GENESCO INC - Quarter Report: 2011 July (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 1-3083

Genesco Inc.

(Exact name of registrant as specified in its charter)

Tennessee Corporation		62-0211340
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
Genesco Park, 1415 Murfreesboro Road
Nashville, Tennessee		37217-2895
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (615) 367-7000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232-405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer; an accelerated filer; a non-accelerated filer; or a smaller reporting company. See definitions of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one:)

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if smaller reporting company.)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes o No þ

As of September 2, 2011, 24,180,553 shares of the registrant’s common stock were outstanding.

 

 

INDEX

		Page
Part I. Financial Information
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets — July 30, 2011, January 29, 2011 and July 31, 2010			3
Condensed Consolidated Statements of Operations — Three Months and Six Months Ended July 30, 2011 and July 31, 2010			5
Condensed Consolidated Statements of Cash Flows — Three Months and Six Months Ended July 30, 2011 and July 31, 2010			6
Condensed Consolidated Statements of Equity — Year Ended January 29, 2011 and Six Months Ended July 30, 2011			7
Notes to Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			43
Item 3. Quantitative and Qualitative Disclosures About Market Risk			61
Item 4. Controls and Procedures			61
Part II. Other Information
Item 1. Legal Proceedings			62
Item 1A. Risk Factors			62
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			63
Item 4. Removed and Reserved			63
Item 6. Exhibits			63
Signature			64
EX-10.A
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)
Genesco Inc.
and Subsidiaries

Condensed Consolidated Balance Sheets
(In Thousands, except share amounts)

		July 30,				January 29,				July 31
Assets		2011				2011				2010
Current Assets
Cash and cash equivalents		$	35,582			$	55,934			$	49,037
Accounts receivable, net of allowances of $4,876 at July 30, 2011, $3,301 at January 29, 2011 and $3,501 at July 31, 2010			43,305				44,512				31,005
Inventories			474,951				359,736				377,380
Deferred income taxes			20,357				19,130				17,824
Prepaids and other current assets			60,689				33,743				42,314
Total current assets			634,884				513,055				517,560
Property and equipment:
Land			6,172				4,863				4,863
Buildings and building equipment			20,787				17,992				17,992
Computer hardware, software and equipment			107,010				92,929				89,779
Furniture and fixtures			120,786				105,056				102,251
Construction in progress			9,175				9,109				3,264
Improvements to leased property			292,944				279,295				275,888
Property and equipment, at cost			556,874				509,244				494,037
Accumulated depreciation			(327,557	)			(310,553	)			(293,270	)
Property and equipment, net			229,317				198,691				200,767
Deferred income taxes			17,560				19,036				14,255
Goodwill			259,174				153,301				126,563
Trademarks, net of accumulated amortization of $1,712 at July 30, 2011, $1,151 at January 29, 2011 and $620 at July 31, 2010			79,891				52,486				52,716
Other intangibles, net of accumulated amortization of $11,857 at July 30, 2011, $10,565 at January 29, 2011 and $9,439 at July 31, 2010			16,980				12,578				9,518
Other noncurrent assets			23,075				11,935				8,155
Total Assets		$	1,260,881			$	961,082			$	929,534

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

		July 30,				January 29,				July 31,
Liabilities and Equity		2011				2011				2010
Current Liabilities
Accounts payable		$	197,653			$	117,001			$	165,466
Accrued employee compensation			41,804				38,188				20,108
Accrued other taxes			18,361				17,289				12,842
Current portion — long-term debt			5,113				-0-				-0-
Accrued income taxes			2,870				13,259				-0-
Other accrued liabilities			49,353				38,177				33,750
Provision for discontinued operations			9,308				10,449				11,935
Total current liabilities			324,462				234,363				244,101
Long-term debt			159,406				-0-				-0-
Pension liability			13,143				11,906				17,651
Deferred rent and other long-term liabilities			106,391				83,406				84,214
Provision for discontinued operations			4,363				4,586				4,254
Total liabilities			607,765				334,261				350,220
Commitments and contingent liabilities
Equity
Non-redeemable preferred stock			5,160				5,183				5,197
Common equity:
Common stock, $1 par value:
Authorized: 80,000,000 shares Issued/Outstanding:
July 30, 2011 — 24,651,206/24,162,742 January 29, 2011 — 24,162,634/23,674,170 July 31, 2010 — 24,541,982/24,053,518			24,651				24,163				24,542
Additional paid-in capital			141,440				131,910				138,280
Retained earnings			519,527				505,224				457,545
Accumulated other comprehensive loss			(22,272	)			(24,305	)			(28,393	)
Treasury shares, at cost			(17,857	)			(17,857	)			(17,857	)
Total Genesco equity			650,649				624,318				579,314
Noncontrolling interest — non-redeemable			2,467				2,503				-0-
Total equity			653,116				626,821				579,314
Total Liabilities and Equity		$	1,260,881			$	961,082			$	929,534

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								Six Months Ended
		July 30,				July 31,				July 30,				July 31,
		2011				2010				2011				2010
Net sales		$	470,591			$	363,654			$	952,093			$	764,507
Cost of sales			233,307				179,610				467,267				372,392
Selling and administrative expenses			235,286				185,465				456,059				376,542
Restructuring and other, net			347				2,001				1,591				4,444
Earnings (loss) from operations			1,651				(3,422	)			27,176				11,129
Interest expense, net
Interest expense			1,097				231				1,613				467
Interest income			(16	)			(4	)			(18	)			(5	)
Total interest expense, net			1,081				227				1,595				462
Earnings (loss) from continuing operations before income taxes			570				(3,649	)			25,581				10,667
Income tax expense (benefit)			220				(1,253	)			10,256				4,500
Earnings (loss) from continuing operations			350				(2,396	)			15,325				6,167
Provision for discontinued operations, net			(742	)			(787	)			(924	)			(734	)
Net (Loss) Earnings		$	(392	)		$	(3,183	)		$	14,401			$	5,433
Basic earnings (loss) per common share:
Continuing operations		$	.01			$	(.10	)		$	.66			$	.26
Discontinued operations		$	(.03	)		$	(.04	)		$	(.04	)		$	(.03	)
Net (loss) earnings		$	(.02	)		$	(.14	)		$	.62			$	.23
Diluted earnings (loss) per common share:
Continuing operations		$	.01			$	(.10	)		$	.65			$	.25
Discontinued operations		$	(.03	)		$	(.04	)		$	(.04	)		$	(.03	)
Net (loss) earnings		$	(.02	)		$	(.14	)		$	.61			$	.22

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								Six Months Ended
		July 30,				July 31,				July 30,				July 31,
		2011				2010				2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings		$	(392	)		$	(3,183	)		$	14,401			$	5,433
Tax benefit of stock options exercised			(3,558	)			-0-				(3,558	)			-0-
Adjustments to reconcile net (loss) earnings to net cash provided by (used in) operating activities:
Depreciation and amortization			13,002				11,625				25,204				23,518
Amortization of deferred note expense and debt discount			165				104				311				208
Deferred income taxes			1,531				163				318				(547	)
Provision for losses on accounts receivable			435				7				676				305
Impairment of long-lived assets			313				1,934				1,060				4,290
Restricted stock and share-based compensation			1,641				2,004				3,237				3,715
Provision for discontinued operations			1,224				1,301				1,524				1,213
Other			240				626				589				972
Effect on cash from changes in working capital and other assets and liabilities:
Accounts receivable			5,085				(136	)			5,498				(2,717	)
Inventories			(69,738	)			(79,832	)			(81,804	)			(84,373	)
Prepaids and other current assets			(17,884	)			(8,481	)			(18,473	)			(9,814	)
Accounts payable			53,567				53,361				67,279				72,681
Other accrued liabilities			(6,018	)			(3,425	)			(25,746	)			872
Other assets and liabilities			(9,791	)			(2,397	)			(8,696	)			(6,183	)
Net cash (used in) provided by operating activities			(30,178	)			(26,329	)			(18,180	)			9,573
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures			(13,616	)			(5,320	)			(23,213	)			(11,860	)
Acquisitions, net of cash acquired			(87,402	)			(11,809	)			(87,402	)			(15,254	)
Proceeds from assets sales			23				-0-				23				2
Net cash used in investing activities			(100,995	)			(17,129	)			(110,592	)			(27,112	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital leases			-0-				(19	)			(21	)			(60	)
Payments of long-term debt			(16,074	)			(1,018	)			(16,074	)			(1,018	)
Tax benefit of stock options exercised			3,558				-0-				3,558				-0-
Shares repurchased			-0-				(9,616	)			-0-				(11,691	)
Change in overdraft balances			455				(2,422	)			(2,823	)			(3,278	)
Borrowings under revolving credit facility			151,000				-0-				151,000				-0-
Payments on revolving credit facility			(33,519	)			-0-				(33,519	)			-0-
Dividends paid on non-redeemable preferred stock			(49	)			(49	)			(98	)			(98	)
Exercise of stock options			5,470				220				7,309				573
Deferred financing costs			(846	)			-0-				(912	)			-0-
Net cash provided by (used in) financing activities			109,995				(12,904	)			108,420				(15,572	)
Net decrease in cash and cash equivalents			(21,178	)			(56,362	)			(20,352	)			(33,111	)
Cash and cash equivalents at beginning of period			56,760				105,399				55,934				82,148
Cash and cash equivalents at end of period		$	35,582			$	49,037			$	35,582			$	49,037
Supplemental Cash Flow Information:
Net cash paid for:
Interest		$	1,539			$	122			$	1,824			$	249
Income taxes			26,439				12,707				38,573				13,167

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

Genesco Inc.
and Subsidiaries

Condensed Consolidated Statements of Equity
In Thousands

																										Non
																										Control-
																		Accum								ling
		Total																Other								Interest
		Non-Redeemable								Additional								Compre-								Non-				Compre-
		Preferred				Common				Paid-In				Retained				hensive				Treasury				Redeem-				hensive				Total
		Stock				Stock				Capital				Earnings				Loss				Stock				able				Income				Equity
Balance January 30, 2010		$	5,220			$	24,563			$	146,981			$	452,210			$	(28,804	)		$	(17,857	)		$	-0-							$	582,313
Net earnings			-0-				-0-				-0-				53,211				-0-				-0-				-0-			$	53,211				53,211
Dividends paid on non-redeemable preferred stock			-0-				-0-				-0-				(197	)			-0-				-0-				-0-				-0-				(197	)
Exercise of stock options			-0-				118				2,105				-0-				-0-				-0-				-0-				-0-				2,223
Issue shares — Employee Stock Purchase Plan			-0-				4				116				-0-				-0-				-0-				-0-				-0-				120
Employee and non-employee restricted stock			-0-				-0-				7,796				-0-				-0-				-0-				-0-				-0-				7,796
Share-based compensation			-0-				-0-				210				-0-				-0-				-0-				-0-				-0-				210
Restricted stock issuance			-0-				423				(423	)			-0-				-0-				-0-				-0-				-0-				-0-
Restricted shares withheld for taxes			-0-				(82	)			(2,293	)			-0-				-0-				-0-				-0-				-0-				(2,375	)
Tax benefit of stock options and restricted stock exercised			-0-				-0-				1,342				-0-				-0-				-0-				-0-				-0-				1,342
Shares repurchased			-0-				(864	)			(23,961	)			-0-				-0-				-0-				-0-				-0-				(24,825	)
Gain on foreign currency forward contracts (net of tax of $0.1 million)			-0-				-0-				-0-				-0-				166				-0-				-0-				166				166
Pension liability adjustment (net of tax of $2.7 million)			-0-				-0-				-0-				-0-				3,921				-0-				-0-				3,921				3,921
Postretirement liability adjustment (net of tax benefit of $0.1 million)			-0-				-0-				-0-				-0-				(131	)			-0-				-0-				(131	)			(131	)
Foreign currency translation adjustment			-0-				-0-				-0-				-0-				543				-0-				-0-				543				543
Other			(37	)			1				37				-0-				-0-				-0-				-0-				-0-				1
Noncontrolling interest — non-redeemable			-0-				-0-				-0-				-0-				-0-				-0-				2,503				-0-				2,503
Comprehensive income																														$	57,710
Balance January 29, 2011			5,183				24,163				131,910				505,224				(24,305	)			(17,857	)			2,503								626,821
Net earnings			-0-				-0-				-0-				14,401				-0-				-0-				-0-			$	14,401				14,401
Dividends paid on non-redeemable preferred stock			-0-				-0-				-0-				(98	)			-0-				-0-				-0-				-0-				(98	)
Exercise of stock options			-0-				283				7,026				-0-				-0-				-0-				-0-				-0-				7,309
Employee and non-employee restricted stock			-0-				-0-				3,236				-0-				-0-				-0-				-0-				-0-				3,236
Share-based compensation			-0-				-0-				1				-0-				-0-				-0-				-0-				-0-				1
Restricted stock issuance			-0-				304				(304	)			-0-				-0-				-0-				-0-				-0-				-0-
Restricted shares withheld for taxes			-0-				(90	)			(3,861	)			-0-				-0-				-0-				-0-				-0-				(3,951	)
Tax benefit of stock options and restricted stock exercised			-0-				-0-				3,399				-0-				-0-				-0-				-0-				-0-				3,399
Gain on foreign currency forward contracts (net of tax of $0.0 million)			-0-				-0-				-0-				-0-				63				-0-				-0-				63				63
Foreign currency translation adjustment			-0-				-0-				-0-				-0-				1,970				-0-				-0-				1,970				1,970
Other			(23	)			(9	)			33				-0-				-0-				-0-				-0-				-0-				1
Noncontrolling interest — earnings (loss)			-0-				-0-				-0-				-0-				-0-				-0-				(36	)			-0-				(36	)
Comprehensive income*																														$	16,434
Balance July 30, 2011		$	5,160			$	24,651			$	141,440			$	519,527			$	(22,272	)		$	(17,857	)		$	2,467							$	653,116

*		Comprehensive income (loss) was $1.0 million and $(3.2) million for the second quarter ended July 30, 2011 and July 31, 2010, respectively. Comprehensive income was $5.8 million for the six months ended July 31, 2010.

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 28, 2012 (“Fiscal 2012”) and of the fiscal year ended January 29, 2011 (“Fiscal 2011”). 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 and under the newly acquired Schuh banner in the United Kingdom and the Republic of Ireland; through e-commerce websites including journeys.com, journeyskidz.com, shibyjourneys.com, undergroundstation.com, schuh.co.uk 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 accessory stores in the U.S. and Canada primarily under the Lids, Hat World and Hat Shack 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; certain e-commerce operations and an athletic team dealer business operating as Lids Team Sports. Including both the footwear businesses and the Lids Sports business, at July 30, 2011, the Company operated 2,380 retail stores in the U.S., Puerto Rico, Canada, United Kingdom and the Republic of Ireland.

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. In the three months and six months ended July 31, 2010 Condensed Consolidated Statements of Cash Flows, amortization of intangibles totaling approximately $0.5 million and $0.7 million, respectively, were reclassified from other to depreciation and amortization under adjustments to reconcile net (loss) earnings to net cash provided by operating activities. Certain expenses previously allocated to the corporate segment have been reallocated to operating segments beginning in Fiscal 2012. Segment operating income (loss) for the three months and six months ended July 31, 2010 has been restated by operating segment totaling $1.5 million and $3.0 million, respectively, with an offsetting increase to corporate and other operating income to conform to the current year presentation (See Note 10).

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1

Summary of Significant Accounting Policies, Continued

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.

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, its Schuh Group segment and its Lids Sports Group wholesale operations, except for the Anaconda Sports operation, cost is determined using the first-in, first-out (“FIFO”) method. Market value 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 value based on current selling prices or when the inventory is not turning and is not expected to turn at levels satisfactory to the Company.

The Lids Sports retail segment and its Anaconda Sports wholesale division employ the moving average cost method for valuing inventories and apply 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.

In its retail operations, other than the Schuh and Lids Sports segments, 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.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1

Summary of Significant Accounting Policies, Continued

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.

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.

Impairment of Long-Lived Assets

The Company periodically reviews the carrying value 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.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1

Summary of Significant Accounting Policies, Continued

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.

Environmental and Other Contingencies

The Company is subject to certain loss contingencies related to environmental proceedings and other legal matters, including those disclosed in Note 9. The Company has made pretax accruals for certain of these contingencies, including approximately $1.2 million in each of the second quarters of Fiscal 2012 and 2011, and $1.6 million for the each of the first six months of Fiscal 2012 and 2011. 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.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1

Summary of Significant Accounting Policies, Continued

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 estimated 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.

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 Accounting Standards Codification (“Codification”). This methodology 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 at least 1,000 hours of service in calendar year 2004, except employees in the Lids Sports and Schuh Group segments, 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. There was no share-based compensation for the second quarter and first six months of Fiscal 2012. For the second quarter of Fiscal 2011, share-based compensation expense was less than $0.1 million. The Company has not issued any new share-based compensation awards since the first quarter of Fiscal 2008. For the second quarters of Fiscal 2012 and 2011, restricted stock expense was $1.6 million and $2.0 million, respectively. For the first six months of Fiscal 2012 and 2011, share-based compensation expense was less than $1,000 and $0.1 million, respectively. For the first six months of Fiscal 2012 and 2011, restricted stock expense was $3.2 million and $3.6 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 for the three months and six months ended July 30, 2011 or July 31, 2010. During the three months and six months ended July 30, 2011, the Company issued 289,407 shares of employee restricted stock at a grant date fair value of $45.14 per share which vest over a four-year term. For the three months and six months ended July 30, 2011, the Company issued 14,643 shares of director restricted stock at a weighted average price of $43.01 which vest on the first anniversary of the grant date. During the three months and six months ended July 31, 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. For the three months and six months ended July 31, 2010, the Company issued 17,838 shares of director restricted stock at a weighted average price of $30.27.

Cash and Cash Equivalents

Included in cash and cash equivalents at July 30, 2011, January 29, 2011 and July 31, 2010 are marketable securities of $0.1 million, $29.8 million and $9.6 million, respectively. Marketable securities are highly-liquid financial instruments having an original maturity of three months or less. At July 30, 2011, substantially all of the Company’s cash was invested in deposit accounts at FDIC-insured banks. All of the Company’s deposit account balances are currently FDIC insured and will remain so through December 31, 2012 as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 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 July 30, 2011, January 29, 2011 and July 31, 2010 outstanding checks drawn on zero-balance accounts at certain domestic banks exceeded book cash balances at those banks by approximately $33.3 million, $36.1 million and $28.6 million, respectively. These amounts are included in accounts payable.

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. The Company’s Lids Team Sports wholesale business sells primarily to college and high school athletic teams and their fan bases. Including both footwear wholesale and Lids Team Sports receivables, one customer accounted for 6% of the Company’s total trade receivables balance, while no other customer accounted for more than 5% of the Company’s total trade receivables balance as of July 30, 2011.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1

Summary of Significant Accounting Policies, Continued

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 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 lesser of the life of the corresponding improvement or lease term. Tenant allowances of $17.4 million, $18.4 million and $20.2 million at July 30, 2011, January 29, 2011 and July 31, 2010, respectively, and deferred rent of $34.0 million, $33.0 million and $31.8 million at July 30, 2011, January 29, 2011 and July 31, 2010, 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 Schuh Group Ltd. in June 2011 and Hat World Corporation in April 2004. The Condensed Consolidated Balance Sheets include goodwill for the Lids Sports Group of $155.4 million, $103.0 million for the Schuh Group and $0.8 million for Licensed Brands at July 30, 2011, Lids Sports Group of $152.5 million and $0.8 million for Licensed Brands at January 29, 2011 and $126.6 million for the Lids Sports Group at July 31, 2010. 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 trademarks acquired in connection with the acquisition of Hat Shack, Inc. in January 2007, Impact Sports in November 2008, Great Plains Sports in September 2009, Sports Fan-Attic in November 2009, Brand Innovators in May 2010, Anaconda Sports in August 2010, Keuka Footwear in August 2010 and Sports Avenue in October 2010, customer lists, in-place leases, non-compete agreements and a vendor contract. 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 July 30, 2011 and January 29, 2011 are:

Fair Values
						July 30,								January 29,
In thousands						2011								2011
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Revolver Borrowings		$	117,481			$	117,481			$	-0-			$	-0-
UK Term Loans			47,038				47,038				-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.

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 $1.9 million and $1.2 million for the second quarters of Fiscal 2012 and 2011, respectively, and $4.3 million and $2.4 million for the first six months of Fiscal 2012 and 2011, 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 $0.1 million for each of the second quarters of Fiscal 2012 and 2011 and $0.2 million for each of the first six months of Fiscal 2012 and 2011. The Condensed Consolidated Balance Sheets include an accrued liability for gift cards of $7.3 million, $9.0 million and $6.6 million at July 30, 2011, January 29, 2011 and July 31, 2010, 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 $8.4 million and $7.0 million for the second quarter of Fiscal 2012 and 2011, respectively, and $18.1 million and $15.2 million for the first six months of Fiscal 2012 and 2011, 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 $1.4 million, $1.1 million and $2.1 million at July 30, 2011, January 29, 2011 and July 31, 2010, respectively.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1

Summary of Significant Accounting Policies, Continued

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.

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 $0.8 million and $1.0 million for the second quarter of Fiscal 2012 and 2011, respectively, and $1.7 million and $1.8 million for the first six months of Fiscal 2012 and 2011, respectively. During the first six months of Fiscal 2012 and 2011, 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.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies, Continued

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.

Vendor reimbursements of cooperative advertising costs recognized as a reduction of selling and administrative expenses were $0.9 million and $0.6 million for the second quarter of Fiscal 2012 and 2011, respectively, and $1.8 million and $1.4 million for the first six months of Fiscal 2012 and 2011, respectively. During the second quarter of Fiscal 2012 and 2011, 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 8).

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies, Continued

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 July 30, 2011 consisted of $25.0 million of cumulative pension liability adjustments, net of tax, and $0.1 million of cumulative postretirement liability adjustments, net of tax, offset by a foreign currency translation adjustment of $2.8 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 10).

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 amount of such contracts outstanding at July 30, 2011, January 29, 2011 and July 31, 2010 were $-0-, $-0- and $0.9 million, respectively. For the six months ended July 30, 2011, the Company recorded an unrealized gain on foreign currency forward contracts of $0.1 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.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 1
Summary of Significant Accounting Policies, Continued

New Accounting Principles

On July 30, 2011, the Company adopted the clarification and additional disclosure provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Update No. 2010-29, an update to the FASB Codification Business Combination Topic. This update, which is applicable to public entities, clarifies that required pro forma financial information should be presented with an assumption that any current period acquisition occurred as of the beginning of the comparable prior annual reporting period only. Additionally, this update expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma sales and earnings. The adoption of this update did not have a significant impact on the Company’s results of operations or financial position.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, an update to the FASB Codification Comprehensive Income Topic, which amends the existing accounting standards related to the presentation of comprehensive income in a company’s financial statements. This update requires that all non-owner changes in shareholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two statement approach, the first statement would present total net earnings and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. Under either presentation alternative, reclassification adjustments and the effect of those adjustments on net earnings and other comprehensive income must be presented in the respective statement or statements, as applicable. This update becomes effective in periods beginning after December 15, 2011 and is required to be adopted retrospectively. Early adoption is permitted. The Company is currently evaluating which of the two presentation alternatives it will adopt, but it is not expected to have a significant impact on the Company’s results of operations or financial position.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 2
Acquisitions and Intangible Assets

Schuh Acquisition

On June 23, 2011, the Company, through its newly-formed, wholly-owned subsidiary Genesco (UK) Limited (“Genesco UK”), completed the acquisition of all the outstanding shares of Schuh Group Ltd. (“Schuh”) for a total purchase price of approximately £100 million, less £29.5 million outstanding under existing Schuh credit facilities, which remain in place, less a £1.9 million working capital adjustment plus £6.2 million net cash acquired with £5.0 million withheld until satisfaction of certain closing conditions. The Company financed the acquisition with borrowings under its existing credit facility and the balance from cash on hand. The purchase agreement also provides for deferred purchase price payments totaling £25 million, payable £15 million and £10 million on the third and fourth anniversaries of the closing, respectively, subject to the payees’ not having terminated their employment with Schuh under certain specified circumstances. This amount will be recorded as compensation expense and not reported as a component of the cost of the acquisition. During the three months and six months ended July 30, 2011, compensation expense related to the Schuh acquisition deferred purchase price obligation was $1.4 million. This expense is included in the operating loss for the Schuh Group segment.

Headquartered in Scotland, Schuh is a specialty retailer of casual and athletic footwear sold through 59 retail stores in the United Kingdom and the Republic of Ireland and 16 concessions in Republic apparel stores as of July 30, 2011. The Company believes the acquisition will enhance its strategic development and prospects for growth and provide the Company with an established retail presence in the United Kingdom and improved insight into global fashion trends. The results of Schuh’s operations from the date of acquisition through July 30, 2011 of net sales of $34.0 million and an operating loss of $(0.1) million have been included in the Company’s Condensed Consolidated Financial Statements for the period ended July 30, 2011. During the three months and six months ended July 30, 2011, the Company expensed $6.4 million and $7.2 million, respectively, in costs related to the acquisition. These costs were recorded as selling and administrative expenses on the Condensed Consolidated Statements of Operations.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 2
Acquisitions and Intangible Assets, Continued

The acquisition has been accounted for using the purchase method in accordance with the amended Business Combinations Topic of the Codification. Accordingly, the total purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values at acquisition as follows (amounts in thousands):

At June 23, 2011

Cash		$	24,835
Accounts Receivable			4,923
Inventories			32,179
Other current assets			8,403
Property and equipment			31,143
Unamortizable intangible assets (indefinite-lived trademarks)			27,223
Amortizable intangibles			5,626
Goodwill			101,731
Accounts payable			(16,196	)
Other current liabilities			(27,033	)
Long-term debt (includes current portion)			(62,562	)
Other non-current liabilities			(14,268	)
Net Assets Acquired		$	116,004

The trademarks acquired include the concept names and are deemed to have an indefinite life. Finite-lived intangibles include a $1.7 million customer list, a $3.1 million asset to reflect the adjustment of acquired leases to market and a vendor contract of $0.8 million. The weighted average amortization period for the asset to adjust acquired leases to market is 3.9 years. The weighted average amortization period for customer lists is 4.6 years.

The recorded amounts above are provisional and subject to change. Specifically, the following items are subject to change:

-

Amounts for intangibles pending finalization of valuation efforts for acquired intangible assets.

-

Amounts for income tax assets, receivables and liabilities pending receipt of Schuh’s pre-acquisition tax information, which may change certain estimates and assumptions used.

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisition of Schuh includes the expected purchasing synergies and other benefits that result from combining the Schuh business with the Company, improved insight into global fashion trends, any intangible assets that do not qualify for separate recognition and an acquired assembled workforce. The goodwill related to the Schuh acquisition is not deductible for tax purposes.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 2
Acquisitions and Intangible Assets, Continued

The following pro forma information presents the results of operations of the Company as if the Schuh acquisition had taken place at the beginning of Fiscal 2011 or January 31, 2010. Pro forma adjustments have been made to reflect additional interest expense from the $89.0 million in debt associated with the acquisition, interest expense on the acquired debt, amortization of intangible assets and the related income tax effects. Pro forma earnings for the six months ended July 30, 2011 have been adjusted to exclude $7.2 million of costs related to the acquisition.

		Six Months Ended -				Six Months Ended -
		Pro forma				Pro forma
In thousands, except per share data		July 30, 2011				July 31, 2010
Net sales		$	1,044,373			$	859,206
Earnings from continuing operations			16,284				2,204
Earnings per share:
Basic		$	0.70			$	0.09
Diluted		$	0.69			$	0.09

The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have occurred had the Schuh acquisition occurred at the beginning of Fiscal 2011.

Intangible Assets

Other intangibles by major classes were as follows:

		Leases								Customer Lists								Other*								Total
		Jul. 30,				Jan. 29,				Jul. 30,				Jan 29,				Jul. 30,				Jan. 29,				Jul. 30,				Jan. 29,
(In Thousands)		2011				2011				2011				2011				2011				2011				2011				2011
Gross other intangibles		$	12,995			$	9,837			$	13,924			$	12,206			$	1,918			$	1,100			$	28,837			$	23,143
Accumulated amortization			(8,823	)			(8,482	)			(2,308	)			(1,480	)			(726	)			(603	)			(11,857	)			(10,565	)
Net Other Intangibles		$	4,172			$	1,355			$	11,616			$	10,726			$	1,192			$	497			$	16,980			$	12,578

The amortization of intangibles was $1.0 million and $0.5 million for the second quarter of Fiscal 2012 and 2011, respectively. The amortization of intangibles was $1.9 million and $0.7 million for the first six months of Fiscal 2012 and 2011, respectively. The amortization of intangibles will be $4.5 million, $4.1 million, $3.1 million, $2.2 million and $1.6 million for Fiscal 2012, 2013, 2014, 2015 and 2016, respectively.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

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 $0.4 million in the second quarter of Fiscal 2012, primarily for retail store asset impairments. The Company recorded a pretax charge to earnings of $1.6 million in the first six months of Fiscal 2012, including $1.1 million for retail store impairments, $0.4 million for network intrusion expenses and $0.1 million for other legal matters.

The Company recorded a pretax charge to earnings of $2.0 million in the second quarter of Fiscal 2011, including $1.9 million in retail store asset impairments and $0.1 million for other legal matters. The Company recorded a pretax charge to earnings of $4.4 million in the first six months of Fiscal 2011, including $4.3 million in retail store asset impairments and $0.1 million for other legal matters.

Discontinued Operations

Accrued Provision for Discontinued Operations

		Facility
		Shutdown
In thousands		Costs
Balance January 30, 2010		$	15,414
Additional provision Fiscal 2011			2,203
Charges and adjustments, net			(2,582	)
Balance January 29, 2011			15,035
Additional provision Fiscal 2012			1,524
Charges and adjustments, net			(2,888	)
Balance July 30, 2011*			13,671
Current provision for discontinued operations			9,308
Total Noncurrent Provision for Discontinued Operations		$	4,363

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 4
Inventories

		July 30,				January 29,
In thousands		2011				2011
Raw materials		$	21,358			$	11,952
Goods in process			1,269				338
Wholesale finished goods			48,329				47,866
Retail merchandise			403,995				299,580
Total Inventories		$	474,951			$	359,736

Note 5
Fair Value

The Fair Value Measurements and Disclosures Topic of the Codification defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. This Topic defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (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.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 5
Fair Value, Continued

The following table presents the Company’s assets and liabilities measured at fair value on a nonrecurring basis for the six month period ended July 30, 2011 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 April 30, 2011		$	548			$	—			$	—			$	548			$	747
Measured as of July 30, 2011		$	189			$	—			$	—			$	189			$	313

In accordance with the Property, Plant and Equipment Topic of the Codification, the Company recorded $0.3 million and $1.1 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 six months ended July 30, 2011. 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 July 30, 2011. 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.

Note 6
Long-Term Debt

		July 30,				January 29,
In thousands		2011				2011
Revolver borrowings		$	117,481			$	-0-
UK term loans			47,038				-0-
Total long-term debt			164,519				-0-
Current portion			5,113				-0-
Total Noncurrent Portion of Long-Term Debt		$	159,406			$	-0-

Long-term debt maturing during each of the next five years ending July is $5.1 million, $5.7 million, $5.7 million, $6.0 million and $142.0 million.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 6
Long-Term Debt, Continued

Credit Agreement:

On June 23, 2011, the Company entered into a First Amendment (the “Amendment”) to the Second Amended and Restated Credit Agreement (the “Credit Facility”) dated January 21, 2011 by and among the Company, certain subsidiaries of the Company party thereto, as other borrowers, the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent. The Amendment raised the aggregate principal amount on the credit facility to $405.0 million from $300.0 million. The Credit Facility was amended to permit the Schuh acquisition (see Note 2). The Credit Facility expires January 21, 2016.

Deferred financing costs incurred of $2.9 million related to the Credit Facility were capitalized and are being amortized over five years. Deferred financing costs incurred of $0.7 million related to the Amendment were also capitalized and are being amortized over five years. These costs are included in other non-current assets on the Consolidated Balance Sheets.

The Company had $117.5 million revolver borrowings outstanding under the Credit Facility at July 30, 2011 and $47.0 million in term loans outstanding under the U.K. Credit Facility (described below). The Company had outstanding letters of credit of $10.2 million under the Credit Facility at July 30, 2011. These letters of credit support product purchases and lease and insurance indemnifications.

The material terms of the Credit Facility, as amended, are as follows:

Availability

The amended Credit Facility is a revolving credit facility in the aggregate principal amount of $405.0 million, with a $40.0 million swingline loan sublimit, a $70.0 million sublimit for the issuance of standby letters of credit, a Canadian sub-facility of up to $8.0 million and a Tranche A-1 sublimit of up to $30.0 million. The facility has a five-year term. Any swingline loans and any letters of credit and borrowings under the Canadian facility will reduce the availability under the Credit Facility on a dollar-for-dollar basis. In addition, the Company has an option to increase the availability under the Credit Facility by up to $75.0 million subject to, among other things, the receipt of commitments for the increased amount. The aggregate amount of the loans made and letters of credit issued under the Credit Facility shall at no time exceed the lesser of the facility amount ($405.0 million or, if increased at the Company’s option, subject to the receipt of commitments for the increased amount, up to $480.0 million including the A-1 Tranche) or the “Borrowing Base”, which generally is based on 90% of eligible inventory plus 85% of eligible wholesale receivables (50% of eligible wholesale receivables of the Lids Team Sports business) plus 90% of eligible credit card and debit card receivables less applicable reserves. The A-1 Tranche provides for an additional 10% availability of eligible inventory (declining to a 7.5% advance rate after one year and then to a 5% advance rate after two years) plus an additional 5% availability of eligible wholesale receivables (other than wholesale receivables of the Lids Team Sports business) (declining to a 2.5% advance rate after one year and then 0.0% after two years) plus an additional 5% of eligible credit card and debit card receivables less applicable reserves.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 6
Long-Term Debt, Continued

Collateral

The loans and other obligations under the Credit Facility are secured by a perfected first priority lien and security interest in all tangible and intangible assets and excludes real estate and leaseholds of the Company and certain subsidiaries of the Company. In addition, with the amendment to the Credit Facility, the Company pledged 65% of its interest in Genesco (UK) Limited.

Interest and Fees

The Company’s borrowings under the Credit Facility and the A-1 Tranche bear interest at varying rates that, at the Company’s option, can be based on:

Domestic Facility

(a) LIBOR plus the applicable margin (as defined and based on average Excess Availability during the prior quarter or (b) the applicable margin plus the higher of (i) the Bank of America prime rate, (ii) the federal funds rate plus 0.50% or (iii) LIBOR for an interest period of thirty days plus 1.0%

Canadian Sub-Facility

(a) For loans made in Canadian dollars, the bankers’ acceptances (“BA”) rate plus the applicable margin or (b) the Canadian Prime Rate (defined as the highest of the (i) Bank of America Canadian Prime Rate, (ii) 0.50% plus the Bank of America (Canadian) overnight rate, and (iii) 1.0% plus the BA rate for a 30 day interest period) plus the applicable margin for loans made in U.S. dollars, LIBOR plus the applicable margin or the U.S. Index Rate (defined as the highest of the (i) Bank of America (Canada branch) U.S. dollar base rate, (ii) the Federal Funds rate plus 0.50%, and (iii) LIBOR for an interest period of thirty days plus 1.0%) plus the applicable margin.

The initial applicable margin for base rate loans and U.S. Index rate loans is 1.50% (3.00% for Tranche A-1 loans), and the initial applicable margin for LIBOR loans and BA equivalent loans is 2.50% (4.00% for Tranche A-1 loans). Thereafter, the applicable margin will be subject to adjustment based on “Excess Availability” for the prior quarter. The term “Excess Availability” means, as of any given date, the excess (if any) of the Loan Cap (being the lesser of the total commitments and the Borrowing Base) over the outstanding credit extensions under the Credit Facility.

Interest on the Company’s borrowings is payable monthly in arrears for base rate loans and U.S. Index rate loans and at the end of each interest rate period (but not less often than quarterly) for LIBOR loans and BA equivalent loans.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 6
Long-Term Debt, Continued

The Company is also required to pay a commitment fee on the actual daily unused portions of the Credit Facility at a rate of (i) 0.50% per annum if less than 50% of the Credit Facility has been utilized on average during the immediately preceding fiscal quarter or (ii) 0.375% per annum if 50% or more of the Credit Facility has been utilized during such fiscal quarter.

Certain Covenants

The Company is not required to comply with any financial covenants unless Excess Availability is less than the greater of $27.5 million or 12.5% of the Loan Cap. If and during such time as Excess Availability is less than the greater of $27.5 million or 12.5% of the Loan Cap, the Credit Facility requires the Company to meet a minimum fixed charge coverage ratio of (a) an amount equal to consolidated EBITDA less capital expenditures and taxes paid in cash, in each case for such period, to (b) fixed charges for such period, of not less than 1.0:1.0.

In addition, the Credit Facility contains certain covenants that, among other things, restrict additional indebtedness, liens and encumbrances, loans and investments, acquisitions, dividends and other restricted payments, transactions with affiliates, asset dispositions, mergers and consolidations, prepayments or material amendments of other indebtedness and other matters customarily restricted in such agreements. The Amendment permits the Company to incur up to $250.0 million of senior debt provided that certain terms and conditions are met.

The Credit Facility also contains cash dominion provisions that apply in the event that the Company’s Excess Availability is less than the greater of $35.0 million or 15% of the Loan Cap or there is an event of default under the Credit Facility.

Events of Default

The Credit Facility contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness in excess of specified amounts and to agreements which would have a material adverse effect if breached, certain events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts and change in control.

Certain of the lenders under the Credit Facility or their affiliates have provided, and may in the future provide, certain commercial banking, financial advisory, and investment banking services in the ordinary course of business for the Company, its subsidiaries and certain of its affiliates, for which they receive customary fees and commissions.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 6
Long-Term Debt, Continued

U.K. Credit Facility

In connection with the Schuh acquisition, Schuh entered into an amended and restated Senior Term Facilities Agreement and Working Capital Facility Letter (collectively, the “UK Credit Facility”) which provides for terms loans of up to £29.5 million (a £15.5 million A term loan and £14.0 million B term loan) and a working capital facility of £5.0 million. The A term loan bears interest at LIBOR plus 2.50% per annum. The B term loan bears interest at LIBOR plus 3.75% per annum. The working capital facility bears interest at the Base Rate (as defined) plus 2.25% per annum.

The UK Credit Facility contains certain covenants at the Schuh level including a minimum interest coverage covenant initially set at 4.25x and increasing to 4.50x in January 2012 and thereafter, a maximum leverage covenant initially set at 2.75x declining over time at various rates to 2.25x beginning in July 2012 and a minimum cash flow coverage of 1.10x. The Company was in compliance with all the convenants at July 30, 2011.

The UK Credit Facility is secured by a pledge of all the assets of Schuh and its subsidiaries.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 7
Defined Benefit Pension Plans and Other Benefit Plans

Components of Net Periodic Benefit Cost

		Pension Benefits								Other Benefits
		Three Months Ended								Three Months Ended
		July 30,				July 31,				July 30,				July 31,
In thousands		2011				2010				2011				2010
Service cost		$	63			$	62			$	42			$	38
Interest cost			1,400				1,471				43				40
Expected return on plan assets			(1,952	)			(2,021	)			-0-				-0-
Amortization:
Prior service cost			1				1				-0-				-0-
Losses			1,162				1,035				20				13
Net amortization			1,163				1,036				20				13
Net Periodic Benefit Cost		$	674			$	548			$	105			$	91

		Pension Benefits								Other Benefits
		Six Months Ended								Six Months Ended
		July 30,				July 31,				July 30,				July 31,
In thousands		2011				2010				2011				2010
Service cost		$	126			$	125			$	84			$	76
Interest cost			2,798				2,955				86				80
Expected return on plan assets			(3,904	)			(4,046	)			-0-				-0-
Amortization:
Prior service cost			2				2				-0-				-0-
Losses			2,403				2,165				40				27
Net amortization			2,405				2,167				40				27
Net Periodic Benefit Cost		$	1,425			$	1,201			$	210			$	183

While there was no cash requirement for the Plan in 2011, the Company made a $0.3 million contribution to the Plan in February 2011.

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 8
Earnings Per Share

		For the Three Months Ended												For the Three Months Ended
		July 30, 2011												July 31, 2010
(In thousands, except		Income				Shares				Per-Share				Income				Shares				Per-Share
per share amounts)		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
Earnings (loss) from continuing operations		$	350											$	(2,396	)
Less: Preferred stock dividends			(49	)											(49	)
Basic EPS from continuing operations
Income (loss) available to common shareholders			301				23,126			$	.01				(2,445	)			23,480			$	(.10	)
Effect of Dilutive Securities from continuing operations
Options							460												-0-
Convertible preferred stock(1)			-0-				-0-								-0-				-0-
Employees’ preferred stock(2)							49												-0-
Diluted EPS
Income (loss) available to common shareholders plus assumed conversions		$	301				23,635			$	.01			$	(2,445	)			23,480			$	(.10	)

Genesco Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note 8
Earnings Per Share, Continued

		For the Six Months Ended												For the Six Months Ended
		July 30, 2011												July 31, 2010
(In thousands, except		Income				Shares				Per-Share				Income				Shares				Per-Share
per share amounts)		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
Earnings from continuing operations		$	15,325											$	6,167
Less: Preferred stock dividends			(98	)											(98	)
Basic EPS from continuing operations
Income available to common shareholders			15,227				23,033			$	.66				6,069				23,471			$	.26
Effect of Dilutive Securities from continuing operations
Options							506												381
Convertible preferred stock(1)			-0-				-0-								-0-				-0-
Employees’ preferred stock(2)							49												50
Diluted EPS
Income available to common shareholders plus assumed conversions		$	15,227				23,588			$	.65			$	6,069				23,902			$	.25