefit pension plans. ASU 2018-14 is effective for financial statements issued for fiscal years ending after December 15, 2020, and early adoption is permitted. The Company's board of directors approved the termination of the pension plan effective June 30, 2019. As a result, the Company does not expect this update to impact its notes to its Condensed Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-15. The standard requires that issuers follow the internal-use software guidance in ASC 350-40 to determine which costs to capitalize as assets or expense as incurred. The ASC 350-40 guidance requires that certain costs incurred during the application development stage be capitalized and other costs incurred during the preliminary project and post-implementation stages be expensed as they are incurred. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of ASU 2018-15.


16

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

Note 2
Goodwill and Other Intangible Assets

Goodwill
The changes in the carrying amount of goodwill by segment were as follows:

In Thousands
Schuh Group
Journeys Group
Total Goodwill
Balance, February 2, 2019
$
83,243

$
9,838

$
93,081

Effect of foreign currency exchange rates
(5,873
)
(82
)
(5,955
)
Balance, August 3, 2019
$
77,370

$
9,756

$
87,126



As required under ASC 350, the Company annually assesses its goodwill and indefinite lived trade names for impairment and on an interim basis if indicators of impairment are present. The Company’s annual assessment date of goodwill and indefinite lived trade names is the first day of the fourth quarter.

During the fourth quarter of Fiscal 2019, because the Schuh Group business has continued to perform below the Company's projected operating results, the Company performed impairment testing as of February 2, 2019. The Company found that the result of the impairment test, which valued the business at approximately $10.8 million in excess of its carrying value, indicated no impairment at that time. The Company may determine in connection with 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 Schuh Group business by $11.4 million. Furthermore, the Company noted that a decrease in projected annual revenue growth by one percent would reduce the fair value of the Schuh Group business by $7.4 million. However, if other assumptions do not remain constant, the fair value of the Schuh Group business may decrease by a greater amount. There were no impairment indicators for the six months ended August 3, 2019.

Other Intangible Assets
Other intangibles by major classes were as follows:

 
Leases(1)
Customer Lists
Other(2)
Total
In Thousands
Aug 3,
2019

Feb 2,
2019

Aug 3,
2019

Feb 2,
2019

Aug 3,
2019

Feb 2,
2019

Aug 3,
2019

Feb 2,
2019

Gross other intangibles
$

$