Genesco Inc.
United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For Quarter Ended October 28, 2006
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o |
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Transition Report Pursuant To Section 13 or 15(d) of the
Securities Exchange Act of 1934 |
Commission File No. 1-3083
Genesco Inc.
A Tennessee Corporation
I.R.S. No. 62-0211340
Genesco Park
1415 Murfreesboro Road
Nashville, Tennessee 37217-2895
Telephone 615/367-7000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition
of acceleratedfilerandlargeacceleratedfiler in Rule12b-2 of the Exchange Act (check one:)
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is
a shell company (as defined in Rule 12b-2 of the Act.) Yes o
No þ
Common Shares Outstanding November 24, 2006 22,479,204
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Genesco Inc.
and Subsidiaries
Condensed Consolidated Balance Sheets
(In Thousands, except share amounts)
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October 28, |
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January 28, |
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October 29, |
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2006 |
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2006 |
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2005 |
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Assets |
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Current Assets |
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Cash and cash equivalents |
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$ |
18,638 |
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$ |
60,451 |
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$ |
33,398 |
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Accounts receivable, net of allowances of $2,366 at October 28, 2006,
$1,439 at January 28, 2006 and $1,933 at October 29, 2005 |
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24,401 |
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21,171 |
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22,738 |
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Inventories |
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344,309 |
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230,648 |
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292,798 |
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Deferred income taxes |
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10,416 |
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8,649 |
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6,087 |
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Prepaids and other current assets |
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22,706 |
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20,269 |
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19,925 |
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Total current assets |
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420,470 |
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341,188 |
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374,946 |
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Property and equipment: |
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Land |
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4,861 |
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4,972 |
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4,972 |
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Buildings and building equipment |
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14,812 |
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14,723 |
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14,690 |
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Computer hardware, software and equipment |
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68,820 |
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60,289 |
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58,978 |
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Furniture and fixtures |
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73,822 |
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67,036 |
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63,420 |
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Construction in progress |
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16,473 |
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11,728 |
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15,664 |
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Improvements to leased property |
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216,118 |
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187,083 |
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174,562 |
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Property and equipment, at cost |
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394,906 |
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345,831 |
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332,286 |
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Accumulated depreciation |
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(180,932 |
) |
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(157,784 |
) |
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(150,656 |
) |
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Property and equipment, net |
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213,974 |
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188,047 |
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181,630 |
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Deferred income taxes |
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2,321 |
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-0- |
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|
817 |
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Goodwill |
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96,235 |
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96,235 |
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96,561 |
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Trademarks |
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47,677 |
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47,671 |
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47,665 |
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Other intangibles, net of accumulated amortization of
$5,677 at October 28, 2006, $4,302 at January 28, 2006 and
$3,741 at October 29, 2005 |
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2,909 |
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4,284 |
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4,845 |
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Other noncurrent assets |
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8,969 |
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8,693 |
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9,241 |
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Total Assets |
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$ |
792,555 |
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$ |
686,118 |
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$ |
715,705 |
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3
Genesco Inc.
and Subsidiaries
Condensed Consolidated Balance Sheets
(In Thousands, except share amounts)
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October 28, |
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January 28, |
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October 29, |
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2006 |
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2006 |
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2005 |
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Liabilities and Shareholders Equity |
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Current Liabilities |
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Accounts payable |
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$ |
135,614 |
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$ |
73,929 |
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$ |
115,993 |
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Accrued employee compensation |
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16,760 |
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26,047 |
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18,384 |
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Accrued other taxes |
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9,746 |
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12,129 |
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9,128 |
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Accrued income taxes |
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3,076 |
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|
12,886 |
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4,496 |
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Other accrued liabilities |
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29,154 |
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27,178 |
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26,910 |
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Provision for discontinued operations |
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4,126 |
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4,033 |
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3,753 |
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Total current liabilities |
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198,476 |
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156,202 |
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178,664 |
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Long-term debt |
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158,250 |
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106,250 |
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151,250 |
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Pension liability |
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21,923 |
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23,222 |
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24,230 |
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Deferred rent and other long-term liabilities |
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54,987 |
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50,013 |
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48,218 |
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Provision for discontinued operations |
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1,812 |
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1,680 |
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1,628 |
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Total liabilities |
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435,448 |
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337,367 |
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403,990 |
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Commitments and contingent liabilities |
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Shareholders Equity |
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Non-redeemable preferred stock |
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6,615 |
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6,695 |
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6,704 |
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Common shareholders equity: |
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Common stock, $1 par value: |
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Authorized: 80,000,000 shares
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Issued/Outstanding: |
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October 28, 2006 22,960,065/22,471,601
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January 28, 2006 23,748,134/23,259,670
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October 29, 2005 23,357,359/22,868,895 |
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22,960 |
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23,748 |
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23,357 |
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Additional paid-in capital |
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99,430 |
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123,137 |
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118,592 |
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Retained earnings |
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271,338 |
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239,232 |
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208,010 |
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Accumulated other comprehensive loss |
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(25,379 |
) |
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(26,204 |
) |
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(27,091 |
) |
Treasury shares, at cost |
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(17,857 |
) |
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(17,857 |
) |
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(17,857 |
) |
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Total shareholders equity |
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357,107 |
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348,751 |
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311,715 |
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Total Liabilities and Shareholders Equity |
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$ |
792,555 |
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$ |
686,118 |
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$ |
715,705 |
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The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
4
Genesco Inc.
and Subsidiaries
Condensed Consolidated Statements of Earnings
(In Thousands, except per share amounts)
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Three Months Ended |
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Nine Months Ended |
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October 28, |
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October 29, |
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October 28, |
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October 29, |
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2006 |
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2005 |
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2006 |
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2005 |
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Net sales |
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$ |
364,298 |
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$ |
316,336 |
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$ |
983,617 |
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$ |
877,589 |
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Cost of sales |
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182,844 |
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|
154,825 |
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487,404 |
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430,567 |
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Selling and administrative
expenses |
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150,992 |
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133,225 |
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433,477 |
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385,429 |
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Restructuring and other, net |
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1,083 |
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(789 |
) |
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1,672 |
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|
2,255 |
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Earnings from operations |
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29,379 |
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29,075 |
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61,064 |
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59,338 |
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Interest expense, net |
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Interest expense |
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2,964 |
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2,871 |
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7,505 |
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8,748 |
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Interest income |
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(16 |
) |
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(202 |
) |
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(483 |
) |
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(807 |
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Total interest expense, net |
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2,948 |
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2,669 |
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|
7,022 |
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7,941 |
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Earnings before income taxes from
continuing operations |
|
|
26,431 |
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|
26,406 |
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|
54,042 |
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|
51,397 |
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Income taxes |
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|
10,456 |
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|
|
10,168 |
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|
21,457 |
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|
|
19,967 |
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|
Earnings from continuing
operations |
|
|
15,975 |
|
|
|
16,238 |
|
|
|
32,585 |
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|
|
31,430 |
|
Provision for discontinued
operations, net |
|
|
(98 |
) |
|
|
(95 |
) |
|
|
(287 |
) |
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|
(30 |
) |
|
Net Earnings |
|
$ |
15,877 |
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|
$ |
16,143 |
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$ |
32,298 |
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|
$ |
31,400 |
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Basic earnings per common share: |
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Continuing operations |
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$ |
.71 |
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$ |
.71 |
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$ |
1.42 |
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|
$ |
1.38 |
|
Discontinued operations |
|
$ |
.00 |
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|
$ |
.00 |
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|
$ |
(.01 |
) |
|
$ |
.00 |
|
Net earnings |
|
$ |
.71 |
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|
$ |
.71 |
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$ |
1.41 |
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$ |
1.38 |
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Diluted earnings per common share: |
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Continuing operations |
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$ |
.62 |
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|
$ |
.62 |
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|
$ |
1.26 |
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|
$ |
1.22 |
|
Discontinued operations |
|
$ |
.00 |
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|
$ |
(.01 |
) |
|
$ |
(.01 |
) |
|
$ |
.00 |
|
Net earnings |
|
$ |
.62 |
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|
$ |
.61 |
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$ |
1.25 |
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$ |
1.22 |
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The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
5
Genesco Inc.
and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In Thousands)
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Three Months Ended |
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Nine Months Ended |
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October 28, |
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October 29, |
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October 28, |
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October 29, |
|
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2006 |
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2005 |
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2006 |
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|
2005 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net earnings |
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$ |
15,877 |
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$ |
16,143 |
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$ |
32,298 |
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$ |
31,400 |
|
Tax benefit of stock options exercised |
|
|
(360 |
) |
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|
850 |
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(518 |
) |
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|
2,350 |
|
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities: |
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Depreciation |
|
|
10,112 |
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|
|
8,743 |
|
|
|
29,289 |
|
|
|
25,630 |
|
Provision for legal settlement |
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-0- |
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|
|
(891 |
) |
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|
-0- |
|
|
|
1,680 |
|
Deferred income taxes |
|
|
(3,890 |
) |
|
|
(2,157 |
) |
|
|
(5,215 |
) |
|
|
(2,679 |
) |
Provision for losses on accounts receivable |
|
|
42 |
|
|
|
55 |
|
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|
296 |
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|
|
39 |
|
Impairment of long-lived assets |
|
|
1,031 |
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|
|
39 |
|
|
|
1,579 |
|
|
|
376 |
|
Share-based compensation and restricted stock |
|
|
1,545 |
|
|
|
118 |
|
|
|
5,049 |
|
|
|
286 |
|
Provision for discontinued operations |
|
|
160 |
|
|
|
157 |
|
|
|
471 |
|
|
|
51 |
|
Other |
|
|
674 |
|
|
|
1,272 |
|
|
|
1,558 |
|
|
|
2,598 |
|
Effect on cash of changes in working capital and other assets
and liabilities: |
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|
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|
|
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|
|
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|
|
|
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Accounts receivable |
|
|
(5,150 |
) |
|
|
(5,030 |
) |
|
|
(3,526 |
) |
|
|
(4,870 |
) |
Inventories |
|
|
(12,870 |
) |
|
|
(22,109 |
) |
|
|
(113,661 |
) |
|
|
(85,601 |
) |
Prepaids and other current assets |
|
|
(376 |
) |
|
|
(77 |
) |
|
|
(1,154 |
) |
|
|
(1,876 |
) |
Accounts payable |
|
|
(6,201 |
) |
|
|
990 |
|
|
|
54,455 |
|
|
|
45,274 |
|
Other accrued liabilities |
|
|
9,475 |
|
|
|
8,972 |
|
|
|
(19,614 |
) |
|
|
(3,151 |
) |
Other assets and liabilities |
|
|
2,925 |
|
|
|
3,831 |
|
|
|
4,773 |
|
|
|
2,731 |
|
|
Net cash provided by (used in) operating activities |
|
|
12,994 |
|
|
|
10,906 |
|
|
|
(13,920 |
) |
|
|
14,238 |
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(21,146 |
) |
|
|
(18,040 |
) |
|
|
(57,559 |
) |
|
|
(41,184 |
) |
Proceeds from sale of property and equipment |
|
|
5 |
|
|
|
18 |
|
|
|
5 |
|
|
|
19 |
|
|
Net cash used in investing activities |
|
|
(21,141 |
) |
|
|
(18,022 |
) |
|
|
(57,554 |
) |
|
|
(41,165 |
) |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments of long-term debt |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(10,000 |
) |
Payments of capital leases |
|
|
-0- |
|
|
|
(77 |
) |
|
|
-0- |
|
|
|
(267 |
) |
Tax benefit of stock options exercised |
|
|
360 |
|
|
|
-0- |
|
|
|
518 |
|
|
|
-0- |
|
Shares repurchased |
|
|
(20,113 |
) |
|
|
-0- |
|
|
|
(31,842 |
) |
|
|
-0- |
|
Change in overdraft balances |
|
|
(3,139 |
) |
|
|
166 |
|
|
|
7,230 |
|
|
|
5,120 |
|
Revolver borrowings, net |
|
|
29,000 |
|
|
|
-0- |
|
|
|
52,000 |
|
|
|
-0- |
|
Dividends paid on non-redeemable preferred stock |
|
|
(64 |
) |
|
|
(67 |
) |
|
|
(192 |
) |
|
|
(209 |
) |
Exercise of stock options |
|
|
1,381 |
|
|
|
1,644 |
|
|
|
1,947 |
|
|
|
5,613 |
|
|
Net cash provided by financing activities |
|
|
7,425 |
|
|
|
1,666 |
|
|
|
29,661 |
|
|
|
257 |
|
|
Net Cash Flow |
|
|
(722 |
) |
|
|
(5,450 |
) |
|
|
(41,813 |
) |
|
|
(26,670 |
) |
Cash and cash equivalents at beginning of period |
|
|
19,360 |
|
|
|
38,848 |
|
|
|
60,451 |
|
|
|
60,068 |
|
|
Cash and cash equivalents at end of period |
|
$ |
18,638 |
|
|
$ |
33,398 |
|
|
$ |
18,638 |
|
|
$ |
33,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
1,258 |
|
|
$ |
1,711 |
|
|
$ |
5,308 |
|
|
$ |
6,884 |
|
Income taxes |
|
|
10,061 |
|
|
|
5,413 |
|
|
|
37,328 |
|
|
|
20,948 |
|
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
6
Genesco Inc.
and Subsidiaries
Condensed Consolidated Statements of Shareholders Equity
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Non-Redeemable |
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Share- |
|
|
|
Preferred |
|
|
Common |
|
|
Paid-In |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury |
|
|
Comprehensive |
|
|
holders |
|
|
|
Stock |
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Loss |
|
|
Stock |
|
|
Income |
|
|
Equity |
|
|
Balance January 29, 2005 |
|
$ |
7,474 |
|
|
$ |
22,926 |
|
|
$ |
109,005 |
|
|
$ |
176,819 |
|
|
$ |
(26,302 |
) |
|
$ |
(17,857 |
) |
|
|
|
|
|
$ |
272,065 |
|
|
Net earnings |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
62,686 |
|
|
|
-0- |
|
|
|
-0- |
|
|
$ |
62,686 |
|
|
|
62,686 |
|
Dividends paid on non-redeemable
preferred stock |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(273 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(273 |
) |
Exercise of stock options |
|
|
-0- |
|
|
|
547 |
|
|
|
8,297 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
8,844 |
|
Employee restricted stock |
|
|
-0- |
|
|
|
229 |
|
|
|
400 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
629 |
|
Issue shares Employee Stock Purchase Plan |
|
|
-0- |
|
|
|
25 |
|
|
|
483 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
508 |
|
Tax benefit of stock options exercised |
|
|
-0- |
|
|
|
-0- |
|
|
|
3,850 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
3,850 |
|
Conversion of Series 4 preferred stock |
|
|
(723 |
) |
|
|
11 |
|
|
|
712 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
Loss on foreign currency forward contracts
(net of tax benefit of $0.7 million) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(1,047 |
) |
|
|
-0- |
|
|
|
(1,047 |
) |
|
|
(1,047 |
) |
Gain on interest rate swaps
(net of tax of $0.1 million) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
61 |
|
|
|
-0- |
|
|
|
61 |
|
|
|
61 |
|
Minimum pension liability adjustment
(net of tax of $0.7 million) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
1,084 |
|
|
|
-0- |
|
|
|
1,084 |
|
|
|
1,084 |
|
Other |
|
|
(56 |
) |
|
|
10 |
|
|
|
390 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
-0- |
|
|
|
344 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
62,784 |
|
|
|
|
|
|
Balance January 28, 2006 |
|
|
6,695 |
|
|
|
23,748 |
|
|
|
123,137 |
|
|
|
239,232 |
|
|
|
(26,204 |
) |
|
|
(17,857 |
) |
|
|
|
|
|
|
348,751 |
|
|
Net earnings |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
32,298 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
32,298 |
|
|
|
32,298 |
|
Dividends paid on non-redeemable
preferred stock |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(192 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(192 |
) |
Exercise of stock options |
|
|
-0- |
|
|
|
88 |
|
|
|
1,538 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
1,626 |
|
Issue shares Employee Stock Purchase Plan |
|
|
-0- |
|
|
|
10 |
|
|
|
311 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
321 |
|
Shares repurchased |
|
|
-0- |
|
|
|
(1,062 |
) |
|
|
(31,026 |
) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(32,088 |
) |
Employee and non-employee restricted stock |
|
|
-0- |
|
|
|
154 |
|
|
|
1,700 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
1,854 |
|
Share-based compensation |
|
|
-0- |
|
|
|
-0- |
|
|
|
3,195 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
3,195 |
|
Tax benefit of stock options exercised |
|
|
-0- |
|
|
|
-0- |
|
|
|
518 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
518 |
|
Gain on foreign currency forward contracts
(net of tax of $0.6 million) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
872 |
|
|
|
-0- |
|
|
|
872 |
|
|
|
872 |
|
Loss on interest rate swaps
(net of tax benefit of $0.1 million) |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(96 |
) |
|
|
-0- |
|
|
|
(96 |
) |
|
|
(96 |
) |
Foreign currency translation adjustment |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
49 |
|
|
|
-0- |
|
|
|
49 |
|
|
|
49 |
|
Other |
|
|
(80 |
) |
|
|
22 |
|
|
|
57 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
-0- |
|
|
|
(1 |
) |
Comprehensive income* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
33,123 |
|
|
|
|
|
|
Balance October 28, 2006 |
|
$ |
6,615 |
|
|
$ |
22,960 |
|
|
$ |
99,430 |
|
|
$ |
271,338 |
|
|
$ |
(25,379 |
) |
|
$ |
(17,857 |
) |
|
|
|
|
|
$ |
357,107 |
|
|
* Comprehensive income was $15.8 million for both the third quarter ended October 28, 2006
and the third quarter ended October 29, 2005.
Comprehensive income was $30.6 million for the
nine month period ended October 29, 2005.
The accompanying Notes are an integral part of these Condensed Consolidated Financial
Statements.
7
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 1
Summary of Significant Accounting Policies
Interim Statements
The condensed consolidated financial statements contained in this report of Genesco Inc., a
Tennessee corporation (together with its subsidiaries, the Company), are unaudited but reflect
all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation
of the results for the interim periods of the fiscal year ending February 3, 2007 (Fiscal 2007)
and of the fiscal year ended January 28, 2006 (Fiscal 2006). The results of operations for any
interim period are not necessarily indicative of results for the full year. The interim financial
statements should be read in conjunction with the financial statements and notes thereto included
in the Companys annual report on Form 10-K.
Nature of Operations
The Companys businesses include the design or sourcing, marketing and distribution of footwear,
principally under the Johnston & Murphy and Dockers brands and the operation at October 28, 2006 of
1,925 Journeys, Journeys Kidz, Shi by Journeys, Johnston & Murphy, Underground Station, Jarman, Hat
World, Lids, Hat Zone, Cap Connection, Lids Kids and Head Quarters retail footwear and headwear
stores.
Principles of Consolidation
All subsidiaries are consolidated in the condensed consolidated financial statements. All
significant intercompany transactions and accounts have been eliminated.
Financial Statement Reclassifications
Certain reclassifications have been made to conform prior years data to the current year
presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Significant areas requiring management estimates or judgments include the following key financial
areas:
Inventory Valuation
The Company values its inventories at the lower of cost or market.
In its wholesale operations, cost is determined using the first-in, first-out (FIFO) method.
Market is determined using a system of analysis which evaluates inventory at the stock number
level based on factors such as inventory turn, average selling price, inventory level, and selling
prices reflected in future orders. The Company provides reserves when the inventory has not been
marked down to market based on current selling prices or when the inventory is not turning and is
not expected to turn at levels satisfactory to the Company.
8
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 1
Summary of Significant Accounting Policies, Continued
In its retail operations, other than the Hat World segment, the Company employs the retail
inventory method, applying average cost-to-retail ratios to the retail value of inventories.
Under the retail inventory method, valuing inventory at the lower of cost or market is achieved as
markdowns are taken or accrued as a reduction of the retail value of inventories.
Inherent in the retail inventory method are subjective judgments and estimates, including
merchandise mark-on, markups, markdowns, and shrinkage. These judgments and estimates, coupled
with the fact that the retail inventory method is an averaging process, could produce a range of
cost figures. To reduce the risk of inaccuracy and to ensure consistent presentation, the Company
employs the retail inventory method in multiple subclasses of inventory with similar gross margin,
and analyzes markdown requirements at the stock number level based on factors such as inventory
turn, average selling price, and inventory age. In addition, the Company accrues markdowns as
necessary. These additional markdown accruals reflect all of the above factors as well as current
agreements to return products to vendors and vendor agreements to provide markdown support. In
addition to markdown provisions, the Company maintains provisions for shrinkage and damaged goods
based on historical rates.
The Hat World segment employs the moving average cost method for valuing inventories and applies
freight using an allocation method. The Company provides a valuation allowance for slow-moving
inventory based on negative margins and estimated shrink based on historical experience and
specific analysis, where appropriate.
Inherent in the analysis of both wholesale and retail inventory valuation are subjective judgments
about current market conditions, fashion trends, and overall economic conditions. Failure to make
appropriate conclusions regarding these factors may result in an overstatement or understatement
of inventory value.
Impairment
of Definite-Lived Long-Lived Assets
The Company periodically assesses the realizability of its definite-lived long-lived assets and
evaluates such assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Asset impairment is determined to exist if
estimated future cash flows, undiscounted and without interest charges, are less than the carrying
amount. Inherent in the analysis of impairment are subjective judgments about future cash flows.
Failure to make appropriate conclusions regarding these judgments may result in an overstatement
of the value of held and used definite-lived long-lived assets (see Note 2).
9
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 1
Summary of Significant Accounting Policies, Continued
Environmental and Other Contingencies
The Company is subject to certain loss contingencies related to environmental proceedings and
other legal matters, including those disclosed in Note 8 to the Companys Condensed Consolidated
Financial Statements. The Company monitors these matters on an ongoing basis and, on a quarterly
basis, management reviews the Companys reserves and accruals in relation to each of them,
adjusting provisions as management deems necessary in view of changes in available information.
Changes in estimates of liability are reported in the periods when they occur. Consequently,
management believes that its reserve in relation to each proceeding is a best estimate of probable
loss connected to the proceeding, or in cases in which no best estimate is possible, the minimum
amount in the range of estimated losses, based upon its analysis of the facts and circumstances as
of the close of the most recent fiscal quarter. However, because of uncertainties and risks
inherent in litigation generally and in environmental proceedings in particular, there can be no
assurance that future developments will not require additional reserves to be set aside, that some
or all reserves will be adequate or that the amounts of any such additional reserves or any such
inadequacy will not have a material adverse effect upon the Companys financial condition or
results of operations.
Revenue Recognition
Retail sales are recorded at the point of sale and are net of estimated returns. Catalog and
internet sales are recorded at time of delivery to the customer and are net of estimated returns.
Wholesale revenue is recorded net of estimated returns and allowances for markdowns, damages and
miscellaneous claims when the related goods have been shipped and legal title has passed to the
customer. Shipping and handling costs charged to customers are included in net sales. Estimated
returns are based on historical returns and claims. Actual amounts of markdowns have not differed
materially from estimates. Actual returns and claims in any future period may differ from
historical experience.
Pension Plan Accounting
In December 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 132 (revised 2003), Employers Disclosures about Pensions and
Other Postretirement Benefits. This statement revised employers disclosures about pension plans
and other post retirement benefit plans. It did not change the measurement or recognition of
those plans required by SFAS No. 87, Employers Accounting for Pensions.
The Company accounts for the defined benefit pension plans using SFAS No. 87, Employers
Accounting for Pensions (SFAS No. 87). Under SFAS No. 87, pension expense is recognized on an
accrual basis over employees approximate service periods. The calculation of pension expense and
the corresponding liability requires the use of a number of critical assumptions, including the
expected long-term rate of return on plan assets and the assumed discount rate, as well as the
recognition of actuarial gains and losses. Changes in these assumptions can result in different
expense and liability amounts, and future actual experience can differ from these assumptions.
10
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 1
Summary of Significant Accounting Policies, Continued
Cash and Cash Equivalents
Included in cash and cash equivalents at October 28, 2006, January 28, 2006 and October 29, 2005
are cash equivalents of $2.9 million, $48.5 million and $17.7 million, respectively. Cash
equivalents are highly-liquid financial instruments having an original maturity of three months or
less. The majority of payments due from banks for customer credit card transactions process within
24 48 hours and are accordingly classified as cash and cash equivalents.
At October 28, 2006, January 28, 2006 and October 29, 2005, outstanding checks drawn on
zero-balance accounts at certain domestic banks exceeded book cash balances at those banks by
approximately $24.5 million, $17.2 million and $22.8 million, respectively. These amounts are
included in accounts payable.
Concentration of Credit Risk and Allowances on Accounts Receivable
The Companys footwear wholesaling business sells primarily to independent retailers and department
stores across the United States. Receivables arising from these sales are not collateralized.
Customer credit risk is affected by conditions or occurrences within the economy and the retail
industry. Two customers accounted for 12% and 11%, respectively, of the Companys trade
receivables balance as of October 28, 2006, and no other customer accounted for more than 9% of the
Companys trade receivables balance as of October 28, 2006.
The Company establishes an allowance for doubtful accounts based upon factors surrounding the
credit risk of specific customers, historical trends and other information, as well as
company-specific factors. The Company also establishes allowances for sales returns, customer
deductions and co-op advertising based on specific circumstances, historical trends and projected
probable outcomes.
Property and Equipment
Property and equipment are recorded at cost and depreciated or amortized over the estimated useful
life of related assets. Depreciation and amortization expense are computed principally by the
straight-line method over the following estimated useful lives:
|
|
|
|
|
Buildings and building equipment |
|
20-45 years |
Computer hardware, software and equipment |
|
3-10 years |
Furniture and fixtures |
|
10 years |
Leases
Leasehold improvements and properties under capital leases are amortized on the straight-line
method over the shorter of their useful lives or their related lease terms and the charge to
earnings is included in selling and administrative expenses in the Condensed Consolidated
Statements of Earnings.
11
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 1
Summary of Significant Accounting Policies, Continued
Certain leases include rent increases during the initial lease term. For these leases, the Company
recognizes the related rental expense on a straight-line basis over the term of the lease (which
includes any rent holidays and the pre-opening period of construction, renovation, fixturing and
merchandise placement) and records the difference between the amounts charged to operations and
amounts paid as a rent liability.
The Company occasionally receives reimbursements from landlords to be used towards construction of
the store the Company intends to lease. Leasehold improvements are recorded at their gross costs
including items reimbursed by landlords. The reimbursements are amortized as a reduction of rent
expense over the initial lease term.
Goodwill and Other Intangibles
Under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, (SFAS No. 142),
goodwill and intangible assets with indefinite lives are not amortized, but tested at least
annually for impairment. SFAS No. 142 also requires that intangible assets with finite lives be
amortized over their respective lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No. 144).
Intangible assets of the Company with indefinite lives are primarily goodwill and identifiable
trademarks acquired in connection with the acquisition of Hat World Corporation on April 1, 2004.
The Company tests for impairment of intangible assets with an indefinite life, at a minimum on an
annual basis, relying on a number of factors including operating results, business plans and
projected future cash flows. The impairment test for identifiable assets not subject to
amortization consists of a comparison of the fair value of the intangible asset with its carrying
amount.
Identifiable intangible assets of the Company with finite lives are primarily leases and customer
lists. They are subject to amortization based upon their estimated useful lives. Finite-lived
intangible assets are evaluated for impairment using a process similar to that used to evaluate
other definite-lived long-lived assets, a comparison of the fair value of the intangible asset with
its carrying amount. An impairment loss is recognized for the amount by which the carrying value
exceeds the fair value of the asset.
Post-retirement Benefits
Substantially all full-time employees, except employees in the Hat World segment, are covered by a
defined benefit pension plan. The Company froze the defined benefit pension plan effective January
1, 2005. The Company also provides certain former employees with limited medical and life
insurance benefits. The Company funds at least the minimum amount required by the Employee
Retirement Income Security Act.
12
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 1
Summary of Significant Accounting Policies, Continued
Cost of Sales
For the Companys retail operations, the cost of sales includes actual product cost, the cost of
transportation to the Companys warehouses from suppliers and the cost of transportation from the
Companys warehouses to the stores. Additionally, the cost of its distribution facilities
allocated to its retail operations is included in cost of sales.
For the Companys wholesale operations, the cost of sales includes the actual product cost and the
cost of transportation to the Companys warehouses from suppliers.
Selling and Administrative Expenses
Selling and administrative expenses include all operating costs of the Company excluding (i) those
related to the transportation of products from the supplier to the warehouse, (ii) for its retail
operations, those related to the transportation of products from the warehouse to the store and
(iii) costs of its distribution facilities which are allocated to its retail operations. Wholesale
and unallocated retail costs of distribution are included in selling and administrative expenses in
the amounts of $1.2 million and $1.1 million for the third quarter of Fiscal 2007 and 2006,
respectively, and $2.6 million and $3.2 million for the first nine months of Fiscal 2007 and 2006,
respectively.
Buying, Merchandising and Occupancy Costs
The Company records buying and merchandising and occupancy costs in selling and administrative
expense. Because the Company does not include these costs in cost of sales, the Companys gross
margin may not be comparable to other retailers that include these costs in the calculation of
gross margin.
Shipping and Handling Costs
Shipping and handling costs related to inventory purchased from suppliers is included in the cost
of inventory and is charged to cost of sales in the period that the inventory is sold. All other
shipping and handling costs are charged to cost of sales in the period incurred except for
wholesale and unallocated retail costs of distribution, which are included in selling and
administrative expenses.
Preopening Costs
Costs associated with the opening of new stores are expensed as incurred, and are included in
selling and administrative expenses on the accompanying Condensed Consolidated Statements of
Earnings.
13
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 1
Summary of Significant Accounting Policies, Continued
Store Closings and Exit Costs
From time to time, the Company makes strategic decisions to close stores or exit locations or
activities. If stores or operating activities to be closed or exited constitute components, as
defined by SFAS No. 144, and will not result in a migration of customers and cash flows, these
closures will be considered discontinued operations when the related assets meet the criteria to be
classified as held for sale, or at the cease-use date, whichever occurs first. The results of
operations of discontinued operations are presented retroactively, net of tax, as a separate
component on the Statement of Earnings, if material individually or cumulatively.
Assets related to planned store closures or other exit activities are reflected as assets held for
sale and recorded at the lower of carrying value or fair value less costs to sell when the required
criteria, as defined by SFAS No. 144, are satisfied. Depreciation ceases on the date that the held
for sale criteria are met.
Assets related to planned store closures or other exit activities that do not meet the criteria to
be classified as held for sale are evaluated for impairment in accordance with the Companys normal
impairment policy, but with consideration given to revised estimates of future cash flows. In any
event, the remaining depreciable useful lives are evaluated and adjusted as necessary.
Exit costs related to anticipated lease termination costs, severance benefits and other expected
charges are accrued for and recognized in accordance with SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities.
Advertising Costs
Advertising costs are predominantly expensed as incurred. Advertising costs were $7.5 million and
$7.0 million for the third quarter of Fiscal 2007 and 2006, respectively, and $22.9 million and
$21.1 million for the first nine months of Fiscal 2007 and 2006, respectively. Direct response
advertising costs for catalogs are capitalized, in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position No. 93-7, Reporting on Advertising
Costs. Such costs are amortized over the estimated future revenues realized from such
advertising, not to exceed six months. The Condensed Consolidated Balance Sheets include prepaid
assets for direct response advertising costs of $1.0 million, $0.9 million and $0.9 million at
October 28, 2006, January 28, 2006 and October 29, 2005, respectively.
Consideration to Resellers
The Company does not have any written buy-down programs with retailers, but the Company has
provided certain retailers with markdown allowances for obsolete and slow moving products that are
in the retailers inventory. The Company estimates these allowances and provides for them as
reductions to revenues at the time revenues are recorded. Markdowns are negotiated with retailers
and changes are made to the estimates as agreements are reached. Actual amounts for markdowns have
not differed materially from estimates.
14
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 1
Summary of Significant Accounting Policies, Continued
Cooperative Advertising
Cooperative advertising funds are made available to all of the Companys wholesale customers. In
order for retailers to receive reimbursement under such programs, the retailer must meet specified
advertising guidelines and provide appropriate documentation of expenses to be reimbursed. The
Companys cooperative advertising agreements require that wholesale customers present documentation
or other evidence of specific advertisements or display materials used for the Companys products
by submitting the actual print advertisements presented in catalogs, newspaper inserts or other
advertising circulars, or by permitting physical inspection of displays. Additionally, the
Companys cooperative advertising agreements require that the amount of reimbursement requested for
such advertising or materials be supported by invoices or other evidence of the actual costs
incurred by the retailer. The Company accounts for these cooperative advertising costs as selling
and administrative expenses, in accordance with Emerging Issues Task Force (EITF) Issue No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors
Products).
Cooperative advertising costs recognized in selling and administrative expenses were $0.8 million
and $0.6 million for the third quarter of Fiscal 2007 and 2006, respectively, and $1.9 million and
$1.6 million for the first nine months of Fiscal 2007 and 2006, respectively. During the first
nine months of Fiscal 2007 and 2006, the Companys cooperative advertising reimbursements paid did
not exceed the fair value of the benefits received under those agreements.
Vendor Allowances
From time to time, the Company negotiates allowances from its vendors for markdowns taken or
expected to be taken. These markdowns are typically negotiated on specific merchandise and for
specific amounts. These specific allowances are recognized as a reduction in cost of sales in the
period in which the markdowns are taken. Markdown allowances not attached to specific inventory on
hand or already sold are applied to concurrent or future purchases from each respective vendor.
The Company receives support from some of its vendors in the form of reimbursements for cooperative
advertising and catalog costs for the launch and promotion of certain products. The reimbursements
are agreed upon with vendors and represent specific, incremental, identifiable costs incurred by
the Company in selling the vendors products. Such costs and the related reimbursements are
accumulated and monitored on an individual vendor basis, pursuant to the respective cooperative
advertising agreements with vendors. Such cooperative advertising reimbursements are recorded as a
reduction of selling and administrative expenses in the same period in which the associated expense
is incurred. If the amount of cash consideration received exceeds the costs being reimbursed, such
excess amount would be recorded as a reduction of cost of sales.
15
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 1
Summary of Significant Accounting Policies, Continued
Vendor reimbursements of cooperative advertising costs recognized as a reduction of selling and
administrative expenses were $0.2 million and $0.3 million for the third quarter of Fiscal 2007 and
2006, respectively, and $2.5 million and $2.2 million for the first nine months of Fiscal 2007 and
2006, respectively. During the first nine months of Fiscal 2007 and 2006, the Companys
cooperative advertising reimbursements received were not in excess of the costs reimbursed.
Environmental Costs
Environmental expenditures relating to current operations are expensed or capitalized as
appropriate. Expenditures relating to an existing condition caused by past operations, and which do
not contribute to current or future revenue generation, are expensed. Liabilities are recorded
when environmental assessments and/or remedial efforts are probable and the costs can be reasonably
estimated and are evaluated independently of any future claims for recovery. Generally, the timing
of these accruals coincides with completion of a feasibility study or the Companys commitment to a
formal plan of action. Costs of future expenditures for environmental remediation obligations are
not discounted to their present value.
Income Taxes
Deferred income taxes are provided for all temporary differences and operating loss and tax credit
carryforwards are limited, in the case of deferred tax assets, to the amount the Company believes
is more likely than not to be realized in the foreseeable future.
Earnings Per Common Share
Basic earnings per share excludes dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if securities to issue common
stock were exercised or converted to common stock (see Note 6).
Other Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, requires, among other things, the Companys minimum
pension liability adjustment, unrealized gains or losses on foreign currency forward contracts,
unrealized gains and losses on interest rate swaps and foreign currency translation adjustments to
be included in other comprehensive income net of tax. Accumulated other comprehensive loss at
October 28, 2006 consisted of $25.9 million of cumulative minimum pension liability adjustments,
net of tax, cumulative net gains of $0.2 million on foreign currency forward contracts, net of tax,
cumulative net gains of $0.1 million on interest rate swaps, net of tax, and a foreign currency
translation adjustment of $0.2 million.
Business Segments
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, requires that
companies disclose operating segments based on the way management disaggregates the Company for
making internal operating decisions (see Note 9).
16
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 1
Summary of Significant Accounting Policies, Continued
Derivative Instruments and Hedging Activities
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of
SFAS No. 133, SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, (collectively SFAS 133) require an entity to recognize all derivatives as either
assets or liabilities in the consolidated balance sheet and to measure those instruments at fair
value. Under certain conditions, a derivative may be specifically designated as a fair value hedge
or a cash flow hedge. The accounting for changes in the fair value of a derivative are recorded
each period in current earnings or in other comprehensive income depending on the intended use of
the derivative and the resulting designation.
New Accounting Principles
Effective January 29, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS No. 123(R)), using the modified prospective transition method. Under the modified
prospective transition method, compensation cost recognized for the three months and nine months
ended October 28, 2006 includes (i) compensation cost for all share-based payments granted prior
to, but not yet vested as of January 29, 2006, based on the grant date fair value estimated in
accordance with the provisions of SFAS No. 123 Accounting for Stock-Based Compensation (SFAS No.
123); and (ii) compensation cost for all share-based payments granted on or after January 29,
2006, based on the grant date fair value estimated in accordance with SFAS No. 123(R). In
accordance with the modified prospective method, the Company has not restated prior period results.
See Note 7 to the Companys Condensed Consolidated Financial Statements for additional information
on the Companys share-based compensation plans and adoption of SFAS No. 123(R).
In March 2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 06-3,
How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (that is, gross versus net presentation), which allows companies to adopt a
policy of presenting taxes in the income statement on either a gross or net basis. Taxes within
the scope of this EITF would include taxes that are imposed on a revenue transaction between a
seller and a customer, for example, sales taxes, use taxes, value-added taxes and some types of
excise taxes. EITF No. 06-3 is effective for interim and annual reporting periods beginning after
December 15, 2006. EITF No. 06-3 will not impact the method for recording and reporting these
sales taxes in the Companys Condensed Consolidated Financial Statements as the Companys policy is
to exclude all such taxes from revenue.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of SFAS No. 109 (FIN 48). This Interpretation clarifies the
accounting for uncertainty in income taxes recognized in the financial statements in accordance
with SFAS No. 109, Accounting for Income Taxes. This Interpretation prescribes that a company
should use a more-likely-than-not recognition threshold based on the technical merits of the tax
position taken. Tax positions that meet the more-likely-than-not recognition threshold should be
measured in order to determine the tax benefit to be recognized in the financial statements. FIN
48 is effective in fiscal years beginning after December 15, 2006. The Company is currently
evaluating the impact that the adoption of FIN 48 will have on its results of operations and
financial position.
17
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 1
Summary of Significant Accounting Policies, Continued
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles and expands disclosures about fair value measurements.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 (fiscal year 2009 for
the Company), and interim periods within those fiscal years. The Company is currently evaluating
the impact that the adoption of SFAS No. 157 will have, if any, on its results of operations and
financial position.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) (SFAS
No. 158). SFAS No. 158 requires companies to recognize the overfunded or underfunded status of a
single-employer defined benefit postretirement plan as an asset or liability in its balance sheet
and to recognize changes in that funded status in comprehensive income in the year in which the
changes occur. This requirement of SFAS No. 158 is effective as of the end of the fiscal year
ending after December 15, 2006 (fiscal year 2007 for the Company). SFAS No. 158 also requires
companies to measure the funded status of a plan as of the date of its fiscal year end. This
requirement of SFAS No. 158 is effective for fiscal years ending after December 15, 2008 (fiscal
year 2009 for the Company). The Company does not believe the adoption of SFAS No. 158 will have a
material impact on the Companys results of operations or financial position.
Note 2
Restructuring and Other Charges and Discontinued Operations
Restructuring and Other Charges
In accordance with Company policy, assets are determined to be impaired when the revised estimated
future cash flows were insufficient to recover the carrying costs. Impairment charges represent
the excess of the carrying value over the fair value of those assets.
Asset impairment charges are reflected as a reduction of the net carrying value of property and
equipment, and in restructuring and other, net in the accompanying Condensed Consolidated
Statements of Earnings.
The Company recorded a pretax charge to earnings of $1.1 million ($0.7 million net of tax) in the
third quarter of Fiscal 2007. The charge was primarily for retail store asset impairments and the
lease termination of one Jarman store. The lease termination was the continuation of a plan
previously announced by the Company in Fiscal 2004.
18
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 2
Restructuring and Other Charges and Discontinued Operations, Continued
The Company recorded a pretax charge to earnings of $0.5 million ($0.3 million net of tax) in the
second quarter of Fiscal 2007. The charge was primarily for retail store asset impairments.
The Company recorded a pretax charge to earnings of $0.1 million in the first quarter of Fiscal
2007. The charge was primarily for retail store asset impairments.
The Company recorded a pretax credit to earnings of $0.8 million ($0.5 million net of tax) in the
third quarter of Fiscal 2006. The credit was primarily for the recognition of a gain of $0.9
million associated with the conclusion of the settlement of a California employment class action
more favorably than originally anticipated, when the charge associated with the settlement was
originally taken in the first quarter of Fiscal 2006 (see Note 8), offset by a $0.1 million charge
for retail store asset impairments and lease terminations of four Jarman stores.
The Company recorded a pretax charge to earnings of $0.2 million ($0.1 million net of tax) in the
second quarter of Fiscal 2006. The charge was primarily for retail store asset impairments and
lease terminations of two Jarman stores.
The Company recorded a pretax charge to earnings of $2.9 million ($1.8 million net of tax) in the
first quarter of Fiscal 2006. The charge included $2.6 million for settlement of a California
employment class action (see Note 8), $0.2 million for retail store asset impairments and $0.1
million for lease terminations of two Jarman stores.
Accrued Provision for Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility |
|
|
|
|
|
|
|
|
|
Shutdown |
|
|
|
|
|
|
|
In thousands |
|
Costs |
|
|
Other |
|
|
Total |
|
|
Balance January 29, 2005 |
|
$ |
5,800 |
|
|
$ |
3 |
|
|
$ |
5,803 |
|
Excess provision Fiscal 2006 |
|
|
(98 |
) |
|
|
-0- |
|
|
|
(98 |
) |
Charges and adjustments, net |
|
|
8 |
|
|
|
-0- |
|
|
|
8 |
|
|
Balance January 28, 2006 |
|
|
5,710 |
|
|
|
3 |
|
|
|
5,713 |
|
Additional provision Fiscal 2007 |
|
|
471 |
|
|
|
-0- |
|
|
|
471 |
|
Charges and adjustments, net |
|
|
(243 |
) |
|
|
(3 |
) |
|
|
(246 |
) |
|
Balance October 28, 2006* |
|
|
5,938 |
|
|
|
-0- |
|
|
|
5,938 |
|
Current provision for discontinued operations |
|
|
4,126 |
|
|
|
-0- |
|
|
|
4,126 |
|
|
Total Noncurrent Provision for
Discontinued Operations |
|
$ |
1,812 |
|
|
$ |
-0- |
|
|
$ |
1,812 |
|
|
|
|
|
* |
|
Includes $5.7 million environmental provision including $3.9 million in current provision for
discontinued operations. |
19
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 3
Inventories
|
|
|
|
|
|
|
|
|
|
|
October 28, |
|
|
January 28, |
|
In thousands |
|
2006 |
|
|
2006 |
|
|
Raw materials |
|
$ |
203 |
|
|
$ |
203 |
|
Wholesale finished goods |
|
|
29,367 |
|
|
|
30,392 |
|
Retail merchandise |
|
|
314,739 |
|
|
|
200,053 |
|
|
Total Inventories |
|
$ |
344,309 |
|
|
$ |
230,648 |
|
|
Note 4
Derivative Instruments and Hedging Activities
In order to reduce exposure to foreign currency exchange rate fluctuations in connection with
inventory purchase commitments for its Johnston & Murphy division, the Company enters into foreign
currency forward exchange contracts for Euro to make Euro denominated payments with a maximum
hedging period of twelve months. Derivative instruments used as hedges must be effective at
reducing the risk associated with the exposure being hedged. The settlement terms of the forward
contracts correspond with the payment terms for the merchandise inventories. As a result, there is
no hedge ineffectiveness to be reflected in earnings. The notional amount of such contracts
outstanding at October 28, 2006 and January 28, 2006 was $7.6 million and $7.5 million,
respectively. Forward exchange contracts have an average remaining term of approximately two and
one-third months. The loss based on spot rates under these contracts at October 28, 2006 was
$2,000, and the gain based on spot rates under these contracts at January 28, 2006 was $15,000.
For the nine months ended October 28, 2006, the Company recorded an unrealized gain on foreign
currency forward contracts of $1.4 million in accumulated other comprehensive loss, before taxes.
The Company monitors the credit quality of the major national and regional financial institutions
with which it enters into such contracts.
The Company estimates that the majority of net hedging gains related to forward exchange contracts
will be reclassified from accumulated other comprehensive loss into earnings through lower cost of
sales over the succeeding year.
The Company uses interest rate swaps as a cash flow hedge to manage interest costs and the risk
associated with changing interest rates of long-term debt. During the first quarter ended May 1,
2004, the Company entered into three separate forward-starting interest rate swap agreements as a
means of managing its interest rate exposure on its $100.0 million variable rate term loan. All
three agreements were effective beginning on October 1, 2004 and are designed to swap a variable
rate of three-month LIBOR (5.38% at October 2, 2006, the day the rate was set) for a fixed rate
ranging from 2.52% to 3.32%. The aggregate notional amount of the swaps was $65.0 million. Of the
three agreements, the swap agreement with a $15.0 million notional amount expired on October 1,
2005. The swap agreement with a $20.0 million notional amount expired on July 1, 2006, but it was
terminated early in January 2006. The swap agreement with an original $30.0 million notional
amount expires on April 1, 2007 and has a $20.0 million notional amount as of October 28, 2006.
The fixed rate on the remaining swap agreement is 3.32%. These agreements have the effect of
converting certain of the Companys variable rate obligations to fixed rate obligations. The
Company received $0.3 million in Fiscal 2006 as a result of early termination of some of the
interest rate swap agreements.
20
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 4
Derivative Instruments and Hedging Activities, Continued
In order to ensure continued hedge effectiveness, the Company intends to elect the three-month
LIBOR option for its variable rate interest payments on its term loan as of each interest payment
date. Since the interest payment dates coincide with the swap reset dates, the hedges are expected
to be perfectly effective. However, because the swaps do not qualify for the short-cut method, the
Company will evaluate quarterly the continued effectiveness of the hedge and will reflect any
ineffectiveness in the results of operations. As long as the hedge continues to be perfectly
effective, net amounts paid or received will be reflected as an adjustment to interest expense and
the changes in the fair value of the derivative will be reflected in other comprehensive income.
At October 28, 2006, the net gain of these interest rate swap agreements was $0.1 million, net of
tax, representing the change in fair value of the derivative instruments.
Note 5
Defined Benefit Pension Plans and Other Benefit Plans
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
October 28, |
|
|
October 29, |
|
|
October 28, |
|
|
October 29, |
|
In thousands |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Service cost |
|
$ |
63 |
|
|
$ |
61 |
|
|
$ |
189 |
|
|
$ |
188 |
|
Interest cost |
|
|
1,605 |
|
|
|
1,656 |
|
|
|
4,818 |
|
|
|
4,982 |
|
Expected return on plan assets |
|
|
(1,944 |
) |
|
|
(1,920 |
) |
|
|
(5,836 |
) |
|
|
(5,781 |
) |
Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses |
|
|
1,105 |
|
|
|
1,087 |
|
|
|
3,375 |
|
|
|
3,416 |
|
|
Net amortization |
|
|
1,105 |
|
|
|
1,087 |
|
|
|
3,375 |
|
|
|
3,416 |
|
|
Net Periodic Benefit Cost |
|
$ |
829 |
|
|
$ |
884 |
|
|
$ |
2,546 |
|
|
$ |
2,805 |
|
|
21
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 5
Defined Benefit Pension Plans and Other Benefit Plans, Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Benefits |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
October 28, |
|
|
October 29, |
|
|
October 28, |
|
|
October 29, |
|
In thousands |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Service cost |
|
$ |
54 |
|
|
$ |
37 |
|
|
$ |
162 |
|
|
$ |
111 |
|
Interest cost |
|
|
50 |
|
|
|
44 |
|
|
|
150 |
|
|
|
132 |
|
Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses |
|
|
22 |
|
|
|
14 |
|
|
|
66 |
|
|
|
42 |
|
|
Net amortization |
|
|
22 |
|
|
|
14 |
|
|
|
66 |
|
|
|
42 |
|
|
Net Periodic Benefit Cost |
|
$ |
126 |
|
|
$ |
95 |
|
|
$ |
378 |
|
|
$ |
285 |
|
|
While there was no cash requirement projected for the plan in 2006, the Company made a $4.0
million contribution to the plan in March 2006.
22
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 6
Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Three Months Ended |
|
|
|
October 28, 2006 |
|
|
October 29, 2005 |
|
(In thousands, except |
|
Income |
|
|
Shares |
|
|
Per-Share |
|
|
Income |
|
|
Shares |
|
|
Per-Share |
|
per share amounts) |
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
|
Earnings from continuing operations |
|
$ |
15,975 |
|
|
|
|
|
|
|
|
|
|
$ |
16,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends |
|
|
(64 |
) |
|
|
|
|
|
|
|
|
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common shareholders |
|
|
15,911 |
|
|
|
22,284 |
|
|
$ |
.71 |
|
|
|
16,171 |
|
|
|
22,797 |
|
|
$ |
.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
|
|
|
|
315 |
|
|
|
|
|
|
|
|
|
|
|
521 |
|
|
|
|
|
Convertible preferred stock(1) |
|
|
42 |
|
|
|
67 |
|
|
|
|
|
|
|
42 |
|
|
|
67 |
|
|
|
|
|
4 1/8% Convertible Subordinated Debentures |
|
|
604 |
|
|
|
3,899 |
|
|
|
|
|
|
|
617 |
|
|
|
3,899 |
|
|
|
|
|
Employees preferred stock(2) |
|
|
|
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common
shareholders plus assumed
conversions |
|
$ |
16,557 |
|
|
|
26,624 |
|
|
$ |
.62 |
|
|
$ |
16,830 |
|
|
|
27,346 |
|
|
$ |
.62 |
|
|
|
|
|
(1) |
|
The amount of the dividends on the Series 1 and 3 convertible preferred stock per common
share obtainable on conversion of the convertible preferred stock is less than basic
earnings per share for all periods presented. Therefore, conversion of these preferred
shares was included in diluted earnings per share. The amount of the dividend on the
Series 4 convertible preferred stock per common share obtainable on conversion of the
convertible preferred stock is higher than basic earnings per share for all periods
presented. Therefore, conversion of the Series 4 preferred stock is not reflected in
diluted earnings per share, because it would have been antidilutive. The shares
convertible to common stock for Series 4 preferred stock would have been 13,960. |
|
(2) |
|
The Companys Employees Subordinated Convertible Preferred Stock is convertible one for
one to the Companys common stock. Because there are no dividends paid on this stock,
these shares are assumed to be converted. |
23
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 6
Earnings Per Share, Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended |
|
|
For the Nine Months Ended |
|
|
|
October 28, 2006 |
|
|
October 29, 2005 |
|
(In thousands, except |
|
Income |
|
|
Shares |
|
|
Per-Share |
|
|
Income |
|
|
Shares |
|
|
Per-Share |
|
per share amounts) |
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
|
Earnings from continuing operations |
|
$ |
32,585 |
|
|
|
|
|
|
|
|
|
|
$ |
31,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends |
|
|
(192 |
) |
|
|
|
|
|
|
|
|
|
|
(209 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
common shareholders |
|
|
32,393 |
|
|
|
22,771 |
|
|
$ |
1.42 |
|
|
|
31,221 |
|
|
|
22,675 |
|
|
$ |
1.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
|
|
|
|
381 |
|
|
|
|
|
|
|
|
|
|
|
469 |
|
|
|
|
|
Convertible preferred stock(1) |
|
|
-0- |
|
|
|
-0- |
|
|
|
|
|
|
|
-0- |
|
|
|
-0- |
|
|
|
|
|
4 1/8% Convertible Subordinated Debentures |
|
|
1,811 |
|
|
|
3,899 |
|
|
|
|
|
|
|
1,850 |
|
|
|
3,899 |
|
|
|
|
|
Employees preferred stock(2) |
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common
shareholders plus assumed
conversions |
|
$ |
34,204 |
|
|
|
27,111 |
|
|
$ |
1.26 |
|
|
$ |
33,071 |
|
|
|
27,106 |
|
|
$ |
1.22 |
|
|
|
|
|
(1) |
|
The amount of the dividend on the convertible preferred stock per common share obtainable
on conversion of the convertible preferred stock is higher than basic earnings per share
for all periods presented. Therefore, conversion of the convertible preferred stock is not
reflected in diluted earnings per share, because it would have been antidilutive. The
shares convertible to common stock for Series 1, 3 and 4 preferred stock would have been
29,917, 37,263 and 13,960, respectively. |
|
(2) |
|
The Companys Employees Subordinated Convertible Preferred Stock is convertible one for
one to the Companys common stock. Because there are no dividends paid on this stock,
these shares are assumed to be converted. |
The weighted shares outstanding reflects the effect of stock buy back programs. In a
series of authorizations from Fiscal 1999-2003, the Companys board of directors authorized the
repurchase of up to 7.5 million shares. In June 2006, the board authorized an additional $20.0
million in stock repurchases. In August 2006, the board authorized an additional $30.0 million
in stock repurchases. The Company repurchased 629,400 shares at a cost of $18.5 million in the
third quarter ended October 28, 2006. Of the $18.5 million repurchased during the third
quarter this year, $0.2 million was not paid in the quarter but included in other accrued
liabilities in the Condensed Consolidated Balance Sheet. For the nine months ended October 28,
2006, the Company has repurchased 1,062,400 shares at a cost of $32.1 million. In total, the
Company has repurchased 8.2 million shares at a cost of $103.4 million from all authorizations
as of October 28, 2006.
24
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 7
Share-Based Compensation Plans
The Companys stock-based compensation plans, as of October 28, 2006, are described below. Prior
to January 29, 2006, the Company accounted for these plans under the recognition and measurement
provisions of APB No. 25, Accounting for Stock Issued to Employees, and related interpretations,
as permitted by SFAS No. 123.
Effective January 29, 2006, the Company adopted SFAS No. 123(R), using the modified prospective
transition method. Under the modified prospective transition method, compensation cost recognized
for the three months and nine months ended October 28, 2006 includes (i) compensation cost for all
share-based payments granted prior to, but not yet vested as of January 29, 2006, based on the
grant date fair value estimated in accordance with the provisions of SFAS No. 123; and (ii)
compensation cost for all share-based payments granted on or after January 29, 2006, based on the
grant date fair value estimated in accordance with SFAS No. 123(R). In accordance with the modified
prospective method, the Company has not restated prior period results.
Stock Incentive Plans
The Company has two fixed stock incentive plans. Under the 2005 Equity Incentive Plan (the 2005
Plan), effective as of June 23, 2005, the Company may grant options, restricted shares and other
stock-based awards to its management personnel as well as directors for up to 1.0 million shares of
common stock. Under the 1996 Stock Incentive Plan (the 1996 Plan), the Company could grant
options to its officers and other key employees of and consultants to the Company as well as
directors for up to 4.4 million shares of common stock. There will be no future awards under the
1996 Stock Incentive Plan. Under both plans, the exercise price of each option equals the market
price of the Companys stock on the date of grant and an options maximum term is 10 years.
Options granted under both plans vest 25% at the end of each year.
For the three months and nine months ended October 28, 2006, the Company recognized share-based
compensation cost of $1.1 million and $3.2 million, respectively, for its fixed stock incentive
plans included in selling and administrative expenses in the accompanying Condensed Consolidated
Statements of Earnings. The Company also recognized a total income tax benefit for share-based
compensation arrangements of $0.3 million and $0.5 million for the three months and nine months
ended October 28, 2006, respectively. The Company did not capitalize any share-based compensation
cost.
As a result of adopting SFAS No. 123(R), earnings before income taxes from continuing operations,
earnings from continuing operations and net earnings for the three months and nine months ended
October 28, 2006 were $1.1 million, $0.7 million, $0.7 million, $3.2 million, $2.7 million and $2.7
million lower, respectively, than if the Company had continued to account for share-based
compensation under APB No. 25. The effect of adopting SFAS No. 123(R) on basic and diluted
earnings per common share for the three months and nine months ended October 28, 2006 was $0.03,
$0.03, $0.12 and $0.10, respectively.
25
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 7
Share-Based Compensation Plans, Continued
The following table illustrates the effect on net earnings per common share as if the Company had
applied the fair value recognition provisions of SFAS No. 123 for the three months and nine months
ended October 29, 2005:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
(In thousands, except per share amounts) |
|
October 29, 2005 |
|
|
October 29, 2005 |
|
Net earnings, as reported |
|
$ |
16,143 |
|
|
$ |
31,400 |
|
Add: stock-based employee compensation expense
included in reported net earnings, net of related tax effects |
|
|
73 |
|
|
|
229 |
|
Deduct: total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects |
|
|
(778 |
) |
|
|
(2,257 |
) |
|
|
|
|
|
|
|
Pro forma net earnings |
|
$ |
15,438 |
|
|
$ |
29,372 |
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
.71 |
|
|
$ |
1.38 |
|
|
|
|
|
|
|
|
Basic pro forma |
|
$ |
.67 |
|
|
$ |
1.29 |
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
.61 |
|
|
$ |
1.22 |
|
|
|
|
|
|
|
|
Diluted pro forma |
|
$ |
.59 |
|
|
$ |
1.14 |
|
|
|
|
|
|
|
|
Prior to adopting SFAS No. 123(R), the Company presented the tax benefit of stock option exercises
as operating cash flows. SFAS No. 123(R) requires that the cash flows resulting from tax benefits
for tax deductions in excess of the compensation cost recognized for those options (excess tax
benefit) be classified as financing cash flows. Accordingly, the Company classified excess tax
benefits of $0.3 million and $0.5 million as financing cash inflows rather than as operating cash
inflows on its Condensed Consolidated Statement of Cash Flows for the three months and nine months
ended October 28, 2006.
SFAS No. 123(R) also requires companies to calculate an initial pool of excess tax benefits
available at the adoption date to absorb any unused deferred tax assets that may be recognized
under SFAS No. 123(R). The Company has elected to calculate the pool of excess tax benefits under
the alternative transition method described in FASB Staff Position (FSP) No. 123(R)-3,
Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards, which
also specifies the method the Company must use to calculate excess tax benefits reported on the
Condensed Consolidated Statements of Cash Flows.
26
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 7
Share-Based Compensation Plans, Continued
The Company granted 109,681 shares of fixed stock options for the three months and nine months
ended October 28, 2006 and 78,595 shares of fixed stock options for the three months and nine
months ended October 29, 2005. For the third quarter ended October 28, 2006, the Company estimated
the fair value of each option award on the date of grant using a Black-Scholes option pricing
model. The Company based expected volatility on historical term structures. The Company based the
risk free rate on an interest rate for a bond with a maturity commensurate with the expected term
estimate. The Company estimated the expected term of stock options using historical exercise and
employee termination experience. The Company does not currently pay a dividend. The following
table shows the weighted average assumptions used to develop the fair value estimates for the third
quarter ended October 28, 2006:
|
|
|
|
|
|
|
October 28, 2006 |
Volatility |
|
|
42.5 |
% |
Risk Free Rate |
|
|
4.6 |
% |
Expected Term (years) |
|
|
4.9 |
|
Dividend yields |
|
|
0.0 |
% |
A summary of fixed stock option activity and changes since the Companys most recent fiscal
year-end is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
Aggregate Intrinsic |
|
|
|
|
|
|
Weighted-Average |
|
Remaining |
|
Value (in |
|
|
Shares |
|
Exercise Price |
|
Contractual Term |
|
thousands) (1) |
Outstanding at January 28, 2006 |
|
|
1,464,486 |
|
|
$ |
20.84 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
109,681 |
|
|
|
38.14 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(88,648 |
) |
|
|
18.34 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(50,909 |
) |
|
|
23.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, October 28, 2006 |
|
|
1,434,610 |
|
|
$ |
22.23 |
|
|
|
6.98 |
|
|
$ |
22,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, October 28, 2006 |
|
|
820,740 |
|
|
$ |
19.52 |
|
|
|
6.24 |
|
|
$ |
15,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based upon the difference between the closing market price of the Companys common stock
on the last trading day of the quarter and the grant price of in-the-money options. |
The total intrinsic value, which represents the difference between the underlying stocks market
price and the options exercise price, of options exercised during the three months and nine months
ended October 28, 2006 and October 29, 2005 was $1.0 million, $2.4 million, $1.5 million and $6.5
million, respectively.
27
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 7
Share-Based Compensation Plans, Continued
A summary of the status of the Companys nonvested shares of its fixed stock incentive plans as of
October 28, 2006, are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Grant-Date |
Nonvested Shares |
|
Shares |
|
Fair Value |
Nonvested at January 28, 2006 |
|
|
806,848 |
|
|
$ |
13.11 |
|
Granted |
|
|
109,681 |
|
|
|
16.44 |
|
Vested |
|
|
(251,750 |
) |
|
|
13.07 |
|
Forfeited |
|
|
(50,909 |
) |
|
|
13.58 |
|
|
|
|
|
|
|
|
|
|
Nonvested at October 28, 2006 |
|
|
613,870 |
|
|
|
13.69 |
|
|
|
|
|
|
|
|
|
|
As of October 28, 2006, there were $7.0 million of total unrecognized compensation costs related to
nonvested share-based compensation arrangements granted under the stock incentive plans discussed
above. That cost is expected to be recognized over a weighted average period of 2.35 years.
Cash received from option exercises under all share-based payment arrangements for the three months
and nine months ended October 28, 2006 and October 29, 2005 was $1.0 million, $1.1 million, $1.6
million and $5.1 million, respectively. The actual tax benefit realized for the tax deductions from
option exercise of the share-based payment arrangements totaled $0.3 million, $0.8 million, $0.5
million and $2.3 million for the three months and nine months ended October 28, 2006 and October
29, 2005, respectively.
Restricted Stock Incentive Plans
The 1996 Plan provided for an automatic grant of restricted stock to non-employee directors on the
date of the annual meeting of shareholders at which an outside director is first elected. The
outside director restricted stock so granted was to vest with respect to one-third of the shares
each year as long as the director is still serving as a director. Once the shares have vested, the
director is restricted from selling, transferring, pledging or assigning the shares for an
additional two years. The 2005 Plan includes no automatic grant provisions, but permits the board
of directors to make awards to non-employee directors. The board granted restricted stock pursuant
to the terms of the 2005 Plan to two new non-employee directors in Fiscal 2006 on substantially the
same terms as the automatic awards under the 1996 Plan, except that transfer restrictions are to
lapse after three years.
28
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 7
Share-Based Compensation Plans, Continued
In addition, under the 1996 Plan an outside director could elect irrevocably to receive all or a
specified portion of his annual retainers for board membership and any committee chairmanship for
the following fiscal year in a number of shares of restricted stock (the Retainer Stock). Shares
of the Retainer Stock were granted as of the first business day of the fiscal year as to which the
election is effective, subject to forfeiture to the extent not earned upon the outside directors
ceasing to serve as a director or committee chairman during such fiscal year. Once the shares were
earned, the director was restricted from selling, transferring, pledging or assigning the shares
for an additional four years. Under the 2005 Plan, Retainer Stock awards were made during Fiscal
2006 on substantially the same terms as the grants under the 1996 Plan, except that transfer
restrictions are to lapse three years from the date of grant. For the nine months ended October
28, 2006 and October 29, 2005, the Company issued 3,022 shares and 2,465 shares, respectively, of
Retainer Stock. There were no shares issued for the three months ended October 28, 2006 or October
29, 2005.
Also pursuant to the 1996 Plan, annually on the date of the annual meeting of shareholders,
beginning in Fiscal 2004, each outside director received restricted stock valued at $44,000 based
on the average of stock prices for the first five days in the month of the annual meeting of
shareholders. For Fiscal 2007, each outside director received restricted stock pursuant to the
terms of the 2005 Plan valued at $60,000 based on the average of stock prices for the first five
days in the month of the annual meeting of shareholders. The outside director restricted stock
vests with respect to one-third of the shares each year as long as the director is still serving as
a director. Once the shares vest, the director is restricted from selling, transferring, pledging
or assigning the shares for an additional two years. For the nine months ended October 28, 2006
and October 29, 2005, the Company issued 16,400 shares and 8,855 shares, respectively, of director
restricted stock. There were no shares issued for the three months ended October 28, 2006 or
October 29, 2005.
For the three months and nine months ended October 28, 2006 and October 29, 2005, the Company
recognized $0.2 million, $0.1 million, $0.4 million and $0.3 million, respectively, of director
restricted stock related share-based compensation in selling and administrative expenses in the
accompanying Condensed Consolidated Statements of Earnings.
On April 24, 2002, the Company issued 36,764 shares of restricted stock to the President and CEO of
the Company under the 1996 Plan. Pursuant to the terms of the grant, these shares vested on April
23, 2005, provided that on such date the grantee remained continuously employed by the Company
since the date of the agreement. Compensation cost recognized in selling and administrative
expenses in the accompanying Condensed Consolidated Statements of Earnings for these shares was
$0.1 million for the nine months ended October 29, 2005. The 36,764 shares were issued in April
2005.
29
Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note 7
Share-Based Compensation Plans, Continued
Under the 2005 Plan, the Company issued 165,334 shares of restricted stock in the three months
ended October 28, 2006. These shares vest 25% per year over four years, provided that on such date
the grantee has remained continuously employed by the Company since the date of grant. The Company
issued 228,594 shares of restricted stock in the three months ended October 29, 2005. There were
4,011 shares forfeited in the nine months ended October 28, 2006 related to the restricted stock
issued in Fiscal 2006. Of the 224,583 restricted shares issued in Fiscal 2006, 106,445 shares vest
at the end of three years and 118,138 shares vest 25% per year over four years, provided that on
such date the grantee has remained continuously employed by the Company since the date of grant.
During the three months ended October 28, 2006, 28,656 shares of restricted stock issued in Fiscal
2006 vested which includes 7,704 shares withheld to satisfy the minimum withholding requirement for
federal taxes. The fair value of restricted stock is charged against income as compensation cost
over the vesting period. Compensation cost recognized in selling and administrative expenses in
the accompanying Condensed Consolidated Statements of Earnings for these shares was $0.6 million,
$0.0, $1.8 million and $0.0 million for the three months and nine months ended October 28, 2006 and
October 29, 2005, respectively.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan, the Company is authorized to issue up to 1.0 million shares
of common stock to qualifying full-time employees whose total annual base salary is less than
$90,000, effective October 1, 2002. Prior to October 1, 2002, the total annual base salary was
limited to $100,000. Under the terms of the Plan, employees could choose each year to have up to
15% of their annual base earnings or $8,500, whichever is lower, withheld to purchase the Companys
common stock. The purchase price of the stock was 85% of the closing market price of the stock on
either the exercise date or the grant date, whichever was less. The Companys board of directors
amended the Companys Employee Stock Purchase Plan effective October 1, 2005 to provide that
participants may acquire shares under the Plan at a 5% discount from fair market value on the last
day of the Plan year. Under SFAS No. 123(R), shares issued under the Plan as amended are
non-compensatory. Under the Plan, the Company sold 9,787 shares and 24,978 shares to employees for
the three months ended October 28, 2006 and October 29, 2005, respectively.
30
|
|
|
|
|
Genesco Inc. |
|
|
and Subsidiaries |
|
|
Notes to Condensed Consolidated Financial Statements |
Note 8
Legal Proceedings
Environmental Matters
New York State Environmental Matters
In August 1997, the New York State Department of Environmental Conservation (the Department) and
the Company entered into a consent order whereby the Company assumed responsibility for conducting
a remedial investigation and feasibility study (RIFS) and implementing an interim remediation
measure (IRM) with regard to the site of a knitting mill operated by a former subsidiary of the
Company from 1965 to 1969. The Company undertook the IRM and RIFS voluntarily, without admitting
liability or accepting responsibility for any future remediation of the site. The Company
estimates that the cost of conducting the RIFS and implementing the IRM will be in the range of
$6.6 million to $6.8 million, net of insurance recoveries, $3.7 million of which the Company has
already paid. In the course of preparing the RIFS, the Company has identified remedial
alternatives with estimated undiscounted costs ranging from $-0- to $24.0 million, excluding
amounts previously expended or provided for by the Company, as described in this footnote.
The Company has not ascertained what responsibility, if any, it has for any contamination in
connection with the facility or what other parties may be liable in that connection and is unable
to predict the extent of its liability, if any, beyond that voluntarily assumed by the consent
order. The Companys voluntary assumption of certain responsibility to date was based upon its
judgment that such action was preferable to litigation to determine its liability, if any, for
contamination related to the site. The Company intends to continue to evaluate the costs of
further voluntary remediation versus the costs and uncertainty of litigation.
As part of its analysis of whether to undertake further voluntary action, the Company has assessed
various methods of preventing potential future impact of contamination from the site on two public
wells that are in the expected future path of the groundwater plume from the site. The Village of
Garden City has proposed the installation at the supply wells of enhanced treatment measures at an
estimated cost of approximately $2.6 million, with estimated future costs of up to $2.0 million.
In the third quarter of Fiscal 2005, the Company provided for the estimated cost of a remedial
alternative it considers adequate to prevent such impact and which it would be willing to implement
voluntarily. The Village of Garden City has also asserted that the Company is liable for
historical costs of treatment at the wells totaling approximately $3.4 million. Because of
evidence with regard to when contaminants from the site of the Companys former operations first
reached the wells, the Company believes it should have no liability with respect to such historical
costs.
31
|
|
|
|
|
Genesco Inc. |
|
|
and Subsidiaries |
|
|
Notes to Condensed Consolidated Financial Statements |
Note 8
Legal Proceedings, Continued
In December 2005, the U.S. Environmental Protection Agency (EPA) notified the Company that it
considers the Company a potentially responsible party (PRP) with respect to contamination at two
Superfund sites in New York State. The sites were used as landfills for process wastes generated
by a glue manufacturer, which acquired tannery wastes from several tanners, allegedly including the
Companys Whitehall tannery, for use as raw materials in the gluemaking process. The Company has
no records indicating that it ever provided raw materials to the gluemaking operation and has not
been able to establish whether EPAs substantive allegations are accurate. The Company has joined
a joint defense group with other tannery PRPs with respect to one of the two sites. The joint
defense group has developed an estimated cost of remediation for the site and proposed an
allocation of liabilities among the PRPs that, if accepted, is estimated to result in liability to
the Company of approximately $100,000 with respect to the site. There is no assurance that the
proposed allocation will be accepted or that the actual cost of remediation will not exceed the
estimate. Additionally, the Company presently cannot estimate its liability, if any, with respect
to the second site associated with the glue manufacturers waste disposal.
Whitehall Environmental Matters
The Company has performed sampling and analysis of soil, sediments, surface water, groundwater and
waste management areas at the Companys former Volunteer Leather Company facility in Whitehall,
Michigan.
The Company has submitted to the Michigan Department of Environmental Quality (MDEQ) and provided
for certain costs associated with a remedial action plan (the Plan) designed to bring the
property into compliance with regulatory standards for non-industrial uses. The Company estimates
that the costs of resolving environmental contingencies related to the Whitehall property range
from $1.3 million to $5.6 million, and considers the cost of implementing the Plan to be the most
likely cost within that range. While management believes that the Plan should be sufficient to
satisfy applicable regulatory standards with respect to the site, until the Plan is finally
approved by MDEQ, management cannot provide assurances that no further remediation will be required
or that its estimate of the range of possible costs or of the most likely cost of remediation will
prove accurate.
Accrual for Environmental Contingences
Related to all outstanding environmental contingencies, the Company had accrued $5.7 million as of
October 28, 2006, $5.4 million as of January 28, 2006 and $5.2 million as of October 29, 2005. All
such provisions reflect the Companys estimates of the most likely cost (undiscounted, including
both current and noncurrent portions) of resolving the contingencies, based on facts and
circumstances as of the time they were made. There is no assurance that relevant facts and
circumstances will not change, necessitating future changes to the provisions. Such contingent
liabilities are included in the liability arising from provision for discontinued operations on the
accompanying Condensed Consolidated Balance Sheets.
32
|
|
|
|
|
Genesco Inc. |
|
|
and Subsidiaries |
|
|
Notes to Condensed Consolidated Financial Statements |
Note 8
Legal Proceedings, Continued
Other Matters
Patent Action
In January 2003, the Company was named a defendant in an action filed in the United States District
Court for the Eastern District of Pennsylvania, Schoenhaus, et al. vs. Genesco Inc., et al.,
alleging that certain features of shoes in the Companys Johnston & Murphy line infringe the
plaintiffs patent, misappropriate trade secrets and involve conversion of the plaintiffs
proprietary information and unjust enrichment of the Company. On January 10, 2005, the court
granted summary judgment to the Company on the patent claims, finding that the accused products do
not infringe the plaintiffs patent. The plaintiffs appealed the summary judgment to the U.S.
Court of Appeals for the Federal Circuit, pending which the trial court stayed the remainder of the
case. On March 15, 2006, the Court of Appeals affirmed the summary judgment in the Companys
favor. The trade secrets and other non-patent claims in the action remain unresolved.
California Employment Matters
On October 22, 2004, the Company was named a defendant in a putative class action filed in the
Superior Court of the State of California, Los Angeles, Schreiner vs. Genesco Inc., et al.,
alleging violations of California wages and hours laws, and seeking damages of $40 million plus
punitive damages. On May 4, 2005, the Company and the plaintiffs reached an agreement in principle
to settle the action, subject to court approval and other conditions. In connection with the
proposed settlement, to provide for the settlement payment to the plaintiff class and related
expenses, the Company recognized a charge of $2.6 million before taxes included in Restructuring
and Other, net in the Condensed Consolidated Statements of Earnings for the first three months of
Fiscal 2006. On May 25, 2005, a second putative class action, Drake vs. Genesco Inc., et al.,
making allegations similar to those in the Schreiner complaint on behalf of employees of the
Companys Johnston & Murphy division, was filed by a different plaintiff in the California Superior
Court, Los Angeles. On November 22, 2005, the Schreiner court granted final approval of the
settlement and the Company and the Drake plaintiff reached an agreement on November 17, 2005 to
settle that action. The two matters were resolved more favorably to the Company than originally
expected, as not all members of the plaintiff class in Schreiner submitted claims and because the
court required that plaintiffs counsel bear the administrative expenses of the settlement.
Consequently, the Company recognized income of $0.9 million before tax, reflected in Restructuring
and Other, net, in the Condensed Consolidated Statements of Earnings for the third quarter of
Fiscal 2006.
33
|
|
|
|
|
Genesco Inc. |
|
|
and Subsidiaries |
|
|
Notes to Condensed Consolidated Financial Statements |
Note 8
Legal Proceedings, Continued
On November 4, 2005, a former employee gave notice to the California Labor Work Force Development
Agency (LWDA) of a claim against Genesco for allegedly failing to provide a payroll check that is
negotiable and payable in cash, on demand, without discount, at an established place of business in
California, as required by the California Labor Code. LWDA is investigating the claim. On May 18,
2006, the same claimant filed a putative class, representative and private attorney general action
alleging the same violations of the Labor Code in the Superior Court of California, Alameda County,
seeking statutory penalties, damages, restitution, and injunctive relief. The Company disputes the
material allegations of the complaint and intends to defend the matter vigorously.
34
|
|
|
|
|
Genesco Inc. |
|
|
and Subsidiaries |
|
|
Notes to Condensed Consolidated Financial Statements |
Note 9
Business Segment Information
The Company operates five reportable business segments (not including corporate): Journeys Group,
comprised of the Journeys, Journeys Kidz and Shi by Journeys retail footwear chains, catalog and
e-commerce operations; Underground Station Group, comprised of the Underground Station and Jarman
retail footwear chains; Hat World Group, comprised of the Hat World, Lids, Hat Zone, Cap
Connection, Lids Kids and Head Quarters retail headwear chains and e-commerce operations; Johnston
& Murphy Group, comprised of Johnston & Murphy retail operations, catalog and e-commerce operations
and wholesale distribution; and Licensed Brands, comprised primarily of Dockers®
Footwear.
The accounting policies of the segments are the same as those described in the summary of
significant accounting policies.
The Companys reportable segments are based on the way management organizes the segments in order
to make operating decisions and assess performance along types of products sold. Journeys Group,
Underground Station Group and Hat World Group sell primarily branded products from other companies
while Johnston & Murphy Group and Licensed Brands sell primarily the Companys owned and licensed
brands.
Corporate assets include cash, deferred income taxes, deferred note expense and corporate fixed
assets. The Company charges allocated retail costs of distribution to each segment and unallocated
retail costs of distribution to the corporate segment. The Company does not allocate certain costs
to each segment in order to make decisions and assess performance. These costs include corporate
overhead, stock compensation, interest expense, interest income, restructuring charges and other,
including severance and litigation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
Underground |
|
|
|
|
|
|
Johnston |
|
|
|
|
|
|
|
|
|
|
October 28, 2006 |
|
Journeys |
|
|
Station |
|
|
Hat World |
|
|
& Murphy |
|
|
Licensed |
|
|
Corporate |
|
|
|
|
In thousands |
|
Group |
|
|
Group |
|
|
Group |
|
|
Group |
|
|
Brands |
|
|
& Other |
|
|
Consolidated |
|
|
Sales |
|
$ |
184,391 |
|
|
$ |
34,981 |
|
|
$ |
77,503 |
|
|
$ |
44,467 |
|
|
$ |
22,905 |
|
|
$ |
112 |
|
|
$ |
364,359 |
|
Intercompany sales |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(61 |
) |
|
|
-0- |
|
|
|
(61 |
) |
|
Net sales to external customers |
|
$ |
184,391 |
|
|
$ |
34,981 |
|
|
$ |
77,503 |
|
|
$ |
44,467 |
|
|
$ |
22,844 |
|
|
$ |
112 |
|
|
$ |
364,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss) |
|
$ |
25,260 |
|
|
$ |
(631 |
) |
|
$ |
7,710 |
|
|
$ |
3,193 |
|
|
$ |
2,326 |
|
|
$ |
(7,396 |
) |
|
$ |
30,462 |
|
Restructuring and other |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(1,083 |
) |
|
|
(1,083 |
) |
|
Earnings (loss) from operations |
|
|
25,260 |
|
|
|
(631 |
) |
|
|
7,710 |
|
|
|
3,193 |
|
|
|
2,326 |
|
|
|
(8,479 |
) |
|
|
29,379 |
|
Interest expense |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(2,964 |
) |
|
|
(2,964 |
) |
Interest income |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
16 |
|
|
|
16 |
|
|
Earnings (loss) before income taxes
from continuing operations |
|
$ |
25,260 |
|
|
$ |
(631 |
) |
|
$ |
7,710 |
|
|
$ |
3,193 |
|
|
$ |
2,326 |
|
|
$ |
(11,427 |
) |
|
$ |
26,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
243,565 |
|
|
$ |
68,806 |
|
|
$ |
287,191 |
|
|
$ |
68,997 |
|
|
$ |
27,118 |
|
|
$ |
96,878 |
|
|
$ |
792,555 |
|
Depreciation |
|
|
4,133 |
|
|
|
1,160 |
|
|
|
2,640 |
|
|
|
730 |
|
|
|
16 |
|
|
|
1,433 |
|
|
|
10,112 |
|
Capital expenditures |
|
|
9,549 |
|
|
|
1,057 |
|
|
|
6,953 |
|
|
|
2,556 |
|
|
|
12 |
|
|
|
1,019 |
|
|
|
21,146 |
|
35
|
|
|
|
|
Genesco Inc. |
|
|
and Subsidiaries |
|
|
Notes to Condensed Consolidated Financial Statements |
Note 9
Business Segment Information, Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
Underground |
|
|
|
|
|
|
Johnston |
|
|
|
|
|
|
|
|
|
|
October 29, 2005 |
|
Journeys |
|
|
Station |
|
|
Hat World |
|
|
& Murphy |
|
|
Licensed |
|
|
Corporate |
|
|
|
|
In thousands |
|
Group |
|
|
Group |
|
|
Group |
|
|
Group |
|
|
Brands |
|
|
& Other |
|
|
Consolidated |
|
|
Sales |
|
$ |
153,109 |
|
|
$ |
38,395 |
|
|
$ |
68,330 |
|
|
$ |
38,981 |
|
|
$ |
17,548 |
|
|
$ |
64 |
|
|
$ |
316,427 |
|
Intercompany sales |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(91 |
) |
|
|
-0- |
|
|
|
(91 |
) |
|
Net sales to external customers |
|
$ |
153,109 |
|
|
$ |
38,395 |
|
|
$ |
68,330 |
|
|
$ |
38,981 |
|
|
$ |
17,457 |
|
|
$ |
64 |
|
|
$ |
316,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss) |
|
$ |
21,551 |
|
|
$ |
1,965 |
|
|
$ |
7,615 |
|
|
$ |
1,404 |
|
|
$ |
1,781 |
|
|
$ |
(6,030 |
) |
|
$ |
28,286 |
|
Restructuring and other |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
789 |
|
|
|
789 |
|
|
Earnings (loss) from operations |
|
|
21,551 |
|
|
|
1,965 |
|
|
|
7,615 |
|
|
|
1,404 |
|
|
|
1,781 |
|
|
|
(5,241 |
) |
|
|
29,075 |
|
Interest expense |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(2,871 |
) |
|
|
(2,871 |
) |
Interest income |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
202 |
|
|
|
202 |
|
|
Earnings (loss) before income taxes
from continuing operations |
|
$ |
21,551 |
|
|
$ |
1,965 |
|
|
$ |
7,615 |
|
|
$ |
1,404 |
|
|
$ |
1,781 |
|
|
$ |
(7,910 |
) |
|
$ |
26,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
202,105 |
|
|
$ |
65,897 |
|
|
$ |
258,002 |
|
|
$ |
63,123 |
|
|
$ |
20,934 |
|
|
$ |
105,644 |
|
|
$ |
715,705 |
|
Depreciation |
|
|
3,289 |
|
|
|
1,078 |
|
|
|
2,348 |
|
|
|
713 |
|
|
|
12 |
|
|
|
1,303 |
|
|
|
8,743 |
|
Capital expenditures |
|
|
7,756 |
|
|
|
2,998 |
|
|
|
6,215 |
|
|
|
602 |
|
|
|
17 |
|
|
|
452 |
|
|
|
18,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
Underground |
|
|
|
|
|
|
Johnston |
|
|
|
|
|
|
|
|
|
|
October 28, 2006 |
|
Journeys |
|
|
Station |
|
|
Hat World |
|
|
& Murphy |
|
|
Licensed |
|
|
Corporate |
|
|
|
|
In thousands |
|
Group |
|
|
Group |
|
|
Group |
|
|
Group |
|
|
Brands |
|
|
& Other |
|
|
Consolidated |
|
|
Sales |
|
$ |
462,560 |
|
|
$ |
105,854 |
|
|
$ |
226,697 |
|
|
$ |
130,414 |
|
|
$ |
58,381 |
|
|
$ |
333 |
|
|
$ |
984,239 |
|
Intercompany sales |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(622 |
) |
|
|
-0- |
|
|
|
(622 |
) |
|
Net sales to external customers |
|
$ |
462,560 |
|
|
$ |
105,854 |
|
|
$ |
226,697 |
|
|
$ |
130,414 |
|
|
$ |
57,759 |
|
|
$ |
333 |
|
|
$ |
983,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss) |
|
$ |
46,346 |
|
|
$ |
27 |
|
|
$ |
22,334 |
|
|
$ |
8,500 |
|
|
$ |
5,390 |
|
|
$ |
(19,861 |
) |
|
$ |
62,736 |
|
Restructuring and other |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(1,672 |
) |
|
|
(1,672 |
) |
|
Earnings (loss) from operations |
|
|
46,346 |
|
|
|
27 |
|
|
|
22,334 |
|
|
|
8,500 |
|
|
|
5,390 |
|
|
|
(21,533 |
) |
|
|
61,064 |
|
Interest expense |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(7,505 |
) |
|
|
(7,505 |
) |
Interest income |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
483 |
|
|
|
483 |
|
|
Earnings (loss) before income taxes
from continuing operations |
|
$ |
46,346 |
|
|
$ |
27 |
|
|
$ |
22,334 |
|
|
$ |
8,500 |
|
|
$ |
5,390 |
|
|
$ |
(28,555 |
) |
|
$ |
54,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
243,565 |
|
|
$ |
68,806 |
|
|
$ |
287,191 |
|
|
$ |
68,997 |
|
|
$ |
27,118 |
|
|
$ |
96,878 |
|
|
$ |
792,555 |
|
Depreciation |
|
|
11,780 |
|
|
|
3,395 |
|
|
|
7,758 |
|
|
|
2,138 |
|
|
|
45 |
|
|
|
4,173 |
|
|
|
29,289 |
|
Capital expenditures |
|
|
25,502 |
|
|
|
3,847 |
|
|
|
19,009 |
|
|
|
5,021 |
|
|
|
39 |
|
|
|
4,141 |
|
|
|
57,559 |
|
36
|
|
|
|
|
Genesco Inc. |
|
|
and Subsidiaries |
|
|
Notes to Condensed Consolidated Financial Statements |
Note 9
Business Segment Information, Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
Underground |
|
|
|
|
|
|
Johnston |
|
|
|
|
|
|
|
|
|
|
October 29, 2005 |
|
Journeys |
|
|
Station |
|
|
Hat World |
|
|
& Murphy |
|
|
Licensed |
|
|
Corporate |
|
|
|
|
In thousands |
|
Group |
|
|
Group |
|
|
Group |
|
|
Group |
|
|
Brands |
|
|
& Other |
|
|
Consolidated |
|
|
Sales |
|
$ |
400,881 |
|
|
$ |
110,417 |
|
|
$ |
199,532 |
|
|
$ |
121,497 |
|
|
$ |
45,417 |
|
|
$ |
197 |
|
|
$ |
877,941 |
|
Intercompany sales |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(352 |
) |
|
|
-0- |
|
|
|
(352 |
) |
|
Net sales to external customers |
|
$ |
400,881 |
|
|
$ |
110,417 |
|
|
$ |
199,532 |
|
|
$ |
121,497 |
|
|
$ |
45,065 |
|
|
$ |
197 |
|
|
$ |
877,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss) |
|
$ |
42,270 |
|
|
$ |
3,900 |
|
|
$ |
22,355 |
|
|
$ |
6,352 |
|
|
$ |
3,545 |
|
|
$ |
(16,829 |
) |
|
$ |
61,593 |
|
Restructuring and other |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(2,255 |
) |
|
|
(2,255 |
) |
|
Earnings (loss) from operations |
|
|
42,270 |
|
|
|
3,900 |
|
|
|
22,355 |
|
|
|
6,352 |
|
|
|
3,545 |
|
|
|
(19,084 |
) |
|
|
59,338 |
|
Interest expense |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
(8,748 |
) |
|
|
(8,748 |
) |
Interest income |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
807 |
|
|
|
807 |
|
|
Earnings (loss) before income taxes
from continuing operations |
|
$ |
42,270 |
|
|
$ |
3,900 |
|
|
$ |
22,355 |
|
|
$ |
6,352 |
|
|
$ |
3,545 |
|
|
$ |
(27,025 |
) |
|
$ |
51,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
202,105 |
|
|
$ |
65,897 |
|
|
$ |
258,002 |
|
|
$ |
63,123 |
|
|
$ |
20,934 |
|
|
$ |
105,644 |
|
|
$ |
715,705 |
|
Depreciation |
|
|
9,753 |
|
|
|
3,009 |
|
|
|
6,721 |
|
|
|
2,131 |
|
|
|
34 |
|
|
|
3,982 |
|
|
|
25,630 |
|
Capital expenditures |
|
|
16,163 |
|
|
|
5,515 |
|
|
|
16,331 |
|
|
|
1,807 |
|
|
|
89 |
|
|
|
1,279 |
|
|
|
41,184 |
|
Note 10
Subsequent Event
On December 1, 2006, the Company entered into an Amended and Restated Credit Agreement (the Credit
Facility) by and among the Company, certain subsidiaries of the Company party thereto, as other
borrowers, the lenders party thereto and Bank of America, N.A., as administrative agent. The
Credit Facility effectively replaces the Companys current $105.0 million revolving credit
facility.
The material terms of the Credit Facility are as follows:
Availability
The Credit Facility is a revolving credit facility in the aggregate principal amount of $200.0
million, with a $20 million swingline loan sublimit and a $70.0 million sublimit for the issuance
of standby letters of credit, and has a five-year term. Any swingline loans and letters of credit
will reduce the availability under the Credit Facility on a dollar-for-dollar basis. In addition,
the Company has an option to increase the availability under the Credit Facility by up to $100.0
million (in increments no less than $25.0 million) subject to, among other things, the receipt of
commitments for the increased amount. The aggregate amount of the loans made and letters of credit
issued under the Restated Credit Agreement shall at no time exceed the lesser of the facility
amount ($200 million or, if increased at the Companys option, up to $300 million) or the
Borrowing Base, which generally is based on 85% of eligible inventory plus 85% of eligible
accounts receivable less applicable reserves.
37
|
|
|
|
|
Genesco Inc. |
|
|
and Subsidiaries |
|
|
Notes to Condensed Consolidated Financial Statements |
Note 10
Subsequent Event, Continued
Collateral
The loans and other obligations under the Credit Facility are secured by substantially all of the
presently owned and hereafter acquired non-real estate assets of the Company and certain
subsidiaries of the Company.
Interest and Fees
The Companys borrowings under the Credit Facility bear interest at varying rates that, at the
Companys option, can be based on either:
|
|
a base rate generally defined as the sum of the prime
rate of Bank of America, N.A. and an applicable margin. |
|
|
|
a LIBO rate generally defined as the sum of LIBOR (as
quoted on the British Banking Association Telerate Page 3750)
and an applicable margin. |
The initial applicable margin for base rate loans is 0.00%, and the initial applicable margin for
LIBOR loans is 1.00%. Thereafter, the applicable margin will be subject to adjustment based on
Excess Availability for the prior quarter. The term Excess Availability means, as of any given
date, the excess (if any) of the borrowing base over the outstanding credit extensions under the
Credit Facility.
Interest on the Companys borrowings is payable monthly in arrears for base rate loans and at the
end of each interest rate period (but not less often than quarterly) for LIBOR loans.
The Company is also required to pay a commitment fee on the difference between committed amounts
and the aggregate amount (including the aggregate amount of letters of credit) of the credit
extensions outstanding under the Credit Facility, which initially is 0.25% per annum, subject to
adjustment in the same manner as the applicable margins for interest rates.
Certain Covenants
The Company is not required to comply with any financial covenants unless Adjusted Excess
Availability is less than 10% of the total commitments under the Credit Facility (currently $20.0
million). The term Adjusted Excess Availability means, as of any given date, the excess (if any)
of (a) the lesser of the total commitments under the Credit Facility and the Borrowing Base over
(b) the outstanding credit extensions under the Credit Facility. If and during such time as
Adjusted Excess Availability is less than such amount, the Credit Facility requires the Company to
meet a minimum fixed charge coverage ratio (EBITDA less capital expenditures less cash taxes
divided by cash interest expense and schedule payments of principal indebtedness) of 1.00 to 1.00.
38
|
|
|
|
|
Genesco Inc. |
|
|
and Subsidiaries |
|
|
Notes to Condensed Consolidated Financial Statements |
Note 10
Subsequent Event, Continued
In addition, the Credit Facility contains certain covenants that, among other things, restrict
additional indebtedness, liens and encumbrances, loans and investments, acquisitions, dividends and
other restricted payments, transactions with affiliates, asset dispositions, mergers and
consolidations, prepayments or material amendments of other indebtedness and other matters
customarily restricted in such agreements.
Cash Dominion
The Credit Facility also contains cash dominion provisions that apply in the event that the
Companys Adjusted Excess Availability fails to meet certain thresholds or there is an event of
default under the Credit Facility.
Events of Default
The Credit Facility contains customary events of default, including, without limitation, payment
defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain
other material indebtedness in excess of specified amounts, certain events of bankruptcy and
insolvency, certain ERISA events, judgments in excess of specified amounts and change in control.
Certain of the lenders under the Credit Facility or their affiliates have provided, and may in the
future provide, certain commercial banking, financial advisory, and investment banking services in
the ordinary course of business for the Company, its subsidiaries and certain of its affiliates,
for which they receive customary fees and commissions.
39
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This discussion and the notes to the Condensed Consolidated Financial Statements include certain
forward-looking statements, which include statements regarding our intent, belief or expectations
and all statements other than those made solely with respect to historical fact. Actual results
could differ materially from those reflected by the forward-looking statements in this discussion
and a number of factors may adversely affect the forward looking statements and the Companys
future results, liquidity, capital resources or prospects. These factors (some of which are beyond
the Companys control) include:
|
|
|
Weakness in consumer demand for products sold by the Company. |
|
|
|
|
Fashion trends that affect the sales or product margins of the Companys retail product
offerings. |
|
|
|
|
Changes in the timing of holidays or in the onset of seasonal weather affecting period
to period sales comparisons. |
|
|
|
|
Changes in buying patterns by significant wholesale customers. |
|
|
|
|
Disruptions in product supply or distribution. |
|
|
|
|
Unfavorable trends in foreign exchange rates and other factors affecting the cost of
products. |
|
|
|
|
Changes in business strategies by the Companys competitors (including pricing and
promotional discounts), the entry of additional competitors into the Companys markets, and
other competitive factors. |
|
|
|
|
Effects of any demand-related factors in the Holiday selling season. |
|
|
|
|
The Companys ability to open, staff and support additional retail stores on schedule
and at acceptable sales and expense levels and to renew leases in existing stores on schedule and at
acceptable expense levels. |
|
|
|
|
The Companys ability to identify appropriate growth opportunities, including brand
extensions, new concept launches, and acquisitions, and to execute its growth strategies. |
|
|
|
|
Variations from expected pension-related charges caused by conditions in the financial
markets. |
|
|
|
|
The outcome of litigation and environmental matters involving the Company, including
those discussed in Note 8 to the Condensed Consolidated Financial Statements. |
|
|
|
|
Fluctuations in oil prices causing changes in gasoline and energy prices resulting in
changes in consumer spending and utility and product costs. |
In addition to the risks referenced above, additional risks are highlighted in the Companys Annual
Report on Form 10-K for the year ended January 28, 2006 and this Quarterly Report under the heading
Item 1A. Risk Factors. Forward-looking statements reflect the expectations of the Company at the
time they are made, and investors should rely on them only as expressions of opinion about what may
happen in the future and only at the time they are made. The Company undertakes no obligation to
update any forward-looking statement. Although the Company believes it has an appropriate business
strategy and the resources necessary for its operations, predictions about future revenue and
margin trends are inherently uncertain and the Company may alter its business strategies to address
changing conditions.
40
Overview
Description of Business
The Company is a leading retailer of branded footwear and of licensed and branded headwear,
operating 1,901 retail footwear and headwear stores throughout the United States and Puerto Rico
and 24 headwear stores in Canada as of October 28, 2006. The Company also designs, sources,
markets and distributes footwear under its own Johnston & Murphy brand and under the licensed
Dockers brand to more than 1,000 retail accounts in the United States, including a number of
leading department, discount, and specialty stores.
The Company operates five reportable business segments (not including corporate): Journeys Group,
comprised of the Journeys, Journeys Kidz and Shi by Journeys retail footwear chains, catalog and
e-commerce operations; Underground Station Group, comprised of the Underground Station and Jarman
retail footwear chains; Hat World Group, comprised of the Hat World, Lids, Hat Zone, Cap
Connection, Lids Kids and Head Quarters retail headwear chains and e-commerce operations; Johnston
& Murphy Group, comprised of Johnston & Murphy retail operations, catalog and e-commerce operations
and wholesale distribution; and Licensed Brands, comprised primarily of Dockers®
Footwear.
The Journeys retail footwear stores sell footwear and accessories primarily for 13 to 22 year old
men and women. The stores average approximately 1,775 square feet. The Journeys Kidz retail
footwear stores sell footwear primarily for younger children, ages five to 12. These stores
average approximately 1,400 square feet. Shi by Journeys retail footwear stores, the first of
which opened in November 2005, sell footwear and accessories to fashionable women in their early
20s to mid 30s. These stores average approximately 2,000 square feet.
The Underground Station Group retail footwear stores sell footwear and accessories primarily for
men and women in the 20 to 35 age group. The Underground Station Group stores average
approximately 1,700 square feet. In the fourth quarter of Fiscal 2004, the Company made the
strategic decision to close 34 Jarman stores subject to its ability to negotiate lease
terminations. These stores are not suitable for conversion to Underground Station stores. The
Company intends to convert the remaining Jarman stores to Underground Station stores and close the
remaining Jarman stores not closed in Fiscal 2005 as quickly as it is financially feasible, subject
to landlord approval. During the first nine months of Fiscal 2007, ten Jarman stores were closed
and three Jarman stores were converted to Underground Station stores. During Fiscal 2006, 13
Jarman stores were closed and two Jarman stores were converted to Underground Station stores.
The Hat World, Lids, Hat Zone, Cap Connection, Lids Kids and Head Quarters retail stores sell
licensed and branded headwear to men and women primarily in the mid-teen to mid-20s age group.
These stores average approximately 750 square feet and are located in malls, airports, street level
stores and factory outlet stores throughout the United States and in Canada.
Johnston & Murphy retail shops sell a broad range of mens footwear and accessories. These shops
average approximately 1,350 square feet and are located primarily in better malls nationwide.
Johnston & Murphy shoes are also distributed through the Companys wholesale operations to better
department and independent specialty stores. In addition, the Company sells Johnston & Murphy
footwear and accessories in factory stores located in factory outlet malls. These stores average
approximately 2,400 square feet.
41
The Company entered into an exclusive license with Levi Strauss and Company to market mens
footwear in the United States under the Dockers® brand name in 1991. The Dockers
license agreement was renewed November 1, 2006. The Dockers license agreement, as amended, expires
on December 31, 2009 with a Company option to renew through December 31, 2012, subject to certain
conditions. The Company uses the Dockers name to market casual and dress casual footwear to men
aged 30 to 55 through many of the same national retail chains that carry Dockers slacks and
sportswear and in department and specialty stores across the country.
Strategy
The Companys strategy is to seek long-term, organic growth by: 1) increasing the Companys store
base, 2) increasing retail square footage, 3) improving comparable store sales, 4) increasing
operating margin and 5) enhancing the value of its brands. Our future results are subject to
various risks, uncertainties and other challenges, including those discussed under the caption
Forward Looking Statements, above and those discussed in Item 1A., Risk Factors in the
Companys Annual Report on Form 10-K for the year ended January 28, 2006. Among the most important
of these factors are those related to consumer demand. Conditions in the external economy can
affect demand, resulting in changes in sales and, as prices are adjusted to drive sales and control
inventories, in gross margins. Because fashion trends influencing many of the Companys target
customers (particularly customers of Journeys Group, Underground Station Group and Hat World Group)
can change rapidly, the Company believes that its ability to detect and respond quickly to those
changes has been important to its success. Even when the Company succeeds in aligning its
merchandise offerings with consumer preferences, those preferences may affect results by, for
example, driving sales of products with lower average selling prices. Moreover, economic factors,
such as high fuel prices may reduce the consumers disposable income and reduce demand for the
Companys merchandise, regardless of the Companys skill in detecting and responding to fashion
trends. The Company believes its experience and discipline in merchandising and the buying power
associated with its relative size in the industry are important to its ability to mitigate risks
associated with changing customer preferences and other reductions in consumer demand. Also
important to the Companys long-term prospects are the availability and cost of appropriate
locations for the Companys retail concepts. The Company is opening stores in airports and on
streets in major cities, tourist venues and college campuses, among other locations in an effort to
broaden its selection of locations for additional stores beyond the malls that have traditionally
been the dominant venue for its retail concepts. The Company will also consider acquisitions to
supplement its organic growth.
Summary of Operating Results
The Companys net sales increased 15.2% during the third quarter of Fiscal 2007 compared to the
third quarter of Fiscal 2006. The increase was driven primarily by the addition of new stores, a
4% increase in comparable store sales and a 31% increase in Licensed Brands sales. Gross margin
decreased slightly as a percentage of net sales during the third quarter of Fiscal 2007, primarily
due to decreases related to promotional activity in the Hat World Group and increased markdowns in
the Journeys Group and Underground Station Group businesses. Gross margin as a percentage of net
sales also declined in the Licensed Brands business primarily due to changes in product mix.
Selling and administrative expenses decreased as a percentage of net sales during the third quarter
of Fiscal 2007 due to decreased expenses as a percentage of net sales in Journeys Group, Johnston &
Murphy Group and Licensed Brands businesses. Operating income decreased as a percentage of net
sales during the third quarter of Fiscal 2007 primarily due to decreased operating income in the
Underground Station Group and decreased operating income as a percentage of net sales in the
Journeys and Hat World Group businesses, partially offset by an
increase in operating income in the
42
Johnston & Murphy Group business. Operating margin for
Licensed Brands was flat for the third quarter ended October 28, 2006.
Significant Developments
Amended Revolving Credit Facility
On December 1, 2006, the Company entered into an Amended and Restated Credit Agreement, (the
Credit Facility) by and among the Company, certain subsidiaries of the Company party thereto, as
other borrowers, the lenders party thereto and Bank of America, N.A., as administrative agent. The
Credit Facility effectively replaces the Companys current $105.0 million revolving credit
facility. The Credit Facility is a revolving credit facility in the aggregate principal amount of
$200.0 million, with a $20 million swingline loan sublimit and a $70.0 million sublimit for the
issuance of standby letters of credit, and has a five-year term. The loans and other obligations
under the Credit Facility are secured by substantially all of the presently owned and hereafter
acquired non-real estate assets of the Company and certain subsidiaries of the Company. Borrowings
under the credit facility bear interest at a variable rate determined based upon the level of
availability under the credit facility. If availability falls below specified levels, the Company
would then be subject to certain financial covenants. In addition, if availability falls below $20
million and the fixed charge coverage ratio is less than 1.0 to 1, the Company would be in default.
For additional information, see Note 10 to the Condensed Consolidated Financial Statements.
Restructuring and Other Charges
The Company recorded a pretax charge to earnings of $1.1 million ($0.7 million net of tax) in the
third quarter of Fiscal 2007. The charge was primarily for retail store asset impairments and the
lease termination of one Jarman store. The lease termination was the continuation of a plan
previously announced by the Company in Fiscal 2004.
The Company recorded a pretax charge to earnings of $0.5 million ($0.3 million net of tax) in the
second quarter of Fiscal 2007. The charge was primarily for retail store asset impairments.
The Company recorded a pretax charge to earnings of $0.1 million in the first quarter of Fiscal
2007. The charge was primarily for retail store asset impairments.
The Company recorded a pretax credit to earnings of $0.8 million ($0.5 million net of tax) in the
third quarter of Fiscal 2006. The credit was primarily for the recognition of a gain of $0.9
million associated with the conclusion of the settlement of a California employment class action
more favorably than originally anticipated, when the charge associated with the settlement was
originally taken in the first quarter of Fiscal 2006 (see Note 8), offset by a $0.1 million charge
for retail store asset impairments and lease terminations of four Jarman stores.
The Company recorded a pretax charge to earnings of $0.2 million ($0.1 million net of tax) in the
second quarter of Fiscal 2006. The charge was primarily for retail store asset impairments and
lease terminations of two Jarman stores.
The Company recorded a pretax charge to earnings of $2.9 million ($1.8 million net of tax) in the
first quarter of Fiscal 2006. The charge included $2.6 million for settlement of a California
employment class action (see Note 8), $0.2 million for retail store asset impairments and $0.1
million for lease terminations of two Jarman stores.
43
Results of Operations Third Quarter Fiscal 2007 Compared to Fiscal 2006
The Companys net sales in the third quarter ended October 28, 2006 increased 15.2% to $364.3
million from $316.3 million in the third quarter ended October 29, 2005. Gross margin increased
12.3% to $181.5 million in the third quarter this year from $161.5 million in the same period last
year and decreased slightly as a percentage of net sales from 51.1% to 49.8%. Selling and
administrative expenses in the third quarter this year increased 13.3% from the third quarter last
year but decreased as a percentage of net sales from 42.1% to 41.4%. The Company records buying
and merchandising and occupancy costs in selling and administrative expense. Because the Company
does not include these costs in cost of sales, the Companys gross margin may not be comparable to
other retailers that include these costs in the calculation of gross margin. Explanations of the
changes in results of operations are provided by business segment in discussions following these
introductory paragraphs.
Earnings before income taxes from continuing operations (pretax earnings) of $26.4 million for
the third quarter ended October 28, 2006 were flat compared to the same period last year. Pretax
earnings for the third quarter ended October 28, 2006 included restructuring and other charges of
$1.1 million ($0.7 million net of tax), primarily for retail store asset impairments and the lease
termination of one Jarman store, representing the continuation of a plan previously announced by
the Company in Fiscal 2004 to close or convert the remaining Jarman stores. Pretax earnings for
the third quarter ended October 29, 2005 included a restructuring and other credit of $0.8
million, primarily due to a favorable adjustment to a litigation settlement in the third quarter,
offset by retail store asset impairments and lease terminations of four Jarman stores.
Net earnings for the third quarter ended October 28, 2006 were $15.9 million ($0.62 diluted
earnings per share) compared to $16.1 million ($0.61 diluted earnings per share) for the third
quarter ended October 29, 2005. Net earnings for the third quarter ended October 28, 2006
included a $0.1 million ($0.00 diluted earnings per share) charge to earnings (net of tax)
primarily for additional environmental costs. Net earnings for the third quarter ended October
29, 2005 included a $0.1 million ($0.01 diluted earnings per share) charge to earnings (net of
tax) primarily for additional environmental costs. The Company recorded an effective income tax
rate of 39.6% in the third quarter this year compared to 38.5% in the same period last year.
Journeys Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
October 28, |
|
|
October 29, |
|
|
% |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
(dollars in thousands) |
|
|
|
|
|
Net sales |
|
$ |
184,391 |
|
|
$ |
153,109 |
|
|
|
20.4 |
% |
Operating income |
|
$ |
25,260 |
|
|
$ |
21,551 |
|
|
|
17.2 |
% |
Operating margin |
|
|
13.7 |
% |
|
|
14.1 |
% |
|
|
|
|
Net sales from Journeys Group increased 20.4% for the third quarter ended October 28, 2006
compared to the same period last year. The increase reflects primarily a 14% increase in average
Journeys Group stores operated (i.e., the sum of the number of stores open on the first day of the
fiscal quarter and the last day of each fiscal month during the quarter divided by four) and a 9%
increase in comparable store sales. The comparable sales increase reflected an increase of 18%
in footwear unit comparable sales, offset by a 6% decline in the average price per pair of shoes
44
related to changes in product mix and increased markdowns. Unit sales increased 32% during the
same period. Journeys Group operated 829 stores at the end of the third quarter of Fiscal 2007,
including 68 Journeys Kidz stores and 10 Shi by Journeys stores, compared to 724 stores at the end
of the third quarter last year, including 41 Journeys Kidz stores.
Journeys Group operating income for the third quarter ended October 28, 2006 increased 17.2% to
$25.3 million compared to $21.6 million for the third quarter ended October 29, 2005. The
increase was due to increased net sales and decreased expenses as a percentage of net sales,
reflecting the strong comparable store sales increase of 9%.
Underground Station Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
October 28, |
|
|
October 29, |
|
|
% |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
(dollars in thousands) |
|
|
|
|
|
Net sales |
|
$ |
34,981 |
|
|
$ |
38,395 |
|
|
|
(8.9 |
)% |
Operating income (loss) |
|
$ |
(631 |
) |
|
$ |
1,965 |
|
|
NM |
Operating margin |
|
|
(1.8 |
)% |
|
|
5.1 |
% |
|
|
|
|
Net sales from the Underground Station Group (comprised of Underground Station and Jarman retail
stores) decreased 8.9% for the third quarter ended October 28, 2006 compared to the same period
last year. Sales for Underground Station stores decreased 4% for the third quarter ended October
28, 2006. Sales for Jarman retail stores decreased 30% for the third quarter this year,
reflecting a 32% decrease in the average number of Jarman stores operated related to the Companys
strategy of closing Jarman stores or converting them to Underground Station stores. Comparable
store sales decreased 11% for the Underground Station Group, 11% for Underground Station stores
and 10% for Jarman retail stores. The decrease in comparable store sales was primarily due to
weak demand for athletic shoes and what management believes was overall softness in the urban
market. The average price per pair of shoes for Underground Station Group decreased 6% in the
third quarter of Fiscal 2007, and unit sales decreased 1% during the same period. The average
price per pair of shoes at Underground Station stores decreased 7% in the third quarter of Fiscal
2007, reflecting changes in product mix and increased markdowns, while unit sales increased 7%.
Underground Station Group operated 229 stores at the end of the third quarter of Fiscal 2007,
including 193 Underground Station stores, compared to 230 stores at the end of the third quarter
last year, including 176 Underground Station stores.
Underground Station Group operating loss for the third quarter ended October 28, 2006 was $(0.6)
million compared to operating income of $2.0 million in the third quarter ended October 29, 2005.
The decrease was due to decreased net sales, decreased gross margin as a percentage of net sales,
reflecting changes in product mix and increased markdowns and to increased expenses as a
percentage of net sales due to the negative leverage from the decline in comparable store sales as
store related expenses grew faster than sales.
45
Hat World Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
October 28, |
|
|
October 29, |
|
|
% |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
(dollars in thousands) |
|
|
|
|
|
Net sales |
|
$ |
77,503 |
|
|
$ |
68,330 |
|
|
|
13.4 |
% |
Operating income |
|
$ |
7,710 |
|
|
$ |
7,615 |
|
|
|
1.2 |
% |
Operating margin |
|
|
9.9 |
% |
|
|
11.1 |
% |
|
|
|
|
Net sales from Hat World Group increased 13.4% for the third quarter ended October 28, 2006
compared to the same period last year, reflecting primarily a 15% increase in average stores
operated. Hat World Group comparable store sales decreased 1% for the third quarter ended October
28, 2006. The comparable store sales were impacted by softness in the urban market and softer
sales in NCAA headwear. This was partially offset by strength in core and fashion-oriented Major
League Baseball products, as well as branded action and performance headwear. Hat World Group
operated 718 stores at the end of the third quarter of Fiscal 2007, including 24 stores in Canada
and three Lids Kids, compared to 621 stores at the end of the third quarter last year, including
18 stores in Canada.
Hat World Group operating income for the third quarter ended October 28, 2006 increased 1.2% to
$7.7 million compared to $7.6 million for the third quarter ended October 29, 2005. The increase
in operating income was primarily due to increased net sales offset by decreased gross margin as a
percentage of net sales reflecting increased promotional activity.
Johnston & Murphy Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
October 28, |
|
|
October 29, |
|
|
% |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
(dollars in thousands) |
|
|
|
|
|
Net sales |
|
$ |
44,467 |
|
|
$ |
38,981 |
|
|
|
14.1 |
% |
Operating income |
|
$ |
3,193 |
|
|
$ |
1,404 |
|
|
|
127.4 |
% |
Operating margin |
|
|
7.2 |
% |
|
|
3.6 |
% |
|
|
|
|
Johnston & Murphy Group net sales increased 14.1% to $44.5 million for the third quarter ended
October 28, 2006 from $39.0 million for the third quarter ended October 29, 2005, reflecting
primarily a 6% increase in comparable store sales, a 4% increase in average retail stores operated
and a 25% increase in Johnston & Murphy wholesale sales. Unit sales for the Johnston & Murphy
wholesale business increased 22% in the third quarter of Fiscal 2007 and the average price per
pair of shoes increased 1% for the same period. Retail operations accounted for 70.6% of Johnston
& Murphy Group sales in the third quarter this year, down from 73.1% in the third quarter last
year. The average price per pair of shoes for Johnston & Murphy retail operations decreased 2%
(flat in the Johnston and Murphy shops) in the third quarter this year, primarily due to changes
in product mix, while footwear unit sales increased 9% during the same period. The store count
for Johnston & Murphy retail operations at the end of the third quarter of Fiscal 2007 included
149 Johnston & Murphy shops and factory stores compared to 143 Johnston & Murphy shops and factory
stores at the end of the third quarter of Fiscal 2006.
46
Johnston & Murphy Group operating income for the third quarter ended October 28, 2006 more than
doubled to $3.2 million compared to $1.4 million for the same period last year, primarily due to
increased net sales, increased gross margin as a percentage of net sales, reflecting improvement
in the retail business due to lower markdowns and changes in product mix, and to decreased
expenses as a percentage of net sales reflecting the strong comparable store sales increase and
wholesale sales increase.
Licensed Brands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
October 28, |
|
|
October 29, |
|
|
% |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
(dollars in thousands) |
|
|
|
|
|
Net sales |
|
$ |
22,844 |
|
|
$ |
17,457 |
|
|
|
30.9 |
% |
Operating income |
|
$ |
2,326 |
|
|
$ |
1,781 |
|
|
|
30.6 |
% |
Operating margin |
|
|
10.2 |
% |
|
|
10.2 |
% |
|
|
|
|
Licensed Brands net sales increased 30.9% to $22.8 million for the third quarter ended October
28, 2006, from $17.5 million for the third quarter ended October 29, 2005. The sales increase
reflects the increase in sales of Dockers Footwear, which performed well at retail, combined with
increased shelf space in existing accounts. Unit sales for Dockers Footwear increased 31% for the
third quarter this year while the average price per pair of shoes decreased 2% compared to the
same period last year.
Licensed Brands operating income for the third quarter ended October 28, 2006 increased 30.6%
from $1.8 million for the third quarter ended October 29, 2005 to $2.3 million, primarily due to
increased net sales and to decreased expenses as a percentage of net sales.
Corporate, Interest Expenses and Other Charges
Corporate and other expenses for the third quarter ended October 28, 2006 were $8.5 million
compared to $5.2 million for the third quarter ended October 29, 2005. Corporate expenses in the
third quarter this year included share-based compensation and restricted stock expense of
approximately $1.8 million and retail store asset impairments of $1.0 million. Last years third
quarter results included restricted stock expense of $0.1 million and a credit of $0.8 million
primarily from the settlement of a California employment class action more favorably than
originally anticipated.
Interest expense increased 3.2% from $2.9 million in the third quarter ended October 29, 2005 to
$3.0 million for the third quarter ended October 28, 2006, primarily due to increased revolver
borrowings. There was an average of $30.4 million of revolver borrowings under the Companys
revolving credit facility during the three months ended October 28, 2006. There were no borrowings
under the Companys revolving credit facility during the three months ended October 29, 2005.
Interest income decreased 92.1% from $0.2 million to $16,000 for the third quarter ended October
28, 2006 due to the decrease in average short-term investments.
Results of Operations Nine Months Fiscal 2007 Compared to Fiscal 2006
The Companys net sales in the nine months ended October 28, 2006 increased 12.1% to $983.6
million from $877.6 million in the nine months ended October 29, 2005. Gross margin increased
47
11.0% to $496.2 million in the nine months ended October 28, 2006 from $447.0 million in the nine
months ended October 29, 2005 and decreased as a percentage of net sales from 50.9% to 50.4%.
Selling and administrative expenses in the nine months ended October 28, 2006 increased 12.5% from
the nine months ended October 29, 2005 and increased as a percentage of net sales from 43.9% to
44.1%. The Company records buying and merchandising and occupancy costs in selling and
administrative expense. Because the Company does not include these costs in cost of sales, the
Companys gross margin may not be comparable to other retailers that include these costs in the
calculation of gross margin. Explanations of the changes in results of operations are provided by
business segment in discussions following these introductory paragraphs.
Earnings before income taxes from continuing operations (pretax earnings) for the nine months
ended October 28, 2006 were $54.0 million compared to $51.4 million for the nine months ended
October 29, 2005. Pretax earnings for the nine months ended October 28, 2006 included
restructuring and other charges of $1.7 million, primarily for retail store asset impairments and
lease terminations of ten Jarman stores. These lease terminations were the continuation of a plan
previously announced by the Company in Fiscal 2004. Pretax earnings for the nine months ended
October 29, 2005 included restructuring and other charges of $2.3 million, primarily $1.7 million
for an anticipated settlement of a previously announced class action lawsuit (see Note 8), retail
store asset impairments and lease terminations of eight Jarman stores.
Net earnings for the nine months ended October 28, 2006 were $32.3 million ($1.25 diluted earnings
per share) compared to $31.4 million ($1.22 diluted earnings per share) for the nine months ended
October 29, 2005. Net earnings for the nine months ended October 28, 2006 included a $0.3 million
($0.01 diluted earnings per share) charge to earnings (net of tax) primarily for additional
environmental costs. The Company recorded an effective income tax rate of 39.7% for the nine
months ended October 28, 2006 compared to 38.8% in the same period last year. This years income
tax expense includes a $0.2 million adjustment relating to changes in state tax laws.
Journeys Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
October 28, |
|
|
October 29, |
|
|
% |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
(dollars in thousands) |
|
|
|
|
|
Net sales |
|
$ |
462,560 |
|
|
$ |
400,881 |
|
|
|
15.4 |
% |
Operating income |
|
$ |
46,346 |
|
|
$ |
42,270 |
|
|
|
9.6 |
% |
Operating margin |
|
|
10.0 |
% |
|
|
10.5 |
% |
|
|
|
|
Net sales from Journeys Group increased 15.4% for the nine months ended October 28, 2006 compared
to the same period last year. The increase reflects primarily a 13% increase in average Journeys
Group stores operated (i.e., the sum of the number of stores open on the first day of the fiscal
year and the last day of each fiscal month during the nine months divided by ten) and an increase
in comparable store sales of 5% for the nine months ended October 28, 2006. Unit sales increased
22% for the nine months ended October 28, 2006 while the average price per pair of shoes decreased
4% during the same period.
Journeys Group operating income for the nine months ended October 28, 2006 increased 9.6% to $46.3
million compared to $42.3 million for the nine months ended October 29, 2005. The
48
increase was
due to increased net sales partially offset by decreased gross margin as a percentage of net
sales, reflecting changes in product mix.
Underground Station Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
October 28, |
|
|
October 29, |
|
|
% |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
(dollars in thousands) |
|
|
|
|
|
Net sales |
|
$ |
105,854 |
|
|
$ |
110,417 |
|
|
|
(4.1 |
)% |
Operating income |
|
$ |
27 |
|
|
$ |
3,900 |
|
|
|
(99.3 |
)% |
Operating margin |
|
|
0.0 |
% |
|
|
3.5 |
% |
|
|
|
|
Net sales from the Underground Station Group (comprised of Underground Station and Jarman retail
stores) decreased 4.1% for the nine months ended October 28, 2006 compared to the same period last
year. Sales for Underground Station stores increased 2% for the nine months ended October 28,
2006. Sales for Jarman retail stores decreased 27% for the nine months ended this year,
reflecting a 25% decrease in the average number of Jarman stores operated related to the Companys
strategy of closing Jarman stores or converting them to Underground Station stores. Comparable
store sales decreased 7% for the Underground Station Group, 6% for Underground Station stores and
10% for Jarman retail stores. The average price per pair of shoes for Underground Station Group
decreased 2% in the first nine months of Fiscal 2007, and unit sales decreased 4% during the same
period. The average price per pair of shoes at Underground Station stores decreased 3% in the
first nine months of Fiscal 2007, while unit sales increased 4%.
Underground Station Group operating income for the nine months ended October 28, 2006 decreased
99.3% to $27,000 compared to $3.9 million in the first nine months ended October 29, 2005. The
decrease was due to decreased net sales and decreased gross margin as a percentage of net sales,
reflecting increased markdowns, and to increased expenses as a percentage of net sales due to the
negative leverage from negative comparable store sales as store related expenses grew faster than
sales.
During the first quarter this year, the Company was notified that Nike products will no longer be
distributed through Underground Station stores. Nike made up approximately 13% of the Underground
Station Group sales in Fiscal 2006. Underground Station received a full allocation of Nike
product for back-to-school in the second quarter this year. Nike product has historically not had
a significant impact on fourth quarter sales at Underground Station. Therefore, the Company does
not anticipate a material impact from this decision in Fiscal 2007. It intends to expand its
product offering to include additional brands and categories and a wider assortment of existing
brands and categories in Fiscal 2008 in response to the Nike decision.
Hat World Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
October 28, |
|
|
October 29, |
|
|
% |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
(dollars in thousands) |
|
|
|
|
|
Net sales |
|
$ |
226,697 |
|
|
$ |
199,532 |
|
|
|
13.6 |
% |
Operating income |
|
$ |
22,334 |
|
|
$ |
22,355 |
|
|
|
(0.1 |
)% |
Operating margin |
|
|
9.9 |
% |
|
|
11.2 |
% |
|
|
|
|
49
Net sales from Hat World Group increased 13.6% for the nine months ended October 28, 2006 compared
to the same period last year, reflecting primarily a 16% increase in average stores operated. Hat
World Group comparable store sales were flat for the nine months ended October 28, 2006.
Hat World Group operating income for the nine months ended October 28, 2006 decreased 0.1% to
$22.3 million compared to $22.4 million for the nine months ended October 29, 2005. The decrease
in operating income was due to decreased gross margin as a percentage of net sales, reflecting
increased promotional activity, and to increased expenses as a percentage of net sales resulting
from negative leverage due to flat comparable store sales, as store related expenses grew faster
than the sales increase.
Johnston & Murphy Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
October 28, |
|
|
October 29, |
|
|
% |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
(dollars in thousands) |
|
|
|
|
|
Net sales |
|
$ |
130,414 |
|
|
$ |
121,497 |
|
|
|
7.3 |
% |
Operating income |
|
$ |
8,500 |
|
|
$ |
6,352 |
|
|
|
33.8 |
% |
Operating margin |
|
|
6.5 |
% |
|
|
5.2 |
% |
|
|
|
|
Johnston & Murphy Group net sales increased 7.3% to $130.4 million for the nine months ended
October 28, 2006 from $121.5 million for the nine months ended October 29, 2005, reflecting
primarily a 15% increase in Johnston & Murphy wholesale sales and a 2% increase in comparable
store sales for Johnston & Murphy retail operations. Unit sales for the Johnston & Murphy
wholesale business increased 13% in the first nine months of Fiscal 2007 and the average price per
pair of shoes increased 1% for the same period. Retail operations accounted for 72.6% of Johnston
& Murphy segment sales in the nine months this year, down from 74.3% in the first nine months last
year. The average price per pair of shoes for Johnston & Murphy retail operations decreased 2%
(2% in the Johnston and Murphy shops) in the first nine months this year, primarily due to changes
in product mix, while footwear unit sales increased 4% during the same period.
Johnston & Murphy Group operating income for the nine months ended October 28, 2006 increased
33.8% to $8.5 million compared to $6.4 million for the same period last year, primarily due to
increased net sales and increased gross margin as a percentage of net sales, primarily due to
lower markdowns in the retail business and improvement in the wholesale business due to shipments
of less off-priced product, and to decreased expenses as a percentage of net sales.
50
Licensed Brands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
October 28, |
|
|
October 29, |
|
|
% |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
(dollars in thousands) |
|
|
|
|
|
Net sales |
|
$ |
57,759 |
|
|
$ |
45,065 |
|
|
|
28.2 |
% |
Operating income |
|
$ |
5,390 |
|
|
$ |
3,545 |
|
|
|
52.0 |
% |
Operating margin |
|
|
9.3 |
% |
|
|
7.9 |
% |
|
|
|
|
Licensed Brands net sales increased 28.2% to $57.8 million for the nine months ended October 28,
2006, from $45.1 million for the nine months ended October 29, 2005. The sales increase reflects
the increase in sales of Dockers Footwear, including replenishment sales of Dockers products, in
particular the proStyle® and Stain Defender® footwear,
which performed well at retail. Dockers sales increase also reflected sell-in related to
increasing shelf space in existing accounts. Unit sales for Dockers Footwear increased 27% for
the nine months ended October 28, 2006 and the average price per pair of shoes was flat compared
to the nine months ended October 29, 2005.
Licensed Brands operating income for the nine months ended October 28, 2006 increased 52.0% from
$3.5 million for the nine months ended October 29, 2005 to $5.4 million, primarily due to
increased net sales and to decreased expenses as a percentage of net sales.
Corporate, Interest Expenses and Other Charges
Corporate and other expenses for the nine months ended October 28, 2006 were $21.5 million
compared to $19.1 million for the nine months ended October 29, 2005. Corporate expenses in the
nine months ended October 28, 2006 included share-based compensation and restricted stock expense
of approximately $5.3 million partially offset by decreased bonus accruals this year. The nine
months ended October 29, 2005 results included restricted stock expense of $0.3 million.
Interest expense decreased 14.2% from $8.7 million in the nine months ended October 29, 2005 to
$7.5 million for the nine months ended October 28, 2006, primarily due to the decrease in the term
loan outstanding from $65 million at the end of the nine months last year to $20 million at the end
of the nine months this year. There was an average of $11.1 million of revolver borrowings under
the Companys revolving credit facility during the nine months ended October 28, 2006. There were
no borrowings under the Companys revolving credit facility during the nine months ended October
29, 2005. Interest income decreased 40.1% to $0.5 million for the nine months ended October 28,
2006 from $0.8 million for the nine months ended October 29, 2005, primarily due to the decrease in
average short-term investments.
The nine months ended October 28, 2006 included $1.7 million in restructuring and other charges,
primarily for retail store asset impairments and lease terminations of ten Jarman stores. The nine
months ended October 29, 2005 included $2.3 million in restructuring and other charges, primarily
for settlement of a California employment class action, retail store asset impairments and lease
terminations of eight Jarman stores.
51
Liquidity and Capital Resources
The following table sets forth certain financial data at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 28, |
|
|
January 28, |
|
|
October 29, |
|
|
|
2006 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
Cash and cash equivalents |
|
$ |
18.6 |
|
|
$ |
60.5 |
|
|
$ |
33.4 |
|
Working capital |
|
$ |
222.0 |
|
|
$ |
185.0 |
|
|
$ |
196.3 |
|
Long-term debt |
|
$ |
158.3 |
|
|
$ |
106.3 |
|
|
$ |
151.3 |
|
Working Capital
The Companys business is somewhat seasonal, with the Companys investment in inventory and
accounts receivable normally reaching peaks in the spring and fall of each year. Historically,
cash flow from operations has been generated principally in the fourth quarter of each fiscal year.
Cash used in operating activities was $13.9 million in the first nine months of Fiscal 2007
compared to cash provided by operating activities of $14.2 million in the first nine months of
Fiscal 2006. The $28.1 million decrease in cash flow from operating activities from last year
reflects primarily a decrease in cash flow from changes in inventory and other accrued liabilities
of $28.1 million and $16.5 million, respectively, offset by an increase in cash flow from changes
in accounts payable of $9.2 million and share-based compensation of $4.8 million. The $28.1
million decrease in cash flow from inventory was due to seasonal increases in retail inventory and
growth in our retail businesses to support the net increase of 152 stores in the first nine months
of Fiscal 2007 versus 100 stores in the first nine months of Fiscal 2006. The $16.5 million
decrease in cash flow from other accrued liabilities was due to a $16.4 million increase in income
taxes paid for the first nine months this year compared to the same period last year and increased
bonus payments. The $9.2 million increase in cash flow from accounts payable was due to changes in
buying patterns and increased inventory purchases.
The $113.7 million increase in inventories at October 28, 2006 from January 28, 2006 levels
reflects seasonal increases in retail inventory and inventory purchased to support the net increase
of 152 stores in the first nine months this year.
Accounts receivable at October 28, 2006 increased $3.5 million compared to January 28, 2006 due
primarily to increased wholesale sales.
Cash provided (or used) due to changes in accounts payable and accrued liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
October 28, |
|
|
October 29, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Accounts payable |
|
$ |
54,455 |
|
|
$ |
45,274 |
|
Accrued liabilities |
|
|
(19,614 |
) |
|
|
(3,151 |
) |
|
|
|
|
|
|
|
|
|
$ |
34,841 |
|
|
$ |
42,123 |
|
|
|
|
|
|
|
|
52
The fluctuations in cash provided due to changes in accounts payable for the first nine months this
year from the first nine months last year are due to changes in buying patterns and payment terms
negotiated with individual vendors and increased inventory purchases. The change in cash provided
due to changes in accrued liabilities for the first nine months this year from the first nine
months last year was due primarily to increased tax payments and bonus payments in the first nine
months of Fiscal 2007.
There was an average of $11.1 million of revolving credit borrowings during the first nine months
ended October 28, 2006 and no revolving credit borrowings during the first nine months ended
October 29, 2005, as cash generated from operations and cash on hand funded most of the seasonal
working capital requirements and capital expenditures for the first nine months of Fiscal 2007.
The Companys contractual obligations over the next five years have increased from January 28,
2006. Long-term debt increased to $158 million from $106 million due to increased revolver
borrowings as a result of stock repurchases. Operating lease obligations increased to $984 million
from $843 million due to new store openings.
Capital Expenditures
Total capital expenditures in Fiscal 2007 are expected to be approximately $67.9 million. These
include expected retail capital expenditures of $61.5 million to open approximately 61 Journeys
stores, 24 Journeys Kidz stores, 12 Shi by Journeys stores, 13 Johnston & Murphy shops and factory
stores, 11 Underground Station stores and 101 Hat World stores and to complete 119 major store
renovations, including three conversions of Jarman stores to Underground Station stores. The amount
of capital expenditures in Fiscal 2007 for other purposes is expected to be approximately $6.4
million, including approximately $1.1 million for new systems to improve customer service and
support the Companys growth.
Future Capital Needs
The Company expects that cash on hand and cash provided by operations will be sufficient to fund
all of its planned capital expenditures through Fiscal 2007, although the Company plans to borrow
under its revolving credit facility from time to time, particularly in the fall, to support
seasonal working capital requirements. The approximately $4.1 million of costs associated with
discontinued operations that are expected to be incurred during the next twelve months are also
expected to be funded from cash on hand and borrowings under the revolving credit facility.
The Companys board of directors authorized the repurchase, from time to time, of up to 7.5 million
shares of the Companys common stock under a series of authorizations in Fiscal 1999-2003.
Purchases were funded from available cash and borrowings under the revolving credit facility. The
Company repurchased 7.1 million shares at a cost of $72.1 million under those authorizations. In
June 2006, the board authorized an additional $20 million in stock repurchases. In August 2006,
the board authorized an additional $30 million in stock repurchases. The Company repurchased
629,400 shares at a cost of $18.5 million during the third quarter of Fiscal 2007, leaving $18.7
million remaining to be repurchased under these authorizations as of October 28, 2006. In total,
the Company has repurchased 8.2 million shares at a cost of $103.4 million at an average price of
$12.66 per share from all authorizations as of October 28, 2006.
There were $11.0 million of letters of credit outstanding and $52.0 million revolver borrowings
outstanding under the revolving credit facility at October 28, 2006, leaving availability under the
53
revolving credit facility of $42.0 million. The revolving credit agreement requires the Company to
meet certain financial ratios and covenants, including minimum tangible net worth, fixed charge
coverage and lease adjusted debt to EBITDAR ratios. The Company was in compliance with these
financial covenants at October 28, 2006.
The Companys revolving credit agreement restricts the payment of dividends and other payments with
respect to common stock, including repurchases. The aggregate of annual dividend requirements on
the Companys Subordinated Serial Preferred Stock, $2.30 Series 1, $4.75 Series 3 and $4.75 Series
4, and on its $1.50 Subordinated Cumulative Preferred Stock is $256,000.
Environmental and Other Contingencies
The Company is subject to certain loss contingencies related to environmental proceedings and other
legal matters, including those disclosed in Note 8 to the Companys Condensed Consolidated
Financial Statements. The Company has made accruals for certain of these contingencies, including
approximately $0.6 million in the first nine months of Fiscal 2007, $0.8 million reflected in
Fiscal 2006 and $0.9 million reflected in Fiscal 2005. The Company monitors these matters on an
ongoing basis and, on a quarterly basis, management reviews the Companys reserves and accruals in
relation to each of them, adjusting provisions as management deems necessary in view of changes in
available information. Changes in estimates of liability are reported in the periods when they
occur. Consequently, management believes that its reserve in relation to each proceeding is a
reasonable estimate of the probable loss connected to the proceeding, or in cases in which no
reasonable estimate is possible, the minimum amount in the range of estimated losses, based upon
its analysis of the facts and circumstances as of the close of the most recent fiscal quarter.
However, because of uncertainties and risks inherent in litigation generally and in environmental
proceedings in particular, there can be no assurance that future developments will not require
additional reserves to be set aside, that some or all reserves may not be adequate or that the
amounts of any such additional reserves or any such inadequacy will not have a material adverse
effect upon the Companys financial condition or results of operations.
Financial Market Risk
The following discusses the Companys exposure to financial market risk related to changes in
interest rates and foreign currency exchange rates.
Outstanding Debt of the Company The Companys outstanding long-term debt of $86.3 million 4 1/8%
Convertible Subordinated Debentures due June 15, 2023 bears interest at a fixed rate. Accordingly,
there would be no immediate impact on the Companys interest expense due to fluctuations in market
interest rates. The Companys $20.0 million outstanding under the term loan bears interest
according to a pricing grid providing margins over LIBOR or Alternate Base Rate. The Company
entered into three separate interest rate swap agreements as a means of managing its interest rate
exposure on the original term loan. The notional amount of the one remaining swap agreement is
$20.0 million. At October 28, 2006, the net gain on this interest rate swap was $0.1 million.
Cash and Cash Equivalents The Companys cash and cash equivalent balances are invested in
financial instruments with original maturities of three months or less. The Company does not have
significant exposure to changing interest rates on invested cash at October 28, 2006. As a result,
the Company considers the interest rate market risk implicit in these investments at October 28,
2006 to be low.
54
Foreign Currency Exchange Rate Risk Most purchases by the Company from foreign sources are
denominated in U.S. dollars. To the extent that import transactions are denominated in other
currencies, it is the Companys practice to hedge its risks through the purchase of forward foreign
exchange contracts. At October 28, 2006, the Company had $7.6 million of forward foreign exchange
contracts for Euro. The Companys policy is not to speculate in derivative instruments for profit
on the exchange rate price fluctuation and it does not hold any derivative instruments for trading
purposes. Derivative instruments used as hedges must be effective at reducing the risk associated
with the exposure being hedged and must be designated as a hedge at the inception of the contract.
The unrealized loss on contracts outstanding at October 28, 2006 was $2,000 based on current spot
rates. As of October 28, 2006, a 10% adverse change in foreign currency exchange rates from market
rates would decrease the fair value of the contracts by approximately $0.8 million.
Accounts Receivable The Companys accounts receivable balance at October 28, 2006 is concentrated
in its two wholesale businesses, which sell primarily to department stores and independent
retailers across the United States. Two customers accounted for 12% and 11%, respectively, of the
Companys trade accounts receivable balance as of October 28, 2006 and no other customer accounted
for more than 9% of the Companys trade receivables balance as of October 28, 2006. The Company
monitors the credit quality of its customers and establishes an allowance for doubtful accounts
based upon factors surrounding credit risk, historical trends and other information; however,
credit risk is affected by conditions or occurrences within the economy and the retail industry, as
well as company-specific information.
Summary Based on the Companys overall market interest rate and foreign currency rate exposure at
October 28, 2006, the Company believes that the effect, if any, of reasonably possible near-term
changes in interest rates or foreign currency exchange rates on the Companys consolidated
financial position, results of operations or cash flows for Fiscal 2007 would not be material.
New Accounting Principles
On January 29, 2006, the Company adopted SFAS No.123(R) using the modified prospective transition
method. Under the modified prospective transition method, recognized compensation cost for the
nine months ended October 28, 2006 includes (i) compensation cost for all share-based payments
granted prior to, but not yet vested as of January 29, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS No. 123; and (ii) compensation cost for all
share-based payments granted on or after January 29, 2006, based on the grant date fair value
estimated in accordance with SFAS No. 123(R). In accordance with the modified prospective method,
the Company has not restated prior period results. SFAS No. 123(R) requires the Company to measure
and recognize compensation expense for all share-based payment awards based on estimated fair
values at the date of grant. Determining the fair value of share-based awards at the grant date
requires judgment in developing assumptions, which involve a number of variables. These variables
include, but are not limited to, the expected stock price volatility over the term of the awards
and expected stock option exercise behavior. In addition, the Company also uses judgment in
estimating the number of share-based awards that are expected to be forfeited. For the nine months
ended October 28, 2006 and October 29, 2005, the Company estimated the fair value of each option
award on the date of grant using a Black-Scholes option pricing model. As a result of adopting
SFAS No. 123(R), earnings before income taxes from continuing operations, earnings from continuing
operations and net earnings for the three months and nine months ended October 28, 2006 were $1.1
million, $0.7 million, $0.7 million,
$3.2 million, $2.7 million and $2.7 million lower, respectively, than if the Company had continued
to account for share-based
55
compensation under APB No. 25. The effect of adopting SFAS No. 123(R)
on basic and diluted earnings per common share for the three months and nine months ended October
28, 2006 was $0.03, $0.03, $0.12 and $0.10, respectively.
In March 2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 06-3,
How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (that is, gross versus net presentation), which allows companies to adopt a
policy of presenting taxes in the income statement on either a gross or net basis. Taxes within
the scope of this EITF would include taxes that are imposed on a revenue transaction between a
seller and a customer, for example, sales taxes, use taxes, value-added taxes and some types of
excise taxes. EITF No. 06-3 is effective for interim and annual reporting periods beginning after
December 15, 2006. EITF No. 06-3 will not impact the method for recording and reporting these
sales taxes in the Companys Condensed Consolidated Financial Statements as the Companys policy is
to exclude all such taxes from revenue.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of SFAS No. 109 (FIN 48). This Interpretation clarifies the
accounting for uncertainty in income taxes recognized in the financial statements in accordance
with SFAS No. 109, Accounting for Income Taxes. This Interpretation prescribes that a company
should use a more-likely-than-not recognition threshold based on the technical merits of the tax
position taken. Tax positions that meet the more-likely-than-not recognition threshold should be
measured in order to determine the tax benefit to be recognized in the financial statements. FIN
48 is effective in fiscal years beginning after December 15, 2006. The Company is currently
evaluating the impact that the adoption of FIN 48 will have on its results of operations and
financial position.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in accordance with generally accepted
accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007 (fiscal year 2009 for the Company),
and interim periods within those fiscal years. The Company is currently evaluating the impact that
the adoption of SFAS No. 157 will have on its results of operations and financial position.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS
No. 158 requires companies to recognize the overfunded or underfunded status of a single-employer
defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize
changes in that funded status in comprehensive income in the year in which the changes occur. This
requirement of SFAS No. 158 is effective as of the end of the fiscal year ending after December 15,
2006 (fiscal year 2007 for the Company). SFAS No. 158 also requires companies to measure the
funded status of a plan as of the date of its fiscal year end. This requirement of SFAS No. 158 is
effective for fiscal years ending after December 15, 2008 (fiscal year 2009 for the Company). The
Company does not believe the adoption of SFAS No. 158 will have a material impact on the Companys
results of operations or financial position.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company incorporates by reference the information regarding market risk appearing under the
heading Financial Market Risk in Item 2, Managements Discussion and Analysis of Financial
Condition and Results of Operations.
56
Item 4. Controls and Procedures
(a) |
|
Evaluation of disclosure controls and procedures. We have established disclosure controls
and procedures to ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to the officers who certify the Companys financial
reports and to other members of senior management and the Board of Directors. |
|
|
|
Based on their evaluation as of October 28, 2006, the principal executive officer and
principal financial officer of the Company have concluded that, the Companys disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) were effective to ensure that the information required to be disclosed
by the Company in the reports that it files or submits under the Securities Exchange Act of
1934 is (i) recorded, processed, summarized and reported within time periods specified in SEC
rules and forms and (ii) accumulated and communicated to the Companys management, including
the Companys principal executive officer and principal financial officer, to allow timely
decisions regarding required disclosure. |
|
(b) |
|
Changes in internal control over financial reporting. There were no changes in the Companys
internal control over financial reporting that occurred during the Companys third fiscal
quarter that have materially affected or are reasonably likely to materially affect the
Companys internal control over financial reporting. |
57
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company incorporates by reference the information regarding legal proceedings in
Note 8 of the Companys Condensed Consolidated Financial Statements.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in Item 1A. Risk
Factors in the Companys Annual Report on Form 10-K for the year ended January 28,
2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Repurchases (shown in 000s except share and per share amounts):
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Total |
|
(d) Maximum Number (or |
|
|
|
|
|
|
|
|
|
|
Number of |
|
Approximate |
|
|
|
|
|
|
|
|
|
|
Shares (or |
|
Dollar Value) of |
|
|
|
|
|
|
|
|
|
|
Units) |
|
shares (or Units) |
|
|
(a) Total of |
|
|
|
|
|
Purchased as |
|
that May Yet Be |
|
|
Number of |
|
(b) Average |
|
Part of Publicly |
|
Purchased |
|
|
Shares (or |
|
Price Paid |
|
Announced |
|
Under the Plans |
|
|
Units |
|
per Share (or |
|
Plans or |
|
or Programs (1) |
Period |
|
Purchased |
|
Unit) |
|
Programs |
|
(in thousands) |
August 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7-30-06 to 8-26-06 |
|
|
65,000 |
|
|
$ |
27.24 |
|
|
|
65,000 |
|
|
$ |
5,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8-27-06 to 9-23-06 |
|
|
463,700 |
|
|
$ |
28.38 |
|
|
|
463,700 |
|
|
$ |
22,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9-24-06 to 10-28-06 |
|
|
100,700 |
|
|
$ |
35.30 |
|
|
|
100,700 |
|
|
$ |
18,741 |
|
10-25-06(2) |
|
|
7,704 |
|
|
$ |
37.72 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
|
(1) |
|
The Companys Board of Directors authorized the repurchase, from time to time,
of up to 7.5 million shares of the Companys common stock under a series of
authorizations in Fiscal 1999 2003. The Company repurchased 7.1 million shares
at a cost of $72.1 million under those authorizations. On June 28, 2006, the
Companys Board of Directors authorized an additional $20.0 million in stock
repurchases. On August 30, 2006, the Board of Directors authorized an additional
$30.0 million in stock repurchases. As of October 28, 2006, the Company had
repurchased and retired a total of 8.2 million shares of common stock at an
aggregate cost of approximately $103.4 million. |
|
(2) |
|
These shares represent shares withheld from vested restricted stock to satisfy
the minimum withholding requirement for federal taxes. |
58
Item 6. Exhibits
Exhibits
|
(10.1) |
|
Amendment No. 2 (Renewal) to Trademark License Agreement, dated November 1, 2006,
between Levi Strauss & Co. and Genesco. Inc.* |
|
|
(10.2) |
|
Amended and Restated Credit agreement, dated as of December 1, 2006, by and among
the Company, certain subsidiaries of the Company party thereto, as other borrowers,
the lenders party thereto and Bank of America, N.A., as administrative agent.
Incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed
December 5, 2006 (File No. 1-3083). |
|
|
(31.1) |
|
Certification of the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
(31.2) |
|
Certification of the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
(32.1) |
|
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
(32.2) |
|
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Certain information has been omitted and filed separately with the Securities and
Exchange Commission. Confidential treatment has been requested with respect to the
omitted portion. |
59
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Genesco Inc.
/s/ James S. Gulmi
James S. Gulmi
Chief Financial Officer
December 7, 2006
60