1
[GENESCO LOGO]
(Mark One) FORM 10-Q
[X] Quarterly Report Pursuant To
Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended
May 5, 2001
[ ] Transition Report Pursuant To
Section 13 or 15(d) of the
Securities Exchange Act of 1934
Securities and Exchange Commission
Washington, D.C. 20549
Commission File No. 1-3083
GENESCO INC.
A Tennessee Corporation
I.R.S. No. 62-0211340
Genesco Park
1415 Murfreesboro Road
Nashville, Tennessee 37217-2895
Telephone 615/367-7000
Indicate by check mark whether the
registrant (1) has filed all reports
required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934
during the preceding 12 months (or such
shorter period that the registrant was
required to file such reports with the
commission) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
- ---------------
Common Shares Outstanding June 15, 2001 - 21,974,607
2
INDEX
PAGE
Part 1 - Financial Information 3
Consolidated Balance Sheet - May 5, 2001, February 3, 2001 and
April 29, 2000 3
Consolidated Earnings - Three Months Ended
May 5, 2001 and April 29, 2000 4
Consolidated Cash Flows - Three Months Ended
May 5, 2001 and April 29, 2000 5
Consolidated Shareholders' Equity - Year Ended
February 3, 2001 and Three Months Ended May 5, 2001 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 22
Part II - Other Information 32
Signature 33
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3
PART I - FINANCIAL INFORMATION
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Balance Sheet
In Thousands
MAY 5, FEBRUARY 3, APRIL 29,
2001 2001 2000
---------- ----------- ----------
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 34,133 $ 60,382 $ 45,218
Accounts receivable 26,787 22,700 28,645
Inventories 146,960 134,236 113,153
Deferred income taxes 15,263 15,263 14,826
Other current assets 11,349 10,806 8,978
Current assets of discontinued operations 187 359 -0-
---------- ---------- ----------
Total current assets 234,679 243,746 210,820
---------- ---------- ----------
Plant, equipment and capital leases, net 90,028 87,747 74,396
Deferred income taxes 3,396 3,396 4,184
Other noncurrent assets 16,591 16,644 12,992
Plant and equipment of discontinued operations, net 554 630 -0-
---------- ---------- ----------
TOTAL ASSETS $ 345,248 $ 352,163 $ 302,392
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 74,771 $ 94,252 $ 70,638
Provision for discontinued operations 4,023 4,568 2,139
---------- ---------- ----------
Total current liabilities 78,794 98,820 72,777
---------- ---------- ----------
Long-term debt 103,500 103,500 103,500
Other long-term liabilities 8,054 7,354 6,260
Provision for discontinued operations 3,578 4,264 5,523
---------- ---------- ----------
Total liabilities 193,926 213,938 188,060
---------- ---------- ----------
Contingent liabilities (see Note 9)
SHAREHOLDERS' EQUITY
Non-redeemable preferred stock 7,694 7,721 7,875
Common shareholders' equity:
Common stock, $1 par value:
Authorized: 80,000,000 shares
Issued: May 5, 2001 - 22,390,428;
February 3, 2001 - 22,149,915;
April 29, 2000 - 21,955,674 22,391 22,150 21,956
Additional paid-in capital 100,155 95,194 94,754
Retained earnings 39,281 31,017 7,604
Accumulated other comprehensive income (342) -0- -0-
Treasury shares, at cost (17,857) (17,857) (17,857)
---------- ---------- ----------
Total shareholders' equity 151,322 138,225 114,332
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 345,248 $ 352,163 $ 302,392
========== ========== ==========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
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4
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Earnings
Three Months Ended
In Thousands, except per share amounts
MAY 5, APRIL 29,
2001 2000
---------- ----------
Net sales $ 171,918 $ 146,644
Cost of sales 89,821 78,338
Selling and administrative expenses 67,212 56,434
---------- ----------
Earnings from operations before interest 14,885 11,872
---------- ----------
Interest expense 2,158 2,101
Interest income (623) (419)
---------- ----------
Total interest expense, net 1,535 1,682
---------- ----------
Earnings before income taxes and discontinued operations 13,350 10,190
Income taxes 5,012 3,997
---------- ----------
Earnings before discontinued operations 8,338 6,193
Discontinued operations (net of tax):
Operating loss -0- (232)
---------- ----------
NET EARNINGS $ 8,338 $ 5,961
========== ==========
Basic earnings per common share:
Before discontinued operations $ 0.38 $ 0.28
Net earnings $ 0.38 $ 0.27
Diluted earnings per common share:
Before discontinued operations $ 0.34 $ 0.26
Net earnings $ 0.34 $ 0.25
========== ==========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
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5
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Three Months Ended
Consolidated Cash Flows
In Thousands
MAY 5, APRIL 29,
2001 2000
-------- ---------
OPERATIONS:
Net earnings $ 8,338 $ 5,961
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 3,832 3,039
Provision for losses on accounts receivable 114 122
Other 230 341
Effect on cash of changes in working
capital and other assets and liabilities:
Accounts receivable (4,029) (5,149)
Inventories (12,724) (3,338)
Other current assets (543) (97)
Accounts payable and accrued liabilities (20,368) (4,316)
Other assets and liabilities 646 405
-------- --------
Net cash used in operating activities (24,504) (3,032)
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (6,408) (8,950)
Proceeds from businesses divested and asset sales 56 95
-------- --------
Net cash used in investing activities (6,352) (8,855)
-------- --------
FINANCING ACTIVITIES:
Stock repurchase -0- (3,728)
Payments of capital leases -0- (1)
Dividends paid (74) (75)
Exercise of options and related income tax benefits 4,681 3,049
-------- --------
Net cash provided by (used in) financing activities 4,607 (755)
-------- --------
NET CASH FLOW (26,249) (12,642)
Cash and short-term investments at
beginning of period 60,382 57,860
-------- --------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 34,133 $ 45,218
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Net cash paid for:
Interest $ 3,519 $ 3,382
Income taxes 4,601 685
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
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6
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Shareholders' Equity
In Thousands
TOTAL ACCUMULATED
NON-REDEEMABLE ADDITIONAL OTHER
PREFERRED COMMON PAID-IN TREASURY RETAINED COMPREHENSIVE
STOCK STOCK CAPITAL STOCK EARNINGS INCOME
-------------- ---------- ---------- ---------- ---------- -------------
Balance January 29, 2000 $ 7,882 $ 21,715 $ 94,784 $ (17,857) $ 1,718 $ -0-
======== ========== ========== ========== ========== ========
Net earnings -0- -0- -0- -0- 29,598 -0-
Dividends paid -0- -0- -0- -0- (299) -0-
Exercise of options -0- 1,013 5,017 -0- -0- -0-
Issue shares - Employee Stock Purchase Plan -0- 55 508 -0- -0- -0-
Tax effect of exercise of stock options -0- -0- 2,758 -0- -0- -0-
Stock repurchases -0- (646) (8,131) -0- -0- -0-
Other (161) 13 258 -0- -0- -0-
Comprehensive Income
-------- ---------- ---------- ---------- ---------- --------
Balance February 3, 2001 $ 7,721 $ 22,150 $ 95,194 $ (17,857) $ 31,017 $ -0-
======== ========== ========== ========== ========== ========
Net earnings -0- -0- -0- -0- 8,338 -0-
Dividends paid -0- -0- -0- -0- (74) -0-
Exercise of options -0- 237 4,444 -0- -0- -0-
Tax effect of exercise of stock options -0- -0- 475 -0- -0- -0-
Loss on foreign currency forward contracts -0- -0- -0- -0- -0- (342)
Other (27) 4 42 -0- -0- -0-
Comprehensive Income
-------- ---------- ---------- ---------- ---------- --------
Balance May 5, 2001 $ 7,694 $ 22,391 $ 100,155 $ (17,857) $ 39,281 (342)
======== ========== ========== ========== ========== ========
TOTAL
SHARE-
COMPREHENSIVE HOLDERS'
INCOME EQUITY
------------- ----------
Balance January 29, 2000 $ 108,242
========== ==========
Net earnings 29,598 29,598
Dividends paid -0- (299)
Exercise of options -0- 6,030
Issue shares - Employee Stock Purchase Plan -0- 563
Tax effect of exercise of stock options -0- 2,758
Stock repurchases -0- (8,777)
Other -0- 110
----------
Comprehensive Income $ 29,598
---------- ----------
Balance February 3, 2001 $ 138,225
========== ==========
Net earnings 8,338 8,338
Dividends paid -0- (74)
Exercise of options -0- 4,681
Tax effect of exercise of stock options -0- 475
Loss on foreign currency forward contracts (342) (342)
Other -0- 19
----------
Comprehensive Income $ 7,996
---------- ----------
Balance May 5, 2001 $ $ 151,322
========== ==========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
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7
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM STATEMENTS
The consolidated financial statements contained in this report are unaudited but
reflect all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the results for the interim periods of the
fiscal year ending February 2, 2002 ("Fiscal 2002") and of the fiscal year ended
February 3, 2001 ("Fiscal 2001"). The results of operations for any interim
period are not necessarily indicative of results for the full year. The
financial statements should be read in conjunction with the financial statements
and notes thereto included in the annual report on Form 10-K.
NATURE OF OPERATIONS
The Company's businesses include the manufacture or sourcing, marketing and
distribution of footwear principally under the Johnston & Murphy and Dockers
brands and the operation at May 5, 2001 of 810 Jarman, Journeys, Journeys Kidz,
Johnston & Murphy and Underground Station retail footwear stores and leased
departments. The Company entered into an agreement with Nautica Apparel, Inc. to
end its license to market footwear under the Nautica label, effective January
31, 2001. The Company will continue to sell Nautica - branded footwear for the
first six months of Fiscal 2002 in order to fill existing customer orders and
sell existing inventory. (See Note 2). The Company also sold certain assets of
its Volunteer Leather business on June 19, 2000, and has discontinued all
Leather segment operations. (See Note 2).
BASIS OF PRESENTATION
All subsidiaries are included in the consolidated financial statements. All
significant intercompany transactions and accounts have been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FINANCIAL STATEMENT RECLASSIFICATIONS
Certain reclassifications have been made to conform prior years' data to the
current presentation.
CASH AND SHORT-TERM INVESTMENTS
Included in cash and short-term investments at February 3, 2001 and May 5, 2001,
are short-term investments of $53.3 million and $25.2 million, respectively.
Short-term investments are highly-liquid debt instruments having an original
maturity of three months or less.
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8
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INVENTORIES
Inventories of wholesaling and manufacturing companies are stated at the lower
of cost or market, with cost determined principally by the first-in, first-out
method. Retail inventories are determined by the retail method.
PLANT, EQUIPMENT AND CAPITAL LEASES
Plant, equipment and capital leases are recorded at cost and depreciated or
amortized over the estimated useful life of related assets. Depreciation and
amortization expense are computed principally by the straight-line method over
estimated useful lives:
Buildings and building equipment 20-45 years
Machinery, furniture and fixtures 3-15 years
Leasehold improvements and properties under capital leases are amortized on the
straight-line method over the shorter of their useful lives or their related
lease terms.
IMPAIRMENT OF LONG-TERM ASSETS
The Company periodically assesses the realizability of its long-lived assets and
evaluates such assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Asset
impairment is determined to exist if estimated future cash flows, undiscounted
and without interest charges, are less than carrying amount.
POSTRETIREMENT BENEFITS
Substantially all full-time employees are covered by a defined benefit pension
plan. The Company also provides certain former employees with limited medical
and life insurance benefits. The Company funds at least the minimum amount
required by the Employee Retirement Income Security Act.
REVENUE RECOGNITION
Retail sales are recorded net of actual returns, and exclude all taxes, while
wholesale revenue is recorded net of estimated returns when the related goods
have been shipped and legal title has passed to the customer.
PREOPENING COSTS
Costs associated with the opening of new stores are expensed as incurred.
ADVERTISING COSTS
Advertising costs are predominantly expensed as incurred. Advertising costs were
$5.2 million and $5.3 million for the first quarter of Fiscal 2002 and 2001,
respectively.
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9
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
ENVIRONMENTAL COSTS
Environmental expenditures relating to current operations are expensed or
capitalized as appropriate. Expenditures relating to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable and the costs can be reasonably
estimated and are evaluated independently of any future claims for recovery.
Generally, the timing of these accruals coincides with completion of a
feasibility study or the Company's commitment to a formal plan of action. Costs
of future expenditures for environmental remediation obligations are not
discounted to their present value.
INCOME TAXES
Deferred income taxes are provided for all temporary differences and operating
loss and tax credit carryforwards limited, in the case of deferred tax assets,
to the amount the Company believes is more likely than not to be realized in the
foreseeable future.
EARNINGS PER COMMON SHARE
Basic earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities to issue common stock were exercised or
converted to common stock. (see Note 8).
COMPREHENSIVE INCOME
The Statement of Financial Accounting Standards (SFAS) 130, "Reporting
Comprehensive Income" requires, among other things, the Company's minimum
pension liability adjustment and gain or loss on derivative instruments to be
included in other comprehensive income.
BUSINESS SEGMENTS
The Statement of Financial Accounting Standards (SFAS) 131, "Disclosures about
Segments of an Enterprise and Related Information" requires that companies
disclose "operating segments" based on the way management disaggregates the
company for making internal operating decisions. (see Notes 2 and 10).
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10
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company implemented Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities" in the first
quarter of Fiscal 2002. This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. SFAS 133
requires an entity to recognize all derivatives as either assets or liabilities
in the consolidated balance sheet and to measure those instruments at fair
value. Under certain conditions, a derivative may be specifically designated as
a fair value hedge or a cash flow hedge. The accounting for changes in the fair
value of a derivative are recorded each period in current earnings or in other
comprehensive income depending on the intended use of the derivative and the
resulting designation. For the first quarter ended May 5, 2001, the Company
recorded a loss on foreign currency forward contracts of $0.3 million in
accumulated other comprehensive income.
In order to reduce exposure to foreign currency exchange rate fluctuations in
connection with inventory purchase commitments, the Company enters into foreign
currency forward exchange contracts for Italian Lira and Euro with a maximum
hedging period of twelve months. At February 3, 2001 and May 5, 2001, the
Company had approximately $31.3 million and $30.1 million, respectively, of such
contracts outstanding. Forward exchange contracts have an average term of
approximately three and one half months. The gain from spot rates at February 3,
2001 under these contracts was $1.3 million and the loss from spot rates at May
5, 2001 was $0.3 million. The Company monitors the credit quality of the major
national and regional financial institutions with whom it enters into such
contracts.
The Company estimates that the majority of net-hedging losses will be
reclassified from accumulated other comprehensive income into earnings through
higher cost of sales within the twelve months between May 6, 2001 and May 4,
2002.
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11
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 2
RESTRUCTURINGS
Nautica Footwear License Cancellation
The Company entered into an agreement with Nautica Apparel, Inc. to end its
license to market footwear under the Nautica label, effective January 31, 2001.
The Company will continue to sell Nautica - branded footwear for the first six
months of Fiscal 2002 in order to fill existing customer orders and sell
existing inventory.
In connection with the termination of the Nautica Footwear license agreement,
the Company recorded a pretax charge to earnings of $4.4 million ($2.7 million
net of tax) in the fourth quarter of Fiscal 2001. The charge includes
contractual obligations to Nautica Apparel for the license cancellation and
other costs, primarily severance. Included in the charge is a $1.0 million
inventory write-down which is reflected in gross margin on the income statement.
All of these costs are expected to be incurred during Fiscal 2002.
The Nautica footwear business contributed sales of approximately $4.2 million
and $7.8 million and operating losses of ($0.3) million and ($0.4) million in
the first quarter of Fiscal 2002 and 2001, respectively.
Volunteer Leather Divestiture
On May 22, 2000, the Company's board of directors approved a plan to sell its
Volunteer Leather finishing business and liquidate its tanning business, to
allow the Company to be more focused on the retailing and marketing of branded
footwear.
Certain assets of the Volunteer Leather business were sold on June 19, 2000. The
plan resulted in a pretax charge to earnings of $4.9 million ($3.0 million net
of tax) in the second quarter of Fiscal 2001. Because Volunteer Leather
constitutes the entire Leather segment of the Company's business, the charge to
earnings is treated for financial reporting purposes as a provision for
discontinued operations.
The provision for discontinued operations included $1.3 million for asset
write-downs and $3.6 million for other costs, of which $1.7 million are expected
to be incurred in the next twelve months. As of May 5, 2001, $1.2 million of
such other costs had been incurred. Other costs include primarily employee
severance and facility shutdown costs. The approximately $0.7 million of other
costs expected to be incurred beyond twelve months are classified as long-term
liabilities in the consolidated balance sheet. The Volunteer Leather business
employed approximately 160 people.
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12
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 2
RESTRUCTURINGS, CONTINUED
The operating results of the leather segment are shown below:
PERIOD ENDED
APRIL 29,
IN THOUSANDS 2000
- ------------ ------------
Net sales $ 4,986
Cost of sales and expenses 5,366
-------
Pretax loss (380)
Income tax benefit (148)
-------
NET LOSS $ (232)
=======
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13
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 3
ACCOUNTS RECEIVABLE
MAY 5, FEBRUARY 3,
IN THOUSANDS 2001 2001
- ------------ -------- -----------
Trade accounts receivable $ 29,126 $ 23,146
Miscellaneous receivables 1,842 3,454
-------- --------
Total receivables 30,968 26,600
Allowance for bad debts (1,417) (1,303)
Other allowances (2,764) (2,597)
-------- --------
NET ACCOUNTS RECEIVABLE $ 26,787 $ 22,700
======== ========
The Company's footwear wholesaling business sells primarily to independent
retailers and department stores across the United States. Receivables arising
from these sales are not collateralized. Credit risk is affected by conditions
or occurrences within the economy and the retail industry. The Company
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends and other information.
One customer accounted for 14% of the Company's trade receivables balance as of
May 5, 2001 and no other customer accounted for more than 11% of the Company's
trade receivables balance as of May 5, 2001.
NOTE 4
INVENTORIES
MAY 5, FEBRUARY 3,
IN THOUSANDS 2001 2001
- ------------ -------- -----------
Raw materials $ 1,326 $ 1,408
Work in process 537 609
Finished goods 30,947 34,551
Retail merchandise 114,150 97,668
-------- --------
TOTAL INVENTORIES $146,960 $134,236
======== ========
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14
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 5
CURRENT ASSETS OF DISCONTINUED OPERATIONS
MAY 5, FEB. 3
IN THOUSANDS 2001 2001
- ------------ ------ ------
Accounts Receivable, net of allowance of $1 and $3, respectively $187 $359
---- ----
TOTAL CURRENT ASSETS OF DISCONTINUED OPERATIONS $187 $359
==== ====
NOTE 6
PLANT, EQUIPMENT AND CAPITAL LEASES, NET
MAY 5, FEBRUARY 3,
IN THOUSANDS 2001 2001
- ------------ ---------- -----------
Plant and equipment:
Land $ 301 $ 291
Buildings and building equipment 1,128 1,128
Machinery, furniture and fixtures 59,463 56,588
Construction in progress 6,204 9,589
Improvements to leased property 78,323 73,008
Capital leases:
Buildings 20 20
---------- ----------
Plant, equipment and capital leases, at cost 145,439 140,624
Accumulated depreciation and amortization:
Plant and equipment (55,403) (52,870)
Capital leases (8) (7)
---------- ----------
NET PLANT, EQUIPMENT AND CAPITAL LEASES $ 90,028 $ 87,747
========== ==========
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15
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 7
PROVISION FOR DISCONTINUED OPERATIONS AND RESTRUCTURING RESERVES
PROVISION FOR DISCONTINUED OPERATIONS
EMPLOYEE FACILITY
RELATED SHUTDOWN
IN THOUSANDS COSTS* COSTS OTHER TOTAL
- ------------ -------- -------- ------ --------
Balance February 3, 2001 6,549 1,924 359 8,832
Charges and adjustments, net (1,067) (59) (105) (1,231)
-------- -------- ------ --------
Balance May 5, 2001 5,482 1,865 254 7,601
Current portion 2,718 1,218 87 4,023
-------- -------- ------ --------
TOTAL NONCURRENT PROVISION FOR
DISCONTINUED OPERATIONS $ 2,764 $ 647 $ 167 $ 3,578
======== ======== ====== ========
* Includes $5.0 million of apparel union pension withdrawal liability.
RESTRUCTURING RESERVES
EMPLOYEE FACILITY
RELATED SHUTDOWN
IN THOUSANDS COSTS COSTS OTHER TOTAL
- ------------ -------- -------- ------ --------
Balance February 3, 2001 517 167 3,531 4,215
Charges and adjustments, net (68) (84) (2,735) (2,887)
---- ----- ------ --------
Balance May 5, 2001 449 83 796 1,328
Current portion (included in accounts
payable and accrued liabilities) 449 47 796 1,292
---- ----- ------ --------
TOTAL NONCURRENT RESTRUCTURING RESERVES
(INCLUDED IN OTHER LONG-TERM LIABILITIES) $-0- $ 36 $ -0- $ 36
==== ===== ====== ========
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16
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8
EARNINGS PER SHARE
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
MAY 5, 2001 APRIL 29, 2000
------------------------------------- ----------------------------------------
(IN THOUSANDS, EXCEPT INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- ----------------------- ----------- ------------- --------- ----------- ------------- ---------
Earnings before discontinued operations $ 8,338 $ 6,193
Less: Preferred stock dividends (74) (75)
------- ------ ------ ------- ------ ------
BASIC EPS
Income available to
common shareholders 8,264 21,846 $ .38 6,118 21,587 $ .28
====== ======
EFFECT OF DILUTIVE SECURITIES
Options 491 416
5 1/2% convertible subordinated notes 970 4,918 947 4,918
Employees' preferred stock(1) 69 72
------- ------ ------ ------- ------ ------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $ 9,234 27,324 $ .34 $ 7,065 26,993 $ .26
======= ====== ====== ======= ====== ======
(1) The Company's Employees' Subordinated Convertible Preferred Stock is
convertible one for one to the Company's common stock. Because there
are no dividends paid on this stock, these shares are assumed to be
converted.
The amount of the dividend on the convertible preferred stock per common share
obtainable on conversion of the convertible preferred stock is higher than basic
earnings per share for the period. Therefore, conversion of the convertible
preferred stock is not reflected in diluted earnings per share, because it would
have been antidilutive. The shares convertible to common stock for Series 1, 3
and 4 preferred stock would have been 30,675, 38,324 and 24,946 , respectively.
The weighted shares outstanding reflects the effect of the stock buy back
program of up to 6.8 million shares announced by the Company in Fiscal 1999,
2000 and 2001. The Company has repurchased 6.4 million shares as of May 5, 2001.
16
17
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 9
LEGAL PROCEEDINGS
New York State Environmental Proceedings
The Company is a defendant in a civil action filed by the State of New York
against the City of Gloversville, New York, and 33 other private defendants. The
action arose out of the alleged disposal of certain hazardous material directly
or indirectly into a municipal landfill and seeks recovery under a federal
environmental statute and certain common law theories for the costs of
investigating and performing remedial actions and damage to natural resources.
The environmental authorities have selected a plan of remediation for the site
with a total estimated cost of approximately $12.0 million. The Company was
allocated liability for a 1.31% share of the remediation cost in non-binding
mediation with other defendants and the State of New York. The State has offered
to release the Company from further liability related to the site in exchange
for payment of its allocated share plus a small premium, totaling approximately
$180,000, and the Company has accepted. Assuming the settlement is completed as
proposed, the Company believes it has fully provided for its liability in
connection with the site.
The Company has received notice from the New York State Department of
Environmental Conservation (the "Department") that it deems remedial action to
be necessary with respect to certain contaminants in the vicinity of a knitting
mill operated by a former subsidiary of the Company from 1965 to 1969, and that
it considers the Company a potentially responsible party. In August 1997, the
Department and the Company entered into a consent order whereby the Company
assumed responsibility for conducting a remedial investigation and feasibility
study ("RIFS") and implementing an interim remediation measure with regard to
the site, without admitting liability or accepting responsibility for any future
remediation of the site. In conjunction with the consent order, the Company
entered into an agreement with the owner of the site providing for a release
from liability for property damage and for necessary access to the site, for
payments totaling $400,000. The Company estimates that the cost of conducting
the RIFS and implementing the interim remedial measure will be in the range of
$2.2 million to $2.6 million. The Company believes that it has adequately
reserved for the costs of conducting the RIFS and implementing the interim
remedial measure contemplated by the consent order, but there is no assurance
that the consent order will ultimately resolve the matter. The Company has not
ascertained what responsibility, if any, it has for any contamination in
connection with the facility or what other parties may be liable in that
connection and is unable to predict whether its liability, if any, beyond that
voluntarily assumed by the consent order will have a material effect on its
financial condition or results of operations.
17
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 9
LEGAL PROCEEDINGS, CONTINUED
Whitehall Environmental Sampling
Pursuant to a work plan approved by the Michigan Department of Environmental
Quality ("MDEQ") the Company has performed sampling and analysis of soil,
sediments, surface water, groundwater and waste management areas at the
Company's Volunteer Leather Company facility in Whitehall, Michigan. On June 29,
1999, the Company submitted a remedial action plan (the "Plan") for the site to
MDEQ. The Plan proposed no direct remedial action with respect to soils at the
site, which are in compliance with applicable regulatory standards, or lake
sediments, which the Company believes do not pose a threat to human health or
the environment and do not violate any applicable regulatory standard. The Plan
included the filing of certain restrictive covenants encumbering the tannery
property to prevent activities disturbing the lake sediments and uses of the
property inconsistent with the applicable regulatory standards. The Company,
with the approval of MDEQ, previously installed horizontal wells to capture
groundwater from a portion of the site and treat it by air sparging. The Plan
proposed continued operation of this system for an indefinite period and
monitoring of groundwater samples to ensure that the system is functioning as
intended. The Plan is subject to MDEQ approval. In December 1999, MDEQ responded
to the Plan with a request for further information.
On June 30, 1999, the City of Whitehall filed an action against the Company in
the circuit court for the City of Muskegon alleging that the Company's and its
predecessors' past wastewater management practices have adversely affected the
environment, and seeking injunctive relief under Parts 17 and 201 of the
Michigan Natural Resources Environmental Protection Act ("MNREPA") to require
the Company to correct the alleged pollution. Further, the City alleges
violations of City ordinances prohibiting blight and litter, and that the
Whitehall Volunteer Leather plant constitutes a public nuisance. The Company
filed an answer denying the material allegations of the complaint and asserting
affirmative defenses and counterclaims against the City. The Company also moved
to join the State of Michigan as a party to the action, since it has primary
responsibility for administration of the environmental statutes underlying most
of the City's claims. The State moved to dismiss the Company's action against it
and to intervene in the case on a limited basis, seeking declaratory and
injunctive relief regarding the restrictive covenants on the property, the
State's jurisdiction under MNREPA Part 201 and its right of access to the
property. On May 5, 2000, the court dismissed the Company's action against the
State; the cross actions between the City and the Company remain.
In connection with its decision during the second quarter of Fiscal 2001 to exit
the leather business and to shut down the Whitehall facility, the Company
formally proposed a compromise remediation plan (the "Compromise Proposal"),
including limited sediment removal and additional upland remediation to bring
the property into compliance with regulatory standards for non-industrial uses.
The Company estimated that the Compromise Proposal would include incremental
costs of approximately $2.2 million, which have been fully provided for.
18
19
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 9
LEGAL PROCEEDINGS, CONTINUED
If the Compromise Proposal is approved and the litigation's outcome does not
require additional remediation of the site, the Company does not expect
remediation to have a material impact on its financial condition or results of
operations. However, there can be no assurance that the Compromise Proposal will
be approved, and the Company is unable to predict whether any further
remediation that may ultimately be required will have a material effect on its
financial condition or results of operations.
Threatened Contribution Claim
The Company has been advised by the current owner of an adhesives manufacturing
business formerly owned by the Company that the owner has been named a
third-party defendant in a suit brought under CERCLA relating to an Alabama
solvent recycling facility allegedly used by the business. According to the
owner, it would in turn seek contribution from the Company against any portion
of its liability arising out of the Company's operation of the business prior to
its 1986 divestiture. The current owner has advised the Company that available
information on volumes of contaminants at the site indicates that the entire
share of liability related to the adhesives business is de minimis, not likely
to exceed $50,000. Based on information concerning its relative contribution of
wastes to the site the Company has agreed to accept approximately 40% of up to
$50,000 in liability imposed on the adhesives business and the current owner and
one other former owner have agreed to accept the balance of such liability up to
$50,000. The Company does not expect this threatened claim to have a material
adverse effect on its financial condition or results of operations.
19
20
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 10
BUSINESS SEGMENT INFORMATION
The Company currently operates four reportable business segments (not including
corporate): Journeys, comprised of Journeys and Journeys Kidz retail footwear
chains; Jarman, comprised primarily of the Jarman and Underground Station retail
footwear chains; Johnston & Murphy, comprised of Johnston & Murphy retail
stores, direct marketing and wholesale distribution; and Licensed Brands,
comprised of Dockers and Nautica Footwear. The Company has ended the license
agreement with Nautica Apparel, Inc. to market Nautica footwear effective
January 31, 2001. All the Company's segments sell footwear products at either
retail or wholesale. The Company also operated the Leather segment during part
of Fiscal 2001. The Company sold certain assets of its Volunteer Leather
business on June 19, 2000, and has discontinued all Leather segment operations.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
The Company's reportable segments are based on the way management organizes the
segments in order to make operating decisions and assess performance along types
of products sold. Journeys and Jarman sells primarily branded products from
other companies while Johnston & Murphy and Licensed Brands sells primarily the
Company's owned and licensed brands.
Corporate assets include cash, deferred income taxes, prepaid pension cost and
deferred note expense. The Company does not allocate certain costs to each
segment in order to make decisions and assess performance. These costs include
corporate overhead, interest expense, interest income, and other charges. Other
includes severance and litigation.
THREE MONTHS ENDED JOHNSTON LICENSED
MAY 5, 2001 JOURNEYS JARMAN & MURPHY BRANDS LEATHER CORPORATE CONSOLIDATED
-------- ------- -------- -------- ------- --------- ------------
Sales $ 80,348 $25,071 $41,813 $ 25,690 $ -0- $ -0- $ 172,922
Intercompany sales -0- -0- -0- (1,004) -0- -0- (1,004)
-------- ------- ------- -------- ----- ------- ---------
NET SALES TO EXTERNAL CUSTOMERS 80,348 25,071 41,813 24,686 -0- -0- 171,918
-------- ------- ------- -------- ----- ------- ---------
Operating income (loss) 10,075 931 4,126 2,935 -0- (3,182) 14,885
Interest expense -0- -0- -0- -0- -0- 2,158 2,158
Interest income -0- -0- -0- -0- -0- 623 623
-------- ------- ------- -------- ----- ------- ---------
EARNINGS BEFORE INCOME TAXES 10,075 931 4,126 2,935 -0- (4,717) 13,350
-------- ------- ------- -------- ----- ------- ---------
Total assets 104,783 42,852 74,674 30,615 741 91,583 345,248
Depreciation 1,583 711 816 43 -0- 679 3,832
Capital expenditures 3,741 1,543 740 10 -0- 374 6,408
20
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 10
BUSINESS SEGMENT INFORMATION, CONTINUED
THREE MONTHS ENDED JOHNSTON LICENSED
APRIL 29, 2000 JOURNEYS JARMAN & MURPHY BRANDS LEATHER CORPORATE CONSOLIDATED
-------- ------- -------- -------- ------- --------- ------------
Sales $ 58,096 $21,020 $ 44,541 $ 24,028 $ -0- $ -0- $ 147,685
Intercompany sales -0- -0- (73) (968) -0- -0- (1,041)
-------- ------- -------- -------- ------ ------- ---------
NET SALES TO EXTERNAL CUSTOMERS 58,096 21,020 44,468 23,060 -0- -0- 146,644
-------- ------- -------- -------- ------ ------- ---------
Operating income (loss) 6,512 743 5,673 1,633 -0- (2,519) 12,042
Interest expense -0- -0- -0- -0- -0- 2,101 2,101
Interest income -0- -0- -0- -0- -0- 419 419
Other -0- -0- -0- -0- -0- (170) (170)
-------- ------- -------- -------- ------ ------- ---------
EARNINGS BEFORE INCOME TAXES 6,512 743 5,673 1,633 -0- (4,371) 10,190
-------- ------- -------- -------- ------ ------- ---------
Total assets 75,680 29,880 64,636 26,449 9,393 96,354 302,392
Depreciation 1,095 469 692 31 110 642 3,039
Capital expenditures 4,130 2,493 1,598 17 -0- 712 8,950
21
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
This discussion and the notes to the Consolidated Financial Statements include
certain forward-looking statements. Actual results could differ materially from
those reflected by the forward-looking statements in this discussion and a
number of factors may adversely affect future results, liquidity and capital
resources. These factors include changes in consumer demand or tastes that
affect sales at retail or wholesale, including demand changes related to actual
or perceived economic disruptions or resulting from the failure correctly to
anticipate consumer trends, changes in buying patterns by significant wholesale
customers and risks associated with a softening economy, including erosion of
revenues or margins caused by weakening consumer demand and deterioration in the
collectibility of trade accounts receivable. These factors also include
disruptions in product supply or distribution, including disruptions or price
increases in the leather market related to foot and mouth or other cattle
diseases, changes in business strategies by the Company's competitors, the
Company's ability to open or convert, staff and support additional retail stores
on schedule and at acceptable expense levels, failure of new retail ventures to
meet expectations and the outcome of litigation and environmental matters and
the adequacy of related reserves, including those discussed in Note 9 to the
Consolidated Financial Statements. Although the Company believes it has an
appropriate business strategy and the resources necessary for its operations,
future revenue and margin trends cannot be reliably predicted and the Company
may alter its business strategies to address changing conditions.
SIGNIFICANT DEVELOPMENTS
Nautica Footwear License Cancellation
The Company entered into an agreement with Nautica Apparel, Inc. to end its
license to market footwear under the Nautica label, effective January 31, 2001.
The Company will continue to sell Nautica-branded footwear for the first six
months of Fiscal 2002 in order to fill existing customer orders and sell
existing inventory.
In connection with the termination of the Nautica Footwear license agreement,
the Company recorded a pretax charge to earnings of $4.4 million ($2.7 million
net of tax) in the fourth quarter of Fiscal 2001. The charge includes
contractual obligations to Nautica Apparel for the license cancellation and
other costs, primarily severance. Included in the charge is a $1.0 million
inventory write-down which is reflected in gross margin on the income statement.
All of these costs are expected to be incurred during Fiscal 2002.
Volunteer Leather Divestiture
On May 22, 2000, the Company's board of directors approved a plan to sell its
Volunteer Leather finishing business and liquidate its tanning business, to
allow the Company to be more focused on the retailing and marketing of branded
footwear.
Certain assets of the Volunteer Leather business were sold on June 19, 2000. The
plan resulted in a pretax charge to earnings of $4.9 million ($3.0 million net
of tax) in the second quarter of Fiscal 2001. Because Volunteer Leather
constitutes the entire Leather segment of the Company's business,
22
23
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
the charge to earnings is treated for financial reporting purposes as a
provision for discontinued operations.
The provision for discontinued operations included $1.3 million in asset
write-downs and $3.6 million of other costs, of which $1.7 million are expected
to be incurred in the next twelve months. As of May 5, 2001, $1.2 million of
such other costs had been incurred. Other costs include primarily employee
severance and facility shutdown costs. The approximately $0.7 million of other
costs expected to be incurred beyond twelve months are classified as long-term
liabilities in the consolidated balance sheet. The Volunteer Leather business
employed approximately 160 people.
Share Repurchase Program
In total, the Company's board of directors has authorized the repurchase of 6.8
million shares of the Company's common stock since the third quarter of Fiscal
1999. The purchases may be made on the open market or in privately negotiated
transactions. As of May 5, 2001, the Company had repurchased 6.4 million shares
at a cost of $60.5 million pursuant to all authorizations. No shares were
purchased during the first quarter of Fiscal 2002.
BUSINESS SEGMENTS
The Company currently operates four reportable business segments (not including
corporate): Journeys, comprised of Journeys and Journeys Kidz retail footwear
chains; Jarman, comprised primarily of the Jarman and Underground Station retail
footwear chains; Johnston & Murphy, comprised of Johnston & Murphy retail
stores, direct marketing and wholesale distribution; and Licensed Brands,
comprised of Dockers and Nautica Footwear. The Company has ended the license
agreement with Nautica Apparel, Inc. to market Nautica footwear effective
January 31, 2001. The Company also operated the Leather segment during part of
Fiscal 2001. The Company sold certain assets of its Volunteer Leather business
on June 19, 2000 and has discontinued all Leather segment operations. See
"Significant Developments."
RESULTS OF OPERATIONS - FIRST QUARTER FISCAL 2002 COMPARED TO FISCAL 2001
The Company's net sales in the first quarter ended May 5, 2001 increased 17.2%
to $171.9 million from $146.6 million in the first quarter ended April 29, 2000.
Gross margin increased 20.2% to $82.1 million in the first quarter this year
from $68.3 million in the same period last year and increased as a percentage of
net sales from 46.6% to 47.8%. Selling and administrative expenses in the first
quarter this year increased 19.1% from the first quarter last year and increased
as a percentage of net sales from 38.5% to 39.1%. Explanations of the changes in
results of operations are provided by business segment in discussions following
these introductory paragraphs.
Earnings before income taxes and discontinued operations ("pretax earnings") for
the first quarter ended May 5, 2001 were $13.4 million compared to $10.2 million
for the first quarter ended April 29, 2000.
23
24
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Net earnings for the first quarter ended May 5, 2001 were $8.3 million ($0.34
diluted earnings per share) compared to $6.0 million ($0.25 diluted earnings per
share) for the first quarter ended April 29, 2000. Net earnings for the first
quarter ended April 29, 2000 included a $0.2 million ($0.01 diluted earnings per
share) loss (net of tax) related to the operations of the Company's Volunteer
Leather business.
Journeys
Three Months Ended
------------------------
May 5, April 29, %
2001 2000 Change
--------- --------- ------
(dollars in thousands)
Net sales............ $ 80,348 $ 58,096 38.3%
Operating income..... $ 10,075 $ 6,512 54.7%
Operating margin..... 12.5% 11.2%
Reflecting both a 29% increase in average Journeys stores operated (i.e., the
sum of the number of stores open on the first day of the fiscal quarter and the
last day of each fiscal month during the quarter divided by four) and an 11%
increase in comparable store sales, net sales from Journeys increased 38.3% for
the first quarter ended May 5, 2001 compared to the same period last year. The
average price per pair of shoes decreased 8% in the first quarter of Fiscal
2002, primarily reflecting changes in product mix, while unit sales increased
47% during the same period. The store count for Journeys was 452 stores at the
end of the first quarter of Fiscal 2002, including 5 Journeys Kidz stores,
compared to 351 stores at the end of the first quarter last year.
Journeys operating income for the first quarter ended May 5, 2001 was up 54.7%
to $10.1 million compared to $6.5 million for the first quarter ended April 29,
2000. The increase was due to increased sales and increased gross margin as a
percentage of sales, primarily reflecting lower markdowns.
Jarman
Three Months Ended
------------------------
May 5, April 29, %
2001 2000 Change
--------- --------- ------
(dollars in thousands)
Net sales.......... $ 25,071 $ 21,020 19.3%
Operating income... $ 931 $ 743 25.3%
Operating margin... 3.7% 3.5%
24
25
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Primarily due to a 24% increase in average stores operated, net sales from the
Jarman division (including Underground Station stores) increased 19.3% for the
first quarter ended May 5, 2001 compared to the same period past year. The
increase in sales was driven by Underground Station stores. The average price
per pair of shoes decreased 5% in the first quarter of Fiscal 2002, primarily
reflecting changes in product mix, while unit sales increased 20% during the
same period. Jarman operated 213 stores at the end of the first quarter of
Fiscal 2002, including 70 Underground Station stores. Going forward, the Company
does not plan to open any new Jarman stores, and expects that all new store
openings in this segment will be Underground Station stores, and that many of
the existing Jarman stores will be converted to Underground Station stores. The
Company operated 177 stores in the Jarman division at the end of the first
quarter last year, including 25 Underground Station stores.
Jarman operating income for the first quarter ended May 5, 2001 was $0.9 million
compared to $0.7 million for the first quarter ended April 29, 2000. The
increase was due to increased sales and increased gross margin in dollars and as
a percentage of sales, due primarily to lower markdowns and changes in product
mix.
Johnston & Murphy
Three Months Ended
------------------------
May 5, April 29, %
2001 2000 Change
--------- --------- ------
(dollars in thousands)
Net sales............ $ 41,813 $ 44,468 (6.0)%
Operating income..... $ 4,126 $ 5,673 (27.3)%
Operating margin..... 9.9% 12.8%
Johnston & Murphy net sales decreased 6.0% to $41.8 million for the first
quarter ended May 5, 2001 from $44.5 million for the first quarter ended April
29, 2000, reflecting a 9% decrease in comparable store sales for Johnston &
Murphy retail operations and a 14% decrease in Johnston & Murphy wholesale
sales. Retail operations accounted for 65% of Johnston & Murphy segment sales in
the first quarter this year, up from 62% in the first quarter last year. The
store count for Johnston & Murphy retail operations at the end of the first
quarter of Fiscal 2002 included 145 Johnston & Murphy stores and factory stores
compared to 148 Johnston & Murphy stores and factory stores at the end of the
first quarter of Fiscal 2001. The average price per pair of shoes for Johnston &
Murphy retail was flat in the first quarter this year while unit sales decreased
6% during the same period. Unit sales for the Johnston & Murphy wholesale
business decreased 12% in the first quarter of Fiscal 2002 and the average price
per pair of shoes decreased 3% for the same period, reflecting increased
promotional activities and mix changes.
25
26
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Johnston & Murphy operating income for the first quarter ended May 5, 2001
decreased 27.3% from $5.7 million for the first quarter ended April 29, 2000 to
$4.1 million, primarily due to decreased sales and increased expenses as a
percentage of sales.
Licensed Brands
Three Months Ended
------------------------
May 5, April 29, %
2001 2000 Change
--------- --------- ------
(dollars in thousands)
Net sales.......... $ 24,686 $ 23,060 7.1%
Operating income... $ 2,935 $ 1,633 79.7%
Operating margin... 11.9% 7.1%
Licensed Brands' net sales increased 7.1% to $24.7 million for the first quarter
ended May 5, 2001 from $23.1 million for the first quarter ended April 29, 2000.
The sales increase reflected a 34% increase in net sales of Dockers Footwear,
offset by declining sales of Nautica Footwear. Unit sales for the Licensed
Brands wholesale businesses increased 11% for the first quarter this year, while
the average price per pair of shoes decreased 1% for the same period, reflecting
increased promotional activities in the Nautica business and changes in product
mix. Licensed Brands' operating income for the first quarter ended May 5, 2001
increased 79.7% from $1.6 million for the first quarter ended April 29, 2000 to
$2.9 million, primarily due to increased sales and decreased expenses as a
percentage of sales.
For additional information regarding the Company's decision to exit the Nautica
Footwear business, see "Significant Developments - Nautica Footwear License
Cancellation." Net sales for Nautica footwear were $4.2 million and $7.8 million
for the first quarter of Fiscal 2002 and 2001, respectively, while operating
losses were $0.3 million and $0.4 million for the first quarter of Fiscal 2002
and 2001, respectively.
Corporate and Interest Expenses
Corporate and other expenses for the first quarter ended May 5, 2001 were $3.2
million compared to $2.5 million for the first quarter ended April 29, 2000
(exclusive of other charges of $0.2 million, primarily litigation and severance
charges, in the first quarter last year), an increase of 26.3%. The increase in
corporate expenses in the first quarter this year is attributable primarily to
costs associated with preparations to construct a new distribution center and
increased professional fees.
Interest expense increased 2.7% from $2.1 million in the first quarter ended
April 29, 2000 to $2.2 million for the first quarter ended May 5, 2001,
primarily due to increased bank activity fees due to the increased number of
individual bank accounts related to new store openings.
26
27
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Interest income increased 49% from $0.4 million in the first quarter last year
to $0.6 million in the first quarter this year due to increases in average
interest bearing short-term investments. There were no borrowings under the
Company's revolving credit facility during the three months ended May 5, 2001 or
April 29, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain financial data at the dates indicated.
May 5, Apr. 29,
2001 2000
------ --------
(dollars in millions)
Cash and short-term investments............................. $ 34.1 $ 45.2
Working capital............................................. $155.9 $138.0
Long-term debt (includes current maturities)................ $103.5 $103.5
Current ratio............................................... 3.0x 2.9x
Working Capital
The Company's business is somewhat seasonal, with the Company's investment in
inventory and accounts receivable normally reaching peaks in the spring and fall
of each year. Cash flow from operations is generated principally in the fourth
quarter of each fiscal year.
Cash used in operating activities was $24.5 million in the first three months of
Fiscal 2002 compared to $3.0 million in the first three months of Fiscal 2001.
The $21.5 million decrease in cash flow from operating activities reflects
primarily a $12.7 million increase in inventory primarily due to increased new
store openings and planned seasonal increases and to decreased accrued
liabilities primarily due to payments of incentive compensation accruals and a
$3.9 million increase in taxes paid.
The $12.7 million increase in inventories at May 5, 2001 from February 3, 2001
levels reflects increases in retail inventory to support the net increase of 31
stores in the first quarter this year, planned seasonal increases and an
increase in Johnston & Murphy inventory due to decreased sales from plan for the
first quarter this year.
Accounts receivable at May 5, 2001 increased $4.0 million compared to February
3, 2001 primarily due to increased wholesale sales and terms given due to
promotional activities.
27
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Cash provided (or used) due to changes in accounts payable and accrued
liabilities are as follows:
Three Months Ended
-------------------------
May 5, Apr. 29,
2001 2000
--------- --------
(in thousands)
Accounts payable.......................... $ (2,230) $ 1,639
Accrued liabilities....................... (18,138) (5,955)
--------- -------
$ (20,368) $(4,316)
========= =======
The fluctuations in accounts payable for the first quarter this year from the
first quarter last year are due to changes in payment terms negotiated with
individual vendors, inventory levels, payment timing and buying patterns. The
change in accrued liabilities for the first quarter this year was due primarily
to payment of incentive compensation accruals and income tax payments.
There were no revolving credit borrowings during the first three months ended
May 5, 2001 and April 29, 2000, as cash generated from operations and cash on
hand funded seasonal working capital requirements and capital expenditures.
Capital Expenditures
Total capital expenditures in Fiscal 2002 are expected to be approximately $54.0
million. These include expected retail expenditures of $28.5 million to open
approximately 100 Journeys stores, 12 Journeys Kidz stores, 8 Johnston & Murphy
stores and factory stores and 46 Underground Station stores and to complete 34
major store renovations. Capital expenditures for wholesale and manufacturing
operations and other purposes, are expected to be approximately $25.5 million,
including approximately $1.9 million for new systems to improve customer service
and support the Company's growth and $22.0 million to $24.0 million for a new
distribution center.
Due to the Company's retail growth, the Company has begun preparations to
construct a new distribution center, which it expects to be located in the
Middle Tennessee area. The Company expects the Fiscal 2002 cost of the facility
to be in the range of $22.0 million to $24.0 million. The Company's current bank
agreement has been amended to permit the additional capital expenditure for the
new distribution center.
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 9 to the
Company's Consolidated Financial Statements. The Company has made provisions for
certain of these contingencies, including approximately $2.6 million reflected
in Fiscal 2001 and $472,000 reflected in Fiscal 2000. The Company monitors these
matters on an ongoing basis and at least quarterly management reviews the
Company's reserves and accruals in relation to each of them, adjusting
provisions as management
28
29
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
deems necessary in view of changes in available information. Changes in
estimates of liability are reported in the periods when they occur.
Consequently, management believes that its reserve in relation to each
proceeding is a reasonable estimate of the probable loss connected to the
proceeding, or in cases in which no reasonable estimate is possible, the minimum
amount in the range of estimated losses, based upon its analysis of the facts
and circumstances as of the close of the most recent fiscal quarter. Because of
uncertainties and risks inherent in litigation generally and in environmental
proceedings in particular, however, there can be no assurance that future
developments will not require additional reserves to be set aside, that some or
all reserves may not be adequate or that the amounts of any such additional
reserves or any such inadequacy will not have a material adverse effect upon the
Company's financial condition or results of operations.
FUTURE CAPITAL NEEDS
The Company expects that cash on hand and cash provided by operations will be
sufficient to fund all of its capital expenditures through Fiscal 2002, although
the Company may borrow from time to time to support seasonal working capital
requirements. The approximately $5.3 million of costs associated with the prior
restructurings and discontinued operations that are expected to be incurred
during the next twelve months are also expected to be funded from cash on hand.
In February of 2000, the Company authorized the additional repurchase, from time
to time, of up to 1.0 million shares of the Company's common stock. These
purchases will be funded from available cash. The Company has repurchased a
total of 6.4 million shares at a cost of $60.5 million from all authorizations
for Fiscal 1999, Fiscal 2000 and Fiscal 2001.
There were $10.0 million of letters of credit outstanding under the revolving
credit agreement at May 5, 2001, leaving availability under the revolving credit
agreement of $55.0 million.
The Company's revolving credit agreement restricts the payment of dividends and
other payments with respect to capital stock. At May 5, 2001, $43.6 million was
available for such payments. The aggregate of annual dividend requirements on
the Company's Subordinated Serial Preferred Stock, $2.30 Series 1, $4.75 Series
3 and $4.75 Series 4, and on its $1.50 Subordinated Cumulative Preferred Stock
is $294,000.
FINANCIAL MARKET RISK
The following discusses the Company's exposure to financial market risk related
to changes in interest rates and foreign currency exchange rates.
Outstanding Debt of the Company - The Company's outstanding long-term debt of
$103.5 million 5 1/2% convertible subordinated notes due April 2005 bears
interest at a fixed rate. Accordingly, there would be no immediate impact on the
Company's interest expense due to fluctuations in market interest rates.
Cash and Short-Term Investments - The Company's cash and short-term investment
balances are invested in financial instruments with original maturities of three
months or less. The Company
29
30
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
does not have significant exposure to changing interest rates on invested cash
at May 5, 2001. As a result, the Company considers the interest rate market risk
implicit in these investments at May 5, 2001, to be low.
Foreign Currency Exchange Rate Risk - Most purchases by the Company from foreign
sources are denominated in U.S. dollars. To the extent that import transactions
are denominated in other currencies, it is the Company's practice to hedge its
risks through the purchase of forward foreign exchange contracts. At May 5,
2001, the Company had $30.1 million of foreign exchange contracts for Italian
Lira and Euro. The Company's policy is not to speculate in derivative
instruments for profit on the exchange rate price fluctuation and it does not
hold any derivative instruments for trading purposes. Derivative instruments
used as hedges must be effective at reducing the risk associated with the
exposure being hedged and must be designated as a hedge at the inception of the
contract. The loss on contracts outstanding at May 5, 2001 was $0.3 million from
current spot rates. As of May 5, 2001, a 10% adverse change in foreign currency
exchange rates from market rates would decrease the fair value of the contracts
by approximately $2.7 million.
Summary - Based on the Company's overall market interest rate and foreign
currency rate exposure at May 5, 2001, the Company believes that the effect, if
any, of reasonably possible near-term changes in interest rates or fluctuations
in foreign currency exchange rates on the Company's consolidated financial
position, result of operations or cash flows for Fiscal 2002 would not be
material.
CHANGES IN ACCOUNTING PRINCIPLES
The Company implemented Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities" in the first
quarter of Fiscal 2002. This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. SFAS 133
requires an entity to recognize all derivatives as either assets or liabilities
in the consolidated balance sheet and to measure those instruments at fair
value. Under certain conditions, a derivative may be specifically designated as
a fair value hedge or a cash flow hedge. The accounting for changes in the fair
value of a derivative are recorded each period in current earnings or in other
comprehensive income depending on the intended use of the derivative and the
resulting designation. For the first quarter ended May 5, 2001, the Company
recorded a loss on foreign currency forward contracts of $0.3 million in
accumulated other comprehensive income.
In July 2000, the Emerging Issues Task Force issued EITF: Issue 00-10,
"Accounting for Shipping and Handling Fees and Costs." The new pronouncement
requires shipping and handling billings to customers be recorded as revenue.
Amounts for shipping and handling costs can no longer be netted with related
shipping and handling billings. The Company has restated its financial
statements for Fiscal 2001, 2000 and 1999 to reflect the change in accounting
for shipping and handling fees and costs.
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
OUTLOOK
This "Outlook" section in this Form 10-Q contains a number of forward-looking
statements relating to sales, earnings per share, capital expenditures and store
opening expectations for Fiscal 2002. These forward-looking statements are based
on the Company's expectations as of June 19, 2001. All of the forward-looking
statements are based on management's current expectations and are inherently
uncertain. Actual results could differ materially from those reflected by the
forward-looking statements in this discussion and a number of factors may
adversely affect future results, liquidity and capital resources. These factors
include changes in consumer demand or tastes that affect sales at retail or
wholesale, including demand changes related to actual or perceived economic
disruptions or resulting from the failure correctly to anticipate consumer
trends, changes in buying patterns by significant wholesale customers and risks
associated with a softening economy, including erosion of revenues or margins
caused by weakening consumer demand and deterioration in the collectibility of
trade accounts receivable. These factors also include disruptions in product
supply or distribution, including disruptions or price increases in the leather
market related to foot and mouth or other cattle diseases, changes in business
strategies by the Company's competitors, the Company's ability to open or
convert, staff and support additional retail stores on schedule and at
acceptable expense levels, failure of new retail ventures to meet expectations
and the outcome of litigation and environmental matters and the adequacy of
related reserves, including those discussed in Note 9 to the Consolidated
Financial Statements. Although the Company believes it has an appropriate
business strategy and the resources necessary for its operations, future revenue
and margin trends cannot be reliably predicted and the Company may alter its
business strategies to address changing conditions.
The Company expects net sales growth in the range of 15-20% for Fiscal 2002,
with an overall same store sales increase in the mid-single digit range.
In connection with the termination of the Nautica Footwear license agreement,
the Company will fill customer orders and sell existing inventory for the first
half of Fiscal 2002. The Company anticipates Nautica sales of between $6.0 and
$7.0 million and operating losses in the range of $0.9 - $1.4 million in the
first half of Fiscal 2002. The Company's expectations for Nautica are subject to
uncertainties including the risk that existing orders may be cancelled or that
existing inventory may not be sold or may require greater than planned
markdowns.
The Company is comfortable that it can meet First Call earnings expectations of
$1.74 per share for Fiscal 2002. It expects the earnings improvement from Fiscal
2001 to be primarily attributable to net sales growth and to selling, general
and administrative expense leverage related to same store sales growth.
The Company expects capital expenditures for Fiscal 2002 to be approximately
$54.0 million. The Company plans to open 100 Journeys stores, 12 Journeys Kidz
stores, 46 Underground Station stores and 8 Johnston & Murphy stores and factory
stores. The Company also plans to build a new distribution center with current
year expenditures of approximately $22.0 - $24.0 million.
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PART II - OTHER INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company incorporates by reference the information regarding market risk to
appear under the heading "Financial Market Risk" in Management's Discussion and
Analysis of Financial Condition and Results of Operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
(10)h. Seventh Amendment to Modified and Restated Loan Agreement dated as of
April 30, 2001.
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REPORTS ON FORM 8-K
The Company filed a current report on Form 8-K on May 18, 2001 disclosing
Regulation FD disclosures.
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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.
/s/ James S. Gulmi
James S. Gulmi
Chief Financial Officer
June 19, 2001
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