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[GENESCO LOGO]
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(Mark One) FORM 10-Q
[X] Quarterly Report Pursuant To
Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended
October 31, 1998
[ ] Transition Report Pursuant To
Section 13 or 15(d) of the
Securities Exchange Act of 1934
Securities and Exchange Commission
Washington, D.C. 20549
Commission File No. 1-3083
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GENESCO INC.
A Tennessee Corporation
I.R.S. No. 62-0211340
Genesco Park
1415 Murfreesboro Road
Nashville, Tennessee 37217-2895
Telephone 615/367-7000
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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
such shorter period that the registrant
was required to file such reports with
the commission) and (2) has been
subject to such filing requirements for
the past 90 days. Yes X No
----- -----
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Common Shares Outstanding December 4, 1998 -- 24,384,830
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INDEX
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PAGE
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Part 1 - Financial Information 3
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Consolidated Balance Sheet - October 31, 1998, January 31, 1998 and
November 1, 1997 3
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Consolidated Earnings - Three Months Ended and Nine Months Ended
October 31, 1998 and November 1, 1997 4
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Consolidated Cash Flows - Three Months Ended and Nine Months Ended
October 31, 1998 and November 1, 1997 5
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Consolidated Shareholders' Equity - Year Ended
January 31, 1998 and Nine Months Ended October 31, 1998 6
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Notes to Consolidated Financial Statements 7
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Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
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Part II - Other Information 33
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Signature 34
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PART I - FINANCIAL INFORMATION
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Balance Sheet
In Thousands
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OCTOBER 31, JANUARY 31, NOVEMBER 1,
1998 1998 1997
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ASSETS
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CURRENT ASSETS
Cash and short-term investments $ 42,552 $ 49,276 $ 13,167
Accounts receivable 26,007 20,339 41,612
Inventories 127,924 102,042 128,641
Other current assets 6,121 5,802 4,590
Current assets of operations to be divested -0- 17,105 -0-
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Total current assets 202,604 194,564 188,010
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Plant, equipment and capital leases, net 56,361 44,810 44,022
Other noncurrent assets 9,715 6,623 8,349
Noncurrent assets of operations to be divested -0- 820 -0-
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TOTAL ASSETS $ 268,680 $ 246,817 $ 240,381
================================================================================================================
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LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 62,828 $ 71,994 $ 58,092
Provision for discontinued operations 2,997 3,017 2,995
Current payments on capital leases 8 240 355
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Total current liabilities 65,833 75,251 61,442
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Long-term debt 103,500 75,000 75,000
Capital leases 34 39 50
Other long-term liabilities 12,496 14,219 12,394
Provision for discontinued operations 8,822 10,344 10,886
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Total liabilities 190,685 174,853 159,772
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Contingent liabilities (see Note 11)
SHAREHOLDERS' EQUITY
Non-redeemable preferred stock 7,936 7,945 7,938
Common shareholders' equity:
Par value of issued shares 25,113 26,264 26,243
Additional paid-in capital 127,876 132,218 132,724
Accumulated deficit (63,923) (75,456) (68,439)
Accumulated other comprehensive income (1,150) (1,150) -0-
Treasury shares, at cost (17,857) (17,857) (17,857)
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Total shareholders' equity 77,995 71,964 80,609
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 268,680 $ 246,817 $ 240,381
================================================================================================================
The accompanying Notes are an integral part of Statements.
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4
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Earnings
In Thousands
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THREE MONTHS ENDED NINE MONTHS ENDED
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OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1,
1998 1997 1998 1997
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Net sales $ 129,764 $ 147,046 $ 395,621 $ 381,255
Cost of sales 71,687 86,387 222,281 223,596
Selling and administrative expenses 50,187 48,361 153,477 134,900
Restructuring income and other charges, net -0- -0- (2,403) (275)
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Earnings from operations before
other income and expenses 7,890 12,298 22,266 23,034
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Other expenses (income):
Interest expense 2,094 2,541 7,163 7,614
Interest income (597) (160) (2,038) (937)
Other expense (income) (42) 340 540 404
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Total other (income) expenses, net 1,455 2,721 5,665 7,081
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Earnings before income taxes
and extraordinary loss 6,435 9,577 16,601 15,953
Income taxes (benefit) 162 55 (85) 116
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Earnings before extraordinary loss 6,273 9,522 16,686 15,837
Extraordinary loss from
early retirement of debt -0- (169) (3,651) (169)
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NET EARNINGS $ 6,273 $ 9,353 $ 13,035 $ 15,668
=======================================================================================================================
Basic earnings per common share:
Before extraordinary loss $ .24 $ .37 $ .64 $ .62
Extraordinary loss $ .00 $ (.01) $ (.14) $ (.01)
Net earnings $ .24 $ .36 $ .50 $ .61
Diluted earnings per common share:
Before extraordinary loss $ .23 $ .35 $ .61 $ .58
Extraordinary loss $ .00 $ (.01) $ (.14) $ (.01)
Net earnings $ .23 $ .34 $ .47 $ .57
=======================================================================================================================
The accompanying Notes are an integral part of these Financial Statements.
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Cash Flows
In Thousands
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THREE MONTHS ENDED NINE MONTHS ENDED
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OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1,
1998 1997 1998 1997
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OPERATIONS:
Net earnings $ 6,273 $ 9,353 $ 13,035 $ 15,668
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,421 2,217 7,528 6,647
Provision for deferred income taxes -0- -0- -0- (687)
Provision for losses on accounts receivable (23) 63 124 1,114
Impairment of long-lived assets and other charges -0- -0- -0- 831
Loss on retirement of debt -0- 169 3,651 169
Restructuring charge (credit) -0- -0- (2,403) (1,106)
Other 126 286 567 924
Effect on cash of changes in working capital and other assets and liabilities:
Accounts receivable 1,127 (5,937) (2,240) (8,337)
Inventories (1,502) (5,175) (22,994) (32,757)
Other current assets (728) (773) (315) (81)
Accounts payable and accrued liabilities (6,087) (1,261) (9,498) 254
Other assets and liabilities 155 278 (2,945) 375
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Net cash provided by (used in) operations 1,762 (780) (15,490) (16,986)
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INVESTING ACTIVITIES:
Capital expenditures (5,347) (5,066) (19,350) (17,603)
Proceeds from businesses divested and asset sales 188 1 14,114 193
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Net cash used in investing activities (5,159) (5,065) (5,236) (17,410)
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FINANCING ACTIVITIES:
Payments of long-term debt -0- -0- (77,220) -0-
Payments on capital leases (20) (156) (237) (1,080)
Stock repurchase (7,699) -0- (7,699) -0-
Dividends paid (76) -0- (1,502) -0-
Long-term borrowings -0- -0- 103,500 -0-
Exercise of stock options and related income tax benefits 494 654 2,128 4,378
Deferred note expense -0- -0- (3,914) -0-
Other 1 890 (1,054) 890
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Net cash provided by (used in) financing activities (7,300) 1,388 14,002 4,188
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NET CASH FLOW (10,697) (4,457) (6,724) (30,208)
Cash and short-term investments at
beginning of period 53,249 17,624 49,276 43,375
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CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 42,552 $ 13,167 $ 42,552 $ 13,167
===================================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Net cash paid (received) for:
Interest $ 3,427 $ 534 $ 10,489 $ 9,094
Income taxes 87 22 (14) 105
===================================================================================================================================
The accompanying Notes are an integral part of these Financial Statements.
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Shareholders' Equity
In Thousands
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TOTAL ACCUMULATED TOTAL
NON-REDEEMABLE ADDITIONAL OTHER SHARE-
PREFERRED COMMON PAID-IN TREASURY ACCUMULATED COMPREHENSIVE COMPREHENSIVE HOLDERS'
STOCK STOCK CAPITAL STOCK (DEFICIT) INCOME INCOME EQUITY
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BALANCE FEBRUARY 1, 1997 $ 7,944 $ 25,195 $ 122,615 $ (17,857) $(84,107) $ -0- -0- $ 53,790
==================================================================================================================================
Exercise of options -0- 458 2,809 -0- -0- -0- -0- 3,267
Issue shares - Employee Stock
Purchase Plan -0- 70 496 -0- -0- -0- -0- 566
Net earnings -0- -0- -0- -0- 8,651 -0- 8,651 8,651
Issue shares - litigation
settlement -0- 525 6,175 -0- -0- -0- -0- 6,700
Tax effect of exercise of
stock options -0- -0- 42 -0- -0- -0- -0- 42
Minimum pension liability
adjustment -0- -0- -0- -0- -0- (1,150) (1,150) (1,150)
Other 1 16 81 -0- -0- -0- -0- 98
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Comprehensive Income $ 7,501
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BALANCE JANUARY 31, 1998 $ 7,945 $ 26,264 $ 132,218 $ (17,857) $(75,456) $(1,150) $ 71,964
==================================================================================================================================
Net earnings -0- -0- -0- -0- 13,035 -0- 13,035 13,035
Dividends paid -0- -0- -0- -0- (1,502) -0- -0- (1,502)
Exercise of options -0- 212 822 -0- -0- -0- -0- 1,034
Issue shares - restricted
stock options -0- 67 533 -0- -0- -0- -0- 600
Issue shares - Employee Stock
Purchase Plan -0- 107 387 -0- -0- -0- -0- 494
Stock repurchase -0- (1,539) (6,160) -0- -0- -0- -0- (7,699)
Minimum pension liability
adjustment -0- -0- -0- -0- -0- -0- -0- -0-
Other (9) 2 76 -0- -0- -0- -0- 69
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Comprehensive Income $ 13,035
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BALANCE OCTOBER 31, 1998 $ 7,936 $ 25,113 $ 127,876 $ (17,857) $(63,923) $ (1,150) $ 77,995
==================================================================================================================================
The accompanying Notes are an integral part of these Financial Statements.
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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INTERIM 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 30, 1999 ("Fiscal 1999") and of the fiscal year ended
January 31, 1998 ("Fiscal 1998"). The results of operations for any interim
period are not necessarily indicative of results for the full year. The
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 manufacture or sourcing, marketing and
distribution of footwear principally under the Johnston & Murphy, Dockers and
Nautica brands, the tanning and distribution of leather by the Volunteer Leather
division and the operation at October 31, 1998 of 678 Jarman, Journeys, Johnston
& Murphy, General Shoe Warehouse, Underground Station and Nautica retail
footwear stores and leased departments. Because of the acquisition by Dillards
Inc. of Mercantile, the Company will end its operation of the Jarman leased
departments. Except for 21 stores which Dillards Inc. closed or sold in
September and November 1998, the Company expects to operate the remaining 82
leased departments at least through the remainder of the current fiscal year.
The Jarman leased departments' business contributed approximately $4.1 million
in operating earnings and $52.3 million in sales to the Company's results in the
fiscal year ended January 31, 1998. The Jarman leased departments' business
contributed approximately $1.5 million in operating earnings and $35.9 million
in sales to the Company's results for the nine months ended October 31, 1998.
The Jarman leased departments had inventory of $16.2 million and total assets of
$20.0 million at October 31, 1998.
BASIS OF PRESENTATION
All subsidiaries are included in the consolidated financial statements. All
significant intercompany transactions and accounts have been eliminated.
The preparation of financial statements in conformity with 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.
FINANCIAL STATEMENT RECLASSIFICATIONS
Certain reclassifications have been made to conform prior years' data to the
current presentation.
CASH AND SHORT-TERM INVESTMENTS
Included in cash and short-term investments at January 31, 1998 and October 31,
1998, are short-term investments of $45.6 million and $37.1 million,
respectively. Short-term investments are highly-liquid debt instruments having
an original maturity of three months or less.
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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INVENTORIES
Inventories of wholesaling and manufacturing companies are stated at the lower
of cost or market, with cost determined principally by the first-in, first-out
method. Retail inventories are determined by the retail method.
PLANT, EQUIPMENT AND CAPITAL LEASES
Plant, equipment and capital leases 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.
IMPAIRMENT OF LONG-TERM ASSETS
The Company periodically assesses the realizability of its long-lived assets and
evaluates such assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Asset
impairment is determined to exist if estimated future cash flows, undiscounted
and without interest charges, are less than carrying amount.
HEDGING CONTRACTS
In order to reduce exposure to foreign currency exchange rate fluctuations in
connection with inventory purchase commitments, the Company enters into foreign
currency forward exchange contracts for Italian Lira. At January 31, 1998 and
October 31, 1998, the Company had approximately $15.0 million and $18.9 million,
respectively, of such contracts outstanding. Forward exchange contracts have an
average term of approximately four months. Gains and losses arising from these
contracts offset gains and losses from the underlying hedged transactions. The
Company monitors the credit quality of the major national and regional financial
institutions with whom it enters into such contracts.
POSTRETIREMENT BENEFITS
Substantially all full-time employees are covered by a defined benefit pension
plan. 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.
In accordance with SFAS 106, postretirement benefits such as life insurance and
health care are accrued over the period the employee provides services to the
Company.
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.
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9
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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INCOME TAXES
Deferred income taxes are provided for all temporary differences and operating
loss and tax credit carryforwards 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.
NOTE 2
RESTRUCTURINGS
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FISCAL 1998 RESTRUCTURING
As a result of the continued weakness in the western boot market, the Company
approved a plan in the fourth quarter of Fiscal 1998 to exit the western boot
business (the "Boot Divestiture"). In connection with the Boot Divestiture, the
Company recorded a charge to earnings of $17.3 million, including $11.3 million
in asset writedowns. The carrying value of the assets held for sale was reduced
to fair value based on estimated selling values less estimated costs to sell. In
addition to the asset writedown, the Company recorded $3.2 million in
employee-related costs and $2.8 million of facility shutdown and other costs in
the fourth quarter of Fiscal 1998. Net sales of the Company's western boot
business for Fiscal 1998, 1997 and 1996 were $45.4 million, $56.1 million and
$57.3 million, respectively. The operating losses for the Company's western boot
business for Fiscal 1998 and 1997 were $3.7 million and $2.2 million,
respectively. The Company's western boot business had operating income of $1.6
million for Fiscal 1996.
On June 12, 1998, the Company and Texas Boot, Inc. entered into an agreement
providing for the purchase by Texas Boot, Inc. of most of the assets related to
the western boot business, including the Company's 26 store Boot Factory retail
chain, which the Company had not planned to include in the Boot Divestiture. The
Company completed the sale of its western boot business to Texas Boot, Inc. on
July 14, 1998. Net earnings for the second quarter ended August 1, 1998 reflects
a restructuring gain of $2.4 million primarily from the Boot Divestiture. The
$2.4 million gain represents savings of employee-related costs and facility
shutdown costs due to facilities assumed and employees retained by the buyer.
The Company's actions relating to the Boot Divestiture resulted in the
elimination of 622 jobs, including all positions related to the western boot
business and the Boot Factory retail chain.
In addition to the charge related to the Boot Divestiture, the Company took a
charge of $0.6 million during the fourth quarter of Fiscal 1998 to consolidate
staff functions in one operating division as well as to account for the costs of
eliminating a production process at its remaining footwear plant.
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10
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 3
ACCOUNTS RECEIVABLE
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OCTOBER 31, JANUARY 31,
IN THOUSANDS 1998 1998
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Trade accounts receivable $ 23,286 $ 19,947
Miscellaneous receivables 4,981 3,142
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Total receivables 28,267 23,089
Allowance for bad debts (862) (988)
Other allowances (1,398) (1,762)
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NET ACCOUNTS RECEIVABLE $ 26,007 $ 20,339
================================================================================
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. Credit risk is affected by conditions
or occurrences within the economy and the retail industry. The Company
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends and other information.
No single customer accounted for more than 8% of the Company's trade receivables
balance as of October 31, 1998.
NOTE 4
INVENTORIES
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OCTOBER 31, JANUARY 31,
IN THOUSANDS 1998 1998
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Raw materials $ 2,990 $ 4,452
Work in process 2,171 2,261
Finished goods 28,160 28,458
Retail merchandise 94,603 66,871
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TOTAL INVENTORIES $127,924 $102,042
================================================================================
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 5
PLANT, EQUIPMENT AND CAPITAL LEASES, NET
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OCTOBER 31, JANUARY 31,
IN THOUSANDS 1998 1998
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Plant and equipment:
Land $ 263 $ 263
Buildings and building equipment 2,444 2,515
Machinery, furniture and fixtures 33,322 34,338
Construction in progress 7,791 6,767
Improvements to leased property 60,450 51,136
Capital leases:
Buildings 293 200
Machinery, furniture and fixtures 4,002 4,777
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Plant, equipment and capital leases, at cost 108,565 99,996
Accumulated depreciation and amortization:
Plant and equipment (48,064) (50,519)
Capital leases (4,140) (4,667)
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NET PLANT, EQUIPMENT AND CAPITAL LEASES $ 56,361 $ 44,810
==============================================================================================
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12
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 6
ASSETS OF OPERATIONS TO BE DIVESTED
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JANUARY 31,
IN THOUSANDS 1998
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Current assets:
Accounts receivable, net of allowance of $3,325 $ 7,684
Inventory 9,418
Other current assets 3
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TOTAL CURRENT ASSETS $17,105
========================================================================
Noncurrent assets:
Plant and equipment 783
Capitalized lease rights 37
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TOTAL NONCURRENT ASSETS $ 820
========================================================================
NOTE 7
PROVISION FOR DISCONTINUED OPERATIONS AND RESTRUCTURING RESERVES
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PROVISION FOR DISCONTINUED OPERATIONS
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EMPLOYEE
RELATED
IN THOUSANDS COSTS* OTHER TOTAL
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Balance January 31, 1998 $12,036 $ 1,325 $13,361
Charges and adjustments, net (1,385) (157) (1,542)
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Balance October 31, 1998 10,651 1,168 11,819
Current portion 1,945 1,052 2,997
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TOTAL NONCURRENT PROVISION FOR
DISCONTINUED OPERATIONS $ 8,706 $ 116 $ 8,822
=========================================================================================================================
*Union pension withdrawal liability.
RESTRUCTURING RESERVES
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EMPLOYEE FACILITY
RELATED SHUTDOWN
IN THOUSANDS COSTS COSTS OTHER TOTAL
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Balance January 31, 1998 $ 3,593 $ 1,983 $ 1,532 $ 7,108
Charges and adjustments, net (3,267) (621) (366) (4,254)
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Balance October 31, 1998 326 1,362 1,166 2,854
Current portion (included in accounts
payable and accrued liabilities) 326 1,033 1,107 2,466
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TOTAL NONCURRENT RESTRUCTURING RESERVES
(INCLUDED IN OTHER LONG-TERM LIABILITIES) $ -0- $ 329 $ 59 $ 388
=======================================================================================================================
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GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8
LONG-TERM DEBT
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OCTOBER 31, JANUARY 31,
IN THOUSANDS 1998 1998
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10 3/8% senior notes due February 2003 $ -0- $75,000
5 1/2% convertible subordinated notes due April 2005 103,500 -0-
- -------------------------------------------------------------------------------------------------------------------
Total long-term debt 103,500 75,000
Current portion -0- -0-
- -------------------------------------------------------------------------------------------------------------------
Total Noncurrent Portion of Long-Term Debt $103,500 $75,000
===================================================================================================================
REVOLVING CREDIT AGREEMENT:
On September 24, 1997, the Company entered into a revolving credit agreement
with three banks providing for loans or letters of credit of up to $65 million.
The agreement, as amended January 30, 1998 and March 31, 1998, expires September
24, 2002. This agreement replaced a $35 million revolving credit agreement
providing for loans or letters of credit. The replacement of the $35 million
revolving credit agreement resulted in an extraordinary loss of $169,000,
recognized in the third quarter of Fiscal 1998. Outstanding letters of credit at
October 31, 1998 were $5.4 million; no loans were outstanding at that date.
Under the revolving credit agreement, the Company may borrow at the prime rate
or LIBOR plus 1.5% which may be changed if the Company's pricing ratio (as
defined in the credit agreement) changes. Facility fees are 0.425% per annum on
$65.0 million and also varies based on the pricing ratio. The revolving credit
agreement requires the Company to meet certain financial ratios and covenants,
including minimum tangible net worth, fixed charge coverage and debt to equity
ratios. The Company is required by the credit agreement to reduce the
outstanding principal balance of the revolving loans to zero for 30 consecutive
days during each period beginning on December 15 of any fiscal year and ending
on April 15 of the following fiscal year. The revolving credit agreement, as
amended, contains other covenants which restrict the payment of dividends and
other payments with respect to capital stock. In addition, annual capital
expenditures are limited to $30.0 million for Fiscal 1998 and thereafter,
subject to possible carryforwards from the previous year of up to $3.0 million
if less is spent in the current year. The Company was in compliance with the
financial covenants contained in the revolving credit agreement at October 31,
1998.
10 3/8% SENIOR NOTES DUE 2003:
On February 1, 1993, the Company issued $75 million of 10 3/8% senior notes due
February 1, 2003. These notes were redeemed on May 8, 1998, resulting in a $3.7
million extraordinary loss for early retirement of debt recognized in the second
quarter of Fiscal 1999.
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14
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8
LONG-TERM DEBT, CONTINUED
- --------------------------------------------------------------------------------
5 1/2% CONVERTIBLE SUBORDINATED NOTES DUE 2005:
On April 9, 1998, the Company issued $103.5 million of 5 1/2% convertible
subordinated notes due April 15, 2005. The notes are convertible into 47.5172
shares of common stock per $1,000 principal amount of Notes (equivalent to a
conversion price of $21.045 per share of common stock), subject to adjustment.
During the second quarter the Company used: 1) $79.9 million of the proceeds to
repay all of the Company's 10 3/8% senior notes including interest and expenses
incurred in connection therewith, resulting in an extraordinary loss of $3.7
million, 2) $1.3 million of the proceeds to pay preferred dividends in arrears
because of certain covenants in the indenture relating to the senior notes, and
3) the remaining proceeds for general corporate purposes.
The indenture pursuant to which the convertible subordinated notes were issued
does not restrict the incurrence of Senior Debt by the Company or other
indebtedness or liabilities by the Company or any of its subsidiaries.
NOTE 9
COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
The Company implemented Statement of Financial Accounting Standards (SFAS) 130,
"Reporting Comprehensive Income" in the first quarter of Fiscal 1999. This
statement establishes standards for reporting and display of comprehensive
income. SFAS 130 requires the minimum pension liability adjustment to be
included in other comprehensive income. The adoption of this statement had no
impact on the Company's net income or shareholders' equity for the quarter and
nine months ended October 31, 1998 or November 1, 1997.
14
15
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 10
EARNINGS PER SHARE
- --------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
OCTOBER 31, 1998 NOVEMBER 1, 1997
----------------------------------------- ----------------------------------------
(IN THOUSANDS, EXCEPT INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary loss $ 6,273 $ 9,522
Less: Preferred stock dividends (75) (75)
- ---------------------------------------------------------------------------------------------------------------------------------
BASIC EPS
Income available to
common shareholders 6,198 25,600 $ .24 9,447 25,702 $ .37
====== =======
EFFECT OF DILUTIVE SECURITIES
Options 662 1,449
Contingent Options(1) 67 133
Employees' Preferred Stock(2) 74 80
- ---------------------------------------------------------------------------------------------------------------------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $ 6,198 26,403 $ .23 $ 9,447 27,364 $ .35
=================================================================================================================================
(1) These options are contingent upon service to the Company and the Company's
common stock trading at various prices.
(2) 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 amount of the dividend on the convertible preferred stock per common share
obtainable on conversion of the convertible preferred is higher than basic
earnings per share for the period. 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 30,816, 40,869 and 24,946, respectively.
The amount of the interest on the convertible subordinated notes (net of tax)
per common share obtainable on conversion of the notes is higher than basic
earnings per share for the period. Therefore, conversion of the convertible
notes is not reflected in diluted earnings per share, because it would have been
antidilutive.
The weighted shares outstanding reflects the effect of the stock buy back
program of up to 2.6 million shares announced by the Company in August 1998. The
Company repurchased 1.5 million shares as of October 31, 1998.
15
16
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 10
EARNINGS PER SHARE, CONTINUED
- --------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
OCTOBER 31, 1998 NOVEMBER 1, 1997
----------------------------------------- ----------------------------------------
(IN THOUSANDS, EXCEPT INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
PER SHARE AMOUNTS) (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary loss $16,686 $15,837
Less: Preferred stock dividends (225) (226)
- ---------------------------------------------------------------------------------------------------------------------------------
BASIC EPS
Income available to
common shareholders 16,461 25,850 $.64 15,611 25,362 $.62
===== =====
EFFECT OF DILUTIVE SECURITIES
Options 1,176 1,416
Contingent Options(1) 67 133
Employees' Preferred Stock(2) 74 80
- ---------------------------------------------------------------------------------------------------------------------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $16,461 27,167 $.61 $15,611 26,991 $.58
=================================================================================================================================
(1) These options are contingent upon service to the Company and the Company's
common stock trading at various prices.
(2) 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 amount of the dividend on the convertible preferred stock per common share
obtainable on conversion of the convertible preferred is higher than basic
earnings per share for the period. 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 30,816, 40,869 and 24,946, respectively.
The amount of the interest on the convertible subordinated notes (net of tax)
per common share obtainable on conversion of the notes is higher than basic
earnings per share for the period. Therefore, conversion of the convertible
notes is not reflected in diluted earnings per share, because it would have been
antidilutive.
The weighted shares outstanding reflects the effect of the stock buy back
program of up to 2.6 million shares announced by the Company in August 1998. The
Company repurchased 1.5 million shares as of October 31, 1998.
16
17
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 11
LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
New York State Environmental Proceedings
The Company is a defendant in a civil action filed by the State of New York
against the City of Gloversville, New York, and 33 other private defendants. The
action arose out of the alleged disposal of certain hazardous material directly
or indirectly in a municipal landfill and seeks recovery under a federal
environmental statute and certain common law theories for the costs of
investigating and performing remedial actions and damage to natural resources.
The environmental authorities have selected a plan of remediation for the site
with a total estimated cost of approximately $10.0 million. The Company has
filed an answer to the complaint denying liability and asserting numerous
defenses. The Company, along with other defendants, and the State of New York
are participating in non-binding mediation in an attempt to agree upon an
allocation of the remediation costs. Because of uncertainties related to the
ability or willingness of the other defendants to pay a portion of remediation
costs, the availability of New York State funding and insurance coverage, the
applicability of joint and several liability and the basis for contribution
claims among the defendants, management is unable to predict the outcome of the
action. However, management does not presently expect the action to have a
material effect on the Company's financial condition or results of operations.
The Company has received notice from the New York State Department of
Environmental Conservation (the "Department") that it deems remedial action to
be necessary with respect to certain contaminants in the vicinity of a knitting
mill operated by a former subsidiary of the Company from 1965 to 1969, and that
it considers the Company a potentially responsible party. In August 1997, 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 with regard to
the site, without admitting liability or accepting responsibility for any future
remediation of the site. In conjunction with the consent order, the Company
entered into an agreement with the owner of the site providing for a release
from liability for property damage and for necessary access to the site, for
payments totaling $400,000. The Company estimates that the cost of conducting
the RIFS and implementing the interim remedial measure will be approximately
$1.6 million. The Company believes that it has adequately reserved for the costs
of conducting the RIFS and implementing the interim remedial measure
contemplated by the consent order, but there is no assurance that the consent
order will ultimately resolve the matter. 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 whether its liability, if any, beyond that voluntarily assumed by the
consent order will have a material effect on its financial condition or results
of operations.
17
18
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 11
LEGAL PROCEEDINGS, CONTINUED
- --------------------------------------------------------------------------------
Whitehall Environmental Sampling
The Michigan Department of Environmental Quality ("MDEQ") has performed sampling
and analysis of soil, sediments, surface water, groundwater and waste management
areas at the Company's Volunteer Leather Company facility in Whitehall,
Michigan. In response to the testing data, the Company submitted and MDEQ
approved a work plan, pursuant to which the Company performed a hydrogeological
study and a series of studies regarding wastes on-site and groundwater. On the
basis of these studies, the Company has proposed a remedial action plan
involving installation of horizontal wells to capture groundwater from a portion
of the site, treatment of the groundwater either after its use in the
manufacturing process or through an air sparge system, and installation of
monitoring wells. The Company's environmental consultants estimate capital cost
associated with the plan to be in the range of $100,000 to $180,000, with
operations and maintenance costs in the range of $10,000 to $15,000 per year.
Based on these estimates and assuming the plan's approval by the MDEQ, the
Company does not believe that soil and groundwater remediation at the site will
have a material impact on its financial condition or results of operations. The
proposed plan does not address lake sediments. Officials of MDEQ have been
quoted in press reports as proposing a $3.5 million lake sediment cleanup with
$2.5 million to be funded by responsible parties, which would presumably include
but not be limited to the Company. The Company is continuing to study the lake
sediment issues, and at present is unable to predict whether and to what extent
it may be required to participate in a remediation of sediments, or whether its
participation, if any, will have a material effect on its financial condition or
results of operations.
Other Legal Proceedings
On August 8, 1997, the trustee in bankruptcy of a Texas boot retailer filed an
action in Texas state court against the Company and an unrelated boot wholesaler
and retail chain alleging violations of a Texas antitrust statute and breach of
contract by the Company. The trustee's allegations against the Company involve
its decision not to consign additional boot inventories to the bankrupt retailer
for its liquidation sale. The complaint seeks damages in an unspecified amount.
The Company has filed an answer denying all material allegations in the
complaint and does not presently expect the action to have a material effect on
its financial condition or results of operations.
18
19
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
This discussion and the notes to the Consolidated Financial Statements include
certain forward-looking statements. Actual results could differ materially from
those reflected by the forward-looking statements in the discussion and a number
of factors may adversely affect future results, liquidity and capital resources.
These factors include a continuation of recent softness in the retail footwear
market, which the Company believes to be reflected in lower than planned
revenues. They also include the timing and acceptance of products being
introduced to the market by the Company, such as the planned launch early in
Fiscal 2000 of a new line of athletic footwear by the Nautica footwear division.
Additionally, as discussed elsewhere in this report, during the second quarter
of Fiscal 1999 the Company announced a plan to address the anticipated loss of
its leased men's shoe departments in Mercantile Stores Company's department
stores, which involved a transition out of the leased department business and an
accelerated store opening plan. The timing and terms of such transition and the
ability to open and operate the additional stores on schedule and at expected
levels of profitability are also among the factors that could lead to material
differences from the expectations reflected in the forward looking statements in
this report. Failure by the Company to successfully complete its plans for
addressing the Year 2000 issue, discussed elsewhere in this report, or failures
related to the issue by key suppliers of goods or services to the Company or by
the customers of the Company could also result in a failure to meet expectations
reflected in forward-looking statements. Other factors that could also lead to
such a failure to meet expectations reflected in forward looking statements
include international trade developments affecting foreign sourcing of products,
the outcome of various litigation and environmental contingencies, including
those discussed in Note 11 to the Consolidated Financial Statements, the
solvency of the retail customers of the Company and the ability to minimize
operating expenses and to take other appropriate measures to deal with changes
in markets for the Company's products. Although the Company believes it has an
appropriate business strategy and the resources necessary for its operations,
future revenue and margin trends cannot be reliably predicted and the Company
may accordingly alter its business strategies.
SIGNIFICANT DEVELOPMENTS
5 1/2% Convertible Subordinated Notes
On April 9, 1998, the Company issued $103.5 million of 5 1/2% convertible
subordinated notes due April 15, 2005. During the second quarter the Company
used: 1) $79.9 million of the proceeds to repay all of the Company's 10 3/8%
senior notes including interest and expenses incurred in connection therewith,
resulting in an extraordinary loss of $3.7 million, 2) $1.3 million of the
proceeds to pay dividends in arrears because of certain convenants in the
indenture relating to the senior notes, and 3) the remaining proceeds for
general corporate purposes. See Note 8 to the Company's Consolidated Financial
Statements included elsewhere herein.
Leased Department Transition; Modified Accelerated Growth Plan
Under a longstanding agreement with Mercantile Stores Company, Inc. the Company
operated the men's shoe departments in Mercantile department stores through the
Company's Jarman lease Division. Because of the acquisition by Dillards Inc. of
Mercantile, the Company will end its
19
20
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
operation of the leased departments. Except for 21 stores which Dillards Inc.
closed or sold during September and November 1998, the Company expects to
operate the remaining 82 leased departments through the remainder of the current
fiscal year. The Jarman leased departments' business contributed approximately
$4.1 million in operating earnings and $52.3 million in net sales to the
Company's results in the fiscal year ended January 31, 1998. The Jarman leased
departments' business contributed approximately $1.5 million in operating
earnings and $35.9 million in sales to the Company's results for the nine months
ended October 31, 1998. The Jarman leased departments had inventory of $16.2
million and total assets of $20.0 million at October 31, 1998. The 21 stores
closed or sold by Dillards Inc. had store operating income of approximately $0.2
million for the three month period ending January 31, 1998.
During the second quarter ended August 1, 1998, the Company announced an
accelerated store opening schedule to address the loss of the Jarman Lease
business. In response to some uncertainty in the retail footwear market, the
Company modified the schedule during the third quarter. The Company currently
intends to open 50 to 60 Journeys stores, 15 to 20 Johnston & Murphy shops and
factory stores and 10 to 15 Jarman and Underground Station stores during Fiscal
2000. The Company also implemented expense reductions and anticipated some
additional wholesale volume in its plans to address the Mercantile transition.
The Company established accruals for severance related to the expense reductions
of approximately $0.5 million in the second quarter ended August 1, 1998.
Additional accruals for severance could be recorded depending on final terms of
the Mercantile transition.
Share Repurchase Program
During the third quarter ended October 31, 1998, the Company authorized the
purchase, from time to time, up to 2.6 million shares of the Company's common
stock. The purchases may be made on the open market or in privately negotiated
transactions. As of October 31, 1998, the Company had repurchased 1.5 million
shares at a cost of $7.7 million.
Fiscal 1998 Restructuring
As a result of the continued weakness in the western boot market, the Company
approved a plan in the fourth quarter of Fiscal 1998 to exit the western boot
business (the "Boot Divestiture"). In connection with the Boot Divestiture, the
Company recorded a charge to earnings of $17.3 million, including $11.3 million
in asset writedowns. The carrying value of the assets held for sale was reduced
to fair value based on estimated selling values less estimated costs to sell. In
addition to the asset writedown, the Company recorded $3.2 million in
employee-related costs and $2.8 million of facility shutdown and other costs in
the fourth quarter of Fiscal 1998. Net sales of the Company's western boot
business for Fiscal 1998, 1997 and 1996 were $45.4 million, $56.1 million and
$57.3 million, respectively. The operating losses for the Company's western boot
business for Fiscal 1998 and 1997 were $3.7 million and $2.2 million,
respectively. The Company's western boot business had operating income of $1.6
million for Fiscal 1996.
20
21
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
On June 12, 1998, the Company and Texas Boot, Inc. entered into an agreement
providing for the purchase by Texas Boot, Inc. of most of the assets related to
the western boot business, including the Company's 26 store Boot Factory retail
chain, which the Company had not planned to include in the Boot Divestiture. The
Company completed the sale of its western boot business to Texas Boot, Inc. on
July 14, 1998. Net earnings for the second quarter ended August 1, 1998 reflects
a restructuring gain of $2.4 million primarily from the Boot Divestiture. The
$2.4 million gain represents savings of employee-related costs and facility
shutdown costs due to facilities assumed and employees retained by the buyer.
The Company's actions relating to the Boot Divestiture resulted in the
elimination of 622 jobs, including all positions related to the western boot
business and the Boot Factory retail chain.
In addition to the charge related to the Boot Divestiture, the Company took a
charge of $0.6 million during the fourth quarter of Fiscal 1998 to consolidate
staff functions in one operating division as well as to account for the costs of
eliminating a production process at its remaining footwear plant.
RESULTS OF OPERATIONS - THIRD QUARTER FISCAL 1999 COMPARED TO FISCAL 1998
The Company's net sales in the third quarter ended October 31, 1998 decreased
11.8% to $129.8 million from $147.0 million in the third quarter ended November
1, 1997. Pro forma for the Boot Divestiture as if it occurred at the beginning
of last year's third quarter, the Company's net sales increased 0.4% to $129.8
million for the third quarter ended October 31, 1998 from $129.2 million in the
same period last year. Gross margin for the quarter decreased 4.3% to $58.1
million in the third quarter this year from $60.7 million in the same period
last year but increased as a percentage of net sales from 41.3% to 44.8%.
Selling and administrative expenses increased 3.8% from the third quarter last
year and increased as a percentage of net sales from 32.9% to 38.7%. Pretax
earnings in the third quarter ended October 31, 1998 were $6.4 million compared
to $9.6 million for the third quarter ended November 1, 1997. Net earnings for
the third quarter ended October 31, 1998 were $6.3 million ($0.23 diluted
earnings per share) compared to $9.4 million ($0.34 diluted earnings per share)
for the third quarter ended November 1, 1997. Net earnings for the third quarter
ended November 1, 1997 included an extraordinary loss for the early retirement
of debt of $169,000.
21
22
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Footwear Retail
Three Months Ended
--------------------------
October 31, November 1, %
1998 1997 Change
------------ ------------ ------
(dollars in thousands)
Net sales.............................................$ 95,053 $ 91,403 4.0%
Net sales-ongoing operations(1).......................$ 95,053 $ 87,396 8.8%
Operating income......................................$ 7,701 $ 11,063 (30.4)%
Operating margin...................................... 8.1 % 12.1%
(1) Pro forma for the Boot Divestiture as if it occurred at the beginning of the
periods presented.
Primarily due to a 17% increase in average retail stores operated, net sales
from footwear retail operations increased 4.0% for the third quarter ended
October 31, 1998, compared to the same period last year. The Company opened 43
stores and closed 21 stores during the third quarter ended October 31, 1998. The
average price per pair decreased 3% and unit sales increased 7% for the third
quarter of Fiscal 1999.
The Company's comparable store sales and store count at the end of the periods
were as follows:
Store Count
-----------------------------
Comparable October 31, November 1,
Sales Changes 1998 1997
------------- ----------- -----------
Journeys................................................. -3% 254 170
Johnston & Murphy (including factory stores)............. +7% 132 125
Jarman Retail............................................ -13% 168(1) 154
Jarman Lease............................................. -24% 86 86
Boot Factory Outlet Stores............................... NA 0 26
Other Outlet Stores...................................... -3% 38 15
--- ---
Total Retail ......................................... -7% 678 576
=== ===
(1) Includes sixteen Underground Station Stores.
22
23
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Retail gross margin for the quarter increased 2.1% to $46.0 million in the third
quarter this year from $45.0 million in the same period last year. Retail gross
margin decreased as a percentage of net sales to 48.4% from 49.3%, primarily
from increased markdowns to stimulate sales. Retail operating expenses increased
13.6% in the third quarter of Fiscal 1999 from the same quarter last year,
primarily due to the 17% increase in average stores operated, which resulted in
increased occupancy related expenses and selling salaries, and due to increased
advertising expenses. In addition, divisional management expenses increased in
the third quarter of Fiscal 1999 to support new store growth. Overall retail
operating expenses increased as a percentage of net sales from 36.9% for the
third quarter of this year to 40.3% for the third quarter of last year.
Retail operating income for the third quarter ended October 31, 1998 was down
30.4% to $7.7 million compared to $11.1 million in the same period last year,
due to decreased margins as a percentage of net sales and increased expenses as
a percentage of net sales.
On July 14, 1998, the Company sold its Boot Factory retail chain in conjunction
with the Boot Divestiture. For the third quarter ended November 1, 1997, the
chain had net sales and operating income of $4.0 million and $244,000,
respectively.
Footwear Wholesale & Manufacturing
Three Months Ended
-------------------------
October 31, November 1, %
1998 1997 Change
----------- ------------ ------
(dollars in thousands)
Net sales.............................................$ 34,711 $ 55,643 (37.6)%
Net sales-ongoing operations(1).......................$ 34,711 $ 41,852 (17.1)%
Operating income......................................$ 2,517 $ 3,785 (33.5)%
Operating margin...................................... 7.3% 6.8%
(1) Pro forma for the Boot Divestiture as if it occurred at the beginning of the
periods presented.
Net sales from footwear wholesale and manufacturing operations decreased 37.6%
to $34.7 million for the third quarter ended October 31, 1998, from $55.6
million in the same period last year, reflecting primarily the absence of sales
in the third quarter ended October 31, 1998 from the operations divested, lower
tanned leather sales and lower sales in the Company's Nautica division. Nautica
sales were down primarily due to the weak retail footwear environment, a lack of
orders from a major customer engaged in an inventory reduction program and the
delay until early next year of the planned launch of a revamped athletic
footwear line in conjunction with a line of coordinating athletic clothing by
Nautica Apparel, which management believes accounted for a
23
24
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
decline in Nautica athletic sales from the third quarter last year. Tanned
leather sales were down due to lower orders from military footwear suppliers,
which have been impacted by a continuing decrease in demand for leather military
footwear. Leather for such footwear makes up the bulk of the Company's tanned
leather business. The Company expects the decline in tanned leather sales to
continue at least through the remainder of Fiscal 1999. Pro forma for the Boot
Divestiture, wholesale sales attributable to ongoing operations decreased 17.1%
to $34.7 million for the third quarter ended October 31, 1998, from $41.9
million in the same period last year, reflecting primarily decreased sales in
the Company's Nautica division and lower tanned leather sales.
Wholesale gross margin for the third quarter ended October 31, 1998 decreased
22.6% to $12.1 million from $15.6 million in the same period last year,
primarily because of the absence in this year's third quarter of gross margin
from the divested operations and the lower Nautica sales. As a percentage of net
sales, gross margin increased from 28.1% to 34.9%, primarily from changes in
sales mix.
Wholesale operating expenses decreased 18.5% for the third quarter ended October
31, 1998 primarily as a result of the Boot Divestiture. These expenses increased
as a percentage of net sales from 21.1% to 27.6%, primarily as a result of
higher divisional administrative expenses to support expected growth in the
branded footwear businesses and increased advertising expenses.
Wholesale operating income decreased from $3.8 million for the third quarter
ended November 1, 1997, to $2.5 million for the third quarter ended October 31,
1998, due to decreased sales and increased expenses as a percentage of net
sales.
The Company completed the Boot Divestiture on July 14, 1998. For the third
quarter ended November 1, 1997, the wholesale western boot business had net
sales and operating loss of $13.8 million and $1.0 million, respectively.
Corporate and Interest Expenses
Corporate and other expenses for the third quarter ended October 31, 1998, were
$2.3 million compared to $2.9 million for the same period last year, a decrease
of 20.9%. The decrease in corporate expenses is attributable primarily to
decreased compensation expense, including decreased performance-related stock
based compensation and decreased bonus accruals based on the Company's decreased
earnings, and to decreased professional fees.
Interest expense decreased 18% from $2.5 million for the third quarter ended
November 1, 1997, to $2.1 million for the third quarter ended October 31, 1998,
primarily due to the decrease in interest rates on the Company's long-term debt
from 10 3/8% on $75 million borrowings to 5 1/2% on $103.5 million borrowings.
Interest income increased 273% for the third quarter of Fiscal 1999, from $0.2
million for the third quarter of Fiscal 1998 to $0.6 million, due to increases
in average short-term investments as a result of the increased cash from the
Boot Divestiture and the net proceeds from the issuance of $103.5 million of 5
1/2% convertible subordinated notes. There were
24
25
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
no borrowings under the Company's revolving credit facility during the three
months ended October 31, 1998 or the three months ended November 1, 1997.
RESULTS OF OPERATIONS - NINE MONTHS FISCAL 1999 COMPARED TO FISCAL 1998
The Company's net sales for the nine months ended October 31, 1998 increased
3.8% to $395.6 million from $381.3 million for the nine months ended November 1,
1997. Pro forma for the Boot Divestiture, the Company's net sales increased
12.8% to $379.1 million for the nine months ended October 31, 1998 from $336.1
million in the same period last year. Gross margin increased 9.9% to $173.3
million for the first nine months of this year from $157.7 million for the same
period last year and increased as a percentage of net sales from 41.4% to 43.8%
for such periods. Selling and administrative expenses increased 13.8% from the
first nine months last year and increased as a percentage of net sales from
35.4% to 38.8%. Pretax earnings for the nine months ended October 31, 1998 were
$16.6 million compared to $16.0 million for the nine months ended November 1,
1997. Pretax earnings for the nine months ended October 31, 1998 and November 1,
1997 included a net restructuring gain of $2.4 million and $0.3 million,
respectively. Net earnings for the nine months ended October 31, 1998 were $13.0
million ($0.47 diluted earnings per share) compared to $15.7 million ($0.57
diluted earnings per share) for the nine months ended November 1, 1997. Net
earnings for the first nine months of this year included a tax credit of $85,000
and an extraordinary loss of $3.7 million for the early retirement of debt. Net
earnings for the nine months ended November 1, 1997 included an extraordinary
loss of $169,000 for the early retirement of debt.
Footwear Retail
Nine Months Ended
-------------------------
October 31, November 1, %
1998 1997 Change
------------ ----------- ------
(dollars in thousands)
Net sales.............................................$ 273,351 $ 241,345 13.3%
Net sales-ongoing operations(1).......................$ 268,676 $ 231,190 16.2%
Operating income......................................$ 18,879 $ 24,319 (22.4)%
Operating margin...................................... 6.9% 10.1%
(1) Pro forma for the Boot Divestiture as if it occurred at the beginning of the
periods presented.
Primarily due to a 19% increase in average retail stores operated, net sales
from footwear retail operations increased 13.3% for the nine months ended
October 31, 1998, compared to the same period last year. The Company opened 150
stores and closed 59 stores during the nine months
25
26
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
ended October 31, 1998. The average price per pair decreased 3% while unit sales
increased 16% for the first nine months of Fiscal 1999.
The Company's comparable store sales and store count at the end of the periods
were as follows:
Store Count
-----------------------------
Comparable October 31, November 1,
Sales Changes 1998 1997
------------- ----------- -----------
Journeys................................................. +1% 254 170
Johnston & Murphy (including factory stores)............. +8% 132 125
Jarman Retail............................................ -7% 168(1) 154
Jarman Lease............................................. -9% 86 86
Boot Factory Outlet Stores............................... -10% 0 26
Other Outlet Stores...................................... +2% 38 15
--- ---
Total Retail ......................................... -1% 678 576
=== ===
- ----------
(1) Includes sixteen Underground Station Stores.
Retail gross margin increased 12.0% to $133.4 million for the first nine months
of this year from $119.1 million in the same period last year. Retail gross
margin decreased as a percentage of net sales to 48.8% from 49.3%, primarily
from increased markdowns to stimulate sales. Retail operating expenses increased
21.1% in the first nine months of Fiscal 1999 from the same period last year,
primarily due to the 19% increase in average stores operated, which resulted in
increased occupancy related expenses and selling salaries, and due to increased
advertising expenses. In addition, divisional management expenses increased in
the first nine months of Fiscal 1999 to support new store growth. Overall retail
operating expenses increased as a percentage of net sales from 39.1% for the
first nine months of this year to 41.8% in the same period last year.
Retail operating income for the nine months ended October 31, 1998 was down
22.4% to $18.9 million compared to $24.3 million in the same period last year,
due primarily to increased expenses.
On July 14, 1998, the Company sold its Boot Factory retail chain in conjunction
with the Boot Divestiture. For the nine months ended October 31, 1998, the chain
had net sales and operating loss of $4.7 million and $535,000, respectively,
compared to net sales and operating income of $10.2 million and $35,000,
respectively, in the same period last year.
26
27
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Footwear Wholesale & Manufacturing
Nine Months Ended
----------------------------
October 31, November 1, %
1998 1997 Change
------------ --------------- ------
(dollars in thousands)
Net sales.............................................$ 122,270 $ 139,910 (12.6)%
Net sales-ongoing operations(1).......................$ 110,385 $ 104,926 5.2%
Operating income......................................$ 11,157 $ 6,366 75.3%
Operating margin...................................... 9.1% 4.6%
- --------
(1) Pro forma for the Boot Divestiture as if it occurred at the beginning of the
periods presented.
Net sales from footwear wholesale and manufacturing operations decreased 12.6%
to $122.3 million for the nine months ended October 31, 1998, from $139.9
million in the same period last year, reflecting primarily the decrease in sales
for the nine months ended October 31, 1998 due to the operations divested and
lower tanned leather sales. Tanned leather sales were down due to lower orders
from military footwear suppliers, which have been impacted by a continuing
decrease in demand for leather military footwear. Leather for such footwear
makes up the bulk of the Company's tanned leather business. The Company expects
the decline in tanned leather sales to continue at least through the remainder
of Fiscal 1999. Pro forma for the Boot Divestiture, wholesale sales attributable
to ongoing operations increased 5.2% to $110.4 million for the nine months ended
October 31, 1998, from $104.9 million in the same period last year, reflecting
primarily increased sales of men's branded footwear.
Wholesale gross margin for the nine months ended October 31, 1998 increased 3.5%
to $39.9 million from $38.6 million in the same period last year. As a
percentage of net sales, gross margin increased from 27.6% to 32.6%, primarily
from changes in sales mix.
Wholesale operating expenses decreased 4.9% for the nine months ended October
31, 1998 primarily from the Boot Divestiture. These expenses increased as a
percentage of net sales from 23.1% to 25.2%, primarily as a result of higher
divisional administrative expenses to support expected growth in the branded
footwear businesses, increased royalty expenses from increased sales and
increased advertising expenses.
Wholesale operating income increased from $6.4 million for the nine months ended
November 1, 1997, to $11.2 million for the nine months ended October 31, 1998,
due to increased margin and
27
28
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
decreased expenses, $1.9 million decrease in western boot business operating
losses and the $2.4 million gain from the Boot Divestiture. Wholesale operating
income for the nine months ended October 31, 1998 included $250,000 of
environmental and litigation settlement costs.
The Company completed the Boot Divestiture on July 14, 1998. For the nine months
ended October 31, 1998, the wholesale western boot business had net sales and
operating loss of $11.9 million and $1.4 million, respectively, compared to net
sales and operating loss of $35.0 million and $3.3 million, respectively, in the
same period last year.
Corporate And Interest Expenses
Corporate and other expenses for the nine months ended October 31, 1998, were
$8.3 million compared to $8.1 million for the same period last year, an increase
of 3.2%. The increase in corporate expenses is attributable primarily to
increased legal fees in the first half of Fiscal 1999 and to expenses related to
systems development in order to be Year 2000 compliant.
Interest expense decreased 5.9% for the nine months ended October 31, 1998
compared to the nine months ended November 1, 1997, primarily due to the
decrease in interest rates on the Company's long-term debt from 10 3/8% on $75
million borrowings to 5 1/2% on $103.5 million borrowings. Interest income
increased 118% for the first nine months of Fiscal 1999, from $0.9 million for
the first nine months of Fiscal 1998 to $2.0 million, due to increases in
average short-term investments as a result of the increased cash from the Boot
Divestiture and the net proceeds from the issuance of $103.5 million of 5 1/2%
convertible subordinated notes. There were no borrowings under the Company's
revolving credit facility during the nine months ended October 31, 1998 or the
nine months ended November 1, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain financial data at the dates indicated.
October 31, November 1,
1998 1997
----------- -----------
(dollars in millions)
Cash and short-term investments................................................... $ 42.6 $ 13.2
Working capital.................................................................... $136.8 $126.6
Long-term debt (includes current maturities)....................................... $103.5 $ 75.0
Current ratio..................................................................... 3.1x 3.1x
- ----------
On April 9, 1998, the Company issued $103.5 million in principal amount of its 5
1/2% Convertible Subordinated Notes due 2005. On May 8, 1998, using a portion of
the proceeds of the sale of the
28
29
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Convertible Subordinated Notes, the Company redeemed $75 million in principal
amount of its 10 3/8% Senior Notes due 2003, at 102.96% of their face value.
Working Capital
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. Cash flow from operations is ordinarily generated principally in
the fourth quarter of each fiscal year.
Cash used in operating activities was $15.5 million in the first nine months of
Fiscal 1999 compared to $17.0 million in the first nine months of Fiscal 1998.
The $1.5 million improvement in cash flow from operating activities primarily
reflects less seasonal growth due to the Boot Divestiture and lower seasonal
growth in accounts receivable from lower wholesale sales.
The $25.9 million increase in inventories from January 31, 1998 levels reflects
planned increases in retail inventory to support the net increase of 91 stores
in the first nine months of Fiscal 1999, increases in men's branded wholesale
inventory to support growth in certain of the wholesale businesses and lower
than anticipated sales in certain product styles.
Accounts receivable at October 31, 1998 increased $6.8 million compared to
January 31, 1998, primarily due to increased sales of men's branded footwear.
Cash provided (or used) due to changes in accounts payable and accrued
liabilities are as follows:
Nine Months Ended
----------------------------------
October 31, November 1,
1998 1997
----------- -----------
(in thousands)
Accounts payable........................................................$ 580 $ 6,794
Accrued liabilities..................................................... (10,078) (6,540)
---------- ---------
$ (9,498) $ 254
========== =========
The fluctuations in accounts payable are due to changes in buying patterns,
payment terms negotiated with individual vendors and changes in inventory
levels. The change in accrued liabilities was primarily due to payment of
bonuses, interest payments on the Company's long-term debt and payments of
severance costs and liabilities related to the Restructurings.
There were no revolving credit borrowings during the nine months ended October
31, 1998 or the nine months ended November 1, 1997, as cash generated from
operations and cash on hand funded seasonal working capital requirements and
capital expenditures. On September 24, 1997, the Company entered into a
revolving credit agreement with three banks providing for loans or letters of
credit of up to $65 million. On January 30, 1998 the revolving credit agreement
was amended to
29
30
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
permit the Boot Divestiture. On March 31, 1998, the revolving credit agreement
was amended to permit the issuance of the Company's 5 1/2% Convertible
Subordinated Notes due 2005. The agreement, as amended, expires September 24,
2002.
Capital Expenditures
Total capital expenditures in Fiscal 1999 are expected to be approximately $26.5
million. These include expected retail expenditures of $19.3 million to open
approximately 159 new retail stores and to complete 28 major store renovations.
Capital expenditures for wholesale and manufacturing operations and other
purposes are expected to be approximately $7.2 million, including approximately
$4.9 million for new computer systems to improve customer service and support
the Company's growth.
Year 2000
The Year 2000 issue is the result of computer programs' being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal activities.
The Company has determined that it will be required to modify or replace
significant portions of its software so that its computer systems will properly
utilize dates beyond December 31, 1999. The Company has also begun the process
of upgrading and modernizing its major information systems, including its
wholesale and retail operating systems and its financial systems. The
replacement systems are expected to be Year 2000 compliant.
The Company will utilize both internal and external resources to reprogram or
replace and test software for Year 2000 compliance. The Company currently has
100% of the estimated human resources it expects to be required in the
remediation and testing process committed.
The Company plans to complete its Year 2000 project no later than the end of the
third quarter of Fiscal 2000. The Company has completed the remediation,
including final testing, of approximately 47% of its identified 2.1 million
lines of code in its legacy systems. The Company added 0.4 million lines of code
associated with existing wholesale systems to the code to be remediated due to
delays until the second half of Fiscal 2000 in system replacements. The Company
is using three of five modules of its new financial system at the end of the
third quarter of Fiscal 1999 and plans to have the other parts in service by the
end of the first quarter of Fiscal 2000. The Company's contingency plan for its
systems replacement calls for remediation of the existing retail systems if
certain hurdles in the replacement process are not met by March 1999.
The total cost of upgrading most of the Company's major operating systems,
including the Year 2000 project for Fiscal years 1998 through 2000, is estimated
at $20 million and is being funded
30
31
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
through operating cash flows and cash on hand. Of the total project cost,
approximately $12 million is attributable to the purchase of new software and
hardware which will be capitalized. The remaining $8 million will be expensed,
including projected costs of $4.0 million for Fiscal 1999. Cumulative to date
expenditures are $5.1 million plus cumulative capital expenditures of $7.7
million.
The Company has developed plans for formal communications with all of its
significant suppliers and large customers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 issues. The communications began in the last quarter of Fiscal 1998
and the Company anticipates initial completion in the fourth quarter of Fiscal
1999 with follow-up continuing until the Year 2000 with critical trading
partners based on the initial responses. There can be no assurance the systems
of other companies on which the Company's systems rely will be timely converted,
or that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have material adverse effect
on the Company. The Company is presently developing contingency plans to
determine what actions the Company will take if its trading partners are not
Year 2000 compliant. The Company expects such contingency plans to be completed
by the end of the first quarter of Fiscal 2000.
The costs of the project and the date on which the Company plans to complete the
Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. Management uses outside consultants to review the adequacy of its Year
2000 plans. However, there can be no assurance that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
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 11 to the
Company's Consolidated Financial Statements included elsewhere herein. The
Company has made provisions for certain of these contingencies, including
provisions of $150,000 and $500,000 in discontinued operations in Fiscal 1997
and Fiscal 1996, respectively, and $250,000 and $500,000 reflected in Fiscal
1998 and Fiscal 1996, respectively. The Company monitors these proceedings on an
ongoing basis and at least quarterly 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 as
of the close of the most recent fiscal quarter. Because of uncertainties and
risks inherent in litigation generally and in environmental proceedings in
particular, however, there can be no assurance that
31
32
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
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.
Future Capital Needs
The Company expects that cash on hand and cash provided by operations will be
sufficient to fund all of its capital expenditures through Fiscal 1999, although
the Company may borrow from time to time to support seasonal working capital
requirements. The approximately $5.5 million of costs associated with the Boot
Divestiture, and prior restructurings that are expected to be incurred during
the next twelve months are also expected to be funded from cash on hand. The
Company has also authorized the repurchase, from time to time, up to 2.6 million
shares of the Company's common stock. These purchases will be funded from
available cash. During the third quarter of Fiscal 1999, the Company repurchased
1.5 million shares at a cost of $7.7 million.
There were $5.4 million of letters of credit outstanding under the revolving
credit agreement at October 31, 1998, leaving availability under the revolving
credit agreement of $59.6 million.
Changes In Accounting Principles
The Company implemented Statement of Financial Accounting Standards (SFAS) 130,
"Reporting Comprehensive Income" in the first quarter of Fiscal 1999. This
statement establishes standards for reporting and display of comprehensive
income. For additional information, see Note 9 to the Company's Consolidated
Financial Statements included elsewhere herein.
32
33
PART II - OTHER INFORMATION
- ------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
(27) Financial Data Schedule (for SEC use only)
- --------------
REPORTS ON FORM 8-K
The Company filed current reports on Form 8-K on the following dates
and to report the following matters:
(a) On October 20, 1998, to announce its expectations for earnings in
the quarter ending October 31, 1998.
(b) On November 17, 1998, to announce its discovery of a mathematical
error in its calculation of diluted earnings per share.
(c) On November 19, 1998, to announce the amendment of the Rights
Agreement governing its shareholder rights plan.
33
34
SIGNATURE
- --------------------------------------------------------------------------------
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.
Genesco Inc.
/s/ James S. Gulmi
James S. Gulmi
Chief Financial Officer
December 15, 1998
34
5
1,000
9-MOS
JAN-30-1999
FEB-01-1998
OCT-31-1998
5,440
37,112
21,888
862
127,924
202,604
108,565
52,204
268,680
65,833
103,500
0
7,936
25,113
44,946
268,680
395,621
395,621
222,281
222,281
0
978
7,163
16,601
(85)
16,686
0
(3,651)
0
13,035
.50
.47
