Document/ExhibitDescriptionPagesSize 1: 10-Q Genesco Inc. HTML 448K
2: EX-10.A EX-10.A Amended and Restated Genesco Employee 12 40K
Stock Purchase Plan
3: EX-31.1 EX-31.1 Section 302 Certification of the CEO 2 10K
4: EX-31.2 EX-31.2 Section 302 Certification of the CFO 2 10K
5: EX-32.1 EX-32.1 Section 906 Certification of the CEO 1 6K
6: EX-32.2 EX-32.2 Section 906 Certification of the CFO 1 6K
A Tennessee Corporation
I.R.S. No. 62-0211340
Genesco Park
1415 Murfreesboro Road Nashville, Tennessee37217-2895
Telephone 615/367-7000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports) 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 is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes þ No o
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Comprehensive income was $6.3 million and $4.8 million for the second quarter ended July30, 2005 and July 31, 2004, respectively. Comprehensive income was $10.1 million for the six
month period ended July 31, 2004.
The accompanying Notes are an integral part of these Consolidated Financial Statements.
The consolidated financial statements contained in this report are unaudited but reflect all
adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of
the results for the interim periods of the fiscal year ending January 28, 2006 (“Fiscal 2006”) and
of the fiscal year ended January 29, 2005 (“Fiscal 2005”). 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 annual report on Form 10-K.
Nature of Operations
The Company’s businesses include the design or sourcing, marketing and distribution of footwear,
principally under the Johnston & Murphy and Dockers brands and the operation at July 30, 2005 of
1,672 Jarman, Journeys, Journeys Kidz, Johnston & Murphy, Underground Station, Hat World, Lids, Hat
Zone, Cap Connection and Head Quarters retail footwear and headwear stores.
Principles of Consolidation
All subsidiaries are included in the 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.
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 wholesale operations, cost is determined using the first-in, first-out (FIFO) method.
Market is determined using a system of analysis which evaluates inventory at the stock number
level based on factors such as inventory turn, average selling price, inventory level, and selling
prices reflected in future orders. The Company provides reserves when the inventory has not been
marked down to market based on current selling prices or when the inventory is not turning and is
not expected to turn at levels satisfactory to the Company.
Summary of Significant Accounting Policies, Continued
In its retail operations, other than the Hat World segment, the Company employs the retail
inventory method, applying average cost-to-retail ratios to the retail value of inventories.
Under the retail inventory method, valuing inventory at the lower of cost or market is achieved as
markdowns are taken or accrued as a reduction of the retail value of inventories.
Inherent in the retail inventory method are subjective judgments and estimates including
merchandise mark-on, markups, markdowns, and shrinkage. These judgments and estimates, coupled
with the fact that the retail inventory method is an averaging process, could produce a range of
cost figures. To reduce the risk of inaccuracy and to ensure consistent presentation, the Company
employs the retail inventory method in multiple subclasses of inventory with similar gross margin,
and analyzes markdown requirements at the stock number level based on factors such as inventory
turn, average selling price, and inventory age. In addition, the Company accrues markdowns as
necessary. These additional markdown accruals reflect all of the above factors as well as current
agreements to return products to vendors and vendor agreements to provide markdown support. In
addition to markdown provisions, the Company maintains provisions for shrinkage and damaged goods
based on historical rates.
The Hat World segment employs the moving average cost method for valuing inventories and applies
freight using an allocation method. The Company provides a valuation allowance for slow-moving
inventory based on negative margins and estimated shrink based on historical experience and
specific analysis, where appropriate.
Inherent in the analysis of both wholesale and retail inventory valuation are subjective judgments
about current market conditions, fashion trends, and overall economic conditions. Failure to make
appropriate conclusions regarding these factors may result in an overstatement or understatement
of inventory value.
Impairment of Definite-Lived Long-Lived Assets
The Company periodically assesses the realizability of its definite-lived 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
of the value of definite-lived long-lived assets.
Summary of Significant Accounting Policies, Continued
Environmental and Other Contingencies
The Company is subject to certain loss contingencies related to environmental proceedings and
other legal matters, including those disclosed in Note 9 to the Company’s Consolidated Financial
Statements. 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 circumstance as of the
close of the most recent fiscal quarter. However, because of uncertainties and risks inherent in
litigation generally and in environmental proceedings in particular, there can be no assurance
that future developments will not require additional reserves to be set aside, that some or all
reserves will be adequate or that the amounts of any such additional reserves or any such
inadequacy will not have a material adverse effect upon the Company’s financial condition or
results of operations.
Revenue Recognition
Retail sales are recorded at the point of sale and are net of estimated returns. Catalog and
internet sales are recorded at time of delivery to the customer and are net of estimated returns.
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.
Pension Plan Accounting
In December 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards (“SFAS”) No. 132 (revised 2003), “Employers’ Disclosures about Pensions and
Other Postretirement Benefits.” This statement revised employers’ disclosures about pension plans
and other post retirement benefit plans. It did not change the measurement or recognition of
those plans required by SFAS No. 87, “Employers’ Accounting for Pensions.”
The Company accounts for the defined benefit pension plans using SFAS No. 87, “Employers’
Accounting for Pensions.” Under SFAS No. 87, 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.
Summary of Significant Accounting Policies, Continued
Cash and Cash Equivalents
Included in cash and cash equivalents at July 30, 2005 and January 29, 2005 are cash equivalents of
$21.8 million and $51.3 million, respectively. Cash equivalents are highly-liquid debt instruments
having an original maturity of three months or less. 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, 2005 and January 29, 2005, outstanding checks drawn on zero-balance accounts at certain
domestic banks exceeded book cash balances at those banks by approximately $22.6 million and $17.6
million, respectively. These amounts are included in accounts payable.
Concentration of Credit Risk and Allowances on Accounts Receivable
The Company’s footwear wholesaling business sells primarily to independent retailers and department
stores across the United States. Receivables arising from these sales are not collateralized.
Customer credit risk is affected by conditions or occurrences within the economy and the retail
industry. One customer accounted for 16% of the Company’s trade receivables balance and another
customer accounted for 11% as of July 30, 2005 and no other customer accounted for more than 5% of
the Company’s trade receivables balance as of July 30, 2005.
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
company-specific factors. The Company also establishes allowances for sales returns, customer
deductions and co-op advertising based on specific circumstances, historical trends and projected
probable outcomes.
Property and Equipment
Property and equipment are recorded at cost and depreciated or amortized over the estimated useful
life of related assets. Depreciation and amortization expense are computed principally by the
straight-line method over the following estimated useful lives:
Buildings and building equipment
20-45 years
Computer hardware, software and equipment
3-10 years
Furniture and fixtures
10 years
Leases
Leasehold improvements and properties under capital leases are amortized on the straight-line
method over the shorter of their useful lives or their related lease terms and the charge to
earnings is included in depreciation expense in the Consolidated Statements of Earnings.
Summary of Significant Accounting Policies, Continued
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 a rent liability.
The Company occasionally receives reimbursements from landlords to be used towards construction of
the store the Company intends to lease. Leasehold improvements are recorded at their gross costs
including items reimbursed by landlords. The reimbursements are amortized as a reduction of rent
expense over the initial lease term.
Goodwill and Other Intangibles
Under the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and
intangible assets with indefinite lives are not amortized, but tested at least annually for
impairment. This Statement also requires that intangible assets with finite lives be amortized
over their respective lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
Intangible assets of the Company with indefinite lives are primarily goodwill and identifiable
trademarks acquired in connection with the acquisition of Hat World Corporation on April 1, 2004.
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 and
projected future cash flows.
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.
Identifiable intangible assets of the Company with finite lives are primarily leases and customer
lists. 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.
Summary of Significant Accounting Policies, Continued
Postretirement Benefits
Substantially all full-time employees, except employees in the Hat World segment, are covered by a
defined benefit pension plan. The Company froze the defined benefit pension plan effective January1, 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.
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 $0.9 million and $1.2 million for the second quarter of Fiscal 2006 and 2005,
respectively, and $2.1 million and $2.4 million for the first six months of Fiscal 2006 and 2005,
respectively.
Buying, Merchandising and Occupancy Costs
The Company records buying and 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 is included in the cost
of inventory and is 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.
Summary of Significant Accounting Policies, Continued
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 Statements of Earnings.
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 SFAS No. 144, 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 Statement of Earnings, if 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 SFAS No. 144, 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 SFAS No. 146, “Accounting for Costs
Associated with Exit or Disposal Activities.”
Advertising Costs
Advertising costs are predominantly expensed as incurred. Advertising costs were $6.3 million and
$6.1 million for the second quarter of Fiscal 2006 and 2005, respectively, and $14.1 million and
$11.9 million for the first six months of Fiscal 2006 and 2005, respectively. Direct response
advertising costs for catalogs are capitalized, in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position No. 93-7, “Reporting on Advertising
Costs.” Such costs are amortized over the estimated future revenues realized from such
advertising, not to exceed six months. The Consolidated Balance Sheets included prepaid assets for
direct response advertising costs of $0.6 million and $1.2 million at July 30, 2005 and January 29,2005.
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 retail 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 retail 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 Emerging Issues Task Force (“EITF”) Issue No. 01-9,
“Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s
Products).”
Cooperative advertising costs recognized in selling and administrative expenses were $0.5 million
and $0.5 million for the second quarter of Fiscal 2006 and 2005, respectively, and $1.0 million and
$1.2 million for the first six months of Fiscal 2006 and 2005, respectively. During the first six
months of Fiscal 2006 and 2005, 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.
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 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 $1.2 million and $0.6 million for the second quarter of Fiscal 2006
and 2005, respectively, and $2.3 million and $1.1 million for the first six months of Fiscal 2006
and 2005, respectively. During the first six months of Fiscal 2006 and 2005, the Company’s
cooperative advertising reimbursements received were not in excess of the costs reimbursed.
Environmental Costs
Environmental expenditures relating to current operations are expensed or capitalized as
appropriate. Expenditures relating to an existing condition caused by past operations, and which do
not contribute to current or future revenue generation, are expensed. Liabilities are recorded
when environmental assessments and/or remedial efforts are probable and the costs can be reasonably
estimated and are evaluated independently of any future claims for recovery. Generally, the timing
of these accruals coincides with completion of a feasibility study or the Company’s commitment to a
formal plan of action. Costs of future expenditures for environmental remediation obligations are
not discounted to their present value.
Income Taxes
Deferred income taxes are provided for all temporary differences and operating loss and tax credit
carryforwards are limited, in the case of deferred tax assets, to the amount the Company believes
is more likely than not to be realized in the foreseeable future.
Earnings Per Common Share
Basic earnings per share excludes dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if securities to issue common
stock were exercised or converted to common stock (see Note 8).
Summary of Significant Accounting Policies, Continued
Other Comprehensive Income
SFAS No. 130, “Reporting Comprehensive Income,” requires, among other things, the Company’s minimum
pension liability adjustment, unrealized gains or losses on foreign currency forward contracts,
unrealized gains and losses on interest rate swaps and foreign currency translation adjustments to
be included in other comprehensive income net of tax. Accumulated other comprehensive loss at July30, 2005 consists of $27.0 million of cumulative minimum pension liability adjustments, net of tax,
cumulative net losses of $0.2 million on foreign currency forward contracts, net of tax, cumulative
net gains of $0.4 million on interest rate swaps, net of tax, and a foreign currency translation
adjustment of less than $0.1 million.
Business Segments
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” requires that
companies disclose “operating segments” based on the way management disaggregates the Company for
making internal operating decisions (see Note 10).
Derivative Instruments and Hedging Activities
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” SFAS No. 137,
“Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of
SFAS No. 133,” SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging
Activities” and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging
Activities,” (collectively “SFAS 133”) require an entity to recognize all derivatives as either
assets or liabilities in the consolidated balance sheet and to measure those instruments at fair
value. Under certain conditions, a derivative may be specifically designated as a fair value hedge
or a cash flow hedge. The accounting for changes in the fair value of a derivative are recorded
each period in current earnings or in other comprehensive income depending on the intended use of
the derivative and the resulting designation.
Summary of Significant Accounting Policies, Continued
Stock Incentive Plans
As of July 30, 2005, the Company had two fixed stock incentive plans. Under the new 2005 Equity
Incentive Plan, effective as of June 23, 2005, the Company may grant options, restricted shares and
other stock-based awards, to its management personnel as well as directors for up to 1.0 million
shares of common stock. Under the 1996 Stock Incentive Plan, the Company granted options to
management personnel as well as directors for up to 4.4 million shares of common stock. There will
be no future awards under the 1996 Stock Incentive Plan. The Company accounts for these plans
under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock
Issued to Employees,” and related Interpretations. In April 2005, 36,764 shares of restricted
stock granted to the chairman, president and chief executive officer of the Company in April 2002
vested and their fair value was charged against income as compensation cost. With this vesting,
the Company’s only outstanding, unvested restricted stock consists of shares granted to
non-employee directors under the 1996 Stock Incentive Plan. Compensation cost of $0.1 million,
$0.1 million, $0.2 million and $0.2 million, net of tax, for each of the second quarters and first
six months of Fiscal 2006 and 2005, respectively, has been charged against income for restricted
stock incentive plans. No other stock incentive plan compensation is reflected in net earnings, as
all other awards under the fixed stock incentive plans were options with an exercise price equal to
the market value of the underlying common stock on the date of grant. Had compensation cost for
all of the Company’s stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the methodology prescribed by SFAS No. 123
“Accounting for Stock-Based Compensation” (as amended by SFAS No. 148), the Company’s net earnings
and earnings per share would have been reduced to the pro forma amounts indicated below:
Three Months Ended
Six Months Ended
July 30,
July 31,
July 30,
July 31,
(In thousands, except per share amounts)
2005
2004
2005
2004
Net earnings, as reported
$
6,766
$
4,804
$
15,257
$
10,610
Add: stock-based employee compensation expense
included in reported net earnings,
net of related tax effects
52
101
156
219
Deduct: total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
Summary of Significant Accounting Policies, Continued
New Accounting Principles
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” which is a
revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) supersedes
APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement
of Cash Flows.” Generally, the approach in SFAS No. 123(R) is similar to the approach described in
SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the Statements of Earnings based on their
fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R) covers a wide
range of share-based compensation arrangements including stock options, restricted share plans,
performance-based awards, share appreciation rights and employee share purchase plans. The
Company’s board of directors has amended the Company’s Employee Stock Purchase Plan to provide that
participants may acquire shares under the Plan at a 5% discount from fair market value on the last
day of the Plan year. Under SFAS No. 123(R), shares issued under the Plan as amended are
non-compensatory and are not required to be reflected in the Consolidated Statements of Earnings.
SFAS No. 123(R) is effective for public companies at the beginning of the first fiscal year
beginning after June 15, 2005 (Fiscal 2007 for the Company).
SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:
1.
A “modified prospective” method in which compensation cost is recognized beginning
with the effective date (a) based on the requirements of SFAS No. 123(R) for all
share-based payments granted after the effective date and (b) based on the requirements
of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS
No. 123(R) that remain unvested on the effective date.
2.
A “modified retrospective” method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the
amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures of
all prior periods presented.
Summary of Significant Accounting Policies, Continued
As permitted by SFAS No. 123, the Company currently accounts for share-based payments to
employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)’s
fair value method will have a significant impact on the Company’s results of operations, although
it will have no impact on the Company’s overall financial position. The impact of adoption of
SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based
payments granted in the future. However, had the Company adopted SFAS No. 123(R) in prior
periods, the impact of that standard would have approximated the impact of SFAS No. 123 as
described in the disclosure of pro forma net earnings and earnings per share in Note 1. The pro
forma amounts were calculated using a Black-Scholes option pricing model and may not be
indicative of amounts which should be expected in future years. As of the date of this filing,
the Company has not determined which option pricing model is most appropriate for future option
grants or which method of adoption the Company will apply. SFAS No. 123(R) also requires the
benefits of tax deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under current literature.
This requirement will reduce net operating cash flows and increase net financing cash flows in
periods after adoption. While the Company cannot estimate what those amounts will be in the
future (because they depend on, among other things, when employees exercise stock options), the
amount of operating cash flows recognized in prior periods for such excess tax deductions were
$0.5 million and $0.8 million for the second quarter of Fiscal 2006 and 2005, respectively, and
$1.5 million and $1.1 million for the first six months of Fiscal 2006 and 2005, respectively.
In November 2004, the EITF reached a consensus on Issue No. 04-8, “The Effect of Contingently
Convertible Debt on Diluted Earnings per Share.” The Issue addressed when to include
contingently convertible debt instruments in diluted earnings per share. The Issue required
companies to include the convertible debt in diluted earnings per share regardless of whether the
market price trigger had been met. The Company’s diluted earnings per share calculation for the
second quarter and first six months of Fiscal 2006 includes an additional 3.9 million shares and
a net after tax interest add back of $0.6 million and $1.2 million, respectively. The Issue was
effective for periods ending after December 15, 2004 and required restatement of prior period
diluted earnings per share. Earnings per share for the second quarter and first six months of
Fiscal 2005 were previously restated.
On April 14, 2005, the Company filed its annual report on Form 10-K. In that report, the
Company restated its financial statements for fiscal years 2004 and 2003 and the first three
quarters of Fiscal 2005. Accordingly, the prior year financial results for the fiscal quarter
and six months ended July 31, 2004 reflect the impact of the restatement.
The issue requiring restatement related to the Company’s lease-related accounting methods. The
Company determined that its methods of accounting for (1) amortization of leasehold
improvements, (2) leasehold improvements funded by landlord incentives and (3) rent expense
prior to commencement of operations and rent payments, while in line with common industry
practice, were not in accordance with U.S. generally accepted accounting principles. As a
result, the Company restated its consolidated financial statements for each of the fiscal years
ended January 31, 2004 and February 1, 2003, and the first three quarters of Fiscal 2005.
Following is a summary of the effects of these changes on the Company’s Consolidated Balance
Sheet as of July 31, 2004, as well as on the Company’s Consolidated Statements of Earnings and
Cash Flows for the three months and six months ended July 31, 2004 (in thousands, except per
share amounts):
Earnings before income taxes from continuing operations
7,064
78
7,142
Income taxes
2,289
28
2,317
Earnings from continuing operations
4,775
50
4,825
Net Earnings
$
4,754
$
50
$
4,804
Net earnings per common share — basic
$
0.21
$
0.01
$
0.22
Net earnings per common share — diluted*
$
0.21
$
(0.01
)
$
0.20
*
Diluted net earnings per share decreased $0.01 per share due to the restatement for EITF Issue
No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” (see Note
8). The lease restatement had no effect on diluted net earnings per share for the quarter
ended July 31, 2004.
Earnings before income taxes from continuing operations
16,484
48
16,532
Income taxes
5,885
16
5,901
Earnings from continuing operations
10,599
32
10,631
Net Earnings
$
10,578
$
32
$
10,610
Net earnings per common share — basic
$
0.48
$
0.00
$
0.48
Net earnings per common share — diluted*
$
0.47
$
(0.02
)
$
0.45
*
Diluted net earnings per share decreased $0.02 per share due to the restatement for EITF Issue
No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” (see Note
8). The lease restatement had no effect on diluted net earnings per share for the six months
ended July 31, 2004.
On April 1, 2004, the Company completed the acquisition of 100% of the outstanding common shares
of Hat World Corporation (“Hat World”) for a total purchase price of approximately $179 million,
including adjustments for $12.6 million of net cash acquired, a $1.2 million subsequent working
capital adjustment and direct acquisition expenses of $2.8 million. The results of Hat World’s
operations have been included in the consolidated financial statements since that date.
Headquartered in Indianapolis, Indiana, Hat World is a leading specialty retailer of licensed and
branded headwear. The Company believes the acquisition has enhanced its strategic development and
prospects for growth.
The acquisition has been accounted for using the purchase method in accordance with SFAS No. 141,
“Business Combinations.” 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):
The trademarks acquired include the concept names and are deemed to have an indefinite life.
Finite-lived intangibles include a $0.3 million customer list and an $8.3 million asset to reflect
the adjustment of acquired leases to market. The weighted average amortization period for the
asset to adjust acquired leases to market is 4.2 years. The goodwill related to the Hat World
acquisition is not deductible for tax purposes. Goodwill decreased $0.7 million in the second
quarter of Fiscal 2006 due to the recognition of a deferred tax asset.
The following pro forma information presents the results of operations of the Company as if the
Hat World acquisition had taken place at the beginning of all periods presented in the table
below. Pro forma adjustments have been made to reflect additional interest expense from the
$100.0 million in debt associated with the acquisition. The pro forma results of operations
include $2.0 million of non-recurring transaction costs incurred by Hat World for the two months
ended March 31, 2004.
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 Hat World acquisition
occurred at the beginning of all periods presented.
Cap Connection Acquisition
On July 1, 2004, the Company acquired the assets and business of Edmonton, Alberta-based Cap
Connection Ltd., consisting of 18 Cap Connection and Head Quarters stores at July 30, 2005 in
Alberta, British Columbia and Ontario, Canada. The purchase price for the Cap Connection business
was approximately $1.7 million. Cap Connection is a leading Canadian specialty retailer of
headwear.
Restructuring and Other Charges and Discontinued Operations
Restructuring and Other Charges
The Company recorded a pretax charge to earnings of $0.2 million ($0.1 million net of tax) in the
second quarter of Fiscal 2006. The charge was primarily for retail store asset impairments and
lease terminations of two Jarman stores. These lease terminations are the continuation of a plan
previously announced by the Company in Fiscal 2004.
The Company recorded a pretax charge to earnings of $2.9 million ($1.8 million net of tax) in the
first quarter of Fiscal 2006. The charge included a $2.6 million charge for an anticipated
settlement of a previously disclosed class action lawsuit (see Note 9), $0.2 million in retail
store asset impairments and $0.1 million related to lease terminations of two Jarman stores.
The Company recorded a pretax credit to earnings of $0.2 million in the second quarter of Fiscal
2005. The credit was primarily for the recognition of a gain on the curtailment of the Company’s
defined benefit pension plan, offset by charges for retail store asset impairments and lease
terminations of four Jarman stores. In connection with the lease terminations, $30,000 in
inventory markdowns are reflected in gross margin on the Consolidated Statements of Earnings.
The Company recorded a pretax charge to earnings of $0.1 million in the first quarter of Fiscal
2005. The charge was primarily for lease terminations of six Jarman stores.
In accordance with Company policy, the Company evaluated assets at these identified stores for
impairment when a strategic decision was made during the fourth quarter of Fiscal 2004 to pursue
the closure of these stores. Assets were determined to be impaired when the revised estimated
future cash flows were 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 Statements of Earnings.
Restructuring Reserves
Employee
Facility
Related
Shutdown
In thousands
Costs
Costs
Total
Balance January 31, 2004 (included in
other accrued liabilities)
In order to reduce exposure to foreign currency exchange rate fluctuations in connection with
inventory purchase commitments for its Johnston & Murphy division, the Company enters into foreign
currency forward exchange contracts for Euro to make Euro denominated payments with a maximum
hedging period of twelve months. 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 payment terms for the merchandise inventories. As a result,
there is no hedge ineffectiveness to be reflected in earnings. At July 30, 2005 and January 29,2005, the Company had approximately $12.6 million and $12.8 million, respectively, of such
contracts outstanding. Forward exchange contracts have an average remaining term of approximately
four and one-half months. The loss based on spot rates under these contracts at July 30, 2005 was
$0.4 million and the gain based on spot rates at January 29, 2005 was $0.1 million. For the six
months ended July 30, 2005, the Company recorded an unrealized loss on foreign currency forward
contracts of $1.1 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 losses related to forward exchange contracts
will be reclassified from accumulated other comprehensive loss into earnings through higher cost of
sales over the succeeding year.
Derivative Instruments and Hedging Activities, Continued
The Company uses interest rate swaps as a cash flow hedge to manage interest costs and the risk
associated with changing interest rates of long-term debt. During the first quarter of Fiscal
2005, the Company entered into three separate forward-starting interest rate swap agreements as a
means of managing its interest rate exposure on its $100.0 million variable rate term loan. All
three agreements were effective beginning on October 1, 2004 and are designed to swap a variable
rate of three-month LIBOR (3.51% at July 1, 2005, the day the rate was set) for a fixed rate
ranging from 2.52% to 3.32%. The aggregate notional amount of the swaps is $65.0 million. Of the
three agreements, the swap agreement with a $15.0 million notional amount expires on October 1,2005, the swap agreement with a $20.0 million notional amount expires on July 1, 2006 and the swap
agreement with a $30.0 million notional amount expires on April 1, 2007. These agreements have the
effect of converting certain of the Company’s variable rate obligations to fixed rate obligations.
In order to ensure continued hedge effectiveness, the Company intends to elect the three-month
LIBOR option for its variable rate interest payments on its term loan as of each interest payment
date. Since the interest payment dates coincide with the swap reset dates, the hedges are expected
to be perfectly effective. However, because the swaps do not qualify for the short-cut method, the
Company will evaluate quarterly the continued effectiveness of the hedge and will reflect any
ineffectiveness in the results of operations. As long as the hedge continues to be perfectly
effective, net amounts paid or received will be reflected as an adjustment to interest expense and
the changes in the fair value of the derivative will be reflected in other comprehensive income.
At July 30, 2005, the net gain of these interest rate swap agreements was $0.4 million, net of tax,
representing the change in fair value of the derivative instruments.
Defined Benefit Pension Plans and Other Benefit Plans
Components of Net Periodic Benefit Cost
Pension Benefits
Three Months Ended
Six Months Ended
July 30,
July 31,
July 30,
July 31,
In thousands
2005
2004
2005
2004
Service cost
$
61
$
582
$
127
$
1,124
Interest cost
1,656
1,670
3,326
3,402
Expected return on plan assets
(1,920
)
(1,872
)
(3,861
)
(3,769
)
Amortization:
Prior service cost
-0-
(35
)
-0-
(70
)
Losses
1,087
1,022
2,329
2,070
Net amortization
1,087
987
2,329
2,000
Curtailment gain
-0-
(605
)
-0-
(605
)
Net Periodic Benefit Cost
$
884
$
762
$
1,921
$
2,152
Other Benefits
Three Months Ended
Six Months Ended
July 30,
July 31,
July 30,
July 31,
In thousands
2005
2004
2005
2004
Service cost
$
37
$
44
$
74
$
88
Interest cost
44
24
88
48
Expected return on plan assets
-0-
-0-
-0-
-0-
Amortization:
Prior service cost
-0-
-0-
-0-
-0-
Losses
14
20
28
40
Net amortization
14
20
28
40
Net Periodic Benefit Cost
$
95
$
88
$
190
$
176
Curtailment
The Company’s board of directors approved freezing the Company’s defined pension benefit plan in
the second quarter ended July 31, 2004, effective January 1, 2005. The action resulted in a
curtailment gain of $0.6 million in the second quarter ended July 31, 2004 which is reflected in
the restructuring and other, net line on the accompanying Statements of Earnings.
Income available to common
shareholders plus assumed
conversions
$
7,314
27,142
$
.27
$
5,368
26,290
$
.20
(1)
The amount of the dividend on the convertible preferred stock per common share obtainable
on conversion of the convertible preferred stock is higher than basic earnings per share
for all periods presented. Therefore, conversion of the convertible preferred stock is not
reflected in diluted earnings per share, because it would have been antidilutive. The
shares convertible to common stock for Series 1, 3 and 4 preferred stock would have been
30,395, 37,263 and 21,310, respectively.
(2)
These debentures are included in diluted earnings per share effective for periods ending
after December 15, 2004. The EITF issued Consensus No. 04-8, “The Effect of Contingently
Convertible Debt on Diluted Earnings per Share” in November 2004. The Consensus requires
companies to include the convertible debt in diluted earnings per share regardless of
whether the market price trigger has been met and prior periods should be restated.
Results for the second quarter of Fiscal 2005 have been restated to include these shares.
(3)
The Company’s Employees’ Subordinated Convertible Preferred Stock is convertible one for
one to the Company’s common stock. Because there are no dividends paid on this stock,
these shares are assumed to be converted.
The weighted shares outstanding reflects the effect of the stock buy back programs of up
to 7.5 million shares announced by the Company in Fiscal 1999 — 2003. The Company had
repurchased 7.1 million shares as of January 31, 2004. There were 398,300 shares remaining to
be repurchased under these authorizations. The board subsequently reduced the repurchase
authorization to 100,000 shares in Fiscal 2005 in view of the Hat World acquisition. The
Company has not repurchased any shares since Fiscal 2004.
Income available to common
shareholders plus assumed
conversions
$
16,283
27,020
$
.60
$
11,712
26,208
$
.45
(1)
The amount of the dividend on the convertible preferred stock per common share obtainable
on conversion of the convertible preferred stock is higher than basic earnings per share
for all periods presented. Therefore, conversion of the convertible preferred stock is not
reflected in diluted earnings per share, because it would have been antidilutive. The
shares convertible to common stock for Series 1, 3 and 4 preferred stock would have been
30,395, 37,263 and 21,310, respectively.
(2)
These debentures are included in diluted earnings per share effective for periods ending
after December 15, 2004. The EITF issued Consensus No. 04-8, “The Effect of Contingently
Convertible Debt on Diluted Earnings per Share” in November 2004. The Consensus requires
companies to include the convertible debt in diluted earnings per share regardless of
whether the market price trigger has been met and prior periods should be restated.
Results for the first six months of Fiscal 2005 have been restated to include these
shares.
(3)
The Company’s Employees’ Subordinated Convertible Preferred Stock is convertible one for
one to the Company’s common stock. Because there are no dividends paid on this stock,
these shares are assumed to be converted.
The weighted shares outstanding reflects the effect of the stock buy back programs of up
to 7.5 million shares announced by the Company in Fiscal 1999 — 2003. The Company had
repurchased 7.1 million shares as of January 31, 2004. There were 398,300 shares remaining to
be repurchased under these authorizations. The board subsequently reduced the repurchase
authorization to 100,000 shares in Fiscal 2005 in view of the Hat World acquisition. The
Company has not repurchased any shares since Fiscal 2004.
In August 1997, the New York State Department of Environmental Conservation (the “Department”) and
the Company entered into a consent order whereby the Company assumed responsibility for conducting
a remedial investigation and feasibility study (“RIFS”) and implementing an interim remediation
measure (“IRM”) with regard to the site of a knitting mill operated by a former subsidiary of the
Company from 1965 to 1969. The Company undertook the IRM and RIFS voluntarily, without admitting
liability or accepting responsibility for any future remediation of the site. The Company
estimates that the cost of conducting the RIFS and implementing the IRM will be in the range of
$6.1 million to $6.3 million, net of insurance recoveries, $3.0 million of which the Company has
already paid.
The Company has not ascertained what responsibility, if any, it has for any contamination in
connection with the facility or what other parties may be liable in that connection and is unable
to predict the extent of its liability, if any, beyond that voluntarily assumed by the consent
order. The Company’s voluntary assumption of responsibility for the IRM and the RIFS and its
willingness to implement a remedial alternative with respect to the supply wells (described below)
were based upon its judgment that such actions were preferable to litigation to determine its
liability, if any, for contamination related to the site. The Company intends to continue to
evaluate the costs of further voluntary remediation versus the costs and uncertainty of litigation.
As part of its analysis of whether to undertake further voluntary action, the Company has assessed
various methods of preventing potential future impact of contamination from the site on two public
wells that are in the expected future path of the groundwater plume from the site. The Village of
Garden City has proposed the installation at the supply wells of enhanced treatment measures at an
estimated cost of approximately $2.6 million, with estimated future costs of up to $2.0 million.
In the third quarter of Fiscal 2005, the Company provided for the estimated cost of a remedial
alternative it considers adequate to prevent such impact and which it would be willing to implement
voluntarily. The Village of Garden City has also asserted that the Company is liable for
historical costs of treatment at the wells totaling approximately $3.4 million. Because of
evidence with regard to when contaminants from the site of the Company’s former operations first
reached the wells, the Company believes it should have no liability with respect to such historical
costs.
The Company has performed sampling and analysis of soil, sediments, surface water, groundwater and
waste management areas at the Company’s former Volunteer Leather Company facility in Whitehall,
Michigan.
The Company has submitted to the Michigan Department of Environmental Quality (“MDEQ”) and provided
for certain costs associated with a remedial action plan (the “Plan”) designed to bring the
property into compliance with regulatory standards for non-industrial uses. The Company estimates
that the costs of resolving environmental contingencies related to the Whitehall property range
from $0.7 million to $5.0 million, and considers the cost of implementing the Plan to be the most
likely cost within that range. While management believes that the Plan should be sufficient to
satisfy applicable regulatory standards with respect to the site, until the Plan is finally
approved by MDEQ, management cannot provide assurances that no further remediation will be required
or that its estimate of the range of possible costs or of the most likely cost of remediation will
prove accurate.
Related to all outstanding environmental contingencies, the Company had accrued $5.1 million as of
July 30, 2005, $5.5 million as of January 29, 2005 and $2.7 million as of January 31, 2004. All
such provisions reflect the Company’s estimates of the most likely cost (undiscounted, including
both current and noncurrent portions) of resolving the contingencies, based on facts and
circumstances as of the time they were made. There is no assurance that relevant facts and
circumstances will not change, necessitating future changes to the provisions. Such contingent
liabilities are included in the liability arising from provision for discontinued operations on the
accompanying Consolidated Balance Sheets.
Insurance Matter
In May 2003, the Company filed a declaratory judgment action in the U.S. District Court for the
Middle District of Tennessee against former general liability insurance carriers that underwrote
policies covering the Company during periods relevant to the New York State knitting mill matter
described above and the matters described above under the caption “Whitehall Environmental
Matters.” The action sought a determination that the carriers’ defense and indemnity obligations
under the policies extend to the sites. During the third quarter of Fiscal 2005, the Company and
the carriers reached definitive settlement agreements and the Company received cash payments from
the carriers totaling approximately $3.0 million in exchange for releases from liability with
respect to the two sites. Net of the insurance proceeds, additional pretax provisions totaling
approximately $1.0 million for future remediation expenses associated with the New York State
knitting mill matter described above and the Whitehall matter described above, are reflected in the
loss from discontinued operations for Fiscal 2005.
In January 2003, the Company was named a defendant in an action filed in the United States District
Court for the Eastern District of Pennsylvania, Schoenhaus, et al. vs. Genesco Inc., et al.,
alleging that certain features of shoes in the Company’s Johnston & Murphy line infringe the
plaintiff’s patent, misappropriate trade secrets and involve conversion of the plaintiff’s
proprietary information and unjust enrichment of the Company. On January 10, 2005, the court
granted summary judgment to the Company on the patent claims, finding that the accused products do
not infringe the plaintiff’s patent. The plaintiffs have appealed the summary judgment to the U.S.
Court of Appeals for the Federal Circuit, pending which the trial court has stayed the remainder of
the case.
California Employment Matter
On October 22, 2004, the Company was named a defendant in a putative class action filed in the
Superior Court of the State of California, Los Angeles, Schreiner vs. Genesco Inc., et al.,
alleging violations of California wages and hours laws, and seeking damages of $40 million plus
punitive damages. On May 4, 2005, the Company and the plaintiffs reached an agreement in principle
to settle the action, subject to court approval and other conditions. In connection with the
proposed settlement, to provide for the settlement payment to the plaintiff class and related
expenses, the Company recognized a charge of $2.6 million before taxes included in restructuring
and other, net in the accompanying Consolidated Statements of Earnings for the first six months of
Fiscal 2006. On May 25, 2005, a second putative class action, Drake vs. Genesco Inc., et al.,
making allegations similar to those in the Schreiner complaint on behalf of employees of the
Company’s Johnston & Murphy division, was filed by a different plaintiff in the California Superior
Court, Los Angeles. The Drake action is stayed pending final resolution of the Schreiner action.
The Company currently operates five reportable business segments (not including corporate):
Journeys, comprised of Journeys and Journeys Kidz retail footwear operations; Underground Station
Group, comprised of the Underground Station and Jarman retail footwear operations; Hat World,
comprised of Hat World, Lids, Hat Zone, Cap Connection and Head Quarters retail headwear
operations; Johnston & Murphy, comprised of Johnston & Murphy retail operations and wholesale
distribution; and Licensed Brands, comprised of Dockers Footwear and Perry Ellis Footwear. The
Company plans to introduce Perry Ellis footwear beginning with the Holiday 2005 season. All the
Company’s segments sell footwear or headwear products to either retail or wholesale
markets/customers.
The accounting policies of the segments are the same as those described in the summary of
significant accounting policies.
The Company’s reportable segments are based on the way management organizes the segments in order
to make operating decisions and assess performance along types of products sold. Journeys,
Underground Station Group and Hat World sell primarily branded products from other companies while
Johnston & Murphy and Licensed Brands sell primarily the Company’s owned and licensed brands.
Corporate assets include cash, deferred income taxes, deferred note expense and corporate fixed
assets. The Company charges allocated retail costs of distribution to each segment and unallocated
retail costs of distribution to the corporate segment. The Company does not allocate certain costs
to each segment in order to make decisions and assess performance. These costs include corporate
overhead, interest expense, interest income, restructuring charges and other, including a $2.6
million charge for a litigation settlement in the first six months of Fiscal 2006.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This discussion and the notes to the Consolidated Financial Statements include certain
forward-looking statements, which include statements regarding our intent, belief or expectations
and all statements other than those made solely with respect to historical fact. Actual results
could differ materially from those reflected by the forward-looking statements in this discussion
and a number of factors may adversely affect the forward looking statements and the Company’s
future results, liquidity, capital resources or prospects. These factors (some of which are beyond
the Company’s control) include:
•
Weakness in consumer demand for products sold by the Company.
•
Weakness in consumer demand and increased distribution costs due to increased fuel
prices.
•
Effects on local consumer demand or on the national economy
related to Hurricane Katrina.
•
Fashion trends that affect the sales or product margins of the Company’s retail product
offerings.
•
Changes in the timing of the holidays or in the onset of seasonal weather affecting
demand or period to period sales comparisons.
•
Changes in buying patterns by significant wholesale customers.
•
Disruptions in product availability or distribution.
•
Unfavorable trends in foreign exchange rates and other factors affecting the cost of
products.
•
Changes in business strategies by the Company’s competitors (including pricing and
promotional discounts).
•
The Company’s ability to open, staff and support additional retail stores on schedule
and at acceptable expense levels and to renew leases in existing stores on schedule and at
acceptable expense levels.
•
Variations from expected pension-related charges caused by conditions in the financial
markets, and
•
The outcome of litigation and environmental matters involving the Company, including
those discussed in Note 9 to the Consolidated Financial Statements.
Forward-looking statements reflect the expectations of the Company at the time they are made, and
investors should rely on them only as expressions of opinion about what may happen in the future
and only at the time they are made. The Company undertakes no obligation to update any
forward-looking statement. Although the Company believes it has an appropriate business strategy
and the resources necessary for its operations, predictions about future results, revenue and
margin trends are inherently uncertain and the Company may alter its business strategies to address
changing conditions.
Overview
Description of Business
The Company is a leading retailer of branded footwear and of licensed and branded headwear,
operating 1,654 retail footwear and headwear stores throughout the United States and Puerto Rico
and 18 headwear stores in Canada as of July 30, 2005. The Company also designs, sources, markets
and distributes footwear under its own Johnston & Murphy brand and under the licensed Dockers brand
to over 950 retail accounts in the United States, including a number of leading
department, discount, and specialty stores. On April 1, 2004, the Company acquired Hat World Corporation (“Hat
World”), a leading retailer of licensed and branded headwear. On July 1, 2004, the Company
acquired the assets and business of Edmonton, Alberta — based Cap Connection Ltd., a leading
Canadian specialty retailer of headwear, operating 18 stores at July 30, 2005. See “Significant
Developments.”
The Company operates five reportable business segments (not including corporate): Journeys,
comprised of Journeys and Journeys Kidz retail footwear chains; Underground Station Group,
comprised of the Underground Station and Jarman retail footwear chains; Hat World, comprised of Hat
World, Lids, Hat Zone, Cap Connection and Head Quarters retail headwear operations; Johnston &
Murphy, comprised of Johnston & Murphy retail operations and wholesale distribution; and Licensed
Brands, comprised of Dockers® Footwear and Perry Ellis® Footwear. The
Company plans to introduce Perry Ellis Footwear beginning with the Holiday 2005 season.
The Journeys retail footwear stores sell footwear and accessories primarily for 13 — 22 year old
men and women. The stores average approximately 1,700 square feet. The Journeys Kidz retail
footwear stores sell footwear primarily for younger children, ages four to eleven. These stores
average approximately 1,400 square feet.
The Underground Station Group retail footwear stores sell footwear and accessories for men and
women in the 20 to 35 age group. The Underground Station Group stores average approximately 1,600
square feet. In the fourth quarter of Fiscal 2004, the Company made the strategic decision to
close 34 Jarman stores subject to its ability to negotiate lease terminations. These stores are
not suitable for conversion to Underground Station stores. The Company intends to convert the
remaining Jarman stores to Underground Station stores and close the remaining Jarman stores not
closed in Fiscal 2005 as quickly as it is financially feasible, subject to landlord approval.
During the first six months of Fiscal 2006, four Jarman stores were closed and two Jarman stores
were converted to Underground Station stores. During Fiscal 2005, 20 Jarman stores were closed and
twelve Jarman stores were converted to Underground Station stores.
Hat World retail stores sell licensed and branded headwear to men and women primarily in the
mid-teen to mid-20’s age group. These stores average approximately 700 square feet and are located
in malls, airports, street level stores and factory outlet stores nationwide and in Canada.
Johnston & Murphy retail stores sell a broad range of men’s dress and casual footwear and
accessories to business and professional consumers. These stores average approximately 1,300
square feet and are located primarily in better malls nationwide. Johnston & Murphy shoes are also
distributed through the Company’s wholesale operations to better department and independent
specialty stores. In addition, the Company sells Johnston & Murphy footwear in factory stores
located in factory outlet malls. These stores average approximately 2,400 square feet.
The Company entered into an exclusive license with Levi Strauss and Company to market men’s
footwear in the United States under the Dockers® brand name in 1991. The Dockers
license agreement was renewed October 22, 2004. The Dockers license agreement, as amended, expires
on December 31, 2006 with a Company option to renew through December 31, 2008, subject to certain
conditions. The Company uses the Dockers name to market casual and dress casual footwear to men
aged 30 to 55 through many of the same national retail chains that carry Dockers slacks and
sportswear and in department and specialty stores across the country. The Company
expects to sell footwear under the Perry Ellis license primarily to department and specialty stores across the
country.
Summary of Operating Results
The Company’s net sales increased 11.9% during the second quarter of Fiscal 2006 compared to the
second quarter of Fiscal 2005. The increase was driven primarily by the addition of new stores and
a 6% increase in comparable store sales for all concepts. Gross margin increased as a percentage
of net sales during the second quarter of Fiscal 2006 primarily due to improved gross margins in
the Journeys, Underground Station, Hat World and Johnston & Murphy businesses. Selling and
administrative expenses decreased as a percentage of net sales during the second quarter of Fiscal
2006 due to decreased expenses in Underground Station, Johnston & Murphy and Licensed Brands
businesses. Operating income increased as a percentage of net sales during the second quarter of
Fiscal 2006 due to improved operating income in Underground Station, Hat World and Johnston &
Murphy businesses.
Strategy
The Company’s strategy is to seek long-term growth by: 1) increasing the Company’s store base, 2)
increasing retail square footage, 3) improving comparable store sales, 4) increasing operating
margin and 5) enhancing the value of its brands. Our future results are subject to various risks,
uncertainties and other challenges, including those discussed under the caption “Forward Looking
Statements,” above. Among the most important of these factors are those related to consumer
demand. Conditions in the external economy can affect demand, resulting in changes in sales and,
as prices are adjusted to drive sales and control inventories, in gross margins. Because fashion
trends influencing many of the Company’s target customers (particularly customers of Journeys,
Underground Station and Hat World) can change rapidly, the Company believes that its ability to
detect and respond quickly to those changes has been important to its success. Even when the
Company succeeds in aligning its merchandise offerings with consumer preferences, those preferences
may affect results. The Company believes its experience and discipline in merchandising and the
buying power associated with its relative size in the industry are important to its ability to
mitigate risks associated with changing customer preferences. Also important to the Company’s
long-term prospects are the availability and cost of appropriate locations for the Company’s retail
concepts. The Company is opening stores in airports and on streets in major cities, tourist venues
and college campuses, among other locations in an effort to broaden its selection of locations for
additional stores beyond the malls that have traditionally been the dominant venue for its retail
concepts.
Significant Developments
Hurricane Katrina
The
Company has 11 stores that will be impacted for an extended period of time as a result of
Hurricane Katrina. The Company has not been able to assess the extent of damage to these stores.
Management believes that the Company’s maximum uninsured
exposure is approximately $1.0 million, which does not include
business lost during the period of time the stores are closed. These
stores had sales of $7.2
million and operating income of $1.1 million for the twelve months ended July 30, 2005.
Restatement of Financial Statements
On April 14, 2005, the Company filed its annual report on Form 10-K. In that report, the Company
restated its financial statements for fiscal years 2004 and 2003 and the first three quarters of
Fiscal
2005. Accordingly, the prior year financial results for the fiscal quarter and six months
ended July 31, 2004 reflect the impact of the restatement.
The issue requiring restatement related to the Company’s lease-related accounting methods. The
Company determined that its methods of accounting for (1) amortization of leasehold improvements,
(2) leasehold improvements funded by landlord incentives and (3) rent expense prior to commencement
of operations and rent payments, while in line with common industry practice, were not in
accordance with generally accepted accounting principles. As a result, the Company restated its
consolidated financial statements for each of the fiscal years ended January 31, 2004 and February1, 2003, and the first three quarters of Fiscal 2005.
See Note 2 to the Consolidated Financial Statements for a summary of the effects of this
restatement on the Company’s Consolidated Balance Sheet as of July 31, 2004, as well as the
Company’s Consolidated Statements of Earnings and Cash Flows for the three months and six months
ended July 31, 2004.
Cap Connection Acquisition
On July 1, 2004, the Company acquired the assets and business of Edmonton, Alberta-based Cap
Connection Ltd. The purchase price for the Cap Connection business was approximately $1.7
million. At July 30, 2005, the Company operated 18 Cap Connection and Head Quarters stores in
Alberta, British Columbia and Ontario, Canada.
Hat World Acquisition
On April 1, 2004, the Company completed the acquisition of Hat World Corporation for a total
purchase price of approximately $179 million, including adjustments for $12.6 million of net cash
acquired, a $1.2 million subsequent working capital adjustment and direct acquisition expenses of
$2.8 million. Hat World is a leading specialty retailer of licensed and branded headwear operating
under the Hat World, Lids and Hat Zone names. The Company believes the acquisition has enhanced
its strategic development and prospects for growth. The Company funded the acquisition and
associated expenses with a $100.0 million, five-year term loan and the balance from cash on hand.
Restructuring and Other Charges
The Company recorded a pretax charge to earnings of $0.2 million ($0.1 million net of tax) in the
second quarter of Fiscal 2006. The charge was primarily for retail store asset impairments and
lease terminations of two Jarman stores. These lease terminations are the continuation of a plan
previously announced by the Company in Fiscal 2004.
The Company recorded a pretax charge to earnings of $2.9 million ($1.8 million net of tax) in the
first quarter of Fiscal 2006. The charge included a $2.6 million charge for an anticipated
settlement of a previously disclosed class action lawsuit (see Note 9), $0.2 million in retail
store asset impairments and $0.1 million related to lease terminations of two Jarman stores.
The Company recorded a pretax credit to earnings of $0.2 million in the second quarter of Fiscal
2005. The credit was primarily for the recognition of a gain on the curtailment of the Company’s
defined benefit pension plan, offset by charges for retail store asset impairments and lease
terminations of four Jarman stores. In connection with the lease terminations, $30,000 in
inventory markdowns are reflected in gross margin on the Consolidated Statements of Earnings.
The Company recorded a pretax charge to earnings of $0.1 million in the first quarter of Fiscal
2005. The charge was primarily for lease terminations of six Jarman stores.
Results of Operations — Second Quarter Fiscal 2006 Compared to Fiscal 2005
The Company’s net sales in the second quarter ended July 30, 2005 increased 11.9% to $275.2 million
from $245.9 million in the second quarter ended July 31, 2004. Gross margin increased 14.0% to
$139.0 million in the second quarter this year from $121.9 million in the same period last year and
increased as a percentage of net sales from 49.6% to 50.5%. Selling and administrative expenses in
the second quarter this year increased 11.5% from the second quarter last year but decreased as a
percentage of net sales from 45.5% to 45.4%. The Company records buying and 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. Explanations of the changes in results of
operations are provided by business segment in discussions following these introductory paragraphs.
Earnings before income taxes from continuing operations (“pretax earnings”) for the second quarter
ended July 30, 2005 were $11.3 million compared to $7.1 million for the second quarter ended July31, 2004. Pretax earnings for the second quarter ended July 30, 2005 included restructuring and
other charges of $0.2 million, primarily for retail store asset impairments and lease terminations
of two Jarman stores. These lease terminations are the continuation of a
plan previously announced by the Company in Fiscal 2004. Pretax earnings for the second quarter
ended July 31, 2004 included a restructuring and other credit of $0.2 million, primarily for the
gain on the curtailment of the Company’s defined benefit pension plan, offset by retail store asset
impairments and lease terminations of four Jarman stores.
Net earnings for the second quarter ended July 30, 2005 were $6.8 million ($0.27 diluted earnings
per share) compared to $4.8 million ($0.20 diluted earnings per share) for the second quarter ended
July 31, 2004. The Company recorded an effective income tax rate of 39.9% in the second quarter
this year compared to 32.4% in the same period last year. Income taxes for the second quarter last
year included a favorable tax settlement of $0.4 million.
Journeys
Three Months Ended
July 30,
July 31,
%
2005
2004
Change
(dollars in thousands)
Net sales
$
118,928
$
105,785
12.4
%
Operating loss
$
6,951
$
6,083
14.3
%
Operating margin
5.8
%
5.8
%
Net sales from Journeys increased 12.4% for the second quarter ended July 30, 2005 compared to the
same period last year. The increase reflects primarily a 6% increase in comparable store sales and
a 4% increase in average Journeys stores operated (i.e., the sum of the number of stores open on
the first day of the fiscal quarter and the last day of each fiscal month during the quarter
divided by four). Footwear unit comparable sales also increased 9% for the second quarter ended
July 30, 2005. The average price per pair of shoes decreased 3% in the second quarter of Fiscal
2006,
reflecting changes in product mix, while unit sales increased 16% during the same period.
The strong comparable sales performance was primarily driven by continued growth in comparable unit
sales. Journeys operated 711 stores at the end of the second quarter of Fiscal 2006, including 41
Journeys Kidz stores, compared to 680 stores at the end of the second quarter last year, including
41 Journeys Kidz stores.
Journeys operating income for the second quarter ended July 30, 2005 was up 14.3% to $7.0 million
compared to $6.1 million for the second quarter ended July 31, 2004. The increase was due to
increased net sales, reflecting increased comparable store sales, and to increased gross margin as
a percentage of net sales, primarily reflecting changes in product mix and decreased markdowns as a
percentage of net sales.
Underground Station Group
Three Months Ended
July 30,
July 31,
%
2005
2004
Change
(dollars in thousands)
Net sales
$
32,186
$
28,462
13.1
%
Operating loss
$
(681
)
$
(1,483
)
54.1
%
Operating margin
(2.1
)%
(5.2
)%
Net sales from the Underground Station Group (comprised of Underground Station and Jarman
retail stores) increased 13.1% for the second quarter ended July 30, 2005 compared to the same
period last year. Comparable store sales were up 9% for the Underground Station Group, 12% for
Underground Station stores and 1% for Jarman retail stores. Footwear unit comparable sales were up
8% in the Underground Station stores. The strong comparable sales performance was primarily driven
by continued increases in average selling prices and continued growth in unit comparable sales.
The average price per pair of shoes increased 3% in the second quarter of Fiscal 2006, primarily
reflecting lower markdowns and changes in product mix, and unit sales increased 9% during the same
period. Underground Station Group operated 226 stores at the end of the second quarter of Fiscal
2006, including 168 Underground Station stores. The Underground Station Group operated 230 stores
at the end of the second quarter last year, including 148 Underground Station stores.
Underground Station Group operating loss for the second quarter ended July 30, 2005 was $(0.7)
million compared to $(1.5) million for the second quarter last year. The decreased operating loss
was due to increased net sales, to increased gross margin as a percentage of net sales, primarily
reflecting lower markdowns and changes in product mix, and to decreased expenses as a percentage of
net sales.
Net sales from Hat World increased 19.2% for the second quarter ended July 30, 2005 compared to the
same period last year. The increase reflects primarily a 16% increase in average Hat World stores
operated and a 4% increase in comparable store sales. Hat World’s comparable store sales increase
was primarily driven by the strength of its core and fashion Major League Baseball products. Hat
World operated 593 stores at the end of the second quarter of Fiscal 2006, including 18 stores in
Canada, compared to 519 stores at the end of the second quarter last year, including 17 stores in
Canada.
Hat World operating income for the second quarter ended July 30, 2005 increased 24.3% to $9.3
million compared to $7.5 million for the second quarter ended July 31, 2004. This increase was due
to increased net sales, reflecting increased average stores operated and increased comparable store
sales, and to increased gross margin as a percentage of net sales, primarily reflecting the
strength of certain product categories and decreased stock shortages.
Johnston & Murphy
Three Months Ended
July 30,
July 31,
%
2005
2004
Change
(dollars in thousands)
Net sales
$
41,008
$
39,413
4.0
%
Operating income
$
2,418
$
1,400
72.7
%
Operating margin
5.9
%
3.6
%
Johnston & Murphy net sales increased 4.0% to $41.0 million for the second quarter ended July 30,2005 from $39.4 million for the second quarter ended July 31, 2004, reflecting primarily a 9%
increase in comparable store sales for Johnston & Murphy retail operations offset by a 4% decrease
in Johnston & Murphy wholesale sales. Unit sales for the Johnston & Murphy wholesale business
increased 6% in the second quarter of Fiscal 2006 while the average price per pair of shoes
decreased 9% for the same period primarily due to changes in product mix. Retail operations
accounted for 76.6% of Johnston & Murphy segment sales in the second quarter this year, up from
74.6% in the second quarter last year. The average price per pair of shoes for Johnston & Murphy
retail operations decreased 11% (15% in the Johnston and Murphy Shops) in the second quarter this
year primarily due to changes in product mix, while unit sales increased 17% during the same
period. The store count for Johnston & Murphy retail operations at the end of the second quarter
of Fiscal 2006 and 2005 included 142 Johnston & Murphy stores and factory stores.
Johnston & Murphy operating income for the second quarter ended July 30, 2005 increased to $2.4
million from $1.4 million or 72.7% compared to the same period last year, primarily due to
increased net sales, to increased gross margin as a percentage of net sales, reflecting
improvements in sourcing and decreased markdowns, and to decreased expenses as a percentage of net
sales.
Licensed
Brands’ net sales, primarily consisting of sales of Dockers® branded footwear
sold under a license from Levi Strauss & Co., decreased 2.2% to $13.9 million for the second
quarter ended July 30, 2005, from $14.2 million for the second quarter ended July 31, 2004. Unit
sales for Dockers Footwear decreased 2% while the average price per pair of shoes was flat compared
to the second quarter last year. The sales decrease reflected a change in merchandising strategy
of a key customer and other customers pursuing private label initiatives at the expense of branded
product offerings. The Company expects continued near-term pressure on sales of Dockers Footwear
due to the impact of these changes in customers’ merchandising strategies.
Licensed Brands’ operating income for the second quarter ended July 30, 2005 decreased 22.3% from
$1.3 million for the second quarter ended July 31, 2004 to $1.0 million, primarily due to decreased
net sales and to decreased gross margin as a percentage of net sales, reflecting increased closeout
sales.
Corporate, Interest Expenses and Other Charges
Corporate and other expenses for the second quarter ended July 30, 2005 were $5.1 million compared
to $4.7 million for the second quarter ended July 31, 2004. This year’s second quarter included
$0.2 million in restructuring and other charges, primarily for retail store asset impairments and
lease terminations of two Jarman stores. Last year’s second quarter included a $0.2 million
restructuring and other credit, primarily for the gain on the curtailment of the Company’s defined
benefit pension plan, offset by retail store asset impairments and lease terminations of four
Jarman stores. Excluding the listed items in both periods, corporate expenses were up 1% in the
second quarter this year compared to the second quarter last year.
Interest expense decreased 2.7% from $2.9 million in the second quarter ended July 31, 2004 to $2.8
million for the second quarter ended July 30, 2005, primarily due to lower outstanding debt in the
second quarter this year as a result of the Company paying $22.0 million early on the $100.0
million term loan. There were no borrowings under the Company’s revolving credit facility during
the three months ended July 30, 2005 and there was an average of $8.2 million of borrowings under
the Company’s revolving credit facility during the three months ended July 31, 2004.
Interest income increased from $3,000 for the second quarter ended July 31, 2004 to $0.3 million
for the second quarter ended July 30, 2005 due to the increase in average short-term investments.
Results of Operations — Six Months Fiscal 2006 Compared to Fiscal 2005
The Company’s net sales in the six months ended July 30, 2005 increased 19.0% to $561.3 million
from $471.5 million in the six months ended July 31, 2004. The sales increase included Hat World
sales of $131.2 million in the first six months this year compared to $76.0 million in
the first six
months last year. Hat World was acquired April 1, 2004 and last year’s first six
months only included four months of sales. Gross margin increased 22.8% to $285.5 million in the
first six months this year from $232.6 million in the same period last year and increased as a
percentage of net sales from 49.3% to 50.9%. Selling and administrative expenses in the first six
months this year increased 19.3% from the first six months last year and increased as a percentage
of net sales from 44.8% to 44.9%. The Company records buying and 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. Explanations of the changes in results of operations are
provided by business segment in discussions following these introductory paragraphs.
Earnings before income taxes from continuing operations (“pretax earnings”) for the six months
ended July 30, 2005 were $25.0 million compared to $16.5 million for the six months ended July 31,2004. Pretax earnings for the six months ended July 30, 2005 included restructuring and other
charges of $3.0 million, primarily $2.6 million for an anticipated settlement of a previously
announced class action lawsuit (see Note 9), retail store asset impairments and lease terminations
of two Jarman stores. These lease terminations are the continuation of a plan previously announced
by the Company in Fiscal 2004. Pretax earnings for the six months ended July 31, 2004 included a
restructuring and other credit of $0.1 million, primarily for the gain on the curtailment of the
Company’s defined benefit pension plan, offset by retail store asset impairments and lease
terminations of ten Jarman stores.
Net earnings for the six months ended July 30, 2005 were $15.3 million ($0.61 diluted earnings per
share) compared to $10.6 million ($0.45 diluted earnings per share) for the six months ended July31, 2004. The Company recorded an effective income tax rate of 39.2% in the first six months this
year compared to 35.7% in the same period last year. Income taxes for the first six months ended
July 31, 2004 included a favorable tax settlement of $0.5 million.
Journeys
Six Months Ended
July 30,
July 31,
%
2005
2004
Change
(dollars in thousands)
Net sales
$
247,772
$
220,026
12.6
%
Operating income
$
20,719
$
15,246
35.9
%
Operating margin
8.4
%
6.9
%
Net sales from Journeys increased 12.6% for the first six months ended July 30, 2005 compared to
the same period last year. The increase reflects primarily a 7% increase in comparable store sales
and a 4% increase in average Journeys stores operated (i.e., the sum of the number of stores open
on the first day of the fiscal year and the last day of each fiscal month during the six months
divided by seven). Footwear unit comparable sales also increased 10% for the first six months
ended July 30, 2005. The average price per pair of shoes decreased 3% in the first six months of
Fiscal 2006, reflecting changes in product mix, while unit sales increased 16% during the same
period driven by fashion athletic, Euro casuals, board sport shoes, and women’s fashion footwear.
The strong comparable sales performance was primarily driven by continued growth in comparable unit
sales.
Journeys operating income for the six months ended July 30, 2005 was up 35.9% to $20.7 million
compared to $15.2 million for the six months ended July 31, 2004. The increase was due to
increased net sales, reflecting increased comparable store sales, to increased gross margin as a
percentage of net sales, primarily reflecting changes in product mix, and to decreased expenses as
a percentage of net sales.
Underground Station Group
Six Months Ended
July 30,
July 31,
%
2005
2004
Change
(dollars in thousands)
Net sales
$
72,022
$
63,591
13.3
%
Operating income
$
1,935
$
142
NM
Operating margin
2.7
%
0.2
%
Net sales from the Underground Station Group (comprised of Underground Station and Jarman retail
stores) increased 13.3% for the six months ended July 30, 2005 compared to the same period last
year. Comparable store sales were up 9% for the Underground Station Group, 12% for Underground
Station stores and 2% for Jarman retail stores. Footwear unit comparable sales were up 7% in the
Underground Station stores. The strong comparable sales performance was primarily driven by
continued increases in average selling prices and continued growth in unit comparable sales. The
average price per pair of shoes increased 4% in the first six months of Fiscal 2006, primarily
reflecting changes in product mix and lower markdowns as a percentage of net sales, and unit sales
increased 8% during the same period.
Underground Station Group operating income for the first six months ended July 30, 2005 increased
to $1.9 million compared to $0.1 million in the first six months ended July 31, 2004. The increase
was due to increased net sales, to increased gross margin as a percentage of net sales, primarily
reflecting changes in product mix and lower markdowns as a percentage of net sales, and to
decreased expenses as a percentage of net sales.
Hat World comparable store sales increased 5% for the first six months ended July 30, 2005. Hat
World’s comparable store sales increase was primarily driven by an increased number of units sold
and higher selling prices.
Johnston & Murphy net sales increased 3.2% to $82.5 million for the six months ended July 30, 2005
from $80.0 million for the six months ended July 31, 2004, reflecting primarily a 6% increase in
comparable store sales for Johnston & Murphy retail operations and a 2% increase in Johnston &
Murphy wholesale sales. Unit sales for the Johnston & Murphy wholesale business increased 4% in
the first six months of Fiscal 2006 while the average price per pair of shoes decreased 2% for the
same period. Retail operations accounted for 74.9% of Johnston & Murphy segment sales in the first
six months this year, up from 74.6% in the first six months last year. The average price per pair
of shoes for Johnston & Murphy retail operations decreased 7% (10% in the Johnston and Murphy
Shops) in the first six months this year primarily due to changes in product mix, while unit sales
increased 9% during the same period.
Johnston & Murphy operating income for the six months ended July 30, 2005 increased 30.7% compared
to the same period last year, primarily due to increased net sales, to increased gross margin as a
percentage of net sales, reflecting improvements in sourcing and a healthier product mix resulting
in less promotional selling, and to decreased expenses as a percentage of net sales.
Licensed Brands
Six Months Ended
July 30,
July 31,
%
2005
2004
Change
(dollars in thousands)
Net sales
$
27,608
$
31,703
(12.9
)%
Operating income
$
1,764
$
3,055
(42.3
)%
Operating margin
6.4
%
9.6
%
Licensed
Brands’ net sales, primarily consisting of sales of Dockers® branded footwear
sold under a license from Levi Strauss & Co., decreased 12.9% to $27.6 million for the six months
ended July 30, 2005, from $31.7 million for the six months ended July 31, 2004. Unit sales for
Dockers Footwear decreased 13% while the average price per pair of shoes was flat compared to the
first six months last year. The sales decrease reflected some product quality issues, a change in
merchandising strategy of a key customer and other customers pursuing private label initiatives at
the expense of branded product offerings.
Licensed Brands’ operating income for the six months ended July 30, 2005 decreased 42.3% from $3.1
million for the six months ended July 31, 2004 to $1.8 million, primarily due to decreased net
sales, to decreased gross margin as a percentage of net sales, reflecting increased closeout sales,
and to increased expenses as a percentage of net sales.
Corporate and other expenses for the six months ended July 30, 2005 were $13.8 million compared to
$9.9 million for the six months ended July 31, 2004. This year’s first six months included $3.0
million in restructuring and other charges, primarily for the anticipated settlement of a
previously announced class action lawsuit, retail store asset impairments and lease terminations of
four Jarman stores. Last year’s first six months included a $0.1 million restructuring and other
credit, primarily for the gain on the curtailment of the Company’s defined benefit pension plan,
offset by retail store asset impairments and lease terminations of ten Jarman stores. Excluding
the listed items in both periods, the increase in corporate expenses in the first six months this
year is attributable primarily to higher bonus accruals and increased audit department costs
resulting from additional work to comply with the Sarbanes-Oxley legislation and related
regulations.
Interest expense increased 19.1% from $4.9 million in the six months ended July 31, 2004 to $5.9
million for the six months ended July 30, 2005, primarily due to the additional $100.0 million term
loan, which was used to purchase Hat World and was included in only four months of last year’s
first six months versus the full six months this year, and to the increase in bank activity fees as
a result of new stores added due to the acquisition of Hat World offset by less revolver borrowings
in the first six months this year versus the first six months last year. There were no borrowings
under the Company’s revolving credit facility during the six months ended July 30, 2005 and there
was an average of $4.1 million of borrowings under the Company’s revolving credit facility during
the six months ended July 31, 2004.
Interest income increased from $0.2 million for the first six months ended July 31, 2004 to $0.6
million for the first six months ended July 30, 2005 due to the increase in average short-term
investments.
Liquidity and Capital Resources
The following table sets forth certain financial data at the dates indicated.
The Company’s business is somewhat seasonal, with the Company’s investment in inventory and
accounts receivable normally reaching peaks in the spring and fall of each year. Historically,
cash flow from operations has been generated principally in the fourth quarter of each fiscal year.
Cash provided by operating activities was $3.3 million in the first six months of Fiscal 2006
compared to cash used in operating activities of $8.5 million in the first six months of Fiscal
2005. The $11.9 million increase in cash flow from operating activities from last year reflects
primarily an increase in cash flow from changes in accounts payable of $20.4 million and an
increase in cash flow from a $4.6 million increase in net earnings offset by a decrease in cash
flow from an $11.0 million change in other accrued liabilities. The $20.4 million increase in cash
flow from accounts payable was due to changes in buying patterns. The $11.0 million decrease in
cash flow from other
accrued liabilities was due to increased bonus payments and tax payments in
the first six months of Fiscal 2006.
The $63.5 million increase in inventories at July 30, 2005 from January 29, 2005 levels reflects
seasonal increases in retail inventory and inventory purchased to support the net increase of 54
stores in the first six months this year.
The fluctuations in cash provided due to changes in accounts payable for the first six months this
year from the first six months last year are due to changes in buying patterns and payment terms
negotiated with individual vendors. The change in cash used due to changes in accrued liabilities
for the first six months this year from the first six months last year was due primarily to
increased bonus payments and tax payments in the first six months of Fiscal 2006.
There were no revolving credit borrowings during the first six months ended July 30, 2005 and there
was an average of $4.1 million of revolving credit borrowings during the first six months ended
July 31, 2004, as cash generated from operations and cash on hand funded seasonal working capital
requirements and capital expenditures for the first six months of Fiscal 2006. On April 1, 2004,
the Company entered into a new credit agreement with ten banks, providing for a $100.0 million,
five-year term loan and a $75.0 million five-year revolving credit facility.
The Company’s contractual obligations over the next five years have increased from January 29,2005. Operating lease obligations increased to $650 million from $606 million due to new store
openings. Purchase obligations increased to $254 million from $208 million due to seasonal
increases in purchases of retail inventory. These increases to contractual obligations were offset
by a decrease to long-term debt of $10 million from $161 million at January 29, 2005 to $151
million at July 30, 2005.
Capital Expenditures
Total capital expenditures in Fiscal 2006 are expected to be approximately $56.3 million. These
include expected retail capital expenditures of $49.3 million to open approximately 65 Journeys
stores, ten Journeys Kidz stores, five Johnston & Murphy stores, 25 Underground Station stores and
at least 90 Hat World stores and to complete 68 major store renovations, including five conversions
of Jarman stores to Underground Station stores. The amount of capital expenditures in Fiscal 2006
for other purposes are expected to be approximately $7.0 million, including approximately $1.6
million for new systems to improve customer service and support the Company’s growth.
The Company expects that cash on hand and cash provided by operations will be sufficient to
fund all of its planned capital expenditures through Fiscal 2006. The Company plans to borrow
under its credit facility from time to time, particularly in the fall, to support seasonal working
capital requirements. The approximately $3.7 million of costs associated with the prior
restructurings and discontinued operations that are expected to be incurred during the next twelve
months are also expected to be funded from cash on hand and borrowings under the revolving credit
facility.
In total, the Company’s board of directors has authorized the repurchase, from time to time, of up
to 7.5 million shares of the Company’s common stock. There were 398,300 shares remaining to be
repurchased under these authorizations as of January 29, 2005. The board reduced the repurchase
authorization to 100,000 shares in Fiscal 2005 as a result of the Hat World acquisition. Any
purchases would be funded from available cash and borrowings under the revolving credit facility.
The Company has repurchased a total of 7.1 million shares at a cost of $71.3 million under a series
of authorizations since Fiscal 1999. The Company did not repurchase any shares during the first
six months of Fiscal 2006.
There were $11.0 million of letters of credit outstanding at July 30, 2005, leaving availability
under the revolving credit facility of $64.0 million. The revolving credit agreement requires the
Company to meet certain financial ratios and covenants, including minimum tangible net worth, fixed
charge coverage and lease adjusted debt to EBITDAR ratios. The Company was in compliance with
these financial covenants at July 30, 2005.
The Company’s revolving credit agreement restricts the payment of dividends and other payments with
respect to common stock, including repurchases. The aggregate of annual dividend requirements on
the Company’s Subordinated Serial Preferred Stock, $2.30 Series 1, $4.75 Series 3 and $4.75 Series
4, and on its $1.50 Subordinated Cumulative Preferred Stock is $283,000.
Environmental and Other Contingencies
The Company is subject to certain loss contingencies related to environmental proceedings and
other legal matters, including those disclosed in Note 9 to the Company’s Consolidated Financial
Statements. The Company has made accruals for certain of these contingencies, including
approximately $0.9 million reflected in Fiscal 2005 and $1.8 million reflected in Fiscal 2004. 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 reasonable estimate of the probable loss connected to the
proceeding, or in cases in which no reasonable estimate is possible, the minimum amount in the
range of estimated losses, based upon its analysis of the facts and circumstances as of the close
of the most recent fiscal quarter. 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
may not be adequate or that the amounts of any such additional reserves or any such inadequacy will
not have a material adverse effect upon the Company’s financial condition or results of operations.
The following discusses the Company’s exposure to financial market risk related to changes in
interest rates and foreign currency exchange rates.
Outstanding Debt of the Company — The Company’s outstanding long-term debt of $86.3 million 4 1/8%
Convertible Subordinated Debentures due June 15, 2023 bears interest at a fixed rate. Accordingly,
there would be no immediate impact on the Company’s interest expense due to fluctuations in market
interest rates. The Company’s $65.0 million outstanding under the term loan bears interest
according to a pricing grid providing margins over LIBOR or Alternate Base Rate. The Company
entered into three separate interest rate swap agreements as a means of managing its interest rate
exposure on the $65.0 million balance remaining on the term loan. The aggregate notional amount of
the swaps is $65.0 million. At July 30, 2005, the net gain on these interest rate swaps was $0.4
million. As of July 30, 2005, a 1% adverse change in the three month LIBOR interest rate would
increase the Company’s interest expense on the $65.0 million term loan by approximately $0.1
million on an annual basis.
Cash and Cash Equivalents — The Company’s cash and cash equivalent balances are invested in
financial instruments with original maturities of three months or less. The Company does not have
significant exposure to changing interest rates on invested cash at July 30, 2005. As a result,
the Company considers the interest rate market risk implicit in these investments at July 30, 2005
to be low.
Foreign Currency Exchange Rate Risk — Most purchases by the Company from foreign sources are
denominated in U.S. dollars. To the extent that import transactions are denominated in other
currencies, it is the Company’s practice to hedge its risks through the purchase of forward foreign
exchange contracts. At July 30, 2005, the Company had $12.6 million of forward foreign exchange
contracts for Euro. The Company’s policy is not to speculate in derivative instruments for profit
on the exchange rate price fluctuation and it does not hold any derivative instruments for trading
purposes. Derivative instruments used as hedges must be effective at reducing the risk associated
with the exposure being hedged and must be designated as a hedge at the inception of the contract.
The unrealized loss on contracts outstanding at July 30, 2005 was $0.4 million based on current
spot rates. As of July 30, 2005, a 10% adverse change in foreign currency exchange rates from
market rates would decrease the fair value of the contracts by approximately $1.3 million.
Accounts Receivable — The Company’s accounts receivable balance at July 30, 2005 is concentrated in
its two wholesale businesses, which sell primarily to department stores and independent retailers
across the United States. One customer accounted for 16% of the Company’s trade accounts
receivable balance and another customer accounted for 11% as of July 30, 2005. The Company
monitors the credit quality of its customers and establishes an allowance for doubtful accounts
based upon factors surrounding credit risk, historical trends and other information; however,
credit risk is affected by conditions or occurrences within the economy and the retail industry, as
well as company-specific information.
Summary — Based on the Company’s overall market interest rate and foreign currency rate exposure at
July 30, 2005, the Company believes that the effect, if any, of reasonably possible near-term
changes in interest rates on the Company’s consolidated financial position, results of operations
or cash flows for Fiscal 2006 would not be material. However, fluctuations in foreign currency
exchange rates could have a material effect on the Company’s consolidated financial position,
results of operations or cash flows for Fiscal 2006.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” which is a
revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) supersedes
APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement
of Cash Flows.” Generally, the approach in SFAS No. 123(R) is similar to the approach described in
SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the Statements of Earnings based on their
fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R) covers a wide
range of share-based compensation arrangements including stock options, restricted share plans,
performance-based awards, share appreciation rights and employee share purchase plans. The
Company’s board of directors has amended the Company’s Employee Stock Purchase Plan to provide that
participants may acquire shares under the Plan at a 5% discount from fair market value on the last
day of the Plan year. Under SFAS No. 123(R), shares issued under the Plan as amended are
non-compensatory and are not required to be reflected in the Consolidated Statements of Earnings.
SFAS No. 123(R) is effective for public companies at the beginning of the first fiscal year
beginning after June 15, 2005 (Fiscal 2007 for the Company).
SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:
1.
A “modified prospective” method in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based
payments granted after the effective date and (b) based on the requirements of SFAS No. 123
for all awards granted to employees prior to the effective date of SFAS No. 123(R) that
remain unvested on the effective date.
2.
A “modified retrospective” method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the
amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosure of
all prior periods presented.
As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees
using APB Opinion No. 25’s intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)’s fair
value method will have a significant impact on our results of operations, although it will have no
impact on our overall financial position. The impact of adoption of SFAS No. 123(R) cannot be
predicted at this time because it will depend on levels of share-based payments granted in the
future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard
would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net
earnings and earnings per share in Note 1. The pro forma amounts were calculated using a
Black-Scholes option pricing model and may not be indicative of amounts which should be expected in
future years. As of the date of this filing, the Company has not determined which option pricing
model is most appropriate for future option grants or which method of adoption the Company will
apply. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods after adoption.
While the Company cannot
estimate what those amounts will be in the future (because they depend on,
among other things, when employees exercise stock options), the amount of operating cash flows
recognized in prior periods for such excess tax deductions were $0.5 million and $0.8 million for
the second quarter of Fiscal 2006 and 2005, respectively, and $1.5 million and $1.1 million for the
first six months of Fiscal 2006 and 2005, respectively.
In November 2004, the EITF reached a consensus on Issue No. 04-8, “The Effect of Contingently
Convertible Debt on Diluted Earnings per Share.” The Issue addressed when to include contingently
convertible debt instruments in diluted earnings per share. The Issue required companies to
include the convertible debt in diluted earnings per share regardless of whether the market price
trigger had been met. The Company’s diluted earnings per share calculation for the second quarter
and first six months of Fiscal 2006 includes an additional 3.9 million shares and a net after tax
interest add back of $0.6 million and $1.2 million, respectively. The Issue was effective for
periods ending after December 15, 2004 and required restatement of prior period diluted earnings
per share. Earnings per share for the second quarter and first six months of Fiscal 2005 were
previously restated.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company incorporates by reference the information regarding market risk appearing under the
heading “Financial Market Risk” in Item 2, Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Item 4. Controls and Procedures
(a)
Evaluation of disclosure controls and procedures. The Company’s management, including its
chief executive officer and its chief financial officer, have reviewed and evaluated the
effectiveness of the Company’s disclosure controls and procedures as of the end of the period
covered by this quarterly report. Based on that evaluation, the Company’s chief executive
officer and chief financial officer have concluded that as of July 30, 2005, the Company’s
disclosure controls and procedures effectively and timely provide them with material
information relating to the Company and its consolidated subsidiaries required to be disclosed
in the reports the Company files or submits under the Exchange Act.
(b)
Changes in internal control over financial reporting. Management is responsible for
establishing and maintaining adequate internal control over financial reporting (as defined in
Rule 13a-15(f) of the Exchange Act).
There have been no changes in the Company’s internal control over
financial reporting during the quarter ended July 30, 2005 that have materially affected or are
reasonably likely to materially affect the Company’s internal control over financial reporting.
During the quarter ended July 30, 2005, the Company continued to evaluate processes and implement
changes to enhance the effectiveness of internal controls surrounding information systems security
and program changes and inventory purchase pricing relating to one of the Company’s business units.
On October 22, 2004, the Company was named a defendant in a putative class action filed
in the Superior Court of the State of California, Los Angeles, Schreiner vs. Genesco
Inc., et al., alleging violations of California wages and hours laws, and seeking
damages of $40 million plus punitive damages. On May 4, 2005, the Company and the
plaintiffs reached an agreement in principle to settle the action, subject to court
approval and other conditions. In connection with the proposed settlement, to provide
for the settlement payment to the plaintiff class and related expenses, the Company
recognized a charge of $2.6 million before taxes included in restructuring and other,
net in the accompanying Consolidated Statements of Earnings for the first six months of
Fiscal 2006. On May 25, 2005, a second putative class action, Drake vs. Genesco Inc.,
et al., making allegations similar to those in the Schreiner complaint on behalf of
employees of the Company’s Johnston & Murphy division, was filed by a different
plaintiff in the California Superior Court, Los Angeles. The Drake action is stayed
pending final resolution of the Schreiner action.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company’s annual meeting of shareholders held on June 22, 2005, shares
representing a total of 22,790,679 votes were outstanding and entitled to vote. At the
meeting, shareholders of the Company:
1)
elected nine directors nominated by the board of directors by the following votes:
Votes
Votes
“For”
“Withheld”
Leonard L. Berry
20,259,478
527,325
William F. Blaufuss, Jr.
20,258,557
528,246
Robert V. Dale
20,259,363
527,440
Matthew C. Diamond
20,259,789
527,014
Marty G. Dickens
19,825,712
961,091
Ben T. Harris
20,318,118
468,685
Kathleen Mason
17,279,266
3,507,537
Hal N. Pennington
19,476,629
1,310,174
William A. Williamson, Jr.
19,416,683
1,370,120
2)
approved the Genesco Inc. 2005 Equity Incentive Plan by a vote of 12,337,288 for
and 5,652,488 against, with 154,670 abstentions and 2,642,357 broker non-votes; and
3)
ratified the appointment of Ernst & Young LLP as independent registered public
accounting firm for the fiscal year ending January 28, 2006 by a vote of 20,647,374
for and 127,812 against, with 11,617 abstentions and no broker non-votes.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.