GENESCO INC - Quarter Report: 2010 October (Form 10-Q)

INDEX

		Page
Part I. Financial Information
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets — October 30, 2010, January 30, 2010 and October 31, 2009		3
Condensed Consolidated Statements of Operations — Three Months and Nine Months Ended October 30, 2010 and October 31, 2009		5
Condensed Consolidated Statements of Cash Flows — Three Months and Nine Months Ended October 30, 2010 and October 31, 2009		6
Condensed Consolidated Statements of Shareholders’ Equity — Year Ended January 30, 2010 and Nine Months Ended October 30, 2010		7
Notes to Condensed Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		36
Item 3. Quantitative and Qualitative Disclosures About Market Risk		51
Item 4. Controls and Procedures		52
Part II. Other Information
Item 1. Legal Proceedings		53
Item 1A. Risk Factors		53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		54
Item 4. Removed and Reserved		54
Item 6. Exhibits		54
Signature		55
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Genesco Inc.
and Subsidiaries
Condensed Consolidated Balance Sheets
(In Thousands)

		October 30,				January 30,				October 31,
Assets		2010				2010				2009
Current Assets
Cash and cash equivalents		$	24,574			$	82,148			$	23,620
Accounts receivable, net of allowances of $3,701 at October 30, 2010, $3,232 at January 30, 2010 and $2,996 at October 31, 2009			47,923				27,217				33,425
Inventories			450,902				290,974				359,684
Deferred income taxes			15,094				17,314				15,848
Prepaids and other current assets			37,061				32,419				41,007
Total current assets			575,554				450,072				473,584
Property and equipment:
Land			4,863				4,863				4,863
Buildings and building equipment			17,992				17,992				17,957
Computer hardware, software and equipment			91,496				86,239				82,811
Furniture and fixtures			102,852				101,923				100,356
Construction in progress			6,446				3,196				6,600
Improvements to leased property			278,855				277,624				274,754
Property and equipment, at cost			502,504				491,837				487,341
Accumulated depreciation			(302,009	)			(275,544	)			(266,077	)
Property and equipment, net			200,495				216,293				221,264
Deferred income taxes			17,110				13,545				7,603
Goodwill			150,311				118,995				112,759
Trademarks, net of accumulated amortization of $879 at October 30, 2010, $418 at January 30, 2010 and $342 at October 31, 2009			52,753				52,799				51,460
Other intangibles, net of accumulated amortization of $9,984 at October 30, 2010, $8,795 at January 30, 2010 and $8,557 at October 31, 2009			13,179				3,670				3,378
Other noncurrent assets			8,568				8,278				8,231
Total Assets		$	1,017,970			$	863,652			$	878,279

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

		October 30,				January 30,				October 31,
Liabilities and Shareholders’ Equity		2010				2010				2009
Current Liabilities
Accounts payable		$	199,299			$	92,699			$	152,273
Accrued employee compensation			28,921				15,043				13,613
Accrued other taxes			13,865				11,570				10,590
Other accrued liabilities			40,788				40,979				29,019
Provision for discontinued operations			11,642				9,366				9,472
Total current liabilities			294,515				169,657				214,967
Long-term debt			30,400				-0-				29,042
Pension liability			18,030				20,402				22,281
Deferred rent and other long-term liabilities			85,657				85,232				83,883
Provision for discontinued operations			4,594				6,048				6,115
Total liabilities			433,196				281,339				356,288
Commitments and contingent liabilities
Shareholders’ Equity
Non-redeemable preferred stock			5,193				5,220				5,235
Common shareholders’ equity:
Common stock, $1 par value:
Authorized: 80,000,000 shares Issued/Outstanding:
October 30, 2010 — 24,083,115/23,594,651
January 30, 2010 — 24,562,693/24,074,229
October 31, 2009 —23,158,918/22,670,454			24,083				24,563				23,159
Additional paid-in capital			127,193				146,981				115,088
Retained earnings			474,412				452,210				426,406
Accumulated other comprehensive loss			(28,250	)			(28,804	)			(30,040	)
Treasury shares, at cost			(17,857	)			(17,857	)			(17,857	)
Total shareholders’ equity			584,774				582,313				521,991
Total Liabilities and Shareholders’ Equity		$	1,017,970			$	863,652			$	878,279

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

Genesco Inc.
and Subsidiaries

Condensed Consolidated Statements of Operations
(In Thousands, except per share amounts)

		Three Months Ended								Nine Months Ended
		October 30,				October 31,				October 30,				October 31,
		2010				2009				2010				2009
Net sales		$	464,838			$	390,302			$	1,229,345			$	1,095,326
Cost of sales			228,097				190,136				600,489				535,993
Selling and administrative expenses			207,942				179,271				584,484				531,071
Restructuring and other, net			2,120				2,571				6,564				10,864
Earnings from operations			26,679				18,324				37,808				17,398
Loss on early retirement of debt			-0-				-0-				-0-				5,119
Interest expense, net
Interest expense			306				922				773				4,046
Interest income			-0-				(1	)			(5	)			(13	)
Total interest expense, net			306				921				768				4,033
Earnings from continuing operations before income taxes			26,373				17,403				37,040				8,246
Income tax expense			9,406				5,880				13,906				4,989
Earnings from continuing operations			16,967				11,523				23,134				3,257
Provision for discontinued operations, net			(50	)			(80	)			(784	)			(298	)
Net Earnings		$	16,917			$	11,443			$	22,350			$	2,959
Basic earnings per common share:
Continuing operations		$	.73			$	.52			$	.98			$	.15
Discontinued operations		$	.00			$	.00			$	(.03	)		$	(.02	)
Net earnings		$	.73			$	.52			$	.95			$	.13
Diluted earnings per common share:
Continuing operations		$	.72			$	.50			$	.97			$	.15
Discontinued operations		$	.00			$	.00			$	(.04	)		$	(.02	)
Net earnings		$	.72			$	.50			$	.93			$	.13

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

Genesco Inc.
and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In Thousands)

		Three Months Ended								Nine Months Ended
		October 30,				October 30,				October 30,				October 31,
		2010				2009				2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	16,917			$	11,443			$	22,350			$	2,959
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation			11,265				11,464				34,078				35,315
Amortization of deferred note expense and debt discount			105				433				313				1,877
Loss on early retirement of debt			-0-				-0-				-0-				5,119
Deferred income taxes			(2,595	)			2,228				(3,142	)			3,774
Provision for losses on accounts receivable			256				126				561				186
Impairment of long-lived assets			2,120				2,594				6,410				10,433
Share-based compensation and restricted stock			2,336				1,995				6,051				5,255
Provision for discontinued operations			82				134				1,295				493
Other			786				508				2,416				1,591
Effect on cash of changes in working capital and other assets and liabilities:
Accounts receivable			(12,066	)			(3,663	)			(14,783	)			(8,230	)
Inventories			(52,344	)			(25,744	)			(136,717	)			(52,583	)
Prepaids and other current assets			6,307				3,216				(3,507	)			(5,439	)
Accounts payable			21,811				20,951				94,492				68,090
Other accrued liabilities			16,424				1,740				17,296				(5,973	)
Other assets and liabilities			3,249				(176	)			(2,887	)			(2,077	)
Net cash provided by operating activities			14,653				27,249				24,226				60,790
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures			(6,956	)			(6,893	)			(18,816	)			(27,953	)
Acquisitions, net of cash acquired			(56,719	)			(2,868	)			(71,973	)			(2,873	)
Proceeds from assets sales			4				-0-				6				13
Net cash used in investing activities			(63,671	)			(9,761	)			(90,783	)			(30,813	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital leases			(30	)			(52	)			(90	)			(148	)
Payments of long-term debt			(900	)			(1,070	)			(1,918	)			(1,070	)
Shares repurchased			(14,026	)			-0-				(25,717	)			-0-
Change in overdraft balances			8,885				9,863				5,607				9,472
Borrowings under revolving credit facility			55,000				18,100				55,000				134,200
Payments on revolving credit facility			(24,600	)			(42,400	)			(24,600	)			(166,500	)
Dividends paid on non-redeemable preferred stock			(50	)			(49	)			(148	)			(148	)
Exercise of stock options			276				283				849				455
Other			-0-				-0-				-0-				(290	)
Net cash provided by (used in) financing activities			24,555				(15,325	)			8,983				(24,029	)
Net (decrease) increase in cash and cash equivalents			(24,463	)			2,163				(57,574	)			5,948
Cash and cash equivalents at beginning of period			49,037				21,457				82,148				17,672
Cash and cash equivalents at end of period		$	24,574			$	23,620			$	24,574			$	23,620
Supplemental Cash Flow Information:
Net cash paid for:
Interest		$	147			$	203			$	396			$	1,389
Income taxes			1,174				1,503				14,341				6,139

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

Genesco Inc.
and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity
In Thousands

		Total																Accumulated												Total
		Non-Redeemable								Additional								Other												Share-
		Preferred				Common				Paid-In				Retained				Comprehensive				Treasury				Comprehensive				holders’
		Stock				Stock				Capital				Earnings				Loss				Stock				Income				Equity
Balance January 31, 2009		$	5,203			$	19,732			$	49,780			$	423,595			$	(30,698	)		$	(17,857	)						$	449,755
Net earnings			-0-				-0-				-0-				28,813				-0-				-0-			$	28,813				28,813
Dividends paid on non-redeemable preferred stock			-0-				-0-				-0-				(198	)			-0-				-0-				-0-				(198	)
Exercise of stock options			-0-				28				372				-0-				-0-				-0-				-0-				400
Issue shares — Employee Stock Purchase Plan			-0-				4				95				-0-				-0-				-0-				-0-				99
Employee and non-employee restricted stock			-0-				-0-				6,528				-0-				-0-				-0-				-0-				6,528
Share-based compensation			-0-				-0-				441				-0-				-0-				-0-				-0-				441
Restricted stock issuance			-0-				405				(405	)			-0-				-0-				-0-				-0-				-0-
Restricted shares withheld for taxes			-0-				(65	)			(1,156	)			-0-				-0-				-0-				-0-				(1,221	)
Tax expense of stock options and restricted stock exercised			-0-				-0-				(658	)			-0-				-0-				-0-				-0-				(658	)
Shares repurchased			-0-				(85	)			(1,942	)			-0-				-0-				-0-				-0-				(2,027	)
Conversion of 4 1/8% debentures			-0-				4,553				93,933				-0-				-0-				-0-				-0-				98,486
Loss on foreign currency forward contracts (net of tax benefit of $0.1 million)			-0-				-0-				-0-				-0-				(157	)			-0-				(157	)			(157	)
Pension liability adjustment (net of tax of $0.6 million)			-0-				-0-				-0-				-0-				1,151				-0-				1,151				1,151
Postretirement liability adjustment (net of tax of $0.0 million)			-0-				-0-				-0-				-0-				14				-0-				14				14
Foreign currency translation adjustment			-0-				-0-				-0-				-0-				886				-0-				886				886
Other			17				(9	)			(7	)			-0-				-0-				-0-				-0-				1
Comprehensive income																										$	30,707
Balance January 30, 2010			5,220				24,563				146,981				452,210				(28,804	)			(17,857	)							582,313
Net earnings			-0-				-0-				-0-				22,350				-0-				-0-			$	22,350				22,350
Dividends paid on non-redeemable preferred stock			-0-				-0-				-0-				(148	)			-0-				-0-				-0-				(148	)
Exercise of stock options			-0-				39				690				-0-				-0-				-0-				-0-				729
Issue shares-Employee Stock Purchase Plan			-0-				4				116				-0-				-0-				-0-				-0-				120
Employee and non-employee restricted stock			-0-				-0-				5,843				-0-				-0-				-0-				-0-				5,843
Share-based compensation			-0-				-0-				208				-0-				-0-				-0-				-0-				208
Restricted stock issuance			-0-				423				(423	)			-0-				-0-				-0-				-0-				-0-
Restricted shares withheld for taxes			-0-				(82	)			(2,289	)			-0-				-0-				-0-				-0-				(2,371	)
Shares repurchased			-0-				(864	)			(23,961	)			-0-				-0-				-0-				-0-				(24,825	)
Gain on foreign currency forward contracts (net of tax of $0.1 million)			-0-				-0-				-0-				-0-				193				-0-				193				193
Foreign currency translation adjustment			-0-				-0-				-0-				-0-				361				-0-				361				361
Other			(27	)			-0-				28				-0-				-0-				-0-				-0-				1
Comprehensive income*																										$	22,904
Balance October 30, 2010		$	5,193			$	24,083			$	127,193			$	474,412			$	(28,250	)		$	(17,857	)						$	584,774

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

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1

Summary of Significant Accounting Policies

Interim Statements

The condensed consolidated financial statements contained in this report 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 January 29, 2011 (“Fiscal 2011”) and of the fiscal year ended January 30, 2010 (“Fiscal 2010”). The results of operations for any interim period are not necessarily indicative of results for the full year. The interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K.

Nature of Operations

The Company’s business includes the design and sourcing, marketing and distribution of footwear and accessories through retail stores in the U.S., Puerto Rico and Canada primarily under the Journeys, Journeys Kidz, Shi by Journeys, Johnston & Murphy, and Underground Station banners; through e-commerce websites including journeys.com, journeyskidz.com, shibyjourneys.com, undergroundstation.com, and johnstonmurphy.com, and at wholesale, primarily under the Company’s Johnston & Murphy brand and the Dockers brand, which the Company licenses for men’s footwear. The Company’s business also includes Lids Sports, which operates headwear and accessories stores in the U.S. and Canada under the Lids, Hat Shack, Hat Zone, HeadQuarters, Cap Connection, and Hat World banners; the Lids Locker Room business, consisting of sports-oriented fan shops featuring a broad array of licensed merchandise such as apparel, hats and accessories, sports decor and novelty products, operating primarily under the Lids Locker Room, Sports Fan-Attic and Sports Avenue banners; an e-commerce business conducted primarily through the lids.com website; and an athletic team dealer business operating as Lids Team Sports. Including both the footwear businesses and the Lids Sports business, at October 30, 2010, the Company operated 2,311 retail stores in the U.S., Puerto Rico and Canada.

Principles of Consolidation

All subsidiaries are consolidated in the condensed consolidated financial statements. All significant intercompany transactions and accounts have been eliminated.

Financial Statement Reclassifications

Certain reclassifications have been made to conform prior years’ data to the current year presentation. For the three months and nine months ended October 31, 2009, bank fees totaling approximately $1.0 million and $2.8 million were reclassified from interest expense to selling and administrative expenses, respectively on the Condensed Consolidated Statements of Operations to conform to the current year presentation.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1

Summary of Significant Accounting Policies, Continued

Significant areas requiring management estimates or judgments include the following key financial areas:

		Inventory Valuation
		The Company values its inventories at the lower of cost or market.
		In its footwear wholesale operations and its Lids Sports wholesale operations, except for Anaconda Sports, cost is determined using the first-in, first-out (“FIFO”) method. Market is determined using a system of analysis which evaluates inventory at the stock number level based on factors such as inventory turn, average selling price, inventory level, and selling prices reflected in future orders. The Company provides reserves when the inventory has not been marked down to market based on current selling prices or when the inventory is not turning and is not expected to turn at levels satisfactory to the Company.
		In its retail operations, other than the Lids Sports segment, the Company employs the retail inventory method, applying average cost-to-retail ratios to the retail value of inventories. Under the retail inventory method, valuing inventory at the lower of cost or market is achieved as markdowns are taken or accrued as a reduction of the retail value of inventories.
		Inherent in the retail inventory method are subjective judgments and estimates, including merchandise mark-on, markups, markdowns, and shrinkage. These judgments and estimates, coupled with the fact that the retail inventory method is an averaging process, could produce a range of cost figures. To reduce the risk of inaccuracy and to ensure consistent presentation, the Company employs the retail inventory method in multiple subclasses of inventory with similar gross margins, and analyzes markdown requirements at the stock number level based on factors such as inventory turn, average selling price, and inventory age. In addition, the Company accrues markdowns as necessary. These additional markdown accruals reflect all of the above factors as well as current agreements to return products to vendors and vendor agreements to provide markdown support. In addition to markdown provisions, the Company maintains provisions for shrinkage and damaged goods based on historical rates.
		The Lids Sports retail segment and its newly acquired Anaconda Sports wholesale division employ the moving average cost method for valuing inventories and applies freight using an allocation method. The Company provides a valuation allowance for slow-moving inventory based on negative margins and estimated shrink based on historical experience and specific analysis, where appropriate.
		Inherent in the analysis of both wholesale and retail inventory valuation are subjective judgments about current market conditions, fashion trends, and overall economic conditions. Failure to make appropriate conclusions regarding these factors may result in an overstatement or understatement of inventory value.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1

Summary of Significant Accounting Policies, Continued

Impairment of Long-Lived 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 the carrying amount. Inherent in the analysis of impairment are subjective judgments about future cash flows. Failure to make appropriate conclusions regarding these judgments may result in an overstatement or understatement of the value of long-lived assets. See also Notes 3 and 5.

The goodwill impairment test involves a two-step process. The first step is a comparison of the fair value and carrying value of the reporting unit with which the goodwill is associated. The Company estimates fair value using the best information available, and computes the fair value by an equal weighting of the results arrived by a market approach and an income approach utilizing discounted cash flow projections. The income approach uses a projection of a business unit’s estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects current market conditions. The projection uses management’s best estimates of economic and market conditions over the projected period including growth rates in sales, costs, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements.

If the carrying value of the reporting unit is higher than its fair value, there is an indication that impairment may exist and the second step must be performed to measure the amount of impairment loss. The amount of impairment is determined by comparing the implied fair value of reporting unit goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. Specifically, the Company would allocate the fair value to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, the Company would record an impairment charge for the difference.

A key assumption in the Company’s fair value estimate is the weighted average cost of capital utilized for discounting its cash flow projections in its income approach. The Company believes the rate it used in its annual test, which is completed in the fourth quarter each year, was consistent with the risks inherent in its business and with industry discount rates.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1

Summary of Significant Accounting Policies, Continued

Environmental and Other Contingencies

The Company is subject to certain loss contingencies related to environmental proceedings and other legal matters, including those disclosed in Note 8. The Company has made pretax accruals for certain of these contingencies, including approximately $0.3 million in each of the third quarters of Fiscal 2011 and Fiscal 2010 and $1.9 million and $0.8 million for the first nine months of Fiscal 2011 and Fiscal 2010, respectively. These charges are included in provision for discontinued operations, net in the Condensed Consolidated Statements of Operations (see Note 3). The Company monitors these matters on an ongoing basis and, on a quarterly basis, 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 best estimate of probable loss connected to the proceeding, or in cases in which no best estimate is possible, the minimum amount in the range of estimated losses, based upon its analysis of the facts and circumstances as of the close of the most recent fiscal quarter. However, because of uncertainties and risks inherent in litigation generally and in environmental proceedings in particular, there can be no assurance that future developments will not require additional reserves to be set aside, that some or all reserves will be adequate or that the amounts of any such additional reserves or any such inadequacy will not have a material adverse effect upon the Company’s financial condition or results of operations.

Revenue Recognition

Retail sales are recorded at the point of sale and are net of estimated returns and exclude sales taxes. Catalog and internet sales are recorded at time of delivery to the customer and are net of estimated returns and exclude sales taxes. Wholesale revenue is recorded net of estimated returns and allowances for markdowns, damages and miscellaneous claims when the related goods have been shipped and legal title has passed to the customer. Shipping and handling costs charged to customers are included in net sales. Estimated returns are based on historical returns and claims. Actual amounts of markdowns have not differed materially from estimates. Actual returns and claims in any future period may differ from historical experience.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1

Summary of Significant Accounting Policies, Continued

Income Taxes

As part of the process of preparing Condensed Consolidated Financial Statements, the Company is required to estimate its income taxes in each of the tax jurisdictions in which it operates. This process involves estimating actual current tax obligations together with assessing temporary differences resulting from differing treatment of certain items for tax and accounting purposes, such as depreciation of property and equipment and valuation of inventories. These temporary differences result in deferred tax assets and liabilities, which are included within the Condensed Consolidated Balance Sheets. The Company then assesses the likelihood that its deferred tax assets will be recovered from future taxable income. Actual results could differ from this assessment if adequate taxable income is not generated in future periods. To the extent the Company believes that recovery of an asset is at risk, valuation allowances are established. To the extent valuation allowances are established or increased in a period, the Company includes an expense within the tax provision in the Condensed Consolidated Statements of Operations.

Income tax reserves are determined using the methodology required by the Income Tax Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“Codification”). This methodology was adopted by the Company as of February 4, 2007, and requires companies to assess each income tax position taken using a two step process. A determination is first made as to whether it is more likely than not that the position will be sustained, based upon the technical merits, upon examination by the taxing authorities. If the tax position is expected to meet the more likely than not criteria, the benefit recorded for the tax position equals the largest amount that is greater than 50% likely to be realized upon ultimate settlement of the respective tax position. Uncertain tax positions require determinations and estimated liabilities to be made based on provisions of the tax law which may be subject to change or varying interpretation. If the Company’s determinations and estimates prove to be inaccurate, the resulting adjustments could be material to its future financial results.

Postretirement Benefits Plan Accounting

Full-time employees who had 1,000 hours of service in calendar year 2004, except employees in the Lids Sports Segment, are covered by a defined benefit pension plan. The Company froze the defined benefit pension plan effective January 1, 2005. The Company also provides certain former employees with limited medical and life insurance benefits. The Company funds at least the minimum amount required by the Employee Retirement Income Security Act.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1

Summary of Significant Accounting Policies, Continued

As required by the Compensation — Retirement Benefits Topic of the Codification, the Company is required to recognize the overfunded or underfunded status of postretirement benefit plans as an asset or liability in their Condensed Consolidated Balance Sheets and to recognize changes in that funded status in accumulated other comprehensive loss, net of tax, in the year in which the changes occur.

The Company accounts for the defined benefit pension plans using the Compensation-Retirement Benefits Topic of the Codification. As permitted under this topic, pension expense is recognized on an accrual basis over employees’ approximate service periods. The calculation of pension expense and the corresponding liability requires the use of a number of critical assumptions, including the expected long-term rate of return on plan assets and the assumed discount rate, as well as the recognition of actuarial gains and losses. Changes in these assumptions can result in different expense and liability amounts, and future actual experience can differ from these assumptions.

Share-Based Compensation

The Company has share-based compensation plans covering certain members of management and non-employee directors. The Company recognizes compensation expense for share-based payments based on the fair value of the awards as required by the Compensation — Stock Compensation Topic of the Codification. For the third quarters of Fiscal 2011 and 2010, share-based compensation expense was $0.1 million and $0.2 million, respectively. For the third quarters of Fiscal 2011 and 2010, restricted stock expense was $2.2 million and $1.9 million, respectively. For the first nine months of Fiscal 2011 and 2010, share-based compensation expense was $0.2 million and $0.4 million, respectively. For the first nine months of Fiscal 2011 and 2010, restricted stock expense was $5.8 million and $4.9 million, respectively. The benefits of tax deductions in excess of recognized compensation expense are reported as a financing cash flow.

The Company estimates the fair value of each option award on the date of grant using a Black-Scholes option pricing model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense, including expected stock price volatility. The Company bases expected volatility on historical stock prices for a period that is commensurate with the expected term estimate. The Company bases the risk free rate on an interest rate for a bond with a maturity commensurate with the expected term estimate. The Company estimates the expected term of stock options using historical exercise and employee termination experience. The Company does not currently pay a dividend on common stock. The fair value of employee restricted stock is determined based on the closing price of the Company’s stock on the date of the grant.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1

Summary of Significant Accounting Policies, Continued

In addition to the key assumptions used in the Black-Scholes model, the estimated forfeiture rate at the time of valuation (which is based on historical experience for similar options) is a critical assumption, as it reduces expense ratably over the vesting period. Share-based compensation expense is recorded based on a 2% expected forfeiture rate and is adjusted annually for actual forfeitures. The Company reviews the expected forfeiture rate annually to determine if that percent is still reasonable based on historical experience. The Company believes its estimates are reasonable in the context of actual (historical) experience.

The Company did not grant any stock options or issue employee restricted stock for the three months ended October 30, 2010 or October 31, 2009. The Company did not grant any stock options for the nine months ended October 30, 2010 or October 31, 2009. During the nine months ended October 30, 2010, the Company issued 404,995 shares of employee restricted stock at a grant date fair value of $28.41 per share which vest over a four-year term. During the nine months ended October 31, 2009, the Company issued 383,745 shares of employee restricted stock at a grant date fair value of $19.25 per share of which 359,096 shares vest over a four-year term and the remaining 24,649 shares vest over a three-year term. For the nine months ended October 30, 2010, the Company issued 17,838 shares of director restricted stock at a weighted average price of $30.27. For the nine months ended October 31, 2009, the Company issued 21,204 shares of director restricted stock at a weighted average price of $25.46. There was no director restricted stock issued for the three months ended October 30, 2010 or October 31, 2009. There was no director retainer stock issued for the three months and nine months ended October 30, 2010 or October 31, 2009.

Cash and Cash Equivalents

Included in cash and cash equivalents at October 30, 2010, January 30, 2010 and October 31, 2009 are cash equivalents of $0.1 million, $62.7 million and $6.0 million, respectively. Cash equivalents are highly-liquid financial instruments having an original maturity of three months or less. Uninsured cash balances were $13.9 million as of October 30, 2010. The majority of payments due from banks for customer credit card transactions process within 24 - 48 hours and are accordingly classified as cash and cash equivalents.

At October 30, 2010, January 30, 2010 and October 31, 2009 outstanding checks drawn on zero-balance accounts at certain domestic banks exceeded book cash balances at those banks by approximately $37.5 million, $31.9 million and $38.3 million, respectively. These amounts are included in accounts payable.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1

Summary of Significant Accounting Policies, Continued

Concentration of Credit Risk and Allowances on Accounts Receivable

The Company’s footwear wholesale businesses sell primarily to independent retailers and department stores across the United States. Receivables arising from these sales are not collateralized. Customer credit risk is affected by conditions or occurrences within the economy and the retail industry as well as by customer specific factors. One customer accounted for 12% and another customer accounted for 10% of the Company’s footwear trade receivables balance, while no other customer accounted for more than 9% of the Company’s footwear trade receivables balance as of October 30, 2010. The Company’s Lids Team Sports wholesale business sells primarily to coaches and players on college, high school and club teams and their fan bases. Including both footwear wholesale and Lids Team Sports receivables, one customer accounted for 7% of the Company’s total trade receivables balance as of October 30, 2010.

The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information, as well as customer specific factors. The Company also establishes allowances for sales returns, customer deductions and co-op advertising based on specific circumstances, historical trends and projected probable outcomes.

Property and Equipment

Property and equipment are recorded at cost and depreciated or amortized over the estimated useful life of related assets. Depreciation and amortization expense are computed principally by the straight-line method over the following estimated useful lives:

Buildings and building equipment		20-45 years
Computer hardware, software and equipment		3-10 years
Furniture and fixtures		10 years

Leases

Leasehold improvements and properties under capital leases are amortized on the straight-line method over the shorter of their useful lives or their related lease terms and the charge to earnings is included in selling and administrative expenses in the Condensed Consolidated Statements of Operations.

Certain leases include rent increases during the initial lease term. For these leases, the Company recognizes the related rental expense on a straight-line basis over the term of the lease (which includes any rent holidays and the pre-opening period of construction, renovation, fixturing and merchandise placement) and records the difference between the amounts charged to operations and amounts paid as deferred rent.

The Company occasionally receives reimbursements from landlords to be used towards construction of the store the Company intends to lease. Leasehold improvements are recorded at their gross costs including items reimbursed by landlords. The reimbursements are amortized as a reduction of rent expense over the initial lease term. Tenant allowances of $19.4 million, $22.1 million and $23.1 million at October 30, 2010, January 30, 2010 and October 31, 2009, respectively, and deferred rent of $32.7 million, $31.1 million and $30.8 million at October 30, 2010, January 30, 2010 and October 31, 2009, respectively, are included in deferred rent and other long-term liabilities on the Condensed Consolidated Balance Sheets.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1

Summary of Significant Accounting Policies, Continued

Goodwill and Other Intangibles

Under the provisions of the Intangibles — Goodwill and Other Topic of the Codification, goodwill and intangible assets with indefinite lives are not amortized, but are tested at least annually, during the fourth quarter, for impairment. The Company will update the tests between annual tests if events or circumstances occur that would more likely than not reduce the fair value of the business unit with which the goodwill is associated below its carrying amount. It is also required that intangible assets with finite lives be amortized over their respective lives to their estimated residual values, and reviewed for impairment in accordance with the Property, Plant and Equipment Topic of the Codification.

Intangible assets of the Company with indefinite lives are primarily goodwill and identifiable trademarks acquired in connection with the acquisition of Hat World Corporation in April 2004, Hat Shack, Inc. in January 2007 and Sports Avenue in October 2010. The Condensed Consolidated Balance Sheets include goodwill for the Lids Sports Group of $149.4 million and $0.9 million for Licensed Brands at October 30, 2010, $119.0 million for the Lids Sports Group at January 30, 2010 and $112.8 million for the Lids Sports Group at October 31, 2009. The Company tests for impairment of intangible assets with an indefinite life, at a minimum on an annual basis, relying on a number of factors including operating results, business plans, projected future cash flows and observable market data. The impairment test for identifiable assets not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying amount. The Company has not had an impairment charge for intangible assets.

Identifiable intangible assets of the Company with finite lives are primarily in-place leases, trademarks acquired in connection with the acquisition of Impact Sports in November 2008, Great Plains Sports in September 2009, Sports Fan-Attic in November 2009, Brand Innovators in May 2010, Keuka Footwear in August 2010, Anaconda Sports in August 2010 and Sports Avenue in October 2010, customer lists and non-compete agreements. They are subject to amortization based upon their estimated useful lives. Finite-lived intangible assets are evaluated for impairment using a process similar to that used to evaluate other definite-lived long-lived assets, a comparison of the fair value of the intangible asset with its carrying amount. An impairment loss is recognized for the amount by which the carrying value exceeds the fair value of the asset.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1

Summary of Significant Accounting Policies, Continued

Fair Value of Financial Instruments

The carrying amounts and fair values of the Company’s financial instruments at October 30, 2010 and January 30, 2010 are:

		October 30,								January 30,
In thousands		2010								2010
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Revolver Borrowings		$	30,400			$	29,876			$	-0-			$	-0-

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

The fair value of the Company’s long-term debt was based on a valuation using the Discounted Cash Flow method.

Cost of Sales

For the Company’s retail operations, the cost of sales includes actual product cost, the cost of transportation to the Company’s warehouses from suppliers and the cost of transportation from the Company’s warehouses to the stores. Additionally, the cost of its distribution facilities allocated to its retail operations is included in cost of sales.

For the Company’s wholesale operations, the cost of sales includes the actual product cost and the cost of transportation to the Company’s warehouses from suppliers.

Selling and Administrative Expenses

Selling and administrative expenses include all operating costs of the Company excluding (i) those related to the transportation of products from the supplier to the warehouse, (ii) for its retail operations, those related to the transportation of products from the warehouse to the store and (iii) costs of its distribution facilities which are allocated to its retail operations. Wholesale and unallocated retail costs of distribution are included in selling and administrative expenses in the amounts of $1.8 million and $1.1 million for the third quarter of Fiscal 2011 and 2010, respectively, and $4.2 million and $3.6 million for the first nine months of Fiscal 2011 and 2010, respectively.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1

Summary of Significant Accounting Policies, Continued

Gift Cards

The Company has a gift card program that began in calendar 1999 for its Lids Sports operations and calendar 2000 for its footwear operations. The gift cards issued to date do not expire. As such, the Company recognizes income when: (i) the gift card is redeemed by the customer; or (ii) the likelihood of the gift card being redeemed by the customer for the purchase of goods in the future is remote and there are no related escheat laws (referred to as “breakage”). The gift card breakage rate is based upon historical redemption patterns and income is recognized for unredeemed gift cards in proportion to those historical redemption patterns.

Gift card breakage is recognized in revenues each period. Gift card breakage recognized as revenue was less than $0.1 million for each of the third quarters of Fiscal 2011 and 2010, and $0.2 million and $0.4 million for the first nine months of Fiscal 2011 and 2010, respectively. The Condensed Consolidated Balance Sheets include an accrued liability for gift cards of $6.4 million, $7.9 million and $5.8 million at October 30, 2010, January 30, 2010 and October 31, 2009, respectively.

Buying, Merchandising and Occupancy Costs

The Company records buying, merchandising and occupancy costs in selling and administrative expense. Because the Company does not include these costs in cost of sales, the Company’s gross margin may not be comparable to other retailers that include these costs in the calculation of gross margin.

Shipping and Handling Costs

Shipping and handling costs related to inventory purchased from suppliers are included in the cost of inventory and are charged to cost of sales in the period that the inventory is sold. All other shipping and handling costs are charged to cost of sales in the period incurred except for wholesale and unallocated retail costs of distribution, which are included in selling and administrative expenses.

Preopening Costs

Costs associated with the opening of new stores are expensed as incurred, and are included in selling and administrative expenses on the accompanying Condensed Consolidated Statements of Operations.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1

Summary of Significant Accounting Policies, Continued

Store Closings and Exit Costs

From time to time, the Company makes strategic decisions to close stores or exit locations or activities. If stores or operating activities to be closed or exited constitute components, as defined by the Property, Plant and Equipment Topic of the Codification, and will not result in a migration of customers and cash flows, these closures will be considered discontinued operations when the related assets meet the criteria to be classified as held for sale, or at the cease-use date, whichever occurs first. The results of operations of discontinued operations are presented retroactively, net of tax, as a separate component on the Condensed Consolidated Statements of Operations, if material individually or cumulatively. To date, no store closings meeting the discontinued operations criteria have been material individually or cumulatively.

Assets related to planned store closures or other exit activities are reflected as assets held for sale and recorded at the lower of carrying value or fair value less costs to sell when the required criteria, as defined by the Property, Plant and Equipment Topic of the Codification, are satisfied. Depreciation ceases on the date that the held for sale criteria are met.

Assets related to planned store closures or other exit activities that do not meet the criteria to be classified as held for sale are evaluated for impairment in accordance with the Company’s normal impairment policy, but with consideration given to revised estimates of future cash flows. In any event, the remaining depreciable useful lives are evaluated and adjusted as necessary.

Exit costs related to anticipated lease termination costs, severance benefits and other expected charges are accrued for and recognized in accordance with the Exit or Disposal Cost Obligations Topic of the Codification.

Advertising Costs

Advertising costs are predominantly expensed as incurred. Advertising costs were $9.4 million and $8.6 million for the third quarter of Fiscal 2011 and 2010, respectively, and $24.6 million and $25.0 million for the first nine months of Fiscal 2011 and 2010, respectively. Direct response advertising costs for catalogs are capitalized in accordance with the Other Assets and Deferred Costs Topic for Capitalized Advertising Costs of the Codification. Such costs are amortized over the estimated future revenues realized from such advertising, not to exceed six months. The Condensed Consolidated Balance Sheets include prepaid assets for direct response advertising costs of $1.9 million, $1.3 million and $1.5 million at October 30, 2010, January 30, 2010 and October 31, 2009, respectively.

Consideration to Resellers

The Company does not have any written buy-down programs with retailers, but the Company has provided certain retailers with markdown allowances for obsolete and slow moving products that are in the retailer’s inventory. The Company estimates these allowances and provides for them as reductions to revenues at the time revenues are recorded. Markdowns are negotiated with retailers and changes are made to the estimates as agreements are reached. Actual amounts for markdowns have not differed materially from estimates.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1

Summary of Significant Accounting Policies, Continued

Cooperative Advertising

Cooperative advertising funds are made available to all of the Company’s wholesale footwear customers. In order for retailers to receive reimbursement under such programs, the retailer must meet specified advertising guidelines and provide appropriate documentation of expenses to be reimbursed. The Company’s cooperative advertising agreements require that wholesale customers present documentation or other evidence of specific advertisements or display materials used for the Company’s products by submitting the actual print advertisements presented in catalogs, newspaper inserts or other advertising circulars, or by permitting physical inspection of displays. Additionally, the Company’s cooperative advertising agreements require that the amount of reimbursement requested for such advertising or materials be supported by invoices or other evidence of the actual costs incurred by the retailer. The Company accounts for these cooperative advertising costs as selling and administrative expenses, in accordance with the Revenue Recognition Topic for Customer Payments and Incentives of the Codification.

Cooperative advertising costs recognized in selling and administrative expenses were $0.9 million and $0.7 million for the third quarter of Fiscal 2011 and 2010, respectively, and $2.7 million and $2.4 million for the first nine months of Fiscal 2011 and 2010, respectively. During the first nine months of Fiscal 2011 and 2010, the Company’s cooperative advertising reimbursements paid did not exceed the fair value of the benefits received under those agreements.

Vendor Allowances

From time to time, the Company negotiates allowances from its vendors for markdowns taken or expected to be taken. These markdowns are typically negotiated on specific merchandise and for specific amounts. These specific allowances are recognized as a reduction in cost of sales in the period in which the markdowns are taken. Markdown allowances not attached to specific inventory on hand or already sold are applied to concurrent or future purchases from each respective vendor.

The Company receives support from some of its vendors in the form of reimbursements for cooperative advertising and catalog costs for the launch and promotion of certain products. The reimbursements are agreed upon with vendors and represent specific, incremental, identifiable costs incurred by the Company in selling the vendor’s specific products. Such costs and the related reimbursements are accumulated and monitored on an individual vendor basis, pursuant to the respective cooperative advertising agreements with vendors. Such cooperative advertising reimbursements are recorded as a reduction of selling and administrative expenses in the same period in which the associated expense is incurred. If the amount of cash consideration received exceeds the costs being reimbursed, such excess amount would be recorded as a reduction of cost of sales.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1

Summary of Significant Accounting Policies, Continued

Vendor reimbursements of cooperative advertising costs recognized as a reduction of selling and administrative expenses were $0.7 million and $1.2 million for the third quarter of Fiscal 2011 and 2010, respectively, and $2.1 million and $3.3 million for the first nine months of Fiscal 2011 and 2010, respectively. During the third quarter of Fiscal 2011 and 2010, the Company’s cooperative advertising reimbursements received were not in excess of the costs incurred.

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.

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).

Other Comprehensive Income

The Comprehensive Income Topic of the Codification requires, among other things, the Company’s pension liability adjustment, postretirement liability adjustment, unrealized gains or losses on foreign currency forward contracts and foreign currency translation adjustments to be included in other comprehensive income net of tax. Accumulated other comprehensive loss at October 30, 2010 consisted of $28.9 million of cumulative pension liability adjustments, net of tax, offset by a foreign currency translation adjustment of $0.6 million.

Business Segments

The Segment Reporting Topic of the Codification requires that companies disclose “operating segments” based on the way management disaggregates the Company’s operations for making internal operating decisions (see Note 9).

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1

Summary of Significant Accounting Policies, Continued

Derivative Instruments and Hedging Activities

The Derivatives and Hedging Topic of the Codification requires an entity to recognize all derivatives as either assets or liabilities in the condensed 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. The Company has entered into a small amount of foreign currency forward exchange contracts in order to reduce exposure to foreign currency exchange rate fluctuations in connection with inventory purchase commitments for its Johnston & Murphy Group. Derivative instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged. The settlement terms of the forward contracts correspond with the expected payment terms for the merchandise inventories. As a result, there is no hedge ineffectiveness to be reflected in earnings.

The notional amounts of such contracts outstanding at October 30, 2010 and January 30, 2010 were $1.4 million and $0.6 million, respectively. Forward exchange contracts have an average remaining term of approximately three months. The gain based on spot rates under these contracts at October 30, 2010 was $0.1 million. For the nine months ended October 30, 2010, the Company recorded an unrealized gain on foreign currency forward contracts of $0.3 million in accumulated other comprehensive loss, before taxes. The Company monitors the credit quality of the major national and regional financial institutions with which it enters into such contracts.

The Company estimates that the majority of net hedging gains related to forward exchange contracts will be reclassified from accumulated other comprehensive loss into earnings through lower cost of sales over the succeeding year.

Note 2

Acquisitions and Intangible Assets

Acquisitions

In the third quarter of Fiscal 2011, the Company completed acquisitions for a total purchase price of $56.7 million. The acquisitions consisted primarily of the assets of Anaconda Sports, Inc., a New York team dealer business, as part of the Lids Sports Group, the stock of Keuka Footwear, Inc., an occupational footwear company for service based industries, to be operated within the Licensed Brands segment and the assets of Sports Avenue, a 48 store retail chain with 12 e-commerce sites, selling officially licensed NFL, NCAA, MLB, NBA, NHL and NASCAR headwear, apparel and accessories, to be operated within the Lids Sports Group.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 2

Acquisitions and Intangible Assets, Continued

Other intangibles by major classes were as follows:

																		Non-Compete
		Leases								Customer Lists								Agreements/Backlog								Total
		Oct. 30,				Jan. 30,				Oct. 30,				Jan. 30,				Oct. 30,				Jan. 30,				Oct. 30,				Jan. 30,
(In Thousands)		2010				2010				2010				2010				2010				2010				2010				2010
Gross other intangibles		$	9,857			$	9,267			$	12,206			$	2,790			$	1,100			$	408			$	23,163			$	12,465
Accumulated amortization			(8,349	)			(8,074	)			(1,091	)			(461	)			(544	)			(260	)			(9,984	)			(8,795	)
Net Other Intangibles		$	1,508			$	1,193			$	11,115			$	2,329			$	556			$	148			$	13,179			$	3,670

The amortization of intangibles was $0.5 million and $0.2 million for the third quarter of Fiscal 2011 and 2010, respectively, and $1.2 million and $0.6 million for the first nine months of Fiscal 2011 and 2010, respectively. The amortization of intangibles will be $2.2 million, $2.8 million, $2.5 million, $2.4 million and $2.1 million for Fiscal 2011, 2012, 2013, 2014 and 2015, respectively.

Note 3

Restructuring and Other Charges and Discontinued Operations

Restructuring and Other Charges

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

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

The Company recorded a pretax charge to earnings of $2.1 million in the third quarter of Fiscal 2011 for asset impairments. The Company recorded a pretax charge to earnings of $6.6 million in the first nine months of Fiscal 2011, including $6.4 million in asset impairments and $0.2 million for other legal matters.

The Company recorded a pretax charge to earnings of $2.6 million in the third quarter of Fiscal 2010 for asset impairments. The Company recorded a pretax charge to earnings of $10.9 million in the first nine months of Fiscal 2010, including $10.5 million in asset impairments, $0.3 million for other legal matters and $0.1 million for lease terminations.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 3

Restructuring and Other Charges and Discontinued Operations, Continued

Discontinued Operations

For the nine months ended October 30, 2010 and October 31, 2009, the Company recorded an additional charge to earnings of $1.3 million ($0.8 million net of tax) and $0.5 million ($0.3 million net of tax), respectively, reflected in provision for discontinued operations, net on the Condensed Consolidated Statements of Operations primarily for anticipated costs of environmental remedial alternatives related to facilities formerly operated by the Company.

Accrued Provision for Discontinued Operations

		Facility
		Shutdown
In thousands		Costs
Balance January 31, 2009		$	15,568
Additional provision Fiscal 2010			452
Charges and adjustments, net			(606	)
Balance January 30, 2010			15,414
Additional provision Fiscal 2011			1,295
Charges and adjustments, net			(473	)
Balance October 30, 2010*			16,236
Current provision for discontinued operations			11,642
Total Noncurrent Provision for Discontinued Operations		$	4,594

Note 4

Inventories

		October 30,				January 30,
In thousands		2010				2010
Raw materials		$	12,763			$	5,415
Wholesale finished goods			40,201				22,383
Retail merchandise			397,938				263,176
Total Inventories		$	450,902			$	290,974

Note 5

Fair Value

The Company adopted the Fair Value Measurements and Disclosures Topic of the Codification as of February 3, 2008, with the exception of the application of the topic to non-recurring, nonfinancial assets and liabilities. The adoption did not have a material impact on the Company’s results of operations or financial position. This Topic defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. In February 2008, the FASB issued an amendment to the Fair Value Topic, to delay the effective date for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually). The Company adopted the amendment as of February 1, 2009.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 5

Fair Value, Continued

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

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

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

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

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

The following table presents the Company’s assets and liabilities measured at fair value on a nonrecurring basis as of October 30, 2010 aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):

		Long-Lived Assets																Total
		Held and Used				Level 1				Level 2				Level 3				Losses
Measured as of May 1, 2010		$	1,789			$	—			$	—			$	1,789			$	2,351
Measured as of July 31, 2010		$	999			$	—			$	—			$	999			$	1,934
Measured as of October 30, 2010		$	1,689			$	—			$	—			$	1,689			$	2,120

In accordance with the Property, Plant and Equipment Topic of the Codification, the Company recorded $2.1 million and $6.4 million of impairment charges as a result of the fair value measurement of its long-lived assets held and used on a nonrecurring basis during the three months and nine months ended October 30, 2010. These charges are reflected in restructuring and other, net on the Condensed Consolidated Statements of Operations.

The Company used a discounted cash flow model to estimate the fair value of these long-lived assets at October 30, 2010. Discount rate and growth rate assumptions are derived from current economic conditions, expectations of management and projected trends of current operating results. As a result, the Company has determined that the majority of the inputs used to value its long-lived assets held and used are unobservable inputs that fall within Level 3 of the fair value hierarchy.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 6

Defined Benefit Pension Plans and Other Benefit Plans

Components of Net Periodic Benefit Cost

		Pension Benefits								Other Benefits
		Three Months Ended								Three Months Ended
		October 30,				October 31,				October 30,				October 31,
In thousands		2010				2009				2010				2009
Service cost		$	62			$	62			$	37			$	37
Interest cost			1,471				1,642				41				44
Expected return on plan assets			(2,021	)			(2,087	)			-0-				-0-
Amortization:
Prior service cost			1				1				-0-				-0-
Losses			1,035				384				14				17
Net amortization			1,036				385				14				17
Net Periodic Benefit Cost		$	548			$	2			$	92			$	98

		Pension Benefits								Other Benefits
		Nine Months Ended								Nine Months Ended
		October 30,				October 31,				October 30,				October 31,
In thousands		2010				2009				2010				2009
Service cost		$	187			$	188			$	113			$	111
Interest cost			4,426				4,920				121				132
Expected return on plan assets			(6,067	)			(6,266	)			-0-				-0-
Amortization:
Prior service cost			3				3				-0-				-0-
Losses			3,200				1,366				41				51
Net amortization			3,203				1,369				41				51
Net Periodic Benefit Cost		$	1,749			$	211			$	275			$	294

While there was no cash requirement for the Plan in 2010, the Company made a $4.0 million contribution to the Plan in February 2010 and a $0.2 million contribution to the Plan in August 2010.

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 7

Earnings Per Share from Continuing Operations

		For the Three Months Ended												For the Three Months Ended
		October 30, 2010												October 31, 2009
(In thousands, except		Income				Shares				Per-Share				Income				Shares				Per-Share
per share amounts)		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
Earnings from continuing operations		$	16,967											$	11,523
Less: Preferred stock dividends			(49	)											(49	)
Basic EPS from continuing operations
Income available to common shareholders			16,918				23,069			$	.73				11,474				21,952			$	.52
Effect of Dilutive Securities from continuing operations
Options							389												252
Convertible preferred stock(1)			34				54								-0-				-0-
4 1/8% Convertible Subordinated Debentures(2)			-0-				-0-								386				1,486
Employees’ preferred stock(3)							50												51
Diluted EPS
Income available to common shareholders plus assumed conversions		$	16,952				23,562			$	.72			$	11,860				23,741			$	.50

(1)		The amount of the dividend on the convertible preferred stock per common share obtainable on conversion of the convertible preferred stock was higher than basic earnings per share for Series 4 preferred stock for the three months ended October 30, 2010 and for Series 1, 3 and 4 preferred stocks for the three months ended October 31, 2009. Therefore, conversion of these convertible preferred shares was not reflected in diluted earnings per share, because it would have been antidilutive. The amount of the dividend on the convertible preferred stock per common share obtainable on conversion of the convertible preferred stock was less than basic earnings per share for Series 1 and 3 preferred shares for the three months ended October 30, 2010. Therefore, conversion of Series 1 and 3 preferred shares was included in diluted earnings per share for the three months ended October 30, 2010. The shares convertible to common stock for Series 1, 3 and 4 preferred stock would have been 27,913, 25,606 and 5,423, respectively, as of October 30, 2010.
(2)		There were no outstanding debentures for the three months ended October 30, 2010. The amount of the interest on the convertible subordinated debentures for the three months ended October 31, 2009 per common share obtainable on conversion was lower than basic earnings per share, therefore the convertible debentures are reflected in diluted earnings per share for the three months ended October 31, 2009.
(3)		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 for the three months ended October 30, 2010 and October 31, 2009.

Genesco Inc.
and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements

Earnings Per Share from Continuing Operations, Continued

		For the Nine Months Ended												For the Nine Months Ended
		October 30, 2010												October 31, 2009
(In thousands, except		Income				Shares				Per-Share				Income				Shares				Per-Share
per share amounts)		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
Earnings from continuing operations		$	23,134											$	3,257
Less: Preferred stock dividends			(148	)											(148	)
Basic EPS from continuing operations
Income available to common shareholders			22,986				23,337			$	.98				3,109				20,868			$	.15
Effect of Dilutive Securities from continuing operations
Options							383												167
Convertible preferred stock(1)			-0-				-0-								-0-				-0-
4 1/8% Convertible Subordinated Debentures(2)			-0-				-0-								-0-				-0-
Employees’ preferred stock(3)							50												51
Diluted EPS
Income available to common shareholders plus assumed conversions		$	22,986				23,770			$	.97			$	3,109				21,086			$	.15

(1)		The amount of the dividend on the convertible preferred stock per common share obtainable on conversion of the convertible preferred stock was higher than basic earnings per share for all periods presented. Therefore, conversion of the convertible preferred stock was 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 27,913, 25,606 and 5,423, respectively, as of October 30, 2010.
(2)		There were no outstanding debentures for the nine months ended October 30, 2010. The amount of the interest on the convertible subordinated debentures for the nine months ended October 31, 2009 per common share obtainable on conversion is higher than basic earnings per share, therefore the convertible debentures are not reflected in diluted earnings per share for the nine months ended October 31, 2009 because it would have been antidilutive.
(3)		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 for the nine months ended October 30, 2010 and October 31, 2009.

During the first quarter this year, the board increased the total repurchase authorization under its common stock repurchase plan to $35.0 million. The board restored the total repurchase authorization in the third quarter this year to $35.0 million. The Company repurchased 864,000 shares at a cost of $24.8 million during the first nine months ended October 30, 2010 of which $1.1 million was not paid in the third quarter but included in other accrued liabilities in the Condensed Consolidated Balance Sheets. All of the $24.8 million in repurchases for the nine months this year, except $0.6 million, was repurchased under the original $35.0 million authorization. The Company did not repurchase any shares during the first nine months ended October 31, 2009. In total, the Company has repurchased 13.1 million shares at a cost of $221.1 million from all authorizations as of October 30, 2010.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 8

Legal Proceedings

Environmental Matters

New York State Environmental Matters

In August 1997, the New York State Department of Environmental Conservation (“NYSDEC”) 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 remedial measure (“IRM”) with regard to the site of a knitting mill operated by a former subsidiary of the Company from 1965 to 1969. The Company undertook the IRM and RIFS voluntarily, without admitting liability or accepting responsibility for any future remediation of the site. The Company has completed the IRM and the RIFS. In the course of preparing the RIFS, the Company identified remedial alternatives with estimated undiscounted costs ranging from $-0- to $24.0 million, excluding amounts previously expended or provided for by the Company. The United States Environmental Protection Agency (“EPA”), which has assumed primary regulatory responsibility for the site from NYSDEC, issued a Record of Decision in September 2007. The Record of Decision requires a remedy of a combination of groundwater extraction and treatment and in-site chemical oxidation at an estimated present worth of approximately $10.7 million.

In July 2009, the Company agreed to a Consent Order with the EPA requiring the Company to perform certain remediation actions, operations, maintenance and monitoring at the site. In September 2009, a Consent Judgment embodying the Consent Order was filed in the U.S. District Court for the Eastern District of New York.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 8

Legal Proceedings, Continued

The Village of Garden City, New York, has asserted that the Company is liable for the costs associated with enhanced treatment required by the impact of the groundwater plume from the site on two public water supply wells, including historical costs ranging from approximately $1.8 million to in excess of $2.5 million, and future operation and maintenance costs which the Village estimates at $126,400 annually while the enhanced treatment continues. On December 14, 2007, the Village filed a complaint against the Company and the owner of the property under the Resource Conservation and Recovery Act (“RCRA”), the Safe Drinking Water Act, and the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) as well as a number of state law theories in the U.S. District Court for the Eastern District of New York, seeking an injunction requiring the defendants to remediate contamination from the site and to establish their liability for future costs that may be incurred in connection with it, which the complaint alleges could exceed $41 million over a 70-year period. The Company has not verified the estimates of either historic or future costs asserted by the Village, but believes that an estimate of future costs based on a 70-year remediation period is unreasonable given the expected remedial period reflected in the EPA’s Record of Decision. On May 23, 2008, the Company filed a motion to dismiss the Village’s complaint on grounds including applicable statutes of limitation and preemption of certain claims by the NYSDEC’s and the EPA’s diligent prosecution of remediation. On January 27, 2009, the Court granted the motion to dismiss all counts of the plaintiff’s complaint except for the CERCLA claim and a state law claim for indemnity for costs incurred after November 27, 2000. On September 23, 2009, on a motion for reconsideration by the Village, the Court reinstated the claims for injunctive relief under RCRA and for equitable relief under certain of the state law theories.

In December 2005, the EPA notified the Company that it considers the Company a potentially responsible party (“PRP”) with respect to contamination at two Superfund sites in upstate New York. The sites were used as landfills for process wastes generated by a glue manufacturer, which acquired tannery wastes from several tanners, allegedly including the Company’s Whitehall tannery, for use as raw materials in the gluemaking process. The Company has no records indicating that it ever provided raw materials to the gluemaking operation and has not been able to establish whether the EPA’s substantive allegations are accurate. The Company, together with other tannery PRPs, has entered into cost sharing agreements and Consent Decrees with the EPA with respect to both sites. Based upon the current estimates of the cost of remediation, the Company’s share is expected to be less than $250,000 in total for the two sites. While there is no assurance that the Company’s share of the actual cost of remediation will not exceed the estimate, the Company does not presently expect that its aggregate exposure with respect to these two landfill sites will have a material adverse effect on its financial condition or results of operations.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 8

Legal Proceedings, Continued

Whitehall Environmental Matters

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

In October 2010, the Company and the Michigan Department of Natural Resources and Environment entered into a Consent Decree providing for implementation of a remedial Work Plan for the facility site designed to bring the site into compliance with applicable regulatory standards. The Company estimates the cost of implementing the Work Plan at approximately $4.6 million. There can be no assurance that remediation costs will not exceed the estimate.

Accrual for Environmental Contingencies

Related to all outstanding environmental contingencies, the Company had accrued $16.7 million as of October 30, 2010, $15.9 million as of January 30, 2010 and $16.1 million as of October 31, 2009. All such provisions reflect the Company’s estimates of the most likely cost (undiscounted, including both current and noncurrent portions) of resolving the contingencies, based on facts and circumstances as of the time they were made. There is no assurance that relevant facts and circumstances will not change, necessitating future changes to the provisions. Such contingent liabilities are included in the liability arising from provision for discontinued operations on the accompanying Condensed Consolidated Balance Sheets. The Company has made pretax accruals for certain of these contingencies, including approximately $0.3 million in each of the third quarters of Fiscal 2011 and 2010 and $1.9 million and $0.8 million reflected in the first nine months of Fiscal 2011 and 2010, respectively. These charges are included in provision for discontinued operations, net in the Condensed Consolidated Statements of Operations.

Patent Action

The Company was named as a defendant in Paul Ware and Financial Systems Innovation, L.L.C. v. Abercrombie & Fitch Stores, Inc., et al., filed on June 19, 2007, in the United States District Court for the Northern District of Georgia, against more than 100 retailers. The suit alleged that the defendants had infringed U.S. Patent No. 4,707,592 by using a feature of their retail point of sale registers to generate transaction numbers for credit card purchases. On November 19, 2010, the plaintiffs and the Company entered into a stipulation of Joint Dismissal with Prejudice of all Claims and Counterclaims between them.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 8

Legal Proceedings, Continued

Other Matters

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

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements