(Mark One)		Form 10-Q
þ		Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended July 29, 2006
o		Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
		Securities and Exchange Commission Washington, D.C. 20549 Commission File No. 1-3083

				Genesco Inc. A Tennessee Corporation I.R.S. No. 62-0211340 Genesco Park 1415 Murfreesboro Road Nashville, Tennessee 37217-2895 Telephone 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 (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
				Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one:) Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o
				Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes o No þ

Common Shares Outstanding August 25, 2006 — 22,807,001

INDEX

		Page
Part I. Financial Information
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets — July 29, 2006, January 28, 2006 and July 30, 2005			3
Condensed Consolidated Statements of Earnings — Three Months and Six Months Ended July 29, 2006 and July 30, 2005			5
Condensed Consolidated Statements of Cash Flows — Three Months and Six Months Ended July 29, 2006 and July 30, 2005			6
Condensed Consolidated Statements of Shareholders’ Equity — Fiscal Year Ended January 28, 2006 and Six Months Ended July 29, 2006			7
Notes to Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			37
Item 3. Quantitative and Qualitative Disclosures About Market Risk			52
Item 4. Controls and Procedures			53
Part II. Other Information
Item 1. Legal Proceedings			54
Item 1A. Risk Factors			54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			54
Item 4. Submission of Matters to a Vote of Security Holders			55
Item 6. Exhibits			55
Signature			56
EX-31.1 CERTIFICATION OF CEO
EX-31.1 CERTIFICATION OF CFO
EX-32.1 CERTIFICATION OF CEO
EX-32.2 CERTIFICATION OF CFO

PART I — FINANCIAL INFORMATION

Condensed Consolidated Balance Sheets
(In Thousands, except share amounts)

		July 29,				January 28,				July 30,
Assets		2006				2006				2005
Current Assets
Cash and cash equivalents		$	19,360			$	60,451			$	38,848
Accounts receivable, net of allowances of $2,087 at July 29, 2006, $1,439 at January 28, 2006 and $1,677 at July 30, 2005			19,293				21,171				17,762
Inventories			331,439				230,648				270,688
Deferred income taxes			8,907				8,649				3,898
Prepaids and other current assets			22,406				20,269				19,849
Total current assets			401,405				341,188				351,045
Property and equipment:
Land			4,972				4,972				4,972
Buildings and building equipment			14,742				14,723				14,663
Computer hardware, software and equipment			66,135				60,289				57,840
Furniture and fixtures			71,543				67,036				61,982
Construction in progress			13,732				11,728				8,015
Improvements to leased property			207,412				187,083				169,207
Property and equipment, at cost			378,536				345,831				316,679
Accumulated depreciation			(174,117	)			(157,784	)			(143,363	)
Property and equipment, net			204,419				188,047				173,316
Deferred income taxes			-0-				-0-				617
Goodwill			96,235				96,235				96,561
Trademarks			47,675				47,671				47,634
Other intangibles, net of accumulated amortization of $5,244 at July 29, 2006, $4,302 at January 28, 2006 and $3,150 at July 30, 2005			3,342				4,284				5,436
Other noncurrent assets			9,033				8,693				9,340
Total Assets		$	762,109			$	686,118			$	683,949

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

		July 29,				January 28,				July 30,
Liabilities and Shareholders’ Equity		2006				2006				2005
Current Liabilities
Accounts payable		$	144,954			$	73,929			$	114,837
Accrued employee compensation			14,612				26,047				15,337
Accrued other taxes			9,514				12,129				8,571
Accrued income taxes			-0-				12,886				-0-
Other accrued liabilities			27,177				27,178				26,338
Provision for discontinued operations			3,909				4,033				3,677
Total current liabilities			200,166				156,202				168,760
Long-term debt			129,250				106,250				151,250
Pension liability			21,083				23,222				23,406
Deferred rent and other long-term liabilities			53,288				50,013				45,571
Provision for discontinued operations			1,802				1,680				1,631
Total liabilities			405,589				337,367				390,618
Commitments and contingent liabilities
Shareholders’ Equity
Non-redeemable preferred stock			6,648				6,695				7,229
Common shareholders’ equity:
Common stock, $1 par value:
Authorized: 80,000,000 shares
Issued/Outstanding:
July 29, 2006 — 23,360,219/22,871,755 January 28, 2006 — 23,748,134/23,259,670 July 30, 2005 — 23,231,418/22,742,954			23,360				23,748				23,231
Additional paid-in capital			114,196				123,137				115,583
Retained earnings			255,525				239,232				191,934
Accumulated other comprehensive loss			(25,352	)			(26,204	)			(26,789	)
Treasury shares, at cost			(17,857	)			(17,857	)			(17,857	)
Total shareholders’ equity			356,520				348,751				293,331
Total Liabilities and Shareholders’ Equity		$	762,109			$	686,118			$	683,949

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

Condensed Consolidated Statements of Earnings
(In Thousands, except per share amounts)

		Three Months Ended								Six Months Ended
		July 29,				July 30,				July 29,				July 30,
		2006				2005				2006				2005
Net sales		$	304,301			$	275,168			$	619,319			$	561,253
Cost of sales			150,911				136,210				304,560				275,742
Selling and administrative expenses			140,619				124,948				282,485				252,204
Restructuring and other, net			480				177				589				3,044
Earnings from operations			12,291				13,833				31,685				30,263
Interest expense, net
Interest expense			2,267				2,821				4,541				5,877
Interest income			(107	)			(253	)			(467	)			(605	)
Total interest expense, net			2,160				2,568				4,074				5,272
Earnings before income taxes from continuing operations			10,131				11,265				27,611				24,991
Income taxes			4,187				4,499				11,001				9,799
Earnings from continuing operations			5,944				6,766				16,610				15,192
(Provision for) earnings from discontinued operations, net			-0-				-0-				(189	)			65
Net Earnings		$	5,944			$	6,766			$	16,421			$	15,257
Basic earnings per common share:
Continuing operations		$	.26			$	.29			$	.72			$	.67
Discontinued operations		$	.00			$	.00			$	(.01	)		$	.00
Net earnings		$	.26			$	.29			$	.71			$	.67
Diluted earnings per common share:
Continuing operations		$	.24			$	.27			$	.65			$	.60
Discontinued operations		$	.00			$	.00			$	(.01	)		$	.01
Net earnings		$	.24			$	.27			$	.64			$	.61

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

Genesco Inc.
and Subsidiaries

Condensed Consolidated Statements of Cash Flows
(In Thousands)

		Three Months Ended								Six Months Ended
		July 29,				July 30,				July 29,				July 30,
		2006				2005				2006				2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	5,944			$	6,766			$	16,421			$	15,257
Tax benefit of stock options exercised			-0-				454				(158	)			1,500
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
Depreciation			9,827				8,439				19,177				16,887
Provision for legal settlement			-0-				-0-				-0-				2,571
Deferred income taxes			(446	)			53				(1,325	)			(522	)
Provision for losses on accounts receivable			197				(11	)			254				(16	)
Impairment of long-lived assets			460				173				548				337
Share-based compensation and restricted stock			1,806				84				3,505				168
Provision for (earnings from) discontinued operations			-0-				-0-				311				(106	)
Other			338				776				883				1,326
Effect on cash of changes in working capital and other assets and liabilities:
Accounts receivable			3,252				(237	)			1,624				160
Inventories			(83,666	)			(53,603	)			(100,791	)			(63,492	)
Prepaids and other current assets			(893	)			(2,053	)			(778	)			(1,799	)
Accounts payable			47,859				30,699				60,656				44,284
Other accrued liabilities			(3,231	)			138				(29,089	)			(12,123	)
Other assets and liabilities			2,776				2,076				1,848				(1,100	)
Net cash (used in) provided by operating activities			(15,777	)			(6,246	)			(26,914	)			3,332
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures			(17,343	)			(10,846	)			(36,413	)			(23,144	)
Proceeds from sale of property and equipment			-0-				1				-0-				1
Net cash used in investing activities			(17,343	)			(10,845	)			(36,413	)			(23,143	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt			-0-				(10,000	)			-0-				(10,000	)
Payments of capital leases			-0-				(77	)			-0-				(190	)
Tax benefit of stock options exercised			-0-				-0-				158				-0-
Shares repurchased			(11,729	)			-0-				(11,729	)			-0-
Change in overdraft balances			6,554				2,310				10,369				4,954
Revolver borrowings, net			23,000				-0-				23,000				-0-
Dividends paid on non-redeemable preferred stock			(64	)			(69	)			(128	)			(142	)
Exercise of stock options			-0-				1,398				566				3,969
Net cash provided by (used in) financing activities			17,761				(6,438	)			22,236				(1,409	)
Net Cash Flow			(15,359	)			(23,529	)			(41,091	)			(21,220	)
Cash and cash equivalents at beginning of period			34,719				62,377				60,451				60,068
Cash and cash equivalents at end of period		$	19,360			$	38,848			$	19,360			$	38,848
Supplemental Cash Flow Information:
Net cash paid for:
Interest		$	2,869			$	3,519			$	4,050			$	5,173
Income taxes			14,383				9,398				27,267				15,535

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

Genesco Inc.
and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity
(In Thousands)

		Total																Accumulated												Total
		Non-Redeemable								Additional								Other												Share-
		Preferred				Common				Paid-In				Retained				Comprehensive				Treasury				Comprehensive				holders'
		Stock				Stock				Capital				Earnings				Loss				Stock				Income				Equity
Balance January 29, 2005		$	7,474			$	22,926			$	109,005			$	176,819			$	(26,302	)		$	(17,857	)						$	272,065
Net earnings			-0-				-0-				-0-				62,686				-0-				-0-			$	62,686				62,686
Dividends paid on non-redeemable preferred stock			-0-				-0-				-0-				(273	)			-0-				-0-				-0-				(273	)
Exercise of stock options			-0-				547				8,297				-0-				-0-				-0-				-0-				8,844
Employee restricted stock			-0-				229				400				-0-				-0-				-0-				-0-				629
Issue shares — Employee Stock Purchase Plan			-0-				25				483				-0-				-0-				-0-				-0-				508
Tax benefit of stock options exercised			-0-				-0-				3,850				-0-				-0-				-0-				-0-				3,850
Conversion of Series 4 preferred stock			(723	)			11				712				-0-				-0-				-0-				-0-				-0-
Loss on foreign currency forward contracts (net of tax benefit of $0.7 million)			-0-				-0-				-0-				-0-				(1,047	)			-0-				(1,047	)			(1,047	)
Gain on interest rate swaps (net of tax of $0.1 million)			-0-				-0-				-0-				-0-				61				-0-				61				61
Minimum pension liability adjustment (net of tax of $0.7 million)			-0-				-0-				-0-				-0-				1,084				-0-				1,084				1,084
Other			(56	)			10				390				-0-				-0-				-0-				-0-				344
Comprehensive income																										$	62,784
Balance January 28, 2006			6,695				23,748				123,137				239,232				(26,204	)			(17,857	)							348,751
Net earnings			-0-				-0-				-0-				16,421				-0-				-0-				16,421				16,421
Dividends paid on non-redeemable preferred stock			-0-				-0-				-0-				(128	)			-0-				-0-				-0-				(128	)
Exercise of stock options			-0-				26				540				-0-				-0-				-0-				-0-				566
Shares repurchased			-0-				(433	)			(13,171	)			-0-				-0-				-0-				-0-				(13,604	)
Employee and non-employee restricted stock			-0-				-0-				1,408				-0-				-0-				-0-				-0-				1,408
Share-based compensation			-0-				-0-				2,097				-0-				-0-				-0-				-0-				2,097
Tax benefit of stock options exercised			-0-				-0-				158				-0-				-0-				-0-				-0-				158
Gain on foreign currency forward contracts (net of tax of $0.6 million)			-0-				-0-				-0-				-0-				849				-0-				849				849
Loss on interest rate swaps (net of tax benefit of $17,000)			-0-				-0-				-0-				-0-				(25	)			-0-				(25	)			(25	)
Foreign currency translation adjustment			-0-				-0-				-0-				-0-				28				-0-				28				28
Other			(47	)			19				27				-0-				-0-				-0-				-0-				(1	)
Comprehensive income*																										$	17,273
Balance July 29, 2006		$	6,648			$	23,360			$	114,196			$	255,525			$	(25,352	)		$	(17,857	)						$	356,520

*		Comprehensive income was $6.2 million and $6.3 million for the second quarter ended July 29, 2006 and July 30, 2005, respectively. Comprehensive income was $14.8 million for the six month period ended July 30, 2005.

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

Notes to Condensed Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies

Interim Statements

The condensed consolidated financial statements contained in this report of Genesco Inc., a Tennessee corporation (together with its subsidiaries, the “Company”) 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 3, 2007 (“Fiscal 2007”) and of the fiscal year ended January 28, 2006 (“Fiscal 2006”). The results of operations for any interim period are not necessarily indicative of results for the full year. The interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K.

Nature of Operations

The Company’s businesses include the design or sourcing, marketing and distribution of footwear, principally under the Johnston & Murphy, Dockers and Perry Ellis brands and the operation at July 29, 2006 of 1,870 Journeys, Journeys Kidz, Johnston & Murphy, Underground Station, Jarman, Hat World, Lids, Hat Zone, Cap Connection and Head Quarters retail footwear and headwear stores.

Principles of Consolidation

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

Financial Statement Reclassifications

Certain reclassifications have been made to conform prior years’ data to the current year presentation.

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 wholesale operations, cost is determined using the first-in, first-out (“FIFO”) method. Market 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 based on current selling prices or when the inventory is not turning and is not expected to turn at levels satisfactory to the Company.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies, Continued

 

In its retail operations, other than the Hat World segment, 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 margin, and analyzes markdown requirements at the stock number level based on factors such as inventory turn, average selling price, and inventory age. In addition, the Company accrues markdowns as necessary. These additional markdown accruals reflect all of the above factors as well as current agreements to return products to vendors and vendor agreements to provide markdown support. In addition to markdown provisions, the Company maintains provisions for shrinkage and damaged goods based on historical rates.

The Hat World segment employs the moving average cost method for valuing inventories and applies 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.

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 Definite-Lived Long-Lived Assets

The Company periodically assesses the realizability of its definite-lived long-lived assets and evaluates such assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Asset impairment is determined to exist if estimated future cash flows, undiscounted and without interest charges, are less than the carrying amount. Inherent in the analysis of impairment are subjective judgments about future cash flows. Failure to make appropriate conclusions regarding these judgments may result in an overstatement of the value of held and used definite-lived long-lived assets.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies, Continued

 

       Environmental and Other Contingencies

The Company is subject to certain loss contingencies related to environmental proceedings and other legal matters, including those disclosed in Note 8 to the Company’s Condensed Consolidated Financial Statements. The Company monitors these matters on an ongoing basis and, on a quarterly basis, management reviews the Company’s reserves and accruals in relation to each of them, 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 to be set aside, that some or all reserves will be adequate or that the amounts of any such additional reserves or any such inadequacy will not have a material adverse effect upon the Company’s financial condition or results of operations.

       Revenue Recognition

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

       Pension Plan Accounting

In December 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This statement revised employers’ disclosures about pension plans and other post retirement benefit plans. It did not change the measurement or recognition of those plans required by SFAS No. 87, “Employers’ Accounting for Pensions.”

The Company accounts for the defined benefit pension plans using SFAS No. 87, “Employers’ Accounting for Pensions.” Under SFAS No. 87, pension expense is recognized on an accrual basis over employees’ approximate service periods. The calculation of pension expense and the corresponding liability requires the use of a number of critical assumptions, including the expected long-term rate of return on plan assets and the assumed discount rate, as well as the recognition of actuarial gains and losses. Changes in these assumptions can result in different expense and liability amounts, and future actual experience can differ from these assumptions.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies, Continued

 

Cash and Cash Equivalents

Included in cash and cash equivalents at July 29, 2006, January 28, 2006 and July 30, 2005 are cash equivalents of $0.8 million, $48.5 million and $21.8 million, respectively. Cash equivalents are highly-liquid financial instruments having an original maturity of three months or less. The majority of payments due from banks for customer credit card transactions process within 24 — 48 hours and are accordingly classified as cash and cash equivalents.

At July 29, 2006, January 28, 2006 and July 30, 2005, outstanding checks drawn on zero-balance accounts at certain domestic banks exceeded book cash balances at those banks by approximately $27.6 million, $17.2 million and $22.6 million, respectively. These amounts are included in accounts payable.

Concentration of Credit Risk and Allowances on Accounts Receivable

The Company’s footwear wholesaling business sells 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. Two customers accounted for 13% each of the Company’s trade receivables balance as of July 29, 2006 and no other customer accounted for more than 9% of the Company’s trade receivables balance as of July 29, 2006.

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 company-specific factors. The Company also establishes allowances for sales returns, customer deductions and co-op advertising based on specific circumstances, historical trends and projected probable outcomes.

Property and Equipment

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

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

Leases

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

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

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 a rent liability.

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.

Goodwill and Other Intangibles

Under the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and intangible assets with indefinite lives are not amortized, but tested at least annually for impairment. SFAS No. 142 also requires that intangible assets with finite lives be amortized over their respective lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

Intangible assets of the Company with indefinite lives are primarily goodwill and identifiable trademarks acquired in connection with the acquisition of Hat World Corporation on April 1, 2004. The Company tests for impairment of intangible assets with an indefinite life, at a minimum on an annual basis, relying on a number of factors including operating results, business plans and projected future cash flows. 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.

Identifiable intangible assets of the Company with finite lives are primarily leases and customer lists. 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.

Post-retirement Benefits

Substantially all full-time employees, except employees in the Hat World segment, are covered by a defined benefit pension plan. The Company froze the defined benefit pension plan effective January 1, 2005. The Company also provides certain former employees with limited medical and life insurance benefits. The Company funds at least the minimum amount required by the Employee Retirement Income Security Act.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies, Continued

 

Cost of Sales

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

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

Selling and Administrative Expenses

Selling and administrative expenses include all operating costs of the Company excluding (i) those related to the transportation of products from the supplier to the warehouse, (ii) for its retail operations, those related to the transportation of products from the warehouse to the store and (iii) costs of its distribution facilities which are allocated to its retail operations. Wholesale and unallocated retail costs of distribution are included in selling and administrative expenses in the amounts of $0.7 million and $0.9 million for the second quarter of Fiscal 2007 and 2006, respectively, and $1.4 million and $2.1 million for the first six months of Fiscal 2007 and 2006, respectively.

Buying, Merchandising and Occupancy Costs

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

Shipping and Handling Costs

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

Preopening Costs

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

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies, Continued

 

Store Closings and Exit Costs

From time to time, the Company makes strategic decisions to close stores or exit locations or activities. If stores or operating activities to be closed or exited constitute components, as defined by SFAS No. 144, and will not result in a migration of customers and cash flows, these closures will be considered discontinued operations when the related assets meet the criteria to be classified as held for sale, or at the cease-use date, whichever occurs first. The results of operations of discontinued operations are presented retroactively, net of tax, as a separate component on the Statement of Earnings, if material individually or cumulatively.

Assets related to planned store closures or other exit activities are reflected as assets held for sale and recorded at the lower of carrying value or fair value less costs to sell when the required criteria, as defined by SFAS No. 144, 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 SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”

Advertising Costs

Advertising costs are predominantly expensed as incurred. Advertising costs were $7.2 million and $6.3 million for the second quarter of Fiscal 2007 and 2006, respectively, and $15.4 million and $14.1 million for the first six months of Fiscal 2007 and 2006, respectively. Direct response advertising costs for catalogs are capitalized, in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position No. 93-7, “Reporting on Advertising Costs.” Such costs are amortized over the estimated future revenues realized from such advertising, not to exceed six months. The Condensed Consolidated Balance Sheets include prepaid assets for direct response advertising costs of $0.9 million, $0.9 million and $0.6 million at July 29, 2006, January 28, 2006 and July 30, 2005, respectively.

Consideration to Resellers

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

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies, Continued

 

Cooperative Advertising

Cooperative advertising funds are made available to all of the Company’s wholesale customers. In order for retailers to receive reimbursement under such programs, the retailer must meet specified advertising guidelines and provide appropriate documentation of expenses to be reimbursed. The Company’s cooperative advertising agreements require that wholesale customers present documentation or other evidence of specific advertisements or display materials used for the Company’s products by submitting the actual print advertisements presented in catalogs, newspaper inserts or other advertising circulars, or by permitting physical inspection of displays. Additionally, the Company’s cooperative advertising agreements require that the amount of reimbursement requested for such advertising or materials be supported by invoices or other evidence of the actual costs incurred by the retailer. The Company accounts for these cooperative advertising costs as selling and administrative expenses, in accordance with Emerging Issues Task Force (“EITF”) Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).”

Cooperative advertising costs recognized in selling and administrative expenses were $0.6 million and $0.5 million for the second quarter of Fiscal 2007 and 2006, respectively, and $1.1 million and $1.0 million for the first six months of Fiscal 2007 and 2006, respectively. During the first six months of Fiscal 2007 and 2006, 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 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.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies, Continued

 

Vendor reimbursements of cooperative advertising costs recognized as a reduction of selling and administrative expenses were $1.7 million and $0.9 million for the second quarter of Fiscal 2007 and 2006, respectively, and $2.3 million and $1.8 million for the first six months of Fiscal 2007 and 2006, respectively. During the first six months of Fiscal 2007 and 2006, the Company’s cooperative advertising reimbursements received were not in excess of the costs reimbursed.

Environmental Costs

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

Income Taxes

Deferred income taxes are provided for all temporary differences and operating loss and tax credit carryforwards are limited, in the case of deferred tax assets, to the amount the Company believes is more likely than not to be realized in the foreseeable future.

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 6).

Other Comprehensive Income

SFAS No. 130, “Reporting Comprehensive Income,” requires, among other things, the Company’s minimum pension liability adjustment, unrealized gains or losses on foreign currency forward contracts, unrealized gains and losses on interest rate swaps and foreign currency translation adjustments to be included in other comprehensive income net of tax. Accumulated other comprehensive loss at July 29, 2006 consisted of $25.9 million of cumulative minimum pension liability adjustments, net of tax, cumulative net gains of $0.2 million on foreign currency forward contracts, net of tax, cumulative net gains of $0.2 million on interest rate swaps, net of tax, and a foreign currency translation adjustment of $0.1 million.

Business Segments

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” requires that companies disclose “operating segments” based on the way management disaggregates the Company for making internal operating decisions (see Note 9).

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies, Continued

 

Derivative Instruments and Hedging Activities

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of SFAS No. 133,” SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” (collectively “SFAS 133”) require an entity to recognize all derivatives as either assets or liabilities in the consolidated balance sheet and to measure those instruments at fair value. Under certain conditions, a derivative may be specifically designated as a fair value hedge or a cash flow hedge. The accounting for changes in the fair value of a derivative are recorded each period in current earnings or in other comprehensive income depending on the intended use of the derivative and the resulting designation.

New Accounting Principles

Effective January 29, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), using the modified prospective transition method. Under the modified prospective transition method, compensation cost recognized for the three months and six months ended July 29, 2006 includes (i) compensation cost for all share-based payments granted prior to, but not yet vested as of January 29, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123; and (ii) compensation cost for all share-based payments granted on or after January 29, 2006, based on the grant date fair value estimated in accordance with SFAS No. 123(R). In accordance with the modified prospective method, the Company has not restated prior period results. See Note 7 to the Company’s Condensed Consolidated Financial Statements for additional information on the Company’s share-based compensation plans and adoption of SFAS No. 123(R).

In March 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the income statement (that is, gross versus net presentation),” which allows companies to adopt a policy of presenting taxes in the income statement on either a gross or net basis. Taxes within the scope of this EITF would include taxes that are imposed on a revenue transaction between a seller and a customer, for example, sales taxes, use taxes, value-added taxes and some types of excise taxes. EITF No. 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. EITF No. 06-3 will not impact the method for recording and reporting these sales taxes in the Company’s Condensed Consolidated Financial Statements as the Company’s policy is to exclude all such taxes from revenue.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — - an interpretation of SFAS No. 109” (“FIN 48”). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” This Interpretation prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the more-likely-than-not recognition threshold should be measured in order to determine the tax benefit to be recognized in the financial statements. FIN 48 is effective in fiscal years beginning after December 15, 2006. The Company has not yet determined the impact, if any, of adopting FIN 48 on its Condensed Consolidated Financial Statements.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 2
Restructuring and Other Charges and Discontinued Operations

 

Restructuring and Other Charges

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

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

The Company recorded a pretax charge to earnings of $0.5 million ($0.3 million net of tax) in the second quarter of Fiscal 2007. The charge was primarily for retail store asset impairments.

The Company recorded a pretax charge to earnings of $0.1 million in the first quarter of Fiscal 2007. The charge was primarily for retail store asset impairments.

The Company recorded a pretax charge to earnings of $0.2 million ($0.1 million net of tax) in the second quarter of Fiscal 2006. The charge was primarily for retail store asset impairments and lease terminations of two Jarman stores. These lease terminations were the continuation of a plan previously announced by the Company in Fiscal 2004.

The Company recorded a pretax charge to earnings of $2.9 million ($1.8 million net of tax) in the first quarter of Fiscal 2006. The charge included $2.6 million for settlement of a California employment class action (see Note 8), $0.2 million for retail store asset impairments and $0.1 million for lease terminations of two Jarman stores.

Accrued Provision for Discontinued Operations

 

		Facility
		Shutdown
In thousands		Costs				Other				Total
Balance January 29, 2005		$	5,800			$	3			$	5,803
Excess provision Fiscal 2006			(98	)			-0-				(98	)
Charges and adjustments, net			8				-0-				8
Balance January 28, 2006			5,710				3				5,713
Additional provision Fiscal 2007			311				-0-				311
Charges and adjustments, net			(310	)			(3	)			(313	)
Balance July 29, 2006*			5,711				-0-				5,711
Current provision for discontinued operations			3,909				-0-				3,909
Total Noncurrent Provision for Discontinued Operations		$	1,802			$	-0-			$	1,802

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 3
Inventories

 

		July 29,				January 28,
In thousands		2006				2006
Raw materials		$	168			$	203
Wholesale finished goods			31,275				30,392
Retail merchandise			299,996				200,053
Total Inventories		$	331,439			$	230,648

Note 4
Derivative Instruments and Hedging Activities

In order to reduce exposure to foreign currency exchange rate fluctuations in connection with inventory purchase commitments for its Johnston & Murphy division, the Company enters into foreign currency forward exchange contracts for Euro to make Euro denominated payments with a maximum hedging period of twelve months. Derivative instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged. The settlement terms of the forward contracts correspond with the payment terms for the merchandise inventories. As a result, there is no hedge ineffectiveness to be reflected in earnings. The notional amount of such contracts outstanding at July 29, 2006 and January 28, 2006, was $9.7 million and $7.5 million, respectively. Forward exchange contracts have an average remaining term of approximately three months. The gain based on spot rates under these contracts at July 29, 2006 and January 28, 2006 was $0.2 million and $15,000, respectively. For the six months ended July 29, 2006, the Company recorded an unrealized gain on foreign currency forward contracts of $1.4 million in accumulated other comprehensive loss, before taxes. The Company monitors the credit quality of the major national and regional financial institutions with which it enters into such contracts.

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

The Company uses interest rate swaps as a cash flow hedge to manage interest costs and the risk associated with changing interest rates of long-term debt. During the first quarter ended May 1, 2004, the Company entered into three separate forward-starting interest rate swap agreements as a means of managing its interest rate exposure on its $100.0 million variable rate term loan. All three agreements were effective beginning on October 1, 2004 and are designed to swap a variable rate of three-month LIBOR (5.51% at July 3, 2006, the day the rate was set) for a fixed rate ranging from 2.52% to 3.32%. The aggregate notional amount of the swaps was $65.0 million. Of the three agreements, the swap agreement with a $15.0 million notional amount expired on October 1, 2005. The swap agreement with a $20.0 million notional amount expired on July 1, 2006 but it was paid off early in January 2006. The swap agreement with an original $30.0 million notional amount expires on April 1, 2007 and has a $20.0 million notional amount as of July 29, 2006. The fixed rate on the remaining swap agreement is 3.32%. These agreements have the effect of converting certain of the Company’s variable rate obligations to fixed rate obligations. The Company received $0.3 million in Fiscal 2006 as a result of early termination of some of the interest rate swap agreements.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 4
Derivative Instruments and Hedging Activities, Continued

In order to ensure continued hedge effectiveness, the Company intends to elect the three-month LIBOR option for its variable rate interest payments on its term loan as of each interest payment date. Since the interest payment dates coincide with the swap reset dates, the hedges are expected to be perfectly effective. However, because the swaps do not qualify for the short-cut method, the Company will evaluate quarterly the continued effectiveness of the hedge and will reflect any ineffectiveness in the results of operations. As long as the hedge continues to be perfectly effective, net amounts paid or received will be reflected as an adjustment to interest expense and the changes in the fair value of the derivative will be reflected in other comprehensive income.

At July 29, 2006, the net gain of these interest rate swap agreements was $0.2 million, net of tax, representing the change in fair value of the derivative instruments.

Note 5
Defined Benefit Pension Plans and Other Benefit Plans

Components of Net Periodic Benefit Cost

		Pension Benefits
		Three Months Ended								Six Months Ended
		July 29,				July 30,				July 29,				July 30,
In thousands		2006				2005				2006				2005
Service cost		$	63			$	61			$	126			$	127
Interest cost			1,605				1,656				3,213				3,326
Expected return on plan assets			(1,944	)			(1,920	)			(3,892	)			(3,861	)
Amortization:
Losses			1,105				1,087				2,270				2,329
Net amortization			1,105				1,087				2,270				2,329
Net Periodic Benefit Cost		$	829			$	884			$	1,717			$	1,921

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 5
Defined Benefit Pension Plans and Other Benefit Plans, Continued

		Other Benefits
		Three Months Ended								Six Months Ended
		July 29,				July 30,				July 29,				July 30,
In thousands		2006				2005				2006				2005
Service cost		$	54			$	37			$	108			$	74
Interest cost			50				44				100				88
Amortization:
Losses			22				14				44				28
Net amortization			22				14				44				28
Net Periodic Benefit Cost		$	126			$	95			$	252			$	190

While there was no cash requirement projected for the plan in 2006, the Company made a $4.0 million contribution to the plan in March 2006.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 6
Earnings Per Share

		For the Three Months Ended												For the Three Months Ended
		July 29, 2006												July 30, 2005
(In thousands, except		Income				Shares				Per-Share				Income				Shares				Per-Share
per share amounts)		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
Earnings from continuing operations		$	5,944											$	6,766
Less: Preferred stock dividends			(64	)											(69	)
Basic EPS
Income available to common shareholders			5,880				22,988			$	.26				6,697				22,702			$	.29
Effect of Dilutive Securities
Options							393												478
Convertible preferred stock(1)			-0-				-0-								-0-				-0-
4 1/8% Convertible Subordinated Debentures			604				3,899								617				3,899
Employees’ preferred stock(2)							60												63
Diluted EPS
Income available to common shareholders plus assumed conversions		$	6,484				27,340			$	.24			$	7,314				27,142			$	.27

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 6
Earnings Per Share, Continued

		For the Six Months Ended												For the Six Months Ended
		July 29, 2006												July 30, 2005
(In thousands, except		Income				Shares				Per-Share				Income				Shares				Per-Share
per share amounts)		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
Earnings from continuing operations		$	16,610											$	15,192
Less: Preferred stock dividends			(128	)											(142	)
Basic EPS
Income available to common shareholders			16,482				23,015			$	.72				15,050				22,613			$	.67
Effect of Dilutive Securities
Options							414												445
Convertible preferred stock(1)			-0-				-0-								-0-				-0-
4 1/8% Convertible Subordinated Debentures			1,207				3,899								1,233				3,899
Employees’ preferred stock(2)							60												63
Diluted EPS
Income available to common shareholders plus assumed conversions		$	17,689				27,388			$	.65			$	16,283				27,020			$	.60

The weighted shares outstanding reflects the effect of stock buy back programs. In a series of authorizations from Fiscal 1999-2003, the Company’s board of directors authorized the repurchase of up to 7.5 million shares. In June 2006, the board authorized an additional $20.0 million in stock repurchases. The Company repurchased 433,000 shares at a cost of $13.6 million in the second quarter ended July 29, 2006, which includes 25,000 shares from prior authorizations. Of the $13.6 million repurchased during the second quarter this year, $1.9 million was not paid in the quarter but included in other accrued liabilities in the Condensed Consolidated Balance Sheet. In August 2006, the board authorized an additional $30.0 million in stock repurchases. In total, the Company has repurchased 7.5 million shares at a cost of $84.9 million from all authorizations as of July 29, 2006.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 7
Share-Based Compensation Plans

The Company’s stock-based compensation plans, as of July 29, 2006, are described below. Prior to January 29, 2006, the Company accounted for these plans under the recognition and measurement provisions of APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation.”

Effective January 29, 2006, the Company adopted SFAS No. 123(R), using the modified prospective transition method. Under the modified prospective transition method, compensation cost recognized for the three months and six months ended July 29, 2006 includes (i) compensation cost for all share-based payments granted prior to, but not yet vested as of January 29, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123; and (ii) compensation cost for all share-based payments granted on or after January 29, 2006, based on the grant date fair value estimated in accordance with SFAS No. 123(R). In accordance with the modified prospective method, the Company has not restated prior period results.

Stock Incentive Plans

The Company has two fixed stock incentive plans. Under the 2005 Equity Incentive Plan, effective as of June 23, 2005, the Company may grant options, restricted shares and other stock-based awards to its management personnel as well as directors for up to 1.0 million shares of common stock. Under the 1996 Stock Incentive Plan, the Company could grant options to its officers and other key employees of and consultants to the Company as well as directors for up to 4.4 million shares of common stock. There will be no future awards under the 1996 Stock Incentive Plan. Under both plans, the exercise price of each option equals the market price of the Company’s stock on the date of grant and an option’s maximum term is 10 years. Options granted under both plans vest 25% at the end of each year.

For the three months and six months ended July 29, 2006, the Company recognized share-based compensation cost of $1.1 million and $2.1 million, respectively, for its fixed stock incentive plans included in selling and administrative expenses in the accompanying Condensed Consolidated Statements of Earnings. The Company also recognized a total income tax benefit for share-based compensation arrangements of $0.0 million and $0.2 million for the three months and six months ended July 29, 2006, respectively. The Company did not capitalize any share-based compensation cost.

As a result of adopting SFAS No. 123(R), earnings before income taxes from continuing operations, earnings from continuing operations and net earnings for the three months and six months ended July 29, 2006 were $1.1 million, $1.1 million, $1.1 million, $2.1 million, $1.9 million and $1.9 million lower, respectively, than if the Company had continued to account for share-based compensation under APB No. 25. The effect of adopting SFAS No. 123(R) on basic and diluted earnings per common share for the three months and six months ended July 29, 2006 was $0.05, $0.04, $0.08 and $0.07, respectively.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 7
Share-Based Compensation Plans, Continued

The following table illustrates the effect on net earnings per common share as if the Company had applied the fair value recognition provisions of SFAS No. 123 for the three months and six months ended July 30, 2005:

		Three Months Ended					Six Months Ended
(In thousands, except per share amounts)		July 30, 2005				July 30, 2005
Net earnings, as reported		$	6,766			$	15,257
Add: stock-based employee compensation expense included in reported net earnings, net of related tax effects			52				156
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(730	)			(1,475	)
Pro forma net earnings		$	6,088			$	13,938
Earnings per share:
Basic — as reported		$	0.29			$	0.67
Basic — pro forma		$	0.27			$	0.61
Diluted — as reported		$	0.27			$	0.61
Diluted — pro forma		$	0.24			$	0.56

Prior to adopting SFAS No. 123(R), the Company presented the tax benefit of stock option exercises as operating cash flows. SFAS No. 123(R) requires that the cash flows resulting from tax benefits for tax deductions in excess of the compensation cost recognized for those options (excess tax benefit) be classified as financing cash flows. Accordingly, the Company classified excess tax benefits of $0.0 million and $0.2 million as financing cash inflows rather than as operating cash inflows on its Condensed Consolidated Statement of Cash Flows for the three months and six months ended July 29, 2006.

SFAS No. 123(R) also requires companies to calculate an initial “pool” of excess tax benefits available at the adoption date to absorb any unused deferred tax assets that may be recognized under SFAS No. 123(R). The Company has elected to calculate the pool of excess tax benefits under the alternative transition method described in FASB Staff Position (“FSP”) No. 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards,” which also specifies the method the Company must use to calculate excess tax benefits reported on the Condensed Consolidated Statements of Cash Flows.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 7
Share-Based Compensation Plans, Continued

The Company did not grant any stock options for the three months or six months ended July 29, 2006 or July 30, 2005. For Fiscal 2006, the Company estimated the fair value of each option award on the date of grant using a Black-Scholes option pricing model. The Company based expected volatility on implied volatilities of traded Genesco options combined with historical term structures. The Company based the risk free rate on the 20-year constant maturity treasury bond rate. The Company estimated the expected term of stock options using historical exercise and employee termination experience. The Company does not currently pay a dividend. The following table shows the weighted average assumptions used to develop the fair value estimates for Fiscal 2006:

		Fiscal 2006
Volatility			.42
Risk Free Rate			4.4	%
Expected Term (years)			5.2
Dividend yields			0.0	%

A summary of fixed stock option activity and changes since the Company’s most recent fiscal year-end is presented below:

										Weighted-Average				Aggregate Intrinsic
						Weighted-Average				Remaining				Value (in
		Shares				Exercise Price				Contractual Term				thousands) (1)
Outstanding at January 28, 2006			1,464,486			$	20.84
Granted			-0-				—
Exercised			(26,000	)			21.75
Forfeited			(39,146	)			23.50
Outstanding, July 29, 2006			1,399,340			$	20.75				6.89			$	8,613
Exercisable, July 29, 2006			656,638			$	18.24				5.85			$	5,362

The total intrinsic value, which represents the difference between the underlying stock’s market price and the option’s exercise price, of options exercised during the three months and six months ended July 29, 2006 and July 30, 2005 was $0.0 million, $1.3 million, $0.5 million and $4.1 million, respectively.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 7
Share-Based Compensation Plans, Continued

A summary of the status of the Company’s nonvested shares of its fixed stock incentive plans as of July 29, 2006, are presented below:

						Weighted-Average
						Grant-Date
Nonvested Shares		Shares				Fair Value
Nonvested at January 28, 2006			806,848			$	13.11
Granted			-0-				—
Vested			(25,000	)			14.27
Forfeited			(39,146	)			13.80
Nonvested at July 29, 2006			742,702				13.04

As of July 29, 2006, there were $6.6 million of total unrecognized compensation costs related to nonvested share-based compensation arrangements granted under the stock incentive plans discussed above. That cost is expected to be recognized over a weighted average period of 2.07 years.

Cash received from option exercises under all share-based payment arrangements for the three months and six months ended July 29, 2006 and July 30, 2005 was $0.0 million, $1.4 million, $0.6 million and $4.0 million, respectively. The actual tax benefit realized for the tax deductions from option exercise of the share-based payment arrangements totaled $0.0 million, $0.5 million, $0.2 million and $1.5 million for the three months and six months ended July 29, 2006 and July 30, 2005, respectively.

Restricted Stock Incentive Plans

The 1996 Stock Incentive Plan (the “1996 Plan”) provided for an automatic grant of restricted stock to non-employee directors on the date of the annual meeting of shareholders at which an outside director is first elected. The outside director restricted stock so granted was to vest with respect to one-third of the shares each year as long as the director is still serving as a director. Once the shares have vested, the director is restricted from selling, transferring, pledging or assigning the shares for an additional two years. The 2005 Equity Incentive Plan includes no automatic grant provisions, but permits the board of directors to make awards to non-employee directors. The board granted restricted stock to two new non-employee directors in Fiscal 2006 on substantially the same terms as the automatic awards under the 1996 Plan, except that transfer restrictions are to lapse after three years.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 7
Share-Based Compensation Plans, Continued

In addition, under the 1996 Plan an outside director could elect irrevocably to receive all or a specified portion of his annual retainers for board membership and any committee chairmanship for the following fiscal year in a number of shares of restricted stock (the “Retainer Stock”). Shares of the Retainer Stock were granted as of the first business day of the fiscal year as to which the election is effective, subject to forfeiture to the extent not earned upon the outside director’s ceasing to serve as a director or committee chairman during such fiscal year. Once the shares were earned, the director was restricted from selling, transferring, pledging or assigning the shares for an additional four years. Under the 2005 Equity Incentive Plan, Retainer Stock awards were made on substantially the same terms as the grants under the 1996 Plan, except that transfer restrictions are to lapse three years from the date of grant. For the six months ended July 29, 2006 and July 30, 2005, the Company issued 3,022 shares and 2,465 shares, respectively, of Retainer Stock. There were no shares issued for the three months ended July 29, 2006 or July 30, 2005.

Also pursuant to the 1996 Plan, annually on the date of the annual meeting of shareholders, beginning in Fiscal 2004, each outside director received restricted stock valued at $44,000 based on the average of stock prices for the first five days in the month of the annual meeting of shareholders. For Fiscal 2007, each outside director received restricted stock valued at $60,000 based on the average of stock prices for the first five days in the month of the annual meeting of shareholders. The outside director restricted stock vests with respect to one-third of the shares each year as long as the director is still serving as a director. Once the shares vest, the director is restricted from selling, transferring, pledging or assigning the shares for an additional two years. For the three months and six months ended July 29, 2006 and July 30, 2005, the Company issued 16,400 shares and 8,855 shares, respectively, of director restricted stock.

For the three months and six months ended July 29, 2006 and July 30, 2005, the Company recognized $0.1 million, $0.1 million, $0.2 million and $0.2 million, respectively, of director restricted stock related share-based compensation in selling and administrative expenses in the accompanying Condensed Consolidated Statements of Earnings.

On April 24, 2002, the Company issued 36,764 shares of restricted stock to the President and CEO of the Company under the 1996 Plan. Pursuant to the terms of the grant, these shares vested on April 23, 2005, provided that on such date the grantee remained continuously employed by the Company since the date of the agreement. Compensation cost recognized in selling and administrative expenses in the accompanying Condensed Consolidated Statements of Earnings for these shares was $0.1 million for the six months ended July 30, 2005. The 36,764 shares were issued in April 2005.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 7
Share-Based Compensation Plans, Continued

Under the 2005 Equity Incentive Plan, the Company issued 228,594 shares of restricted stock in October and December 2005. There were 2,106 shares forfeited in the three months ended April 29, 2006. Of the 226,488 restricted shares outstanding, 106,445 shares vest at the end of three years and 120,043 shares vest 25% per year over four years, provided that on such date the grantee has remained continuously employed by the Company since the date of grant. The fair value of this stock is charged against income as compensation cost over the vesting period. Compensation cost recognized in selling and administrative expenses in the accompanying Condensed Consolidated Statements of Earnings for these shares was $0.6 million and $1.2 million, respectively, for the three months and six months ended July 29, 2006.

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan, the Company is authorized to issue up to 1.0 million shares of common stock to qualifying full-time employees whose total annual base salary is less than $90,000, effective October 1, 2002. Prior to October 1, 2002, the total annual base salary was limited to $100,000. Under the terms of the Plan, employees could choose each year to have up to 15% of their annual base earnings or $8,500, whichever is lower, withheld to purchase the Company’s common stock. The purchase price of the stock was 85% of the closing market price of the stock on either the exercise date or the grant date, whichever was less. The Company’s board of directors amended the Company’s Employee Stock Purchase Plan effective October 1, 2005 to provide that participants may acquire shares under the Plan at a 5% discount from fair market value on the last day of the Plan year. Under SFAS No. 123(R), shares issued under the Plan as amended are non-compensatory.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 8
Legal Proceedings

Environmental Matters
New York State Environmental Matters

In August 1997, the New York State Department of Environmental Conservation (the “Department”) 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 remediation 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 estimates that the cost of conducting the RIFS and implementing the IRM will be in the range of $6.6 million to $6.8 million, net of insurance recoveries, $3.6 million of which the Company has already paid. In the course of preparing the RIFS, the Company has identified remedial alternatives with estimated undiscounted costs ranging from $-0- to $24.0 million, excluding amounts previously expended or provided for by the Company, as described in this footnote.

The Company has not ascertained what responsibility, if any, it has for any contamination in connection with the facility or what other parties may be liable in that connection and is unable to predict the extent of its liability, if any, beyond that voluntarily assumed by the consent order. The Company’s voluntary assumption of certain responsibility to date was based upon its judgment that such action was preferable to litigation to determine its liability, if any, for contamination related to the site. The Company intends to continue to evaluate the costs of further voluntary remediation versus the costs and uncertainty of litigation.

As part of its analysis of whether to undertake further voluntary action, the Company has assessed various methods of preventing potential future impact of contamination from the site on two public wells that are in the expected future path of the groundwater plume from the site. The Village of Garden City has proposed the installation at the supply wells of enhanced treatment measures at an estimated cost of approximately $2.6 million, with estimated future costs of up to $2.0 million. In the third quarter of Fiscal 2005, the Company provided for the estimated cost of a remedial alternative it considers adequate to prevent such impact and which it would be willing to implement voluntarily. The Village of Garden City has also asserted that the Company is liable for historical costs of treatment at the wells totaling approximately $3.4 million. Because of evidence with regard to when contaminants from the site of the Company’s former operations first reached the wells, the Company believes it should have no liability with respect to such historical costs.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 8
Legal Proceedings, Continued

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.

The Company has submitted to the Michigan Department of Environmental Quality (“MDEQ”) and provided for certain costs associated with a remedial action plan (the “Plan”) designed to bring the property into compliance with regulatory standards for non-industrial uses. The Company estimates that the costs of resolving environmental contingencies related to the Whitehall property range from $1.1 million to $5.4 million, and considers the cost of implementing the Plan to be the most likely cost within that range. While management believes that the Plan should be sufficient to satisfy applicable regulatory standards with respect to the site, until the Plan is finally approved by MDEQ, management cannot provide assurances that no further remediation will be required or that its estimate of the range of possible costs or of the most likely cost of remediation will prove accurate.

In December 2005, the U.S. Environmental Protection Agency (“EPA”) notified the Company that it considers the Company a potentially responsible party (“PRP”) with respect to contamination at two Superfund sites in New York State. The sites were used as landfills for process wastes generated by a glue manufacturer, which acquired tannery wastes from several tanners, allegedly including the Company’s Whitehall tannery, for use as raw materials in the gluemaking process. The Company has no records indicating that it ever provided raw materials to the gluemaking operation and has not been able to establish whether EPA’s substantive allegations are accurate. The Company has joined a joint defense group with other tannery PRP’s with respect to one of the two sites. The joint defense group has developed an estimated cost of remediation for the site and proposed an allocation of liabilities among the PRP’s that, if accepted, is estimated to result in liability to the Company of approximately $100,000 with respect to the site. There is no assurance that the proposed allocation will be accepted or that the actual cost of remediation will not exceed the estimate. Additionally, the Company presently cannot estimate its liability, if any, with respect to the second site associated with the glue manufacturer’s waste disposal.

Related to all outstanding environmental contingencies, the Company had accrued $5.5 million as of July 29, 2006, $5.4 million as of January 28, 2006 and $5.5 million as of January 29, 2005. 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.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 8
Legal Proceedings, Continued

Other Matters
Patent Action

In January 2003, the Company was named a defendant in an action filed in the United States District Court for the Eastern District of Pennsylvania, Schoenhaus, et al. vs. Genesco Inc., et al., alleging that certain features of shoes in the Company’s Johnston & Murphy line infringe the plaintiff’s patent, misappropriate trade secrets and involve conversion of the plaintiff’s proprietary information and unjust enrichment of the Company. On January 10, 2005, the court granted summary judgment to the Company on the patent claims, finding that the accused products do not infringe the plaintiff’s patent. The plaintiffs appealed the summary judgment to the U.S. Court of Appeals for the Federal Circuit, pending which the trial court stayed the remainder of the case. On March 15, 2006, the Court of Appeals affirmed the summary judgment in the Company’s favor.

California Employment Matters

On October 22, 2004, the Company was named a defendant in a putative class action filed in the Superior Court of the State of California, Los Angeles, Schreiner vs. Genesco Inc., et al., alleging violations of California wages and hours laws, and seeking damages of $40 million plus punitive damages. On May 4, 2005, the Company and the plaintiffs reached an agreement in principle to settle the action, subject to court approval and other conditions. In connection with the proposed settlement, to provide for the settlement payment to the plaintiff class and related expenses, the Company recognized a charge of $2.6 million before taxes included in Restructuring and Other, net in the Condensed Consolidated Statements of Earnings for the first three months of Fiscal 2006. On May 25, 2005, a second putative class action, Drake vs. Genesco Inc., et al., making allegations similar to those in the Schreiner complaint on behalf of employees of the Company’s Johnston & Murphy division, was filed by a different plaintiff in the California Superior Court, Los Angeles. On November 22, 2005, the Schreiner court granted final approval of the settlement and the Company and the Drake plaintiff reached an agreement on November 17, 2005 to settle that action. The two matters were resolved more favorably to the Company than originally expected, as not all members of the plaintiff class in Schreiner submitted claims and because the court required that plaintiff’s counsel bear the administrative expenses of the settlement. Consequently, the Company recognized income of $0.9 million before tax, reflected in Restructuring and Other, net, in the Condensed Consolidated Statements of Earnings for the third quarter of Fiscal 2006.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 8
Legal Proceedings, Continued

On November 4, 2005, a former employee gave notice to the California Labor Work Force Development Agency (“LWDA”) of a claim against Genesco for allegedly failing to provide a payroll check that is negotiable and payable in cash, on demand, without discount, at an established place of business in California, as required by the California Labor Code. LWDA is investigating the claim. On May 18, 2006, the same claimant filed a putative class, representative and private attorney general action alleging the same violations of the Labor Code in the Superior Court of California, Alameda County, seeking statutory penalties, damages, restitution, and injunctive relief. The Company disputes the material allegations of the complaint and intends to defend the matter vigorously.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 9
Business Segment Information

The Company operates five reportable business segments (not including corporate): Journeys Group, comprised of the Journeys, Journeys Kidz and Shi by Journeys retail footwear chains; Underground Station Group, comprised of the Underground Station and Jarman retail footwear chains; Hat World Group, comprised of the Hat World, Lids, Hat Zone, Cap Connection and Head Quarters retail headwear operations; Johnston & Murphy Group, comprised of Johnston & Murphy retail operations and wholesale distribution; and Licensed Brands, comprised of Dockers^® Footwear and Perry Ellis^® Footwear. The Company introduced Perry Ellis Footwear with a limited offering for the Holiday 2005 season.

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

The Company’s reportable segments are based on the way management organizes the segments in order to make operating decisions and assess performance along types of products sold. Journeys Group, Underground Station Group and Hat World 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, deferred income taxes, deferred note expense and corporate fixed assets. The Company charges allocated retail costs of distribution to each segment and unallocated retail costs of distribution to the corporate segment. The Company does not allocate certain costs to each segment in order to make decisions and assess performance. These costs include corporate overhead, stock compensation, interest expense, interest income, restructuring charges and other, including severance and litigation.

Three Months Ended						Underground								Johnston
July 29, 2006		Journeys				Station				Hat World				& Murphy				Licensed				Corporate
In thousands		Group				Group				Group				Group				Brands				& Other				Consolidated
Sales		$	136,669			$	30,917			$	78,506			$	41,916			$	16,226			$	177			$	304,411
Intercompany sales			-0-				-0-				-0-				-0-				(110	)			-0-				(110	)
Net sales to external customers		$	136,669			$	30,917			$	78,506			$	41,916			$	16,116			$	177			$	304,301
Segment operating income (loss)		$	7,935			$	(1,747	)		$	8,617			$	2,484			$	1,335			$	(5,853	)		$	12,771
Restructuring and other			-0-				-0-				-0-				-0-				-0-				(480	)			(480	)
Earnings (loss) from operations			7,935				(1,747	)			8,617				2,484				1,335				(6,333	)			12,291
Interest expense			-0-				-0-				-0-				-0-				-0-				(2,267	)			(2,267	)
Interest income			-0-				-0-				-0-				-0-				-0-				107				107
Earnings (loss) before income taxes from continuing operations		$	7,935			$	(1,747	)		$	8,617			$	2,484			$	1,335			$	(8,493	)		$	10,131
Total assets		$	249,207			$	67,514			$	263,946			$	63,911			$	22,854			$	94,677			$	762,109
Depreciation			3,950				1,136				2,623				723				16				1,379				9,827
Capital expenditures			6,544				1,201				6,390				1,065				13				2,130				17,343