10-Q 1 g71758e10-q.txt GENESCO INC 1 [GENESCO LOGO] (Mark One) FORM 10-Q [X] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended August 4, 2001 [ ] Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934 Securities and Exchange Commission Washington, D.C. 20549 Commission File No. 1-3083 GENESCO INC. A Tennessee Corporation I.R.S. No. 62-0211340 Genesco Park 1415 Murfreesboro Road Nashville, Tennessee 37217-2895 Telephone 615/367-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports with the commission) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Common Shares Outstanding September 7, 2001 - 21,974,954 2 INDEX
PAGE ---- Part 1 - Financial Information 3 Consolidated Balance Sheet -August 4, 2001, February 3, 2001 and July 29, 2000 3 Consolidated Earnings - Three Months Ended and Six Months Ended August 4, 2001 and July 29, 2000 4 Consolidated Cash Flows - Three Months Ended and Six Months Ended August 4, 2001 and July 29, 2000 5 Consolidated Shareholders' Equity - Year Ended February 3, 2001 and Six Months Ended August 4, 2001 6 Notes to Consolidated Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Part II - Other Information 38 Signature 39
2 3 PART I - FINANCIAL INFORMATION GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Balance Sheet In Thousands
AUGUST 4, FEBRUARY 3, JULY 29, 2001 2001 2000 --------- ----------- --------- ASSETS CURRENT ASSETS Cash and short-term investments $ 24,513 $ 60,382 $ 38,275 Accounts receivable 27,053 22,700 23,957 Inventories 182,216 134,236 140,562 Deferred income taxes 15,263 15,263 14,826 Other current assets 11,402 10,806 9,154 Current assets of discontinued operations -0- 359 6,232 --------- --------- --------- Total current assets 260,447 243,746 233,006 --------- --------- --------- Plant, equipment and capital leases, net 95,971 87,747 79,609 Deferred income taxes 3,396 3,396 4,184 Other noncurrent assets 16,591 16,644 12,709 Plant and equipment of discontinued operations, net 605 630 669 --------- --------- --------- TOTAL ASSETS $ 377,010 $ 352,163 $ 330,177 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $ 99,945 $ 94,252 $ 93,696 Provision for discontinued operations 3,954 4,568 5,293 --------- --------- --------- Total current liabilities 103,899 98,820 98,989 --------- --------- --------- Long-term debt 103,245 103,500 103,500 Other long-term liabilities 7,898 7,354 6,108 Provision for discontinued operations 3,327 4,264 5,447 --------- --------- --------- Total liabilities 218,369 213,938 214,044 --------- --------- --------- Contingent liabilities (see Note 8) SHAREHOLDERS' EQUITY Non-redeemable preferred stock 7,669 7,721 7,843 Common shareholders' equity: Common stock, $1 par value: Authorized: 80,000,000 shares Issued: August 4, 2001 - 22,475,128; February 3, 2001 - 22,149,915; July 29, 2000 - 21,942,727 22,475 22,150 21,943 Additional paid-in capital 101,534 95,194 94,112 Retained earnings 45,391 31,017 10,092 Accumulated other comprehensive income (571) -0- -0- Treasury shares, at cost (17,857) (17,857) (17,857) --------- --------- --------- Total shareholders' equity 158,641 138,225 116,133 --------- --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 377,010 $ 352,163 $ 330,177 ========= ========= =========
The accompanying Notes are an integral part of these Consolidated Financial Statements. 3 4 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Earnings In Thousands
THREE MONTHS ENDED SIX MONTHS ENDED --------------------------- --------------------------- AUGUST 4, JULY 29, AUGUST 4, JULY 29, 2001 2000 2001 2000 --------- --------- --------- --------- Net sales $ 166,543 $ 143,243 $ 338,461 $ 289,887 Cost of sales 88,178 74,277 177,999 152,615 Selling and administrative expenses 66,804 58,093 134,016 114,527 Restructuring credit (205) -0- (205) -0- --------- --------- --------- --------- Earnings from operations before interest 11,766 10,873 26,651 22,745 --------- --------- --------- --------- Interest expense 2,157 2,093 4,315 4,194 Interest income (269) (261) (892) (680) --------- --------- --------- --------- Total interest expense, net 1,888 1,832 3,423 3,514 --------- --------- --------- --------- Earnings before income taxes and discontinued operations 9,878 9,041 23,228 19,231 Income taxes 3,695 3,510 8,707 7,507 --------- --------- --------- --------- Earnings before discontinued operations 6,183 5,531 14,521 11,724 Discontinued operations (net of tax): Operating income (loss) -0- 6 -0- (226) Provision for discontinued operations -0- (2,975) -0- (2,975) --------- --------- --------- --------- NET EARNINGS $ 6,183 $ 2,562 $ 14,521 $ 8,523 ========= ========= ========= ========= Basic earnings per common share: Before discontinued operations $ .28 $ .25 $ .66 $ .54 Discontinued operations $ .00 $ (.13) $ .00 $ (.15) Net earnings $ .28 $ .12 $ .66 $ .39 Diluted earnings per common share: Before discontinued operations $ .26 $ .24 $ .60 $ .50 Discontinued operations $ .00 $ (.11) $ .00 $ (.12) Net earnings $ .26 $ .13 $ .60 $ .38 ========= ========= ========= =========
The accompanying Notes are an integral part of these Financial Statements. 4 5 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Cash Flows In Thousands
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------- ------------------------- AUGUST 4, JULY 29, AUGUST 4, JULY 29, 2001 2000 2001 2000 --------- -------- --------- -------- OPERATIONS: Net earnings $ 6,183 $ 2,562 $ 14,521 $ 8,523 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 3,938 3,138 7,770 6,177 Provision for losses on accounts receivable (167) 109 (53) 231 Restructuring charge (gain) (269) -0- (269) -0- Provision for discontinued operations -0- 4,854 -0- 4,854 Other 86 155 316 496 Effect on cash of changes in working capital and other assets and liabilities: Accounts receivable 90 (779) (3,939) (5,928) Inventories (35,193) (28,635) (47,917) (31,973) Other current assets (55) (177) (598) (274) Accounts payable and accrued liabilities 25,081 23,002 4,713 18,686 Other assets and liabilities 338 (119) 984 286 -------- -------- -------- -------- Net cash provided by (used in) operating activities 32 4,110 (24,472) 1,078 -------- -------- -------- -------- INVESTING ACTIVITIES: Capital expenditures (10,025) (10,279) (16,433) (19,229) Proceeds from businesses divested and asset sales 147 293 203 388 -------- -------- -------- -------- Net cash used in investing activities (9,878) (9,986) (16,230) (18,841) -------- -------- -------- -------- FINANCING ACTIVITIES: Stock repurchase -0- (1,631) -0- (5,359) Payments on capital leases -0- -0- -0- (1) Dividends paid (73) (74) (147) (149) Deferred note expense (356) -0- (356) -0- Exercise of options 655 638 5,336 3,687 -------- -------- -------- -------- Net cash provided by (used in) financing activities 226 (1,067) 4,833 (1,822) -------- -------- -------- -------- NET CASH FLOW (9,620) (6,943) (35,869) (19,585) Cash and short-term investments at beginning of period 34,133 45,218 60,382 57,860 -------- -------- -------- -------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 24,513 $ 38,275 $ 24,513 $ 38,275 ======== ======== ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Net cash paid for: Interest $ 464 $ 496 $ 3,983 $ 3,878 Income taxes 8,275 6,726 12,876 7,411 ======== ======== ======== ========
The accompanying Notes are an integral part of these Financial Statements. 5 6 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Consolidated Shareholders' Equity In Thousands
TOTAL NON-REDEEMABLE ADDITIONAL PREFERRED COMMON PAID-IN TREASURY STOCK STOCK CAPITAL STOCK -------------- -------- ---------- --------- BALANCE JANUARY 29, 2000 $ 7,882 $ 21,715 $ 94,784 $ (17,857) ======== ======== ========= ========= Net earnings -0- -0- -0- -0- Dividends paid -0- -0- -0- -0- Exercise of options -0- 1,013 5,017 -0- Issue shares - Employee Stock Purchase Plan -0- 55 508 -0- Tax effect of exercise of stock options -0- -0- 2,758 -0- Stock repurchases -0- (646) (8,131) -0- Other (161) 13 258 -0- Comprehensive Income -------- -------- --------- --------- BALANCE FEBRUARY 3, 2001 $ 7,721 $ 22,150 $ 95,194 $ (17,857) ======== ======== ========= ========= Net earnings -0- -0- -0- -0- Dividends paid -0- -0- -0- -0- Exercise of options -0- 308 5,028 -0- Tax effect of exercise of stock options -0- -0- 988 -0- Loss on foreign currency forward contracts -0- -0- -0- -0- Other (52) 17 324 -0- Comprehensive Income -------- -------- --------- --------- BALANCE AUGUST 4, 2001 $ 7,669 $ 22,475 $ 101,534 $ (17,857) ======== ======== ========= ========= ACCUMULATED TOTAL OTHER SHARE- RETAINED COMPREHENSIVE COMPREHENSIVE HOLDERS' EARNINGS INCOME INCOME EQUITY --------- ------------- ------------- --------- BALANCE JANUARY 29, 2000 $ 1,718 $ -0- $ 108,242 ========= ========= ========= ========= Net earnings 29,598 -0- 29,598 29,598 Dividends paid (299) -0- -0- (299) Exercise of options -0- -0- -0- 6,030 Issue shares - Employee Stock Purchase Plan -0- -0- -0- 563 Tax effect of exercise of stock options -0- -0- -0- 2,758 Stock repurchases -0- -0- -0- (8,777) Other -0- -0- -0- 110 --------- Comprehensive Income $ 29,598 --------- --------- --------- --------- BALANCE FEBRUARY 3, 2001 $ 31,017 $ -0- $ 138,225 ========= ========= ========= ========= Net earnings 14,521 -0- 14,521 14,521 Dividends paid (147) -0- -0- (147) Exercise of options -0- -0- -0- 5,336 Tax effect of exercise of stock options -0- -0- -0- 988 Loss on foreign currency forward contracts -0- (571) (571) (571) Other -0- -0- -0- 289 --------- Comprehensive Income $ 13,950 --------- --------- --------- --------- BALANCE AUGUST 4, 2001 $ 45,391 $ (571) $ 158,641 ========= ========= ========= =========
The accompanying Notes are an integral part of these Consolidated Financial Statements. 6 7 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INTERIM STATEMENTS The consolidated financial statements contained in this report are unaudited but reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for the interim periods of the fiscal year ending February 2, 2002 ("Fiscal 2002") and of the fiscal year ended February 3, 2001 ("Fiscal 2001"). The results of operations for any interim period are not necessarily indicative of results for the full year. The financial statements should be read in conjunction with the financial statements and notes thereto included in the annual report on Form 10-K. NATURE OF OPERATIONS The Company's businesses include the manufacture or sourcing, marketing and distribution of footwear principally under the Johnston & Murphy and Dockers brands and the operation at August 4, 2001 of 831 Jarman, Journeys, Journeys Kidz, Johnston & Murphy and Underground Station retail footwear stores and leased departments. The Company entered into an agreement with Nautica Apparel, Inc. to end its license to market footwear under the Nautica label, effective January 31, 2001. The Company sold Nautica - branded footwear for the first six months of Fiscal 2002 in order to fill existing customer orders and sell existing inventory. (See Note 2). The Company also sold certain assets of its Volunteer Leather business on June 19, 2000, and has discontinued all Leather segment operations. (See Note 2). BASIS OF PRESENTATION All subsidiaries are included in the consolidated financial statements. All significant intercompany transactions and accounts have been eliminated. The preparation of financial statements in conformity with 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. FINANCIAL STATEMENT RECLASSIFICATIONS Certain reclassifications have been made to conform prior years' data to the current presentation. CASH AND SHORT-TERM INVESTMENTS Included in cash and short-term investments at February 3, 2001 and August 4, 2001, are short-term investments of $53.3 million and $13.9 million, respectively. Short-term investments are highly-liquid debt instruments having an original maturity of three months or less. 7 8 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED INVENTORIES Inventories of wholesaling and manufacturing companies are stated at the lower of cost or market, with cost determined principally by the first-in, first-out method. Retail inventories are determined by the retail method. PLANT, EQUIPMENT AND CAPITAL LEASES Plant, equipment and capital leases 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 estimated useful lives: Buildings and building equipment 20-45 years Machinery, furniture and fixtures 3-15 years 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. IMPAIRMENT OF LONG-TERM ASSETS The Company periodically assesses the realizability of its 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 carrying amount. POSTRETIREMENT BENEFITS Substantially all full-time employees are covered by a defined benefit pension plan. 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. REVENUE RECOGNITION Retail sales are recorded net of actual returns, and exclude all taxes, while wholesale revenue is recorded net of estimated returns when the related goods have been shipped and legal title has passed to the customer. PREOPENING COSTS Costs associated with the opening of new stores are expensed as incurred. ADVERTISING COSTS Advertising costs are predominantly expensed as incurred. Advertising costs were $10.3 million and $10.6 million for the first six months of Fiscal 2002 and 2001, respectively. 8 9 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED ENVIRONMENTAL COSTS Environmental expenditures relating to current operations are expensed or capitalized as appropriate. Expenditures relating to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated and are evaluated independently of any future claims for recovery. Generally, the timing of these accruals coincides with completion of a feasibility study or the Company's commitment to a formal plan of action. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. INCOME TAXES Deferred income taxes are provided for all temporary differences and operating loss and tax credit carryforwards 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 7). COMPREHENSIVE INCOME The Statement of Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive Income" requires, among other things, the Company's minimum pension liability adjustment and gain or loss on derivative instruments to be included in other comprehensive income. BUSINESS SEGMENTS The Statement of Financial Accounting Standards (SFAS) 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 Notes 2 and 9). 9 10 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company implemented Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" in the first quarter of Fiscal 2002. This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 requires 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. For the first six months ended August 4, 2001, the Company recorded a loss on foreign currency forward contracts of $0.6 million in accumulated other comprehensive income. In order to reduce exposure to foreign currency exchange rate fluctuations in connection with inventory purchase commitments, the Company enters into foreign currency forward exchange contracts for Euro with a maximum hedging period of twelve months. At February 3, 2001 and August 4, 2001, the Company had approximately $31.3 million and $27.9 million, respectively, of such contracts outstanding. Forward exchange contracts have an average term of approximately four months. The gain from spot rates at February 3, 2001 under these contracts was $1.3 million and the loss from spot rates at August 4, 2001 was $0.1 million. The Company monitors the credit quality of the major national and regional financial institutions with whom it enters into such contracts. The Company estimates that the majority of net-hedging losses will be reclassified from accumulated other comprehensive income into earnings through higher cost of sales within the twelve months between August 4, 2001 and August 3, 2002. 10 11 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 2 RESTRUCTURINGS Nautica Footwear License Cancellation The Company entered into an agreement with Nautica Apparel, Inc. to end its license to market footwear under the Nautica label, effective January 31, 2001. The Company sold Nautica - branded footwear for the first six months of Fiscal 2002 in order to fill existing customer orders and sell existing inventory. In connection with the termination of the Nautica Footwear license agreement, the Company recorded a pretax charge to earnings of $4.4 million ($2.7 million net of tax) in the fourth quarter of Fiscal 2001. The charge includes contractual obligations to Nautica Apparel for the license cancellation and other costs, primarily severance. Included in the charge was a $1.0 million inventory write-down which is reflected in gross margin on the income statement. During the second quarter of Fiscal 2002 the Company recorded a restructuring gain of $0.3 million in connection with the termination of the Nautica Footwear license agreement. Included in the gain is a $0.1 million reversal of inventory write-down which is reflected in gross margin on the income statement. The remaining $0.4 million of anticipated costs associated with the Nautica license termination are expected to be incurred before the end of the current fiscal year. The Nautica footwear business contributed sales of approximately $1.8 million, $3.8 million, $6.0 million and $11.6 million and operating losses of ($0.3) million, ($0.8) million, ($0.6) million and ($1.2) million in the second quarter and six months of Fiscal 2002 and 2001, respectively. Volunteer Leather Divestiture On May 22, 2000, the Company's board of directors approved a plan to sell its Volunteer Leather finishing business and liquidate its tanning business, to allow the Company to be more focused on the retailing and marketing of branded footwear. Certain assets of the Volunteer Leather business were sold on June 19, 2000. The plan resulted in a pretax charge to earnings of $4.9 million ($3.0 million net of tax) in the second quarter of Fiscal 2001. Because Volunteer Leather constitutes the entire Leather segment of the Company's business, the charge to earnings is treated for financial reporting purposes as a provision for discontinued operations. The provision for discontinued operations included $1.3 million in asset write-downs and $3.6 million of other costs, including primarily employee severance and facility shutdown costs. As of August 4, 2001, $1.5 million of such other costs had been incurred and $1.6 million are expected to be incurred in the next twelve months. The approximately $0.5 million of other costs expected to be incurred beyond twelve months are classified as long-term liabilities in the consolidated balance sheet. The Volunteer Leather business employed approximately 160 people. 11 12 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 2 RESTRUCTURINGS, CONTINUED The operating results of the leather segment are shown below:
THREE MONTHS ENDED SIX MONTHS ENDED JULY 29, JULY 29, IN THOUSANDS 2000* 2000** ------------------ ---------------- Net sales $ 1,550 $ 6,545 Cost of sales and expenses 1,542 6,917 ------- ------- PRETAX EARNINGS (LOSS) 8 (372) INCOME TAX EXPENSE (BENEFIT) 2 (146) ------- ------- NET EARNINGS (LOSS) $ 6 $ (226) ======= =======
* Results for the month of May 2000. ** Results for the four months ended May 2000. 12 13 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 3 ACCOUNTS RECEIVABLE
AUGUST 4, FEBRUARY 3, IN THOUSANDS 2001 2001 --------- ---------- Trade accounts receivable $ 26,655 $ 23,146 Miscellaneous receivables 4,203 3,454 -------- -------- Total receivables 30,858 26,600 Allowance for bad debts (1,248) (1,303) Other allowances (2,557) (2,597) -------- -------- NET ACCOUNTS RECEIVABLE $ 27,053 $ 22,700 ======== ========
The Company's footwear wholesaling business sells primarily to department stores and independent retailers across the United States. Receivables arising from these sales are not collateralized. Credit risk is affected by conditions or occurrences within the economy and the retail industry. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. One customer accounted for 14% and another customer accounted for 13% of the Company's trade receivables balance as of August 4, 2001 and no other customer accounted for more than 10% of the Company's trade receivables balance as of August 4, 2001. NOTE 4 INVENTORIES
AUGUST 4, FEBRUARY 3, IN THOUSANDS 2001 2001 --------- ---------- Raw materials $ 1,481 $ 1,408 Work in process 437 609 Finished goods 36,266 34,551 Retail merchandise 144,032 97,668 -------- -------- TOTAL INVENTORIES $182,216 $134,236 ======== ========
13 14 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 5 PLANT, EQUIPMENT AND CAPITAL LEASES, NET
AUGUST 4, FEBRUARY 3, IN THOUSANDS 2001 2001 --------- ----------- Plant and equipment: Land $ 448 $ 291 Buildings and building equipment 1,128 1,128 Machinery, furniture and fixtures 60,106 56,588 Construction in progress 11,659 9,589 Improvements to leased property 81,790 73,008 Capital leases: Buildings 20 20 --------- --------- Plant, equipment and capital leases, at cost 155,151 140,624 Accumulated depreciation and amortization: Plant and equipment (59,172) (52,870) Capital leases (8) (7) --------- --------- NET PLANT, EQUIPMENT AND CAPITAL LEASES $ 95,971 $ 87,747 ========= =========
14 15 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 6 PROVISION FOR DISCONTINUED OPERATIONS AND RESTRUCTURING RESERVES PROVISION FOR DISCONTINUED OPERATIONS
EMPLOYEE FACILITY RELATED SHUTDOWN IN THOUSANDS COSTS* COSTS OTHER TOTAL -------- -------- ----- ------- Balance February 3, 2001 6,549 1,924 359 8,832 Charges and adjustments, net (1,405) 15 (161) (1,551) ------- ------ ----- ------- Balance August 4, 2001 5,144 1,939 198 7,281 Current portion 2,502 1,413 39 3,954 ------- ------ ----- ------- TOTAL NONCURRENT PROVISION FOR DISCONTINUED OPERATIONS $ 2,642 $ 526 $ 159 $ 3,327 ======= ====== ===== =======
* Includes $5.0 million of apparel union pension withdrawal liability. RESTRUCTURING RESERVES
EMPLOYEE FACILITY RELATED SHUTDOWN IN THOUSANDS COSTS COSTS OTHER TOTAL -------- -------- ------ ------- Balance February 3, 2001 517 167 3,531 4,215 Charges and adjustments, net (68) (93) (2,789) (2,950) Excess restructuring reserve August 4, 2001 (81) -0- (124) (205) ----- ------ ------ ------- Balance August 4, 2001 368 74 618 1,060 Current portion (included in accounts payable and accrued liabilities) 368 42 618 1,028 ----- ------ ------ ------- TOTAL NONCURRENT RESTRUCTURING RESERVES (INCLUDED IN OTHER LONG-TERM LIABILITIES) $ -0- $ 32 $ -0- $ 32 ===== ====== ====== =======
15 16 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 7 EARNINGS PER SHARE
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED AUGUST 4, 2001 JULY 29, 2000 ------------------------------------------ ----------------------------------------- (IN THOUSANDS, EXCEPT INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- ----------- ------------- --------- Earnings before discontinued operations $6,183 $5,531 Less: Preferred stock dividends (73) (75) ------ ------ ---- ------ ------ ---- BASIC EPS Income available to common shareholders 6,110 21,962 $.28 5,456 21,496 $.25 ==== ==== EFFECT OF DILUTIVE SECURITIES Options 518 529 5 1/2% convertible subordinated notes 969 4,906 947 4,918 Employees' preferred stock(1) 69 71 ------ ------ ---- ------ ------ ---- DILUTED EPS Income available to common shareholders plus assumed conversions $7,079 27,455 $.26 $6,403 27,014 $.24 ====== ====== ==== ====== ====== ====
(1) The Company's Employees' Subordinated Convertible Preferred Stock is convertible one for one to the Company's common stock. Because there are no dividends paid on this stock, these shares are assumed to be converted. 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 the period. 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 30,674, 38,324 and 24,946, respectively. The weighted shares outstanding reflects the effect of the stock buy back program of up to 6.8 million shares announced by the Company in Fiscal 1999, 2000 and 2001. The Company has repurchased 6.4 million shares as of August 4, 2001. 16 17 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 7 EARNINGS PER SHARE, CONTINUED
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED AUGUST 4, 2001 JULY 29, 2000 ------------------------------------------ ----------------------------------------- (IN THOUSANDS, EXCEPT INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- ----------- ------------- --------- Earnings before discontinued operations $14,521 $11,724 Less: Preferred stock dividends (147) (150) ------- ------ ---- ------- ------ ---- BASIC EPS Income available to common shareholders 14,374 21,904 $.66 11,574 21,542 $.54 ==== ==== EFFECT OF DILUTIVE SECURITIES Options 504 472 5 1/2% convertible subordinated notes 1,939 4,906 1,894 4,918 Employees' preferred stock(1) 69 72 ------- ------ ---- ------- ------ ---- DILUTED EPS Income available to common shareholders plus assumed conversions $16,313 27,383 $.60 $13,468 27,004 $.50 ======= ====== ==== ======= ====== ====
(1) The Company's Employees' Subordinated Convertible Preferred Stock is convertible one for one to the Company's common stock. Because there are no dividends paid on this stock, these shares are assumed to be converted. 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 the period. 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 30,674, 38,324 and 24,946, respectively. The weighted shares outstanding reflects the effect of the stock buy back program of up to 6.8 million shares announced by the Company in Fiscal 1999, 2000 and 2001. The Company has repurchased 6.4 million shares as of August 4, 2001. 17 18 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 8 LEGAL PROCEEDINGS New York State Environmental Proceedings The Company is a defendant in a civil action filed by the State of New York against the City of Gloversville, New York, and 33 other private defendants. The action arose out of the alleged disposal of certain hazardous material directly or indirectly into a municipal landfill and seeks recovery under a federal environmental statute and certain common law theories for the costs of investigating and performing remedial actions and damage to natural resources. The environmental authorities have selected a plan of remediation for the site with a total estimated cost of approximately $12.0 million. The Company was allocated liability for a 1.31% share of the remediation cost in non-binding mediation with other defendants and the State of New York. The State has offered to release the Company from further liability related to the site in exchange for payment of its allocated share plus a small premium, totaling approximately $180,000, and the Company has accepted. Assuming the settlement is completed as proposed, the Company believes it has fully provided for its liability in connection with the site. The Company has received notice from the New York State Department of Environmental Conservation (the "Department") that it deems remedial action to be necessary with respect to certain contaminants in the vicinity of a knitting mill operated by a former subsidiary of the Company from 1965 to 1969, and that it considers the Company a potentially responsible party. In August 1997, 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 with regard to the site, without admitting liability or accepting responsibility for any future remediation of the site. In conjunction with the consent order, the Company entered into an agreement with the owner of the site providing for a release from liability for property damage and for necessary access to the site, for payments totaling $400,000. The Company estimates that the cost of conducting the RIFS and implementing the interim remedial measure will be in the range of $3.2 million to $3.6 million. The Company believes that it has adequately reserved for the costs of conducting the RIFS and implementing the interim remedial measure contemplated by the consent order, but there is no assurance that the consent order will ultimately resolve the matter. 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 whether its liability, if any, beyond that voluntarily assumed by the consent order will have a material effect on its financial condition or results of operations. 18 19 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 8 LEGAL PROCEEDINGS, CONTINUED WHITEHALL ENVIRONMENTAL SAMPLING Pursuant to a work plan approved by the Michigan Department of Environmental Quality ("MDEQ") the Company has performed sampling and analysis of soil, sediments, surface water, groundwater and waste management areas at the Company's Volunteer Leather Company facility in Whitehall, Michigan. On June 29, 1999, the Company submitted a remedial action plan (the "Plan") for the site to MDEQ. The Plan proposed no direct remedial action with respect to soils at the site, which are in compliance with applicable regulatory standards, or lake sediments, which the Company believes do not pose a threat to human health or the environment and do not violate any applicable regulatory standard. The Plan included the filing of certain restrictive covenants encumbering the tannery property to prevent activities disturbing the lake sediments and uses of the property inconsistent with the applicable regulatory standards. The Company, with the approval of MDEQ, previously installed horizontal wells to capture groundwater from a portion of the site and treat it by air sparging. The Plan proposed continued operation of this system for an indefinite period and monitoring of groundwater samples to ensure that the system is functioning as intended. The Plan is subject to MDEQ approval. In December 1999, MDEQ responded to the Plan with a request for further information. On June 30, 1999, the City of Whitehall filed an action against the Company in the circuit court for the City of Muskegon alleging that the Company's and its predecessors' past wastewater management practices have adversely affected the environment, and seeking injunctive relief under Parts 17 and 201 of the Michigan Natural Resources Environmental Protection Act ("MNREPA") to require the Company to correct the alleged pollution. Further, the City alleges violations of City ordinances prohibiting blight and litter, and that the Whitehall Volunteer Leather plant constitutes a public nuisance. The Company filed an answer denying the material allegations of the complaint and asserting affirmative defenses and counterclaims against the City. The Company also moved to join the State of Michigan as a party to the action, since it has primary responsibility for administration of the environmental statutes underlying most of the City's claims. The State moved to dismiss the Company's action against it and to intervene in the case on a limited basis, seeking declaratory and injunctive relief regarding the restrictive covenants on the property, the State's jurisdiction under MNREPA Part 201 and its right of access to the property. On May 5, 2000, the court dismissed the Company's action against the State; the cross actions between the City and the Company remain. In connection with its decision during the second quarter of Fiscal 2001 to exit the leather business and to shut down the Whitehall facility, the Company formally proposed a compromise remediation plan (the "Compromise Proposal"), including limited sediment removal and additional upland remediation to bring the property into compliance with regulatory standards for non-industrial uses. The Company estimated that the Compromise Proposal would include incremental costs of approximately $2.2 million, which have been fully provided for. 19 20 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 8 LEGAL PROCEEDINGS, CONTINUED If the Compromise Proposal is approved and the litigation's outcome does not require additional remediation of the site, the Company does not expect remediation to have a material impact on its financial condition or results of operations. However, there can be no assurance that the Compromise Proposal will be approved, and the Company is unable to predict whether any further remediation that may ultimately be required will have a material effect on its financial condition or results of operations. 20 21 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 9 BUSINESS SEGMENT INFORMATION The Company currently operates four reportable business segments (not including the corporate segment): Journeys, comprised of Journeys and Journeys Kidz retail footwear chains; Jarman, comprised primarily of the Jarman and Underground Station retail footwear chains; Johnston & Murphy, comprised of Johnston & Murphy retail stores, direct marketing and wholesale distribution; and Licensed Brands, comprised of Dockers and Nautica Footwear. The Company has ended the license agreement with Nautica Apparel, Inc. to market Nautica footwear effective January 31, 2001. All the Company's segments sell footwear products at either retail or wholesale. The Company also operated the Leather segment during part of Fiscal 2001. The Company sold certain assets of its Volunteer Leather business on June 19, 2000, and has discontinued all Leather segment operations. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company's reportable segments are based on the way management organizes the segments in order to make operating decisions and assess performance along types of products sold. Journeys and Jarman sells primarily branded products from other companies while Johnston & Murphy and Licensed Brands sells primarily the Company's owned and licensed brands. Corporate assets include cash, deferred income taxes, prepaid pension cost and deferred note expense. The Company does not allocate certain costs to each segment in order to make decisions and assess performance. These costs include corporate overhead, interest expense, interest income, restructuring gains and other charges. Other includes severance and litigation.
THREE MONTHS ENDED JOHNSTON LICENSED AUGUST 4, 2001 JOURNEYS JARMAN & MURPHY BRANDS LEATHER CORPORATE CONSOLIDATED ---------------------------------------------------------------------------------------------------------------------------------- Sales $ 81,047 $ 22,956 $ 42,772 $ 20,388 $ -0- $ -0- $ 167,163 Intercompany sales -0- -0- 2 (622) -0- -0- (620) ---------------------------------------------------------------------------------------------------------------------------------- NET SALES TO EXTERNAL CUSTOMERS 81,047 22,956 42,774 19,766 -0- -0- 166,543 ---------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) 9,330 (1,032) 4,532 2,055 -0- (2,938) 11,947 Interest expense -0- -0- -0- -0- -0- 2,157 2,157 Interest income -0- -0- -0- -0- -0- 269 269 Restructuring gain -0- -0- -0- -0- -0- 205 205 Other -0- -0- -0- -0- -0- (386) (386) ---------------------------------------------------------------------------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES 9,330 (1,032) 4,532 2,055 -0- (5,007) 9,878 ---------------------------------------------------------------------------------------------------------------------------------- Total assets 138,393 48,265 75,662 28,867 605 85,218 377,010 Depreciation 1,661 733 814 35 -0- 695 3,938 Capital expenditures 4,889 1,778 933 18 -0- 2,407 10,025
21 22 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 9 BUSINESS SEGMENT INFORMATION, CONTINUED
THREE MONTHS ENDED JOHNSTON LICENSED JULY 29, 2000 JOURNEYS JARMAN & MURPHY BRANDS LEATHER CORPORATE CONSOLIDATED ---------------------------------------------------------------------------------------------------------------------------------- Sales $ 59,796 $ 20,498 $ 44,532 $ 19,321 $ -0- $ -0- $ 144,147 Intercompany sales -0- -0- (13) (891) -0- -0- (904) ---------------------------------------------------------------------------------------------------------------------------------- NET SALES TO EXTERNAL CUSTOMERS 59,796 20,498 44,519 18,430 -0- -0- 143,243 ---------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) 6,569 450 5,632 974 -0- (2,752) 10,873 Interest expense -0- -0- -0- -0- -0- 2,093 2,093 Interest income -0- -0- -0- -0- -0- 261 261 ---------------------------------------------------------------------------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS 6,569 450 5,632 974 -0- (4,584) 9,041 ---------------------------------------------------------------------------------------------------------------------------------- Total assets 101,113 37,319 68,792 24,667 6,901 91,385 330,177 Depreciation 1,199 518 652 28 91 650 3,138 Capital expenditures 5,217 2,764 1,291 19 -0- 988 10,279
---------------------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED JOHNSTON LICENSED AUGUST 4, 2001 JOURNEYS JARMAN & MURPHY BRANDS LEATHER CORPORATE CONSOLIDATED ---------------------------------------------------------------------------------------------------------------------------------- Sales $ 161,395 $ 48,027 $ 84,585 $46,078 $ -0- $ -0- $ 340,085 Intercompany sales -0- -0- 2 (1,626) -0- -0- (1,624) ---------------------------------------------------------------------------------------------------------------------------------- NET SALES TO EXTERNAL CUSTOMERS 161,395 48,027 84,587 44,452 -0- -0- 338,461 ---------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) 19,405 (101) 8,658 4,990 -0- (6,120) 26,832 Interest expense -0- -0- -0- -0- -0- 4,315 4,315 Interest income -0- -0- -0- -0- -0- 892 892 Restructuring gain -0- -0- -0- -0- -0- 205 205 Other -0- -0- -0- -0- -0- (386) (386) ---------------------------------------------------------------------------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES 19,405 (101) 8,658 4,990 -0- (9,724) 23,228 ---------------------------------------------------------------------------------------------------------------------------------- Total assets 138,393 48,265 75,662 28,867 605 85,218 377,010 Depreciation 3,244 1,444 1,630 78 -0- 1,374 7,770 Capital expenditures 8,630 3,321 1,673 28 -0- 2,781 16,433
---------------------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED JOHNSTON LICENSED JULY 29, 2000 JOURNEYS JARMAN & MURPHY BRANDS LEATHER CORPORATE CONSOLIDATED ---------------------------------------------------------------------------------------------------------------------------------- Sales $ 117,892 $ 41,518 $ 89,073 $ 43,350 $ -0- $ -0- $ 291,833 Intercompany sales -0- -0- (86) (1,860) -0- -0- (1,946) ---------------------------------------------------------------------------------------------------------------------------------- NET SALES TO EXTERNAL CUSTOMERS 117,892 41,518 88,987 41,490 -0- -0- 289,887 ---------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) 13,081 1,193 11,305 2,607 -0- (5,271) 22,915 Interest expense -0- -0- -0- -0- -0- 4,194 4,194 Interest income -0- -0- -0- -0- -0- 680 680 Other -0- -0- -0- -0- -0- (170) (170) ---------------------------------------------------------------------------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS 13,081 1,193 11,305 2,607 -0- (8,955) 19,231 ---------------------------------------------------------------------------------------------------------------------------------- Total assets 101,113 37,319 68,792 24,667 6,901 91,385 330,177 Depreciation 2,294 987 1,344 59 201 1,292 6,177 Capital expenditures 9,347 5,257 2,889 36 -0- 1,700 19,229
22 23 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion and the notes to the Consolidated Financial Statements include certain forward-looking statements, including all statements that do not refer to past or present events or conditions. Actual results could differ materially from those reflected by the forward-looking statements in this discussion and a number of factors may adversely affect future results, liquidity and capital resources. These factors include lower than expected consumer demand for the Company's products, whether caused by further weakening in the overall economy or by changes in fashions or tastes that the Company fails to anticipate or respond appropriately to, changes in buying patterns by significant wholesale customers, disruptions in product supply or distribution, the inability to adjust inventory levels to sales and changes in business strategies by the Company's competitors. Any greater than expected weakness in demand or disruption in supply could have an especially pronounced effect on the Company's performance in the second half of the year, because of the importance of the Holiday selling season. Other factors that could cause results to differ from expectations include the Company's ability to open, staff and support additional retail stores on schedule and at acceptable expense levels and the outcome of litigation and environmental matters involving the Company, including those discussed in Note 8 to the Consolidated Financial Statements. The recent terrorist attacks on the United States, possible responses by the U. S. government, the effects on consumer demand, the financial markets, product supply and distribution and other conditions increase the uncertainty inherent in forward-looking statements. 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, future revenue and margin trends cannot be reliably predicted and the Company may alter its business strategies to address changing conditions. SIGNIFICANT DEVELOPMENTS Revolving Credit Agreement On July 16, 2001, the Company entered into a revolving credit agreement with five banks providing for loans or letters of credit of up to $75 million. The agreement expires July 16, 2004. This agreement replaced a $65 million revolving credit agreement with three banks that was to expire September 24, 2002, providing for loans or letters of credit. Nautica Footwear License Cancellation The Company entered into an agreement with Nautica Apparel, Inc. to end its license to market footwear under the Nautica label, effective January 31, 2001. The Company sold Nautica - branded footwear for the first six months of Fiscal 2002 in order to fill existing customer orders and sell existing inventory. In connection with the termination of the Nautica Footwear license agreement, the Company recorded a pretax charge to earnings of $4.4 million ($2.7 million net of tax) in the fourth quarter of Fiscal 2001. The charge includes contractual obligations to Nautica Apparel for the license cancellation and other costs, primarily severance. Included in the charge was a $1.0 million inventory write-down which is reflected in gross margin on the income statement. 23 24 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations During the second quarter of Fiscal 2002 the Company recorded a restructuring gain of $0.3 million in connection with the termination of the Nautica Footwear license agreement. Included in the gain is a $0.1 million reversal of inventory write-down which is reflected in gross margin on the income statement. The remaining $0.4 million of anticipated costs associated with the Nautica license termination are expected to be incurred in the next twelve months. Volunteer Leather Divestiture On May 22, 2000, the Company's board of directors approved a plan to sell its Volunteer Leather finishing business and liquidate its tanning business, to allow the Company to be more focused on the retailing and marketing of branded footwear. Certain assets of the Volunteer Leather business were sold on June 19, 2000. The plan resulted in a pretax charge to earnings of $4.9 million ($3.0 million net of tax) in the second quarter of Fiscal 2001. Because Volunteer Leather constitutes the entire Leather segment of the Company's business, the charge to earnings is treated for financial reporting purposes as a provision for discontinued operations. The provision for discontinued operations included $1.3 million in asset write-downs and $3.6 million of other costs, including primarily employee severance and facility shutdown costs. As of August 4, 2001, $1.5 million of such other costs had been incurred and $1.6 million are expected to be incurred in the next twelve months. The approximately $0.5 million of other costs expected to be incurred beyond twelve months are classified as long-term liabilities in the consolidated balance sheet. The Volunteer Leather business employed approximately 160 people. Share Repurchase Program In total, the Company's board of directors has authorized the repurchase of 6.8 million shares of the Company's common stock since the third quarter of Fiscal 1999. The purchases may be made on the open market or in privately negotiated transactions. As of August 4, 2001, the Company had repurchased 6.4 million shares at a cost of $60.5 million pursuant to all authorizations. No shares were purchased during the first six months of Fiscal 2002. BUSINESS SEGMENTS The Company currently operates four reportable business segments (not including the corporate segment): Journeys, comprised of Journeys and Journeys Kidz retail footwear chains; Jarman, comprised primarily of the Jarman and Underground Station retail footwear chains; Johnston & Murphy, comprised of Johnston & Murphy retail stores, direct marketing and wholesale distribution; and Licensed Brands, comprised of Dockers and Nautica Footwear. The Company has ended the license agreement with Nautica Apparel, Inc. to market Nautica footwear effective January 31, 2001. The Company also operated the Leather segment during part of Fiscal 2001. The Company sold certain assets of its Volunteer Leather business on June 19, 2000 and has discontinued all Leather segment operations. See "Significant Developments." 24 25 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS - SECOND QUARTER FISCAL 2002 COMPARED TO FISCAL 2001 The Company's net sales in the second quarter ended August 4, 2001 increased 16.3% to $166.5 million from $143.2 million in the second quarter ended July 29, 2000. Gross margin increased 13.6% to $78.4 million in the second quarter this year from $69.0 million in the same period last year but decreased as a percentage of net sales from 48.1% to 47.1%. Selling and administrative expenses increased 15.0% to $66.8 million in the second quarter this year from $58.1 million in the second quarter last year but decreased as a percentage of net sales from 40.6% to 40.1%. Explanations of the changes in results of operations are provided by business segment in discussions following these introductory paragraphs. Earnings before income taxes and discontinued operations ("pretax earnings") for the second quarter ended August 4, 2001 were $9.9 million compared to $9.0 million for the second quarter ended July 29, 2000. Pretax earnings for the second quarter ended August 4, 2001 included a $0.3 million restructuring gain related to the termination of the Nautica Footwear license agreement. Net earnings for the second quarter ended August 4, 2001 were $6.2 million ($0.26 diluted earnings per share) compared to $2.6 million ($0.13 diluted earnings per share) for the second quarter ended July 29, 2000. Net earnings for the second quarter ended July 29, 2000 included a $3.0 million ($0.11 diluted earnings per share) charge to earnings (net of tax) for the divestiture of the Company's Volunteer Leather business. Journeys
Three Months Ended -------------------------- August 4, July 29, % 2001 2000 Change ---------- ---------- ------ (dollars in thousands) Net sales............................................... $ 81,047 $ 59,796 35.5% Operating income........................................ $ 9,330 $ 6,569 42.0% Operating margin........................................ 11.5% 11.0%
Reflecting both a 27% increase in average Journeys 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 1% increase in comparable store sales, net sales from Journeys increased 35.5% for the second quarter ended August 4, 2001 compared to the same period last year. The average price per pair of shoes decreased 2% in the second quarter of Fiscal 2002, primarily reflecting changes in product mix, while unit sales increased 38% during the same period. The store count for Journeys was 470 stores at the end of the second quarter of Fiscal 2002, including 8 Journeys Kidz stores, compared to 377 stores at the end of the second quarter last year. 25 26 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Journeys operating income for the second quarter ended August 4, 2001 was up 42.0% to $9.3 million compared to $6.6 million for the second quarter ended July 29, 2000. The increase was due to increased sales and decreased expenses as a percentage of net sales. Jarman
Three Months Ended -------------------------- August 4, July 29, % 2001 2000 Change ---------- ---------- ------ (dollars in thousands) Net sales............................................... $ 22,956 $ 20,498 12.0% Operating income (loss)................................. $ (1,032) $ 450 NA Operating margin........................................ (4.5)% 2.2%
Primarily due to a 19% increase in average stores operated, offset by an 11% decrease in comparable store sales, net sales from the Jarman division (including Underground Station stores) increased 12.0% for the second quarter ended August 4, 2001 compared to the same period past year. The increase in sales was driven by Underground Station stores. The average price per pair of shoes decreased 7% in the second quarter of Fiscal 2002, primarily reflecting increased markdowns and changes in product mix, while unit sales increased 16% during the same period. Jarman operated 217 stores at the end of the second quarter of Fiscal 2002, including 79 Underground Station stores. The Company operated 186 stores in the Jarman division at the end of the second quarter last year, including 33 Underground Station stores. Going forward, the Company does not plan to open any new Jarman stores, and expects that all new store openings in this segment will be Underground Station stores, and that many of the existing Jarman stores will be converted to Underground Station stores. During the second quarter ended August 4, 2001, three Jarman stores were converted to Underground Station stores. Jarman's operating loss for the second quarter ended August 4, 2001 was $1.0 million compared to operating income of $0.5 million for the second quarter ended July 29, 2000. The decrease was due to decreased gross margin as a percentage of net sales, due primarily to higher markdowns and changes in product mix, and to increased expenses as a percentage of net sales. 26 27 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Johnston & Murphy
Three Months Ended ------------------------- August 4, July 29, % 2001 2000 Change ---------- ---------- ------- (dollars in thousands) Net sales............................................... $ 42,774 $ 44,519 (3.9)% Operating income........................................ $ 4,532 $ 5,632 (19.5)% Operating margin........................................ 10.6% 12.7%
Johnston & Murphy net sales decreased 3.9% to $42.8 million for the second quarter ended August 4, 2001 from $44.5 million for the second quarter ended July 29, 2000, reflecting a 9% decrease in comparable store sales for Johnston & Murphy retail operations and a 2% decrease in Johnston & Murphy wholesale sales. Retail operations accounted for 64% of Johnston & Murphy segment sales in the second quarter this year, down from 65% in the second quarter last year. The store count for Johnston & Murphy retail operations at the end of the second quarter of Fiscal 2002 included 144 Johnston & Murphy stores and factory stores compared to 152 Johnston & Murphy stores and factory stores at the end of the second quarter of Fiscal 2001. The average price per pair of shoes for Johnston & Murphy retail decreased 3% in the second quarter this year, reflecting primarily changes in product mix and increased markdowns, and unit sales decreased 4% during the same period. Unit sales for the Johnston & Murphy wholesale business decreased 1% in the second quarter of Fiscal 2002 and the average price per pair of shoes decreased 2% for the same period, reflecting increased promotional activity and mix changes. Johnston & Murphy operating income for the second quarter ended August 4, 2001 decreased 19.5% from $5.6 million for the second quarter ended July 29, 2000 to $4.5 million, primarily due to decreased sales and decreased gross margin as a percentage of net sales, due primarily to increased markdowns and changes in product mix. Licensed Brands
Three Months Ended ------------------------- August 4, July 29, % 2001 2000 Change ---------- ---------- ------ (dollars in thousands) Net sales............................................... $ 19,766 $ 18,430 7.2% Operating income........................................ $ 2,055 $ 974 111.0% Operating margin 10.4% 5.3%
27 28 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Licensed Brands' net sales increased 7.2% to $19.8 million for the second quarter ended August 4, 2001 from $18.4 million for the second quarter ended July 29, 2000. The sales increase reflected a 23% increase in net sales of Dockers Footwear, partially offset by declining sales of Nautica Footwear. Unit sales for the Licensed Brands wholesale businesses increased 15% for the second quarter this year, while the average price per pair of shoes decreased 6% for the same period, reflecting increased promotional activities in the Nautica business and changes in product mix. Licensed Brands' operating income for the second quarter ended August 4, 2001 increased 111.0% from $1.0 million for the second quarter ended July 29, 2000 to $2.1 million, primarily due to increased sales, increased gross margin as a percentage of net sales and decreased expenses as a percentage of net sales. For additional information regarding the Company's decision to exit the Nautica Footwear business, see "Significant Developments - Nautica Footwear License Cancellation." Net sales for Nautica footwear were $1.8 million and $3.8 million for the second quarter of Fiscal 2002 and 2001, respectively, while operating losses were $0.3 million and $0.8 million for the second quarter of Fiscal 2002 and 2001, respectively. Corporate, Interest Expenses and Other Charges Corporate and other expenses for the second quarter ended August 4, 2001 were $2.9 million compared to $2.8 million for the second quarter ended July 29, 2000 (exclusive of other charges of $0.2 million, primarily litigation and severance charges partially offset by a $0.3 million gain relating to the Nautica restructuring, in the second quarter this year), an increase of 6.8%. The increase in corporate expenses in the second quarter this year is attributable primarily to costs associated with preparations to construct a new distribution center and increased professional fees. Interest expense increased 3.1% from $2.1 million in the second quarter ended July 29, 2000 to $2.2 million for the second quarter ended August 4, 2001, primarily due to increased bank activity fees due to the increased number of individual bank accounts related to new store openings. Interest income remained flat at $0.3 million. There were no borrowings under the Company's revolving credit facility during the three months ended August 4, 2001 or July 29, 2000. RESULTS OF OPERATIONS - SIX MONTHS FISCAL 2002 COMPARED TO FISCAL 2001 The Company's net sales in the first six months ended August 4, 2001 increased 16.8% to $338.5 million from $289.9 million in the first six months ended July 29, 2000. Gross margin increased 16.9% to $160.5 million in the first six months this year from $137.3 million in the same period last year and was flat as a percentage of net sales at 47.4%. Selling and administrative expenses in the first six months this year increased 17.0% from the first six months last year and increased as a percentage of net sales from 39.5% to 39.6%. Explanations of the changes in results of operations are provided by business segment in discussions following this introductory paragraph. 28 29 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Earnings before income taxes and discontinued operations ("pretax earnings") for the first six months ended August 4, 2001 were $23.2 million compared to $19.2 million for the first six months ended July 29, 2000. Pretax earnings for the first six months ended August 4, 2001 included a $0.3 million restructuring gain related to the termination of the Nautica Footwear license agreement. Net earnings for the first six months ended August 4, 2001 were $14.5 million ($.60 diluted earnings per share) compared to $8.5 million ($.38 diluted earnings per share) for the first six months ended July 29, 2000. Net earnings for the first six months ended July 29, 2000 included a $3.0 million ($.12 diluted earnings per share) charge to earnings (net of tax) for the divestiture of the Company's Volunteer Leather business. Journeys
Six Months Ended ------------------------- August 4, July 29, % 2001 2000 Change ---------- --------- ------ (dollars in thousands) Net sales............................................... $ 161,395 $ 117,892 36.9% Operating income........................................ $ 19,405 $ 13,081 48.3% Operating margin........................................ 12.0% 11.1%
Reflecting both a 28% increase in average Journeys 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 six months divided by seven) and a 6% increase in comparable store sales, net sales from Journeys increased 36.9% for the first six months ended August 4, 2001 compared to the same period last year. The average price per pair of shoes decreased 5% in the first six months of Fiscal 2002, primarily reflecting changes in product mix, while unit sales increased 42% during the same period. The store count for Journeys was 470 stores at the end of the first six months of Fiscal 2002, including 8 Journeys Kidz stores, compared to 377 stores at the end of the first six months last year. Journeys operating income for the first six months ended August 4, 2001 was up 48.3% to $19.4 million compared to $13.1 million for the first six months ended July 29, 2000. The increase was due to increased sales, both from store openings and a comparable store sales increase, increased gross margin as a percentage of net sales and decreased expenses as a percentage of net sales. 29 30 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Jarman
Six Months Ended -------------------------- August 4, July 29, % 2001 2000 Change ---------- ---------- ------ (dollars in thousands) Net sales............................................... $ 48,027 $ 41,518 15.7% Operating income (loss)................................. $ (101) $ 1,193 NA Operating margin........................................ (0.2)% 2.9%
Primarily due to a 22% increase in average stores operated, offset by a 7% decrease in comparable store sales, net sales from the Jarman division (including Underground Station stores) increased 15.7% for the first six months ended August 4, 2001 compared to the same period last year. The increase in sales was driven primarily by Underground Station stores. The average price per pair of shoes decreased 6% in the first six months of Fiscal 2002, primarily reflecting increased markdowns and changes in product mix, while unit sales increased 18% during the same period. Jarman operated 217 stores at the end of the first six months of Fiscal 2002, including 79 Underground Station stores. The Company operated 186 stores in the Jarman division at the end of the first six months last year, including 33 Underground Station stores. Going forward, the Company does not plan to open any new Jarman stores, and expects that all new store openings in this segment will be Underground Station stores, and that many of the existing Jarman stores will be converted to Underground Station stores. During the six months ended August 4, 2001, six Jarman stores were converted to Underground Station stores. Jarman's operating loss for the first six months ended August 4, 2001 was $0.1 million compared to operating income of $1.2 million for the first six months ended July 29, 2000. The decrease was due to a lesser extent from decreased gross margin as a percentage of net sales, due primarily to higher markdowns and changes in product mix, but primarily due to increased expenses as a percentage of net sales. Johnston & Murphy
Six Months Ended -------------------------- August 4, July 29, % 2001 2000 Change ---------- ---------- ------ (dollars in thousands) Net sales............................................... $ 84,587 $ 88,987 (4.9)% Operating income........................................ $ 8,658 $ 11,305 (23.4)% Operating margin........................................ 10.2% 12.7%
Johnston & Murphy net sales decreased 4.9% to $84.6 million for the first six months ended August 4, 2001 from $89.0 million for the first six months ended July 29, 2000, reflecting a 9% decrease in 30 31 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations comparable store sales for Johnston & Murphy retail operations and an 8% decrease in Johnston & Murphy wholesale sales. Retail operations accounted for 65% of Johnston & Murphy segment sales in the first six months this year, up from 64% of Johnston & Murphy segment sales in the first six months last year. The store count for Johnston & Murphy retail operations at the end of the first six months of Fiscal 2002 included 144 Johnston & Murphy stores and factory stores compared to 152 Johnston & Murphy stores and factory stores at the end of the first six months of Fiscal 2001. The average price per pair of shoes for Johnston & Murphy retail decreased 2% in the first six months this year, reflecting primarily changes in product mix, and unit sales decreased 5% during the same period. Unit sales for the Johnston & Murphy wholesale business decreased 7% in the first six months of Fiscal 2002, and the average price per pair of shoes decreased 2% for the same period, reflecting increased promotional activities and mix changes. Johnston & Murphy operating income for the first six months ended August 4, 2001 decreased 23.4% from $11.3 million for the first six months ended July 29, 2000 to $8.7 million, primarily due to decreased sales, decreased gross margin as a percentage of net sales, due primarily to increased promotional activity and changes in product mix, and to increased expenses as a percentage of net sales. Licensed Brands
Six Months Ended -------------------------- August 4, July 29, % 2001 2000 Change ---------- ---------- ------ (dollars in thousands) Net sales............................................... $ 44,452 $ 41,490 7.1% Operating income........................................ $ 4,990 $ 2,607 91.4% Operating margin........................................ 11.2% 6.3%
Licensed Brands' net sales increased 7.1% to $44.5 million for the first six months ended August 4, 2001 from $41.5 million for the first six months ended July 29, 2000. The sales increase reflected a 29% increase in net sales of Dockers Footwear, offset by declining sales of Nautica Footwear. Unit sales for the Licensed Brands wholesale businesses increased 13% for the first six months this year, while the average price per pair of shoes decreased 3% for the same period, reflecting increased promotional activities in the Nautica business. Licensed Brands' operating income for the first six months ended August 4, 2001 increased 91.4% from $2.6 million for the first six months ended July 29, 2000 to $5.0 million, primarily due to increased sales, increased gross margin as a percentage of net sales and decreased expenses as a percentage of net sales. For additional information regarding the Company's decision to exit the Nautica Footwear business, see "Significant Developments - Nautica Footwear License Cancellation." Net sales for Nautica footwear were $6.0 million and $11.6 million for the first six months of Fiscal 2002 and 2001, 31 32 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations respectively, while operating losses were $0.6 million and $1.2 million for the first six months of Fiscal 2002 and 2001, respectively. Corporate, Interest Expenses and Other Charges Corporate and other expenses for the first six months ended August 4, 2001 were $6.1 million compared to $5.3 million for the first six months ended July 29, 2000 (exclusive of other charges of $0.2 million, primarily litigation and severance charges, partially offset by a $0.3 million gain relating to the Nautica restructuring, this year and other charges of $0.2 million, primarily litigation and severance charges, last year), an increase of 16.1%. The increase in corporate expenses in the first six months this year is attributable primarily to costs associated with preparations to construct a new distribution center and increased professional fees. Interest expense increased 2.9% from $4.2 million in the first six months ended July 29, 2000 to $4.3 million for the first six months ended August 4, 2001, primarily due to increased bank activity fees due to the increased number of individual bank accounts related to new store openings. Interest income increased 31% from $0.7 million in the first six months last year to $0.9 million in the first six months this year due to increases in average interest bearing short-term investments. There were no borrowings under the Company's revolving credit facility during the six months ended August 4, 2001 or July 29, 2000. LIQUIDITY AND CAPITAL RESOURCES The following table sets forth certain financial data at the dates indicated.
August 4, July 29, 2001 2000 ----------- -------- (dollars in millions) Cash and short-term investments ............................................. $ 24.5 $ 38.3 Working capital ............................................................. $ 156.5 $ 134.0 Long-term debt (includes current maturities) ................................ $ 103.2 $ 103.5 Current ratio ............................................................... 2.5X 2.4X
Working Capital The Company's business is somewhat seasonal, with the Company's investment in inventory and accounts receivable normally reaching peaks in the spring and fall of each year. Cash flow from operations is generated principally in the fourth quarter of each fiscal year. Cash used in operating activities was $24.5 million in the first six months of Fiscal 2002 compared to $1.1 million cash provided by operating activities in the first six months of Fiscal 2001. The $25.6 million decrease in cash flow from operating activities reflects primarily a $15.9 million 32 33 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations increase in inventory primarily due to new store openings, planned seasonal increases and an increase in Johnston and Murphy inventory due to decreased sales from plan, and to decreased accrued liabilities primarily due to payments of incentive compensation accruals, a $5.5 million increase in taxes paid and a $4.0 million increase in restructuring payments due primarily to the Nautica restructuring. The Company has opened a net of 116 full service stores since last July 29, 2000 contributing to the increased seasonality. The $47.9 million increase in inventories at August 4, 2001 from February 3, 2001 levels reflects increases in retail inventory to support the net increase of 52 stores in the first six months this year, planned seasonal increases and an increase in Johnston & Murphy inventory due to decreased sales from plan for the first six months this year. Accounts receivable at August 4, 2001 increased $3.9 million compared to February 3, 2001 primarily due to increased wholesale sales and terms given due to promotional activities combined with a slowing of payments from customers. Cash provided (or used) due to changes in accounts payable and accrued liabilities are as follows:
Six Months Ended ------------------------------ Aug. 4, Jul. 29, 2001 2000 ---------- --------- (in thousands) Accounts payable ............................................................ $ 23,962 $ 24,911 Accrued liabilities ......................................................... (19,249) (6,225) ---------- --------- $ 4,713 $ 18,686 ========== =========
The fluctuations in accounts payable for the first six months this year from the first six months last year are due to changes in payment terms negotiated with individual vendors, inventory levels, payment timing and buying patterns. The change in accrued liabilities for the first six months this year was due primarily to payment of incentive compensation accruals, income tax payments and restructuring payments. There were no revolving credit borrowings during the first six months ended August 4, 2001 and July 29, 2000, as cash generated from operations and cash on hand funded seasonal working capital requirements and capital expenditures. On July 16, 2001, the Company entered into a revolving credit agreement with five banks providing for loans or letters of credit of up to $75 million. The agreement expires July 16, 2004. Capital Expenditures Total capital expenditures in Fiscal 2002 are expected to be approximately $53.8 million. These include expected retail expenditures of $28.9 million to open approximately 100 Journeys stores, 12 Journeys Kidz stores, 10 Johnston & Murphy stores and factory stores and 32 Underground Station stores and to complete 35 major store renovations. Capital expenditures for wholesale and manufacturing operations and other purposes, are expected to be approximately $24.9 million, including approximately $1.8 million for new systems to improve customer service and support the Company's growth and $22.0 million to $24.0 million for a new distribution center. 33 34 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Due to the Company's retail growth, the Company has begun preparations to construct a new distribution center. The Company signed an agreement to purchase 215 acres in Wilson County, Tennessee to develop a new 322,000 square foot distribution facility. The Company expects a completion date in Spring 2002. The Company expects the Fiscal 2002 cost of the facility to be in the range of $22.0 million to $24.0 million. ENVIRONMENTAL AND OTHER CONTINGENCIES The Company is subject to certain loss contingencies related to environmental proceedings and other legal matters, including those disclosed in Note 8 to the Company's Consolidated Financial Statements. The Company has made provisions for certain of these contingencies, including approximately $2.6 million reflected in Fiscal 2001 and $472,000 reflected in Fiscal 2000. The Company monitors these matters on an ongoing basis and at least quarterly management reviews the Company's reserves and accruals in relation to each of them, adjusting provisions as management deems necessary in view of changes in available information. Changes in estimates of liability are reported in the periods when they occur. Consequently, management believes that its reserve in relation to each proceeding is a 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. Because of uncertainties and risks inherent in litigation generally and in environmental proceedings in particular, however, 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 Company's financial condition or results of operations. FUTURE CAPITAL NEEDS The Company expects that cash on hand and cash provided by operations will be sufficient to fund all of its capital expenditures through Fiscal 2002, although the Company may borrow from time to time to support seasonal working capital requirements. The approximately $5.0 million of costs associated with the prior restructurings and discontinued operations that are expected to be incurred during the next twelve months are also expected to be funded from cash on hand. In February 2000, the Company authorized the additional repurchase, from time to time, of up to 1.0 million shares of the Company's common stock of which there are 372,000 shares remaining to be repurchased under the authorization. These purchases will be funded from available cash. The Company has repurchased a total of 6.4 million shares at a cost of $60.5 million from all authorizations for Fiscal 1999, Fiscal 2000 and Fiscal 2001. No shares were purchased during the first six months of Fiscal 2002. There were $6.5 million of letters of credit outstanding under the revolving credit agreement at August 4, 2001, leaving availability under the revolving credit agreement of $68.5 million. 34 35 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations The Company's revolving credit agreement restricts the payment of dividends and other payments with respect to capital stock, however the Company may make payments with respect to preferred stock. At August 4, 2001, $13.0 million was available for such payments related to common stock. The aggregate of annual dividend requirements on the Company's 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 $294,000. FINANCIAL MARKET RISK The following discusses the Company's exposure to financial market risk related to changes in interest rates and foreign currency exchange rates. Outstanding Debt of the Company - The Company's outstanding long-term debt of $103.2 million 5 1/2% convertible subordinated notes due April 2005 bears interest at a fixed rate. Accordingly, there would be no immediate impact on the Company's interest expense due to fluctuations in market interest rates. Cash and Short-Term Investments - The Company's cash and short-term investment 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 August 4, 2001. As a result, the Company considers the interest rate market risk implicit in these investments at August 4, 2001, to be low. 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 Company's practice to hedge its risks through the purchase of forward foreign exchange contracts. At August 4, 2001, the Company had $27.9 million of foreign exchange contracts for Euro. The Company's 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 loss on contracts outstanding at August 4, 2001 was $0.1 million from current spot rates. As of August 4, 2001, a 10% adverse change in foreign currency exchange rates from market rates would decrease the fair value of the contracts by approximately $2.6 million. Accounts Receivable - The Company's accounts receivable balance at August 4, 2001 is concentrated in its two remaining wholesale businesses, which sell primarily to department stores and independent retailers across the United States. Two customers account for 27% of the Company's trade accounts receivable balance as of August 4, 2001. 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. 35 36 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Summary - Based on the Company's overall market interest rate and foreign currency rate exposure at August 4, 2001, the Company believes that the effect, if any, of reasonably possible near-term changes in interest rates or fluctuations in foreign currency exchange rates on the Company's consolidated financial position, result of operations or cash flows for Fiscal 2002 would not be material. CHANGES IN ACCOUNTING PRINCIPLES The Company implemented Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" in the first quarter of Fiscal 2002. This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 requires 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. For the six months ended August 4, 2001, the Company recorded a loss on foreign currency forward contracts of $0.6 million in accumulated other comprehensive income. In July 2000, the Emerging Issues Task Force issued EITF: Issue 00-10, "Accounting for Shipping and Handling Fees and Costs." The new pronouncement requires shipping and handling billings to customers be recorded as revenue. Amounts for shipping and handling costs can no longer be netted with related shipping and handling billings. The Company has restated its financial statements for Fiscal 2001, 2000 and 1999 to reflect the change in accounting for shipping and handling fees and costs. OUTLOOK This "Outlook" section in this Form 10-Q contains a number of forward-looking statements relating to sales, earnings per share, capital expenditures and store opening expectations for Fiscal 2002. These forward-looking statements are based on the Company's expectations as of September 18, 2001. All of the forward-looking statements are based on management's current expectations and are inherently uncertain. Actual results could differ materially from those reflected by the forward-looking statements in this discussion and a number of factors may adversely affect future results, liquidity and capital resources. These factors include lower than expected consumer demand for the Company's products, whether caused by further weakening in the overall economy or by changes in fashions or tastes that the Company fails to anticipate or respond appropriately to, changes in buying patterns by significant wholesale customers, disruptions in product supply or distribution, the inability to adjust inventory levels to sales and changes in business strategies by the Company's competitors. Any greater than expected weakness in demand or disruption in supply could have an especially pronounced effect on the Company's performance in the second half of the year, because of the importance of the Holiday selling season. Other factors that could cause results to differ from expectations include the Company's ability to open, staff and support additional retail stores on schedule and at acceptable expense levels and the outcome of litigation and environmental matters 36 37 GENESCO INC. AND CONSOLIDATED SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations involving the Company, including those discussed in Note 8 to the Consolidated Financial Statements. The recent terrorist attacks on the United States, possible responses by the U. S. government, the effects on consumer demand, the financial markets, product supply and distribution and other conditions increase the uncertainty inherent in forward-looking statements. 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, future revenue and margin trends cannot be reliably predicted and the Company may alter its business strategies to address changing conditions. The Company expects net sales growth in the range of $760 million to $767 million for Fiscal 2002. The Company expects earnings per share to be in the range of $1.61 to $1.65 per share for Fiscal 2002. It expects the earnings improvement from Fiscal 2001 to be primarily attributable to net sales growth and to selling, general and administrative expense leverage related to same store sales growth. The Company expects capital expenditures for Fiscal 2002 to be approximately $53.8 million. The Company plans to open 100 Journeys stores, 12 Journeys Kidz stores, 32 Underground Station stores and 10 Johnston & Murphy stores and factory stores. The Company also plans to build a new distribution center with current year expenditures of approximately $22.0 - $24.0 million. 37 38 PART II - OTHER INFORMATION ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company incorporates by reference the information regarding market risk to appear under the heading "Financial Market Risk" in Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's annual meeting of shareholders held on June 27, 2001, shares representing a total of 22,091,926 votes were outstanding and entitled to vote. At the meeting, shareholders of the Company: (1) elected ten directors nominated by the board of directors by the following votes:
Votes Votes "For" "Withheld" ----------- ---------- Leonard L. Berry 19,886,716 346,928 Robert V. Dale 19,884,036 349,608 W. Lipscomb Davis, Jr. 19,882,760 350,884 Matthew C. Diamond 19,878,681 354,963 Ben T. Harris 14,398,100 5,835,544 Kathleen Mason 19,885,236 348,408 Hal N. Pennington 19,885,030 348,614 Linda H. Potter 19,878,681 354,963 William A. Williamson, Jr. 19,882,975 350,669 William S. Wire II 18,791,580 1,442,064
(2) approved an amendment to the Company's 1996 Stock Incentive Plan by a vote of 14,365,291 for, 3,354,388 against, with 56,446 abstentions. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K EXHIBITS (10)h. Second Amended, Restated and Modified Loan Agreement dated as of July 16, 2001 among the Company and Bank of America, N.A., Fifth Third National Bank, Fleet National Bank, The Chase Manhattan Bank and Bank One, N.A. --------------- REPORTS ON FORM 8-K The Company filed current reports on Form 8-K on June 25, 2001, July 9, 2001, August 6, 2001 and August 27, 2001 disclosing Regulation FD disclosures. 38 39 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 September 18, 2001 39