Document
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended May 5, 2018
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from              to             
Commission File No. 1-3083
 
Genesco Inc.
(Exact name of registrant as specified in its charter)
 
 
Tennessee
 
62-0211340
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
Genesco Park, 1415 Murfreesboro Road
Nashville, Tennessee
 
37217-2895
(Address of principal executive offices)
 
(Zip Code)
 
Registrant's telephone number, including area code: (615) 367-7000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer; an accelerated filer; a non-accelerated filer; a smaller reporting company; or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer
 
x
 
Accelerated filer
o
 
 
 
 
Non-accelerated filer
 
o   (Do not check if smaller reporting company)
 
Smaller reporting company
o
Emerging growth company
 
o
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  o    No  x
As of June 1, 2018, 19,915,132 shares of the registrant's common stock were outstanding.
 


Table of Contents

INDEX
 
 
 
 



2

Table of Contents

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

Assets
May 5, 2018

 
February 3, 2018

 
April 29, 2017

Current Assets:
 
 
 
 
 
  Cash and cash equivalents
$
30,880

 
$
39,937

 
$
43,371

  Accounts receivable, net of allowances of $5,584 at May 5, 2018,
 
 
 
 
 
$4,593 at Feb. 3, 2018 and $3,764 at April 29, 2017
51,421

 
43,292

 
54,314

  Inventories
552,475

 
542,625

 
578,102

  Prepaids and other current assets
71,720

 
67,234

 
63,899

Total current assets
706,496

 
693,088

 
739,686

 
 
 
 
 
 
Property and equipment:
 
 
 
 
 
Land
7,954

 
8,065

 
7,847

Buildings and building equipment
81,347

 
79,587

 
56,032

Computer hardware, software and equipment
222,155

 
213,335

 
188,818

Furniture and fixtures
179,407

 
179,008

 
163,117

Construction in progress
25,616

 
33,625

 
44,835

Improvements to leased property
440,293

 
440,719

 
415,043

Property and equipment, at cost
956,772

 
954,339

 
875,692

Accumulated depreciation
(579,409
)
 
(571,710
)
 
(533,082
)
Property and equipment, net
377,363

 
382,629

 
342,610

Deferred income taxes
24,842

 
25,077

 
15,289

Goodwill
96,086

 
100,308

 
272,880

Trademarks, net of accumulated amortization of $5,582 at May 5,
 
 
 
 
 
   2018, $5,593 at Feb. 3, 2018 and $5,563 at April 29, 2017
86,303

 
87,898

 
84,387

Other intangibles, net of accumulated amortization of $17,372 at
 
 
 
 
 
May 5, 2018, $17,439 at Feb. 3, 2018 and $16,448 at April 29, 2017
1,578

 
1,794

 
2,165

Other noncurrent assets
24,757

 
24,559

 
22,359

Total Assets
$
1,317,425

 
$
1,315,353

 
$
1,479,376










3


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

Liabilities and Equity
May 5, 2018

 
February 3, 2018

 
April 29, 2017

Current Liabilities:
 
 
 
 
 
  Accounts payable
$
146,375

 
$
140,962

 
$
175,588

  Accrued employee compensation
23,557

 
20,616

 
19,761

  Accrued other taxes
14,008

 
16,114

 
18,400

  Accrued income taxes
67

 
1,488

 
8,746

  Current portion – long-term debt
1,690

 
1,766

 
1,617

  Other accrued liabilities
53,502

 
72,220

 
65,424

  Provision for discontinued operations
1,804

 
1,902

 
3,164

Total current liabilities
241,003

 
255,068

 
292,700

Long-term debt
103,994

 
86,619

 
136,390

Pension liability

 

 
6,094

Deferred rent and other long-term liabilities
141,882

 
141,255

 
129,617

Provision for discontinued operations
1,707

 
1,707

 
1,713

Total liabilities
488,586

 
484,649

 
566,514

Commitments and contingent liabilities

 

 

Equity:
 
 
 
 
 
Non-redeemable preferred stock
1,040

 
1,052

 
1,059

Common equity:
 
 
 
 
 
Common stock, $1 par value:
 
 
 
 
 
Authorized: 80,000,000 shares
 
 
 
 
 
Issued/Outstanding:
 
 
 
 
 
May 5, 2018 – 20,404,230/19,915,766
 
 
 
 
 
February 3, 2018 – 20,392,253/19,903,789
 
 
 
 
 
April 29, 2017 – 20,082,245/19,593,781
20,404

 
20,392

 
20,082

Additional paid-in capital
254,230

 
250,877

 
241,023

Retained earnings
605,984

 
603,902

 
716,108

Accumulated other comprehensive loss
(36,890
)
 
(29,192
)
 
(48,947
)
Treasury shares, at cost (488,464 shares)
(17,857
)
 
(17,857
)
 
(17,857
)
Total Genesco equity
826,911

 
829,174

 
911,468

Noncontrolling interest – non-redeemable
1,928

 
1,530

 
1,394

Total equity
828,839

 
830,704

 
912,862

Total Liabilities and Equity
$
1,317,425

 
$
1,315,353

 
$
1,479,376


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

4


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

 
Three Months Ended
 
May 5, 2018

 
April 29, 2017

Net sales
$
644,959

 
$
643,368

Cost of sales
323,131

 
324,455

Selling and administrative expenses
322,124

 
315,968

Asset impairments and other, net
1,552

 
119

Earnings (loss) from operations
(1,848
)
 
2,826

Other components of net periodic benefit cost
20

 
32

Interest expense, net:
 
 
 
Interest expense
1,047

 
1,177

Interest income
(19
)
 

Total interest expense, net
1,028

 
1,177

Earnings (loss) from continuing operations before income taxes
(2,896
)
 
1,617

Income tax expense (benefit)
(588
)
 
620

Earnings (loss) from continuing operations
(2,308
)
 
997

Provision for discontinued operations, net
(23
)
 
(112
)
Net Earnings (Loss)
$
(2,331
)
 
$
885

 
 
 
 
Basic earnings (loss) per common share:
 
 
 
Continuing operations
$
(0.12
)
 
$
0.05

Discontinued operations
0.00

 
0.00

     Net earnings (loss)
$
(0.12
)
 
$
0.05

Diluted earnings (loss) per common share:
 
 
 
Continuing operations
$
(0.12
)
 
$
0.05

Discontinued operations
0.00

 
0.00

    Net earnings (loss)
$
(0.12
)
 
$
0.05


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


5


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

 
Three Months Ended
 
May 5, 2018

 
April 29, 2017

Net earnings (loss)
$
(2,331
)
 
$
885

Other comprehensive income (loss):
 
 
 
Pension liability adjustments, net of tax of $0.0 and $0.1 million for the three months ended May 5, 2018 and April 29, 2017, respectively.
140

 
132

Postretirement liability adjustments, net of tax of $0.0 million for each of the three months ended May 5, 2018 and April 29, 2017
26

 
23

Foreign currency translation adjustments
(7,864
)
 
2,190

Total other comprehensive income (loss)
(7,698
)
 
2,345

Comprehensive income (loss)
$
(10,029
)
 
$
3,230


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


6


Genesco Inc.
and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
 
 
Three Months Ended
 
May 5, 2018

 
April 29, 2017

CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net earnings (loss)
$
(2,331
)
 
$
885

Adjustments to reconcile net earnings (loss) to net cash
 
 
 
provided by (used in) operating activities:
 
 
 
Depreciation and amortization
19,693

 
19,616

Amortization of deferred note expense and debt discount
153

 
206

Deferred income taxes
(1,546
)
 
(2,006
)
Provision on accounts receivable
17

 
151

Impairment of long-lived assets
1,274

 
119

Restricted stock expense
3,354

 
3,348

Provision for discontinued operations
31

 
184

Other
612

 
(182
)
Effect on cash from changes in working capital and other
 
 
 
assets and liabilities, net of acquisitions:
 
 
 
  Accounts receivable
(9,395
)
 
(12,402
)
  Inventories
(15,263
)
 
(14,418
)
  Prepaids and other current assets
(2,708
)
 
(2,218
)
  Accounts payable
14,249

 
4,699

  Other accrued liabilities
(8,172
)
 
(17,713
)
  Other assets and liabilities
838

 
1,749

Net cash provided by (used in) operating activities
806

 
(17,982
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
  Capital expenditures
(19,533
)
 
(30,326
)
  Other investing activities
633

 

  Proceeds from asset sales
56

 
211

Net cash used in investing activities
(18,844
)
 
(30,115
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
  Payments of long-term debt
(430
)
 
(8,018
)
  Borrowings under revolving credit facility
119,217

 
191,394

  Payments on revolving credit facility
(98,367
)
 
(128,413
)
  Share repurchases

 
(16,163
)
  Change in overdraft balances
(7,522
)
 
2,998

  Additions to deferred note cost
(330
)
 

  Other
(3,165
)
 
1,357

Net cash provided by financing activities
9,403

 
43,155

Effect of foreign exchange rate fluctuations on cash
(422
)
 
12

Net Decrease in Cash and Cash Equivalents
(9,057
)
 
(4,930
)
Cash and cash equivalents at beginning of period
39,937

 
48,301

Cash and cash equivalents at end of period
$
30,880

 
$
43,371

Supplemental Cash Flow Information:
 
 
 
Net cash paid for:
 
 
 
Interest
$
619

 
$
993

Income taxes
530

 
2,276


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

7


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

 

Non-Redeemable
Preferred
Stock

 
Common
Stock

 
Additional
Paid-In
Capital

 
Retained
Earnings

 
Accumulated
Other
Comprehensive Loss

 
Treasury
Shares

 
Non Controlling
Interest
Non-Redeemable

 
Total
Equity

Balance January 28, 2017
$
1,060

 
$
20,354

 
$
237,677

 
$
731,111

 
$
(51,292
)
 
$
(17,857
)
 
$
1,468

 
$
922,521

Net loss

 

 

 
(111,839
)
 

 

 

 
(111,839
)
Other comprehensive income

 

 

 

 
22,100

 

 

 
22,100

Stranded tax effect from tax reform

 

 

 
2,234

 

 

 

 
2,234

Employee and non-employee restricted stock

 

 
13,505

 

 

 

 

 
13,505

Restricted stock issuance

 
357

 
(357
)
 

 

 

 

 

Restricted shares withheld for taxes

 
(51
)
 
51

 
(1,716
)
 

 

 

 
(1,716
)
Shares repurchased

 
(275
)
 

 
(15,888
)
 

 

 

 
(16,163
)
Other
(8
)
 
7

 
1

 

 

 

 

 

Noncontrolling interest – earnings

 

 

 

 

 

 
62

 
62

Balance February 3, 2018
1,052

 
20,392

 
250,877

 
603,902

 
(29,192
)
 
(17,857
)
 
1,530

 
830,704

Cumulative adj from ASC 606, net of tax

 

 

 
4,413

 

 

 

 
4,413

Net loss

 

 

 
(2,331
)
 

 

 

 
(2,331
)
Other comprehensive loss

 

 

 

 
(7,698
)
 

 

 
(7,698
)
Employee and non-employee restricted stock

 

 
3,354

 

 

 

 

 
3,354

Restricted stock issuance

 
14

 
(14
)
 

 

 

 

 

Other
(12
)
 
(2
)
 
13

 

 

 

 

 
(1
)
Noncontrolling interest – earnings

 

 

 

 

 

 
398

 
398

Balance May 5, 2018
$
1,040

 
$
20,404

 
$
254,230

 
$
605,984

 
$
(36,890
)
 
$
(17,857
)
 
$
1,928

 
$
828,839


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


8

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

Note 1
Summary of Significant Accounting Policies

Basis of Presentation
The Condensed Consolidated Financial Statements and Notes contained in this report are unaudited but reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for the interim periods of the fiscal year ending February 2, 2019 ("Fiscal 2019") and of the fiscal year ended February 3, 2018 ("Fiscal 2018"). The results of operations for any interim period are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") have been condensed or omitted. The Condensed Consolidated Balance Sheet as of February 3, 2018 has been derived from the audited financial statements at that date. These Condensed Consolidated Financial Statements should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto for Fiscal 2018, which are contained in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission ("SEC") on April 4, 2018.

Nature of Operations
Genesco Inc. and its subsidiaries (collectively, the "Company") business includes the sourcing and design, marketing and distribution of footwear and accessories through retail stores in the U.S., Puerto Rico and Canada primarily under the Journeys, Journeys Kidz, Little Burgundy and Johnston & Murphy banners and under the Schuh banner in the United Kingdom, the Republic of Ireland and Germany; through catalogs and e-commerce websites including the following: journeys.com, journeyskidz.com, journeys.ca, schuh.co.uk, littleburgundyshoes.com, johnstonmurphy.com and trask.com, and at wholesale, primarily under the Company's Johnston & Murphy brand, the Trask brand, the licensed Dockers brand and other brands that the Company licenses for footwear. The Company's business also includes Lids Sports Group, which operates headwear and accessory stores in the U.S., Puerto Rico and Canada primarily under the Lids banner; the Lids Locker Room and Lids Clubhouse businesses, consisting of sports-oriented fan shops featuring a broad array of licensed merchandise such as apparel, hats and accessories, sports decor and novelty products, operating under various trade names; licensed team merchandise departments in Macy's department stores operated under the name Locker Room by Lids and on macys.com, under a license agreement with Macy's; certain e-commerce operations including lids.com, lids.ca, lidslockerroom.com and lidsclubhouse.com. Including both the footwear businesses and the Lids Sports Group business, at May 5, 2018, the Company operated 2,680 retail stores and leased departments in the U.S., Puerto Rico, Canada, the United Kingdom, the Republic of Ireland and Germany.
During the three months ended May 5, 2018 and April 29, 2017, the Company operated five reportable business segments (not including corporate): (i) Journeys Group, comprised of the Journeys, Journeys Kidz and Little Burgundy retail footwear chains, e-commerce and catalog operations; (ii) Schuh Group, comprised of the Schuh retail footwear chain and e-commerce operations; (iii) Lids Sports Group, comprised as described in the preceding paragraph; (iv) Johnston & Murphy Group, comprised of Johnston & Murphy retail operations, e-commerce and catalog operations and wholesale distribution of products under the Johnston & Murphy® and H.S. Trask® brands; and (v) Licensed Brands, comprised of Dockers® Footwear, sourced and marketed under a license from Levi Strauss & Company; G.H. Bass Footwear operated under a



9

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

Note 1
Summary of Significant Accounting Policies, Continued
license from G-III Apparel Group, Ltd., which was terminated in January 2018; and other brands.  

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

Financial Statement Reclassifications
Certain reclassifications have been made to conform prior years' data to the current year presentation with respect to fixed assets. In order to categorize the fixed assets of Schuh Group comparable to the Company's other business segments, $45.8 million was reclassified from furniture and fixtures to leasehold improvements as of April 29, 2017.

Revenue Recognition
On February 4, 2018, the Company adopted Accounting Standards Update 2014-09, “Revenue from Contracts with Customers (Topic 606)” ("ASC 606") using the modified retrospective approach for all contracts not completed as of the adoption date. Financial results for reporting periods beginning after February 3, 2018 are presented in accordance with ASC 606, while prior periods will continue to be reported in accordance with the Company's pre-adoption accounting policies and therefore have not been adjusted to conform to ASC 606.

The primary impact of adopting Topic 606 relates to the timing of revenue recognition for gift card breakage and the timing of recognizing expense for direct-mail advertising costs. Gift card breakage prior to adoption was recognized at the point gift card redemption was deemed remote. Upon adoption, the Company now recognizes gift card breakage over time in proportion to the pattern of rights exercised by the customer. Prior to adopting ASC 606, the Company capitalized direct-response advertising costs and expensed them over the period of benefit. Under ASC 606, the Company is recognizing these costs as expense when incurred. Additionally, the adoption of ASC 606 resulted in the Company presenting the asset for the carrying amount of product to be returned within prepaids and other current assets on the Condensed Consolidated Balance Sheets. Prior to adopting ASC 606, the value of product expected to be returned was presented as a component of inventories on the Condensed Consolidated Balance Sheets.















10

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

Note 1
Summary of Significant Accounting Policies, Continued

The cumulative effect of the changes made to the Company's Condensed Consolidated Balance Sheets as of February 4, 2018 for the adoption of ASC 606 were as follows (in thousands):

 
Balance at
Adjustments
Balance at
 
February 3, 2018
due to ASC 606
February 4, 2018
 
 
 
 
Assets
 
 
 
Current assets:
 
 
 
  Prepaids and other current assets
$
67,234

$
2,537

$
69,771

  Inventories
542,625

(4,788
)
537,837

Deferred income taxes
25,077

(1,568
)
23,509

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
  Other accrued liabilities
72,220

(8,232
)
63,988

Equity
 
 
 
  Retained Earnings
603,902

4,413

608,315



In accordance with the requirements of ASC 606, the disclosure of the impact of adoption on the Company's Condensed Consolidated Statements of Operations and Condensed Consolidated Balance Sheets for the three months ended May 5, 2018 was as follows (in thousands, except per share data):

 
Q1 FY2019
 
As Reported
Balances without the adoption of ASC 606
Effect of Change Higher/(Lower)
 
 
 
 
Inventories
$
552,475

$
556,442

$
(3,967
)
Prepaids and other current assets
71,720

69,111

2,609

Total current assets
706,496

707,854

(1,358
)
 
 
 
 
Deferred income taxes
24,842

26,584

(1,742
)
Total Assets
1,317,425

1,320,525

(3,100
)
 
 
 
 
Other accrued liabilities
53,502

61,684

(8,182
)
Total current liabilities
241,003

249,185

(8,182
)
Total liabilities
488,586

496,768

(8,182
)
Retained earnings
605,984

600,886

5,098

Accumulated other comprehensive loss
(36,890
)
(36,874
)
(16
)
Total equity
828,839

823,757

5,082

Total Liabilities and Equity
1,317,425

1,320,525

(3,100
)


11

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

Note 1
Summary of Significant Accounting Policies, Continued

 
Q1 FY2019
 
As Reported
Balances without the adoption of ASC 606
Effect of Change Higher/(Lower)
 
 
 
 
Net sales
$
644,959

$
644,991

$
(32
)
Selling and administrative expenses
322,124

323,016

$
(892
)
Earnings from operations
(1,848
)
(2,708
)
$
860

Earnings from continuing operations before income taxes
(2,896
)
(3,756
)
$
860

Income tax expense
(588
)
(763
)
$
175

Earnings from continuing operations
(2,308
)
(2,993
)
$
685

Net earnings (loss)
(2,331
)
(3,016
)
$
685

 
 
 
 
Diluted earnings (loss) per share from continuing operations
$
(0.12
)
$
(0.16
)
$
0.04


In accordance with ASC 606, revenue shall be recognized upon satisfaction of all contractual performance obligations and transfer of control to the customer. Revenue is measured as the amount of consideration the Company expects to be entitled to in exchange for corresponding goods. The majority of the Company's sales are single performance obligation arrangements for retail sale transactions for which the transaction price is equivalent to the stated price of the product, net of any stated discounts applicable at a point in time. Each sales transaction results in an implicit contract with the customer to deliver a product at the point of sale. Revenue from retail sales is recognized at the point of sale, is net of estimated returns, and excludes sales and value added taxes. Revenue from catalog and internet sales is recognized at estimated time of delivery to the customer, is net of estimated returns, and excludes sales and value added taxes. Wholesale revenue is recorded net of estimated returns and allowances for markdowns, damages and miscellaneous claims when the related goods have been shipped and legal title has passed to the customer. Actual amounts of markdowns have not differed materially from estimates. Shipping and handling costs charged to customers are included in net sales. The Company elected the practical expedient within ASC 606 related to taxes that are assessed by a governmental authority, which allows for the exclusion of sales and value added tax from transaction price.

A provision for estimated returns is provided through a reduction of sales and cost of goods sold in the period that the related sales are recorded. Estimated returns are based on historical returns and claims. Actual returns and claims in any future period may differ from historical experience. Revenue from gift cards is deferred and recognized upon the redemption of the cards. These cards have no expiration date. Income from unredeemed cards is recognized on the Condensed Consolidated Statements of Operations within net sales in proportion to the pattern of rights exercised by the customer in future periods. The Company performs an evaluation of historical redemption patterns from the date of original issuance to estimate future period redemption activity.

The Condensed Consolidated Balance Sheets include an accrued liability for gift cards of $8.2 million, $18.1 million and $16.2 million at May 5, 2018, February 3, 2018 and April 29, 2017,


12

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

Note 1
Summary of Significant Accounting Policies, Continued

respectively. Gift card breakage recognized as revenue was $0.3 million for each of the first quarters of Fiscal 2019 and Fiscal 2018. During the three months ended May 5, 2018, the Company
recognized $2.8 million of gift card redemptions and gift card breakage revenue that were included in the gift card liability as of February 3, 2018.

Cash and Cash Equivalents
The Company had total available cash and cash equivalents of $30.9 million, $39.9 million and $43.4 million as of May 5, 2018, February 3, 2018 and April 29, 2017, respectively, of which approximately $8.6 million, $21.2 million and $6.8 million was held by the Company's foreign subsidiaries as of May 5, 2018, February 3, 2018 and April 29, 2017, respectively. The Company's strategic plan does not require the repatriation of foreign cash in order to fund its operations in the U.S., and it is the Company's current intention to indefinitely reinvest its foreign cash and cash equivalents outside of the U.S. If the Company were to repatriate foreign cash to the U.S., it would be required to accrue and pay U.S. taxes in accordance with applicable U.S. tax rules and regulations as a result of the repatriation. There were no cash equivalents included in cash and cash equivalents at May 5, 2018, February 3, 2018 and April 29, 2017. Cash equivalents are highly-liquid financial instruments having an original maturity of three months or less.
At May 5, 2018, substantially all of the Company’s domestic cash was invested in deposit accounts at FDIC-insured banks. The majority of payments due from banks for domestic customer credit card transactions process within 24 - 48 hours and are accordingly classified as cash and cash equivalents in the Condensed Consolidated Balance Sheets.

At May 5, 2018, February 3, 2018 and April 29, 2017, outstanding checks drawn on zero-balance accounts at certain domestic banks exceeded book cash balances at those banks by approximately $6.6 million, $14.2 million and $39.7 million, respectively. These amounts are included in accounts payable in the Condensed Consolidated Balance Sheets.

Concentration of Credit Risk and Allowances on Accounts Receivable
The Company’s footwear wholesale businesses sell primarily to department stores and independent retailers across the United States. Receivables arising from these sales are not collateralized. Customer credit risk is affected by conditions or occurrences within the economy and the retail industry as well as by customer specific factors. In the footwear wholesale businesses, one customer accounted for 15%, one customer accounted for 8% and one customer accounted for 7% of the
Company’s total trade receivables balance, while no other customer accounted for more than 6% of the Company’s total trade receivables balance as of May 5, 2018.

Leases
The Company occasionally receives reimbursements from landlords to be used towards construction of a store the Company intends to lease. Leasehold improvements are recorded at their gross costs including items reimbursed by landlords. The reimbursements are amortized as a reduction of rent expense over the initial lease term. Tenant allowances of $29.2 million, $29.0 million and $25.8 million at May 5, 2018, February 3, 2018 and April 29, 2017, respectively, and deferred



13

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

Note 1
Summary of Significant Accounting Policies, Continued

rent of $59.2 million, $59.3 million and $53.3 million, at May 5, 2018, February 3, 2018 and April 29, 2017, respectively, are included in deferred rent and other long-term liabilities on the Condensed Consolidated Balance Sheets.

The Condensed Consolidated Balance Sheets include asset retirement obligations related to leases of $12.6 million, $11.5 million and $10.6 million as of May 5, 2018, February 3, 2018 and April 29, 2017, respectively.

Fair Value of Financial Instruments
The carrying amounts and fair values of the Company’s financial instruments at May 5, 2018 and February 3, 2018 are as follows:

Fair Values
 
 
 
 
 
 
 
In thousands
May 5, 2018
 
February 3, 2018
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
U.S. Credit Facility Borrowings
$
77,727

 
$
78,392

 
$
69,372

 
$
69,421

UK Term Loans
10,516

 
10,656

 
11,419

 
11,602

UK Revolver Borrowings
17,441

 
17,631

 
7,594

 
7,671


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

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

Selling and Administrative Expenses
Selling and administrative expenses include all operating costs of the Company excluding (i) those related to the transportation of products from the supplier to the warehouse, (ii) for its retail operations, those related to the transportation of products from the warehouse to the store and from the warehouse to the customer and (iii) costs of its distribution facilities which are allocated to its retail operations. Wholesale costs of distribution are included in selling and administrative expenses
on the Condensed Consolidated Statements of Operations in the amount of $1.5 million and $1.6 million for the first quarters of Fiscal 2019 and Fiscal 2018, respectively.

Buying, Merchandising and Occupancy Costs
The Company records buying, merchandising and occupancy costs in selling and administrative expense on the Condensed Consolidated Statements of Operations. Because the Company does not include these costs in cost of sales, the Company’s gross margin may not be comparable to other retailers that include these costs in the calculation of gross margin. Retail store occupancy costs


14

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

Note 1
Summary of Significant Accounting Policies, Continued

recorded in selling and administrative expense were $114.1 million and $113.3 million for the first quarters of Fiscal 2019 and Fiscal 2018, respectively.

Advertising Costs
Advertising costs are predominantly expensed as incurred. Advertising costs were $19.0 million and $19.6 million for the first quarters of Fiscal 2019 and Fiscal 2018, respectively. Prior to adopting ASC 606, the Company capitalized these costs and such costs were expensed over the period of benefit in accordance with the Other Assets and Deferred Costs Topic for Capitalized Advertising Costs of the Codification. For prior periods, the Condensed Consolidated Balance Sheets include prepaid assets for direct response advertising costs of $2.3 million and $1.1 million at February 3, 2018 and April 29, 2017, respectively.

Cooperative Advertising
Cooperative advertising costs recognized in selling and administrative expenses on the Condensed Consolidated Statements of Operations were $0.8 million and $1.2 million for the first quarters of Fiscal 2019 and Fiscal 2018, respectively. During the first three months of Fiscal 2019 and Fiscal 2018, the Company’s cooperative advertising reimbursements paid did not exceed the fair value of the benefits received under those agreements.

Vendor Allowances
Vendor reimbursements of cooperative advertising costs recognized as a reduction of selling and administrative expenses were $2.1 million and $2.7 million for the first quarters of Fiscal 2019 and Fiscal 2018, respectively. During the first three months of Fiscal 2019 and Fiscal 2018, the Company’s cooperative advertising reimbursements received were not in excess of the costs incurred.

Foreign Currency Translation
The functional currency of the Company's foreign operations is the applicable local currency. The translation of the applicable foreign currency into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date. Income and expense accounts are translated at monthly average exchange rates. The unearned gains and losses resulting
from such translation are included as a separate component of accumulated other comprehensive loss within shareholders' equity. Gains and losses from certain foreign currency transactions are
reported as an item of income and resulted in a net loss of $0.3 million for each of the first quarters of Fiscal 2019 and Fiscal 2018.

Other Comprehensive Income
ASC 220 requires, among other things, the Company’s pension liability adjustment, postretirement liability adjustment and foreign currency translation adjustment to be included in other comprehensive income net of tax. Accumulated other comprehensive loss at May 5, 2018 consisted of $6.0 million of cumulative pension liability adjustments, net of tax, a cumulative post-retirement liability adjustment of $2.2 million, net of tax, and a cumulative foreign currency translation adjustment of $28.7 million.



15

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

Note 1
Summary of Significant Accounting Policies, Continued

The following table summarizes the components of accumulated other comprehensive loss for the three months ended May 5, 2018:

 
 
Foreign Currency Translation
Unrecognized Pension/Postretirement Benefit Costs
Total Accumulated Other Comprehensive Income (Loss)
(In thousands)
 
 
 
 
Balance February 3, 2018
 
$
(20,808
)
$
(8,384
)
$
(29,192
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
  Foreign currency translation adjustment
 
(6,890
)

(6,890
)
  Loss on intra-entity foreign currency transactions
 
 
 
 
    (long-term investment nature)
 
(974
)

(974
)
Amounts reclassified from AOCI:
 
 
 
 
  Amortization of net actuarial loss (1)
 

224

224

Income tax expense
 

58

58

Current period other comprehensive income (loss), net of tax
 
(7,864
)
166

(7,698
)
Balance May 5, 2018
 
$
(28,672
)
$
(8,218
)
$
(36,890
)

(1) Amount is included in other components of net periodic benefit cost on the Condensed Consolidated Statements of Operations.

Income Taxes
The Company recorded an effective income tax rate of 20.3% and 38.3% in the first quarter of Fiscal 2019 and 2018, respectively. The lower tax rate for the first quarter of Fiscal 2019 reflects the lower U.S. federal income tax rate following the passage of the Tax Cut and Jobs Act (the "Act") in December 2017, partially offset by the inability to recognize a tax benefit for certain overseas losses.

New Accounting Pronouncements
New Accounting Pronouncements Recently Adopted
In March 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118.”  The new guidance provides SEC Staff views on income tax accounting implications of the Act signed into law in December 2017.  The guidance clarifies the measurement period timeframe, changes in subsequent reporting periods and reporting requirements as a result of the Act.  The Company adopted this guidance in the first quarter of Fiscal 2019. The Company recorded a provisional impact of the Act in Fiscal 2018 and will recognize any changes to this provisional amount as the Company refines its estimates of its cumulative temporary differences and interpretations of guidance related to the application of the Act. The adoption of this guidance has not had, nor is expected to have, a material impact on the Company's Consolidated Financial Statements and related disclosures.


16

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

Note 1
Summary of Significant Accounting Policies, Continued

In February 2018, the FASB issued issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASC 220"), which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Act. This guidance is effective for all entities for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The amendments in ASC 220 should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Act is recognized. The Company adopted ASC 220 in the fourth quarter of Fiscal 2018 and reclassed $2.2 million to retained earnings for the impact of stranded tax effects resulting from the Act.

In March 2017, the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715)" ("ASC 715"). The standard requires the sponsors of benefit plans to present service cost in the same line item or items as other current employee compensation costs, and present the remaining components of net benefit cost in one or more separate line items outside of income from operations, while also limiting the components of net benefit cost eligible to be capitalized to service cost. The standard will require the Company to present the non-service pension costs as a component of expense below operating income. The amendments to this standard allow a practical expedient that permits an employer to use the amounts disclosed in its employee benefits footnote for the prior comparative period as the estimation basis for applying the retrospective presentation. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.

The Company adopted ASC 715 in the first quarter of Fiscal 2019 and utilized the practical expedient to estimate the impact on the prior comparative period information presented in the Condensed
Consolidated Statements of Operations. As required by the amendments in this update, the presentation of the service cost component and other components of net periodic benefit cost in the Condensed Consolidated Statements of Operations were applied retrospectively on and after the effective date. Upon adoption of this standard update, the Company reclassified the other components of net periodic benefit cost from selling and administrative expenses to other components of net periodic benefit cost on the Condensed Consolidated Statements of Operations. The retrospective adoption of this standard update resulted in an increase to earnings from operations of less than $0.1 million for the three months ended April 29, 2017 which was fully offset by the same amount on the other components of net periodic benefit cost line on the Condensed Consolidated Statements of Operations. As such, there was no impact to consolidated net earnings for the three months ended April 29, 2017.









17

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

Note 1
Summary of Significant Accounting Policies, Continued

The Company adopted ASC 606 in the first quarter of Fiscal 2019 using the modified retrospective method by recognizing the cumulative effect of $4.4 million as an adjustment to the opening balance of retained earnings at February 4, 2018. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. While the adoption of this standard did not have a material impact on the Company's Consolidated Financial Statements and related disclosures, it did impact the timing of revenue recognition for gift card breakage and the timing of recognizing expense for direct-mail advertising costs as presented in the Condensed Consolidated Statements of Operations for Fiscal 2019.

New Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, "Leases". The standard's core principle is to increase transparency and comparability among organizations by recognizing lease assets and
liabilities on the balance sheet and disclosing key information. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, which would be the beginning of our Fiscal 2020 or February 2019. Early adoption is permitted. The Company is currently assessing the impact the adoption of ASU 2016-02 will have on its Consolidated Financial Statements and related disclosures and is expecting a material impact because the Company is party to a significant number of lease contracts.

Note 2
Goodwill and Other Intangible Assets

Goodwill

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

(In Thousands)
Schuh Group
Journeys Group
Total Goodwill
Balance, February 3, 2018
$89,915
$10,393
$
100,308

Effect of foreign currency exchange rates
(3,853
)
(369
)
$
(4,222
)
Balance, May 5, 2018
$
86,062

10,024

$
96,086


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










18

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

Note 2
Goodwill and Other Intangible Assets, Continued

Other Intangibles
Other intangibles by major classes were as follows:

 
Leases
 
Customer Lists
 
Other*
 
Total
(In Thousands)
May 5, 2018

Feb. 3, 2018

 
May 5, 2018

Feb. 3, 2018

 
May 5, 2018

Feb. 3, 2018

 
May 5, 2018

Feb. 3, 2018

Gross other intangibles
$
14,817

$
14,981

 
$
2,064

$
2,130

 
$
2,069

$
2,122

 
$
18,950

$
19,233

Accumulated amortization
(13,690
)
(13,714
)
 
(2,064
)
(2,130
)
 
(1,618
)
(1,595
)
 
(17,372
)
(17,439
)
Net Other Intangibles
$
1,127

$
1,267

 
$

$

 
$
451

$
527

 
$
1,578

$
1,794


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

The amortization of intangibles, including trademarks, was $0.1 million for each of the first quarters of Fiscal 2019 and 2018. The amortization of intangibles, including trademarks, is expected to be
$0.2 million for Fiscal 2019 and less than $0.1 million for Fiscal 2020, 2021, 2022 and 2023.

Note 3
Asset Impairments and Other Charges and Discontinued Operations

Asset Impairments and Other Charges

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

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

The Company recorded pretax charges of $1.6 million in the first quarter of Fiscal 2019, including $1.3 million for retail store asset impairments and $0.3 million for legal and other matters.

The Company recorded pretax charges of $0.1 million in the first quarter of Fiscal 2018 for retail store asset impairments.












19

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

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

Discontinued Operations

Accrued Provision for Discontinued Operations
 
In thousands
Facility
Shutdown
Costs

Balance January 28, 2017
$
5,043

Additional provision Fiscal 2018
552

Charges and adjustments, net
(1,986
)
Balance February 3, 2018
3,609

Additional provision Fiscal 2019
31

Charges and adjustments, net
(129
)
Balance May 5, 2018*
3,511

Current provision for discontinued operations
1,804

Total Noncurrent Provision for Discontinued Operations    
$
1,707


*Includes a $2.9 million environmental provision, including $1.8 million in current provision for discontinued operations (see Note 8).

Note 4
Inventories
            
In thousands
May 5, 2018

 
February 3, 2018

Wholesale finished goods
$
33,741

 
$
52,924

Retail merchandise
518,734

 
489,701

Total Inventories
$
552,475

 
$
542,625




20

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

Note 5
Fair Value

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

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

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

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

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

The following table presents the Company's assets and liabilities measured at fair value on a nonrecurring basis as of May 5, 2018 aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):

 
Long-Lived Assets
Held and Used

 
Level 1

 
Level 2

 
Level 3

 
Total
Losses

Measured as of May 5, 2018
$
552

 
$

 
$

 
$
552

 
$
1,274


In accordance with the Property, Plant and Equipment Topic of the Codification, the Company recorded $1.3 million of impairment charges as a result of the fair value measurement of its long-lived assets held and used during the three months ended May 5, 2018. These charges are reflected in asset impairments and other, net on the Condensed Consolidated Statements of Operations.

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


21

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



Note 6
Defined Benefit Pension Plans and Other Benefit Plans

The following table summarizes the components of net periodic benefit cost related to the Company's pension and postretirement health care and life insurance plans:

Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Other Benefits
 
Three Months Ended
 
Three Months Ended
In thousands
May 5, 2018

 
April 29, 2017

 
May 5, 2018

 
April 29, 2017

Service cost
$
113

 
$
138

 
$
253

 
$
209

 
 
 
 
 
 
 
 
Interest cost
$
754

 
$
824

 
$
93

 
$
85

Expected return on plan assets
(1,051
)
 
(1,130
)
 

 

Amortization of losses
189

 
215

 
35

 
38

Total other components of net periodic benefit cost
$
(108
)
 
$
(91
)
 
$
128

 
$
123

 
 
 
 
 
 
 
 
Net Periodic Benefit Cost
$
5

 
$
47

 
$
381

 
$
332



The service cost component of net periodic benefit cost is recorded in selling and administrative expenses in the Consolidated Statements of Operations, while the other components are recorded in other components of net periodic benefit cost in the Consolidated Statements of Operations.

There is no cash contribution required for the pension plan in calendar 2018.

22

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

Note 7
Earnings Per Share


For the Three Months Ended

For the Three Months Ended

May 5, 2018

April 29, 2017
(In thousands, except
     per share amounts)
Income
(Numerator)

Shares
(Denominator)

Per Share
Amount

Income
(Numerator)

Shares
(Denominator)

Per Share
Amount












Earnings (loss) from continuing operations
$
(2,308
)





$
997

















Basic EPS from continuing operations











Income (loss) available to











common shareholders
(2,308
)

19,278


$
(0.12
)

997


19,189


$
0.05













Effect of Dilutive Securities from
continuing operations











Dilutive share-based awards(1)








66



Employees' preferred stock(2)








38















Diluted EPS from continuing operations











Income (loss) available to











common shareholders plus











assumed conversions
$
(2,308
)

19,278


$
(0.12
)

$
997


19,293


$
0.05


(1) Due to the loss from continuing operations, restricted share-based awards are excluded from the diluted earnings per share calculation for the first quarter ended May 5, 2018.

(2) The Company's Employees' Subordinated Convertible Preferred Stock is convertible one for one to the Company's common stock. Due to the loss from continuing operations, these shares are not assumed to be converted for the first quarter ended May 5, 2018. Because no dividends are paid on this stock, these shares are assumed to be converted in the diluted earnings per share calculation for the first quarter ended April 29, 2017.

The weighted shares outstanding reflects the effect of the Company's Board-approved share repurchase program. The Company did not repurchase any shares of common stock during the three months ended May 5, 2018 and repurchased 275,300 shares of common stock during the three months ended April 29, 2017 for $16.2 million. The Company has $24.0 million remaining under its current $100.0 million share repurchase authorization.


23

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

Note 8
Legal Proceedings

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

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

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

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




24

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

Note 8
Legal Proceedings, Continued

In April 2015, the Company received from the EPA a Notice of Potential Liability and Demand for Costs (the "Notice") pursuant to CERCLA regarding the site in Gloversville, New York of a former leather tannery operated by the Company and by other, unrelated parties. The Notice demanded payment of approximately $2.2 million of response costs claimed by EPA to have been incurred to conduct assessments and removal activities at the site. In February 2017, the Company and EPA entered into a settlement agreement resolving EPA's claim for past response costs in exchange for a payment by the Company of $1.5 million which was paid in May 2017. The Company's environmental insurance carrier has reimbursed the Company for 75% of the settlement amount, subject to a $500,000 self-insured retention. The Company does not expect that the matter will have a material effect on its financial condition or results of operations.

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

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

Accrual for Environmental Contingencies
Related to all outstanding environmental contingencies, the Company had accrued $2.9 million as of May 5, 2018, $3.0 million as of February 3, 2018 and $4.2 million as of April 29, 2017. All such provisions reflect the Company's estimates of the most likely cost (undiscounted, including both current and noncurrent portions) of resolving the contingencies, based on facts and circumstances as of the time they were made. There is no assurance that relevant facts and circumstances will not change, necessitating future changes to the provisions. Such contingent liabilities are included in the liability arising from provision for discontinued operations on the accompanying Condensed Consolidated Balance Sheets because they relate to former facilities operated by the Company. The Company has made pretax accruals for certain of these contingencies, including approximately $0.0 million in the first quarter of Fiscal 2019 and $0.2 million in the first quarter of Fiscal 2018. These charges are included in provision for discontinued operations, net in the Consolidated Statements of Operations and represent changes in estimates.

Other Matters
On February 22, 2017, a former employee of a subsidiary of the Company filed a putative class and collective action, Shumate v. Genesco, Inc., et al., in the U.S District Court for the Southern District of Ohio, alleging violations of the federal Fair Labor Standards Act ("FLSA") and Ohio wages and hours law including failure to pay minimum wages and overtime to the subsidiary's store managers and seeking back pay, damages, penalties, and declaratory and injunctive relief. On April 21, 2017, a former


25

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

Note 8
Legal Proceedings, Continued

employee of the same subsidiary filed a putative class and collective action, Ward v. Hat World, Inc., in the Superior Court for the State of Washington, alleging violations of the FLSA and certain Washington wages and hours laws, including, among others, failure to pay overtime to certain loss prevention investigators, and seeking back pay, damages, attorneys' fees and other relief. A total of seven loss prevention investigators elected to join the suit at the expiration of the opt-in period. The Company has removed the case to federal court and the court has approved its transfer to the U.S. District Court for the Southern District of Indiana. On May 19, 2017, two former employees of the same subsidiary filed a putative class and collective action, Chen and Salas v. Genesco Inc., et al., in the U.S. District Court for the Northern District of Illinois alleging violations of the FLSA and certain Illinois and New York wages and hours laws, including, among others, failure to pay overtime to store managers, and also seeking back pay, damages, statutory penalties, and declaratory and injunctive relief. On March 8, 2018, the court granted the Company's motion to transfer venue to the U.S. District Court for the Southern District of Indiana. On March 9, 2018, a former employee of the same subsidiary filed a putative class action in the Superior Court of the Commonwealth of Massachusetts claiming violations of the Massachusetts Overtime Law, M.G.L.C. 151§1A, by failing to pay overtime to employees classified as store managers, and seeking restitution, an incentive award, treble damages, interest, attorneys fees and costs. The Company disputes the material allegations in each of these complaints and intends to defend the matters.

On April 30, 2015, an employee of a subsidiary of the Company filed an action, Stewart v. Hat World, Inc., et al., under the California Labor Code Private Attorneys General Act on behalf of herself, the State of California, and other non-exempt, hourly-paid employees of the subsidiary in California, seeking unspecified damages and penalties for various alleged violations of the California Labor Code, including failure to pay for all hours worked, minimum wage and overtime violations, failure to provide
required meal and rest periods, failure to timely pay wages, failure to provide complete and accurate wage statements, and failure to provide full reimbursement of business-related costs and expenses incurred in the course of employment. On March 5, 2018, the court issued a proposed statement of decision in the first phase of the case, tentatively finding that the plaintiff is an "aggrieved employee" with regard to meal period and rest break claims only, and not with respect to any other violations alleged in the complaint and that she can represent other employees only with respect to meal and rest break claims. The Company disputes the material allegations in the complaint and intends to continue defending the matter.

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


26

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

Note 9
Business Segment Information

During the three months ended May 5, 2018 and April 29, 2017, the Company operated five reportable business segments (not including corporate): (i) Journeys Group, comprised of the Journeys, Journeys Kidz and Little Burgundy retail footwear chains, e-commerce and catalog operations; (ii) Schuh Group, comprised of the Schuh retail footwear chain and e-commerce operations; (iii) Lids Sports Group, comprised primarily of the Lids retail headwear stores, the Lids Locker Room and Lids Clubhouse fan shops (operated under various trade names), licensed team merchandise departments in Macy's department stores operated under the name of Locker Room by Lids under a license agreement with Macy's and certain e-commerce operations; (iv) Johnston & Murphy Group, comprised of Johnston & Murphy retail operations, e-commerce operations, catalog and wholesale distribution of products under the Johnston & Murphy® and H.S. Trask® brands; and (v) Licensed Brands, comprised of Dockers® Footwear, sourced and marketed under a license from Levi Strauss & Company; G.H. Bass Footwear operated under a license from G-III Apparel Group, Ltd., which was terminated in January 2018; and other brands.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 1, under Item 8 in the Company's Annual Report on Form10-K for the fiscal year ended February 3, 2018).

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

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


27

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

Note 9
Business Segment Information, Continued

Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
May 5, 2018
Journeys Group
 
Schuh Group
 
Lids Sports
Group
 
Johnston
& Murphy
Group
 
Licensed
Brands
 
Corporate
& Other
 
Consolidated
In thousands
 
 
 
 
 
 
Sales
$
306,142

 
$
80,266

 
$
158,740

 
$
75,684

 
$
24,066

 
$
62

 
$
644,960

Intercompany Sales

 

 

 

 
(1
)
 

 
(1
)
Net sales to external customers
$
306,142

 
$
80,266

 
$
158,740

 
$
75,684

 
$
24,065

 
$
62

 
$
644,959

Segment operating income (loss)
$
13,637

 
$
(5,640
)
 
$
(5,362
)
 
$
5,006

 
$
306

 
$
(8,243
)
 
$
(296
)
Asset Impairments and other*

 

 

 

 

 
(1,552
)
 
(1,552
)
Earnings (loss) from operations
13,637

 
(5,640
)
 
(5,362
)
 
5,006

 
306

 
(9,795
)
 
(1,848
)
Other components of net periodic benefit cost

 

 

 

 

 
(20
)
 
(20
)
Interest expense

 

 

 

 

 
(1,047
)
 
(1,047
)
Interest income

 

 

 

 

 
19

 
19

Earnings (loss) from continuing
operations before income taxes
$
13,637

 
$
(5,640
)
 
$
(5,362
)
 
$
5,006

 
$
306

 
$
(10,843
)
 
$
(2,896
)
Total assets**
$
446,001

 
$
243,921

 
$
337,835

 
$
119,854

 
$
29,520

 
$
140,294

 
$
1,317,425

Depreciation and amortization***
6,795

 
3,927

 
6,657

 
1,568

 
155

 
591

 
19,693

Capital expenditures
10,543

 
2,907

 
4,490

 
1,470

 
60

 
63

 
19,533


*Asset Impairments and other charge includes a $1.3 million charge for asset impairments, which includes $0.3 million for Lids Sports Group, $0.2 million for Journeys Group and $0.8 million for Schuh Group.

**Total assets for the Schuh Group and Journeys Group include $86.1 million and $10.0 million of goodwill, respectively. Goodwill for the Schuh Group and Journeys Group decreased by $3.9 million, and $0.4 million, respectively, from February 3, 2018, due to foreign currency translation adjustments. Of the Company's $377.4 million of property and equipment, $54.8 million and $21.9 million relate to property and equipment in the United Kingdom and Canada, respectively.

***Includes $19.6 million in depreciation expense for the three months ended May 5, 2018.






















28

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

Note 9
Business Segment Information, Continued

Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
April 29, 2017
Journeys Group
 
Schuh Group
 
Lids Sports
Group
 
Johnston
& Murphy
Group
 
Licensed
Brands
 
Corporate
& Other
 
Consolidated
In thousands
 
 
 
 
 
 
Sales
$
284,119

 
76,456

 
$
176,901

 
$
72,793

 
$
33,011

 
$
89

 
$
643,369

Intercompany Sales

 

 

 

 
(1
)
 

 
(1
)
Net sales to external customers
$
284,119

 
$
76,456

 
$
176,901

 
$
72,793

 
$
33,010

 
$
89

 
$
643,368

Segment operating income (loss)
$
7,472

 
$
(687
)
 
$
(1,786
)
 
$
3,820

 
$
2,275

 
$
(8,149
)
 
$
2,945

Asset Impairments and other*

 

 

 

 

 
(119
)
 
(119
)
Earnings (loss) from operations
7,472

 
(687
)
 
(1,786
)
 
3,820

 
2,275

 
(8,268
)
 
2,826

Other components of net periodic benefit cost

 

 

 

 

 
(32
)
 
(32
)
Interest expense

 

 

 

 

 
(1,177
)
 
(1,177
)
Interest income

 

 

 

 

 

 

Earnings (loss) from continuing
operations before income taxes
$
7,472

 
$
(687
)
 
$
(1,786
)
 
$
3,820

 
$
2,275

 
$
(9,477
)
 
$
1,617

Total assets**
$
424,477

 
231,395

 
$
537,901

 
$
120,048

 
$
36,803

 
$
128,752

 
$
1,479,376

Depreciation and amortization***
6,515

 
3,364

 
6,937

 
1,566

 
167

 
1,067

 
19,616

Capital expenditures
19,195

 
2,758

 
5,131

 
1,057

 
77

 
2,108

 
30,326


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

**Total assets for the Lids Sports Group, Schuh Group and Journeys Group include $181.1 million, $82.4 million and $9.4 million of goodwill, respectively. Goodwill for Lids Sports Group and Journeys Group decreased by $0.5 million and $0.4 million, respectively, from January 28, 2017 and Schuh Group goodwill increased by $2.6 million from January 28, 2017 due to foreign currency translation adjustments. Of the Company's $342.6 million of property and equipment, $55.4 million and $20.7 million relate to property and equipment in the United Kingdom and Canada, respectively.

***Includes $19.6 million in depreciation expense for the three months ended April 29, 2017.




















29

Table of Contents

Item 2. Management's 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, including those regarding the performance outlook for the Company and its individual businesses (including, without limitation, sales, expenses, margins and earnings) and all other statements not addressing solely historical facts or present conditions. Words such as "may," "will," "should," "likely," "anticipate," "expect," "intend," "plan," "project," "believe," "estimate" and similar expressions can be used to identify these forward-looking statements. Actual results, including those regarding the Company's performance outlook for Fiscal 2019 and beyond, could differ materially from those reflected by the forward-looking statements in this discussion, in the Notes to the Condensed Consolidated Financial Statements, and in other disclosures.

A number of factors may adversely affect the outlook reflected in forward looking statements and the Company's future results, liquidity, capital resources and prospects. These factors (some of which are beyond the Company's control) include:

The level and timing of promotional activity necessary to maintain inventories at appropriate levels.
The Company's ability to complete the sale of the Lids Sports Group business on acceptable terms and the timing of any sale transaction.
The effectiveness of the Company's omni-channel initiatives.
Costs associated with changes in minimum wage and overtime requirements.
The level of chargebacks from credit card issuers for fraudulent purchases or other reasons.
Weakness in the consumer economy and retail industry.
Competition in the Company's markets, including online and including competition from some of the Company's vendors in both the licensed sports and branded footwear markets.
Fashion trends, including the lack of new fashion trends or products, that affect the sales or product margins of the Company's retail product offerings.
Weakness in shopping mall traffic and challenges to the viability of malls where the Company operates stores, related to planned closings of department stores or other factors, and the extent and pace of growth of online shopping.
The effects of the implementation of federal tax reform on the estimated tax rate reflected in certain forward-looking statements.
Risks related to the potential for terrorist events, especially in malls and shopping districts.
Imposition of tariffs on imported products or the disallowance of tax deductions on imported products.
Changes in buying patterns by significant wholesale customers.
Bankruptcies or deterioration in the financial condition of significant wholesale customers or the inability of wholesale customers or consumers to obtain credit.
The Company's ability to obtain from suppliers products that are in-demand on a timely basis and disruptions in product supply or distribution.
Unfavorable trends in fuel costs, foreign exchange rates, foreign labor and material costs and other factors affecting the cost of products.
The effects of the British decision to exit the European Union, including potential effects on consumer demand, currency exchange rates, and the supply chain.
The Company's ability to continue to complete and integrate acquisitions, expand its business and diversify its product base.

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Table of Contents

Changes in the timing of holidays or in the onset of seasonal weather affecting period-to-period sales comparisons.
The performance of athletic teams, the participants in major sporting events such as NBA finals, Super Bowl and World Series, developments with respect to certain individual athletes and other sports-related events or changes, including the timing of major sporting events, that may affect period-to-period comparisons in the Company's Lids Sports Group retail businesses.
The Company's ability to build, open, staff and support additional retail stores and to renew leases in existing stores and control or lower occupancy costs, and to conduct required remodeling or refurbishment on schedule and at expected expense levels.
Ability to attract and retain employees in a full employment environment.
Deterioration in the performance of individual businesses or of the Company's market value relative to its book value, resulting in impairments of fixed assets or intangible assets or other adverse financial consequences.
Unexpected changes to the market for the Company's shares.
Variations from expected pension-related charges caused by conditions in the financial markets.
Costs and reputational harm as a result of disruptions in the Company's business or information technology systems either by security breaches and incidents or by potential problems associated with the implementation of new or upgraded systems.
The cost and outcome of litigation, investigations and environmental matters involving the Company, including but not limited to the matters discussed in Note 8 to the Condensed Consolidated Financial Statements.
The Company's ability to execute its cost-reduction initiatives and to achieve acceptable levels of expense in a changing retail environment.
Other factors cited in the "Risk Factors," "Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of, and elsewhere in, our SEC filings, copies of which may be obtained from the SEC website, www.sec.gov, or by contacting the investor relations department of Genesco via our website, www.genesco.com.

Many of the factors that will determine the outcome of the subject matter of this Form 10-Q are beyond Genesco's ability to control or predict. Genesco undertakes no obligation to release publicly the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Forward-looking statements reflect the expectations of the Company at the time they are made. The Company disclaims any obligation to update such statements.

Overview
Description of Business
The Company’s business includes the sourcing and design, marketing and distribution of footwear and accessories through retail stores, including Journeys®, Journeys Kidz®, Little Burgundy® and Johnston & Murphy® in the U.S., Puerto Rico and Canada and through Schuh® stores in the United Kingdom, the Republic of Ireland and Germany, and through e-commerce websites and catalogs, and at wholesale, primarily under the Company’s Johnston & Murphy® brand, the H.S. Trask® brand, the licensed Dockers® brand, and other brands that the Company licenses for footwear. The Company’s wholesale footwear brands are distributed to more than 1,325 retail accounts in the United States, including a number of leading department, discount, and specialty stores. The Company’s business also includes Lids Sports Group, which operates (i) headwear and accessory stores under the Lids® name and other names in the U.S., Puerto Rico and Canada, (ii) the Lids Locker Room and Lids Clubhouse businesses, consisting of sports-oriented fan shops featuring a broad array of licensed merchandise such as apparel, hats and accessories, sports decor and novelty products, operating under various trade names, (iii) licensed team merchandise departments

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in Macy's department stores operated under the name Locker Room by Lids and on macys.com under a license agreement with Macy's, and (iv) e-commerce operations. Including both the footwear businesses and the Lids Sports business, at May 5, 2018, the Company operated 2,680 retail stores and leased departments in the U.S., Puerto Rico, Canada, the United Kingdom, the Republic of Ireland and Germany.

During the three months ended May 5, 2018 and April 29, 2017, the Company operated five reportable business segments (not including corporate): (i) Journeys Group, comprised of the Journeys, Journeys Kidz and Little Burgundy retail footwear chains, e-commerce and catalog operations; (ii) Schuh Group, comprised of the Schuh retail footwear chain and e-commerce operations; (iii) Lids Sports Group, comprised as described in the preceding paragraph; (iv) Johnston & Murphy Group, comprised of Johnston & Murphy retail operations, e-commerce and catalog operations and wholesale distribution of products under the Johnston & Murphy® and H.S.Trask® brands; and (v) Licensed Brands, comprised of Dockers® Footwear, sourced and marketed under a license from Levi Strauss & Company; G.H. Bass Footwear operated under a license from G-III Apparel Group, Ltd., which was terminated in January 2018; and other brands.

The Journeys retail footwear stores sell footwear and accessories primarily for 13 to 22 year old men and women. The stores average approximately 2,075 square feet. The Journeys Kidz retail footwear stores sell footwear primarily for younger children, ages five to 12. These stores average approximately 1,525 square feet. The Journeys Group stores are primarily in malls and factory outlet centers throughout the United States, Puerto Rico and Canada. The Company's Canadian subsidiary acquired the Little Burgundy retail footwear chain in Canada during the fourth quarter of Fiscal 2016. Little Burgundy is being operated under the Journeys Group. Little Burgundy retail footwear stores sell footwear and accessories to fashion-oriented men and women in the 18 to 34 age group ranging from students to young professionals. These stores average approximately 1,825 square feet. With the 39 Little Burgundy stores, Journeys Group now operates 85 stores in Canada. Journeys also sells footwear and accessories through direct-to-consumer catalog and e-commerce operations.

The Schuh retail footwear stores sell a broad range of branded casual and athletic footwear along with a meaningful private label offering primarily for 15 to 30 year old men and women. The stores, which average approximately 4,875 square feet, include both street-level and mall locations in the United Kingdom, the Republic of Ireland and Germany. The Schuh Group also sells footwear through e-commerce operations.

The Lids Sports Group includes stores and kiosks, primarily under the Lids banner, that sell licensed and branded headwear to men and women primarily in the early-teens to mid-20's age group. The Lids store locations average approximately 900 square feet and are primarily in malls, airports, street-level stores and factory outlet centers throughout the United States, Puerto Rico and Canada. The Lids Sports Group also operates Lids Locker Room and Lids Clubhouse stores under a number of trade names, selling licensed sports headwear, apparel and accessories to sports fans of all ages in locations averaging approximately 2,825 square feet in malls and other locations primarily in the United States and Canada. The Lids Sports Group operates 143 stores in Canada. The Lids Sports Group also operates Locker Room by Lids leased departments in Macy's department stores offering headwear, apparel, accessories and novelties representing an assortment of college and professional teams specific to particular Macy's department stores' geographic locations. As of May 5, 2018, the Company operated 122 Locker Room by Lids leased departments averaging approximately 650 square feet. The Lids Sports Group also sells headwear and accessories through e-commerce operations.

Johnston & Murphy retail shops sell a broad range of men's footwear, apparel and accessories. Women's footwear and accessories are sold in select Johnston & Murphy retail locations. Johnston & Murphy shops average approximately 1,600 square feet and are located primarily in better malls and in airports throughout

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the United States. As of May 5, 2018, Johnston & Murphy operated eight stores in Canada. The Company also has license and distribution agreements for wholesale and retail sales of Johnston & Murphy products in various non - U.S. jurisdictions. The Company also sells Johnston & Murphy footwear and accessories in factory stores, averaging approximately 2,400 square feet, located in factory outlet malls, and through a direct-to-consumer catalog and e-commerce operations. In addition, Johnston & Murphy shoes are distributed through the Company's wholesale operations to better department stores, independent specialty stores and e-commerce. Additionally, the Company offers the H.S. Trask brand, with men's and women's footwear and leather accessories distributed to better independent retailers and department stores.

The Licensed Brands segment markets casual and dress casual footwear under the licensed Dockers® brand 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 United States. The Company entered into an exclusive license with Levi Strauss & Co. to market men's footwear in the United States under the Dockers brand name in 1991. Levi Strauss & Co. and the Company have subsequently added additional territories, including Canada and Mexico and certain other Latin American countries. The Dockers license agreement expires on November 30, 2018. The Company also sells footwear under other licenses and in March 2015 entered into a license agreement to source and distribute certain men's and women's footwear under the G.H. Bass trademark and related marks. This license was terminated in January 2018.

Strategy
The Company's long-term strategy has been to seek organic growth by: 1) improving comparable sales, both in stores and e-commerce, 2) increasing operating margin, 3) increasing the Company's store base in its newer concepts and opportunistically in more mature concepts, 4) expanding retail square footage in proven locations with upside opportunity, and 5) enhancing the value of its brands. As a result of the degree of penetration of many of our concepts in their current geographic markets and the increasing trend of consumer purchases through e-commerce channels, the Company anticipates opening fewer new stores in the future, concentrating on locations that the Company believes will be most productive, as well as closing certain stores, perhaps reducing the overall square footage and store count from current levels, and has enhanced its investments in technology and infrastructure to support omni-channel retailing. In recognition of a continuing shift in added expense associated with omni-channel operations, the Company has undertaken a profit enhancement initiative, targeting annualized expense reductions in the range of $35 million to $40 million in an effort to reduce the fixed cost structure of its retail stores and improve efficiency in e-commerce.

To supplement its organic growth potential, the Company has made acquisitions, including the acquisition of the Schuh Group in June 2011, Little Burgundy in December 2015 and several smaller acquisitions of businesses in the Lids Sports Group's markets, and expects to consider acquisition opportunities, either to augment its existing businesses or to enter new businesses that it considers compatible with its existing businesses, core expertise and strategic profile. Acquisitions involve a number of risks, including, among others, inaccurate valuation of the acquired business, the assumption of undisclosed liabilities, the failure to integrate the acquired business appropriately, and distraction of management from existing businesses. The Company seeks to mitigate these risks by applying appropriate financial metrics in its valuation analysis and developing and executing plans for due diligence and integration that are appropriate to each acquisition. The Company also seeks appropriate opportunities to extend existing brands and retail concepts. The Company typically tests such extensions on a relatively small scale to determine their viability and to refine their strategies and operations before making significant, long-term commitments.
More generally, the Company attempts to develop strategies to mitigate the risks it views as material, including those discussed under the caption “Forward Looking Statements,” above, and those discussed in Part I, Item 1A, Risk Factors in the Company's Annual Report on Form 10-K. Among the most important

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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 manage inventories, in gross margins. Because fashion trends influencing many of the Company's target customers can change rapidly, the Company's ability to react quickly to those changes is critical. 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 or lower average margins or products which are more widely available in the marketplace and thus more subject to competitive pressures than the Company's typical offering. Moreover, economic factors, such as persistent unemployment and any future economic contraction and changes in tax policies, may reduce the consumer's disposable income or his or her willingness to purchase discretionary items, and thus may reduce demand for the Company's merchandise, regardless of the Company's skill in detecting and responding to fashion trends. Similarly, consumers may choose to spend their disposable income in merchandise categories other than those the Company sells. The Company believes its experience and discipline in merchandising and the buying power associated with its relative size and importance in the industry segments in which it competes are important to its ability to mitigate risks associated with changing customer preferences and other changes in consumer demand.

Summary of Results of Operations
The Company's net sales increased to $645 million during the first quarter of Fiscal 2019 compared to $643 million for the same quarter of Fiscal 2018. Excluding the impact of exchange rates, sales would have decreased 1% for the first quarter. Journeys Group sales increased 8%, Schuh Group sales increased 5% and Johnston & Murphy sales increased 4%, while Lids Sports Group and Licensed Brands decreased 10% and 27%, respectively, during the first quarter of Fiscal 2019. Gross margin as a percentage of net sales increased to 49.9% during the first quarter of Fiscal 2019, compared to 49.6% for the same period last year, reflecting increased gross margin in Journeys Group and Johnston & Murphy Group, partially offset by decreased gross margin in Schuh Group, Lids Sports Group and Licensed Brands. Selling and administrative expenses increased to 49.9% of net sales during the first quarter of Fiscal 2019 from 49.1% for the same quarter of Fiscal 2018, reflecting increases in expenses as a percentage of net sales in all of the Company's business segments, except Journeys Group, while Corporate remained flat for the quarter. Earnings (loss) from operations decreased as a percentage of net sales to (0.3%) during the first quarter of Fiscal 2019 compared to 0.4% in the same quarter of Fiscal 2018, reflecting decreased earnings from operations as a percentage of net sales in all of the Company's business segments, except Journeys Group and Johnston & Murphy Group.

Significant Developments

The potential sale of Lids Sports Group
The Company announced in February 2018 it was initiating a formal process to explore the sale of its Lids Sports Group business. The Company's board of directors concluded through a strategic review process that it is in the best interest of the Company and its shareholders to focus on its industry-leading footwear businesses, which it believes is the optimal platform to deliver enhanced shareholder value over the long term.

Asset Impairment and Other Charges
The Company recorded pretax charges of $1.6 million in the first quarter of Fiscal 2019, including $1.3 million for retail store asset impairments and $0.3 million for legal and other matters.

The Company recorded pretax charges of $0.1 million in the first quarter of Fiscal 2018 for retail store asset impairments.

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Critical Accounting Policies

The preparation of financial statements in conformity with U.S. GAAP 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.

The Company has identified the critical accounting policies used in determining estimates and assumptions in the amounts reported in Management's Discussion and Analysis of Financial Condition and Results of Operations in its Annual Report on Form 10-K for the fiscal year ended February 3, 2018. Management believes that there have been no material changes in those critical accounting policies.

Comparable Sales

For purposes of this report, "comparable sales" are sales from stores open longer than one year, beginning with the first day it has comparable prior year sales (which we refer to in this report as "same store sales"), and sales from websites operated longer than one year and direct mail catalog sales (which we refer to in this report as "comparable direct sales"). Temporarily closed stores are excluded from the comparable sales calculation if closed more than seven days. Expanded stores are excluded from the comparable sales calculation until the first day it has comparable prior year sales. Current year foreign exchange rates are applied to both current year and prior year comparable sales to achieve a consistent basis for comparison.

Results of Operations - First Quarter Fiscal 2019 Compared to First Quarter Fiscal 2018

The Company's net sales in the first quarter ended May 5, 2018 increased to $645.0 million from $643.4 million in the first quarter ended April 29, 2017, reflecting increased net sales in Journeys Group, Schuh Group and Johnston & Murphy Group, partially offset by decreased net sales in Lids Sports Group and Licensed Brands. Excluding the impact of exchange rates, net sales would have decreased 1%. Comparable sales decreased 1% for the first quarter of Fiscal 2019, which included a decrease of 2% in same store sales and an increase of 10% in comparable direct sales. Gross margin increased 0.9% to $321.8 million in the first quarter of Fiscal 2019 from $318.9 million in the same period last year and increased as a percentage of net sales from 49.6% to 49.9%, reflecting increased gross margin in Journeys Group and Johnston & Murphy Group, partially offset by decreased gross margin in Schuh Group, Lids Sports Group and Licensed Brands. Selling and administrative expenses in the first quarter of Fiscal 2019 increased 1.9% and increased as a percentage of net sales from 49.1% to 49.9%, reflecting increased expenses as a percentage of net sales in all of the Company's business segments, except Journeys Group, while Corporate was flat. The increase in selling and administrative expense as a percentage of net sales reflects higher expenses relating primarily to selling salaries and benefits and bonus accruals. 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 Company's 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 (loss) from continuing operations before income taxes (“pretax earnings (loss)”) for the first quarter ended May 5, 2018 was a loss of ($2.9) million compared to earnings of $1.6 million for the first quarter ended April 29, 2017. The pretax loss for the first quarter ended May 5, 2018 included an asset impairment and other charge of $1.6 million for retail store asset impairments and legal and other matters. Pretax earnings for the first quarter ended April 29, 2017 included an asset impairment and other charge of $0.1 million for retail store asset impairments.

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The net loss for the first quarter ended May 5, 2018 was ($2.3) million ($0.12 diluted loss per share) compared to net earnings of $0.9 million ($0.05 diluted earnings per share) for the first quarter ended April 29, 2017. The Company recorded an effective income tax rate of 20.3% and 38.3% in the first quarter of Fiscal 2019 and 2018, respectively. The tax rate for the first quarter of Fiscal 2019 was impacted by the lower U.S. federal income tax rate following the passage of the Tax Cut and Jobs Act in December 2017, partially offset by the inability to recognize a tax benefit for certain overseas losses.

Journeys Group
    
 
Three Months Ended
 
 
 
May 5, 2018

 
April 29, 2017

 
%
Change
 
(dollars in thousands)
 
 
Net sales
$
306,142

 
$
284,119

 
7.8
%
Earnings from operations
$
13,637

 
$
7,472

 
82.5
%
Operating margin
4.5
%
 
2.6
%
 
 

Net sales from Journeys Group increased 7.8% to $306.1 million for the first quarter ended May 5, 2018, compared to $284.1 million for the same period last year. The increase reflects a 6% increase in comparable sales, partially offset by a 2% decrease in the average number of 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). The comparable sales increase reflected a 2% increase in the average price per pair of shoes and a 4% increase in footwear unit sales. Journeys Group operated 1,221 stores at the end of the first quarter of Fiscal 2019, including 245 Journeys Kidz stores, 46 Journeys stores in Canada and 39 Little Burgundy stores in Canada, compared to 1,250 stores at the end of the first quarter last year, including 236 Journeys Kidz stores, 46 Journeys stores in Canada and 36 Little Burgundy stores in Canada.

Journeys Group earnings from operations increased 82.5% to $13.6 million for the first quarter ended May 5, 2018 compared to $7.5 million for the first quarter ended April 29, 2017. The increase in earnings from operations for Journeys Group was due to (i) increased net sales, (ii) increased gross margin as a percentage of net sales, reflecting increased initial margins and decreased markdowns, partially offset by higher shipping and warehouse expenses, and (iii) decreased expenses as a percentage of net sales, reflecting leverage of occupancy related costs and depreciation, partially offset by increased bonus expense.

Schuh Group
    
 
Three Months Ended
 
 
 
May 5, 2018

 
April 29, 2017

 
%
Change
 
(dollars in thousands)
 
 
Net sales
$
80,266

 
$
76,456

 
5.0
%
Loss from operations
$
(5,640
)
 
$
(687
)
 
NM

Operating margin
(7.0
)%
 
(0.9
)%
 
 

Net sales from Schuh Group increased 5.0% to $80.3 million for the first quarter ended May 5, 2018, compared to $76.5 million for the first quarter ended April 29, 2017. The increase reflects a sales increase of $8.7 million due to increases in foreign exchange rates this year and a 6% increase in the average number of Schuh stores operated, partially offset by a comparable sales decrease of 13%. Schuh Group operated

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136 stores at the end of the first quarter of Fiscal 2019, compared to 129 stores at the end of the first quarter of Fiscal 2018.

Schuh Group loss from operations increased to $(5.6) million for the first quarter ended May 5, 2018 compared to $(0.7) million for the first quarter ended April 29, 2017. The decrease in earnings this year reflects decreased gross margin as a percentage of net sales, reflecting less full price selling and increased promotional activity, and increased expenses as a percentage of net sales reflecting the inability to leverage expenses, particularly occupancy related costs, due to the negative comparable sales for the quarter, partially offset by decreased bonus expense. In addition, Schuh Group's loss increased $0.6 million due to increases in foreign exchange rates this year compared to the same period last year.

Lids Sports Group
    
 
Three Months Ended
 
 
 
May 5, 2018

 
April 29, 2017

 
%
Change
 
(dollars in thousands)
 
 
Net sales
$
158,740

 
$
176,901

 
(10.3
)%
Loss from operations
$
(5,362
)
 
$
(1,786
)
 
NM

Operating margin
(3.4
)%
 
(1.0
)%
 
 

Net sales from Lids Sports Group decreased 10.3% to $158.7 million for the first quarter ended May 5, 2018, compared to $176.9 million for the same period last year. The decrease reflects primarily a comparable sales decrease of 7% and a decrease of 6% in the average number of Lids Sports Group stores operated, excluding leased departments, in the first quarter of Fiscal 2019. Comparable sales reflects a 10% decrease in comparable store hat and apparel units sold, while the average price increased 3% for the first quarter of Fiscal 2019. Lids Sports Group operated 1,141 stores at the end of the first quarter of Fiscal 2019, including 114 Lids stores in Canada, 179 Lids Locker Room and Clubhouse stores, which includes 29 Locker Room stores in Canada, and 122 Locker Room by Lids leased departments in Macy's, compared to 1,199 stores at the end of the first quarter last year, including 111 Lids stores in Canada, 202 Lids Locker Room and Clubhouse stores, which includes 33 Locker Room stores in Canada, and 124 Locker Room by Lids leased departments in Macy's.

Lids Sports Group loss from operations increased to $(5.4) million for the first quarter ended May 5, 2018 compared to $(1.8) million for the first quarter ended April 29, 2017. The decrease was due to (i) decreased net sales, (ii) decreased gross margin as a percentage of net sales, reflecting increased shipping and warehouse expense, and (iii) increased expenses as a percentage of net sales reflecting the inability to leverage expenses due to the negative comparable sales for the quarter, partially offset by decreased credit card expenses.










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Johnston & Murphy Group
        
 
Three Months Ended
 
 
 
May 5, 2018

 
April 29, 2017

 
%
Change
 
(dollars in thousands)
 
 
Net sales
$
75,684

 
$
72,793

 
4.0
%
Earnings from operations
$
5,006

 
$
3,820

 
31.0
%
Operating margin
6.6
%
 
5.2
%
 
 

Johnston & Murphy Group net sales increased 4.0% to $75.7 million for the first quarter ended May 5, 2018 from $72.8 million for the first quarter ended April 29, 2017, reflecting primarily a 7% increase in comparable sales and a 2% increase in the average number of stores operated for Johnston & Murphy retail operations, partially offset by a 7% decrease in Johnston & Murphy Group wholesale sales. Unit sales for the Johnston & Murphy wholesale business decreased 12% in the first quarter of Fiscal 2019, while the average price per pair of shoes increased 2% for the same period. Retail operations accounted for 70.8% of Johnston & Murphy Group's sales in the first quarter of Fiscal 2019, up from 67.2% in the first quarter last year. Comparable sales reflected a 6% increase in footwear unit comparable sales and the average price per pair of shoes for Johnston & Murphy retail operations increased 1%. The store count for Johnston & Murphy retail operations at the end of the first quarter of Fiscal 2019 was 182 stores, including eight stores in Canada, compared to 178 stores, including seven stores in Canada, at the end of the first quarter of Fiscal 2018.

Johnston & Murphy Group earnings from operations for the first quarter ended May 5, 2018 increased 31.0% to $5.0 million compared to $3.8 million for the same period last year. The increase was primarily due to increased net sales and increased gross margin as percentage of net sales, primarily due to increased weighting of retail sales, which carry a higher gross margin, and lower warehouse expenses. Expenses as a percentage of net sales increased for the first quarter in total due to increased rent expense and selling salaries, due primarily to a higher weighting of retail sales, and increased bonus expense, partially offset by decreased advertising expenses. However, expenses as a percentage of net sales decreased in the retail business.

Licensed Brands
        
 
Three Months Ended
 
 
 
May 5, 2018

 
April 29, 2017

 
%
Change
 
(dollars in thousands)
 
 
Net sales
$
24,065

 
$
33,010

 
(27.1
)%
Earnings from operations
$
306

 
$
2,275

 
(86.5
)%
Operating margin
1.3
%
 
6.9
%
 
 

Licensed Brands' net sales decreased 27.1% to $24.1 million for the first quarter ended May 5, 2018, from $33.0 million for the same period last year, primarily reflecting decreased sales of Dockers Footwear and the expiration of a small footwear license. Unit sales for Dockers footwear decreased 18% for the first quarter of Fiscal 2019 and the average price per pair of Dockers shoes decreased 9% compared to the same period last year.


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Licensed Brands earnings from operations decreased 86.5% to $0.3 million for the first quarter of Fiscal 2019, compared to $2.3 million for the first quarter of Fiscal 2018, primarily due to (i) decreased net sales, (ii) decreased gross margin as a percentage of net sales due to lower initial margins, reflecting increased closeout sales and (iii) increased expenses as a percentage of net sales due to decreased leverage from the lower sales across most expense categories and increased bonus expense, partially offset by decreased royalty, bad debt and advertising expenses.

Corporate, Interest Expenses and Other Charges
Corporate and other expense for the first quarter ended May 5, 2018 was $9.8 million compared to $8.3 million for the first quarter ended April 29, 2017. Corporate expense in the first quarter of Fiscal 2019 included $1.6 million in asset impairment and other charges for retail store asset impairments and legal and other matters. Corporate expense in the first quarter of Fiscal 2018 included $0.1 million in asset impairment and other charges for retail store asset impairments. Corporate expenses increased 1%, excluding asset impairment and other charges, reflecting increased professional fees, partially offset by decreased other corporate expenses.

Net interest expense decreased 12.7% from $1.2 million in the first quarter of Fiscal 2018 to $1.0 million for the first quarter of Fiscal 2019 resulting from decreased average revolver borrowings in the first quarter this year.

Liquidity and Capital Resources
The following table sets forth certain financial data at the dates indicated.
 
May 5, 2018

 
February 3, 2018

 
April 29, 2017

 
(dollars in millions)
Cash and cash equivalents
$
30.9

 
$
39.9

 
$
43.4

Working capital
$
465.5

 
$
438.0

 
$
447.0

Long-term debt (including current portion)
$
105.7

 
$
88.4

 
$
138.0


Working Capital
The Company's business is seasonal, with the Company's investment in inventory and accounts receivable normally reaching peaks in the spring and fall of each year. Historically, cash flows from operations have been generated principally in the fourth quarter of each fiscal year.

Cash flow changes:
Three Months Ended
 
 
 
Increase
(dollars in millions)
May 5, 2018
April 29, 2017
(Decrease)
Net cash provided by (used in) operating activities
$
0.8

$
(18.0
)
$
18.8

Net cash used in investing activities
(18.9
)
(30.1
)
11.2

Net cash provided by financing activities
9.4

43.2

(33.8
)
Effect of foreign exchange rate fluctuations on cash
(0.4
)

(0.4
)
Decrease in cash and cash equivalents
$
(9.1
)
$
(4.9
)
$
(4.2
)

Reasons for the major variances in cash provided (used) in the table above are as follows:


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Cash provided by (used in) operating activities was $18.8 million higher for the three months ended May 5, 2018 compared to the same period last year, primarily reflecting the following factors:

A $9.6 million increase in cash flow from changes in accounts payable reflecting changes in buying patterns and vendor mix;
A $9.5 million increase in cash flow from changes in other accrued liabilities primarily reflecting decreased bonus payments; partially offset by
Decreased net earnings.

Cash used in investing activities was $11.2 million lower for the three months ended May 5, 2018 primarily reflecting decreased capital expenditures. The Company expects capital expenditures in the range of $70-$75 million for Fiscal 2019.

Cash provided by financing activities was $33.8 million lower for the three months ended May 5, 2018 reflecting decreased revolver borrowings and no share repurchases in the first quarter this year compared to the same period last year.

Changes in inventory and accounts receivable
The $15.3 million increase in inventories at May 5, 2018 from February 3, 2018 levels reflected increased retail inventory in most business units, partially offset by seasonal decreases in footwear wholesale inventory.

Accounts receivable at May 5, 2018 increased by $9.4 million compared to February 3, 2018, due primarily to seasonal sales increases in the Company's wholesale businesses.

Sources of Liquidity
The Company has three principal sources of liquidity: cash from operations, cash and cash equivalents on hand and the credit facilities discussed below. The Company believes that cash and cash equivalents on hand, cash flow from operations and availability under its credit facilities will be sufficient to cover its working capital, capital expenditures and stock repurchases for the foreseeable future.
On January 31, 2018, the Company entered into the Fourth Amended and Restated Credit Agreement (the “Credit Facility”) by and among the Company, certain subsidiaries of the Company party thereto, as other borrowers, with the lenders party thereto (the "Lenders") and Bank of America, N.A., as agent (the "Agent"). The Credit Facility provides revolving credit in the aggregate principal amount of $400.0 million, including (i) for the Company and the other borrowers formed in the U.S., a $70.0 million sublimit for the issuance of letters of credit and a domestic swingline subfacility of up to $45.0 million, (ii) for GCO Canada Inc., a revolving credit subfacility in an aggregate amount not to exceed $70.0 million, which includes a $5.0 million sublimit for the issuance of letters of credit and a swingline subfacility of up to $5.0 million, and (iii) for Genesco (UK) Limited, a revolving credit subfacility in an aggregate amount not to exceed $100.0 million, which includes a $10.0 million sublimit for the issuance of letters of credit and a swingline subfacility of up to $10.0 million. The facility expires January 31, 2023. Any swingline loans and any letters of credit and borrowings under the Canadian and UK subfacilities will reduce the availability under the Credit Facility on a dollar-for-dollar basis.
The Company has the option, from time to time, to increase the availability under the Credit Facility by an aggregate amount of up to $200.0 million subject to, among other things, the receipt of commitments for the increased amount. In connection with this increased facility, the Canadian revolving credit subfacility may be increased by no more than $15.0 million and the UK revolving credit subfacility may be increased by no more than $100.0 million.

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The aggregate amount of the loans made and letters of credit issued under the Credit Facility shall at no time exceed the lesser of the facility amount ($400.0 million or, if increased as described above, up to $600.0 million) or the "Borrowing Base", which generally is based on 90% of eligible inventory (increased to 92.5% during fiscal months September through November) plus 85% of eligible wholesale receivables plus 90% of eligible credit card and debit card receivables of the Company and the other borrowers formed in the U.S. and GCO Canada Inc. less applicable reserves (the "Loan Cap"). If requested by the Company and Genesco (UK) Limited and agreed to by the required percentage of Lenders, the relevant assets of Genesco (UK) Limited will be included in the Borrowing Base, provided that amounts borrowed by Genesco (UK) Limited based solely on its own borrowing base will be limited to $100.0 million, subject to the increased facility as described above. At no time can the total loans outstanding to Genesco (UK) Limited and to GCO Canada Inc. exceed 50% of the Loan Cap. In the event that the availability for GCO Canada Inc. to borrow loans based solely on its own borrowing base is completely utilized, GCO Canada Inc. will have the ability, subject to certain terms and conditions, to obtain additional loans (but not to exceed its total revolving credit subfacility amount) to the extent of the then unused portion of the domestic Loan Cap.
The Credit Facility also provides that a first-in, last-out tranche could be added to the revolving credit facility at the option of the Company subject to, among other things, the receipt of commitments for such tranche.
In April 2017, Schuh Group Limited entered into an Amendment and Restatement Agreement which amended the Form of Amended and Restated Facilities Agreement and Working Capital Facility Letter ("UK Credit Facilities") dated May 2015. The amendment includes a new Facility A of £1.0 million, a Facility B of £9.4 million, a Facility C revolving credit agreement of £16.5 million, a working capital facility of £2.5 million and an additional revolving credit facility, Facility D, of €7.2 million for its operations in Ireland and Germany. The Facility A loan was paid off in April 2017. The Facility B loan bears interest at LIBOR plus 2.5% per annum with quarterly payments through September 2019. The Facility C bears interest at LIBOR plus 2.2% per annum and expires in September 2019. The Facility D bears interest at EURIBOR plus 2.2% per annum and expires in September 2019.

There were $10.5 million in UK term loans and $17.4 million in UK revolver loans outstanding at May 5, 2018. The UK Credit Facilities contain certain covenants at the Schuh level including a minimum interest coverage covenant of 4.50x and a maximum leverage covenant of 1.75x. The Company was in compliance with all the covenants at May 5, 2018. The UK Credit Facilities are secured by a pledge of all the assets of Schuh and its subsidiaries.

The Company's revolving credit borrowings averaged $60.1 million during the three months ended May 5, 2018 and $87.8 million during the three months ended April 29, 2017, as cash on hand, cash generated from operations and revolver borrowings primarily funded seasonal working capital requirements, capital expenditures for the first three months each year and stock repurchases for the first quarter of Fiscal 2018. The borrowings outstanding during the first three months of Fiscal 2019 reflect funds borrowed to fund working capital requirements.
There were $11.3 million of letters of credit outstanding and $77.7 million of revolver borrowings outstanding, including $14.2 million (£10.5 million) related to Genesco (UK) Limited and $42.0 million (C$54.0 million) related to GCO Canada, under the Credit Facility at May 5, 2018. The Company is not required to comply with any financial covenants under the Credit Facility unless Excess Availability (as defined in the Credit Facility) is less than the greater of $25.0 million or 10.0% of the Loan Cap. If and during such time as Excess Availability is less than the greater of $25.0 million or 10.0% of the Loan Cap, the Credit Facility requires the Company to meet a minimum fixed charge coverage ratio of (a) an amount

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equal to consolidated EBITDA less capital expenditures and taxes paid in cash, in each case for such period, to (b) fixed charges for such period, of not less than 1.0:1.0. Excess Availability was $274.8 million at May 5, 2018. Because Excess Availability exceeded $25.0 million or 10.0% of the Loan Cap, the Company was not required to comply with this financial covenant at May 5, 2018.
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 and to agreements which would have a material adverse effect if breached, certain events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts and change in control.
The Credit Facility prohibits the payment of dividends and other restricted payments unless, among other things, as of the date of the making of any Restricted Payment (as defined in the Credit Facility), (a) no Default (as defined in the Credit Facility) or Event of Default (as defined in the Credit Facility) exists or would arise after giving effect to such Restricted Payment and (b) either (i) the Borrowers (as defined in the Credit Facility) have pro forma Excess Availability for the prior 60 day period equal to or greater than 20% of the Loan Cap, after giving pro forma effect to such Restricted Payment, or (ii) (A) the Borrowers have pro forma Excess Availability for the prior 60 day period of less than 20% of the Loan Cap but equal to or greater than 15% of the Loan Cap, after giving pro forma effect to the Restricted Payment or Acquisition, and (B) the Fixed Charge Coverage Ratio (as defined in the Credit Facility), on a pro-forma basis for the twelve months preceding such Restricted Payment, will be equal to or greater than 1.0:1.0 and (c) after giving effect to such Restricted Payment, the Borrowers are Solvent (as defined in the Credit Facility). Additionally, the Company may make cash dividends on preferred stock up to $0.5 million in any fiscal year absent a continuing Event of Default. The Company’s management does not expect availability under the Credit Facility to fall below the requirements listed above during Fiscal 2019.

The Company's contractual obligations at May 5, 2018 were flat compared to February 3, 2018 as the increase in long-term debt and purchase obligations was offset by decreased operating leases.

Capital Expenditures
Total capital expenditures in Fiscal 2019 are expected to be approximately $70 to $75 million. These include retail capital expenditures of approximately $40 to $45 million to open approximately 15 Journeys stores, 10 Journeys Kidz stores, three Little Burgundy stores in Canada, seven Schuh stores, five Johnston & Murphy shops and factory stores and 18 Lids Sports Group stores, including eleven Lids stores, with two stores in Canada, one Lids Locker Room store and six Locker Room by Lids leased departments and to complete approximately 188 major store renovations. The Company also expects to spend approximately $30 million on other initiatives, including omni-channel, IT and distribution centers.
 
Future Capital Needs
The Company expects that cash on hand, cash provided by operations and borrowings under its Credit Facilities will be sufficient to support seasonal working capital, capital expenditure requirements and stock repurchases during Fiscal 2019. The approximately $1.8 million of costs associated with discontinued operations that are expected to be paid during the next twelve months are expected to be funded from cash on hand, cash generated from operations and borrowings under the Credit Facility.


The Company had total available cash and cash equivalents of $30.9 million, $39.9 million and $43.4 million as of May 5, 2018, February 3, 2018 and April 29, 2017, respectively, of which approximately $8.6 million, $21.2 million and $6.8 million was held by the Company's foreign subsidiaries as of May 5, 2018,

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February 3, 2018 and April 29, 2017, respectively. The Company's strategic plan does not require the repatriation of foreign cash in order to fund its operations in the U.S., and it is the Company's current intention to indefinitely reinvest its foreign cash and cash equivalents outside of the U.S. If the Company were to repatriate foreign cash to the U.S., it would be required to accrue and pay U.S. taxes in accordance with applicable U.S. tax rules and regulations as a result of the repatriation.

Common Stock Repurchases
The Company did not repurchase any shares of common stock during the three months ended May 5, 2018 and repurchased 275,300 shares of common stock during the three months ended April 29, 2017 for $16.2 million. The Company has $24.0 million remaining under its current $100.0 million share repurchase authorization.

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 Condensed Consolidated Financial Statements. The Company has made pretax accruals for certain of these contingencies, including approximately $0.0 million and $0.2 million for the first quarters of Fiscal 2019 and 2018, respectively. These charges are included in provision for discontinued operations, net in the Condensed Consolidated Statements of Operations because they relate to former facilities operated by the Company. The Company monitors these matters on an ongoing basis and, on a quarterly basis, management reviews the Company's 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 accrued liability 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 provisions, that some or all accruals may not be adequate or that the amounts of any such additional provisions or any such inadequacy will not have a material adverse effect upon the Company's financial condition or results of operations.

Financial Market Risk
The following discusses the Company's exposure to financial market risk related to changes in interest rates.

Outstanding Debt of the Company - The Company has $10.6 million of outstanding U.K. term loans at a weighted average interest rate of 3.21% as of May 5, 2018. A 100 basis point increase in interest rates would increase annual interest expense by $0.1 million on the $10.6 million term loans. The Company has $17.4 million of outstanding U.K. revolver borrowings at a weighted average interest rate of 2.51% as of May 5, 2018. A 100 basis point increase in interest rates would increase annual interest expense by $0.2 million on the $17.4 million revolver borrowings. The Company has $77.7 million of outstanding revolver borrowings at a weighted average interest rate of 3.68% as of May 5, 2018. A 100 basis point increase in interest rates would increase annual interest expense by $0.8 million on the $77.7 million revolver borrowings.

Cash and Cash Equivalents - The Company's cash and cash equivalent balances are invested in financial instruments with original maturities of three months or less. The Company did not have significant exposure to changing interest rates on invested cash at May 5, 2018. As a result, the Company considers the interest rate market risk implicit in these investments at May 5, 2018 to be low.

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Accounts Receivable - The Company's accounts receivable balance at May 5, 2018 is concentrated in two of its footwear wholesale businesses, which sell primarily to department stores and independent retailers across the United States. In its footwear wholesale businesses, one customer accounted for 15%, one customer accounted for 8% and one customer accounted for 7%, while no other customer accounted for more than 6% of the Company's total trade receivables balance as of May 5, 2018. The Company monitors the credit quality of its customers and establishes an allowance for doubtful accounts based upon factors surrounding credit risk of specific customers, historical trends and other information, as well as customer specific factors; however, credit risk is affected by conditions or occurrences within the economy and the retail industry, as well as company-specific information.

Foreign Currency Exchange Risk - The Company is exposed to translation risk because certain of its foreign operations utilize the local currency as their functional currency and those financial results must be translated into United States dollars. As currency exchange rates fluctuate, translation of the Company's financial statements of foreign businesses into United States dollars affects the comparability of financial results between years. Schuh Group's net sales for the first three months of Fiscal 2019 were positively impacted by $8.7 million due to the increase in foreign exchange rates and Schuh Group's loss from operations were negatively impacted by $0.6 million.

Summary - Based on the Company's overall market interest rate exposure at May 5, 2018, the Company believes that the effect, if any, of reasonably possible near-term changes in interest rates on the Company's consolidated financial position, results of operations or cash flows for Fiscal 2019 would not be material.

New Accounting Pronouncements
Descriptions of the recently issued accounting pronouncements, if any, and the accounting pronouncements adopted by the Company during the three months ended May 5, 2018 are included in Note 1 to the Condensed Consolidated Financial Statements.


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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 Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures.
The Company has established disclosure controls and procedures designed to ensure that information required to be disclosed by the Company, including its consolidated subsidiaries, in the reports it files or submits under the Securities Exchange Act of 1934, as amended (the"Exchange Act"), is made known to the officers who certify the Company's financial reports and to other members of senior management. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving desired objectives.

Based on their evaluation as of May 5, 2018, the principal executive officer and principal financial officer of the Company have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within time periods specified in SEC rules and forms and (ii) accumulated and communicated to the Company's management, including the Company's principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting.
There were no changes in the Company's internal control over financial reporting that occurred during the Company's first quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


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PART II - OTHER INFORMATION
 

Item 1. Legal Proceedings

The Company incorporates by reference the information regarding legal proceedings in Note 8 of the Company's Condensed Consolidated Financial Statements.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in Part I, Item 1A. "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 2018.


Item 6. Exhibits
 
Exhibit Index
  
 
 
 
(10.1)
 
 
 
 
(31.1)
  
 
 
(31.2)
  
 
 
(32.1)
  
 
 
(32.2)
  
 
 
   101.INS
  
XBRL Instance Document
 
 
    101.SCH
  
XBRL Schema Document
 
 
    101.CAL
  
XBRL Calculation Linkbase Document
 
 
    101.DEF
  
XBRL Definition Linkbase Document
 
 
    101.LAB
  
XBRL Label Linkbase Document
 
 
    101.PRE
  
XBRL Presentation Linkbase Document
 


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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.
 
 
By:
 
/s/ Mimi E. Vaughn
 
 
Mimi E. Vaughn
 
 
Senior Vice President - Finance and
 
 
Chief Financial Officer
Date: June 14, 2018
 



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