10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended October 31, 2015
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from              to             
Commission File No. 1-3083
 
Genesco Inc.
(Exact name of registrant as specified in its charter)
 
 
Tennessee
 
62-0211340
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
Genesco Park, 1415 Murfreesboro Road
Nashville, Tennessee
 
37217-2895
(Address of principal executive offices)
 
(Zip Code)
 
Registrant's telephone number, including area code: (615) 367-7000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232-405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer; an accelerated filer; a non-accelerated filer; or a smaller reporting company. See definitions of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer
 
x
 
Accelerated filer
o
 
 
 
 
Non-accelerated filer
 
o   (Do not check if smaller reporting company)
 
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  o    No  x
As of November 27, 2015, 22,090,544 shares of the registrant's common stock were outstanding.
 



Table of Contents

INDEX
 
 
 
 



2
Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

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

Assets
October 31, 2015

 
January 31, 2015

 
November 1, 2014

Current Assets:
 
 
 
 
 
  Cash and cash equivalents
$
28,148

 
$
112,867

 
$
38,026

  Accounts receivable, net of allowances of $5,036 at October 31,
 
 
 
 
 
2015, $4,191 at January 31, 2015 and $4,462 at November 1, 2014
82,136

 
55,263

 
71,796

  Inventories
779,895

 
598,145

 
737,577

  Deferred income taxes
31,464

 
28,293

 
23,651

  Prepaids and other current assets
65,448

 
53,090

 
60,002

Total current assets
987,091

 
847,658

 
931,052

 
 
 
 
 
 
Property and equipment:
 
 
 
 
 
Land
8,267

 
7,653

 
7,822

Buildings and building equipment
34,687

 
32,872

 
33,764

Computer hardware, software and equipment
181,810

 
164,512

 
152,770

Furniture and fixtures
203,201

 
192,078

 
192,830

Construction in progress
47,712

 
25,587

 
34,643

Improvements to leased property
352,731

 
349,087

 
348,515

Property and equipment, at cost
828,408

 
771,789

 
770,344

Accumulated depreciation
(506,339
)
 
(466,037
)
 
(455,680
)
Property and equipment, net
322,069

 
305,752

 
314,664

Deferred income taxes
27

 
31

 
4,335

Goodwill
298,990

 
296,865

 
304,552

Trademarks, net of accumulated amortization of $5,652 at
 
 
 
 
 
    October 31, 2015, $5,054 at January 31, 2015 and $4,867 at
 
 
 
 
 
    November 1, 2014
82,094

 
82,263

 
84,947

Other intangibles, net of accumulated amortization of $25,413 at
 
 
 
 
 
October 31, 2015, $23,389 at January 31, 2015 and $22,802 at
 
 
 
 
 
November 1, 2014
9,649

 
11,585

 
12,590

Other noncurrent assets
43,784

 
38,933

 
17,105

Total Assets
$
1,743,704

 
$
1,583,087

 
$
1,669,245









3

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

Liabilities and Equity
October 31, 2015

 
January 31, 2015

 
November 1, 2014

Current Liabilities:
 
 
 
 
 
  Accounts payable
$
270,951

 
$
176,307

 
$
248,782

  Accrued employee compensation
25,759

 
88,030

 
83,042

  Accrued other taxes
22,702

 
33,965

 
21,501

  Accrued income taxes
3,792

 
12,921

 
6,121

  Current portion – long-term debt
15,437

 
13,152

 
35,347

  Other accrued liabilities
85,063

 
71,036

 
82,170

  Provision for discontinued operations
10,904

 
10,505

 
7,759

Total current liabilities
434,608

 
405,916

 
484,722

Long-term debt
199,691

 
16,003

 
79,688

Pension liability
21,441

 
22,184

 
8,597

Deferred rent and other long-term liabilities
153,329

 
135,953

 
120,790

Provision for discontinued operations
4,272

 
4,254

 
4,790

Total liabilities
813,341

 
584,310

 
698,587

Commitments and contingent liabilities

 

 

Equity:
 
 
 
 
 
Non-redeemable preferred stock
1,233

 
1,274

 
1,286

Common equity:
 
 
 
 
 
Common stock, $1 par value:
 
 
 
 
 
Authorized: 80,000,000 shares
 
 
 
 
 
Issued/Outstanding:
 
 
 
 
 
October 31, 2015 – 22,579,008/22,090,544
 
 
 
 
 
January 31, 2015 – 24,515,362/24,026,898
 
 
 
 
 
November 1, 2014 – 24,566,507/24,078,043
22,579

 
24,515

 
24,566

Additional paid-in capital
220,379

 
208,888

 
205,485

Retained earnings
739,180

 
820,563

 
773,804

Accumulated other comprehensive loss
(37,055
)
 
(40,576
)
 
(18,820
)
Treasury shares, at cost (488,464 shares)
(17,857
)
 
(17,857
)
 
(17,857
)
Total Genesco equity
928,459

 
996,807

 
968,464

Noncontrolling interest – non-redeemable
1,904

 
1,970

 
2,194

Total equity
930,363

 
998,777

 
970,658

Total Liabilities and Equity
$
1,743,704

 
$
1,583,087

 
$
1,669,245


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

4

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

 
Three Months Ended
Nine Months Ended
 
October 31, 2015

 
November 1, 2014

October 31, 2015

 
November 1, 2014

Net sales
$
773,898

 
$
722,915

$
2,090,020

 
$
1,967,214

Cost of sales
400,012

 
364,426

1,069,710

 
991,036

Selling and administrative expenses
321,685

 
310,893

935,540

 
894,469

Asset impairments and other, net
151

 
1,036

3,970

 
1,347

Earnings from operations
52,050

 
46,560

80,800

 
80,362

Indemnification asset write-off
—

 
7,050

—

 
7,050

Interest expense, net:
 
 
 
 
 
 
Interest expense
1,314

 
914

2,919

 
2,447

Interest income
16

 
(23
)
(16
)
 
(73
)
Total interest expense, net
1,330

 
891

2,903

 
2,374

Earnings from continuing operations before income taxes
50,720

 
38,619

77,897

 
70,938

Income tax expense
17,865

 
9,869

27,504

 
23,322

Earnings from continuing operations
32,855

 
28,750

50,393

 
47,616

Provision for discontinued operations, net
(348
)
 
(88
)
(488
)
 
(287
)
Net Earnings
$
32,507

 
$
28,662

$
49,905

 
$
47,329

 
 
 
 
 
 
 
Basic earnings per common share:
 
 
 
 
 
 
Continuing operations
$
1.44

 
$
1.22

$
2.16

 
$
2.03

Discontinued operations
(0.02
)
 
(0.01
)
(0.02
)
 
(0.02
)
     Net earnings
$
1.42

 
$
1.21

$
2.14

 
$
2.01

Diluted earnings per common share:
 
 
 
 
 
 
Continuing operations
$
1.43

 
$
1.21

$
2.15

 
$
2.01

Discontinued operations
(0.01
)
 
0.00

(0.02
)
 
(0.01
)
    Net earnings
$
1.42

 
$
1.21

$
2.13

 
$
2.00


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


5

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

 
Three Months Ended
Nine Months Ended
 
October 31, 2015

 
November 1, 2014

October 31, 2015

 
November 1, 2014

Net earnings
$
32,507

 
$
28,662

$
49,905

 
$
47,329

Other comprehensive income (loss):
 
 
 
 
 
 
Pension liability adjustments, net of tax of $0.5 million and $1.5 million for the three and nine months ended October 31, 2015 and $0.4 million and $1.1 million for the three and nine months ended November 1, 2014
727

 
521

2,279

 
1,628

Postretirement liability adjustments, net of tax of $0.1 million and ($0.2 million) for the three and nine months ended October 31, 2015 and $0.0 million for the three and nine months ended November 1, 2014
29

 
15

(376
)
 
48

Foreign currency translation adjustments
(1,654
)
 
(6,856
)
1,618

 
(3,729
)
Total other comprehensive income (loss)
(898
)
 
(6,320
)
3,521

 
(2,053
)
Comprehensive income
$
31,609

 
$
22,342

$
53,426

 
$
45,276


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


6

Genesco Inc.
and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In Thousands)
 
Three Months Ended
Nine Months Ended
 
October 31, 2015

 
November 1, 2014

October 31, 2015

 
November 1, 2014

CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net earnings
$
32,507

 
$
28,662

$
49,905

 
$
47,329

Adjustments to reconcile net earnings to net cash
 
 
 
 
 
 
(used in) provided by operating activities:
 
 
 
 
 
 
Depreciation and amortization
19,294

 
19,006

58,169

 
54,755

Amortization of deferred note expense and debt discount
222

 
173

604

 
518

Deferred income taxes
(622
)
 
(8,022
)
3,193

 
(6,413
)
Recoveries on accounts receivable
283

 
317

219

 
79

Tax indemnification asset write-off
—

 
7,050

—

 
7,050

Impairment of long-lived assets
90

 
397

1,787

 
1,639

Restricted stock expense
3,550

 
3,435

10,450

 
9,943

Provision for discontinued operations
570

 
144

801

 
472

Tax benefit of stock options and restricted stock
(30
)
 
(21
)
(89
)
 
(3,119
)
Other
394

 
329

1,155

 
791

Effect on cash from changes in working capital and other
 
 
 
 
 
 
assets and liabilities, net of acquisitions:
 
 
 
 
 
 
  Accounts receivable
(24,097
)
 
(15,550
)
(26,919
)
 
(16,682
)
  Inventories
(45,797
)
 
(66,219
)
(181,524
)
 
(163,339
)
  Prepaids and other current assets
5,080

 
12,480

(12,159
)
 
(5,780
)
  Accounts payable
12,838

 
7,539

91,757

 
93,868

  Other accrued liabilities
10,175

 
22,215

(79,322
)
 
41,382

  Other assets and liabilities
4,789

 
(10,902
)
6,051

 
(53,596
)
Net cash provided by (used in) operating activities
19,246

 
1,033

(75,922
)
 
8,897

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
  Capital expenditures
(31,525
)
 
(32,580
)
(77,796
)
 
(85,317
)
  Acquisitions, net of cash acquired
—

 
(31,684
)
—

 
(34,917
)
  Proceeds from asset sales
21

 
79

55

 
235

Net cash used in investing activities
(31,504
)
 
(64,185
)
(77,741
)
 
(119,999
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
  Payments of long-term debt
(5,137
)
 
(3,057
)
(17,741
)
 
(10,755
)
  Proceeds from issuance of long-term debt
—

 
2,433

27,417

 
26,253

  Borrowings under revolving credit facility
206,037

 
129,750

288,177

 
212,950

  Payments on revolving credit facility
(98,200
)
 
(88,750
)
(111,600
)
 
(150,750
)
  Tax benefit of stock options and restricted stock
30

 
21

89

 
3,119

  Share repurchases
(99,120
)
 
(946
)
(120,815
)
 
(946
)
  Change in overdraft balances
(12,676
)
 
2,383

2,503

 
7,969

  Additions to deferred note cost
(16
)
 
—

(655
)
 
—

  Exercise of stock options
500

 
322

1,076

 
2,009

  Other
—

 
—

—

 
(42
)
Net cash (used in) provided by financing activities
(8,582
)
 
42,156

68,451

 
89,807

Effect of foreign exchange rate fluctuations on cash
(9
)
 
(281
)
493

 
(126
)
Net Decrease in Cash and Cash Equivalents
(20,849
)
 
(21,277
)
(84,719
)
 
(21,421
)
Cash and cash equivalents at beginning of period
48,997

 
59,303

112,867

 
59,447

Cash and cash equivalents at end of period
$
28,148

 
$
38,026

$
28,148

 
$
38,026

Supplemental Cash Flow Information:
 
 
 
 
 
 
Net cash paid (received) for:
 
 
 
 
 
 
Interest
$
1,140

 
$
658

$
2,065

 
$
1,952

Income taxes
5,895

 
(1,202
)
39,677

 
23,775

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

7

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

 
Total
Non-Redeemable
Preferred
Stock

 
Common
Stock

 
Additional
Paid-In
Capital

 
Retained
Earnings

 
Accumulated
Other
Comprehensive Loss

 
Treasury
Shares

 
Non Controlling
Interest
Non-Redeemable

 
Total
Equity

Balance February 1, 2014
$
1,305

 
$
24,408

 
$
190,568

 
$
734,533

 
$
(16,767
)
 
$
(17,857
)
 
$
1,933

 
$
918,123

Net earnings
—

 
—

 
—

 
97,725

 
—

 
—

 
—

 
97,725

Other comprehensive loss
—

 
—

 
—

 
—

 
(23,809
)
 
—

 
—

 
(23,809
)
Exercise of stock options
—

 
69

 
1,749

 
—

 
—

 
—

 
—

 
1,818

Issue shares – Employee Stock Purchase Plan
—

 
3

 
188

 
—

 
—

 
—

 
—

 
191

Employee and non-employee restricted stock
—

 
—

 
13,392

 
—

 
—

 
—

 
—

 
13,392

Restricted stock issuance
—

 
202

 
(202
)
 
—

 
—

 
—

 
—

 
—

Restricted shares withheld for taxes
—

 
(88
)
 
88

 
(7,125
)
 
—

 
—

 
—

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

 
—

 
3,061

 
—

 
—

 
—

 
—

 
3,061

Shares repurchased
—

 
(65
)
 
—

 
(4,570
)
 
—

 
—

 
—

 
(4,635
)
Other
(31
)
 
(14
)
 
44

 
—

 
—

 
—

 
—

 
(1
)
Noncontrolling interest – gain
—

 
—

 
—

 
—

 
—

 
—

 
37

 
37

Balance January 31, 2015
1,274

 
24,515

 
208,888

 
820,563

 
(40,576
)
 
(17,857
)
 
1,970

 
998,777

Net earnings
—

 
—

 
—

 
49,905

 
—

 
—

 
—

 
49,905

Other comprehensive income
—

 
—

 
—

 
—

 
3,521

 
—

 
—

 
3,521

Exercise of stock options
—

 
30

 
1,046

 
—

 
—

 
—

 
—

 
1,076

Issue shares - Employee Stock Purchase Plan
—

 
3

 
131

 
—

 
—

 
—

 
—

 
134

Employee and non-employee restricted stock
—

 
—

 
10,450

 
—

 
—

 
—

 
—

 
10,450

Restricted stock issuance
—

 
239

 
(239
)
 
—

 
—

 
—

 
—

 
—

Restricted shares withheld for taxes
—

 
(66
)
 
66

 
(4,408
)
 
—

 
—

 
—

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

 
—

 
(13
)
 
—

 
—

 
—

 
—

 
(13
)
Shares repurchased
—

 
(2,133
)
 
—

 
(126,880
)
 
—

 
—

 
—

 
(129,013
)
Other
(41
)
 
(9
)
 
50

 
—

 
—

 
—

 
—

 
—

Noncontrolling interest – loss
—

 
—

 
—

 
—

 
—

 
—

 
(66
)
 
(66
)
Balance October 31, 2015
$
1,233

 
$
22,579

 
$
220,379

 
$
739,180

 
$
(37,055
)
 
$
(17,857
)
 
$
1,904

 
$
930,363


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


8
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies

Interim Statements
The Condensed Consolidated Financial Statements and Notes contained in this report are unaudited but reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for the interim periods of the fiscal year ending January 30, 2016 ("Fiscal 2016") and of the fiscal year ended January 31, 2015 ("Fiscal 2015"). The results of operations for any interim period are not necessarily indicative of results for the full year. The interim financial statements should be read in conjunction with the financial statements and notes thereto included in Genesco Inc.'s Annual Report on Form 10-K.

Nature of Operations
Genesco Inc. and its subsidiaries (collectively, the "Company") business includes the design and sourcing, marketing and distribution of footwear and accessories through retail stores in the U.S., Puerto Rico and Canada primarily under the Journeys, Journeys Kidz, Shi by Journeys, Underground by Journeys and Johnston & Murphy banners and under the Schuh banner in the United Kingdom, the Republic of Ireland and Germany; through e-commerce websites including journeys.com, journeyskidz.com, shibyjourneys.com, schuh.co.uk, johnstonmurphy.com and trask.com and catalogs, and at wholesale, primarily under the Company's Johnston & Murphy brand, the Trask brand, the licensed Dockers brand and other brands that the Company licenses for footwear, and the Company's SureGrip® line of slip-resistant, occupational footwear. The Company's business also includes Lids Sports Group, which operates headwear and accessory stores in the U.S. and Canada primarily under the Lids banner; the Lids Locker Room and Lids Clubhouse businesses, consisting of sports-oriented fan shops featuring a broad array of licensed merchandise such as apparel, hats and accessories, sports decor and novelty products, operating under various trade names; licensed team merchandise departments in Macy's department stores operated under the name Locker Room by Lids and on macys.com, under a license agreement with Macy's; certain e-commerce operations including lids.com, lids.ca, lidslockerroom.com and lidsclubhouse.com; and an athletic team dealer business operating as Lids Team Sports. Including both the footwear businesses and the Lids Sports Group business, at October 31, 2015, the Company operated 2,817 retail stores and leased departments in the U.S., Puerto Rico, Canada, the United Kingdom, the Republic of Ireland and Germany.
During the nine months ended October 31, 2015 and November 1, 2014, the Company operated five reportable business segments (not including corporate): (i) Journeys Group, comprised of the Journeys, Journeys Kidz, Shi by Journeys and Underground by Journeys retail footwear chains, e-commerce operations and catalog; (ii) Schuh Group, comprised of the Schuh retail footwear chain and e-commerce operations; (iii) Lids Sports Group, comprised as described in the preceding paragraph; (iv) Johnston & Murphy Group, comprised of Johnston & Murphy retail operations, e-commerce and catalog operations and wholesale distribution of products under the Johnston & Murphy and Trask brands; and (v) Licensed Brands, comprised of Dockers® Footwear, sourced and marketed under a license from Levi Strauss & Company; SureGrip®Footwear, occupational footwear primarily sold directly to consumers; and other brands.  





9
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

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

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

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

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

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

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

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

Inherent in the retail inventory method are subjective judgments and estimates, including merchandise mark-on, markups, markdowns, and shrinkage. These judgments and estimates, coupled with the fact that the retail inventory method is an averaging process, could produce a range of cost figures. To reduce the risk of inaccuracy and to ensure consistent presentation, the Company employs the retail inventory method in multiple subclasses of inventory with similar gross margins, and analyzes markdown requirements at the stock number level based on factors such as inventory turn, average selling price, and inventory age. In addition, the Company accrues




10
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

markdowns as necessary. These additional markdown accruals reflect all of the above factors as well as current agreements to return products to vendors and vendor agreements to provide
markdown support. In addition to markdown provisions, the Company maintains provisions for shrinkage and damaged goods based on historical rates.

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

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





11
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

If the carrying value of the reporting unit is higher than its fair value, there is an indication that impairment may exist and the second step must be performed to measure the amount of impairment loss. The amount of impairment is determined by comparing the implied fair value of reporting
unit goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. Specifically, the Company would allocate the fair value of the reporting unit to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, the Company would record an impairment charge for the difference.

Environmental and Other Contingencies
The Company is subject to certain loss contingencies related to environmental proceedings and other legal matters. The Company has made pretax accruals for certain of these contingencies, including approximately $0.6 million and $0.1 million for the third quarter of Fiscal 2016 and 2015, respectively, and $0.8 million and $0.5 million for the first nine months of Fiscal 2016 and 2015, respectively. These charges are included in provision for discontinued operations, net in the Condensed Consolidated Statements of Operations because they relate to former facilities operated by the Company. The Company monitors these matters on an ongoing basis and, on a quarterly basis, management reviews the Company’s reserves and accruals, adjusting provisions as management deems necessary in view of changes in available information. Changes in estimates of liability are reported in the periods when they occur. Consequently, management believes that its reserve in relation to each proceeding is a best estimate of probable loss connected to the proceeding, or in cases in which no best estimate is possible, the minimum amount in the range of estimated losses, based upon its analysis of the facts and circumstances as of the close of the most recent fiscal quarter. However, because of uncertainties and risks inherent in litigation generally and in environmental proceedings in particular, there can be no assurance that future developments will not require additional reserves, that some or all reserves will be adequate or that the amounts of any such additional reserves or any such inadequacy will not have a material adverse effect upon the Company’s financial condition, cash flows, or results of operations. See also Notes 3 and 9.

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





12
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

Income Taxes
As part of the process of preparing the Condensed Consolidated Financial Statements, the Company is required to estimate its income taxes in each of the tax jurisdictions in which it operates. This process involves estimating current tax obligations together with assessing temporary differences resulting from differing treatment of certain items for tax and accounting purposes, such as depreciation of property and equipment and valuation of inventories. These temporary differences result in deferred tax assets and liabilities, which are included within the Condensed Consolidated Balance Sheets. The Company then assesses the likelihood that its deferred tax assets will be recovered from future taxable income or other sources. Actual results could differ from this assessment if adequate taxable income is not generated in future periods. To the extent the Company believes that recovery of an asset is at risk, valuation allowances are established. To the extent valuation allowances are established or increased in a period, the Company includes an expense within the tax provision in the Condensed Consolidated Statements of Operations. These deferred tax valuation allowances may be released in future years when management considers that it is more likely than not that some portion or all of the deferred tax assets will be realized. In making such a determination, management will need to periodically evaluate whether or not all available evidence, such as future taxable income and reversal of temporary differences, tax planning strategies, and recent results of operations, provides sufficient positive evidence to offset any potential negative evidence that may exist at such time. In the event the deferred tax valuation allowance is released, the Company would record an income tax benefit for the portion or all of the deferred tax valuation allowance released. At October 31, 2015, the Company had a deferred tax valuation allowance of $3.1 million.

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

The Company recorded an effective income tax rate of 35.2% in the third quarter of Fiscal 2016 compared to 25.6% for the same period last year and 35.3% and 32.9% for the first nine months of Fiscal 2016 and 2015, respectively. The tax rate for Fiscal 2016 was higher compared to Fiscal 2015 primarily due to a $7.0 million reversal of charges previously recorded related to formerly uncertain tax positions that were taken by Schuh at the time of the purchase by the Company, which were favorably resolved during the third quarter of Fiscal 2015. Related to the same uncertain tax position, the Company wrote off a $7.1 million indemnification asset during the third quarter of Fiscal 2015.


13
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

Postretirement Benefits Plan Accounting
Full-time employees who had at least 1000 hours of service in calendar year 2004, except employees in the Lids Sports Group and Schuh Group segments, are covered by a defined benefit pension plan. The Company froze the defined benefit pension plan effective January 1, 2005. The Company also provides certain former employees with medical and life insurance benefits. The Company funds at least the minimum amount required by the Employee Retirement Income Security Act.

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

The Company recognizes pension expense on an accrual basis over employees’ approximate service periods. The calculation of pension expense and the corresponding liability requires the use of a number of critical assumptions, including the expected long-term rate of return on plan assets and the assumed discount rate, as well as the recognition of actuarial gains and losses. Changes in these assumptions can result in different expense and liability amounts, and future actual experience can differ from these assumptions.

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


Cash and Cash Equivalents
The Company had total available cash and cash equivalents of $28.1 million, $112.9 million and $38.0 million as of October 31, 2015, January 31, 2015 and November 1, 2014, respectively, of which approximately $3.1 million, $25.2 million and $13.7 million was held by the Company's foreign subsidiaries as of October 31, 2015, January 31, 2015 and November 1, 2014, respectively. The Company's strategic plan does not require the repatriation of foreign cash in order to fund its operations in the U.S., and it is the Company's current intention to permanently reinvest its foreign cash and cash equivalents outside of the U.S. If the Company were to repatriate foreign cash to the U.S., it would be required to accrue and pay U.S. taxes in accordance with applicable U.S. tax rules and regulations as a result of the repatriation. There were no cash equivalents included in cash and cash equivalents at October 31, 2015, January 31, 2015 and November 1, 2014. Cash equivalents are highly-liquid financial instruments having an original maturity of three months or less.
At October 31, 2015, substantially all of the Company’s domestic cash was invested in deposit accounts at FDIC-insured banks. The majority of payments due from banks for domestic customer


14
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


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

At October 31, 2015, January 31, 2015 and November 1, 2014, outstanding checks drawn on zero-balance accounts at certain domestic banks exceeded book cash balances at those banks by approximately $48.1 million, $45.6 million and $50.1 million, respectively. These amounts are included in accounts payable in the Condensed Consolidated Balance Sheets.

Concentration of Credit Risk and Allowances on Accounts Receivable
The Company’s footwear wholesale businesses sell primarily to independent retailers and department stores across the United States. Receivables arising from these sales are not collateralized. Customer credit risk is affected by conditions or occurrences within the economy and the retail industry as well as by customer specific factors. The Company’s Lids Team Sports wholesale business sells primarily to colleges and high school athletic teams and their fan bases. Including both footwear wholesale and Lids Team Sports wholesale business receivables, one customer accounted for 7% and one customer accounted for 6% of the Company’s total trade receivables balance, while no other customer accounted for more than 5% of the Company’s total trade receivables balance as of October 31, 2015.

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

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

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

Depreciation expense related to property and equipment was approximately $18.5 million and $18.0 million for the three months ended October 31, 2015 and November 1, 2014, respectively, and $56.0 million and $52.3 million for the nine months ended October 31, 2015 and November 1, 2014, respectively.

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



15
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

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

The Company occasionally receives reimbursements from landlords to be used towards construction of the store the Company intends to lease. Leasehold improvements are recorded at their gross costs including items reimbursed by landlords. The reimbursements are amortized as a reduction
of rent expense over the initial lease term. Tenant allowances of $26.2 million, $23.5 million and $25.4 million at October 31, 2015, January 31, 2015 and November 1, 2014, respectively, and deferred rent of $47.7 million, $45.0 million and $44.2 million at October 31, 2015, January 31, 2015 and November 1, 2014, respectively, are included in deferred rent and other long-term liabilities on the Condensed Consolidated Balance Sheets.

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

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

Intangible assets of the Company with indefinite lives are primarily goodwill and identifiable trademarks acquired in connection with the acquisition of Schuh Group Ltd. in June 2011 and Hat World Corporation in April 2004 and various other small acquisitions. The Condensed Consolidated Balance Sheets include goodwill of $199.8 million for the Lids Sports Group, $98.4 million for the Schuh Group and $0.8 million for Licensed Brands at October 31, 2015, $200.1 million for the Lids Sports Group, $96.0 million for the Schuh Group and $0.8 million for Licensed Brands at January 31, 2015 and $201.9 million for the Lids Sports Group, $101.9 million for the Schuh Group and $0.8 million for Licensed Brands at November 1, 2014. The Company tests for impairment of intangible assets with an indefinite life, relying on a number of factors including operating results, business plans, projected future cash flows and observable market data. The impairment test for identifiable assets not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying amount. The Company has not had an impairment charge for intangible assets.




16
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

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

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

Identifiable intangible assets of the Company with finite lives are trademarks, customer lists, in-place leases, non-compete agreements and a vendor contract. They are subject to amortization based upon their estimated useful lives. Finite-lived intangible assets are evaluated for impairment using a process similar to that used to evaluate other definite-lived long-lived assets, a comparison of the fair value of the intangible asset with its carrying amount. An impairment loss is recognized for the amount by which the carrying value exceeds the fair value of the asset.













17
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 October 31, 2015 and January 31, 2015 are:

Fair Values
 
 
 
 
 
 
 
In thousands
October 31, 2015
 
January 31, 2015
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
U.S. Revolver Borrowings
$
148,845

 
$
148,750

 
$
—

 
$
—

UK Term Loans
39,268

 
39,197

 
29,155

 
29,126

UK Revolver Borrowings
27,015

 
26,845

 
—

 
—


Debt fair values were estimated using a discounted cash flow analysis based on current market interest rates for similar types of financial instruments and would be classified in Level 2 as defined in Note 5.

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

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

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

Selling and Administrative Expenses
Selling and administrative expenses include all operating costs of the Company excluding (i) those related to the transportation of products from the supplier to the warehouse, (ii) for its retail operations, those related to the transportation of products from the warehouse to the store and (iii)
costs of its distribution facilities which are allocated to its retail operations. Wholesale costs of distribution are included in selling and administrative expenses on the Condensed Consolidated Statements of Operations in the amounts of $2.6 million for each of the third quarters of Fiscal 2016 and 2015 and $7.2 million for each of the first nine months of Fiscal 2016 and 2015.

EVA Incentive Plan
Under the Company's EVA Incentive Plan, bonus awards in excess of a specified cap in any one year are retained and paid over three subsequent years, subject to reduction or elimination by deteriorating financial performance and historically were subject to forfeiture if the participant voluntarily resigns from employment with the Company. As a result, the bonus awards were subject

18
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

to service conditions that resulted in recognition of expense over the period of service by the respective employee. During the first quarter of Fiscal 2015, the Company amended the plan to remove the future service requirement for the payment of the retained bonuses. As a result, the bonus expense that would have been deferred under the previous plan terms is now recognized in the first year of service. The Company recorded a $5.7 million charge to earnings in the first quarter of Fiscal 2015 in connection with the amendment related to bonus amounts previously deferred to future years.

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

Gift card breakage is recognized in revenues each period for which financial statements are updated. Gift card breakage recognized as revenue was $0.1 million for each of the third quarters of Fiscal 2016 and 2015 and $0.4 million for each of the first nine months of Fiscal 2016 and 2015. The Condensed Consolidated Balance Sheets include an accrued liability for gift cards of $13.8 million, $15.8 million and $12.7 million at October 31, 2015, January 31, 2015 and November 1, 2014, respectively.

Buying, Merchandising and Occupancy Costs
The Company records buying, merchandising and occupancy costs in selling and administrative expense on the Condensed Consolidated Statements of Operations. Because the Company does not include these costs in cost of sales, the Company’s gross margin may not be comparable to other retailers that include these costs in the calculation of gross margin. Retail store occupancy costs recorded in selling and administrative expense were $109.0 million and $103.2 million for the third quarters of Fiscal 2016 and 2015, respectively, and $322.5 million and $306.9 million for the first nine months of Fiscal 2016 and 2015, respectively.

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

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


19
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


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. Under the provisions of the new Property, Plant, and Equipment Topic of the Codification, which the Company adopted in the first quarter of Fiscal 2015, the definition of a discontinued operation was amended. A discontinued operation may include a component of an entity or a group of components of an entity that represent a strategic shift that has or will have a major effect on an entity's operation or financial results. If stores or operating activities to be closed or exited constitute
a component or group of components that represent a strategic shift in the Company's operations, these closures will be considered discontinued operations. The results of operations of discontinued operations are presented retroactively, net of tax, as a separate component on the Condensed
Consolidated Statements of Operations. In each of the years presented, no store closings have met the discontinued operations criteria.

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

Assets related to planned store closures or other exit activities that do not meet the criteria to be classified as held for sale are evaluated for impairment in accordance with the Company’s normal impairment policy, but with consideration given to revised estimates of future cash flows. In any event, the remaining depreciable useful lives are evaluated and adjusted as necessary.

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

Advertising Costs
Advertising costs are predominantly expensed as incurred. Advertising costs were $17.6 million and $15.3 million for the third quarters of Fiscal 2016 and 2015, respectively, and $49.7 million and $44.9 million for the first nine months of Fiscal 2016 and 2015, respectively. Direct response advertising costs for catalogs are capitalized in accordance with the Other Assets and Deferred Costs Topic for Capitalized Advertising Costs of the Codification. Such costs are amortized over the estimated future period as revenues are realized from such advertising, not to exceed six months. The Condensed Consolidated Balance Sheets include prepaid assets for direct response advertising costs of $3.8 million, $2.3 million and $4.2 million at October 31, 2015, January 31, 2015 and November 1, 2014, respectively.









20
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

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

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

Cooperative advertising costs recognized in selling and administrative expenses on the Condensed Consolidated Statements of Operations were $1.1 million and $1.0 million for the third quarters of Fiscal 2016 and 2015, respectively, and $2.8 million and $2.7 million for the first nine months of Fiscal 2016 and 2015, respectively. During the first nine months of Fiscal 2016 and 2015, the Company’s cooperative advertising reimbursements paid did not exceed the fair value of the benefits received under those agreements.

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

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


21
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

exceeds the costs being reimbursed, such excess amount would be recorded as a reduction of cost of sales.

Vendor reimbursements of cooperative advertising costs recognized as a reduction of selling and administrative expenses were $2.0 million and $1.5 million for the third quarters of Fiscal 2016 and 2015, respectively, and $3.6 million and $2.8 million for the first nine months of Fiscal 2016 and 2015, respectively. During the first nine months of Fiscal 2016 and 2015, the Company’s cooperative advertising reimbursements received were not in excess of the costs incurred.

Earnings Per Common Share
Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities to issue common stock were exercised or converted to common stock (see Note 8).

Foreign Currency Translation
The functional currency of the Company's foreign operations is the applicable local currency. The translation of the applicable foreign currency into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date. Income and expense accounts are translated at monthly average exchange rates. The unearned gains and losses resulting
from such translation are included as a separate component of accumulated other comprehensive loss within shareholders' equity. Gains and losses from certain foreign currency transactions are reported as an item of income and resulted in a net loss of $0.6 million and $2.1 million for the third quarter and first nine months of Fiscal 2016, respectively, and a net loss of $1.0 million and $0.8 million for the third quarter and first nine months of Fiscal 2015, respectively.

Share-Based Compensation
The Company has share-based compensation covering certain members of management and non-employee directors. The Company recognizes compensation expense for share-based payments based on the fair value of the awards as required by the Compensation - Stock Compensation Topic of the Codification. The Company has not granted any stock options since the first quarter of Fiscal 2008. The fair value of employee restricted stock is determined based on the closing price of the Company's stock on the date of grant. The benefits of tax deductions in excess of recognized compensation expense are reported as a financing cash flow.

Other Comprehensive Income
The Comprehensive Income Topic of the Codification requires, among other things, the Company’s pension liability adjustment, postretirement liability adjustment and foreign currency translation adjustments to be included in other comprehensive income net of tax. Accumulated other comprehensive loss at October 31, 2015 consisted of $20.5 million of cumulative pension liability adjustments, net of tax, a cumulative post-retirement liability adjustment of $1.9 million, net of tax, and a cumulative foreign currency translation adjustment of $14.6 million.



22
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

The following table summarizes the components of accumulated other comprehensive income for the nine months ended October 31, 2015:

 
 
Foreign Currency Translation
Unrecognized Pension/Postretirement Benefit Costs
Total Accumulated Other Comprehensive Income (Loss)
(In thousands)
 
 
 
 
Balance January 31, 2015
 
$
(16,247
)
$
(24,329
)
$
(40,576
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
  Foreign currency translation adjustment
 
2,360

—

2,360

  Loss on intra-entity foreign currency transactions
 
 
 
 
    (long-term investment nature)
 
(743
)
—

(743
)
  Net actuarial loss
 
—

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

3,894

3,894

Income tax expense
 
—

1,228

1,228

Current period other comprehensive income, net of tax
 
1,617

1,904

3,521

Balance October 31, 2015
 
$
(14,630
)
$
(22,425
)
$
(37,055
)

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

Business Segments
The Segment Reporting Topic of the Codification requires that companies disclose “operating segments” based on the way management disaggregates the Company’s operations for making internal operating decisions (see Note 10).

New Accounting Principles
In November 2015, the FASB issued ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes". ASU No. 2015-17 requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The change to noncurrent classification could have a significant impact on working capital. ASU No. 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and may be applied either prospectively or retrospectively. Early adoption is permitted. The Company is currently assessing the impact the adoption of ASU 2015-17 will have on its Consolidated Financial Statements and related disclosures, including which transition method will be adopted.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)". ASU No. 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and merges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards.

23
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 1
Summary of Significant Accounting Policies, Continued

The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, however, in August 2015, the FASB deferred this ASU for one year. The amendment is to be applied either retrospectively to each prior reporting period presented or with the cumulative effect recognized at the date of initial adoption as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets on the balance sheet). Early adoption is not permitted. The Company is currently assessing the impact the adoption of ASU 2014-09 will have on its Consolidated Financial Statements and related disclosures, including which transition method will be adopted.


Note 2
Intangible Assets

Other intangibles by major classes were as follows:

 
Leases
 
Customer Lists
 
Other*
 
Total
(In Thousands)
Oct. 31, 2015

Jan. 31, 2015

 
Oct. 31, 2015

Jan. 31, 2015

 
Oct. 31, 2015

Jan. 31, 2015

 
Oct. 31, 2015

Jan. 31, 2015

Gross other intangibles
$
13,663

$
13,616

 
$
18,284

$
18,244

 
$
3,115

$
3,114

 
$
35,062

$
34,974

Accumulated amortization
(12,739
)
(12,301
)
 
(10,772
)
(9,424
)
 
(1,902
)
(1,664
)
 
(25,413
)
(23,389
)
Net Other Intangibles
$
924

$
1,315

 
$
7,512

$
8,820

 
$
1,213

$
1,450

 
$
9,649

$
11,585


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

The amortization of intangibles, including trademarks, was $0.7 million and $0.9 million for the third quarters of Fiscal 2016 and 2015, respectively, and $2.2 million and $2.4 million for the first nine months of Fiscal 2016 and 2015, respectively. The amortization of intangibles, including trademarks, is expected to be $2.9 million, $2.4 million, $1.7 million, $1.5 million and $0.8 million for Fiscal 2016, 2017, 2018, 2019 and 2020, respectively.

24
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 3
Asset Impairments and Other Charges and Discontinued Operations

Asset Impairments and Other Charges

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

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

The Company recorded pretax charges of $0.2 million in the third quarter of Fiscal 2016, including a $0.1 million charge for retail store asset impairments and a $0.1 million charge for network intrusion expenses. The Company recorded pretax charges of $4.0 million in the first nine months of Fiscal 2016, including charges of $2.1 million for network intrusion expenses, a $1.8 million charge for retail store asset impairments and a $0.1 million charge for other legal matters.

The Company recorded pretax charges of $1.0 million in the third quarter of Fiscal 2015, including a $0.6 million charge for network intrusion expenses and a $0.4 million charge for retail store asset impairments. The Company recorded pretax charges of $1.3 million in the first nine months of Fiscal 2015, including charges of $2.4 million for network intrusion expenses, $1.6 million for retail store asset impairments and $0.7 million for other legal matters, partially offset by a $(3.4) million gain on a lease termination of a Lids store.

Discontinued Operations

Accrued Provision for Discontinued Operations
 
In thousands
Facility
Shutdown
Costs

Balance February 1, 2014
$
11,375

Additional provision Fiscal 2015
2,711

Charges and adjustments, net
673

Balance January 31, 2015
14,759

Additional provision Fiscal 2016
801

Charges and adjustments, net
(384
)
Balance October 31, 2015*
15,176

Current provision for discontinued operations
10,904

Total Noncurrent Provision for Discontinued Operations    
$
4,272


*Includes a $14.5 million environmental provision, including $10.9 million in current provision for discontinued operations.

25
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 4
Inventories
            
In thousands
October 31, 2015

 
January 31, 2015

Raw materials
$
34,239

 
$
32,941

Wholesale finished goods
60,990

 
65,785

Retail merchandise
684,666

 
499,419

Total Inventories
$
779,895

 
$
598,145


Note 5
Fair Value

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

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

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

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

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


26
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 5
Fair Value, Continued

The following table presents the Company’s assets (which excludes the Company's pension plan assets) and liabilities measured at fair value on a nonrecurring basis as of October 31, 2015 aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):
 
Long-Lived Assets
Held and Used

 
Level 1

 
Level 2

 
Level 3

 
Total
Losses

Measured as of May 2, 2015
$
67

 
$
—

 
$
—

 
$
67

 
$
766

Measured as of August 1, 2015
632

 
—

 
—

 
632

 
931

Measured as of October 31, 2015
200

 
—

 
—

 
200

 
$
90

  Sub-total asset impairment YTD
 
 
 
 
 
 
 
 
$
1,787


In accordance with the Property, Plant and Equipment Topic of the Codification, the Company recorded $0.1 million and $1.8 million of impairment charges as a result of the fair value measurement of its long-lived assets held and used on a nonrecurring basis during the three and nine months ended October 31, 2015, respectively. These charges are reflected in asset impairments and other, net on the Condensed Consolidated Statements of Operations.

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


27
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)



Note 6
Long-Term Debt
 
In thousands
October 31, 2015
 
January 31, 2015
U.S. revolver borrowings
$
148,845

 
$
—

UK term loans
39,268

 
29,155

UK revolver borrowings
27,015

 
—

Total long-term debt
215,128

 
29,155

Current portion
15,437

 
13,152

Total Noncurrent Portion of Long-Term Debt
$
199,691

 
$
16,003


Long-term debt maturing during each of the next five years ending in January each year is $7.8 million, $15.4 million, $3.5 million, $150.8 million and $37.6 million, respectively.

The Company had $148.8 million of revolver borrowings outstanding under the Credit Facility at October 31, 2015, which includes $15.4 million (£10.0 million) related to Genesco (UK) Limited and $8.4 million (C$11.0 million) related to GCO Canada, and had $39.3 million in term loans outstanding and $27.0 million in revolver loans outstanding under the U.K. Credit Facilities (described below) at October 31, 2015. The Company had outstanding letters of credit of $13.5 million under the Credit Facility at October 31, 2015. These letters of credit support product purchases and lease and insurance indemnifications.
U.K. Credit Facility

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

The UK Credit Facilities contain certain covenants at the Schuh level including a minimum interest coverage covenant of 4.50x and thereafter, a maximum leverage covenant initially set at 2.25x declining over time at various rates to 1.75x beginning in April 2017 and a minimum cash flow coverage of 1.00x. The Company was in compliance with all the covenants at October 31, 2015. The UK Credit Facilities are secured by a pledge of all the assets of Schuh and its subsidiaries.



28
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)



Note 7
Defined Benefit Pension Plans and Other Benefit Plans


Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Benefits
 
Three Months Ended
 
Three Months Ended
In thousands
October 31, 2015

 
November 1, 2014

 
October 31, 2015

 
November 1, 2014

Service cost
$
113

 
$
112

 
$
209

 
$
130

Interest cost
1,062

 
1,163

 
61

 
55

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

 
—

Amortization:
 
 
 
 
 
 
 
Losses
1,197

 
860

 
48

 
25

Net amortization
1,197

 
860

 
48

 
25

Net Periodic Benefit Cost
$
926

 
$
618

 
$
318

 
$
210


Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Benefits
 
Nine Months Ended
 
Nine Months Ended
In thousands
October 31, 2015

 
November 1, 2014

 
October 31, 2015

 
November 1, 2014

Service cost
$
338

 
$
337

 
$
628

 
$
396

Interest cost
3,202

 
3,501

 
184

 
171

Expected return on plan assets
(4,341
)
 
(4,552
)
 
—

 
—

Amortization:
 
 
 
 
 
 
 
Losses
3,751

 
2,686

 
144

 
78

Net amortization
3,751

 
2,686

 
144

 
78

Net Periodic Benefit Cost
$
2,950

 
$
1,972

 
$
956

 
$
645



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


29
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 8
Earnings Per Share


For the Three Months Ended

For the Three Months Ended

October 31, 2015

November 1, 2014
(In thousands, except
     per share amounts)
Income
(Numerator)

Shares
(Denominator)

Per Share
Amount

Income
(Numerator)

Shares
(Denominator)

Per Share
Amount












Earnings from continuing operations
$
32,855






$
28,750

















Basic EPS from continuing operations











Income available to











common shareholders
32,855


22,834


$
1.44


28,750


23,602


$
1.22













Effect of Dilutive Securities from
continuing operations











Dilutive share-based awards


39






113



Employees' preferred stock(1)


44






45















Diluted EPS from continuing operations











Income available to common











shareholders plus assumed











conversions
$
32,855


22,917


$
1.43


$
28,750


23,760


$
1.21


(1)
The Company's Employees' Subordinated Convertible Preferred Stock is convertible one for one to the Company's common stock. Because no dividends are paid on this stock, these shares are assumed to be converted in the diluted earnings per share calculations for the third quarters ended October 31, 2015 and November 1, 2014.

30
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 8
Earnings Per Share, Continued

 
For the Nine Months Ended
 
For the Nine Months Ended
 
October 31, 2015
 
November 1, 2014
(In thousands, except
     per share amounts)
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
 
 
 
 
 
 
 
 
 
 
 
 
Earnings from continuing operations
$
50,393

 
 
 
 
 
$
47,616

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS from continuing operations
 
 
 
 
 
 
 
 
 
 
 
Income available to
 
 
 
 
 
 
 
 
 
 
 
common shareholders
50,393

 
23,308

 
$
2.16

 
47,616

 
23,489

 
$
2.03

 
 
 
 
 
 
 
 
 
 
 
 
Effect of Dilutive Securities from
continuing operations
 
 
 
 
 
 
 
 
 
 
 
Dilutive share-based awards
 
 
84

 
 
 
 
 
156

 
 
Employees' preferred stock(1)
 
 
44

 
 
 
 
 
46

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS from continuing operations
 
 
 
 
 
 
 
 
 
 
 
Income available to common
 
 
 
 
 
 
 
 
 
 
 
shareholders plus assumed
 
 
 
 
 
 
 
 
 
 
 
conversions
$
50,393

 
23,436

 
$
2.15

 
$
47,616

 
23,691

 
$
2.01


(1)
The Company's Employees' Subordinated Convertible Preferred Stock is convertible one for one to the Company's common stock. Because no dividends are paid on this stock, these shares are assumed to be converted in the diluted earnings per share calculations for the first nine months ended October 31, 2015 and November 1, 2014.

The Company repurchased 1,708,000 and 2,132,384 shares of common stock during the three and nine months ended October 31, 2015 for $101.5 million and $129.0 million, respectively, of which $8.2 million was not paid in the third quarter but included in other accrued liabilities in the Condensed Consolidated Balance Sheets. The Company has $21.5 million remaining under its current $100.0 million share repurchase authorization approved by the Company's board of directors in September 2015. The Company repurchased 13,159 shares during the three and nine months ended November 1, 2014 for $0.9 million.











31
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 9
Legal Proceedings

Environmental Matters
New York State Environmental Matters
In August 1997, the New York State Department of Environmental Conservation (“NYSDEC”) and the Company entered into a consent order whereby the Company assumed responsibility for conducting a remedial investigation and feasibility study (“RIFS”) and implementing an interim remedial measure (“IRM”) with regard to the site of a knitting mill operated by a former subsidiary of the Company from 1965 to 1969. The Company undertook the IRM and RIFS voluntarily, without admitting liability or accepting responsibility for any future remediation of the site. The Company has completed the IRM and the RIFS. In the course of preparing the RIFS, the Company identified remedial alternatives with estimated undiscounted costs ranging from $0.0 million to $24.0 million, excluding amounts previously expended or provided for by the Company. The United States Environmental Protection Agency (“EPA”), which has assumed primary regulatory responsibility for the site from NYSDEC, issued a Record of Decision (the "2007 ROD") in September 2007. The 2007 ROD requires a remedy of a combination of groundwater extraction and treatment and in-situ chemical oxidation at an estimated present cost of approximately $10.7 million.

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

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

The Village has additionally asserted that the Company is liable for the costs associated with enhanced treatment required by the impact of the groundwater plume from the site on two public water supply wells, including historical costs ranging from approximately $1.8 million to in excess of $2.5 million, and future operation and maintenance costs which the Village estimates at $126,400 annually while the enhanced treatment continues. On December 14, 2007, the Village filed a complaint against the Company and the owner of the property under the Resource Conservation and Recovery Act (“RCRA”), the Safe Drinking Water Act, and the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) as well as a number of state law theories in the U.S. District Court for the Eastern District of New York, seeking an injunction requiring the defendants to remediate contamination from the site and to establish their liability for future costs that may be incurred in connection with it, which the complaint alleges could exceed $41 million, undiscounted, over a 70-year period.

The Company has not verified the estimates of either historic or future costs asserted by the Village, but believes that an estimate of future costs based on a 70-year remediation period is unreasonable given the expected remedial period reflected in the EPA's Record of Decision. On May 23, 2008, the Company filed a motion to dismiss the Village's complaint on grounds including applicable statutes of limitation and preemption of certain claims by the NYSDEC's and the EPA's diligent prosecution of remediation. On January 27, 2009, the Court granted the motion to dismiss all counts of the plaintiff's complaint except for

32
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 9
Legal Proceedings, Continued

the CERCLA claim and a state law claim for indemnity for costs incurred after November 27, 2000. On September 23, 2009, on a motion for reconsideration by the Village, the Court reinstated the claims for injunctive relief under RCRA and for equitable relief under certain of the state law theories. The Company intends to continue to defend the action if an acceptable settlement agreement cannot be reached.

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

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

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

Accrual for Environmental Contingencies
Related to all outstanding environmental contingencies, the Company had accrued $14.5 million, $14.1 million and $11.9 million as of October 31, 2015, January 31, 2015 and November 1, 2014, respectively. All such provisions reflect the Company's estimates of the most likely cost (undiscounted, including both current and noncurrent portions) of resolving the contingencies, based on facts and circumstances as of the time they were made. There is no assurance that relevant facts and circumstances will not change, necessitating future changes to the provisions. Such contingent liabilities are included in the liability arising from provision for discontinued operations on the accompanying Condensed Consolidated Balance Sheets because they relate to former facilities operated by the Company. The Company has made pretax accruals for certain of these contingencies, including approximately $0.6 million and $0.1 million for the third quarters of Fiscal 2016 and 2015, respectively, and approximately $0.8 million and $0.5 million reflected in the first nine months of Fiscal 2016 and 2015, respectively. These charges are included in provision for discontinued operations, net in the Condensed Consolidated Statements of Operations and represent changes in estimates.




33
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 9
Legal Proceedings, Continued

Other Matters
On December 10, 2010, the Company announced that it had suffered a criminal intrusion into the portion of its computer network that processes payments for transactions in certain of its retail stores. Visa, Inc., MasterCard Worldwide and American Express Travel Related Services Company, Inc. asserted claims totaling approximately $15.6 million in connection with the intrusion and the claims of two of the claimants have been collected by withholding payment card receivables of the Company. In the fourth quarter of Fiscal 2013, the Company recorded a $15.4 million charge to earnings in connection with the disputed liability. On March 7, 2013, the Company filed an action in the U.S. District Court for the Middle District of Tennessee against Visa U.S.A. Inc., Visa Inc. and Visa International Service Association seeking to recover $13.3 million in non-compliance fines and issuer reimbursement assessments collected from the Company in connection with the intrusion. The Company does not currently expect any future claims in connection with the intrusion to have a material effect on its financial condition, cash flows, or results of operations.

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

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

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


34
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 10
Business Segment Information

During the nine months ended October 31, 2015 and November 1, 2014, the Company operated five reportable business segments (not including corporate): (i) Journeys Group, comprised of the Journeys, Journeys Kidz, Shi by Journeys and Underground by Journeys retail footwear chains, e-commerce operations and catalog; (ii) Schuh Group, comprised of the Schuh retail footwear chain and e-commerce operations; (iii) Lids Sports Group, comprised primarily of the Lids retail headwear stores, the Lids Locker Room and Lids Clubhouse fan shops (operated under various trade names), licensed team merchandise departments in Macy's department stores operated under the name of Locker Room by Lids under a license agreement with Macy's, the Lids Team Sports business and certain e-commerce operations; (iv) Johnston & Murphy Group, comprised of Johnston & Murphy retail operations, e-commerce operations, catalog and wholesale distribution of products under the Johnston & Murphy and Trask brands; and (v) Licensed Brands, comprised of Dockers Footwear, sourced and marketed under a license from Levi Strauss & Company; SureGrip Footwear, occupational footwear primarily sold directly to consumers; and other brands.

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

The Company's reportable segments are based on management's organization of the segments in order to make operating decisions and assess performance along types of products sold. Journeys Group, Schuh Group and Lids Sports Group sell primarily branded products from other companies while Johnston & Murphy Group and Licensed Brands sell primarily the Company's owned and licensed brands.

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


35
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)


Note 10
Business Segment Information, Continued

Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
October 31, 2015
Journeys Group
 
Schuh Group
 
Lids Sports
Group
 
Johnston
& Murphy
Group
 
Licensed
Brands
 
Corporate
& Other
 
Consolidated
In thousands
 
 
 
 
 
 
Sales
$
321,996

 
$
101,644

 
$
247,178

 
$
70,416

 
$
32,800

 
$
276

 
$
774,310

Intercompany Sales
—

 
—

 
(211
)
 
—

 
(201
)
 
—

 
(412
)
Net sales to external customers
$
321,996

 
$
101,644

 
$
246,967

 
$
70,416

 
$
32,599

 
$
276

 
$
773,898

Segment operating income (loss)
$
38,944

 
$
8,649

 
$
4,704

 
$
4,637

 
$
3,345

 
$
(8,078
)
 
$
52,201

Asset Impairments and other*
—

 
—

 
—

 
—

 
—

 
(151
)
 
(151
)
Earnings (loss) from operations
38,944

 
8,649

 
4,704

 
4,637

 
3,345

 
(8,229
)
 
52,050

Interest expense
—

 
—

 
—

 
—

 
—

 
(1,314
)
 
(1,314
)
Interest income
—

 
—

 
—

 
—

 
—

 
(16
)
 
(16
)
Earnings (loss) from continuing
operations before income taxes
$
38,944

 
$
8,649

 
$
4,704

 
$
4,637

 
$
3,345

 
$
(9,559
)
 
$
50,720

Total assets**
$
407,708

 
$
283,121

 
$
723,374