Document
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended July 29, 2017
 
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; a smaller reporting company; or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer
 
x
 
Accelerated filer
o
 
 
 
 
Non-accelerated filer
 
o   (Do not check if smaller reporting company)
 
Smaller reporting company
o
Emerging growth company
 
o
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  o    No  x
As of August 25, 2017, 19,919,019 shares of the registrant's common stock were outstanding.
 

Table of Contents

INDEX
 
 
 
 



2
Table of Contents

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Genesco Inc.
and Subsidiaries
Condensed Consolidated Balance Sheets
(In Thousands, except share amounts)

Assets
July 29, 2017

 
January 28, 2017

 
July 30, 2016

Current Assets:
 
 
 
 
 
  Cash and cash equivalents
$
43,520

 
$
48,301

 
$
41,466

  Accounts receivable, net of allowances of $3,469 at Jul. 29, 2017,
 
 
 
 
 
$3,073 at Jan. 28, 2017 and $3,171 at Jul. 30, 2016
39,411

 
43,525

 
46,469

  Inventories
670,104

 
563,677

 
663,708

  Prepaids and other current assets
83,578

 
61,470

 
69,381

Total current assets
836,613

 
716,973

 
821,024

 
 
 
 
 
 
Property and equipment:
 
 
 
 
 
Land
7,881

 
7,773

 
7,872

Buildings and building equipment
56,222

 
52,673

 
50,761

Computer hardware, software and equipment
192,880

 
179,926

 
190,689

Furniture and fixtures
219,025

 
211,833

 
209,246

Construction in progress
55,374

 
33,660

 
27,341

Improvements to leased property
375,636

 
366,186

 
363,000

Property and equipment, at cost
907,018

 
852,051

 
848,909

Accumulated depreciation
(544,714
)
 
(521,440
)
 
(527,678
)
Property and equipment, net
362,304

 
330,611

 
321,231

Deferred income taxes
11,918

 
13,372

 
27,015

Goodwill
276,209

 
271,222

 
277,028

Trademarks, net of accumulated amortization of $5,590 at Jul. 29,
 
 
 
 
 
   2017, $5,574 at Jan. 28, 2017 and $5,372 at Jul. 30, 2016
86,150

 
84,327

 
86,035

Other intangibles, net of accumulated amortization of $16,785 at
 
 
 
 
 
Jul. 29, 2017, $16,200 at Jan. 28, 2017 and $16,303 at Jul. 30, 2016
2,129

 
2,392

 
3,123

Other noncurrent assets
22,190

 
22,102

 
43,201

Total Assets
$
1,597,513

 
$
1,440,999

 
$
1,578,657










3

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

Liabilities and Equity
July 29, 2017

 
January 28, 2017

 
July 30, 2016

Current Liabilities:
 
 
 
 
 
  Accounts payable
$
242,729

 
$
170,751

 
$
269,371

  Accrued employee compensation
20,297

 
31,128

 
23,529

  Accrued other taxes
19,555

 
23,101

 
22,415

  Accrued income taxes
64

 
7,568

 
4,288

  Current portion – long-term debt
2,051

 
9,175

 
10,620

  Other accrued liabilities
64,225

 
64,333

 
64,233

  Provision for discontinued operations
2,111

 
3,330

 
13,249

Total current liabilities
351,032

 
309,386

 
407,705

Long-term debt
188,823

 
73,730

 
124,981

Pension liability
5,989

 
6,265

 
9,487

Deferred rent and other long-term liabilities
133,059

 
127,384

 
147,852

Provision for discontinued operations
1,713

 
1,713

 
1,713

Total liabilities
680,616

 
518,478

 
691,738

Commitments and contingent liabilities

 

 

Equity:
 
 
 
 
 
Non-redeemable preferred stock
1,061

 
1,060

 
1,071

Common equity:
 
 
 
 
 
Common stock, $1 par value:
 
 
 
 
 
Authorized: 80,000,000 shares
 
 
 
 
 
Issued/Outstanding:
 
 
 
 
 
July 29, 2017 – 20,407,483/19,919,019
 
 
 
 
 
January 28, 2017 – 20,354,272/19,865,808
 
 
 
 
 
July 30, 2016 – 21,109,751/20,621,287
20,408

 
20,354

 
21,110

Additional paid-in capital
244,083

 
237,677

 
230,372

Retained earnings
710,445

 
731,111

 
697,768

Accumulated other comprehensive loss
(42,806
)
 
(51,292
)
 
(47,105
)
Treasury shares, at cost (488,464 shares)
(17,857
)
 
(17,857
)
 
(17,857
)
Total Genesco equity
915,334

 
921,053

 
885,359

Noncontrolling interest – non-redeemable
1,563

 
1,468

 
1,560

Total equity
916,897

 
922,521

 
886,919

Total Liabilities and Equity
$
1,597,513

 
$
1,440,999

 
$
1,578,657


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

4

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

 
Three Months Ended
Six Months Ended
 
July 29, 2017

 
July 30, 2016

July 29, 2017

 
July 30, 2016

Net sales
$
616,506

 
$
625,557

$
1,259,874

 
$
1,274,350

Cost of sales
309,999

 
310,820

634,454

 
629,916

Selling and administrative expenses
308,459

 
302,662

624,459

 
610,905

Asset impairments and other, net
58

 
(7,945
)
177

 
(4,388
)
Earnings (loss) from operations
(2,010
)
 
20,020

784

 
37,917

Gain on sale of Lids Team Sports
—

 
(2,485
)
—

 
(2,485
)
Interest expense, net:
 
 
 
 
 
 
Interest expense
1,255

 
1,316

2,429

 
2,479

Interest income
(6
)
 
(10
)
(3
)
 
(36
)
Total interest expense, net
1,249

 
1,306

2,426

 
2,443

Earnings (loss) from continuing operations before income taxes
(3,259
)
 
21,199

(1,642
)
 
37,959

Income tax expense
616

 
6,695

1,236

 
12,891

Earnings (loss) from continuing operations
(3,875
)
 
14,504

(2,878
)
 
25,068

Provision for discontinued operations, net
(73
)
 
74

(185
)
 
(80
)
Net Earnings (Loss)
$
(3,948
)
 
$
14,578

$
(3,063
)
 
$
24,988

 
 
 
 
 
 
 
Basic earnings (loss) per common share:
 
 
 
 
 
 
Continuing operations
$
(0.20
)
 
$
0.72

$
(0.15
)
 
$
1.22

Discontinued operations
(0.01
)
 
0.00

(0.01
)
 
0.00

     Net earnings (loss)
$
(0.21
)
 
$
0.72

$
(0.16
)
 
$
1.22

Diluted earnings (loss) per common share:
 
 
 
 
 
 
Continuing operations
$
(0.20
)
 
$
0.72

$
(0.15
)
 
$
1.22

Discontinued operations
(0.01
)
 
0.00

(0.01
)
 
(0.01
)
    Net earnings (loss)
$
(0.21
)
 
$
0.72

$
(0.16
)
 
$
1.21


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


5

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

 
Three Months Ended
Six Months Ended
 
July 29, 2017

 
July 30, 2016

July 29, 2017

 
July 30, 2016

Net earnings (loss)
$
(3,948
)
 
$
14,578

$
(3,063
)
 
$
24,988

Other comprehensive income:
 
 
 
 
 
 
Pension liability adjustments, net of tax of $0.1 million and $0.2 million for the three and six months ended July 29, 2017 and July 30, 2016
126

 
118

258

 
256

Postretirement liability adjustments, net of tax of $0.0 million for both the three and six months ended July 29, 2017 and July 30, 2016
20

 
15

43

 
30

Foreign currency translation adjustments
5,995

 
(13,376
)
8,185

 
(4,778
)
Total other comprehensive income (loss)
6,141

 
(13,243
)
8,486

 
(4,492
)
Comprehensive income
$
2,193

 
$
1,335

$
5,423

 
$
20,496


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


6

Genesco Inc.
and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In Thousands)
 
 
Three Months Ended
Six Months Ended
 
July 29, 2017

 
July 30, 2016

July 29, 2017

 
July 30, 2016

CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net earnings (loss)
$
(3,948
)
 
$
14,578

$
(3,063
)
 
$
24,988

Adjustments to reconcile net earnings (loss) to net cash
 
 
 
 
 
 
(used in) provided by operating activities:
 
 
 
 
 
 
Depreciation and amortization
18,930

 
19,109

38,546

 
37,923

Amortization of deferred note expense and debt discount
179

 
212

385

 
426

Deferred income taxes
3,288

 
4,135

1,282

 
1,609

Provision on accounts receivable
8

 
81

159

 
247

Gain on sale of business
—

 
(2,485
)
—

 
(2,485
)
Impairment of long-lived assets
58

 
1,017

177

 
4,453

Restricted stock expense
3,387

 
3,367

6,735

 
6,653

Provision for discontinued operations
119

 
(120
)
303

 
132

Other
526

 
446

344

 
1,077

Effect on cash from changes in working capital and other
 
 
 
 
 
 
assets and liabilities, net of acquisitions:
 
 
 
 
 
 
  Accounts receivable
15,208

 
5,623

2,806

 
417

  Inventories
(87,027
)
 
(118,357
)
(101,445
)
 
(134,174
)
  Prepaids and other current assets
(19,023
)
 
(10,726
)
(21,241
)
 
(9,143
)
  Accounts payable
67,916

 
97,691

72,615

 
120,890

  Other accrued liabilities
(8,707
)
 
3,076

(26,420
)
 
(20,293
)
  Other assets and liabilities
2,289

 
(2,152
)
4,038

 
1,340

Net cash provided by (used in) operating activities
(6,797
)
 
15,495

(24,779
)
 
34,060

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
  Capital expenditures
(37,010
)
 
(23,346
)
(67,336
)
 
(40,703
)
  Acquisitions, net of cash acquired
—

 
(22
)
—

 
(22
)
  Payments related to asset sales and sale of business
27

 
(545
)
238

 
(545
)
Net cash used in investing activities
(36,983
)
 
(23,913
)
(67,098
)
 
(41,270
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
  Payments of long-term debt
—

 
(3,070
)
(8,018
)
 
(4,990
)
  Borrowings under revolving credit facility
133,593

 
69,994

324,987

 
69,994

  Payments on revolving credit facility
(85,869
)
 
(38,682
)
(214,282
)
 
(39,429
)
  Share repurchases
(1,715
)
 
(27,192
)
(17,878
)
 
(104,088
)
  Change in overdraft balances
(2,371
)
 
6,595

627

 
(5,760
)
  Exercise of stock options
—

 
513

—

 
573

  Other
(143
)
 
(143
)
1,214

 
(283
)
Net cash provided by (used in) financing activities
43,495

 
8,015

86,650

 
(83,983
)
Effect of foreign exchange rate fluctuations on cash
434

 
(881
)
446

 
(629
)
Net Increase (Decrease) in Cash and Cash Equivalents
149

 
(1,284
)
(4,781
)
 
(91,822
)
Cash and cash equivalents at beginning of period
43,371

 
42,750

48,301

 
133,288

Cash and cash equivalents at end of period
$
43,520

 
$
41,466

$
43,520

 
$
41,466

Supplemental Cash Flow Information:
 
 
 
 
 
 
Net cash paid for:
 
 
 
 
 
 
Interest
$
1,112

 
$
1,086

$
2,105

 
$
1,884

Income taxes
21,868

 
21,413

24,144

 
34,535


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)

 

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 January 30, 2016
$
1,077

 
$
22,323

 
$
224,004

 
$
768,222

 
$
(42,613
)
 
$
(17,857
)
 
$
1,627

 
$
956,783

Net earnings
—

 
—

 
—

 
97,431

 
—

 
—

 
—

 
97,431

Other comprehensive loss
—

 
—

 
—

 
—

 
(8,679
)
 
—

 
—

 
(8,679
)
Exercise of stock options
—

 
27

 
991

 
—

 
—

 
—

 
—

 
1,018

Employee and non-employee restricted stock
—

 
—

 
13,481

 
—

 
—

 
—

 
—

 
13,481

Restricted stock issuance
—

 
236

 
(236
)
 
—

 
—

 
—

 
—

 
—

Restricted shares withheld for taxes
—

 
(56
)
 
56

 
(3,435
)
 
—

 
—

 
—

 
(3,435
)
Tax benefit of stock options and restricted stock exercised
—

 
—

 
(657
)
 
—

 
—

 
—

 
—

 
(657
)
Shares repurchased
—

 
(2,156
)
 
—

 
(131,107
)
 
—

 
—

 
—

 
(133,263
)
Other
(17
)
 
(20
)
 
38

 
—

 
—

 
—

 
—

 
1

Noncontrolling interest – loss
—

 
—

 
—

 
—

 
—

 
—

 
(159
)
 
(159
)
Balance January 28, 2017
1,060

 
20,354

 
237,677

 
731,111

 
(51,292
)
 
(17,857
)
 
1,468

 
922,521

Net earnings (loss)

 
—

 
—

 
(3,063
)
 
—

 
—

 
—

 
(3,063
)
Other comprehensive income
—

 
—

 
—

 
—

 
8,486

 
—

 
—

 
8,486

Employee and non-employee restricted stock
—

 
—

 
6,735

 
—

 
—

 
—

 
—

 
6,735

Restricted stock issuance
—

 
357

 
(357
)
 
—

 
—

 
—

 
—

 
—

Restricted shares withheld for taxes
—

 
(51
)
 
51

 
(1,715
)
 
—

 
—

 
—

 
(1,715
)
Shares repurchased
—

 
(275
)
 
—

 
(15,888
)
 
—

 
—

 
—

 
(16,163
)
Other
1

 
23

 
(23
)
 
—

 
—

 
—

 
—

 
1

Noncontrolling interest – earnings
—

 
—

 
—

 
—

 
—

 
—

 
95

 
95

Balance July 29, 2017
$
1,061

 
$
20,408

 
$
244,083

 
$
710,445

 
$
(42,806
)
 
$
(17,857
)
 
$
1,563

 
$
916,897


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

Basis of Presentation
The Condensed Consolidated Financial Statements and Notes contained in this report are unaudited but reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for the interim periods of the fiscal year ending February 3, 2018 ("Fiscal 2018") and of the fiscal year ended January 28, 2017 ("Fiscal 2017"). The results of operations for any interim period are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The Condensed Consolidated Balance Sheet as of January 28, 2017 has been derived from the audited financial statements at that date. These Condensed Consolidated Financial Statements should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto for Fiscal 2017, which are contained in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission ("SEC") on March 29, 2017.

Nature of Operations
Genesco Inc. and its subsidiaries (collectively, the "Company") business includes the sourcing and design, marketing and distribution of footwear and accessories through retail stores in the U.S., Puerto Rico and Canada primarily under the Journeys, Journeys Kidz, Shi by Journeys, Little Burgundy and Johnston & Murphy banners and under the Schuh banner in the United Kingdom, the Republic of Ireland and Germany; through catalogs and e-commerce websites including the following: journeys.com, journeyskidz.com, journeys.ca, shibyjourneys.com, schuh.co.uk, littleburgundyshoes.com, johnstonmurphy.com and trask.com, and at wholesale, primarily under the Company's Johnston & Murphy brand, the Trask brand, the licensed Dockers brand and other brands that the Company licenses for footwear. The Company's business also includes Lids Sports Group, which operates headwear and accessory stores in the U.S., Puerto Rico 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, lidsclubhouse.com and neweracap.com. Including both the footwear businesses and the Lids Sports Group business, at July 29, 2017, the Company operated 2,745 retail stores and leased departments in the U.S., Puerto Rico, Canada, the United Kingdom, the Republic of Ireland and Germany.
During the six months ended July 29, 2017 and July 30, 2016, the Company operated five reportable business segments (not including corporate): (i) Journeys Group, comprised of the Journeys, Journeys Kidz, Shi by Journeys and Little Burgundy retail footwear chains, e-commerce and catalog operations; (ii) Schuh Group, comprised of the Schuh retail footwear chain and e-commerce operations; (iii) 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 H. S. Trask® brands; and (v) Licensed Brands, comprised of Dockers® Footwear, sourced and marketed under a license from Levi Strauss & Company; SureGrip®Footwear, which was sold in


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

Note 1
Summary of Significant Accounting Policies, Continued
the fourth quarter of Fiscal 2017; G.H. Bass Footwear operated under a license from G-III Apparel Group, Ltd.; and other brands.  

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

Cash and Cash Equivalents
The Company had total available cash and cash equivalents of $43.5 million, $48.3 million and $41.5 million as of July 29, 2017, January 28, 2017 and July 30, 2016, respectively, of which approximately $14.8 million, $22.9 million and $11.8 million was held by the Company's foreign subsidiaries as of July 29, 2017, January 28, 2017 and July 30, 2016, respectively. The Company's strategic plan does not require the repatriation of foreign cash in order to fund its operations in the U.S., and it is the Company's current intention to indefinitely reinvest its foreign cash and cash equivalents outside of the U.S. If the Company were to repatriate foreign cash to the U.S., it would be required to accrue and pay U.S. taxes in accordance with applicable U.S. tax rules and regulations as a result of the repatriation. There were no cash equivalents included in cash and cash equivalents at July 29, 2017, January 28, 2017 and July 30, 2016. Cash equivalents are highly-liquid financial instruments having an original maturity of three months or less.
At July 29, 2017, substantially all of the Company’s domestic cash was invested in deposit accounts at FDIC-insured banks. The majority of payments due from banks for domestic customer credit card transactions process within 24 - 48 hours and are accordingly classified as cash and cash equivalents in the Condensed Consolidated Balance Sheets.

At July 29, 2017, January 28, 2017 and July 30, 2016, outstanding checks drawn on zero-balance accounts at certain domestic banks exceeded book cash balances at those banks by approximately $37.3 million, $36.7 million and $39.2 million, respectively. These amounts are included in accounts payable in the Condensed Consolidated Balance Sheets.

Concentration of Credit Risk and Allowances on Accounts Receivable
The Company’s footwear wholesale businesses sell primarily to department stores and independent retailers across the United States. Receivables arising from these sales are not collateralized. Customer credit risk is affected by conditions or occurrences within the economy and the retail industry as well as by customer specific factors. In the footwear wholesale businesses, one customer accounted for 19% and one customer accounted for 10% of the Company’s total trade receivables balance, while no other customer accounted for more than 9% of the Company’s total trade receivables balance as of July 29, 2017.

Leases
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 $27.0 million, $25.4 million and $25.4 million at July 29, 2017, January 28, 2017 and July 30, 2016, respectively, and deferred

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

Note 1
Summary of Significant Accounting Policies, Continued

rent of $55.4 million, $51.9 million and $49.7 million, each at July 29, 2017, January 28, 2017 and July 30, 2016, respectively, are included in deferred rent and other long-term liabilities on the Condensed Consolidated Balance Sheets.

The Condensed Consolidated Balance Sheets include asset retirement obligations related to leases of $10.9 million, $10.3 million and $10.4 million as of July 29, 2017, January 28, 2017 and July 30, 2016, respectively.

Fair Value of Financial Instruments
The carrying amounts and fair values of the Company’s financial instruments at July 29, 2017 and January 28, 2017 are as follows:

Fair Values
 
 
 
 
 
 
 
In thousands
July 29, 2017
 
January 28, 2017
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
U.S. Credit Facility Borrowings
$
162,251

 
$
163,620

 
$
49,879

 
$
50,396

UK Term Loans
11,821

 
12,025

 
19,230

 
19,541

UK Revolver Borrowings
16,802

 
17,071

 
13,796

 
13,956


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

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

Selling and Administrative Expenses
Selling and administrative expenses include all operating costs of the Company excluding (i) those related to the transportation of products from the supplier to the warehouse, (ii) for its retail operations, those related to the transportation of products from the warehouse to the store and (iii)
costs of its distribution facilities which are allocated to its retail operations. Wholesale costs of distribution are included in selling and administrative expenses on the Condensed Consolidated Statements of Operations in the amount of $1.2 million and $1.4 million for the second quarters of Fiscal 2018 and Fiscal 2017, respectively, and $2.8 million and $3.0 million for the first six months of Fiscal 2018 and 2017, respectively.

Gift Cards
Gift card breakage is recognized in revenues each period for which financial statements are updated. Gift card breakage recognized as revenue was $0.1 million for each of the second quarters of Fiscal 2018 and Fiscal 2017, and $0.4 million and $0.3 million for the first six months of Fiscal 2018 and 2017, respectively. The Condensed Consolidated Balance Sheets include an accrued liability for

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

Note 1
Summary of Significant Accounting Policies, Continued

gift cards of $15.6 million, $17.7 million and $15.0 million at July 29, 2017, January 28, 2017 and July 30, 2016, 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 $114.1 million and $112.2 million for the second quarters of Fiscal 2018 and Fiscal 2017, respectively, and $227.4 million and $223.4 million for the first six months of Fiscal 2018 and 2017, respectively.

Advertising Costs
Advertising costs are predominantly expensed as incurred. Advertising costs were $16.9 million and $15.7 million for the second quarters of Fiscal 2018 and Fiscal 2017, respectively, and $36.5 million and $32.4 million for the first six months of Fiscal 2018 and 2017, 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 $3.7 million, $1.2 million and $1.6 million at July 29, 2017, January 28, 2017 and July 30, 2016, respectively.

Cooperative Advertising
Cooperative advertising costs recognized in selling and administrative expenses on the Condensed Consolidated Statements of Operations were $0.6 million and $0.7 million for the second quarters of Fiscal 2018 and Fiscal 2017, respectively, and $1.8 million and $1.7 million for the first six months of Fiscal 2018 and 2017, respectively. During the first six months of Fiscal 2018 and Fiscal 2017, the Company’s cooperative advertising reimbursements paid did not exceed the fair value of the benefits received under those agreements.

Vendor Allowances
Vendor reimbursements of cooperative advertising costs recognized as a reduction of selling and administrative expenses were $1.7 million and $1.4 million for the second quarters of Fiscal 2018 and Fiscal 2017, respectively, and $4.4 million and $2.7 million for the first six months of Fiscal 2018 and 2017, respectively. During the first six months of Fiscal 2018 and Fiscal 2017, the Company’s cooperative advertising reimbursements received were not in excess of the costs incurred.

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


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

Note 1
Summary of Significant Accounting Policies, Continued

from such translation are included as a separate component of accumulated other comprehensive loss within shareholders' equity. Gains and losses from certain foreign currency transactions are
reported as an item of income and resulted in a net loss of $0.2 million and $0.5 million for the second quarter and first six months of Fiscal 2018, respectively, and a net gain of $(0.5) million and $(1.5) million for the second quarter and first six months of Fiscal 2017, respectively.

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 July 29, 2017 consisted of $9.2 million of cumulative pension liability adjustments, net of tax, a cumulative post-retirement liability adjustment of $1.5 million, net of tax, and a cumulative foreign currency translation adjustment of $32.1 million.

The following table summarizes the components of accumulated other comprehensive loss for the six months ended July 29, 2017:

 
 
Foreign Currency Translation
Unrecognized Pension/Postretirement Benefit Costs
Total Accumulated Other Comprehensive Income (Loss)
(In thousands)
 
 
 
 
Balance January 28, 2017
 
$
(40,329
)
$
(10,963
)
$
(51,292
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
  Foreign currency translation adjustment
 
6,790

—

6,790

  Gain on intra-entity foreign currency transactions
 
 
 
 
    (long-term investment nature)
 
1,395

—

1,395

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

493

493

Income tax expense
 
—

192

192

Current period other comprehensive income, net of tax
 
8,185

301

8,486

Balance July 29, 2017
 
$
(32,144
)
$
(10,662
)
$
(42,806
)

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

Income Taxes
The Company recorded an effective income tax rate of (18.9)% and 31.6% in the second quarter of Fiscal 2018 and 2017, respectively, and (75.3)% and 34.0% for the first six months of Fiscal 2018 and 2017, respectively. The tax rate for the second quarter and first six months of Fiscal 2018 was impacted by $2.2 million of tax expense due to the impact of ASU 2016-09 related to the vesting of stock grants. This year's tax rate for the second quarter and first six months was favorably impacted by a $0.5 million return to provision adjustment. Last year's tax rate for the second quarter

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

Note 1
Summary of Significant Accounting Policies, Continued

and first six months was favorably impacted primarily due to the reversal of previously recorded charges related to a formerly uncertain tax position as a result of a vacated tax assessment.

New Accounting Pronouncements
New Accounting Pronouncements Recently Adopted
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 simplifies the measurement of goodwill by eliminating the second step from the goodwill impairment test, which requires the comparison of the implied fair value of goodwill with the current carrying amount of goodwill. Instead, under the amendments in this guidance, an entity shall perform a goodwill impairment test
by comparing the fair value of each reporting unit with its carrying amount and an impairment charge is to be recorded for the amount, if any, in which the carrying value exceeds the reporting unit’s fair value. This guidance should be applied prospectively and is effective for public business
entities that are United States Securities and Exchange Commission filers for fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company adopted ASU 2017-04 in the first quarter of Fiscal 2018, and it did not have a material impact on its Consolidated Financial Statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). The update addresses several aspects of the accounting for share-based compensation transactions including: (a) income tax consequences when awards vest or are settled, (b) classification of awards as either equity or liabilities, (c) a policy election to account for forfeitures as they occur rather than on an
estimated basis and (d) classification of excess tax impacts on the statement of cash flows. The inclusion of excess tax benefits and deficiencies as a component of the Company's income tax expense will increase volatility within its provision for income taxes as the amount of excess tax benefits or deficiencies from share-based compensation awards is dependent on the Company's stock price at the date the awards are exercised or settled which is primarily in the second quarter of each fiscal year. The Company adopted ASU 2016-09 in the first quarter of Fiscal 2018. Earnings per share decreased $0.11 per share for the second quarter and six months ended July 29, 2017 due to the impact of ASU 2016-09. The Company reclassified $3.4 million from operating activities to financing activities on the Condensed Consolidated Statements of Cash Flows for both the second quarter and six months ended July 30, 2016 representing the value of the shares withheld for taxes on the vesting of restricted stock. If the Company had adopted the standard in Fiscal 2017, reported earnings per share would have decreased $0.03 per share for Fiscal 2017.

In November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes". ASU 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 Company adopted ASU 2015-17 in the first quarter of Fiscal 2018 under the retrospective approach and, as such, the Company reclassified $21.2 million and $28.1 million of deferred taxes from current to noncurrent on its Consolidated Balance Sheets as of January 28, 2017 and July 30, 2016, respectively.


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

Note 1
Summary of Significant Accounting Policies, Continued

In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory." ASU 2015-11 requires an entity that determines the cost of inventory by methods other than last-in, first-out and the retail inventory method to measure inventory at the lower of cost and net realizable value. The Company adopted ASU 2015-11 in the first quarter of Fiscal 2018 and it did not have a material impact on its Consolidated Financial Statements and related disclosures.

New Accounting Pronouncements Not Yet Adopted
In March 2017, the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715)". The standard requires the sponsors of benefit plans to present service cost in the same line item or items as other current employee compensation costs, and present the remaining components of net benefit cost in one or more separate line items outside of income from operations, while also limiting the components of net benefit cost eligible to be capitalized to service cost. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal
years. Early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on its Consolidated Financial Statements and related disclosures. The
standard will require the Company to present the non-service pension costs as a component of expense below operating income.

In February 2016, the FASB issued ASU 2016-02, "Leases". The standard's core principle is to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, which would be the beginning of our Fiscal 2020 or February 2019. Early adoption is permitted. The Company is currently assessing the impact the adoption of ASU 2016-02 will have on its Consolidated Financial Statements and related disclosures and is expecting a material impact because the Company is party to a significant number of lease contracts.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)". ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and merges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. ASU 2014-09 was originally 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, which would be the beginning of our Fiscal 2019 or February 2018. 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). Based on an evaluation of the standard as a whole, the Company has identified timing of catalog costs, timing of gift card breakage and customer incentives as the areas that will most likely be affected by the new revenue recognition guidance. The Company continues to evaluate the adoption of this standard, including the transition method, and will provide


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

Note 1
Summary of Significant Accounting Policies, Continued

updates throughout the remainder of Fiscal 2018 related to the expected impact of adopting this standard.

Note 2
Intangible Assets and Sale of Business

Other intangibles by major classes were as follows:

 
Leases
 
Customer Lists
 
Other*
 
Total
(In Thousands)
Jul. 29, 2017

Jan. 28, 2017

 
Jul. 29, 2017

Jan. 28, 2017

 
Jul. 29, 2017

Jan. 28, 2017

 
Jul. 29, 2017

Jan. 28, 2017

Gross other intangibles
$
14,820

$
14,625

 
$
2,024

$
1,958

 
$
2,070

$
2,009

 
$
18,914

$
18,592

Accumulated amortization
(13,317
)
(12,938
)
 
(2,024
)
(1,956
)
 
(1,444
)
(1,306
)
 
(16,785
)
(16,200
)
Net Other Intangibles
$
1,503

$
1,687

 
$
—

$
2

 
$
626

$
703

 
$
2,129

$
2,392


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

The amortization of intangibles, including trademarks, was $0.0 million and $0.2 million for the second quarters of Fiscal 2018 and 2017, respectively, and $0.1 million and $0.5 million for the first six months of Fiscal 2018 and 2017, respectively. The amortization of intangibles, including trademarks, is expected to be $0.2 million, $0.1 million, $0.0 million, $0.0 million and $0.0 million for Fiscal 2018, 2019, 2020, 2021 and 2022, respectively.

Sale of Business
The Company recognized a pretax gain of $2.5 million during the second quarter of Fiscal 2017 on the sale of Lids Team Sports related to final working capital adjustments.


Note 3
Asset Impairments and Other Charges and Discontinued Operations

Asset Impairments and Other Charges

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

Asset impairment charges are reflected as a reduction of the net carrying value of property and equipment 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 $0.1 million and $0.2 million in the second quarter and first six months of Fiscal 2018, respectively, for retail store asset impairments.



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

Note 3
Asset Impairments and Other Charges and Discontinued Operations, Continued

The Company recorded a pretax gain of $(7.9) million in the second quarter of Fiscal 2017, including a $(9.0) million gain for network intrusion expenses related to a litigation settlement, partially offset by a $1.0 million charge for retail store asset impairments. The Company recorded a pretax gain of $(4.4) million in the first six months of Fiscal 2017, including an $(8.9) million gain for network intrusion expenses related to a litigation settlement (see Note 8), partially offset by a $4.5 million charge for retail store asset impairments and $0.1 million for other legal matters.

Discontinued Operations

Accrued Provision for Discontinued Operations
 
In thousands
Facility
Shutdown
Costs

Balance January 30, 2016
$
15,619

Additional provision Fiscal 2017
701

Charges and adjustments, net
(11,277
)
Balance January 28, 2017
5,043

Additional provision Fiscal 2018
303

Charges and adjustments, net
(1,522
)
Balance July 29, 2017*
3,824

Current provision for discontinued operations
2,111

Total Noncurrent Provision for Discontinued Operations    
$
1,713


*Includes a $3.2 million environmental provision, including $2.1 million in current provision for discontinued operations.

Note 4
Inventories
            
In thousands
July 29, 2017

 
January 28, 2017

Raw materials
$
—

 
$
389

Wholesale finished goods
55,442

 
61,575

Retail merchandise
614,662

 
501,713

Total Inventories
$
670,104

 
$
563,677




17
Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements (unaudited)

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.

The following table presents the Company's assets and liabilities measured at fair value on a nonrecurring basis as of July 29, 2017 aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):

 
Long-Lived Assets
Held and Used

 
Level 1

 
Level 2

 
Level 3

 
Total
Losses

Measured as of April 29, 2017
$
14

 
$
—

 
$
—

 
$
14

 
$
119

Measured as of July 29, 2017
—

 
—

 
—

 
—

 
58

  Sub-total asset impairment YTD
 
 
 
 
 
 
 
 
$
177


In accordance with the Property, Plant and Equipment Topic of the Codification, the Company recorded $0.1 million and $0.2 million of impairment charges as a result of the fair value measurement of its long-lived assets held and used during the three and six months ended July 29, 2017, 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.


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


Note 6
Defined Benefit Pension Plans and Other Benefit Plans


Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Benefits
 
Three Months Ended
 
Three Months Ended
In thousands
July 29, 2017

 
July 30, 2016

 
July 29, 2017

 
July 30, 2016

Service cost
$
137

 
$
137

 
$
231

 
$
165

Interest cost
818

 
1,028

 
90

 
66

Expected return on plan assets
(1,125
)
 
(1,410
)
 
—

 
—

Amortization:
 
 
 
 
 
 
 
Losses
207

 
195

 
34

 
25

Net amortization
207

 
195

 
34

 
25

Net Periodic Benefit Cost (Gain)
$
37

 
$
(50
)
 
$
355

 
$
256




Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Benefits
 
Six Months Ended
 
Six Months Ended
In thousands
July 29, 2017

 
July 30, 2016

 
July 29, 2017

 
July 30, 2016

Service cost
$
275

 
$
275

 
$
440

 
$
330

Interest cost
1,642

 
2,062

 
175

 
132

Expected return on plan assets
(2,255
)
 
(2,822
)
 
—

 
—

Amortization:
 
 
 
 
 
 
 
Losses
422

 
421

 
72

 
50

Net amortization
422

 
421

 
72

 
50

Net Periodic Benefit Cost (Gain)
$
84

 
$
(64
)
 
$
687

 
$
512


There is no cash contribution required for the pension plan in calendar 2017.
















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

Note 7
Earnings Per Share


For the Three Months Ended

For the Three Months Ended

July 29, 2017

July 30, 2016
(In thousands, except
     per share amounts)
Income
(Numerator)

Shares
(Denominator)

Per Share
Amount

Income
(Numerator)

Shares
(Denominator)

Per Share
Amount












Earnings (loss) from continuing operations
$
(3,875
)





$
14,504

















Basic EPS from continuing operations











Income (loss) available to











common shareholders
(3,875
)

19,152


$
(0.20
)

14,504


20,195


$
0.72













Effect of Dilutive Securities from
continuing operations











Dilutive share-based awards(1)


—






11



Employees' preferred stock(2)


—






38















Diluted EPS from continuing operations











Income (loss) available to common











shareholders plus assumed











conversions
$
(3,875
)

19,152


$
(0.20
)

$
14,504


20,244


$
0.72


(1) Due to the loss from continuing operations, restricted share-based awards are excluded from the diluted earnings per share calculation for the second quarter ended July 29, 2017.

(2) The Company's Employees' Subordinated Convertible Preferred Stock is convertible one for one to the Company's common stock. Due to the loss from continuing operations, these shares are not assumed to be converted for the second quarter ended July 29, 2017. Because no dividends are paid on this stock, these shares are assumed to be converted in the diluted earnings per share calculation for the second quarter ended July 30, 2016.


















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

Note 7
Earnings Per Share, Continued

 
For the Six Months Ended
 
For the Six Months Ended
 
July 29, 2017
 
July 30, 2016
(In thousands, except
     per share amounts)
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
 
Income
(Numerator)
 
Shares
(Denominator)
 
Per Share
Amount
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) from continuing operations
$
(2,878
)
 
 
 
 
 
$
25,068

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS from continuing operations
 
 
 
 
 
 
 
 
 
 
 
Income (loss) available to
 
 
 
 
 
 
 
 
 
 
 
common shareholders
(2,878
)
 
19,171

 
$
(0.15
)
 
25,068

 
20,505

 
$
1.22

 
 
 
 
 
 
 
 
 
 
 
 
Effect of Dilutive Securities from
continuing operations
 
 
 
 
 
 
 
 
 
 
 
Dilutive share-based awards(1)
 
 
—

 
 
 
 
 
74

 
 
Employees' preferred stock(2)
 
 
—

 
 
 
 
 
38

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS from continuing operations
 
 
 
 
 
 
 
 
 
 
 
Income (loss) available to common
 
 
 
 
 
 
 
 
 
 
 
shareholders plus assumed
 
 
 
 
 
 
 
 
 
 
 
conversions
$
(2,878
)
 
19,171

 
$
(0.15
)
 
$
25,068

 
20,617

 
$
1.22


(1) Due to the loss from continuing operations, restricted share-based awards are excluded from the diluted earnings per share calculation for the six months ended July 29, 2017.

(2) The Company's Employees' Subordinated Convertible Preferred Stock is convertible one for one to the Company's common stock. Due to the loss from continuing operations, these shares are not assumed to be converted for the six months ended July 29, 2017. Because no dividends are paid on this stock, these shares are assumed to be converted in the diluted earnings per share calculation for the six months ended July 30, 2016.


The weighted shares outstanding reflects the effect of the Company's Board-approved share repurchase program. The Company did not repurchase any shares during the three months ended July 29, 2017 and repurchased 275,300 shares of common stock during the six months ended July 29, 2017 for $16.2 million. The Company has $24.0 million remaining under its current $100.0 million share repurchase authorization. The Company repurchased 309,105 shares of common stock during the three months ended July 30, 2016 for $20.0 million and repurchased 1,409,005 shares of common stock during the six months ended July 30, 2016 for $93.4 million.


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

Note 8
Legal Proceedings

Environmental Matters
New York State Environmental Matters
In August 1997, the New York State Department of Environmental Conservation (“NYSDEC”) and the Company entered into a consent order whereby the Company assumed responsibility for conducting a remedial investigation and feasibility study (“RIFS”) and implementing an interim remedial measure (“IRM”) with regard to the site of a knitting mill operated by a former subsidiary of the Company from 1965 to 1969. The United States Environmental Protection Agency (“EPA”), which assumed primary regulatory responsibility for the site from NYSDEC, issued a Record of Decision in September 2007. The Record of Decision specified a remedy of a combination of groundwater extraction and treatment and in-situ chemical oxidation.

In September 2015, the EPA adopted an amendment to the Record of Decision eliminating the separate ground-water extraction and treatment systems and the use of in-situ oxidation from the remedy adopted in the Record of Decision. The amendment provides for the continued operation and maintenance of the existing wellhead treatment systems on wells operated by the Village of Garden City, New York (the "Village"). It also requires the Company to perform certain ongoing monitoring, operation and maintenance activities and to reimburse EPA's future oversight cost, involving future costs to the Company estimated at $1.7 million to $2.0 million, and to reimburse EPA for approximately $1.25 million of interim oversight costs. On August 15, 2016, the Court entered a Consent Judgment implementing the remedy provided for by the amendment.

The Village 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 total costs ranging from approximately $1.8 million to in excess of $2.5 million, and future operation and maintenance costs which the Village estimated at $126,400 annually while the enhanced treatment continues. On December 14, 2007, the Village filed a complaint (the "Village Lawsuit") 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.

In June 2016, the Company and the Village reached an agreement providing for the Village to continue to operate and maintain the well head treatment systems in accordance with the Record of Decision and to release its claims against the Company asserted in the Village Lawsuit in exchange for a lump-sum payment of $10.0 million by the Company. On August 25, 2016, the Village Lawsuit was dismissed with prejudice. The cost of the settlement with the Village and the estimated costs associated with the Company's compliance with the Consent Judgment were covered by the Company's existing provision for the site. The settlement with the Village did not have, and the Company expects that the Consent Judgment will not have, a material effect on its financial condition or results of operations.




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

Note 8
Legal Proceedings, Continued

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. In February 2017, the Company and EPA entered into a settlement agreement resolving EPA's claim for past response costs in exchange for a payment by the Company of $1.5 million which was paid in May 2017. The Company's environmental insurance carrier has agreed to reimburse the Company for 75% of the settlement amount, subject to a $500,000 self-insured retention. The Company does not expect that the matter will have a material effect on its financial condition or results of operations.

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

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

Accrual for Environmental Contingencies
Related to all outstanding environmental contingencies, the Company had accrued $3.2 million as of July 29, 2017, $4.4 million as of January 28, 2017 and $14.3 million as of July 30, 2016. 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. The Company paid $10.0 million of the accrued total at July 30, 2016 in August 2016. There is no assurance that relevant facts and circumstances will not change, necessitating future changes to the provisions. Such contingent liabilities are included in the liability arising from provision for discontinued operations on the accompanying Condensed Consolidated Balance Sheets because it relates to former facilities operated by the Company. The Company has made pretax accruals for certain of these contingencies, including approximately $0.1 million and $0.0 million reflected in the second quarters of Fiscal 2018 and 2017, respectively, and $0.3 million and $0.1 million reflected in the first six months of Fiscal 2018 and 2017, respectively. These charges are included in provision for discontinued operations, net in the Consolidated Statements of Operations and represent changes in estimates.







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

Note 8
Legal Proceedings, Continued

Other Matters
On February 22, 2017, a former employee of a subsidiary of the Company filed a putative class and collective action, Shumate v. Genesco, Inc., et al., in the U.S District Court for the Southern District of Ohio, alleging violations of the federal Fair Labor Standards Act ("FLSA") and Ohio wages and hours law including failure to pay minimum wages and overtime to the subsidiary's store managers and seeking back pay, damages, penalties, and declaratory and injunctive relief. On April 21, 2017, a former employee of the same subsidiary filed a putative class and collective action, Ward v. Hat World, Inc., in the Superior Court for the State of Washington, alleging violations of the FLSA and Washington wages and hours laws, including, among others, failure to pay overtime to certain loss prevention investigators, and seeking back pay, damages, attorneys' fees and other relief. The Company has removed the action to U.S. District Court. On May 19, 2017, two former employees of the same subsidiary filed a putative class and collective action, Chen and Salas v. Genesco Inc., et al., in the U.S. District Court for the Northern District of Illinois alleging violations of the FLSA and Illinois and New York wages and hours laws, including, among others, failure to pay overtime to store managers, and also seeking back pay, damages, statutory penalties, and declaratory and injunctive relief. The Company disputes the material allegations in these complaints and intends to defend the matters.

On April 30, 2015, an employee of the same subsidiary 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.


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

Note 9
Business Segment Information

During the six months ended July 29, 2017 and July 30, 2016, the Company operated five reportable business segments (not including corporate): (i) Journeys Group, comprised of the Journeys, Journeys Kidz, Shi by Journeys and Little Burgundy retail footwear chains, e-commerce and catalog operations; (ii) Schuh Group, comprised of the Schuh retail footwear chain and e-commerce operations; (iii) 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 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 H. S. Trask® brands; and (v) Licensed Brands, comprised of Dockers® Footwear, sourced and marketed under a license from Levi Strauss & Company; SureGrip® Footwear, which was sold in the fourth quarter of Fiscal 2017; G.H. Bass Footwear operated under a license from G-III Apparel Group, Ltd.; 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, under Item 8 in the Company's Annual Report on Form10-K for the fiscal year ended January 28, 2017).

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 on revolver debt 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.


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

Note 9
Business Segment Information, Continued

Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
July 29, 2017
Journeys Group
 
Schuh Group
 
Lids Sports
Group
 
Johnston
& Murphy
Group
 
Licensed
Brands
 
Corporate
& Other
 
Consolidated
In thousands
 
 
 
 
 
 
Sales
$
258,953

 
$
97,625

 
$
180,230

 
$
64,860

 
$
14,696

 
$
141

 
$
616,505

Intercompany Sales
—

 
—

 
—

 
—

 
1

 
—

 
1

Net sales to external customers
$
258,953

 
$
97,625

 
$
180,230

 
$
64,860

 
$
14,697

 
$
141

 
$
616,506

Segment operating income (loss)
$
(2,194
)
 
$
4,538

 
$
3,040

 
$
1,547

 
$
(1,051
)
 
$
(7,832
)
 
$
(1,952
)
Asset Impairments and other*
—

 
—

 
—

 
—

 
—

 
(58
)
 
(58
)
Earnings (loss) from operations
(2,194
)
 
4,538

 
3,040

 
1,547

 
(1,051
)
 
(7,890
)
 
(2,010
)
Interest expense
—

 
—

 
—

 
—

 
—

 
(1,255
)
 
(1,255
)
Interest income
—

 
—

 
—

 
—

 
—

 
6

 
6

Earnings (loss) from continuing
operations before income taxes
$
(2,194
)
 
$
4,538

 
$
3,040

 
$
1,547

 
$
(1,051
)
 
$
(9,139
)
 
$
(3,259
)
Total assets**
$
511,456

 
$
235,408

 
$
549,825

 
$
127,478

 
$
32,610

 
$
140,736

 
$
1,597,513

Depreciation and amortization***
6,308

 
3,383

 
6,732

 
1,578

 
170

 
759

 
18,930

Capital expenditures
24,656

 
2,673

 
9,841

 
1,454

 
84

 
(1,698
)
 
37,010


*Asset Impairments and other includes a $0.1 million charge for asset impairments, which relates to Journeys Group and Lids Sports Group equally.

**Total assets for the Lids Sports Group, Schuh Group and Journeys Group include $182.3 million, $83.5 million and $10.4 million of goodwill, respectively. Goodwill for the Lids Sports Group, Schuh Group and Journeys Group increased by $0.7 million, $3.7 million, and $0.6 million, respectively, from January 28, 2017, due to foreign currency translation adjustments. Of the Company's $362.3 million of property and equipment, $55.8 million and $23.0 million relate to property and equipment in the United Kingdom and Canada, respectively.

***Includes $18.8 million in depreciation expense for the three months ended July 29, 2017.























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

Note 9
Business Segment Information, Continued

Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
July 30, 2016
Journeys Group
 
Schuh Group
 
Lids Sports
Group
 
Johnston
& Murphy
Group
 
Licensed
Brands
 
Corporate
& Other
 
Consolidated
In thousands
 
 
 
 
 
 
Sales
$
252,134

 
96,960

 
$
188,912

 
$
65,151

 
$
22,673

 
$
300

 
$
626,130

Intercompany Sales
—

 
—

 
—

 
—

 
(573
)
 
—

 
(573
)
Net sales to external customers
$
252,134

 
$
96,960

 
$
188,912

 
$
65,151

 
$
22,100

 
$
300

 
$
625,557

Segment operating income (loss)
$
4,481

 
$
5,693

 
$
7,132

 
$
2,255

 
$
234

 
$
(7,720
)
 
$
12,075

Asset Impairments and other*
—

 
—

 
—

 
—

 
—

 
7,945

 
7,945

Earnings (loss) from operations
4,481

 
5,693

 
7,132

 
2,255

 
234

 
225

 
20,020

Gain on sale of Lids Team Sports
—

 
—

 
—

 
—

 
—

 
2,485

 
2,485

Interest expense
—

 
—

 
—

 
—

 
—

 
(1,316
)
 
(1,316
)
Interest income
—

 
—

 
—

 
—

 
—

 
10

 
10

Earnings (loss) from continuing
operations before income taxes
$
4,481

 
$
5,693

 
$
7,132

 
$
2,255

 
$
234

 
$
1,404

 
$
21,199

Total assets**
$
451,154

 
232,812

 
$
545,216

 
$
128,487

 
$
47,071

 
$
173,917

 
$
1,578,657

Depreciation and amortization***
5,950

 
3,809

 
6,592

 
1,483

 
257

 
1,018

 
19,109

Capital expenditures
15,632

 
3,566

 
731

 
3,183

 
196

 
38

 
23,346


*Asset Impairments and other includes a $1.0 million charge for assets impairments, which relates primarily to the Lids Sports Group, and a $(9.0) million gain for network intrusion expenses related to a litigation settlement.

**Total assets for the Lids Sports Group, Schuh Group, Journeys Group and Licensed Brands include $181.8 million, $84.5 million, $9.9 million and $0.8 million of goodwill, respectively. Goodwill for Lids Sports Group and Journeys Group increased by $0.9 million and $0.5 million, respectively, from January 30, 2016 and Schuh Group goodwill decreased by $5.8 million from January 30, 2016 due to foreign currency translation adjustments. Of the Company's $321.2 million of property and equipment, $60.2 million and $20.2 million relate to property and equipment in the United Kingdom and Canada, respectively.

***Includes $18.9 million in depreciation expense for the three months ended July 30, 2016.





















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

Note 9
Business Segment Information, Continued

Six Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
July 29, 2017
Journeys Group
 
Schuh Group
 
Lids Sports
Group
 
Johnston
& Murphy
Group
 
Licensed
Brands
 
Corporate
& Other
 
Consolidated
In thousands
 
 
 
 
 
 
Sales
$
543,072

 
$
174,081

 
$
357,131

 
$
137,653

 
$