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 October 28, 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 November 24, 2017, 19,913,201 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 28, 2017

 
January 28, 2017

 
October 29, 2016

Current Assets:
 
 
 
 
 
  Cash and cash equivalents
$
50,740

 
$
48,301

 
$
30,520

  Accounts receivable, net of allowances of $4,349 at Oct. 28, 2017,
 
 
 
 
 
$3,073 at Jan. 28, 2017 and $3,731 at Oct. 29, 2016
52,704

 
43,525

 
55,109

  Inventories
697,949

 
563,677

 
719,975

  Prepaids and other current assets
73,895

 
61,470

 
65,090

Total current assets
875,288

 
716,973

 
870,694

 
 
 
 
 
 
Property and equipment:
 
 
 
 
 
Land
7,879

 
7,773

 
7,667

Buildings and building equipment
56,071

 
52,673

 
49,740

Computer hardware, software and equipment
196,955

 
179,948

 
180,654

Furniture and fixtures
170,795

 
167,881

 
164,187

Construction in progress
70,210

 
33,660

 
32,181

Improvements to leased property
430,032

 
410,116

 
402,778

Property and equipment, at cost
931,942

 
852,051

 
837,207

Accumulated depreciation
(553,459
)
 
(521,440
)
 
(515,427
)
Property and equipment, net
378,483

 
330,611

 
321,780

Deferred income taxes
41,451

 
13,372

 
14,620

Goodwill
93,440

 
271,222

 
269,115

Trademarks, net of accumulated amortization of $5,582 at Oct. 28,
 
 
 
 
 
   2017, $5,574 at Jan. 28, 2017 and $5,516 at Oct. 29, 2016
85,580

 
84,327

 
83,601

Other intangibles, net of accumulated amortization of $16,928 at
 
 
 
 
 
Oct. 28, 2017, $16,200 at Jan. 28, 2017 and $16,127 at Oct. 29, 2016
1,890

 
2,392

 
2,796

Other noncurrent assets
22,351

 
22,102

 
21,765

Total Assets
$
1,498,483

 
$
1,440,999

 
$
1,584,371










3

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

Liabilities and Equity
October 28, 2017

 
January 28, 2017

 
October 29, 2016

Current Liabilities:
 
 
 
 
 
  Accounts payable
$
244,366

 
$
170,751

 
$
247,282

  Accrued employee compensation
17,799

 
31,128

 
23,434

  Accrued other taxes
19,151

 
23,101

 
19,828

  Accrued income taxes
24,907

 
7,568

 
2,956

  Current portion – long-term debt
2,207

 
9,175

 
12,172

  Other accrued liabilities
69,242

 
64,333

 
63,742

  Provision for discontinued operations
1,822

 
3,330

 
2,866

Total current liabilities
379,494

 
309,386

 
372,280

Long-term debt
221,372

 
73,730

 
214,076

Pension liability
5,878

 
6,265

 
9,283

Deferred rent and other long-term liabilities
135,632

 
127,384

 
121,286

Provision for discontinued operations
1,707

 
1,713

 
1,713

Total liabilities
744,083

 
518,478

 
718,638

Commitments and contingent liabilities

 

 

Equity:
 
 
 
 
 
Non-redeemable preferred stock
1,052

 
1,060

 
1,065

Common equity:
 
 
 
 
 
Common stock, $1 par value:
 
 
 
 
 
Authorized: 80,000,000 shares
 
 
 
 
 
Issued/Outstanding:
 
 
 
 
 
October 28, 2017 – 20,401,665/19,913,201
 
 
 
 
 
January 28, 2017 – 20,354,272/19,865,808
 
 
 
 
 
October 29, 2016 – 20,359,129/19,870,665
20,402

 
20,354

 
20,359

Additional paid-in capital
247,504

 
237,677

 
234,184

Retained earnings
545,624

 
731,111

 
684,574

Accumulated other comprehensive loss
(44,018
)
 
(51,292
)
 
(58,260
)
Treasury shares, at cost (488,464 shares)
(17,857
)
 
(17,857
)
 
(17,857
)
Total Genesco equity
752,707

 
921,053

 
864,065

Noncontrolling interest – non-redeemable
1,693

 
1,468

 
1,668

Total equity
754,400

 
922,521

 
865,733

Total Liabilities and Equity
$
1,498,483

 
$
1,440,999

 
$
1,584,371


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 28, 2017

 
October 29, 2016

October 28, 2017

 
October 29, 2016

Net sales
$
716,759

 
$
710,822

$
1,976,633

 
$
1,985,172

Cost of sales
362,761

 
355,187

997,215

 
985,103

Selling and administrative expenses
322,740

 
314,698

947,199

 
925,603

Goodwill impairment
182,211

 
—

182,211

 
—

Asset impairments and other, net
1,446

 
589

1,623

 
(3,799
)
Earnings (loss) from operations
(152,399
)
 
40,348

(151,615
)
 
78,265

Gain on sale of Lids Team Sports
—

 
—

—

 
(2,485
)
Interest expense, net:
 
 
 
 
 
 
Interest expense
1,454

 
1,489

3,883

 
3,968

Interest income
3

 
(1
)
—

 
(37
)
Total interest expense, net
1,457

 
1,488

3,883

 
3,931

Earnings (loss) from continuing operations before income taxes
(153,856
)
 
38,860

(155,498
)
 
76,819

Income tax expense
10,950

 
12,912

12,186

 
25,803

Earnings (loss) from continuing operations
(164,806
)
 
25,948

(167,684
)
 
51,016

Provision for discontinued operations, net
(15
)
 
(53
)
(200
)
 
(133
)
Net Earnings (Loss)
$
(164,821
)
 
$
25,895

$
(167,884
)
 
$
50,883

 
 
 
 
 
 
 
Basic earnings (loss) per common share:
 
 
 
 
 
 
Continuing operations
$
(8.55
)
 
$
1.30

$
(8.73
)
 
$
2.51

Discontinued operations
(0.01
)
 
0.00

(0.01
)
 
0.00

     Net earnings (loss)
$
(8.56
)
 
$
1.30

$
(8.74
)
 
$
2.51

Diluted earnings (loss) per common share:
 
 
 
 
 
 
Continuing operations
$
(8.55
)
 
$
1.30

$
(8.73
)
 
$
2.50

Discontinued operations
(0.01
)
 
0.00

(0.01
)
 
(0.01
)
    Net earnings (loss)
$
(8.56
)
 
$
1.30

$
(8.74
)
 
$
2.49


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 28, 2017

 
October 29, 2016

October 28, 2017

 
October 29, 2016

Net earnings (loss)
$
(164,821
)
 
$
25,895

$
(167,884
)
 
$
50,883

Other comprehensive income (loss):
 
 
 
 
 
 
Pension liability adjustments, net of tax of $0.1 and $0.0 million for the three months ended October 28, 2017 and October 29, 2016, respectively, and $0.2 million for each of the nine months ended October 28, 2017 and October 29, 2016
125

 
119

383

 
375

Postretirement liability adjustments, net of tax of $0.0 million for both the three and nine months ended October 28, 2017 and October 29, 2016
21

 
15

64

 
45

Foreign currency translation adjustments
(1,358
)
 
(11,289
)
6,827

 
(16,067
)
Total other comprehensive income (loss)
(1,212
)
 
(11,155
)
7,274

 
(15,647
)
Comprehensive income (loss)
$
(166,033
)
 
$
14,740

$
(160,610
)
 
$
35,236


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 28, 2017

 
October 29, 2016

October 28, 2017

 
October 29, 2016

CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net earnings (loss)
$
(164,821
)
 
$
25,895

$
(167,884
)
 
$
50,883

Adjustments to reconcile net earnings (loss) to net cash
 
 
 
 
 
 
(used in) provided by operating activities:
 
 
 
 
 
 
Depreciation and amortization
18,984

 
18,596

57,530

 
56,519

Amortization of deferred note expense and debt discount
180

 
207

565

 
633

Deferred income taxes
(29,629
)
 
12,284

(28,347
)
 
13,893

Provision on accounts receivable
84

 
14

243

 
261

Gain on sale of business
—

 
—

—

 
(2,485
)
Impairment of goodwill
182,211

 
—

182,211

 
—

Impairment of long-lived assets
510

 
579

687

 
5,032

Restricted stock expense
3,406

 
3,379

10,141

 
10,032

Provision for discontinued operations
25

 
86

328

 
218

Other
1,494

 
381

1,838

 
1,458

Effect on cash from changes in working capital and other
 
 
 
 
 
 
assets and liabilities, net of acquisitions:
 
 
 
 
 
 
  Accounts receivable
(13,463
)
 
(9,090
)
(10,657
)
 
(8,673
)
  Inventories
(29,775
)
 
(62,179
)
(131,220
)
 
(196,353
)
  Prepaids and other current assets
9,614

 
3,069

(11,627
)
 
(6,074
)
  Accounts payable
4,719

 
(15,698
)
77,334

 
105,192

  Other accrued liabilities
25,924

 
(10,817
)
(496
)
 
(31,110
)
  Other assets and liabilities
2,770

 
(2,948
)
6,808

 
(1,608
)
Net cash provided by (used in) operating activities
12,233

 
(36,242
)
(12,546
)
 
(2,182
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
  Capital expenditures
(36,727
)
 
(24,817
)
(104,063
)
 
(65,520
)
  Acquisitions, net of cash acquired
—

 
—

—

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

 
477

238

 
(68
)
Net cash used in investing activities
(36,727
)
 
(24,340
)
(103,825
)
 
(65,610
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
  Payments of long-term debt
(412
)
 
—

(8,430
)
 
(4,990
)
  Borrowings under revolving credit facility
114,696

 
191,048

439,683

 
261,042

  Payments on revolving credit facility
(80,215
)
 
(94,214
)
(294,497
)
 
(133,643
)
  Share repurchases
—

 
(39,835
)
(17,878
)
 
(143,923
)
  Change in overdraft balances
(2,558
)
 
(4,079
)
(1,931
)
 
(9,839
)
  Exercise of stock options
—

 
445

—

 
1,018

  Other
(143
)
 
(2,842
)
1,071

 
(3,125
)
Net cash provided by (used in) financing activities
31,368

 
50,523

118,018

 
(33,460
)
Effect of foreign exchange rate fluctuations on cash
346

 
(887
)
792

 
(1,516
)
Net Increase (Decrease) in Cash and Cash Equivalents
7,220

 
(10,946
)
2,439

 
(102,768
)
Cash and cash equivalents at beginning of period
43,520

 
41,466

48,301

 
133,288

Cash and cash equivalents at end of period
$
50,740

 
$
30,520

$
50,740

 
$
30,520

Supplemental Cash Flow Information:
 
 
 
 
 
 
Net cash paid for:
 
 
 
 
 
 
Interest
$
1,233

 
$
591

$
3,338

 
$
2,475

Income taxes
3,442

 
282

27,586

 
34,817


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)

 
—

 
—

 
(167,884
)
 
—

 
—

 
—

 
(167,884
)
Other comprehensive income
—

 
—

 
—

 
—

 
7,274

 
—

 
—

 
7,274

Employee and non-employee restricted stock
—

 
—

 
10,141

 
—

 
—

 
—

 
—

 
10,141

Restricted stock issuance
—

 
357

 
(357
)
 
—

 
—

 
—

 
—

 
—

Restricted shares withheld for taxes
—

 
(51
)
 
51

 
(1,715
)
 
—

 
—

 
—

 
(1,715
)
Shares repurchased
—

 
(275
)
 
—

 
(15,888
)
 
—

 
—

 
—

 
(16,163
)
Other
(8
)
 
17

 
(8
)
 
—

 
—

 
—

 
—

 
1

Noncontrolling interest – earnings
—

 
—

 
—

 
—

 
—

 
—

 
225

 
225

Balance October 28, 2017
$
1,052

 
$
20,402

 
$
247,504

 
$
545,624

 
$
(44,018
)
 
$
(17,857
)
 
$
1,693

 
$
754,400


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 and lidsclubhouse.com. Including both the footwear businesses and the Lids Sports Group business, at October 28, 2017, the Company operated 2,727 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 28, 2017 and October 29, 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.

Financial Statement Reclassifications
Certain reclassifications have been made to conform prior years' data to the current year presentation with respect to fixed assets. In order to categorize the fixed assets of Schuh Group comparable to the Company's other business segments, $44.0 million and $42.0 million was reclassed from furniture and fixtures to leasehold improvements as of January 28, 2017 and October 29, 2016, respectively.

Cash and Cash Equivalents
The Company had total available cash and cash equivalents of $50.7 million, $48.3 million and $30.5 million as of October 28, 2017, January 28, 2017 and October 29, 2016, respectively, of which approximately $4.4 million, $22.9 million and $5.4 million was held by the Company's foreign subsidiaries as of October 28, 2017, January 28, 2017 and October 29, 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 October 28, 2017, January 28, 2017 and October 29, 2016. Cash equivalents are highly-liquid financial instruments having an original maturity of three months or less.
At October 28, 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 October 28, 2017, January 28, 2017 and October 29, 2016, outstanding checks drawn on zero-balance accounts at certain domestic banks exceeded book cash balances at those banks by approximately $34.7 million, $36.7 million and $35.2 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 17%, one customer accounted for 8% and two customers each accounted for 7% of the Company’s total trade receivables balance, while no other customer accounted for more than 7% of the Company’s total trade receivables balance as of October 28, 2017.

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

Note 1
Summary of Significant Accounting Policies, Continued

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 $28.6 million, $25.4 million and $24.4 million at October 28, 2017, January 28, 2017 and October 29, 2016, respectively, and deferred
rent of $57.0 million, $51.9 million and $50.5 million, each at October 28, 2017, January 28, 2017 and October 29, 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 $10.0 million as of October 28, 2017, January 28, 2017 and October 29, 2016, respectively.

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

Fair Values
 
 
 
 
 
 
 
In thousands
October 28, 2017
 
January 28, 2017
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
U.S. Credit Facility Borrowings
$
195,340

 
$
195,902

 
$
49,879

 
$
50,396

UK Term Loans
11,406

 
11,632

 
19,230

 
19,541

UK Revolver Borrowings
16,833

 
17,055

 
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 $1.4 million and $1.6 million for the third quarters of Fiscal 2018 and Fiscal 2017, respectively, and $4.2 million and $4.6 million for the first nine months of Fiscal 2018 and 2017, respectively.

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

Note 1
Summary of Significant Accounting Policies, Continued

Gift Cards
Gift card breakage is recognized in revenues each period for which financial statements are updated. Gift card breakage recognized as revenue was $0.5 million and $0.3 million for the third quarter of Fiscal 2018 and Fiscal 2017, respectively, and $0.9 million and $0.6 million for the first nine months
of Fiscal 2018 and 2017, respectively. The Condensed Consolidated Balance Sheets include an accrued liability for gift cards of $14.9 million, $17.7 million and $14.5 million at October 28, 2017, January 28, 2017 and October 29, 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 $115.7 million and $113.3 million for the third quarters of Fiscal 2018 and Fiscal 2017, respectively, and $343.1 million and $336.7 million for the first nine months of Fiscal 2018 and 2017, respectively.

Advertising Costs
Advertising costs are predominantly expensed as incurred. Advertising costs were $20.3 million and $18.2 million for the third quarters of Fiscal 2018 and Fiscal 2017, respectively, and $56.8 million and $50.6 million for the first nine 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 $5.1 million, $1.2 million and $3.7 million at October 28, 2017, January 28, 2017 and October 29, 2016, respectively.

Cooperative Advertising
Cooperative advertising costs recognized in selling and administrative expenses on the Condensed Consolidated Statements of Operations were $1.0 million for each of the third quarters of Fiscal 2018 and Fiscal 2017, and $2.8 million and $2.7 million for the first nine months of Fiscal 2018 and 2017, respectively. During the first nine 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 $3.1 million and $3.0 million for the third quarters of Fiscal 2018 and Fiscal 2017, respectively, and $7.5 million and $5.7 million for the first nine months of Fiscal 2018 and 2017, respectively. During the first nine months of Fiscal 2018 and Fiscal 2017, the Company’s cooperative advertising reimbursements received were not in excess of the costs incurred.



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

Note 1
Summary of Significant Accounting Policies, Continued

Foreign Currency Translation
The functional currency of the Company's foreign operations is the applicable local currency. The translation of the applicable foreign currency into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date. Income and expense accounts are translated at monthly average exchange rates. The unearned gains and losses resulting
from such translation are included as a separate component of accumulated other comprehensive loss within shareholders' equity. Gains and losses from certain foreign currency transactions are
reported as an item of income and resulted in a net gain of $(0.1) million and a net loss of $0.4 million for the third quarter and first nine months of Fiscal 2018, respectively, and a net gain of $(0.4) million and $(1.9) million for the third quarter and first nine 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 October 28, 2017 consisted of $9.0 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 $33.5 million.

The following table summarizes the components of accumulated other comprehensive loss for the nine months ended October 28, 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
 
6,352

—

6,352

  Gain on intra-entity foreign currency transactions
 
 
 
 
    (long-term investment nature)
 
475

—

475

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

732

732

Income tax expense
 
—

285

285

Current period other comprehensive income, net of tax
 
6,827

447

7,274

Balance October 28, 2017
 
$
(33,502
)
$
(10,516
)
$
(44,018
)

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



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

Note 1
Summary of Significant Accounting Policies, Continued

Income Taxes
The Company recorded an effective income tax rate of (7.1)% and 33.2% in the third quarter of Fiscal 2018 and 2017, respectively, and (7.8)% and 33.6% for the first nine months of Fiscal 2018 and 2017, respectively. The tax rate for the third quarter and first nine months of Fiscal 2018 was impacted by the non-deductibility of $107.6 million of the $182.2 million of goodwill impairment charge in the third quarter of Fiscal 2018. In addition, the tax rate for the nine 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. The tax rate for the first nine months of Fiscal 2018 was favorably impacted by a $0.5 million return to provision adjustment. The tax rate for the third quarter and first nine months of Fiscal 2017 was favorably impacted reflecting the release of tax reserves and other items.

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 the Company measured goodwill impairment in the third quarter of Fiscal 2018 under the provisions of ASC 350, "Intangibles - Goodwill and Other" ("ASC 350").

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. 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 nine months ended October 28, 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 nine months ended October 29, 2016 representing the value of the shares withheld for taxes on the vesting of restricted stock.



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

Note 1
Summary of Significant Accounting Policies, Continued

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 $23.9 million of deferred taxes from current to noncurrent on its Consolidated Balance Sheets as of January 28, 2017 and October 29, 2016, respectively.

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 will require the Company to present the non-service pension costs as a component of expense below operating income. 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.

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


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

Note 1
Summary of Significant Accounting Policies, Continued

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 and timing of gift card breakage as the areas that will most likely be affected by the new revenue recognition guidance. The Company is continuing to assess all the impacts of the new standard and the design of internal control over financial reporting; however, based upon the materiality of the transactions that are impacted by the standard, adoption is not expected to have a material impact on its Condensed Consolidated Financial Statements and related disclosures. The Company expects to adopt this guidance in the first quarter of Fiscal 2019 using the modified retrospective approach.

Note 2
Goodwill, Other Intangible Assets and Sale of Business

Goodwill

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

(In Thousands)
Lids Sports Group
Schuh Group
Journeys Group
Total Goodwill
Balance, January 28, 2017
$
181,628

$79,769
$9,825
$
271,222

Impairment charge
(182,211
)
—

—

(182,211
)
Effect of foreign currency exchange rates
583

3,666

180

$
4,429

Balance, October 28, 2017
$
—

$
83,435

10,005

$
93,440


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

During the third quarter of Fiscal 2018, the Company identified qualitative indicators of impairment, including a significant decline in the Company's stock price and market capitalization for a sustained period since the last consideration of indicators of impairment in the second quarter of Fiscal 2018, underperformance relative to projected operating results, particularly in the Lids Sports Group reporting unit, and an increased competitive environment in the licensed sports business.





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

Note 2
Goodwill, Other Intangible Assets and Sale of Business, Continued

In accordance with ASC 350, when indicators of impairment are present on an interim basis, the Company must assess whether it is “more likely than not” (i.e., a greater than 50% chance) that an impairment has occurred. In our Fiscal 2017 annual evaluation of goodwill, the Company determined
that the fair value of the Lids Sports Group and Schuh Group reporting units exceeded the carrying value of the reporting units’ assets by approximately 15% and 28%, respectively. Due to the identified indicators of impairment during the the third quarter of Fiscal 2018, the Company determined that it was "more likely than not" that an impairment had occurred and performed a full valuation of its reporting units as required under ASC 350 and reconciled the aggregate fair values of the individual reporting units to the Company’s market capitalization.

Based upon the results of these analyses, the Company concluded the goodwill attributed to Lids Sports Group was fully impaired. As a result, the Company recorded a non-cash impairment charge of $182.2 million in the third quarter of Fiscal 2018.

In addition, as a result of the factors noted above, the Company evaluated the fair value of its trademarks during the third quarter of Fiscal 2018. The fair value of trademarks was determined based on the royalty savings approach. This analysis did not result in any trademark impairment.


Other Intangibles
Other intangibles by major classes were as follows:

 
Leases
 
Customer Lists
 
Other*
 
Total
(In Thousands)
Oct. 28, 2017

Jan. 28, 2017

 
Oct. 28, 2017

Jan. 28, 2017

 
Oct. 28, 2017

Jan. 28, 2017

 
Oct. 28, 2017

Jan. 28, 2017

Gross other intangibles
$
14,750

$
14,625

 
$
2,020

$
1,958

 
$
2,048

$
2,009

 
$
18,818

$
18,592

Accumulated amortization
(13,406
)
(12,938
)
 
(2,020
)
(1,956
)
 
(1,502
)
(1,306
)
 
(16,928
)
(16,200
)
Net Other Intangibles
$
1,344

$
1,687

 
$
—

$
2

 
$
546

$
703

 
$
1,890

$
2,392


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

The amortization of intangibles, including trademarks, was $0.1 million and $0.3 million for the third quarters of Fiscal 2018 and 2017, respectively, and $0.2 million and $0.8 million for the first nine 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.



17
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 are determined to be impaired when the revised estimated future cash flows are insufficient to recover the carrying costs. Impairment charges represent the excess of the carrying value over the fair value of those assets.

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

The Company recorded pretax charges of $1.4 million in the third quarter of Fiscal 2018, including $0.9 million for losses related to Hurricane Maria and $0.5 million for retail store asset impairments. The Company recorded pretax charges of $1.6 million in the first nine months of Fiscal 2018, including $0.9 million for losses related to Hurricane Maria and $0.7 million for retail store asset impairments.

The Company recorded pretax charges of $0.6 million in the third quarter of Fiscal 2017 for retail store asset impairments. The Company recorded a pretax gain of $(3.8) million in the first nine 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 $5.0 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
328

Charges and adjustments, net
(1,842
)
Balance October 28, 2017*
3,529

Current provision for discontinued operations
1,822

Total Noncurrent Provision for Discontinued Operations    
$
1,707


*Includes a $2.9 million environmental provision, including $1.8 million in current provision for discontinued operations.


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

Note 4
Inventories
            
In thousands
October 28, 2017

 
January 28, 2017

Raw materials
$
—

 
$
389

Wholesale finished goods
40,095

 
61,575

Retail merchandise
657,854

 
501,713

Total Inventories
$
697,949

 
$
563,677



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 October 28, 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

Measured as of October 28, 2017
251

 
—

 
—

 
251

 
$
510

  Sub-total asset impairment YTD
 
 
 
 
 
 
 
 
$
687





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

Note 5
Fair Value, Continued

In accordance with the Property, Plant and Equipment Topic of the Codification, the Company recorded $0.5 million and $0.7 million of impairment charges as a result of the fair value measurement of its long-lived assets held and used during the three and nine months ended October 28, 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.

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
October 28, 2017

 
October 29, 2016

 
October 28, 2017

 
October 29, 2016

Service cost
$
137

 
$
137

 
$
232

 
$
166

Interest cost
818

 
1,028

 
89

 
67

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

 
—

Amortization:
 
 
 
 
 
 
 
Losses
206

 
195

 
33

 
23

Net amortization
206

 
195

 
33

 
23

Net Periodic Benefit Cost (Gain)
$
36

 
$
(50
)
 
$
354

 
$
256


Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Benefits
 
Nine Months Ended
 
Nine Months Ended
In thousands
October 28, 2017

 
October 29, 2016

 
October 28, 2017

 
October 29, 2016

Service cost
$
412

 
$
412

 
$
672

 
$
496

Interest cost
2,460

 
3,090

 
264

 
199

Expected return on plan assets
(3,380
)
 
(4,232
)
 
—

 
—

Amortization:
 
 
 
 
 
 
 
Losses
628

 
616

 
105

 
73

Net amortization
628

 
616

 
105

 
73

Net Periodic Benefit Cost (Gain)
$
120

 
$
(114
)
 
$
1,041

 
$
768


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

20
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

October 28, 2017

October 29, 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
$
(164,806
)





$
25,948

















Basic EPS from continuing operations











Income (loss) available to











common shareholders
(164,806
)

19,265


$
(8.55
)

25,948


19,912


$
1.30













Effect of Dilutive Securities from
continuing operations











Dilutive share-based awards(1)


—






12



Employees' preferred stock(2)


—






38















Diluted EPS from continuing operations











Income (loss) available to











common shareholders plus











assumed conversions
$
(164,806
)

19,265


$
(8.55
)

$
25,948


19,962


$
1.30


(1) Due to the loss from continuing operations, restricted share-based awards are excluded from the diluted earnings per share calculation for the third quarter ended October 28, 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 third quarter ended October 28, 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 third quarter ended October 29, 2016.


















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

Note 7
Earnings Per Share, Continued

 
For the Nine Months Ended
 
For the Nine Months Ended
 
October 28, 2017
 
October 29, 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
$
(167,684
)
 
 
 
 
 
$
51,016

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS from continuing operations
 
 
 
 
 
 
 
 
 
 
 
Income (loss) available to
 
 
 
 
 
 
 
 
 
 
 
common shareholders
(167,684
)
 
19,202

 
$
(8.73
)
 
51,016

 
20,307

 
$
2.51

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

 
 
 
 
 
54

 
 
Employees' preferred stock(2)
 
 
—

 
 
 
 
 
38

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS from continuing operations
 
 
 
 
 
 
 
 
 
 
 
Income (loss) available to
 
 
 
 
 
 
 
 
 
 
 
common shareholders plus
 
 
 
 
 
 
 
 
 
 
 
assumed conversions
$
(167,684
)
 
19,202

 
$
(8.73
)
 
$
51,016

 
20,399

 
$
2.50


(1) Due to the loss from continuing operations, restricted share-based awards are excluded from the diluted earnings per share calculation for the nine months ended October 28, 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 nine months ended October 28, 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 nine months ended October 29, 2016.


The weighted shares outstanding reflects the effect of the Company's Board-approved share repurchase program. The Company did not repurchase any shares of common stock during the three months ended October 28, 2017 and repurchased 275,300 shares of common stock during the nine months ended October 28, 2017 for $16.2 million. The Company has $24.0 million remaining under its current $100.0 million share repurchase authorization. The Company repurchased 746,864 shares of common stock during the three months ended October 29, 2016 for $39.8 million and repurchased 2,155,869 shares of common stock during the nine months ended October 29, 2016 for $133.3 million.


22
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.




23
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 reimbursed 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 $2.9 million as of October 28, 2017, $4.4 million as of January 28, 2017 and $3.9 million as of October 29, 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 reflected in each of the third quarters of Fiscal 2018 and 2017, and $0.4 million and $0.2 million reflected in the first nine 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.









24
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.


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

Note 9
Business Segment Information

During the nine months ended October 28, 2017 and October 29, 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, bank fees, interest expense, interest income, asset impairment charges and other, including major litigation and major lease terminations and goodwill impairment charges.


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

Note 9
Business Segment Information, Continued

Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
October 28, 2017
Journeys Group
 
Schuh Group
 
Lids Sports
Group
 
Johnston
& Murphy
Group
 
Licensed
Brands
 
Corporate
& Other
 
Consolidated
In thousands
 
 
 
 
 
 
Sales
$
333,506

 
$
101,489

 
$
181,347

 
$
74,132

 
$
26,208

 
$
77

 
$
716,759

Intercompany Sales
—

 
—

 
—

 
—

 
—

 
—

 
—

Net sales to external customers
$
333,506

 
$
101,489

 
$
181,347

 
$
74,132

 
$
26,208

 
$
77

 
$
716,759

Segment operating income (loss)
$
24,283

 
$
7,054

 
$
1,991

 
$
5,287

 
$
1,153

 
$
(8,510
)
 
$
31,258

Goodwill impairment*
—

 
—

 
—

 
—

 
—

 
(182,211
)
 
(182,211
)
Asset Impairments and other**
—

 
—

 
—

 
—

 
—

 
(1,446
)
 
(1,446
)
Earnings (loss) from operations
24,283

 
7,054

 
1,991

 
5,287

 
1,153

 
(192,167
)
 
(152,399
)
Interest expense
—

 
—

 
—

 
—

 
—

 
(1,454
)
 
(1,454
)
Interest income
—

 
—

 
—

 
—

 
—

 
(3
)
 
(3
)
Earnings (loss) from continuing
operations before income taxes
$
24,283

 
$
7,054

 
$
1,991

 
$
5,287

 
$
1,153

 
$
(193,624
)
 
$
(153,856
)
Total assets***
$
524,563

 
$
248,336

 
$
396,877

 
$
128,651

 
$
34,817

 
$
165,239

 
$
1,498,483

Depreciation and amortization****
6,385

 
3,443

 
6,609

 
1,565

 
166

 
816

 
18,984

Capital expenditures
21,772

 
2,124

 
8,438

 
1,929

 
227

 
2,237

 
36,727


*Goodwill impairment charge of $182.2 million relates to Lids Sports Group.

**Asset Impairments and other charge includes a $0.9 million charge for losses related to Hurricane Maria and a $0.5 million charge for asset impairments, which includes $0.2 million each for Journeys Group and Lids Sports Group and $0.1 million for Schuh Group.

***Total assets for the Schuh Group and Journeys Group include $83.4 million and $10.0 million of goodwill, respectively. Goodwill for the Schuh Group and Journeys Group increased by $3.7 million, and $0.2 million, respectively, from January 28, 2017, due to foreign currency translation adjustments. Of the Company's $378.5 million of property and equipment, $54.3 million and $21.4 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 October 28, 2017.





















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

Note 9
Business Segment Information, Continued

Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
October 29, 2016
Journeys Group
 
Schuh Group
 
Lids Sports
Group
 
Johnston
& Murphy
Group
 
Licensed
Brands
 
Corporate
& Other
 
Consolidated
In thousands
 
 
 
 
 
 
Sales
$
314,159

 
90,087

 
$
200,279

 
$
72,115

 
$
34,334

 
$
124

 
$
711,098

Intercompany Sales
—

 
—

 
—

 
—

 
(276
)
 
—

 
(276
)
Net sales to external customers
$
314,159

 
$
90,087

 
$
200,279

 
$
72,115

 
$
34,058

 
$
124

 
$
710,822

Segment operating income (loss)
$
25,656

 
$
6,615

 
$
8,173

 
$
4,922

 
$
2,689

 
$
(7,118
)
 
$
40,937

Asset Impairments and other*
—

 
—

 
—

 
—

 
—

 
(589
)
 
(589
)
Earnings (loss) from operations
25,656

 
6,615

 
8,173

 
4,922

 
2,689

 
(7,707
)
 
40,348

Interest expense
—

 
—

 
—

 
—

 
—

 
(1,489
)
 
(1,489
)
Interest income
—

 
—

 
—

 
—

 
—

 
1

 
1

Earnings (loss) from continuing
operations before income taxes
$
25,656

 
$
6,615

 
$
8,173

 
$
4,922

 
$
2,689

 
$
(9,195
)
 
$
38,860

Total assets**
$
453,352

 
222,796

 
$
603,747

 
$
131,966

 
$
51,474

 
$
121,036

 
$
1,584,371

Depreciation and amortization***
5,971

 
3,191

 
6,728

 
1,513

 
255

 
938

 
18,596