GENESCO INC - Quarter Report: 2020 August (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission File No. 1-3083

Genesco Inc.

(Exact name of registrant as specified in its charter)

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

Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ☒    No  ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of August 28, 2020, 14,993,755 shares of the registrant's common stock were outstanding.

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INDEX

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cautionary notice regarding forward-looking statements

Statements in this Quarterly Report on Form 10-Q include certain forward-looking statements, including those regarding the performance outlook for the Company and our individual businesses (including, without limitation, sales, expenses, margins and earnings) and all other statements not addressing solely historical facts or present conditions. Words such as "may," "will," "should," "likely," "anticipate," "expect," "intend," "plan," "project," "believe," "estimate" and similar expressions can be used to identify these forward-looking statements. Actual results, including those regarding our performance outlook for Fiscal 2021 and beyond, could differ materially from those reflected by the forward-looking statements in this Quarterly Report on Form 10-Q and a number of factors may adversely affect the forward-looking statements and our future results, liquidity, capital resources or prospects. These include, but are not limited to, risks related to public health and safety issues, including, for example, the novel coronavirus disease ("COVID-19") outbreak which began in 2019, our ability to keep stores open, operate stores safely and ensure the safety of customers and employees, whether there are periods of increases in the number of COVID-19 cases in locations in which we operate, further closures of stores due to COVID-19, weakness in store and shopping mall traffic, restrictions on operations imposed by government entities and landlords, changes in public safety and health requirements, our ability to adequately staff our stores, limitations on our ability to provide adequate personal protective equipment to our employees, our ability to maintain social distancing requirements, stores closures and effect on our business as a result of civil disturbances, the level and timing of promotional activity necessary to maintain inventories at appropriate levels, our ability to recognize deferred tax assets, the imposition of tariffs on products imported by us or our vendors as well as the ability and costs to move production of products in response to tariffs, our ability to obtain from suppliers products that are in-demand on a timely basis and effectively manage disruptions in product supply or distribution, including disruptions as a result of COVID-19, unfavorable trends in fuel costs, foreign exchange rates, foreign labor and material costs, and other factors affecting the cost of products, the effects of the British decision to exit the European Union and other sources of weakness in the U.K. market, the effectiveness of our omnichannel initiatives, costs associated with changes in minimum wage and overtime requirements, wage pressure in the markets in which we operate., weakness in the consumer economy and retail industry, competition and fashion trends in our markets, risks related to the potential for terrorist events, changes in buying patterns by significant wholesale customers,  retained liabilities associated with divestitures of businesses including potential liabilities under leases as the prior tenant or as a guarantor of certain leases, and changes in the timing of holidays or in the onset of seasonal weather affecting period-to-period sales comparisons. Additional factors that could cause differences from expectations include the ability to renew leases in existing stores and control or lower occupancy costs, and to conduct required remodeling or refurbishment on schedule and at expected expense levels, our ability to eliminate stranded costs associated with dispositions, our ability to realize anticipated cost savings, including rent savings, deterioration in the performance of individual businesses or of our market value relative to our book value, resulting in impairments of fixed assets, operating lease right of use assets or intangible assets or other adverse financial consequences and the timing and amount of such impairments or other consequences, unexpected changes to the market for our shares or for the retail sector in general, costs and reputational harm as a result of disruptions in our business or information technology systems either by security breaches and incidents or by potential problems associated with the implementation of new or upgraded systems, uncertainty regarding the expected phase out of the London Interbank Offered Rate ("LIBOR"), and the cost and outcome of litigation, investigations and environmental matters that involve us.

Readers are cautioned not to place undue reliance on forward-looking statements as such statements speak only as of the date they were made and involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements. The most important factors which could cause our actual results to differ from our forward-looking statements are set forth in our description of risk factors in Item 1A contained in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020, and Item 1A in Part II of this Quarterly Report on Form 10-Q, which should be read in conjunction with the forward-looking statements in this Quarterly Report on Form 10-Q. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement.

The events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. As a result, our actual results may differ materially from the results contemplated by these forward-looking statements.

We maintain a website at www.genesco.com where investors and other interested parties may obtain, free of charge, press releases and other information as well as gain access to our periodic filings with the Securities and Exchange Commission (“SEC”). The information contained on this website should not be considered to be a part of this or any other report filed with or furnished to the SEC.

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                                                PART I - FINANCIAL INFORMATION

                                                Item 1. Financial Statements (unaudited)

Genesco Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share amounts)

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

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Genesco Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

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

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Genesco Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

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

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Genesco Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

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

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Genesco Inc. and Subsidiaries

Condensed Consolidated Statements of Equity

(In thousands)

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

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Genesco Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1

Summary of Significant Accounting Policies

Basis of Presentation

The Condensed Consolidated Financial Statements and Notes contained in this report are unaudited but reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for the interim periods of the fiscal year ending January 30, 2021 ("Fiscal 2021") and of the fiscal year ended February 1, 2020 ("Fiscal 2020"). All subsidiaries are consolidated in the Condensed Consolidated Financial Statements. All significant intercompany transactions and accounts have been eliminated.  The results of operations for any interim period are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") have been condensed or omitted. The Condensed Consolidated Balance Sheet as of February 1, 2020 has been derived from the audited financial statements at that date. These Condensed Consolidated Financial Statements should be read in conjunction with our Consolidated Financial Statements and notes for Fiscal 2020, which are contained in our Annual Report on Form 10-K as filed with the SEC on April 1, 2020.

Nature of Operations

Genesco Inc. and its subsidiaries (collectively the "Company", "we", "our", or "us") business includes the sourcing and design, marketing and distribution of footwear and accessories through retail stores in the U.S., Puerto Rico and Canada primarily under the Journeys, Journeys Kidz, Little Burgundy and Johnston & Murphy banners and under the Schuh banner in the United Kingdom and the Republic of Ireland (“ROI”); through catalogs and e-commerce websites including the following: journeys.com, journeyskidz.com, journeys.ca, schuh.co.uk, schuh.ie, schuh.eu, johnstonmurphy.com and littleburgundyshoes.com and at wholesale, primarily under our Johnston & Murphy brand, the licensed Dockers brand, the licensed Levi's brand, the licensed Bass brand and other brands that we license for footwear.  At August 1, 2020, we operated 1,476 retail stores in the U.S., Puerto Rico, Canada, the United Kingdom and the ROI.

During the three and six months ended August 1, 2020 and August 3, 2019, we operated four reportable business segments (not including corporate): (i) Journeys Group, comprised of the Journeys, Journeys Kidz and Little Burgundy retail footwear chains and e-commerce operations; (ii) Schuh Group, comprised of the Schuh retail footwear chain and e-commerce operations; (iii) Johnston & Murphy Group, comprised of Johnston & Murphy retail operations, e-commerce operations and wholesale distribution of products under the Johnston & Murphy^® brand; and (iv) Licensed Brands, comprised of the licensed Dockers^®, Levi's^®, and Bass^® brands, as well as other brands we license for footwear.

Cash and Cash Equivalents

Our foreign subsidiaries held cash of approximately $42.2 million, $8.9 million and $10.8 million as of August 1, 2020, February 1, 2020 and August 3, 2019, respectively, which is included in cash and cash equivalents on the Condensed Consolidated Balance Sheets.

There were $241.1 million, $59.6 million and $17.5 million in cash equivalents at August 1, 2020, February 1, 2020 and August 3, 2019, respectively.

At August 1, 2020, February 1, 2020 and August 3, 2019, outstanding checks drawn on zero-balance accounts at certain domestic banks exceeded book cash balances at those banks by approximately $4.1 million, $17.1 million and $9.4 million, respectively. These amounts are included in accounts payable in the Condensed Consolidated Balance Sheets.

Concentration of Credit Risk and Allowances on Accounts Receivable

Our footwear wholesale businesses sell primarily to department stores and independent retailers across the United States. Receivables arising from these sales are not collateralized. Customer credit risk is affected by conditions or occurrences within the economy and the retail industry as well as by customer-specific factors. In the footwear wholesale businesses, one customer accounted for 19%, one customer accounted for 15%, one customer accounted for 13% and no other customer accounted for more than 7% of our total trade receivables balance as of August 1, 2020.

Selling and Administrative Expenses

Wholesale costs of distribution are included in selling and administrative expenses on the Condensed Consolidated Statements of Operations in the amount of $2.2 million and $1.3 million for the second quarters of Fiscal 2021 and Fiscal 2020, respectively, and $4.6 million and $2.7 million for the first six months of Fiscal 2021 and Fiscal 2020, respectively.

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Genesco Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1

Summary of Significant Accounting Policies, Continued

Retail occupancy costs recorded in selling and administrative expense were $71.5 million and $85.9 million for the second quarters of Fiscal 2021 and Fiscal 2020, respectively, and $148.7 million and $169.1 million for the first six months of Fiscal 2021 and Fiscal 2020, respectively.

Advertising Costs

Advertising costs were $14.1 million and $16.5 million for the second quarters of Fiscal 2021 and Fiscal 2020, respectively, and $28.6 million and $30.2 million for the first six months of Fiscal 2021 and Fiscal 2020, respectively.

Vendor Allowances

Vendor reimbursements of cooperative advertising costs recognized as a reduction of selling and administrative expenses were $0.9 million and $2.3 million for the second quarters of Fiscal 2021 and Fiscal 2020, respectively, and $2.7 million and $4.2 million for the first six months of Fiscal 2021 and Fiscal 2020, respectively.  During the first six months of Fiscal 2021 and Fiscal 2020, our cooperative advertising reimbursements received were not in excess of the costs incurred.

Foreign Currency Translation

The functional currency of our foreign operations is the applicable local currency. The translation of the applicable foreign currency into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date. Income and expense accounts are translated at monthly average exchange rates. The unearned gains and losses resulting from such translation are included as a separate component of accumulated other comprehensive loss within shareholders' equity. Gains and losses from certain foreign currency transactions are reported as an item of income and resulted in net income of $(0.4) million and $(0.2) million for the second quarters of Fiscal 2021 and Fiscal 2020, respectively, and net income of $(0.5) million for the first six months of Fiscal 2021 and a net loss of $0.1 million for the first six months of Fiscal 2020.

New Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-13 guidance related to the disclosure requirements for fair value measurement.  This guidance added, modified and removed certain disclosure requirements related to assets and liabilities recorded at fair value.  This guidance is effective for public business entities for fiscal years and interim periods within those years, beginning after December 15, 2019, and early adoption is permitted.  We adopted this guidance in the first quarter of Fiscal 2021 and it had no impact to our results of operations, financial position or cash flows.

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which requires entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. The FASB has subsequently issued updates to the standard to provide additional clarification on specific topics. We adopted ASU No. 2016-13 in the first quarter of Fiscal 2021. This guidance did not have a material impact on our Condensed Consolidated Financial Statements.

Note 2

COVID-19

In March 2020, the World Health Organization categorized the outbreak of COVID-19 as a pandemic. To help control the spread of the virus and protect the health and safety of our employees and customers, we began temporarily closing or modifying operating models and hours of our retail stores in North America, the United Kingdom and ROI both in response to governmental requirements including “stay-at-home” orders and similar mandates and voluntarily, beyond the requirements of local government authorities, during the first and second quarters of Fiscal 2021.

Changes made in our operations, including temporary closures, combined with reduced customer traffic due to concerns over COVID-19, resulted in material reductions in revenues and operating income during the first and second quarters of Fiscal 2021. This prompted us to update our impairment analyses of our retail store portfolios and related lease right-of-use assets. For certain lower-performing stores, we compared the carrying value of store assets to undiscounted cash flows with updated assumptions on near-term profitability. As a result, we recorded a $3.0 million and $1.7 million asset impairment charge within asset impairments and other, net on our Condensed Consolidated Statements of Operations during the quarters ended May 2, 2020 and August 1, 2020, respectively.

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Genesco Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

Note 2

COVID-19, Continued

We evaluated our goodwill and indefinite-lived intangible assets at the end of the quarters ended May 2, 2020 and August 1, 2020. Our goodwill impairment analyses for Schuh Group completed as of the first day of the fourth quarter of Fiscal 2020 indicated $8.2 million of excess fair value over its carrying value. Therefore, considering the impact of COVID-19, we updated the goodwill impairment analysis for Schuh Group, and as a result, recorded a goodwill impairment charge of $79.3 million during the quarter ended May 2, 2020.  In addition, we updated our impairment analysis for other intangible assets considering the impact of COVID-19 and, as a result, recorded a trademark impairment charge of $5.3 million during the quarter ended May 2, 2020.  There were no impairment indicators for the quarter ended August 1, 2020.

We evaluated our remaining tangible assets, particularly accounts receivable and inventory. Our 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, such as COVID-19, as well as by customer specific factors. We establish an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. As a result of the impact of COVID-19, we recorded additional bad debt expense of $2.4 million and $0.7 million during the quarters ended May 2, 2020 and August 1, 2020, respectively.

We also record reserves for obsolete and slow-moving inventory and for estimated shrinkage between physical inventory counts. During the quarters ended May 2, 2020 and August 1, 2020, we recorded approximately $1.8 million and $2.5 million, respectively, of incremental inventory reserve provisions as a result of excess inventory due to the impact of COVID-19 on retail traffic and demand for certain products. Depending on the pace of reopening our stores as well as future customer behavior, among other factors, we may incur additional inventory reserve provisions during Fiscal 2021.

Since the first quarter of Fiscal 2021, we have withheld certain contractual rent payments generally correlating with time periods when our stores were closed and/or correlating with sales declines from Fiscal 2020. We continue to recognize rent expense in accordance with the contractual terms.  We are working with landlords in various markets seeking commercially reasonable lease concessions given the current environment, and while some agreements have been reached, a significant number of negotiations remain ongoing.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which among other things, provides employer payroll tax credits for wages paid to employees who are unable to work during the COVID-19 pandemic and options to defer payroll tax payments. Based on our preliminary evaluation of the CARES Act, we qualify for certain employer payroll tax credits as well as the deferral of payroll and other tax payments in the future, which will be treated as government subsidies to offset related operating expenses. During the quarters ended May 2, 2020 and August 1, 2020, qualified payroll tax credits reduced our selling and administrative expenses by approximately $7.0 million and $3.8 million on our Condensed Consolidated Statements of Operations as a result of relief from the CARES Act and other foreign governmental packages. We intend to defer qualified payroll and other tax payments as permitted by the CARES Act.  Other foreign governmental packages also provided relief from property taxes of approximately $1.6 million and $3.9 million in the quarters ended May 2, 2020 and August 1, 2020, respectively.

We recorded our income tax expense, deferred tax assets and related liabilities based on our best estimates. As part of this process, we assessed the likelihood of realizing the benefits of our deferred tax assets. As of the end of our first quarter of Fiscal 2021, based on available evidence, we recorded additional valuation allowance adjustments in our UK jurisdiction of $2.0 million. Further, we excluded the UK tax jurisdiction from our estimate of the annual effective tax rate for Fiscal 2021 as we do not expect to record any tax benefit from the losses anticipated for Fiscal 2021.  We will continue to monitor the realizability of our deferred tax assets, particularly in certain foreign jurisdictions where the COVID-19 pandemic has started to create significant net operating losses. Our ability to recover these deferred tax assets depends on several factors, including our results of operations and our ability to project future taxable income in those jurisdictions. If we determine that some portion of the tax benefit will not be realized, we would record a valuation allowance, which would decrease our income tax benefit. Total deferred tax assets, net of valuation allowances, as of the end of our first quarter ended May 2, 2020 were approximately $14.6 million, of which approximately $0.9 million related to foreign jurisdictions.  Total deferred tax assets as of August 1, 2020 were approximately $12.4 million, of which approximately $1.0 million related to foreign jurisdictions.

The COVID-19 pandemic remains a rapidly evolving situation. The continuation of the COVID-19 pandemic, its economic impact and actions taken in response thereto may result in prolonged or recurring periods of store closures and modified operating schedules and may result in changes in customer behaviors, including a potential reduction in consumer discretionary spending in our stores. These may lead to increased asset recovery and valuation risks, such as impairment of our store and other assets and an inability to realize deferred tax assets due to sustaining losses in certain jurisdictions. The uncertainties in the global economy have and are likely to continue to impact the financial viability of our suppliers, and other business partners, which may interrupt our supply chain, limit our ability to collect receivables and require

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Genesco Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

Note 2

COVID-19, Continued

other changes to our operations. These and other factors have and will continue to adversely impact our net revenues, operating income and earnings per share financial measures.

Note 3

Goodwill and Other Intangible Assets

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

During the first quarter of Fiscal 2021, we identified qualitative indicators of impairment, including a significant decline in our stock price and market capitalization resulting from the COVID-19 pandemic, since the last consideration of indicators of impairment in the fourth quarter of Fiscal 2020 for our Schuh Group reporting unit.  When indicators of impairment are present on an interim basis, we must assess whether it is “more likely than not” (i.e., a greater than 50% chance) that an impairment has occurred.  In our Fiscal 2020 annual evaluation of goodwill, we determined the Schuh Group reporting unit was valued at approximately $8.2 million in excess of its carrying value.  Due to the identified indicators of impairment in the first quarter of Fiscal 2021, we determined that it was “more likely than not” that an impairment had occurred and performed a full valuation of our Schuh Group reporting.  Based upon the results of these analyses, we concluded the goodwill attributed to Schuh Group was fully impaired.  As a result, we recorded an impairment charge of $79.3 million in the first quarter of Fiscal 2021.

Goodwill Valuation (Schuh Group)

We estimated the fair value of our Schuh reporting unit in the first quarter of Fiscal 2021 using a discounted cash flow method (income approach) weighted 50% and a guideline public company method (market approach) weighted 50%. The key assumptions used under the income approach include the following:

• Future cash flow assumptions - Our projections for the Schuh reporting unit were based on organic growth and were derived from historical experience and assumptions regarding future growth and profitability trends, including considerations for the impact from the outbreak of the COVID-19 pandemic. Our analysis incorporated an assumed period of cash flows of seven years with a terminal value.

• Discount rate - The discount rate was based on an estimated WACC for the reporting unit. The components of WACC are the cost of equity and the cost of debt, each of which requires judgment by management to estimate. We developed our cost of equity estimate based on perceived risks and predictability of future cash flows. The WACC used to estimate the fair values of the Schuh reporting unit was 16%.

The guideline company method involves analyzing transaction and financial data of publicly traded companies to develop multiples, which are adjusted to account for differences in growth prospects and risk profiles of the reporting unit and comparable companies.

Trademark Valuation

In addition, as a result of the factors noted above, we evaluated the fair value of our trademarks during the first quarter of Fiscal 2021.  The fair value of trademarks was determined based on the royalty savings approach.  This analysis indicated trademark impairment in our Journeys Group and Johnston & Murphy Group.  As a result, we recorded a trademark impairment of $5.3 million in the first quarter of Fiscal 2021.  This charge is included in asset impairment and other, net in the accompanying Condensed Consolidated Statements of Operations.

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Genesco Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

Note 3

Goodwill and Other Intangible Assets, Continued

Key assumptions included in the estimation of the fair value for trademarks include the following:

• Future cash flow assumptions - Future cash flow assumptions include retail sales from our retail store operations and ecommerce retail sales. Sales were based on organic growth and were derived from historical experience and assumptions regarding future growth, including considerations for the impact from the outbreak of the COVID-19 pandemic. Our analysis incorporated an assumed period of cash flows of five years with a terminal value.

• Royalty rate - The royalty rate used to estimate the fair values of our reporting units’ trademarks was 1%.

• Discount rate - The discount rate was based on an estimated weighted average cost of capital ("WACC") for each business. The components of WACC are the cost of equity and the cost of debt, each of which requires judgment by management to estimate. The WACC used to estimate the fair values of our reporting units’ trademarks was 15%.

Other intangibles by major classes were as follows:

⁽¹⁾ Includes $5.1 million for the acquisition of substantially all the assets and the assumption of certain liabilities of Togast LLC, Togast Direct,LLC and TGB Design, LLC (collectively, “Togast”).

⁽²⁾ Includes backlog and vendor contract.

Note 4

Asset Impairments and Other Charges

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

We recorded pretax charges of $1.7 million in the second quarter of Fiscal 2021 for retail store asset impairments.  We recorded pretax charges of $9.6 million in the first six months of Fiscal 2021, including $5.3 million for trademark impairment and $4.8 million for retail store asset impairments, partially offset by a $(0.4) million gain for the release of an earnout related to the Togast acquisition. We recorded a pretax charge of $1.8 million in the second quarter of Fiscal 2020, including $1.0 million for lease terminations and $0.7 million for retail store asset impairments.  We recorded pretax charges of $1.0 million in the first six months of Fiscal 2020 for retail store asset impairments.

Note 5

Inventories

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Genesco Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

Note 6

Fair Value

Fair Value of Financial Instruments

The carrying amounts and fair values of our financial instruments at August 1, 2020 and February 1, 2020 are as follows:

As of August 1, 2020, we have $32.4 million of long-lived assets held and used which were measured using Level 3 inputs within the fair value hierarchy.  We recorded $1.7 million and $4.8 million of impairment charges as a result of the fair value measurement of our long-lived assets held and used during the three months and six months ended August 1, 2020, respectively. These charges are reflected in asset impairments and other, net on the Condensed Consolidated Statements of Operations.

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Genesco Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

Note 7

Long-Term Debt

On March 19, 2020, Schuh Limited ("Schuh") entered into an Amendment and Restatement Agreement (the "U.K. A&R Agreement") with Lloyds Bank which amended and restated the Amendment and Restatement Agreement dated April 26, 2017.  The U.K. A&R Agreement includes only a Facility C revolving credit agreement of £19.0 million, bears interest at LIBOR plus 2.2% per annum and expires in September 2020.  We are in the process of finalizing alternative financing arrangements to replace the U.K. A&R Agreement when it expires.  The U.K. A&R Agreement contains certain covenants at the Schuh level, including a minimum interest coverage covenant of 4.50x and a maximum leverage covenant of 1.75x. The U.K. A&R Agreement is secured by a pledge of all the assets of Schuh and Schuh (ROI) Limited.  Pursuant to a Guarantee in favor of Lloyds, Genesco Inc. has guaranteed the obligations of Schuh under the U.K. A&R Agreement on an unsecured basis.

On June 5, 2020, we entered into a Second Amendment (the “Second Amendment”) to our Fourth Amended and Restated Credit Agreement dated as of January 31, 2018 between us and the lenders party thereto and Bank of America, N.A. as agent (as amended, the “Credit Facility” or the “Credit Agreement”), to, among other things, increase the Total Commitments (as defined in the Credit Facility) for the revolving loans from $275.0 million to $332.5 million, establish a first-in, last-out (“FILO”) tranche of indebtedness of $17.5 million, for $350.0 million of total capacity, increase pricing on the revolving loans and modify certain covenant and reporting terms. The Credit Facility will continue to be secured by certain assets of the Company and certain subsidiaries of the Company, including accounts receivable, inventory, payment intangibles, and deposit accounts and specifically excludes equity interests, equipment, and most leasehold interests. The Second Amendment to our Credit Facility added a security interest in certain intellectual property.  The Second Amendment also provides for the borrowing base expansion to include real estate as those assets are added as collateral.  In addition, the Second Amendment adds customary real estate covenants to the Credit Facility.  The Credit Facility matures on January 31, 2023.

We borrowed $171.6 million under our Credit Facility during the six months ended August 1, 2020 as a precautionary measure to ensure funds are available to meet our obligations for a substantial period of time in response to the COVID-19 pandemic.  On September 10, 2020, we paid down $150.0 million of the borrowings under the Credit Facility and an additional $4.0 million (C$5.4 million) related to GCO Canada, Inc.

In addition, we borrowed £19.0 million ($24.9 million) under the U.K. A&R Agreement during the six months ended August 1, 2020 as a precautionary measure to ensure funds are available to meet our obligations in the UK for a substantial period of time in response to the COVID-19 pandemic.

The long-term debt balance of $186.0 million bears interest at an average rate of 3.65% and matures in January 2023.

The revolver borrowings outstanding under the Credit Facility at August 1, 2020 were $186.0 million, including $14.5 million (£11.1 million) related to Genesco (UK) Limited and $4.0 million (C$5.4 million) related to GCO Canada Inc.  We had outstanding letters of credit of $9.4 million under the Credit Facility at August 1, 2020. These letters of credit support lease and insurance obligations.

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Genesco Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

Note 8

Earnings Per Share

Weighted-average number of shares used to calculate earnings per share is as follows:

Due to the loss from continuing operations in the second quarter and first six months ended August 1, 2020, share-based awards are excluded from the diluted earnings per share calculation for those periods because they would be antidilutive.

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Genesco Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

Note 9

Legal Proceedings and Other Matters

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 we assumed responsibility for conducting a remedial investigation and feasibility study and implementing an interim remedial measure with regard to the site of a knitting mill operated by a former subsidiary of ours from 1965 to 1969.  The United States Environmental Protection Agency (“EPA”), which assumed primary regulatory responsibility for the site from NYSDEC, issued a Record of Decision in September 2007.  The Record of Decision specified a remedy of a combination of groundwater extraction and treatment and in-situ chemical oxidation.

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

The Village additionally asserted that we are liable for the costs associated with enhanced treatment required by the impact of the groundwater plume from the site on two public water supply wells, including historical total costs ranging from approximately $1.8 million to in excess of $2.5 million, and future operation and maintenance costs which the Village estimated at $126,400 annually while the enhanced treatment continues.  On December 14, 2007, the Village filed a complaint (the "Village Lawsuit") against us 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.

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

In April 2015, we received from EPA a Notice of Potential Liability and Demand for Costs (the "Notice") pursuant to CERCLA regarding the site in Gloversville, New York of a former leather tannery operated by us and by other, unrelated parties.  The Notice demanded payment of approximately $2.2 million of response costs claimed by EPA to have been incurred to conduct assessments and removal activities at the site. In February 2017, we entered into a settlement agreement with EPA resolving their claim for past response costs in exchange for a payment by us of $1.5 million which was paid in May 2017.  Our environmental insurance carrier has reimbursed us for 75% of the settlement amount, subject to a $500,000 self-insured retention. We do not expect any additional cost related to the matter.

Whitehall Environmental Matters

We have performed sampling and analysis of soil, sediments, surface water, groundwater and waste management areas at our former Volunteer Leather Company facility in Whitehall, Michigan.

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

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Notes to Condensed Consolidated Financial Statements (unaudited)

Note 9

Legal Proceedings and Other Matters, Continued

Accrual for Environmental Contingencies

Related to all outstanding environmental contingencies, we had accrued $1.5 million as of August 1, 2020, $1.5 million as of February 1, 2020 and $1.7 million as of August 3, 2019.  All such provisions reflect our 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 Consolidated Balance Sheets because it relates to former facilities operated by us. We have made pretax accruals for certain of these contingencies, including approximately $0.2 million and $0.3 million in the second quarters of Fiscal 2021 and Fiscal 2020, respectively, and $0.2 million and $0.4 million in the first six months of Fiscal 2021 and Fiscal 2020, respectively. These charges are included in loss from discontinued operations, net in the Consolidated Statements of Operations and represent changes in estimates.

 Other Matters

In the fourth quarter of Fiscal 2020, the IRS notified us on Letter 226-J, that we may be liable for an Employer Shared Responsibility Payment (“ESRP”) in the amount of $4.2 million for the year ended December 31, 2017. The ESRP is applicable to employers that had 50 or more full-time equivalent employees, did not offer minimum essential coverage (“MEC”) to at least 95% of full-time employees (and their dependents) or did offer MEC to at least 95% of full time-employees (and their dependents), which did not meet the affordable or minimum value criteria and had one or more employees who claimed the Employee Premium Tax Credit (“PTC”) pursuant to the Affordable Care Act (the “ACA”). The IRS determines which employers receive Letter 226-J and the amount of the proposed ESRP from information that the employers complete on their information returns (IRS Forms 1094-C and 1095-C) and from the income tax returns of their employees. Since the inception of the ACA, it has been our policy to offer MEC to all full-time employees and their dependents.  Based on our analysis, we responded to the IRS on January 15, 2020 asserting that we did offer MEC to at least 95% of our full-time employees for each month of 2017 and noting that the discrepancy was caused by errors in the electronic files uploaded through the ACA information return system.  The IRS has requested that we provide some additional information, and we provided that information on September 2, 2020.  However, we do not believe we have any liability with respect to this matter.  As a result, we did not make an accrual for this matter for the year ended February 1, 2020 or the six months ended August 1, 2020.

On July 22, 2020, Pontegadea UK Ltd. (the “Pontegadea”) filed a claim against Schuh Ltd. in the Queen’s Bench Division of the U.K. High Court of Justice regarding unpaid rent, service charges and insurance for certain premises located at 34-48 Oxford Street in London.  Pontegadea is seeking to recover £845,500, plus £10,000 of court fees and interest.  The claim is in its early stages and we are contesting the liability.  The unpaid rent, service charges and insurance have been accrued as of August 1, 2020.   

In addition to the matters specifically described in this Note, we are a party to other legal and regulatory proceedings and claims arising in the ordinary course of our business or specifically related to the COVID-19 pandemic.  While management does not believe that our liability with respect to any of these other matters is likely to have a material effect on our financial statements, legal proceedings are subject to inherent uncertainties and unfavorable rulings could have a material adverse impact on our financial statements.

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Notes to Condensed Consolidated Financial Statements (unaudited)

Note 10

Business Segment Information

⁽¹⁾ Asset impairments and other includes a $1.7 million charge for retail store asset impairments, which includes $0.4 million in Schuh Group and $1.3 million in Journeys Group.

⁽²⁾ Of our $890.8 million of long-lived assets, $151.3 million and $39.8 million relate to long-lived assets in the United Kingdom and Canada, respectively.

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Notes to Condensed Consolidated Financial Statements (unaudited)

Note 10

Business Segment Information, Continued