1
[GENESCO LOGO]
(Mark One) FORM 10-Q
[X] Quarterly Report Pursuant To
Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended
August 4, 2001
[ ] Transition Report Pursuant To
Section 13 or 15(d) of the
Securities Exchange Act of 1934
Securities and Exchange Commission
Washington, D.C. 20549
Commission File No. 1-3083
GENESCO INC.
A Tennessee Corporation
I.R.S. No. 62-0211340
Genesco Park
1415 Murfreesboro Road
Nashville, Tennessee 37217-2895
Telephone 615/367-7000
Indicate by check mark whether the
registrant (1) has filed all reports
required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934
during the preceding 12 months (or such
shorter period that the registrant was
required to file such reports with the
commission) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Common Shares Outstanding September 7, 2001 - 21,974,954
2
INDEX
PAGE
----
Part 1 - Financial Information 3
Consolidated Balance Sheet -August 4, 2001, February 3, 2001 and
July 29, 2000 3
Consolidated Earnings - Three Months Ended and Six Months Ended
August 4, 2001 and July 29, 2000 4
Consolidated Cash Flows - Three Months Ended and Six Months Ended
August 4, 2001 and July 29, 2000 5
Consolidated Shareholders' Equity - Year Ended
February 3, 2001 and Six Months Ended August 4, 2001 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 23
Part II - Other Information 38
Signature 39
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3
PART I - FINANCIAL INFORMATION
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Balance Sheet
In Thousands
AUGUST 4, FEBRUARY 3, JULY 29,
2001 2001 2000
--------- ----------- ---------
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 24,513 $ 60,382 $ 38,275
Accounts receivable 27,053 22,700 23,957
Inventories 182,216 134,236 140,562
Deferred income taxes 15,263 15,263 14,826
Other current assets 11,402 10,806 9,154
Current assets of discontinued operations -0- 359 6,232
--------- --------- ---------
Total current assets 260,447 243,746 233,006
--------- --------- ---------
Plant, equipment and capital leases, net 95,971 87,747 79,609
Deferred income taxes 3,396 3,396 4,184
Other noncurrent assets 16,591 16,644 12,709
Plant and equipment of discontinued operations, net 605 630 669
--------- --------- ---------
TOTAL ASSETS $ 377,010 $ 352,163 $ 330,177
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 99,945 $ 94,252 $ 93,696
Provision for discontinued operations 3,954 4,568 5,293
--------- --------- ---------
Total current liabilities 103,899 98,820 98,989
--------- --------- ---------
Long-term debt 103,245 103,500 103,500
Other long-term liabilities 7,898 7,354 6,108
Provision for discontinued operations 3,327 4,264 5,447
--------- --------- ---------
Total liabilities 218,369 213,938 214,044
--------- --------- ---------
Contingent liabilities (see Note 8)
SHAREHOLDERS' EQUITY
Non-redeemable preferred stock 7,669 7,721 7,843
Common shareholders' equity:
Common stock, $1 par value:
Authorized: 80,000,000 shares
Issued: August 4, 2001 - 22,475,128;
February 3, 2001 - 22,149,915;
July 29, 2000 - 21,942,727 22,475 22,150 21,943
Additional paid-in capital 101,534 95,194 94,112
Retained earnings 45,391 31,017 10,092
Accumulated other comprehensive income (571) -0- -0-
Treasury shares, at cost (17,857) (17,857) (17,857)
--------- --------- ---------
Total shareholders' equity 158,641 138,225 116,133
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 377,010 $ 352,163 $ 330,177
========= ========= =========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
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4
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Earnings
In Thousands
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
AUGUST 4, JULY 29, AUGUST 4, JULY 29,
2001 2000 2001 2000
--------- --------- --------- ---------
Net sales $ 166,543 $ 143,243 $ 338,461 $ 289,887
Cost of sales 88,178 74,277 177,999 152,615
Selling and administrative expenses 66,804 58,093 134,016 114,527
Restructuring credit (205) -0- (205) -0-
--------- --------- --------- ---------
Earnings from operations before interest 11,766 10,873 26,651 22,745
--------- --------- --------- ---------
Interest expense 2,157 2,093 4,315 4,194
Interest income (269) (261) (892) (680)
--------- --------- --------- ---------
Total interest expense, net 1,888 1,832 3,423 3,514
--------- --------- --------- ---------
Earnings before income taxes
and discontinued operations 9,878 9,041 23,228 19,231
Income taxes 3,695 3,510 8,707 7,507
--------- --------- --------- ---------
Earnings before discontinued operations 6,183 5,531 14,521 11,724
Discontinued operations (net of tax):
Operating income (loss) -0- 6 -0- (226)
Provision for discontinued operations -0- (2,975) -0- (2,975)
--------- --------- --------- ---------
NET EARNINGS $ 6,183 $ 2,562 $ 14,521 $ 8,523
========= ========= ========= =========
Basic earnings per common share:
Before discontinued operations $ .28 $ .25 $ .66 $ .54
Discontinued operations $ .00 $ (.13) $ .00 $ (.15)
Net earnings $ .28 $ .12 $ .66 $ .39
Diluted earnings per common share:
Before discontinued operations $ .26 $ .24 $ .60 $ .50
Discontinued operations $ .00 $ (.11) $ .00 $ (.12)
Net earnings $ .26 $ .13 $ .60 $ .38
========= ========= ========= =========
The accompanying Notes are an integral part of these Financial Statements.
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5
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Cash Flows
In Thousands
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
AUGUST 4, JULY 29, AUGUST 4, JULY 29,
2001 2000 2001 2000
--------- -------- --------- --------
OPERATIONS:
Net earnings $ 6,183 $ 2,562 $ 14,521 $ 8,523
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 3,938 3,138 7,770 6,177
Provision for losses on accounts receivable (167) 109 (53) 231
Restructuring charge (gain) (269) -0- (269) -0-
Provision for discontinued operations -0- 4,854 -0- 4,854
Other 86 155 316 496
Effect on cash of changes in working capital and other assets
and liabilities:
Accounts receivable 90 (779) (3,939) (5,928)
Inventories (35,193) (28,635) (47,917) (31,973)
Other current assets (55) (177) (598) (274)
Accounts payable and accrued liabilities 25,081 23,002 4,713 18,686
Other assets and liabilities 338 (119) 984 286
-------- -------- -------- --------
Net cash provided by (used in) operating activities 32 4,110 (24,472) 1,078
-------- -------- -------- --------
INVESTING ACTIVITIES:
Capital expenditures (10,025) (10,279) (16,433) (19,229)
Proceeds from businesses divested and asset sales 147 293 203 388
-------- -------- -------- --------
Net cash used in investing activities (9,878) (9,986) (16,230) (18,841)
-------- -------- -------- --------
FINANCING ACTIVITIES:
Stock repurchase -0- (1,631) -0- (5,359)
Payments on capital leases -0- -0- -0- (1)
Dividends paid (73) (74) (147) (149)
Deferred note expense (356) -0- (356) -0-
Exercise of options 655 638 5,336 3,687
-------- -------- -------- --------
Net cash provided by (used in) financing activities 226 (1,067) 4,833 (1,822)
-------- -------- -------- --------
NET CASH FLOW (9,620) (6,943) (35,869) (19,585)
Cash and short-term investments at
beginning of period 34,133 45,218 60,382 57,860
-------- -------- -------- --------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 24,513 $ 38,275 $ 24,513 $ 38,275
======== ======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Net cash paid for:
Interest $ 464 $ 496 $ 3,983 $ 3,878
Income taxes 8,275 6,726 12,876 7,411
======== ======== ======== ========
The accompanying Notes are an integral part of these Financial Statements.
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Shareholders' Equity
In Thousands
TOTAL
NON-REDEEMABLE ADDITIONAL
PREFERRED COMMON PAID-IN TREASURY
STOCK STOCK CAPITAL STOCK
-------------- -------- ---------- ---------
BALANCE JANUARY 29, 2000 $ 7,882 $ 21,715 $ 94,784 $ (17,857)
======== ======== ========= =========
Net earnings -0- -0- -0- -0-
Dividends paid -0- -0- -0- -0-
Exercise of options -0- 1,013 5,017 -0-
Issue shares - Employee Stock Purchase Plan -0- 55 508 -0-
Tax effect of exercise of stock options -0- -0- 2,758 -0-
Stock repurchases -0- (646) (8,131) -0-
Other (161) 13 258 -0-
Comprehensive Income
-------- -------- --------- ---------
BALANCE FEBRUARY 3, 2001 $ 7,721 $ 22,150 $ 95,194 $ (17,857)
======== ======== ========= =========
Net earnings -0- -0- -0- -0-
Dividends paid -0- -0- -0- -0-
Exercise of options -0- 308 5,028 -0-
Tax effect of exercise of stock options -0- -0- 988 -0-
Loss on foreign currency forward contracts -0- -0- -0- -0-
Other (52) 17 324 -0-
Comprehensive Income
-------- -------- --------- ---------
BALANCE AUGUST 4, 2001 $ 7,669 $ 22,475 $ 101,534 $ (17,857)
======== ======== ========= =========
ACCUMULATED TOTAL
OTHER SHARE-
RETAINED COMPREHENSIVE COMPREHENSIVE HOLDERS'
EARNINGS INCOME INCOME EQUITY
--------- ------------- ------------- ---------
BALANCE JANUARY 29, 2000 $ 1,718 $ -0- $ 108,242
========= ========= ========= =========
Net earnings 29,598 -0- 29,598 29,598
Dividends paid (299) -0- -0- (299)
Exercise of options -0- -0- -0- 6,030
Issue shares - Employee Stock Purchase Plan -0- -0- -0- 563
Tax effect of exercise of stock options -0- -0- -0- 2,758
Stock repurchases -0- -0- -0- (8,777)
Other -0- -0- -0- 110
---------
Comprehensive Income $ 29,598
--------- --------- --------- ---------
BALANCE FEBRUARY 3, 2001 $ 31,017 $ -0- $ 138,225
========= ========= ========= =========
Net earnings 14,521 -0- 14,521 14,521
Dividends paid (147) -0- -0- (147)
Exercise of options -0- -0- -0- 5,336
Tax effect of exercise of stock options -0- -0- -0- 988
Loss on foreign currency forward contracts -0- (571) (571) (571)
Other -0- -0- -0- 289
---------
Comprehensive Income $ 13,950
--------- --------- --------- ---------
BALANCE AUGUST 4, 2001 $ 45,391 $ (571) $ 158,641
========= ========= ========= =========
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM STATEMENTS
The consolidated financial statements contained in this report are unaudited but
reflect all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the results for the interim periods of the
fiscal year ending February 2, 2002 ("Fiscal 2002") and of the fiscal year ended
February 3, 2001 ("Fiscal 2001"). The results of operations for any interim
period are not necessarily indicative of results for the full year. The
financial statements should be read in conjunction with the financial statements
and notes thereto included in the annual report on Form 10-K.
NATURE OF OPERATIONS
The Company's businesses include the manufacture or sourcing, marketing and
distribution of footwear principally under the Johnston & Murphy and Dockers
brands and the operation at August 4, 2001 of 831 Jarman, Journeys, Journeys
Kidz, Johnston & Murphy and Underground Station retail footwear stores and
leased departments. The Company entered into an agreement with Nautica Apparel,
Inc. to end its license to market footwear under the Nautica label, effective
January 31, 2001. The Company sold Nautica - branded footwear for the first six
months of Fiscal 2002 in order to fill existing customer orders and sell
existing inventory. (See Note 2). The Company also sold certain assets of its
Volunteer Leather business on June 19, 2000, and has discontinued all Leather
segment operations. (See Note 2).
BASIS OF PRESENTATION
All subsidiaries are included in the consolidated financial statements. All
significant intercompany transactions and accounts have been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FINANCIAL STATEMENT RECLASSIFICATIONS
Certain reclassifications have been made to conform prior years' data to the
current presentation.
CASH AND SHORT-TERM INVESTMENTS
Included in cash and short-term investments at February 3, 2001 and August 4,
2001, are short-term investments of $53.3 million and $13.9 million,
respectively. Short-term investments are highly-liquid debt instruments having
an original maturity of three months or less.
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INVENTORIES
Inventories of wholesaling and manufacturing companies are stated at the lower
of cost or market, with cost determined principally by the first-in, first-out
method. Retail inventories are determined by the retail method.
PLANT, EQUIPMENT AND CAPITAL LEASES
Plant, equipment and capital leases are recorded at cost and depreciated or
amortized over the estimated useful life of related assets. Depreciation and
amortization expense are computed principally by the straight-line method over
estimated useful lives:
Buildings and building equipment 20-45 years
Machinery, furniture and fixtures 3-15 years
Leasehold improvements and properties under capital leases are amortized on the
straight-line method over the shorter of their useful lives or their related
lease terms.
IMPAIRMENT OF LONG-TERM ASSETS
The Company periodically assesses the realizability of its long-lived assets and
evaluates such assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Asset
impairment is determined to exist if estimated future cash flows, undiscounted
and without interest charges, are less than carrying amount.
POSTRETIREMENT BENEFITS
Substantially all full-time employees are covered by a defined benefit pension
plan. The Company also provides certain former employees with limited medical
and life insurance benefits. The Company funds at least the minimum amount
required by the Employee Retirement Income Security Act.
REVENUE RECOGNITION
Retail sales are recorded net of actual returns, and exclude all taxes, while
wholesale revenue is recorded net of estimated returns when the related goods
have been shipped and legal title has passed to the customer.
PREOPENING COSTS
Costs associated with the opening of new stores are expensed as incurred.
ADVERTISING COSTS
Advertising costs are predominantly expensed as incurred. Advertising costs were
$10.3 million and $10.6 million for the first six months of Fiscal 2002 and
2001, respectively.
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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 7).
COMPREHENSIVE INCOME
The Statement of Financial Accounting Standards (SFAS) 130, "Reporting
Comprehensive Income" requires, among other things, the Company's minimum
pension liability adjustment and gain or loss on derivative instruments to be
included in other comprehensive income.
BUSINESS SEGMENTS
The Statement of Financial Accounting Standards (SFAS) 131, "Disclosures about
Segments of an Enterprise and Related Information" requires that companies
disclose "operating segments" based on the way management disaggregates the
company for making internal operating decisions. (see Notes 2 and 9).
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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 six months ended August 4, 2001, the
Company recorded a loss on foreign currency forward contracts of $0.6 million in
accumulated other comprehensive income.
In order to reduce exposure to foreign currency exchange rate fluctuations in
connection with inventory purchase commitments, the Company enters into foreign
currency forward exchange contracts for Euro with a maximum hedging period of
twelve months. At February 3, 2001 and August 4, 2001, the Company had
approximately $31.3 million and $27.9 million, respectively, of such contracts
outstanding. Forward exchange contracts have an average term of approximately
four months. The gain from spot rates at February 3, 2001 under these contracts
was $1.3 million and the loss from spot rates at August 4, 2001 was $0.1
million. The Company monitors the credit quality of the major national and
regional financial institutions with whom it enters into such contracts.
The Company estimates that the majority of net-hedging losses will be
reclassified from accumulated other comprehensive income into earnings through
higher cost of sales within the twelve months between August 4, 2001 and August
3, 2002.
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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 sold Nautica - branded footwear for the first six months of Fiscal
2002 in order to fill existing customer orders and sell existing inventory.
In connection with the termination of the Nautica Footwear license agreement,
the Company recorded a pretax charge to earnings of $4.4 million ($2.7 million
net of tax) in the fourth quarter of Fiscal 2001. The charge includes
contractual obligations to Nautica Apparel for the license cancellation and
other costs, primarily severance. Included in the charge was a $1.0 million
inventory write-down which is reflected in gross margin on the income statement.
During the second quarter of Fiscal 2002 the Company recorded a restructuring
gain of $0.3 million in connection with the termination of the Nautica Footwear
license agreement. Included in the gain is a $0.1 million reversal of inventory
write-down which is reflected in gross margin on the income statement. The
remaining $0.4 million of anticipated costs associated with the Nautica license
termination are expected to be incurred before the end of the current fiscal
year.
The Nautica footwear business contributed sales of approximately $1.8 million,
$3.8 million, $6.0 million and $11.6 million and operating losses of ($0.3)
million, ($0.8) million, ($0.6) million and ($1.2) million in the second quarter
and six months of Fiscal 2002 and 2001, respectively.
Volunteer Leather Divestiture
On May 22, 2000, the Company's board of directors approved a plan to sell its
Volunteer Leather finishing business and liquidate its tanning business, to
allow the Company to be more focused on the retailing and marketing of branded
footwear.
Certain assets of the Volunteer Leather business were sold on June 19, 2000. The
plan resulted in a pretax charge to earnings of $4.9 million ($3.0 million net
of tax) in the second quarter of Fiscal 2001. Because Volunteer Leather
constitutes the entire Leather segment of the Company's business, the charge to
earnings is treated for financial reporting purposes as a provision for
discontinued operations.
The provision for discontinued operations included $1.3 million in asset
write-downs and $3.6 million of other costs, including primarily employee
severance and facility shutdown costs. As of August 4, 2001, $1.5 million of
such other costs had been incurred and $1.6 million are expected to be incurred
in the next twelve months. The approximately $0.5 million of other costs
expected to be incurred beyond twelve months are classified as long-term
liabilities in the consolidated balance sheet. The Volunteer Leather business
employed approximately 160 people.
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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:
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 29, JULY 29,
IN THOUSANDS 2000* 2000**
------------------ ----------------
Net sales $ 1,550 $ 6,545
Cost of sales and expenses 1,542 6,917
------- -------
PRETAX EARNINGS (LOSS) 8 (372)
INCOME TAX EXPENSE (BENEFIT) 2 (146)
------- -------
NET EARNINGS (LOSS) $ 6 $ (226)
======= =======
* Results for the month of May 2000.
** Results for the four months ended May 2000.
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13
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 3
ACCOUNTS RECEIVABLE
AUGUST 4, FEBRUARY 3,
IN THOUSANDS 2001 2001
--------- ----------
Trade accounts receivable $ 26,655 $ 23,146
Miscellaneous receivables 4,203 3,454
-------- --------
Total receivables 30,858 26,600
Allowance for bad debts (1,248) (1,303)
Other allowances (2,557) (2,597)
-------- --------
NET ACCOUNTS RECEIVABLE $ 27,053 $ 22,700
======== ========
The Company's footwear wholesaling business sells primarily to department stores
and independent retailers across the United States. Receivables arising from
these sales are not collateralized. Credit risk is affected by conditions or
occurrences within the economy and the retail industry. The Company establishes
an allowance for doubtful accounts based upon factors surrounding the credit
risk of specific customers, historical trends and other information. One
customer accounted for 14% and another customer accounted for 13% of the
Company's trade receivables balance as of August 4, 2001 and no other customer
accounted for more than 10% of the Company's trade receivables balance as of
August 4, 2001.
NOTE 4
INVENTORIES
AUGUST 4, FEBRUARY 3,
IN THOUSANDS 2001 2001
--------- ----------
Raw materials $ 1,481 $ 1,408
Work in process 437 609
Finished goods 36,266 34,551
Retail merchandise 144,032 97,668
-------- --------
TOTAL INVENTORIES $182,216 $134,236
======== ========
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14
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 5
PLANT, EQUIPMENT AND CAPITAL LEASES, NET
AUGUST 4, FEBRUARY 3,
IN THOUSANDS 2001 2001
--------- -----------
Plant and equipment:
Land $ 448 $ 291
Buildings and building equipment 1,128 1,128
Machinery, furniture and fixtures 60,106 56,588
Construction in progress 11,659 9,589
Improvements to leased property 81,790 73,008
Capital leases:
Buildings 20 20
--------- ---------
Plant, equipment and capital leases, at cost 155,151 140,624
Accumulated depreciation and amortization:
Plant and equipment (59,172) (52,870)
Capital leases (8) (7)
--------- ---------
NET PLANT, EQUIPMENT AND CAPITAL LEASES $ 95,971 $ 87,747
========= =========
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15
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 6
PROVISION FOR DISCONTINUED OPERATIONS AND RESTRUCTURING RESERVES
PROVISION FOR DISCONTINUED OPERATIONS
EMPLOYEE FACILITY
RELATED SHUTDOWN
IN THOUSANDS COSTS* COSTS OTHER TOTAL
-------- -------- ----- -------
Balance February 3, 2001 6,549 1,924 359 8,832
Charges and adjustments, net (1,405) 15 (161) (1,551)
------- ------ ----- -------
Balance August 4, 2001 5,144 1,939 198 7,281
Current portion 2,502 1,413 39 3,954
------- ------ ----- -------
TOTAL NONCURRENT PROVISION FOR
DISCONTINUED OPERATIONS $ 2,642 $ 526 $ 159 $ 3,327
======= ====== ===== =======
* Includes $5.0 million of apparel union pension withdrawal liability.
RESTRUCTURING RESERVES
EMPLOYEE FACILITY
RELATED SHUTDOWN
IN THOUSANDS COSTS COSTS OTHER TOTAL
-------- -------- ------ -------
Balance February 3, 2001 517 167 3,531 4,215
Charges and adjustments, net (68) (93) (2,789) (2,950)
Excess restructuring reserve August 4, 2001 (81) -0- (124) (205)
----- ------ ------ -------
Balance August 4, 2001 368 74 618 1,060
Current portion (included in accounts
payable and accrued liabilities) 368 42 618 1,028
----- ------ ------ -------
TOTAL NONCURRENT RESTRUCTURING RESERVES
(INCLUDED IN OTHER LONG-TERM LIABILITIES) $ -0- $ 32 $ -0- $ 32
===== ====== ====== =======
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16
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 7
EARNINGS PER SHARE
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
AUGUST 4, 2001 JULY 29, 2000
------------------------------------------ -----------------------------------------
(IN THOUSANDS, EXCEPT INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
Earnings before discontinued operations $6,183 $5,531
Less: Preferred stock dividends (73) (75)
------ ------ ---- ------ ------ ----
BASIC EPS
Income available to
common shareholders 6,110 21,962 $.28 5,456 21,496 $.25
==== ====
EFFECT OF DILUTIVE SECURITIES
Options 518 529
5 1/2% convertible subordinated notes 969 4,906 947 4,918
Employees' preferred stock(1) 69 71
------ ------ ---- ------ ------ ----
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $7,079 27,455 $.26 $6,403 27,014 $.24
====== ====== ==== ====== ====== ====
(1) The Company's Employees' Subordinated Convertible Preferred Stock is
convertible one for one to the Company's common stock. Because there are no
dividends paid on this stock, these shares are assumed to be converted.
The amount of the dividend on the convertible preferred stock per common share
obtainable on conversion of the convertible preferred stock is higher than basic
earnings per share for the period. Therefore, conversion of the convertible
preferred stock is not reflected in diluted earnings per share, because it would
have been antidilutive. The shares convertible to common stock for Series 1, 3
and 4 preferred stock would have been 30,674, 38,324 and 24,946, respectively.
The weighted shares outstanding reflects the effect of the stock buy back
program of up to 6.8 million shares announced by the Company in Fiscal 1999,
2000 and 2001. The Company has repurchased 6.4 million shares as of August 4,
2001.
16
17
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 7
EARNINGS PER SHARE, CONTINUED
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
AUGUST 4, 2001 JULY 29, 2000
------------------------------------------ -----------------------------------------
(IN THOUSANDS, EXCEPT INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
Earnings before discontinued operations $14,521 $11,724
Less: Preferred stock dividends (147) (150)
------- ------ ---- ------- ------ ----
BASIC EPS
Income available to
common shareholders 14,374 21,904 $.66 11,574 21,542 $.54
==== ====
EFFECT OF DILUTIVE SECURITIES
Options 504 472
5 1/2% convertible subordinated notes 1,939 4,906 1,894 4,918
Employees' preferred stock(1) 69 72
------- ------ ---- ------- ------ ----
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $16,313 27,383 $.60 $13,468 27,004 $.50
======= ====== ==== ======= ====== ====
(1) The Company's Employees' Subordinated Convertible Preferred Stock is
convertible one for one to the Company's common stock. Because there are no
dividends paid on this stock, these shares are assumed to be converted.
The amount of the dividend on the convertible preferred stock per common share
obtainable on conversion of the convertible preferred stock is higher than basic
earnings per share for the period. Therefore, conversion of the convertible
preferred stock is not reflected in diluted earnings per share, because it would
have been antidilutive. The shares convertible to common stock for Series 1, 3
and 4 preferred stock would have been 30,674, 38,324 and 24,946, respectively.
The weighted shares outstanding reflects the effect of the stock buy back
program of up to 6.8 million shares announced by the Company in Fiscal 1999,
2000 and 2001. The Company has repurchased 6.4 million shares as of August 4,
2001.
17
18
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8
LEGAL PROCEEDINGS
New York State Environmental Proceedings
The Company is a defendant in a civil action filed by the State of New York
against the City of Gloversville, New York, and 33 other private defendants. The
action arose out of the alleged disposal of certain hazardous material directly
or indirectly into a municipal landfill and seeks recovery under a federal
environmental statute and certain common law theories for the costs of
investigating and performing remedial actions and damage to natural resources.
The environmental authorities have selected a plan of remediation for the site
with a total estimated cost of approximately $12.0 million. The Company was
allocated liability for a 1.31% share of the remediation cost in non-binding
mediation with other defendants and the State of New York. The State has offered
to release the Company from further liability related to the site in exchange
for payment of its allocated share plus a small premium, totaling approximately
$180,000, and the Company has accepted. Assuming the settlement is completed as
proposed, the Company believes it has fully provided for its liability in
connection with the site.
The Company has received notice from the New York State Department of
Environmental Conservation (the "Department") that it deems remedial action to
be necessary with respect to certain contaminants in the vicinity of a knitting
mill operated by a former subsidiary of the Company from 1965 to 1969, and that
it considers the Company a potentially responsible party. In August 1997, the
Department and the Company entered into a consent order whereby the Company
assumed responsibility for conducting a remedial investigation and feasibility
study ("RIFS") and implementing an interim remediation measure with regard to
the site, without admitting liability or accepting responsibility for any future
remediation of the site. In conjunction with the consent order, the Company
entered into an agreement with the owner of the site providing for a release
from liability for property damage and for necessary access to the site, for
payments totaling $400,000. The Company estimates that the cost of conducting
the RIFS and implementing the interim remedial measure will be in the range of
$3.2 million to $3.6 million. The Company believes that it has adequately
reserved for the costs of conducting the RIFS and implementing the interim
remedial measure contemplated by the consent order, but there is no assurance
that the consent order will ultimately resolve the matter. The Company has not
ascertained what responsibility, if any, it has for any contamination in
connection with the facility or what other parties may be liable in that
connection and is unable to predict whether its liability, if any, beyond that
voluntarily assumed by the consent order will have a material effect on its
financial condition or results of operations.
18
19
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8
LEGAL PROCEEDINGS, CONTINUED
WHITEHALL ENVIRONMENTAL SAMPLING
Pursuant to a work plan approved by the Michigan Department of Environmental
Quality ("MDEQ") the Company has performed sampling and analysis of soil,
sediments, surface water, groundwater and waste management areas at the
Company's Volunteer Leather Company facility in Whitehall, Michigan. On June 29,
1999, the Company submitted a remedial action plan (the "Plan") for the site to
MDEQ. The Plan proposed no direct remedial action with respect to soils at the
site, which are in compliance with applicable regulatory standards, or lake
sediments, which the Company believes do not pose a threat to human health or
the environment and do not violate any applicable regulatory standard. The Plan
included the filing of certain restrictive covenants encumbering the tannery
property to prevent activities disturbing the lake sediments and uses of the
property inconsistent with the applicable regulatory standards. The Company,
with the approval of MDEQ, previously installed horizontal wells to capture
groundwater from a portion of the site and treat it by air sparging. The Plan
proposed continued operation of this system for an indefinite period and
monitoring of groundwater samples to ensure that the system is functioning as
intended. The Plan is subject to MDEQ approval. In December 1999, MDEQ responded
to the Plan with a request for further information.
On June 30, 1999, the City of Whitehall filed an action against the Company in
the circuit court for the City of Muskegon alleging that the Company's and its
predecessors' past wastewater management practices have adversely affected the
environment, and seeking injunctive relief under Parts 17 and 201 of the
Michigan Natural Resources Environmental Protection Act ("MNREPA") to require
the Company to correct the alleged pollution. Further, the City alleges
violations of City ordinances prohibiting blight and litter, and that the
Whitehall Volunteer Leather plant constitutes a public nuisance. The Company
filed an answer denying the material allegations of the complaint and asserting
affirmative defenses and counterclaims against the City. The Company also moved
to join the State of Michigan as a party to the action, since it has primary
responsibility for administration of the environmental statutes underlying most
of the City's claims. The State moved to dismiss the Company's action against it
and to intervene in the case on a limited basis, seeking declaratory and
injunctive relief regarding the restrictive covenants on the property, the
State's jurisdiction under MNREPA Part 201 and its right of access to the
property. On May 5, 2000, the court dismissed the Company's action against the
State; the cross actions between the City and the Company remain.
In connection with its decision during the second quarter of Fiscal 2001 to exit
the leather business and to shut down the Whitehall facility, the Company
formally proposed a compromise remediation plan (the "Compromise Proposal"),
including limited sediment removal and additional upland remediation to bring
the property into compliance with regulatory standards for non-industrial uses.
The Company estimated that the Compromise Proposal would include incremental
costs of approximately $2.2 million, which have been fully provided for.
19
20
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8
LEGAL PROCEEDINGS, CONTINUED
If the Compromise Proposal is approved and the litigation's outcome does not
require additional remediation of the site, the Company does not expect
remediation to have a material impact on its financial condition or results of
operations. However, there can be no assurance that the Compromise Proposal will
be approved, and the Company is unable to predict whether any further
remediation that may ultimately be required will have a material effect on its
financial condition or results of operations.
20
21
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 9
BUSINESS SEGMENT INFORMATION
The Company currently operates four reportable business segments (not including
the corporate segment): Journeys, comprised of Journeys and Journeys Kidz retail
footwear chains; Jarman, comprised primarily of the Jarman and Underground
Station retail footwear chains; Johnston & Murphy, comprised of Johnston &
Murphy retail stores, direct marketing and wholesale distribution; and Licensed
Brands, comprised of Dockers and Nautica Footwear. The Company has ended the
license agreement with Nautica Apparel, Inc. to market Nautica footwear
effective January 31, 2001. All the Company's segments sell footwear products at
either retail or wholesale. The Company also operated the Leather segment during
part of Fiscal 2001. The Company sold certain assets of its Volunteer Leather
business on June 19, 2000, and has discontinued all Leather segment operations.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
The Company's reportable segments are based on the way management organizes the
segments in order to make operating decisions and assess performance along types
of products sold. Journeys and Jarman sells primarily branded products from
other companies while Johnston & Murphy and Licensed Brands sells primarily the
Company's owned and licensed brands.
Corporate assets include cash, deferred income taxes, prepaid pension cost and
deferred note expense. The Company does not allocate certain costs to each
segment in order to make decisions and assess performance. These costs include
corporate overhead, interest expense, interest income, restructuring gains and
other charges. Other includes severance and litigation.
THREE MONTHS ENDED JOHNSTON LICENSED
AUGUST 4, 2001 JOURNEYS JARMAN & MURPHY BRANDS LEATHER CORPORATE CONSOLIDATED
----------------------------------------------------------------------------------------------------------------------------------
Sales $ 81,047 $ 22,956 $ 42,772 $ 20,388 $ -0- $ -0- $ 167,163
Intercompany sales -0- -0- 2 (622) -0- -0- (620)
----------------------------------------------------------------------------------------------------------------------------------
NET SALES TO EXTERNAL CUSTOMERS 81,047 22,956 42,774 19,766 -0- -0- 166,543
----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 9,330 (1,032) 4,532 2,055 -0- (2,938) 11,947
Interest expense -0- -0- -0- -0- -0- 2,157 2,157
Interest income -0- -0- -0- -0- -0- 269 269
Restructuring gain -0- -0- -0- -0- -0- 205 205
Other -0- -0- -0- -0- -0- (386) (386)
----------------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 9,330 (1,032) 4,532 2,055 -0- (5,007) 9,878
----------------------------------------------------------------------------------------------------------------------------------
Total assets 138,393 48,265 75,662 28,867 605 85,218 377,010
Depreciation 1,661 733 814 35 -0- 695 3,938
Capital expenditures 4,889 1,778 933 18 -0- 2,407 10,025
21
22
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 9
BUSINESS SEGMENT INFORMATION, CONTINUED
THREE MONTHS ENDED JOHNSTON LICENSED
JULY 29, 2000 JOURNEYS JARMAN & MURPHY BRANDS LEATHER CORPORATE CONSOLIDATED
----------------------------------------------------------------------------------------------------------------------------------
Sales $ 59,796 $ 20,498 $ 44,532 $ 19,321 $ -0- $ -0- $ 144,147
Intercompany sales -0- -0- (13) (891) -0- -0- (904)
----------------------------------------------------------------------------------------------------------------------------------
NET SALES TO EXTERNAL CUSTOMERS 59,796 20,498 44,519 18,430 -0- -0- 143,243
----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 6,569 450 5,632 974 -0- (2,752) 10,873
Interest expense -0- -0- -0- -0- -0- 2,093 2,093
Interest income -0- -0- -0- -0- -0- 261 261
----------------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES
AND DISCONTINUED OPERATIONS 6,569 450 5,632 974 -0- (4,584) 9,041
----------------------------------------------------------------------------------------------------------------------------------
Total assets 101,113 37,319 68,792 24,667 6,901 91,385 330,177
Depreciation 1,199 518 652 28 91 650 3,138
Capital expenditures 5,217 2,764 1,291 19 -0- 988 10,279
----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JOHNSTON LICENSED
AUGUST 4, 2001 JOURNEYS JARMAN & MURPHY BRANDS LEATHER CORPORATE CONSOLIDATED
----------------------------------------------------------------------------------------------------------------------------------
Sales $ 161,395 $ 48,027 $ 84,585 $46,078 $ -0- $ -0- $ 340,085
Intercompany sales -0- -0- 2 (1,626) -0- -0- (1,624)
----------------------------------------------------------------------------------------------------------------------------------
NET SALES TO EXTERNAL CUSTOMERS 161,395 48,027 84,587 44,452 -0- -0- 338,461
----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 19,405 (101) 8,658 4,990 -0- (6,120) 26,832
Interest expense -0- -0- -0- -0- -0- 4,315 4,315
Interest income -0- -0- -0- -0- -0- 892 892
Restructuring gain -0- -0- -0- -0- -0- 205 205
Other -0- -0- -0- -0- -0- (386) (386)
----------------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 19,405 (101) 8,658 4,990 -0- (9,724) 23,228
----------------------------------------------------------------------------------------------------------------------------------
Total assets 138,393 48,265 75,662 28,867 605 85,218 377,010
Depreciation 3,244 1,444 1,630 78 -0- 1,374 7,770
Capital expenditures 8,630 3,321 1,673 28 -0- 2,781 16,433
----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JOHNSTON LICENSED
JULY 29, 2000 JOURNEYS JARMAN & MURPHY BRANDS LEATHER CORPORATE CONSOLIDATED
----------------------------------------------------------------------------------------------------------------------------------
Sales $ 117,892 $ 41,518 $ 89,073 $ 43,350 $ -0- $ -0- $ 291,833
Intercompany sales -0- -0- (86) (1,860) -0- -0- (1,946)
----------------------------------------------------------------------------------------------------------------------------------
NET SALES TO EXTERNAL CUSTOMERS 117,892 41,518 88,987 41,490 -0- -0- 289,887
----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 13,081 1,193 11,305 2,607 -0- (5,271) 22,915
Interest expense -0- -0- -0- -0- -0- 4,194 4,194
Interest income -0- -0- -0- -0- -0- 680 680
Other -0- -0- -0- -0- -0- (170) (170)
----------------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES
AND DISCONTINUED OPERATIONS 13,081 1,193 11,305 2,607 -0- (8,955) 19,231
----------------------------------------------------------------------------------------------------------------------------------
Total assets 101,113 37,319 68,792 24,667 6,901 91,385 330,177
Depreciation 2,294 987 1,344 59 201 1,292 6,177
Capital expenditures 9,347 5,257 2,889 36 -0- 1,700 19,229
22
23
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
This discussion and the notes to the Consolidated Financial Statements include
certain forward-looking statements, including all statements that do not refer
to past or present events or conditions. Actual results could differ materially
from those reflected by the forward-looking statements in this discussion and a
number of factors may adversely affect future results, liquidity and capital
resources. These factors include lower than expected consumer demand for the
Company's products, whether caused by further weakening in the overall economy
or by changes in fashions or tastes that the Company fails to anticipate or
respond appropriately to, changes in buying patterns by significant wholesale
customers, disruptions in product supply or distribution, the inability to
adjust inventory levels to sales and changes in business strategies by the
Company's competitors. Any greater than expected weakness in demand or
disruption in supply could have an especially pronounced effect on the Company's
performance in the second half of the year, because of the importance of the
Holiday selling season. Other factors that could cause results to differ from
expectations include the Company's ability to open, staff and support additional
retail stores on schedule and at acceptable expense levels and the outcome of
litigation and environmental matters involving the Company, including those
discussed in Note 8 to the Consolidated Financial Statements. The recent
terrorist attacks on the United States, possible responses by the U. S.
government, the effects on consumer demand, the financial markets, product
supply and distribution and other conditions increase the uncertainty inherent
in forward-looking statements. Forward-looking statements reflect the
expectations of the Company at the time they are made, and investors should rely
on them only as expressions of opinion about what may happen in the future and
only at the time they are made. The Company undertakes no obligation to update
any forward-looking statement. Although the Company believes it has an
appropriate business strategy and the resources necessary for its operations,
future revenue and margin trends cannot be reliably predicted and the Company
may alter its business strategies to address changing conditions.
SIGNIFICANT DEVELOPMENTS
Revolving Credit Agreement
On July 16, 2001, the Company entered into a revolving credit agreement with
five banks providing for loans or letters of credit of up to $75 million. The
agreement expires July 16, 2004. This agreement replaced a $65 million revolving
credit agreement with three banks that was to expire September 24, 2002,
providing for loans or letters of credit.
Nautica Footwear License Cancellation
The Company entered into an agreement with Nautica Apparel, Inc. to end its
license to market footwear under the Nautica label, effective January 31, 2001.
The Company sold Nautica - branded footwear for the first six months of Fiscal
2002 in order to fill existing customer orders and sell existing inventory.
In connection with the termination of the Nautica Footwear license agreement,
the Company recorded a pretax charge to earnings of $4.4 million ($2.7 million
net of tax) in the fourth quarter of Fiscal 2001. The charge includes
contractual obligations to Nautica Apparel for the license cancellation and
other costs, primarily severance. Included in the charge was a $1.0 million
inventory write-down which is reflected in gross margin on the income statement.
23
24
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
During the second quarter of Fiscal 2002 the Company recorded a restructuring
gain of $0.3 million in connection with the termination of the Nautica Footwear
license agreement. Included in the gain is a $0.1 million reversal of inventory
write-down which is reflected in gross margin on the income statement. The
remaining $0.4 million of anticipated costs associated with the Nautica license
termination are expected to be incurred in the next twelve months.
Volunteer Leather Divestiture
On May 22, 2000, the Company's board of directors approved a plan to sell its
Volunteer Leather finishing business and liquidate its tanning business, to
allow the Company to be more focused on the retailing and marketing of branded
footwear.
Certain assets of the Volunteer Leather business were sold on June 19, 2000. The
plan resulted in a pretax charge to earnings of $4.9 million ($3.0 million net
of tax) in the second quarter of Fiscal 2001. Because Volunteer Leather
constitutes the entire Leather segment of the Company's business, the charge to
earnings is treated for financial reporting purposes as a provision for
discontinued operations.
The provision for discontinued operations included $1.3 million in asset
write-downs and $3.6 million of other costs, including primarily employee
severance and facility shutdown costs. As of August 4, 2001, $1.5 million of
such other costs had been incurred and $1.6 million are expected to be incurred
in the next twelve months. The approximately $0.5 million of other costs
expected to be incurred beyond twelve months are classified as long-term
liabilities in the consolidated balance sheet. The Volunteer Leather business
employed approximately 160 people.
Share Repurchase Program
In total, the Company's board of directors has authorized the repurchase of 6.8
million shares of the Company's common stock since the third quarter of Fiscal
1999. The purchases may be made on the open market or in privately negotiated
transactions. As of August 4, 2001, the Company had repurchased 6.4 million
shares at a cost of $60.5 million pursuant to all authorizations. No shares were
purchased during the first six months of Fiscal 2002.
BUSINESS SEGMENTS
The Company currently operates four reportable business segments (not including
the corporate segment): Journeys, comprised of Journeys and Journeys Kidz retail
footwear chains; Jarman, comprised primarily of the Jarman and Underground
Station retail footwear chains; Johnston & Murphy, comprised of Johnston &
Murphy retail stores, direct marketing and wholesale distribution; and Licensed
Brands, comprised of Dockers and Nautica Footwear. The Company has ended the
license agreement with Nautica Apparel, Inc. to market Nautica footwear
effective January 31, 2001. The Company also operated the Leather segment during
part of Fiscal 2001. The Company sold certain assets of its Volunteer Leather
business on June 19, 2000 and has discontinued all Leather segment operations.
See "Significant Developments."
24
25
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
RESULTS OF OPERATIONS - SECOND QUARTER FISCAL 2002 COMPARED TO FISCAL 2001
The Company's net sales in the second quarter ended August 4, 2001 increased
16.3% to $166.5 million from $143.2 million in the second quarter ended July 29,
2000. Gross margin increased 13.6% to $78.4 million in the second quarter this
year from $69.0 million in the same period last year but decreased as a
percentage of net sales from 48.1% to 47.1%. Selling and administrative expenses
increased 15.0% to $66.8 million in the second quarter this year from $58.1
million in the second quarter last year but decreased as a percentage of net
sales from 40.6% to 40.1%. Explanations of the changes in results of operations
are provided by business segment in discussions following these introductory
paragraphs.
Earnings before income taxes and discontinued operations ("pretax earnings") for
the second quarter ended August 4, 2001 were $9.9 million compared to $9.0
million for the second quarter ended July 29, 2000. Pretax earnings for the
second quarter ended August 4, 2001 included a $0.3 million restructuring gain
related to the termination of the Nautica Footwear license agreement.
Net earnings for the second quarter ended August 4, 2001 were $6.2 million
($0.26 diluted earnings per share) compared to $2.6 million ($0.13 diluted
earnings per share) for the second quarter ended July 29, 2000. Net earnings for
the second quarter ended July 29, 2000 included a $3.0 million ($0.11 diluted
earnings per share) charge to earnings (net of tax) for the divestiture of the
Company's Volunteer Leather business.
Journeys
Three Months Ended
--------------------------
August 4, July 29, %
2001 2000 Change
---------- ---------- ------
(dollars in thousands)
Net sales............................................... $ 81,047 $ 59,796 35.5%
Operating income........................................ $ 9,330 $ 6,569 42.0%
Operating margin........................................ 11.5% 11.0%
Reflecting both a 27% increase in average Journeys stores operated (i.e., the
sum of the number of stores open on the first day of the fiscal quarter and the
last day of each fiscal month during the quarter divided by four) and a 1%
increase in comparable store sales, net sales from Journeys increased 35.5% for
the second quarter ended August 4, 2001 compared to the same period last year.
The average price per pair of shoes decreased 2% in the second quarter of Fiscal
2002, primarily reflecting changes in product mix, while unit sales increased
38% during the same period. The store count for Journeys was 470 stores at the
end of the second quarter of Fiscal 2002, including 8 Journeys Kidz stores,
compared to 377 stores at the end of the second quarter last year.
25
26
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Journeys operating income for the second quarter ended August 4, 2001 was up
42.0% to $9.3 million compared to $6.6 million for the second quarter ended July
29, 2000. The increase was due to increased sales and decreased expenses as a
percentage of net sales.
Jarman
Three Months Ended
--------------------------
August 4, July 29, %
2001 2000 Change
---------- ---------- ------
(dollars in thousands)
Net sales............................................... $ 22,956 $ 20,498 12.0%
Operating income (loss)................................. $ (1,032) $ 450 NA
Operating margin........................................ (4.5)% 2.2%
Primarily due to a 19% increase in average stores operated, offset by an 11%
decrease in comparable store sales, net sales from the Jarman division
(including Underground Station stores) increased 12.0% for the second quarter
ended August 4, 2001 compared to the same period past year. The increase in
sales was driven by Underground Station stores. The average price per pair of
shoes decreased 7% in the second quarter of Fiscal 2002, primarily reflecting
increased markdowns and changes in product mix, while unit sales increased 16%
during the same period. Jarman operated 217 stores at the end of the second
quarter of Fiscal 2002, including 79 Underground Station stores. The Company
operated 186 stores in the Jarman division at the end of the second quarter last
year, including 33 Underground Station stores. Going forward, the Company does
not plan to open any new Jarman stores, and expects that all new store openings
in this segment will be Underground Station stores, and that many of the
existing Jarman stores will be converted to Underground Station stores. During
the second quarter ended August 4, 2001, three Jarman stores were converted to
Underground Station stores.
Jarman's operating loss for the second quarter ended August 4, 2001 was $1.0
million compared to operating income of $0.5 million for the second quarter
ended July 29, 2000. The decrease was due to decreased gross margin as a
percentage of net sales, due primarily to higher markdowns and changes in
product mix, and to increased expenses as a percentage of net sales.
26
27
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Johnston & Murphy
Three Months Ended
-------------------------
August 4, July 29, %
2001 2000 Change
---------- ---------- -------
(dollars in thousands)
Net sales............................................... $ 42,774 $ 44,519 (3.9)%
Operating income........................................ $ 4,532 $ 5,632 (19.5)%
Operating margin........................................ 10.6% 12.7%
Johnston & Murphy net sales decreased 3.9% to $42.8 million for the second
quarter ended August 4, 2001 from $44.5 million for the second quarter ended
July 29, 2000, reflecting a 9% decrease in comparable store sales for Johnston &
Murphy retail operations and a 2% decrease in Johnston & Murphy wholesale sales.
Retail operations accounted for 64% of Johnston & Murphy segment sales in the
second quarter this year, down from 65% in the second quarter last year. The
store count for Johnston & Murphy retail operations at the end of the second
quarter of Fiscal 2002 included 144 Johnston & Murphy stores and factory stores
compared to 152 Johnston & Murphy stores and factory stores at the end of the
second quarter of Fiscal 2001. The average price per pair of shoes for Johnston
& Murphy retail decreased 3% in the second quarter this year, reflecting
primarily changes in product mix and increased markdowns, and unit sales
decreased 4% during the same period. Unit sales for the Johnston & Murphy
wholesale business decreased 1% in the second quarter of Fiscal 2002 and the
average price per pair of shoes decreased 2% for the same period, reflecting
increased promotional activity and mix changes.
Johnston & Murphy operating income for the second quarter ended August 4, 2001
decreased 19.5% from $5.6 million for the second quarter ended July 29, 2000 to
$4.5 million, primarily due to decreased sales and decreased gross margin as a
percentage of net sales, due primarily to increased markdowns and changes in
product mix.
Licensed Brands
Three Months Ended
-------------------------
August 4, July 29, %
2001 2000 Change
---------- ---------- ------
(dollars in thousands)
Net sales............................................... $ 19,766 $ 18,430 7.2%
Operating income........................................ $ 2,055 $ 974 111.0%
Operating margin 10.4% 5.3%
27
28
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Licensed Brands' net sales increased 7.2% to $19.8 million for the second
quarter ended August 4, 2001 from $18.4 million for the second quarter ended
July 29, 2000. The sales increase reflected a 23% increase in net sales of
Dockers Footwear, partially offset by declining sales of Nautica Footwear. Unit
sales for the Licensed Brands wholesale businesses increased 15% for the second
quarter this year, while the average price per pair of shoes decreased 6% for
the same period, reflecting increased promotional activities in the Nautica
business and changes in product mix.
Licensed Brands' operating income for the second quarter ended August 4, 2001
increased 111.0% from $1.0 million for the second quarter ended July 29, 2000 to
$2.1 million, primarily due to increased sales, increased gross margin as a
percentage of net sales and decreased expenses as a percentage of net sales.
For additional information regarding the Company's decision to exit the Nautica
Footwear business, see "Significant Developments - Nautica Footwear License
Cancellation." Net sales for Nautica footwear were $1.8 million and $3.8 million
for the second quarter of Fiscal 2002 and 2001, respectively, while operating
losses were $0.3 million and $0.8 million for the second quarter of Fiscal 2002
and 2001, respectively.
Corporate, Interest Expenses and Other Charges
Corporate and other expenses for the second quarter ended August 4, 2001 were
$2.9 million compared to $2.8 million for the second quarter ended July 29, 2000
(exclusive of other charges of $0.2 million, primarily litigation and severance
charges partially offset by a $0.3 million gain relating to the Nautica
restructuring, in the second quarter this year), an increase of 6.8%. The
increase in corporate expenses in the second quarter this year is attributable
primarily to costs associated with preparations to construct a new distribution
center and increased professional fees.
Interest expense increased 3.1% from $2.1 million in the second quarter ended
July 29, 2000 to $2.2 million for the second quarter ended August 4, 2001,
primarily due to increased bank activity fees due to the increased number of
individual bank accounts related to new store openings.
Interest income remained flat at $0.3 million. There were no borrowings under
the Company's revolving credit facility during the three months ended August 4,
2001 or July 29, 2000.
RESULTS OF OPERATIONS - SIX MONTHS FISCAL 2002 COMPARED TO FISCAL 2001
The Company's net sales in the first six months ended August 4, 2001 increased
16.8% to $338.5 million from $289.9 million in the first six months ended July
29, 2000. Gross margin increased 16.9% to $160.5 million in the first six months
this year from $137.3 million in the same period last year and was flat as a
percentage of net sales at 47.4%. Selling and administrative expenses in the
first six months this year increased 17.0% from the first six months last year
and increased as a percentage of net sales from 39.5% to 39.6%. Explanations of
the changes in results of operations are provided by business segment in
discussions following this introductory paragraph.
28
29
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Earnings before income taxes and discontinued operations ("pretax earnings") for
the first six months ended August 4, 2001 were $23.2 million compared to $19.2
million for the first six months ended July 29, 2000. Pretax earnings for the
first six months ended August 4, 2001 included a $0.3 million restructuring gain
related to the termination of the Nautica Footwear license agreement.
Net earnings for the first six months ended August 4, 2001 were $14.5 million
($.60 diluted earnings per share) compared to $8.5 million ($.38 diluted
earnings per share) for the first six months ended July 29, 2000. Net earnings
for the first six months ended July 29, 2000 included a $3.0 million ($.12
diluted earnings per share) charge to earnings (net of tax) for the divestiture
of the Company's Volunteer Leather business.
Journeys
Six Months Ended
-------------------------
August 4, July 29, %
2001 2000 Change
---------- --------- ------
(dollars in thousands)
Net sales............................................... $ 161,395 $ 117,892 36.9%
Operating income........................................ $ 19,405 $ 13,081 48.3%
Operating margin........................................ 12.0% 11.1%
Reflecting both a 28% increase in average Journeys stores operated (i.e., the
sum of the number of stores open on the first day of the fiscal year and the
last day of each fiscal month during the six months divided by seven) and a 6%
increase in comparable store sales, net sales from Journeys increased 36.9% for
the first six months ended August 4, 2001 compared to the same period last year.
The average price per pair of shoes decreased 5% in the first six months of
Fiscal 2002, primarily reflecting changes in product mix, while unit sales
increased 42% during the same period. The store count for Journeys was 470
stores at the end of the first six months of Fiscal 2002, including 8 Journeys
Kidz stores, compared to 377 stores at the end of the first six months last
year.
Journeys operating income for the first six months ended August 4, 2001 was up
48.3% to $19.4 million compared to $13.1 million for the first six months ended
July 29, 2000. The increase was due to increased sales, both from store openings
and a comparable store sales increase, increased gross margin as a percentage of
net sales and decreased expenses as a percentage of net sales.
29
30
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Jarman
Six Months Ended
--------------------------
August 4, July 29, %
2001 2000 Change
---------- ---------- ------
(dollars in thousands)
Net sales............................................... $ 48,027 $ 41,518 15.7%
Operating income (loss)................................. $ (101) $ 1,193 NA
Operating margin........................................ (0.2)% 2.9%
Primarily due to a 22% increase in average stores operated, offset by a 7%
decrease in comparable store sales, net sales from the Jarman division
(including Underground Station stores) increased 15.7% for the first six months
ended August 4, 2001 compared to the same period last year. The increase in
sales was driven primarily by Underground Station stores. The average price per
pair of shoes decreased 6% in the first six months of Fiscal 2002, primarily
reflecting increased markdowns and changes in product mix, while unit sales
increased 18% during the same period. Jarman operated 217 stores at the end of
the first six months of Fiscal 2002, including 79 Underground Station stores.
The Company operated 186 stores in the Jarman division at the end of the first
six months last year, including 33 Underground Station stores. Going forward,
the Company does not plan to open any new Jarman stores, and expects that all
new store openings in this segment will be Underground Station stores, and that
many of the existing Jarman stores will be converted to Underground Station
stores. During the six months ended August 4, 2001, six Jarman stores were
converted to Underground Station stores.
Jarman's operating loss for the first six months ended August 4, 2001 was $0.1
million compared to operating income of $1.2 million for the first six months
ended July 29, 2000. The decrease was due to a lesser extent from decreased
gross margin as a percentage of net sales, due primarily to higher markdowns and
changes in product mix, but primarily due to increased expenses as a percentage
of net sales.
Johnston & Murphy
Six Months Ended
--------------------------
August 4, July 29, %
2001 2000 Change
---------- ---------- ------
(dollars in thousands)
Net sales............................................... $ 84,587 $ 88,987 (4.9)%
Operating income........................................ $ 8,658 $ 11,305 (23.4)%
Operating margin........................................ 10.2% 12.7%
Johnston & Murphy net sales decreased 4.9% to $84.6 million for the first six
months ended August 4, 2001 from $89.0 million for the first six months ended
July 29, 2000, reflecting a 9% decrease in
30
31
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
comparable store sales for Johnston & Murphy retail operations and an 8%
decrease in Johnston & Murphy wholesale sales. Retail operations accounted for
65% of Johnston & Murphy segment sales in the first six months this year, up
from 64% of Johnston & Murphy segment sales in the first six months last year.
The store count for Johnston & Murphy retail operations at the end of the first
six months of Fiscal 2002 included 144 Johnston & Murphy stores and factory
stores compared to 152 Johnston & Murphy stores and factory stores at the end of
the first six months of Fiscal 2001. The average price per pair of shoes for
Johnston & Murphy retail decreased 2% in the first six months this year,
reflecting primarily changes in product mix, and unit sales decreased 5% during
the same period. Unit sales for the Johnston & Murphy wholesale business
decreased 7% in the first six months of Fiscal 2002, and the average price per
pair of shoes decreased 2% for the same period, reflecting increased promotional
activities and mix changes.
Johnston & Murphy operating income for the first six months ended August 4, 2001
decreased 23.4% from $11.3 million for the first six months ended July 29, 2000
to $8.7 million, primarily due to decreased sales, decreased gross margin as a
percentage of net sales, due primarily to increased promotional activity and
changes in product mix, and to increased expenses as a percentage of net sales.
Licensed Brands
Six Months Ended
--------------------------
August 4, July 29, %
2001 2000 Change
---------- ---------- ------
(dollars in thousands)
Net sales............................................... $ 44,452 $ 41,490 7.1%
Operating income........................................ $ 4,990 $ 2,607 91.4%
Operating margin........................................ 11.2% 6.3%
Licensed Brands' net sales increased 7.1% to $44.5 million for the first six
months ended August 4, 2001 from $41.5 million for the first six months ended
July 29, 2000. The sales increase reflected a 29% increase in net sales of
Dockers Footwear, offset by declining sales of Nautica Footwear. Unit sales for
the Licensed Brands wholesale businesses increased 13% for the first six months
this year, while the average price per pair of shoes decreased 3% for the same
period, reflecting increased promotional activities in the Nautica business.
Licensed Brands' operating income for the first six months ended August 4, 2001
increased 91.4% from $2.6 million for the first six months ended July 29, 2000
to $5.0 million, primarily due to increased sales, increased gross margin as a
percentage of net sales and decreased expenses as a percentage of net sales.
For additional information regarding the Company's decision to exit the Nautica
Footwear business, see "Significant Developments - Nautica Footwear License
Cancellation." Net sales for Nautica footwear were $6.0 million and $11.6
million for the first six months of Fiscal 2002 and 2001,
31
32
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
respectively, while operating losses were $0.6 million and $1.2 million for the
first six months of Fiscal 2002 and 2001, respectively.
Corporate, Interest Expenses and Other Charges
Corporate and other expenses for the first six months ended August 4, 2001 were
$6.1 million compared to $5.3 million for the first six months ended July 29,
2000 (exclusive of other charges of $0.2 million, primarily litigation and
severance charges, partially offset by a $0.3 million gain relating to the
Nautica restructuring, this year and other charges of $0.2 million, primarily
litigation and severance charges, last year), an increase of 16.1%. The increase
in corporate expenses in the first six months this year is attributable
primarily to costs associated with preparations to construct a new distribution
center and increased professional fees.
Interest expense increased 2.9% from $4.2 million in the first six months ended
July 29, 2000 to $4.3 million for the first six months ended August 4, 2001,
primarily due to increased bank activity fees due to the increased number of
individual bank accounts related to new store openings.
Interest income increased 31% from $0.7 million in the first six months last
year to $0.9 million in the first six months this year due to increases in
average interest bearing short-term investments. There were no borrowings under
the Company's revolving credit facility during the six months ended August 4,
2001 or July 29, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain financial data at the dates indicated.
August 4, July 29,
2001 2000
----------- --------
(dollars in millions)
Cash and short-term investments ............................................. $ 24.5 $ 38.3
Working capital ............................................................. $ 156.5 $ 134.0
Long-term debt (includes current maturities) ................................ $ 103.2 $ 103.5
Current ratio ............................................................... 2.5X 2.4X
Working Capital
The Company's business is somewhat seasonal, with the Company's investment in
inventory and accounts receivable normally reaching peaks in the spring and fall
of each year. Cash flow from operations is generated principally in the fourth
quarter of each fiscal year.
Cash used in operating activities was $24.5 million in the first six months of
Fiscal 2002 compared to $1.1 million cash provided by operating activities in
the first six months of Fiscal 2001. The $25.6 million decrease in cash flow
from operating activities reflects primarily a $15.9 million
32
33
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
increase in inventory primarily due to new store openings, planned seasonal
increases and an increase in Johnston and Murphy inventory due to decreased
sales from plan, and to decreased accrued liabilities primarily due to payments
of incentive compensation accruals, a $5.5 million increase in taxes paid and a
$4.0 million increase in restructuring payments due primarily to the Nautica
restructuring. The Company has opened a net of 116 full service stores since
last July 29, 2000 contributing to the increased seasonality.
The $47.9 million increase in inventories at August 4, 2001 from February 3,
2001 levels reflects increases in retail inventory to support the net increase
of 52 stores in the first six months this year, planned seasonal increases and
an increase in Johnston & Murphy inventory due to decreased sales from plan for
the first six months this year.
Accounts receivable at August 4, 2001 increased $3.9 million compared to
February 3, 2001 primarily due to increased wholesale sales and terms given due
to promotional activities combined with a slowing of payments from customers.
Cash provided (or used) due to changes in accounts payable and accrued
liabilities are as follows:
Six Months Ended
------------------------------
Aug. 4, Jul. 29,
2001 2000
---------- ---------
(in thousands)
Accounts payable ............................................................ $ 23,962 $ 24,911
Accrued liabilities ......................................................... (19,249) (6,225)
---------- ---------
$ 4,713 $ 18,686
========== =========
The fluctuations in accounts payable for the first six months this year from the
first six months last year are due to changes in payment terms negotiated with
individual vendors, inventory levels, payment timing and buying patterns. The
change in accrued liabilities for the first six months this year was due
primarily to payment of incentive compensation accruals, income tax payments
and restructuring payments.
There were no revolving credit borrowings during the first six months ended
August 4, 2001 and July 29, 2000, as cash generated from operations and cash on
hand funded seasonal working capital requirements and capital expenditures. On
July 16, 2001, the Company entered into a revolving credit agreement with five
banks providing for loans or letters of credit of up to $75 million. The
agreement expires July 16, 2004.
Capital Expenditures
Total capital expenditures in Fiscal 2002 are expected to be approximately $53.8
million. These include expected retail expenditures of $28.9 million to open
approximately 100 Journeys stores, 12 Journeys Kidz stores, 10 Johnston & Murphy
stores and factory stores and 32 Underground Station stores and to complete 35
major store renovations. Capital expenditures for wholesale and manufacturing
operations and other purposes, are expected to be approximately $24.9 million,
including approximately $1.8 million for new systems to improve customer service
and support the Company's growth and $22.0 million to $24.0 million for a new
distribution center.
33
34
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Due to the Company's retail growth, the Company has begun preparations to
construct a new distribution center. The Company signed an agreement to purchase
215 acres in Wilson County, Tennessee to develop a new 322,000 square foot
distribution facility. The Company expects a completion date in Spring 2002. The
Company expects the Fiscal 2002 cost of the facility to be in the range of $22.0
million to $24.0 million.
ENVIRONMENTAL AND OTHER CONTINGENCIES
The Company is subject to certain loss contingencies related to environmental
proceedings and other legal matters, including those disclosed in Note 8 to the
Company's Consolidated Financial Statements. The Company has made provisions for
certain of these contingencies, including approximately $2.6 million reflected
in Fiscal 2001 and $472,000 reflected in Fiscal 2000. The Company monitors these
matters on an ongoing basis and at least quarterly management reviews the
Company's reserves and accruals in relation to each of them, adjusting
provisions as management deems necessary in view of changes in available
information. Changes in estimates of liability are reported in the periods when
they occur. Consequently, management believes that its reserve in relation to
each proceeding is a reasonable estimate of the probable loss connected to the
proceeding, or in cases in which no reasonable estimate is possible, the minimum
amount in the range of estimated losses, based upon its analysis of the facts
and circumstances as of the close of the most recent fiscal quarter. Because of
uncertainties and risks inherent in litigation generally and in environmental
proceedings in particular, however, there can be no assurance that future
developments will not require additional reserves to be set aside, that some or
all reserves may not be adequate or that the amounts of any such additional
reserves or any such inadequacy will not have a material adverse effect upon the
Company's financial condition or results of operations.
FUTURE CAPITAL NEEDS
The Company expects that cash on hand and cash provided by operations will be
sufficient to fund all of its capital expenditures through Fiscal 2002, although
the Company may borrow from time to time to support seasonal working capital
requirements. The approximately $5.0 million of costs associated with the prior
restructurings and discontinued operations that are expected to be incurred
during the next twelve months are also expected to be funded from cash on hand.
In February 2000, the Company authorized the additional repurchase, from time to
time, of up to 1.0 million shares of the Company's common stock of which there
are 372,000 shares remaining to be repurchased under the authorization. These
purchases will be funded from available cash. The Company has repurchased a
total of 6.4 million shares at a cost of $60.5 million from all authorizations
for Fiscal 1999, Fiscal 2000 and Fiscal 2001. No shares were purchased during
the first six months of Fiscal 2002.
There were $6.5 million of letters of credit outstanding under the revolving
credit agreement at August 4, 2001, leaving availability under the revolving
credit agreement of $68.5 million.
34
35
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The Company's revolving credit agreement restricts the payment of dividends and
other payments with respect to capital stock, however the Company may make
payments with respect to preferred stock. At August 4, 2001, $13.0 million was
available for such payments related to common stock. The aggregate of annual
dividend requirements on the Company's Subordinated Serial Preferred Stock,
$2.30 Series 1, $4.75 Series 3 and $4.75 Series 4, and on its $1.50 Subordinated
Cumulative Preferred Stock is $294,000.
FINANCIAL MARKET RISK
The following discusses the Company's exposure to financial market risk related
to changes in interest rates and foreign currency exchange rates.
Outstanding Debt of the Company - The Company's outstanding long-term debt of
$103.2 million 5 1/2% convertible subordinated notes due April 2005 bears
interest at a fixed rate. Accordingly, there would be no immediate impact on the
Company's interest expense due to fluctuations in market interest rates.
Cash and Short-Term Investments - The Company's cash and short-term investment
balances are invested in financial instruments with original maturities of three
months or less. The Company does not have significant exposure to changing
interest rates on invested cash at August 4, 2001. As a result, the Company
considers the interest rate market risk implicit in these investments at August
4, 2001, to be low.
Foreign Currency Exchange Rate Risk - Most purchases by the Company from foreign
sources are denominated in U.S. dollars. To the extent that import transactions
are denominated in other currencies, it is the Company's practice to hedge its
risks through the purchase of forward foreign exchange contracts. At August 4,
2001, the Company had $27.9 million of foreign exchange contracts for Euro. The
Company's policy is not to speculate in derivative instruments for profit on the
exchange rate price fluctuation and it does not hold any derivative instruments
for trading purposes. Derivative instruments used as hedges must be effective at
reducing the risk associated with the exposure being hedged and must be
designated as a hedge at the inception of the contract. The loss on contracts
outstanding at August 4, 2001 was $0.1 million from current spot rates. As of
August 4, 2001, a 10% adverse change in foreign currency exchange rates from
market rates would decrease the fair value of the contracts by approximately
$2.6 million.
Accounts Receivable - The Company's accounts receivable balance at August 4,
2001 is concentrated in its two remaining wholesale businesses, which sell
primarily to department stores and independent retailers across the United
States. Two customers account for 27% of the Company's trade accounts receivable
balance as of August 4, 2001. The Company monitors the credit quality of its
customers and establishes an allowance for doubtful accounts based upon factors
surrounding credit risk, historical trends and other information, however,
credit risk is affected by conditions or occurrences within the economy and the
retail industry.
35
36
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Summary - Based on the Company's overall market interest rate and foreign
currency rate exposure at August 4, 2001, the Company believes that the effect,
if any, of reasonably possible near-term changes in interest rates or
fluctuations in foreign currency exchange rates on the Company's consolidated
financial position, result of operations or cash flows for Fiscal 2002 would not
be material.
CHANGES IN ACCOUNTING PRINCIPLES
The Company implemented Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities" in the first
quarter of Fiscal 2002. This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. SFAS 133
requires an entity to recognize all derivatives as either assets or liabilities
in the consolidated balance sheet and to measure those instruments at fair
value. Under certain conditions, a derivative may be specifically designated as
a fair value hedge or a cash flow hedge. The accounting for changes in the fair
value of a derivative are recorded each period in current earnings or in other
comprehensive income depending on the intended use of the derivative and the
resulting designation. For the six months ended August 4, 2001, the Company
recorded a loss on foreign currency forward contracts of $0.6 million in
accumulated other comprehensive income.
In July 2000, the Emerging Issues Task Force issued EITF: Issue 00-10,
"Accounting for Shipping and Handling Fees and Costs." The new pronouncement
requires shipping and handling billings to customers be recorded as revenue.
Amounts for shipping and handling costs can no longer be netted with related
shipping and handling billings. The Company has restated its financial
statements for Fiscal 2001, 2000 and 1999 to reflect the change in accounting
for shipping and handling fees and costs.
OUTLOOK
This "Outlook" section in this Form 10-Q contains a number of forward-looking
statements relating to sales, earnings per share, capital expenditures and store
opening expectations for Fiscal 2002. These forward-looking statements are based
on the Company's expectations as of September 18, 2001. All of the
forward-looking statements are based on management's current expectations and
are inherently uncertain. Actual results could differ materially from those
reflected by the forward-looking statements in this discussion and a number of
factors may adversely affect future results, liquidity and capital resources.
These factors include lower than expected consumer demand for the Company's
products, whether caused by further weakening in the overall economy or by
changes in fashions or tastes that the Company fails to anticipate or respond
appropriately to, changes in buying patterns by significant wholesale customers,
disruptions in product supply or distribution, the inability to adjust inventory
levels to sales and changes in business strategies by the Company's competitors.
Any greater than expected weakness in demand or disruption in supply could have
an especially pronounced effect on the Company's performance in the second half
of the year, because of the importance of the Holiday selling season. Other
factors that could cause results to differ from expectations include the
Company's ability to open, staff and support additional retail stores on
schedule and at acceptable expense levels and the outcome of litigation and
environmental matters
36
37
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
involving the Company, including those discussed in Note 8 to the Consolidated
Financial Statements. The recent terrorist attacks on the United States,
possible responses by the U. S. government, the effects on consumer demand, the
financial markets, product supply and distribution and other conditions increase
the uncertainty inherent in forward-looking statements. Forward-looking
statements reflect the expectations of the Company at the time they are made,
and investors should rely on them only as expressions of opinion about what may
happen in the future and only at the time they are made. The Company undertakes
no obligation to update any forward-looking statement. Although the Company
believes it has an appropriate business strategy and the resources necessary for
its operations, future revenue and margin trends cannot be reliably predicted
and the Company may alter its business strategies to address changing
conditions.
The Company expects net sales growth in the range of $760 million to $767
million for Fiscal 2002.
The Company expects earnings per share to be in the range of $1.61 to $1.65 per
share for Fiscal 2002. It expects the earnings improvement from Fiscal 2001 to
be primarily attributable to net sales growth and to selling, general and
administrative expense leverage related to same store sales growth.
The Company expects capital expenditures for Fiscal 2002 to be approximately
$53.8 million. The Company plans to open 100 Journeys stores, 12 Journeys Kidz
stores, 32 Underground Station stores and 10 Johnston & Murphy stores and
factory stores. The Company also plans to build a new distribution center with
current year expenditures of approximately $22.0 - $24.0 million.
37
38
PART II - OTHER INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company incorporates by reference the information regarding market risk to
appear under the heading "Financial Market Risk" in Management's Discussion and
Analysis of Financial Condition and Results of Operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of shareholders held on June 27, 2001, shares
representing a total of 22,091,926 votes were outstanding and entitled to vote.
At the meeting, shareholders of the Company:
(1) elected ten directors nominated by the board of directors by the
following votes:
Votes
Votes "For" "Withheld"
----------- ----------
Leonard L. Berry 19,886,716 346,928
Robert V. Dale 19,884,036 349,608
W. Lipscomb Davis, Jr. 19,882,760 350,884
Matthew C. Diamond 19,878,681 354,963
Ben T. Harris 14,398,100 5,835,544
Kathleen Mason 19,885,236 348,408
Hal N. Pennington 19,885,030 348,614
Linda H. Potter 19,878,681 354,963
William A. Williamson, Jr. 19,882,975 350,669
William S. Wire II 18,791,580 1,442,064
(2) approved an amendment to the Company's 1996 Stock Incentive Plan by a
vote of 14,365,291 for, 3,354,388 against, with 56,446 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
(10)h. Second Amended, Restated and Modified Loan Agreement dated as of July
16, 2001 among the Company and Bank of America, N.A., Fifth Third
National Bank, Fleet National Bank, The Chase Manhattan Bank and Bank
One, N.A.
---------------
REPORTS ON FORM 8-K
The Company filed current reports on Form 8-K on June 25, 2001, July 9, 2001,
August 6, 2001 and August 27, 2001 disclosing Regulation FD disclosures.
38
39
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Genesco Inc.
/s/ James S. Gulmi
James S. Gulmi
Chief Financial Officer
September 18, 2001
39