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GCO > SEC Filings for GCO > Form 10-Q/A on 24-Sep-2013All Recent SEC Filings

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Form 10-Q/A for GENESCO INC


24-Sep-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements
This discussion and the Notes to the Condensed Consolidated Financial Statements include certain forward-looking statements, including those regarding the performance outlook for the Company and its individual businesses and all other statements not addressing solely historical facts or present conditions. Words such as "may," "will," "should," "likely," "anticipate," "expect," "intend," "plan," "project," "believe," "estimate" and similar expressions can be used to identify these forward-looking statements. Actual results could differ materially from those reflected by the forward-looking statements in this discussion, in the Notes to the Condensed Consolidated Financial Statements, and in other disclosures, including those regarding the Company's performance outlook for Fiscal 2014 and beyond.

A number of factors may adversely affect the outlook reflected in forward looking statements and the Company's future results, liquidity, capital resources and prospects. These factors (some of which are beyond the Company's control) include:

• Adjustments to estimates reflected in forward-looking statements, including the amount of required accruals related to the earn-out bonus potentially payable to Schuh management based on the achievement of certain performance objectives.

• The timing and amount of non-cash asset impairments related to retail store fixed assets or to intangible assets of acquired businesses.

• Weakness in the consumer economy.

• Competition in the Company's markets.

• Inability of customers to obtain credit.

• Fashion trends that affect the sales or product margins of the Company's retail product offerings.

• Changes in buying patterns by significant wholesale customers.

• Bankruptcies or deterioration in the financial condition of significant wholesale customers, limiting their ability to buy or pay for merchandise offered by the Company.

• Disruptions in product supply or distribution.

• Unfavorable trends in fuel costs, foreign exchange rates, foreign labor and material costs and other factors affecting the cost of products.

• The Company's ability to continue to complete and integrate acquisitions, expand its business and diversify its product base.

• Changes in the timing of holidays or in the onset of seasonal weather affecting period-to-period sales comparisons.

• The Company's ability to build, open, staff and support additional retail stores and to renew leases in existing stores and maintain reductions in occupancy costs achieved in recent lease negotiations, and to conduct required remodeling or refurbishment on schedule and at expected expense levels.

• Deterioration in the performance of individual businesses or of the Company's market value relative to its book value, resulting in impairments of fixed assets or intangible assets or other adverse financial consequences.

• Unexpected changes to the market for the Company's shares.

• Variations from expected pension-related charges caused by conditions in the financial markets.

• Disruptions in the Company's information technology systems either by security breaches and incidents or by potential problems associated with the implementation of new or upgraded systems.

• The outcome of litigation, investigations and environmental matters involving the Company, including but not limited to the matters discussed in Note 10 to the Condensed Consolidated Financial Statements.


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Overview
Description of Business
The Company's business includes the design and sourcing, marketing and distribution of footwear and accessories through retail stores, including Journeys®, Journeys Kidz®, Shi by Journeys®, Underground by Journeys® and Johnston & Murphy® in the U.S., Puerto Rico and Canada and through Schuh® stores in the United Kingdom and the Republic of Ireland, and through e-commerce websites and catalogs, and at wholesale, primarily under the Company's Johnston & Murphy® brand, the licensed Dockers® brand, and other brands that the Company licenses for men's footwear. The Company's wholesale footwear brands are distributed to more than 1,100 retail accounts in the United States, including a number of leading department, discount, and specialty stores. The Company's business also includes Lids Sports, which operates (i) headwear and accessory stores under the Lids® name and other names in the U.S., Puerto Rico and Canada,
(ii) the Lids Locker Room and Lids Clubhouse businesses, consisting of sports-oriented fan shops featuring a broad array of licensed merchandise such as apparel, hats and accessories, sports decor and novelty products, (iii) e-commerce business and (iv) an athletic team dealer business operating as Lids Team Sports. Including both the footwear businesses and the Lids Sports business, at May 4, 2013, the Company operated 2,458 retail stores in the U.S., Puerto Rico, Canada, the United Kingdom and the Republic of Ireland.

During the three months ended May 4, 2013, the Company operated five reportable business segments (not including corporate): (i) Journeys Group, comprised of the Journeys, Journeys Kidz, Shi by Journeys and Underground by Journeys retail footwear chains, catalog and e-commerce operations; (ii) Schuh Group, comprised of the Schuh retail footwear chain and e-commerce operations; (iii) Lids Sports Group, comprised as described in the preceding paragraph; (iv) Johnston & Murphy Group, comprised of Johnston & Murphy retail operations, catalog and e-commerce operations and wholesale distribution; and (v) Licensed Brands, comprised of Dockers® Footwear, sourced and marketed under a license from Levi Strauss & Company; SureGrip® Footwear, occupational footwear primarily sold directly to consumers; and other brands.

The Journeys retail footwear stores sell footwear and accessories primarily for 13 to 22 year old men and women. The stores average approximately 1,975 square feet. The Journeys Kidz retail footwear stores sell footwear primarily for younger children, ages five to 12. These stores average approximately 1,425 square feet. Shi by Journeys retail footwear stores sell footwear and accessories to fashion-conscious women in their early 20's to mid 30's. These stores average approximately 2,125 square feet. The Underground by Journeys retail footwear stores sell footwear and accessories primarily for men and women in the 20 to 35 age group. These stores average approximately 1,825 square feet. The Journeys Group stores are primarily in malls and factory outlet centers throughout the United States, Puerto Rico and Canada. Journeys also sells footwear and accessories through direct-to-consumer catalog and e-commerce operations.

The Schuh retail footwear stores sell a broad range of branded casual and athletic footwear along with a meaningful private label offering primarily for 15 to 30 year old men and women. The stores, which average approximately 4,300 square feet, include both street-level and mall locations in the United Kingdom and the Republic of Ireland. During the third quarter of Fiscal 2013, the Schuh Group opened its first Schuh Kids store. As of May 4, 2013, the Company has opened three Schuh Kids stores that sell footwear primarily for younger children, ages five to 12, and average 1,075 square feet. As of May 4, 2013, the Schuh Group currently operates 11 footwear concessions in Republic apparel stores in the United Kingdom averaging approximately 1,125 square feet, all of which the group expects to close by the end of the current fiscal year, and also sells footwear through e-commerce operations.


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The Lids Sports Group includes stores and kiosks, primarily under the Lids banner, that sell licensed and branded headwear to men and women primarily in the early-teens to mid-20's age group. The Lids store locations average approximately 875 square feet and are primarily in malls, airports, street-level stores and factory outlet centers throughout the United States, Puerto Rico and Canada. The Lids Sports Group also operates Lids Locker Room and Lids Clubhouse stores under a number of trade names, selling licensed sports headwear, apparel and accessories to sports fans of all ages in locations averaging approximately 2,975 square feet in malls and other locations primarily in the United States. The Lids Sports Group also sells headwear and accessories through e-commerce operations. In addition, the Lids Sports Group operates Lids Team Sports, an athletic team dealer business.

Johnston & Murphy retail shops sell a broad range of men's footwear, luggage and accessories. Women's footwear and accessories are sold in select Johnston & Murphy retail locations. Johnston & Murphy shops average approximately 1,525 square feet and are located primarily in better malls and in airports throughout the United States. Johnston & Murphy opened its first store in Canada during the fourth quarter of Fiscal 2012. As of May 4, 2013, Johnston & Murphy operates five stores in Canada. The Company also has license and distribution agreements for wholesale and retail sales of Johnston & Murphy products in various non - U.S. jurisdictions. The Company also sells Johnston & Murphy footwear and accessories in factory stores, averaging approximately 2,350 square feet, located in factory outlet malls, and through an e-commerce operation and a direct-to-consumer catalog. In addition, Johnston & Murphy shoes are also distributed through the Company's wholesale operations to better department and independent specialty stores.

The Licensed Brands segment markets casual and dress casual footwear under the licensed Dockers® brand 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 entered into an exclusive license with Levi Strauss & Co. to market men's footwear in the United States under the Dockers brand name in 1991. Levi Strauss & Co. and the Company have subsequently added additional territories, including Canada and Mexico and certain other Latin American countries. The Dockers license agreement was renewed July 23, 2012 for a term expiring November 30, 2015, subject to extension for an additional 3-year term if certain conditions are met. The Company acquired Keuka Footwear in the third quarter of Fiscal 2011 and subsequently launched its SureGrip® Footwear line of slip-resistant, occupational footwear from that base. The Company sources and distributes the Suregrip line for occupational use by consumers employed in the hospitality, healthcare, and other industries.

Strategy
The Company's long-term strategy has been to seek organic growth by: 1) increasing the Company's store base, 2) increasing retail square footage, 3) improving comparable sales, both in stores and digital commerce, 4) increasing operating margin and 5) enhancing the value of its brands. Most of the new stores openings in North America are currently planned to be Lids Locker Room, Lids Clubhouse and Journeys Kidz stores, all of which management considers to be underpenetrated in many markets. To address potential saturation of the U.S. market, certain of the Company's retail businesses have opened retail stores in Canada, beginning in Fiscal 2011.

To further supplement its organic growth potential, the Company has made acquisitions, including the acquisition of the Schuh Group in June 2011 and several smaller acquisitions of businesses in the Lids Sports Group's markets, and expects to consider acquisition opportunities, either to augment its existing businesses or to enter new businesses that it considers compatible with its existing businesses, core expertise and strategic profile. Acquisitions involve a number of risks, including, among others, inaccurate valuation of the acquired business, the assumption of undisclosed liabilities, the failure to integrate the acquired


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business appropriately, and distraction of management from existing businesses. The Company seeks to mitigate these risks by applying appropriate financial metrics in its valuation analysis and developing and executing plans for due diligence and integration that are appropriate to each acquisition. The Company also seeks appropriate opportunities to extend existing brands and retail concepts. For example, the Schuh Group opened its first Schuh Kids store in Scotland during the third quarter of Fiscal 2013. The Company typically tests such extensions on a relatively small scale to determine their viability and to refine their strategies and operations before making significant, long-term commitments.

More generally, the Company attempts to develop strategies to mitigate the risks it views as material, including those discussed under the caption "Forward Looking Statements," above, and those discussed in Item 1A, Risk Factors. 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 manage inventories, in gross margins. Because fashion trends influencing many of the Company's target customers can change rapidly, the Company believes that its ability to react 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 by, for example, driving sales of products with lower average selling prices. Moreover, economic factors, such as the relatively high level of unemployment and any future economic contraction and changes in tax policies, may reduce the consumer's disposable income or his or her willingness to purchase discretionary items, and thus may reduce demand for the Company's merchandise, regardless of the Company's skill in detecting and responding to fashion trends. The Company believes its experience and discipline in merchandising and the buying power associated with its relative size and importance in the industry segments in which it competes are important to its ability to mitigate risks associated with changing customer preferences and other changes in consumer demand.

Summary of Results of Operations
The Company's net sales decreased 1.5% during the first quarter of Fiscal 2014 compared to the same quarter of Fiscal 2013. The decrease reflected a 3% decrease in each of Journeys Group, Schuh Group and Lids Sports Group sales and a 6% decrease in Licensed Brands sales, partially offset by a 14% increase in Johnston & Murphy Group sales. Gross margin as a percentage of net sales decreased to 50.5% during the first quarter of Fiscal 2014, compared to 51.1% for the same period last year, reflecting decreased gross margin as a percentage of net sales in the Schuh Group, Lids Sports Group and Johnston & Murphy Group, offset slightly by increased gross margin in Licensed Brands. Gross margin was flat for Journeys Group. Selling and administrative expenses increased as a percentage of net sales during the first quarter of Fiscal 2014, reflecting increases as a percentage of net sales in all of the Company's business units. Earnings from operations decreased as a percentage of net sales during the first quarter of Fiscal 2014, reflecting decreased earnings from operations as a percentage of net sales in all of the Company's business units.

Significant Developments

Restatement of Previously Issued Financial Statements The Company is restating its Condensed Consolidated Financial Statements for the three months ended May 4, 2013 and April 28, 2012.

Under the Company's EVA Incentive Plan, bonus awards in excess of a specified cap in any year are retained and paid out over the three subsequent years, subject to reduction or elimination by deteriorating financial performance or subject to forfeiture if the participant voluntarily resigns from employment with the Company or is terminated for cause before the retained amount is paid. Historically, the Company has expensed the full amount of the retained bonus in the year in which it was determined. As a result of a


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review of this treatment, the Company has determined that the retained bonus should be expensed across the three-year service period rather than fully expensed in the year it is determined. The effects of the restatement also reflect corrections of other immaterial errors related to income taxes and earnings per share. The corrections have no impact on total revenues or total cash flows for the restated periods and had no impact on the Company's compliance with debt covenants in any period presented. See Note 2 in the Condensed Consolidated Financial Statements for additional information on the restatement. The results for the three months ended May 4, 2013 and April 28, 2012 have been restated in the results of operations discussion below.

Preferred Stock Redemption
The Company issued a notice of mandatory redemption effective April 30, 2013 to its holders of 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 during the first quarter of Fiscal 2014. The total cost of the redemption was $1.5 million. For additional information on the redemption, see Note 8 to the Condensed Consolidated Financial Statements.

Asset Impairment and Other Charges
The Company recorded a pretax charge to earnings of $1.3 million in the first quarter of Fiscal 2014, including $1.2 million for retail store asset impairments and $0.1 million for network intrusion expenses. The Company recorded a pretax charge to earnings of $0.1 million in the first quarter of Fiscal 2013, primarily associated with the network intrusion.

Comparable Sales

During Fiscal 2013, the Company revised its presentation of comparable sales to include its e-commerce and direct mail catalog businesses. Prior year comparable sales have been adjusted to conform to the current year presentation. Comparable sales are sales from stores open longer than one year, beginning in the fifty-third week of a store's operation, sales of websites operated longer than one year, and direct mail catalog sales. Temporarily closed stores are excluded from the comparable store sales calculation for every full week of the store closing. Expanded stores are excluded from the comparable store sales calculation until the fifty-third week of operation in the expanded format.

Results of Operations - First Quarter Fiscal 2014 Compared to Fiscal 2013

The Company's net sales in the first quarter ended May 4, 2013 decreased 1.5% to $591.4 million from$600.1 million in the first quarter ended April 28, 2012, reflecting decreased net sales and/or comparable sales in all of the Company's business units except Johnston & Murphy Group. Gross margin decreased 2.8% to $298.4 million in the first quarter this year from $306.9 million in the same period last year and decreased as a percentage of net sales from 51.1% to 50.5%, reflecting decreased gross margin as a percentage of net sales in Schuh Group, Lids Sports Group and Johnston & Murphy Group, offset slightly by increased gross margin as a percentage of net sales in Licensed Brands. Gross margin was flat in Journeys Group. Selling and administrative expenses in the first quarter this year increased 0.6% from the first quarter last year and increased as a percentage of net sales from 45.0% to 45.9% reflecting increased expenses in all of the Company's business units. 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.


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Earnings from continuing operations before income taxes ("pretax earnings") for the first quarter ended May 4, 2013 were $24.7 million compared to $35.9 million for the first quarter ended April 28, 2012. Pretax earnings for the first quarter ended May 4, 2013 included asset impairment and other charges of $1.3 million primarily for retail store asset impairments and network intrusion expenses and $2.9 million in expense related to the deferred purchase price obligation related to the Schuh acquisition. Because the deferred purchase price for Schuh is contingent on the payees' continuing employment with Schuh (subject to certain exceptions), U.S. Generally Accepted Accounting Principles require that it be expensed as compensation across the period of service until payment is due. Pretax earnings for the first quarter ended April 28, 2012 included asset impairment and other charges of $0.1 million, primarily for network intrusion expenses and $3.0 million in expenses related to the deferred purchase price obligation related to the Schuh acquisition.

Net earnings for the first quarter ended May 4, 2013 were $14.4 million ($0.61 diluted earnings per share) compared to $21.6 million ($0.87 diluted earnings per share) for the first quarter ended April 28, 2012. The Company recorded an effective income tax rate of 41.2% in the first quarter this year compared to 39.4% in the same period last year.

Journeys Group

                                                   Three Months Ended
                                             May 4, 2013     April 28, 2012             %
                                           (As restated)      (As restated)        Change
                                                 (dollars in thousands)
Net sales                                  $     257,143     $      263,840          (2.5 )%
Earnings from operations                   $      22,213     $       26,843         (17.2 )%
Operating margin                                     8.6 %             10.2 %

Net sales from Journeys Group decreased 2.5% to $257.1 million for the first quarter ended May 4, 2013 compared to $263.8 million for the same period last year. The decrease reflects primarily a 2% decrease in comparable sales which includes a 2% decrease in same store sales and a 26% increase in comparable direct sales. The comparable sales decrease reflected a 3% decrease in footwear unit sales while the average price per pair of shoes was flat. Journeys Group operated 1,156 stores at the end of the first quarter of Fiscal 2014, including 157 Journeys Kidz stores, 51 Shi by Journeys stores, 126 Underground by Journeys stores and 24 Journeys stores in Canada, compared to 1,154 stores at the end of the first quarter last year, including 152 Journeys Kidz stores, 53 Shi by Journeys stores, 135 Underground by Journeys stores and 18 Journeys stores in Canada.

Journeys Group earnings from operations for the first quarter ended May 4, 2013 decreased 17.2% to $22.2 million compared to $26.8 million for the first quarter ended April 28, 2012. The decrease was primarily due to decreased net sales and to increased expenses as a percentage of net sales, reflecting negative leverage from negative comparable sales, partially offset by decreased bonus accruals.


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Schuh Group

                                                   Three Months Ended
                                                                  April 28,
                                             May 4, 2013           2012 (As              %
                                           (As restated)          restated)         Change
                                                 (dollars in thousands)
Net sales                                  $      68,323      $      70,312           (2.8 )%
Loss from operations                       $      (4,643 )    $      (2,081 )       (123.1 )%
Operating margin                                    (6.8 )%            (3.0 )%

Net sales from the Schuh Group decreased 2.8% to $68.3 million for the first quarter ended May 4, 2013, compared to $70.3 million for the first quarter ended April 28, 2012. The decrease reflects primarily an 11% decrease in comparable sales, which includes a 14% decrease in same store sales and a 5% increase in comparable direct sales. The comparable sales decrease was offset by an 18% increase in average Schuh 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). Schuh Group operated 80 stores, including three Schuh Kids stores, and 11 concessions at the end of the first quarter of Fiscal 2014, compared to 65 stores and 14 concessions at the end of the first quarter of Fiscal 2013. The Schuh Group expects to exit the 11 concessions they currently operate in Republic stores in the U.K. by the end of this fiscal year.

Schuh Group loss from operations was ($4.6) million for the first quarter ended May 4, 2013 compared to a loss of ($2.1) million for the first quarter ended April 28, 2012. The increased loss was primarily due to decreased net sales from negative comparable sales and decreased gross margin as a percentage of net sales, reflecting lower initial markons related to changes in product mix and increased promotional activity. The loss included $2.9 million in the first quarter this year and $3.0 million in the first quarter last year in compensation expense related to a deferred purchase price obligation in connection with the acquisition. The loss also included $1.0 million this year and $2.5 million last year related to accruals for a contingent bonus payment for Schuh employees provided for in the Schuh acquisition. These improvements in deferred purchase price - related compensation expense and contingent bonus expense this year were more than offset by the effects of decreases in net sales, which created negative leverage in store related expenses, and lower gross margin.

Lids Sports Group

                                                   Three Months Ended
                                             May 4, 2013     April 28, 2012             %
                                           (As restated)      (As restated)        Change
                                                 (dollars in thousands)
Net sales                                  $     177,905     $      183,136          (2.9 )%
Earnings from operations                   $      10,796     $       18,748         (42.4 )%
Operating margin                                     6.1 %             10.2 %

Net sales from Lids Sports Group decreased 2.9% to $177.9 million for the first quarter ended May 4, 2013, compared to $183.1 million for the same period last year, reflecting primarily a 6% decrease in comparable sales, which includes an 8% decrease in same store sales and a 33% increase in comparable direct sales, slightly offset by a 5% increase in average Lids Sports Group stores operated. The comparable sales decrease reflected a 5% decrease in comparable store hat units sold, primarily in the fitted hat business due


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