GENESCO INC.
Table of Contents

 
 
(GENESCO LOGO)
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
     
(Mark One)
 
   
þ
  Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
 
   
 
  For Quarter Ended July 30, 2005
 
   
o
  Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File No. 1-3083
Genesco Inc.
A Tennessee Corporation
I.R.S. No. 62-0211340
Genesco Park
1415 Murfreesboro Road
Nashville, Tennessee 37217-2895
Telephone 615/367-7000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Common Shares Outstanding August 27, 2005 – 22,746,844
 
 

 


INDEX
             
        Page
Part I. Financial Information        
 
           
Item 1. Financial Statements (unaudited):        
 
           
 
  Consolidated Balance Sheets – July 30, 2005, January 29, 2005 and July 31, 2004     3  
 
           
 
  Consolidated Statements of Earnings — Three Months Ended and Six Months Ended July 30, 2005 and July 31, 2004     5  
 
           
 
  Consolidated Statements of Cash Flows — Three Months Ended and Six Months Ended July 30, 2005 and July 31, 2004     6  
 
           
 
  Consolidated Statements of Shareholders’ Equity — Year Ended January 29, 2005 and Six Months Ended July 30, 2005     7  
 
           
 
  Notes to Consolidated Financial Statements     8  
 
           
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations     39  
 
           
Item 3. Quantitative and Qualitative Disclosures About Market Risk     55  
 
           
Item 4. Controls and Procedures     55  
 
           
Part II. Other Information        
 
           
Item 1. Legal Proceedings     56  
 
           
Item 4. Submission of Matters to a Vote of Security Holders     56  
 
           
Item 6. Exhibits     57  
 
           
Signature     58  
 EX-10.A AMENDED AND RESTATED GENESCO EMPLOYEE STOCK PURCHASE PLAN
 EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
 EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
 EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
 EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

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Table of Contents

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Genesco Inc.
and Subsidiaries
Consolidated Balance Sheets
In Thousands, except share amounts
                         
    July 30,     January 29,     July 31,  
    2005     2005     2004  
                    (as restated,  
                    see Note 2)  
 
Assets
                       
Current Assets
                       
Cash and cash equivalents
  $ 38,848     $ 60,068     $ 15,286  
Accounts receivable, net of allowances of $1,677 at July 30, 2005, $2,166 at January 29, 2005 and $3,519 at July 31, 2004
    17,762       17,906       17,449  
Inventories
    270,688       207,197       263,377  
Deferred income taxes
    3,898       2,699       6,859  
Prepaids and other current assets
    19,849       18,049       13,401  
 
Total current assets
    351,045       305,919       316,372  
 
Property and equipment:
                       
Land
    4,972       4,972       4,971  
Buildings and building equipment
    14,663       14,565       14,175  
Computer hardware, software and equipment
    57,840       54,445       51,271  
Furniture and fixtures
    61,982       58,679       55,933  
Construction in progress
    8,015       6,085       5,703  
Improvements to leased property
    169,207       158,692       151,062  
 
Property and equipment, at cost
    316,679       297,438       283,115  
Accumulated depreciation
    (143,363 )     (128,768 )     (118,118 )
 
Property and equipment, net
    173,316       168,670       164,997  
 
Deferred income taxes
    617       329       1,606  
Goodwill
    96,561       97,223       97,556  
Trademarks
    47,634       47,633       47,543  
Other intangibles, net of accumulated amortization of $3,150 at July 30, 2005, $1,954 at January 29, 2005 and $772 at July 31, 2004
    5,436       6,632       7,814  
Other noncurrent assets
    9,340       9,165       9,650  
 
Total Assets
  $ 683,949     $ 635,571     $ 645,538  
 

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Table of Contents

Genesco Inc.
and Subsidiaries
Consolidated Balance Sheets
In Thousands, except share amounts
                         
    July 30,     January 29,     July 31,  
    2005     2005     2004  
                    (as restated,  
                    see Note 2)  
 
Liabilities and Shareholders’ Equity
                       
Current Liabilities
                       
Accounts payable
  $ 114,837     $ 65,599     $ 104,468  
Accrued employee compensation
    15,337       21,836       12,570  
Accrued other taxes
    8,571       10,162       7,314  
Accrued income taxes
    -0-       5,312       325  
Other accrued liabilities
    26,338       22,640       19,659  
Current portion — long-term debt
    -0-       -0-       13,000  
Provision for discontinued operations
    3,677       4,125       1,234  
 
Total current liabilities
    168,760       129,674       158,570  
 
Long-term debt
    151,250       161,250       189,250  
Pension liability
    23,406       28,328       27,799  
Deferred rent and other long-term liabilities
    45,571       42,576       42,321  
Provision for discontinued operations
    1,631       1,678       1,234  
 
Total liabilities
    390,618       363,506       419,174  
 
Commitments and contingent liabilities
                       
Shareholders’ Equity
                       
Non-redeemable preferred stock
    7,229       7,474       7,502  
Common shareholders’ equity:
                       
Common stock, $1 par value:
                       
Authorized: 80,000,000 shares
                       
Issued/Outstanding:
July 30, 2005 - 23,231,418/22,742,954
January 29, 2005 - 22,925,857/22,437,393
July 31, 2004 - 22,461,925/21,973,461
    23,231       22,926       22,462  
Additional paid-in capital
    115,583       109,005       100,615  
Retained earnings
    191,934       176,819       139,326  
Accumulated other comprehensive loss
    (26,789 )     (26,302 )     (25,684 )
Treasury shares, at cost
    (17,857 )     (17,857 )     (17,857 )
 
Total shareholders’ equity
    293,331       272,065       226,364  
 
Total Liabilities and Shareholders’ Equity
  $ 683,949     $ 635,571     $ 645,538  
 
The accompanying Notes are an integral part of these Consolidated Financial Statements.

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Table of Contents

Genesco Inc.
and Consolidated Subsidiaries
Consolidated Statements of Earnings
In Thousands, except per share amounts
                                 
    Three Months Ended     Six Months Ended  
    July 30,     July 31,     July 30,     July 31,  
    2005     2004     2005     2004  
            (as restated,             (as restated,  
            see Note 2)             see Note 2)  
 
Net sales
  $ 275,168     $ 245,939     $ 561,253     $ 471,465  
Cost of sales
    136,210       124,050       275,742       238,898  
Selling and administrative expenses
    124,948       112,011       252,204       211,349  
Restructuring and other, net
    177       (160 )     3,044       (92 )
 
Earnings from operations
    13,833       10,038       30,263       21,310  
 
Interest expense, net
                               
Interest expense
    2,821       2,899       5,877       4,934  
Interest income
    (253 )     (3 )     (605 )     (156 )
 
Total interest expense, net
    2,568       2,896       5,272       4,778  
 
Earnings before income taxes from continuing operations
    11,265       7,142       24,991       16,532  
Income taxes
    4,499       2,317       9,799       5,901  
 
Earnings from continuing operations
    6,766       4,825       15,192       10,631  
Provision for discontinued operations, net
    -0-       (21 )     65       (21 )
 
Net Earnings
  $ 6,766     $ 4,804     $ 15,257     $ 10,610  
 
 
                               
Basic earnings per common share:
                               
Continuing operations
  $ .29     $ .22     $ .67     $ .48  
Discontinued operations
  $ .00     $ .00     $ .00     $ .00  
Net earnings
  $ .29     $ .22     $ .67     $ .48  
Diluted earnings per common share:
                               
Continuing operations
  $ .27     $ .20     $ .60     $ .45  
Discontinued operations
  $ .00     $ .00     $ .01     $ .00  
Net earnings
  $ .27     $ .20     $ .61     $ .45  
 
The accompanying Notes are an integral part of these Consolidated Financial Statements.

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Table of Contents

Genesco Inc.
and Consolidated Subsidiaries
Consolidated Statements of Cash Flows
In Thousands
                                 
    Three Months Ended     Six Months Ended  
    July 30,     July 31,     July 30,     July 31,  
    2005     2004     2005     2004  
            (as restated,             (as restated,  
            see Note 2)             see Note 2)  
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                               
Net earnings
  $ 6,766     $ 4,804     $ 15,257     $ 10,610  
Tax benefit of stock options exercised
    454       822       1,500       1,095  
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
                               
Depreciation
    8,439       8,034       16,887       14,786  
Provision for legal settlement
    -0-       -0-       2,571       -0-  
Deferred income taxes
    53       (758 )     (522 )     (309 )
Provision for losses on accounts receivable
    (11 )     8       (16 )     88  
Impairment of long-lived assets
    173       319       337       319  
Loss on retirement of debt
    74       -0-       74       -0-  
Provision for discontinued operations
    -0-       34       (106 )     34  
Other
    786       727       1,420       1,192  
Effect on cash of changes in working capital and other assets and liabilities, net of acquisitions:
                               
Accounts receivable
    (237 )     (2,913 )     160       (3,449 )
Inventories
    (53,603 )     (47,305 )     (63,492 )     (61,373 )
Prepaids and other current assets
    (2,053 )     775       (1,799 )     1,905  
Accounts payable
    30,699       25,165       44,284       23,902  
Other accrued liabilities
    138       (1,786 )     (12,123 )     (1,141 )
Other assets and liabilities
    2,076       2,141       (1,100 )     3,807  
 
Net cash provided by (used in) operating activities
    (6,246 )     (9,933 )     3,332       (8,534 )
 
 
                               
CASH FLOWS FROM INVESTING ACTIVITIES:
                               
Capital expenditures
    (10,846 )     (10,421 )     (23,144 )     (17,829 )
Acquisitions, net of cash acquired
    -0-       (1,261 )     -0-       (168,783 )
Proceeds from sale of property and equipment
    1       2       1       2  
 
Net cash used in investing activities
    (10,845 )     (11,680 )     (23,143 )     (186,610 )
 
 
                               
CASH FLOWS FROM FINANCING ACTIVITIES:
                               
Payments of long-term debt
    (10,000 )     -0-       (10,000 )     -0-  
Payments of capital leases
    (77 )     (133 )     (190 )     (186 )
Change in overdraft balances
    2,310       11,485       4,954       13,608  
Revolver borrowings, net
    -0-       12,000       -0-       16,000  
Dividends paid
    (69 )     (73 )     (142 )     (146 )
Long-term borrowings
    -0-       -0-       -0-       100,000  
Options exercised
    1,398       2,084       3,969       2,965  
Deferred financing costs
    -0-       -0-       -0-       (3,360 )
 
Net cash provided by (used in) financing activities
    (6,438 )     25,363       (1,409 )     128,881  
 
Net Cash Flow
    (23,529 )     3,750       (21,220 )     (66,263 )
Cash and cash equivalents at beginning of period
    62,377       11,536       60,068       81,549  
 
Cash and cash equivalents at end of period
  $ 38,848     $ 15,286     $ 38,848     $ 15,286  
 
 
                               
Supplemental Cash Flow Information:
                               
Net cash paid for:
                               
Interest
  $ 3,519     $ 3,391     $ 5,173     $ 4,108  
Income taxes
    9,398       6,422       15,535       14,654  
The accompanying Notes are an integral part of these Consolidated Financial Statements.

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Table of Contents

Genesco Inc.
and Subsidiaries
Consolidated Statements of Shareholders’ Equity
In Thousands
                                                                 
    Total                             Accumulated                     Total  
    Non-Redeemable             Additional             Other                     Share-  
    Preferred     Common     Paid-In     Retained     Comprehensive     Treasury     Comprehensive     holders'  
    Stock     Stock     Capital     Earnings     Loss     Stock     Income     Equity  
 
Balance January 31, 2004
  $ 7,580     $ 22,212     $ 96,612     $ 128,862     $ (25,164 )   $ (17,857 )           $ 212,245  
 
Net earnings
    -0-       -0-       -0-       48,249       -0-       -0-     $ 48,249       48,249  
Dividends paid
    -0-       -0-       -0-       (292 )     -0-       -0-       -0-       (292 )
Exercise of stock options
    -0-       667       8,448       -0-       -0-       -0-       -0-       9,115  
Issue shares – Employee Stock Purchase Plan
    -0-       25       327       -0-       -0-       -0-       -0-       352  
Tax benefit of stock options exercised
    -0-       -0-       3,264       -0-       -0-       -0-       -0-       3,264  
Loss on foreign currency forward contracts
(net of tax benefit of $0.6 million)
    -0-       -0-       -0-       -0-       (905 )     -0-       (905 )     (905 )
Gain on interest rate swaps
(net of tax of $0.1 million)
    -0-       -0-       -0-       -0-       157       -0-       157       157  
Foreign currency translation adjustment
    -0-       -0-       -0-       -0-       101       -0-       101       101  
Minimum pension liability adjustment
(net of tax benefit of $0.6 million)
    -0-       -0-       -0-       -0-       (491 )     -0-       (491 )     (491 )
Other
    (106 )     22       354       -0-       -0-       -0-       -0-       270  
 
                                                           
Comprehensive income
                                                  $ 47,111      
 
Balance January 29, 2005
    7,474       22,926       109,005       176,819       (26,302 )     (17,857 )             272,065  
 
Net earnings
    -0-       -0-       -0-       15,257       -0-       -0-       15,257       15,257  
Dividends paid
    -0-       -0-       -0-       (142 )     -0-       -0-       -0-       (142 )
Exercise of stock options
    -0-       295       4,675       -0-       -0-       -0-       -0-       4,970  
Tax benefit of stock options exercised
    -0-       -0-       1,500       -0-       -0-       -0-       -0-       1,500  
Loss on foreign currency forward contracts
(net of tax benefit of $0.4 million)
    -0-       -0-       -0-       -0-       (660 )     -0-       (660 )     (660 )
Gain on interest rate swaps
(net of tax of $0.2 million)
    -0-       -0-       -0-       -0-       264       -0-       264       264  
Foreign currency translation adjustment
    -0-       -0-       -0-       -0-       (91 )     -0-       (91 )     (91 )
Other
    (245 )     10       403       -0-       -0-       -0-       -0-       168  
 
                                                             
Comprehensive income*
                                                  $ 14,770          
 
Balance July 30, 2005
  $ 7,229     $ 23,231     $ 115,583     $ 191,934     $ (26,789 )   $ (17,857 )           $ 293,331  
 
 
*   Comprehensive income was $6.3 million and $4.8 million for the second quarter ended July 30, 2005 and July 31, 2004, respectively. Comprehensive income was $10.1 million for the six month period ended July 31, 2004.
The accompanying Notes are an integral part of these Consolidated Financial Statements.

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Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 1
   
Summary of Significant Accounting Policies
   
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 28, 2006 (“Fiscal 2006”) and of the fiscal year ended January 29, 2005 (“Fiscal 2005”). The results of operations for any interim period are not necessarily indicative of results for the full year. The interim financial statements should be read in conjunction with the financial statements and notes thereto included in the annual report on Form 10-K.
Nature of Operations
The Company’s businesses include the design or sourcing, marketing and distribution of footwear, principally under the Johnston & Murphy and Dockers brands and the operation at July 30, 2005 of 1,672 Jarman, Journeys, Journeys Kidz, Johnston & Murphy, Underground Station, Hat World, Lids, Hat Zone, Cap Connection and Head Quarters retail footwear and headwear stores.
Principles of Consolidation
All subsidiaries are included in the consolidated financial statements. All significant intercompany transactions and accounts have been eliminated.
Financial Statement Reclassifications
Certain reclassifications have been made to conform prior years’ data to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant areas requiring management estimates or judgments include the following key financial areas:
Inventory Valuation
The Company values its inventories at the lower of cost or market.
In its wholesale operations, cost is determined using the first-in, first-out (FIFO) method. Market is determined using a system of analysis which evaluates inventory at the stock number level based on factors such as inventory turn, average selling price, inventory level, and selling prices reflected in future orders. The Company provides reserves when the inventory has not been marked down to market based on current selling prices or when the inventory is not turning and is not expected to turn at levels satisfactory to the Company.

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Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 1
   
Summary of Significant Accounting Policies, Continued
   
In its retail operations, other than the Hat World segment, the Company employs the retail inventory method, applying average cost-to-retail ratios to the retail value of inventories. Under the retail inventory method, valuing inventory at the lower of cost or market is achieved as markdowns are taken or accrued as a reduction of the retail value of inventories.
Inherent in the retail inventory method are subjective judgments and estimates including merchandise mark-on, markups, markdowns, and shrinkage. These judgments and estimates, coupled with the fact that the retail inventory method is an averaging process, could produce a range of cost figures. To reduce the risk of inaccuracy and to ensure consistent presentation, the Company employs the retail inventory method in multiple subclasses of inventory with similar gross margin, and analyzes markdown requirements at the stock number level based on factors such as inventory turn, average selling price, and inventory age. In addition, the Company accrues markdowns as necessary. These additional markdown accruals reflect all of the above factors as well as current agreements to return products to vendors and vendor agreements to provide markdown support. In addition to markdown provisions, the Company maintains provisions for shrinkage and damaged goods based on historical rates.
The Hat World segment employs the moving average cost method for valuing inventories and applies freight using an allocation method. The Company provides a valuation allowance for slow-moving inventory based on negative margins and estimated shrink based on historical experience and specific analysis, where appropriate.
Inherent in the analysis of both wholesale and retail inventory valuation are subjective judgments about current market conditions, fashion trends, and overall economic conditions. Failure to make appropriate conclusions regarding these factors may result in an overstatement or understatement of inventory value.
Impairment of Definite-Lived Long-Lived Assets
The Company periodically assesses the realizability of its definite-lived long-lived assets and evaluates such assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Asset impairment is determined to exist if estimated future cash flows, undiscounted and without interest charges, are less than the carrying amount. Inherent in the analysis of impairment are subjective judgments about future cash flows. Failure to make appropriate conclusions regarding these judgments may result in an overstatement of the value of definite-lived long-lived assets.

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Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 1
   
Summary of Significant Accounting Policies, Continued
   
Environmental and Other Contingencies
The Company is subject to certain loss contingencies related to environmental proceedings and other legal matters, including those disclosed in Note 9 to the Company’s Consolidated Financial Statements. The Company monitors these matters on an ongoing basis and, on a quarterly basis, management reviews the Company’s reserves and accruals in relation to each of them, adjusting provisions as management deems necessary in view of changes in available information. Changes in estimates of liability are reported in the periods when they occur. Consequently, management believes that its reserve in relation to each proceeding is a best estimate of probable loss connected to the proceeding, or in cases in which no best estimate is possible, the minimum amount in the range of estimated losses, based upon its analysis of the facts and circumstance as of the close of the most recent fiscal quarter. However, because of uncertainties and risks inherent in litigation generally and in environmental proceedings in particular, there can be no assurance that future developments will not require additional reserves to be set aside, that some or all reserves will be adequate or that the amounts of any such additional reserves or any such inadequacy will not have a material adverse effect upon the Company’s financial condition or results of operations.
Revenue Recognition
Retail sales are recorded at the point of sale and are net of estimated returns. Catalog and internet sales are recorded at time of delivery to the customer and are net of estimated returns. Wholesale revenue is recorded net of estimated returns and allowances for markdowns, damages and miscellaneous claims when the related goods have been shipped and legal title has passed to the customer. Shipping and handling costs charged to customers are included in net sales. Estimated returns are based on historical returns and claims. Actual amounts of markdowns have not differed materially from estimates. Actual returns and claims in any future period may differ from historical experience.
Pension Plan Accounting
In December 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This statement revised employers’ disclosures about pension plans and other post retirement benefit plans. It did not change the measurement or recognition of those plans required by SFAS No. 87, “Employers’ Accounting for Pensions.”
The Company accounts for the defined benefit pension plans using SFAS No. 87, “Employers’ Accounting for Pensions.” Under SFAS No. 87, pension expense is recognized on an accrual basis over employees’ approximate service periods. The calculation of pension expense and the corresponding liability requires the use of a number of critical assumptions, including the expected long-term rate of return on plan assets and the assumed discount rate, as well as the recognition of actuarial gains and losses. Changes in these assumptions can result in different expense and liability amounts, and future actual experience can differ from these assumptions.

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Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 1
   
Summary of Significant Accounting Policies, Continued
   
Cash and Cash Equivalents
Included in cash and cash equivalents at July 30, 2005 and January 29, 2005 are cash equivalents of $21.8 million and $51.3 million, respectively. Cash equivalents are highly-liquid debt instruments having an original maturity of three months or less. The majority of payments due from banks for customer credit card transactions process within 24 — 48 hours and are accordingly classified as cash and cash equivalents.
At July 30, 2005 and January 29, 2005, outstanding checks drawn on zero-balance accounts at certain domestic banks exceeded book cash balances at those banks by approximately $22.6 million and $17.6 million, respectively. These amounts are included in accounts payable.
Concentration of Credit Risk and Allowances on Accounts Receivable
The Company’s footwear wholesaling business sells primarily to independent retailers and department stores across the United States. Receivables arising from these sales are not collateralized. Customer credit risk is affected by conditions or occurrences within the economy and the retail industry. One customer accounted for 16% of the Company’s trade receivables balance and another customer accounted for 11% as of July 30, 2005 and no other customer accounted for more than 5% of the Company’s trade receivables balance as of July 30, 2005.
The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information, as well as company-specific factors. The Company also establishes allowances for sales returns, customer deductions and co-op advertising based on specific circumstances, historical trends and projected probable outcomes.
Property and Equipment
Property and equipment are recorded at cost and depreciated or amortized over the estimated useful life of related assets. Depreciation and amortization expense are computed principally by the straight-line method over the following estimated useful lives:
     
Buildings and building equipment
  20-45 years
Computer hardware, software and equipment
  3-10 years
Furniture and fixtures
  10 years
Leases
Leasehold improvements and properties under capital leases are amortized on the straight-line method over the shorter of their useful lives or their related lease terms and the charge to earnings is included in depreciation expense in the Consolidated Statements of Earnings.

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Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 1
   
Summary of Significant Accounting Policies, Continued
   
Certain leases include rent increases during the initial lease term. For these leases, the Company recognizes the related rental expense on a straight-line basis over the term of the lease (which includes any rent holidays and the pre-opening period of construction, renovation, fixturing and merchandise placement) and records the difference between the amounts charged to operations and amounts paid as a rent liability.
The Company occasionally receives reimbursements from landlords to be used towards construction of the store the Company intends to lease. Leasehold improvements are recorded at their gross costs including items reimbursed by landlords. The reimbursements are amortized as a reduction of rent expense over the initial lease term.
Goodwill and Other Intangibles
Under the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and intangible assets with indefinite lives are not amortized, but tested at least annually for impairment. This Statement also requires that intangible assets with finite lives be amortized over their respective lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
Intangible assets of the Company with indefinite lives are primarily goodwill and identifiable trademarks acquired in connection with the acquisition of Hat World Corporation on April 1, 2004. The Company tests for impairment of intangible assets with an indefinite life, at a minimum on an annual basis, relying on a number of factors including operating results, business plans and projected future cash flows.
The impairment test for identifiable assets not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying amount.
Identifiable intangible assets of the Company with finite lives are primarily leases and customer lists. They are subject to amortization based upon their estimated useful lives. Finite-lived intangible assets are evaluated for impairment using a process similar to that used to evaluate other definite-lived long-lived assets, a comparison of the fair value of the intangible asset with its carrying amount. An impairment loss is recognized for the amount by which the carrying value exceeds the fair value of the asset.

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Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 1
   
Summary of Significant Accounting Policies, Continued
   
Postretirement Benefits
Substantially all full-time employees, except employees in the Hat World segment, are covered by a defined benefit pension plan. The Company froze the defined benefit pension plan effective January 1, 2005. The Company also provides certain former employees with limited medical and life insurance benefits. The Company funds at least the minimum amount required by the Employee Retirement Income Security Act.
Cost of Sales
For the Company’s retail operations, the cost of sales includes actual product cost, the cost of transportation to the Company’s warehouses from suppliers and the cost of transportation from the Company’s warehouses to the stores. Additionally, the cost of its distribution facilities allocated to its retail operations is included in cost of sales.
For the Company’s wholesale operations, the cost of sales includes the actual product cost and the cost of transportation to the Company’s warehouses from suppliers.
Selling and Administrative Expenses
Selling and administrative expenses include all operating costs of the Company excluding (i) those related to the transportation of products from the supplier to the warehouse, (ii) for its retail operations, those related to the transportation of products from the warehouse to the store and (iii) costs of its distribution facilities which are allocated to its retail operations. Wholesale and unallocated retail costs of distribution are included in selling and administrative expenses in the amounts of $0.9 million and $1.2 million for the second quarter of Fiscal 2006 and 2005, respectively, and $2.1 million and $2.4 million for the first six months of Fiscal 2006 and 2005, respectively.
Buying, Merchandising and Occupancy Costs
The Company records buying and merchandising and occupancy costs in selling and administrative expense. Because the Company does not include these costs in cost of sales, the Company’s gross margin may not be comparable to other retailers that include these costs in the calculation of gross margin.
Shipping and Handling Costs
Shipping and handling costs related to inventory purchased from suppliers is included in the cost of inventory and is charged to cost of sales in the period that the inventory is sold. All other shipping and handling costs are charged to cost of sales in the period incurred except for wholesale and unallocated retail costs of distribution, which are included in selling and administrative expenses.

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Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 1
   
Summary of Significant Accounting Policies, Continued
   
Preopening Costs
Costs associated with the opening of new stores are expensed as incurred, and are included in selling and administrative expenses on the accompanying Statements of Earnings.
Store Closings and Exit Costs
From time to time, the Company makes strategic decisions to close stores or exit locations or activities. If stores or operating activities to be closed or exited constitute components, as defined by SFAS No. 144, and will not result in a migration of customers and cash flows, these closures will be considered discontinued operations when the related assets meet the criteria to be classified as held for sale, or at the cease-use date, whichever occurs first. The results of operations of discontinued operations are presented retroactively, net of tax, as a separate component on the Statement of Earnings, if material individually or cumulatively.
Assets related to planned store closures or other exit activities are reflected as assets held for sale and recorded at the lower of carrying value or fair value less costs to sell when the required criteria, as defined by SFAS No. 144, are satisfied. Depreciation ceases on the date that the held for sale criteria are met.
Assets related to planned store closures or other exit activities that do not meet the criteria to be classified as held for sale are evaluated for impairment in accordance with the Company’s normal impairment policy, but with consideration given to revised estimates of future cash flows. In any event, the remaining depreciable useful lives are evaluated and adjusted as necessary.
Exit costs related to anticipated lease termination costs, severance benefits and other expected charges are accrued for and recognized in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”
Advertising Costs
Advertising costs are predominantly expensed as incurred. Advertising costs were $6.3 million and $6.1 million for the second quarter of Fiscal 2006 and 2005, respectively, and $14.1 million and $11.9 million for the first six months of Fiscal 2006 and 2005, respectively. Direct response advertising costs for catalogs are capitalized, in accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position No. 93-7, “Reporting on Advertising Costs.” Such costs are amortized over the estimated future revenues realized from such advertising, not to exceed six months. The Consolidated Balance Sheets included prepaid assets for direct response advertising costs of $0.6 million and $1.2 million at July 30, 2005 and January 29, 2005.

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Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 1
   
Summary of Significant Accounting Policies, Continued
   
Consideration to Resellers
The Company does not have any written buy-down programs with retailers, but the Company has provided certain retailers with markdown allowances for obsolete and slow moving products that are in the retailer’s inventory. The Company estimates these allowances and provides for them as reductions to revenues at the time revenues are recorded. Markdowns are negotiated with retailers and changes are made to the estimates as agreements are reached. Actual amounts for markdowns have not differed materially from estimates.
Cooperative Advertising
Cooperative advertising funds are made available to all of the Company’s retail customers. In order for retailers to receive reimbursement under such programs, the retailer must meet specified advertising guidelines and provide appropriate documentation of expenses to be reimbursed. The Company’s cooperative advertising agreements require that retail customers present documentation or other evidence of specific advertisements or display materials used for the Company’s products by submitting the actual print advertisements presented in catalogs, newspaper inserts or other advertising circulars, or by permitting physical inspection of displays. Additionally, the Company’s cooperative advertising agreements require that the amount of reimbursement requested for such advertising or materials be supported by invoices or other evidence of the actual costs incurred by the retailer. The Company accounts for these cooperative advertising costs as selling and administrative expenses, in accordance with Emerging Issues Task Force (“EITF”) Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).”
Cooperative advertising costs recognized in selling and administrative expenses were $0.5 million and $0.5 million for the second quarter of Fiscal 2006 and 2005, respectively, and $1.0 million and $1.2 million for the first six months of Fiscal 2006 and 2005, respectively. During the first six months of Fiscal 2006 and 2005, the Company’s cooperative advertising reimbursements paid did not exceed the fair value of the benefits received under those agreements.
Vendor Allowances
From time to time the Company negotiates allowances from its vendors for markdowns taken or expected to be taken. These markdowns are typically negotiated on specific merchandise and for specific amounts. These specific allowances are recognized as a reduction in cost of sales in the period in which the markdowns are taken. Markdown allowances not attached to specific inventory on hand or already sold are applied to concurrent or future purchases from each respective vendor.

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Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 1
   
Summary of Significant Accounting Policies, Continued
   
The Company receives support from some of its vendors in the form of reimbursements for cooperative advertising and catalog costs for the launch and promotion of certain products. The reimbursements are agreed upon with vendors and represent specific, incremental, identifiable costs incurred by the Company in selling the vendor’s products. Such costs and the related reimbursements are accumulated and monitored on an individual vendor basis, pursuant to the respective cooperative advertising agreements with vendors. Such cooperative advertising reimbursements are recorded as a reduction of selling and administrative expenses in the same period in which the associated expense is incurred. If the amount of cash consideration received exceeds the costs being reimbursed, such excess amount would be recorded as a reduction of cost of sales.
Vendor reimbursements of cooperative advertising costs recognized as a reduction of selling and administrative expenses were $1.2 million and $0.6 million for the second quarter of Fiscal 2006 and 2005, respectively, and $2.3 million and $1.1 million for the first six months of Fiscal 2006 and 2005, respectively. During the first six months of Fiscal 2006 and 2005, the Company’s cooperative advertising reimbursements received were not in excess of the costs reimbursed.
Environmental Costs
Environmental expenditures relating to current operations are expensed or capitalized as appropriate. Expenditures relating to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated and are evaluated independently of any future claims for recovery. Generally, the timing of these accruals coincides with completion of a feasibility study or the Company’s commitment to a formal plan of action. Costs of future expenditures for environmental remediation obligations are not discounted to their present value.
Income Taxes
Deferred income taxes are provided for all temporary differences and operating loss and tax credit carryforwards are limited, in the case of deferred tax assets, to the amount the Company believes is more likely than not to be realized in the foreseeable future.
Earnings Per Common Share
Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities to issue common stock were exercised or converted to common stock (see Note 8).

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Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 1
   
Summary of Significant Accounting Policies, Continued
   
Other Comprehensive Income
SFAS No. 130, “Reporting Comprehensive Income,” requires, among other things, the Company’s minimum pension liability adjustment, unrealized gains or losses on foreign currency forward contracts, unrealized gains and losses on interest rate swaps and foreign currency translation adjustments to be included in other comprehensive income net of tax. Accumulated other comprehensive loss at July 30, 2005 consists of $27.0 million of cumulative minimum pension liability adjustments, net of tax, cumulative net losses of $0.2 million on foreign currency forward contracts, net of tax, cumulative net gains of $0.4 million on interest rate swaps, net of tax, and a foreign currency translation adjustment of less than $0.1 million.
Business Segments
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” requires that companies disclose “operating segments” based on the way management disaggregates the Company for making internal operating decisions (see Note 10).
Derivative Instruments and Hedging Activities
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of SFAS No. 133,” SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” (collectively “SFAS 133”) require an entity to recognize all derivatives as either assets or liabilities in the consolidated balance sheet and to measure those instruments at fair value. Under certain conditions, a derivative may be specifically designated as a fair value hedge or a cash flow hedge. The accounting for changes in the fair value of a derivative are recorded each period in current earnings or in other comprehensive income depending on the intended use of the derivative and the resulting designation.

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Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 1
   
Summary of Significant Accounting Policies, Continued
   
Stock Incentive Plans
As of July 30, 2005, the Company had two fixed stock incentive plans. Under the new 2005 Equity Incentive Plan, effective as of June 23, 2005, the Company may grant options, restricted shares and other stock-based awards, to its management personnel as well as directors for up to 1.0 million shares of common stock. Under the 1996 Stock Incentive Plan, the Company granted options to management personnel as well as directors for up to 4.4 million shares of common stock. There will be no future awards under the 1996 Stock Incentive Plan. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. In April 2005, 36,764 shares of restricted stock granted to the chairman, president and chief executive officer of the Company in April 2002 vested and their fair value was charged against income as compensation cost. With this vesting, the Company’s only outstanding, unvested restricted stock consists of shares granted to non-employee directors under the 1996 Stock Incentive Plan. Compensation cost of $0.1 million, $0.1 million, $0.2 million and $0.2 million, net of tax, for each of the second quarters and first six months of Fiscal 2006 and 2005, respectively, has been charged against income for restricted stock incentive plans. No other stock incentive plan compensation is reflected in net earnings, as all other awards under the fixed stock incentive plans were options with an exercise price equal to the market value of the underlying common stock on the date of grant. Had compensation cost for all of the Company’s stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the methodology prescribed by SFAS No. 123 “Accounting for Stock-Based Compensation” (as amended by SFAS No. 148), the Company’s net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
                                 
    Three Months Ended     Six Months Ended  
    July 30,     July 31,     July 30,     July 31,  
(In thousands, except per share amounts)   2005     2004     2005     2004  
Net earnings, as reported
  $ 6,766     $ 4,804     $ 15,257     $ 10,610  
 
                               
Add: stock-based employee compensation expense included in reported net earnings, net of related tax effects
    52       101       156       219  
 
                               
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
    (730 )     (634 )     (1,475 )     (1,252 )
 
                       
 
                               
Pro forma net earnings
  $ 6,088     $ 4,271     $ 13,938     $ 9,577  
 
                       
 
Earnings per share:
                               
 
                               
Basic — as reported
  $ .29     $ .22     $ .67     $ .48  
 
                       
Basic — pro forma
  $ .27     $ .19     $ .61     $ .43  
 
                       
 
                               
Diluted — as reported
  $ .27     $ .20     $ .61     $ .45  
 
                       
Diluted — pro forma
  $ .24     $ .18     $ .56     $ .41  
 
                       

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Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 1
   
Summary of Significant Accounting Policies, Continued
   
New Accounting Principles
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the Statements of Earnings based on their fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. The Company’s board of directors has amended the Company’s Employee Stock Purchase Plan to provide that participants may acquire shares under the Plan at a 5% discount from fair market value on the last day of the Plan year. Under SFAS No. 123(R), shares issued under the Plan as amended are non-compensatory and are not required to be reflected in the Consolidated Statements of Earnings.
SFAS No. 123(R) is effective for public companies at the beginning of the first fiscal year beginning after June 15, 2005 (Fiscal 2007 for the Company).
SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:
  1.   A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.
 
  2.   A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures of all prior periods presented.

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Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 1
   
Summary of Significant Accounting Policies, Continued
   
As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)’s fair value method will have a significant impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net earnings and earnings per share in Note 1. The pro forma amounts were calculated using a Black-Scholes option pricing model and may not be indicative of amounts which should be expected in future years. As of the date of this filing, the Company has not determined which option pricing model is most appropriate for future option grants or which method of adoption the Company will apply. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $0.5 million and $0.8 million for the second quarter of Fiscal 2006 and 2005, respectively, and $1.5 million and $1.1 million for the first six months of Fiscal 2006 and 2005, respectively.
In November 2004, the EITF reached a consensus on Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.” The Issue addressed when to include contingently convertible debt instruments in diluted earnings per share. The Issue required companies to include the convertible debt in diluted earnings per share regardless of whether the market price trigger had been met. The Company’s diluted earnings per share calculation for the second quarter and first six months of Fiscal 2006 includes an additional 3.9 million shares and a net after tax interest add back of $0.6 million and $1.2 million, respectively. The Issue was effective for periods ending after December 15, 2004 and required restatement of prior period diluted earnings per share. Earnings per share for the second quarter and first six months of Fiscal 2005 were previously restated.

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Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 2
   
Restatement of Financial Statements
   
On April 14, 2005, the Company filed its annual report on Form 10-K. In that report, the Company restated its financial statements for fiscal years 2004 and 2003 and the first three quarters of Fiscal 2005. Accordingly, the prior year financial results for the fiscal quarter and six months ended July 31, 2004 reflect the impact of the restatement.
The issue requiring restatement related to the Company’s lease-related accounting methods. The Company determined that its methods of accounting for (1) amortization of leasehold improvements, (2) leasehold improvements funded by landlord incentives and (3) rent expense prior to commencement of operations and rent payments, while in line with common industry practice, were not in accordance with U.S. generally accepted accounting principles. As a result, the Company restated its consolidated financial statements for each of the fiscal years ended January 31, 2004 and February 1, 2003, and the first three quarters of Fiscal 2005.
Following is a summary of the effects of these changes on the Company’s Consolidated Balance Sheet as of July 31, 2004, as well as on the Company’s Consolidated Statements of Earnings and Cash Flows for the three months and six months ended July 31, 2004 (in thousands, except per share amounts):
Consolidated Balance Sheet
                         
    As Previously              
    Reported     Adjustments     As Restated  
 
July 31, 2004:
                       
Deferred income taxes — current
  $ 10,966     $ (4,107 )   $ 6,859  
Property and equipment, net
    148,279       16,718       164,997  
Deferred income taxes — non-current
    -0-       1,606       1,606  
Total assets
    631,321       14,217       645,538  
Total current liabilities*
    169,462       (10,892 )     158,570  
Deferred income tax liability
    4,645       (4,645 )     -0-  
Deferred rent and other long-term liabilities
    9,246       33,075       42,321  
Retained earnings
    142,647       (3,321 )     139,326  
Total shareholders’ equity
    229,685       (3,321 )     226,364  
Total liabilities and shareholders’ equity
  $ 631,321     $ 14,217     $ 645,538  
 
*   Deferred rent reclassified to other long-term liabilities.

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Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 2
   
Restatement of Financial Statements, Continued
   
   
Consolidated Statement of Earnings
                         
    As Previously              
    Reported     Adjustments     As Restated  
 
Three Months Ended July 31, 2004:
                       
Selling and administrative expenses
  $ 112,115     $ (104 )   $ 112,011  
Restructuring and other, net
    (186 )     26       (160 )
Earnings from operations
    9,960       78       10,038  
Earnings before income taxes from continuing operations
    7,064       78       7,142  
Income taxes
    2,289       28       2,317  
Earnings from continuing operations
    4,775       50       4,825  
Net Earnings
  $ 4,754     $ 50     $ 4,804  
 
Net earnings per common share — basic
  $ 0.21     $ 0.01     $ 0.22  
Net earnings per common share — diluted*
  $ 0.21     $ (0.01 )   $ 0.20  
 
*   Diluted net earnings per share decreased $0.01 per share due to the restatement for EITF Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” (see Note 8). The lease restatement had no effect on diluted net earnings per share for the quarter ended July 31, 2004.
Consolidated Statement of Earnings
                         
    As Previously              
    Reported     Adjustments     As Restated  
 
Six Months Ended July 31, 2004:
                       
Selling and administrative expenses
  $ 211,345     $ 4     $ 211,349  
Restructuring and other, net
    (40 )     (52 )     (92 )
Earnings from operations
    21,262       48       21,310  
Earnings before income taxes from continuing operations
    16,484       48       16,532  
Income taxes
    5,885       16       5,901  
Earnings from continuing operations
    10,599       32       10,631  
Net Earnings
  $ 10,578     $ 32     $ 10,610  
 
Net earnings per common share — basic
  $ 0.48     $ 0.00     $ 0.48  
Net earnings per common share — diluted*
  $ 0.47     $ (0.02 )   $ 0.45  
 
*   Diluted net earnings per share decreased $0.02 per share due to the restatement for EITF Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” (see Note 8). The lease restatement had no effect on diluted net earnings per share for the six months ended July 31, 2004.

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Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 2
   
Restatement of Financial Statements, Continued
   
Consolidated Statement of Cash Flows
                         
    As Previously              
    Reported     Adjustments     As Restated  
 
Three Months Ended July 31, 2004:
                       
Net cash used in operating activities
  $ (11,002 )     1,069     $ (9,933 )
Net cash used in investing activities
    (10,611 )     (1,069 )     (11,680 )
 
                       
Six Months Ended July 31, 2004:
                       
Net cash used in operating activities
  $ (10,108 )     1,574     $ (8,534 )
Net cash used in investing activities
    (185,036 )     (1,574 )     (186,610 )

23


Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 3
   
Acquisitions
   
Hat World Acquisition
On April 1, 2004, the Company completed the acquisition of 100% of the outstanding common shares of Hat World Corporation (“Hat World”) for a total purchase price of approximately $179 million, including adjustments for $12.6 million of net cash acquired, a $1.2 million subsequent working capital adjustment and direct acquisition expenses of $2.8 million. The results of Hat World’s operations have been included in the consolidated financial statements since that date. Headquartered in Indianapolis, Indiana, Hat World is a leading specialty retailer of licensed and branded headwear. The Company believes the acquisition has enhanced its strategic development and prospects for growth.
The acquisition has been accounted for using the purchase method in accordance with SFAS No. 141, “Business Combinations.” Accordingly, the total purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values at acquisition as follows (amounts in thousands):
At April 1, 2004
         
Inventories
  $ 33,888  
Property and equipment
    24,278  
Unamortizable intangible assets (indefinite-lived trademarks)
    47,324  
Amortizable intangibles (primarily lease write-up)
    8,586  
Goodwill
    96,561  
Other assets
    4,524  
Accounts payable
    (19,036 )
Noncurrent deferred tax liability
    (22,828 )
Other liabilities
    (6,979 )
 
     
Net Assets Acquired
  $ 166,318  
 
     
The trademarks acquired include the concept names and are deemed to have an indefinite life. Finite-lived intangibles include a $0.3 million customer list and an $8.3 million asset to reflect the adjustment of acquired leases to market. The weighted average amortization period for the asset to adjust acquired leases to market is 4.2 years. The goodwill related to the Hat World acquisition is not deductible for tax purposes. Goodwill decreased $0.7 million in the second quarter of Fiscal 2006 due to the recognition of a deferred tax asset.

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Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 3
   
Acquisitions, Continued
   
The following pro forma information presents the results of operations of the Company as if the Hat World acquisition had taken place at the beginning of all periods presented in the table below. Pro forma adjustments have been made to reflect additional interest expense from the $100.0 million in debt associated with the acquisition. The pro forma results of operations include $2.0 million of non-recurring transaction costs incurred by Hat World for the two months ended March 31, 2004.
                                 
    Three Months Ended     Six Months Ended  
In thousands,   Actual     Actual     Actual     Pro forma  
except per share data   July 30, 2005     July 31, 2004     July 30, 2005     July 31, 2004  
 
Net sales
  $ 275,168     $ 245,939     $ 561,253     $ 504,426  
Net earnings
    6,766       4,804       15,257       9,160  
Net earnings per share:
                               
Basic
  $ 0.29     $ 0.22     $ 0.67     $ 0.41  
Diluted
  $ 0.27     $ 0.20     $ 0.61     $ 0.39  
The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have occurred had the Hat World acquisition occurred at the beginning of all periods presented.
Cap Connection Acquisition
On July 1, 2004, the Company acquired the assets and business of Edmonton, Alberta-based Cap Connection Ltd., consisting of 18 Cap Connection and Head Quarters stores at July 30, 2005 in Alberta, British Columbia and Ontario, Canada. The purchase price for the Cap Connection business was approximately $1.7 million. Cap Connection is a leading Canadian specialty retailer of headwear.

25


Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 4
   
Restructuring and Other Charges and Discontinued Operations
   
Restructuring and Other Charges
The Company recorded a pretax charge to earnings of $0.2 million ($0.1 million net of tax) in the second quarter of Fiscal 2006. The charge was primarily for retail store asset impairments and lease terminations of two Jarman stores. These lease terminations are the continuation of a plan previously announced by the Company in Fiscal 2004.
The Company recorded a pretax charge to earnings of $2.9 million ($1.8 million net of tax) in the first quarter of Fiscal 2006. The charge included a $2.6 million charge for an anticipated settlement of a previously disclosed class action lawsuit (see Note 9), $0.2 million in retail store asset impairments and $0.1 million related to lease terminations of two Jarman stores.
The Company recorded a pretax credit to earnings of $0.2 million in the second quarter of Fiscal 2005. The credit was primarily for the recognition of a gain on the curtailment of the Company’s defined benefit pension plan, offset by charges for retail store asset impairments and lease terminations of four Jarman stores. In connection with the lease terminations, $30,000 in inventory markdowns are reflected in gross margin on the Consolidated Statements of Earnings.
The Company recorded a pretax charge to earnings of $0.1 million in the first quarter of Fiscal 2005. The charge was primarily for lease terminations of six Jarman stores.
In accordance with Company policy, the Company evaluated assets at these identified stores for impairment when a strategic decision was made during the fourth quarter of Fiscal 2004 to pursue the closure of these stores. Assets were determined to be impaired when the revised estimated future cash flows were insufficient to recover the carrying costs. Impairment charges represent the excess of the carrying value over the fair value of those assets.
Asset impairment charges are reflected as a reduction of the net carrying value of property and equipment, and in restructuring and other, net in the accompanying Statements of Earnings.
                         
Restructuring Reserves
    Employee     Facility        
    Related     Shutdown        
In thousands   Costs     Costs     Total  
 
Balance January 31, 2004 (included in other accrued liabilities)
  $ 54     $ 453     $ 507  
Charges and adjustments, net
    (54 )     (453 )     (507 )
 
Balance January 29, 2005
  $ -0-     $ -0-     $ -0-  
 

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Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 4
   
Restructuring and Other Charges and Discontinued Operations Continued
   
Accrued Provision for Discontinued Operations
                         
    Facility              
    Shutdown              
In thousands   Costs     Other     Total  
 
Balance January 31, 2004
  $ 3,021     $ 2     $ 3,023  
Additional provisions Fiscal 2005
    911       -0-       911  
Charges and adjustments, net
    1,868       1       1,869  
 
Balance January 29, 2005
    5,800       3       5,803  
Charges and adjustments, net
    (495 )     -0-       (495 )
 
Balance July 30, 2005*
    5,305       3       5,308  
Current provision for discontinued operations
    3,674       3       3,677  
 
Total Noncurrent Provision for Discontinued Operations
  $ 1,631     $ -0-     $ 1,631  
 
*   Includes $5.1 million environmental provision including $3.5 million in current provision for discontinued operations.

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Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 5
   
Inventories
   
                 
    July 30,     January 29,  
In thousands   2005     2005  
 
Raw materials
  $ 207     $ 212  
Wholesale finished goods
    28,035       28,476  
Retail merchandise
    242,446       178,509  
 
Total Inventories
  $ 270,688     $ 207,197  
 
     
Note 6
   
Derivative Instruments and Hedging Activities
   
In order to reduce exposure to foreign currency exchange rate fluctuations in connection with inventory purchase commitments for its Johnston & Murphy division, the Company enters into foreign currency forward exchange contracts for Euro to make Euro denominated payments with a maximum hedging period of twelve months. Derivative instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged. The settlement terms of the forward contracts correspond with the payment terms for the merchandise inventories. As a result, there is no hedge ineffectiveness to be reflected in earnings. At July 30, 2005 and January 29, 2005, the Company had approximately $12.6 million and $12.8 million, respectively, of such contracts outstanding. Forward exchange contracts have an average remaining term of approximately four and one-half months. The loss based on spot rates under these contracts at July 30, 2005 was $0.4 million and the gain based on spot rates at January 29, 2005 was $0.1 million. For the six months ended July 30, 2005, the Company recorded an unrealized loss on foreign currency forward contracts of $1.1 million in accumulated other comprehensive loss, before taxes. The Company monitors the credit quality of the major national and regional financial institutions with which it enters into such contracts.
The Company estimates that the majority of net hedging losses related to forward exchange contracts will be reclassified from accumulated other comprehensive loss into earnings through higher cost of sales over the succeeding year.

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Table of Contents

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 6
   
Derivative Instruments and Hedging Activities, Continued
   
The Company uses interest rate swaps as a cash flow hedge to manage interest costs and the risk associated with changing interest rates of long-term debt. During the first quarter of Fiscal 2005, the Company entered into three separate forward-starting interest rate swap agreements as a means of managing its interest rate exposure on its $100.0 million variable rate term loan. All three agreements were effective beginning on October 1, 2004 and are designed to swap a variable rate of three-month LIBOR (3.51% at July 1, 2005, the day the rate was set) for a fixed rate ranging from 2.52% to 3.32%. The aggregate notional amount of the swaps is $65.0 million. Of the three agreements, the swap agreement with a $15.0 million notional amount expires on October 1, 2005, the swap agreement with a $20.0 million notional amount expires on July 1, 2006 and the swap agreement with a $30.0 million notional amount expires on April 1, 2007. These agreements have the effect of converting certain of the Company’s variable rate obligations to fixed rate obligations.
In order to ensure continued hedge effectiveness, the Company intends to elect the three-month LIBOR option for its variable rate interest payments on its term loan as of each interest payment date. Since the interest payment dates coincide with the swap reset dates, the hedges are expected to be perfectly effective. However, because the swaps do not qualify for the short-cut method, the Company will evaluate quarterly the continued effectiveness of the hedge and will reflect any ineffectiveness in the results of operations. As long as the hedge continues to be perfectly effective, net amounts paid or received will be reflected as an adjustment to interest expense and the changes in the fair value of the derivative will be reflected in other comprehensive income.
At July 30, 2005, the net gain of these interest rate swap agreements was $0.4 million, net of tax, representing the change in fair value of the derivative instruments.

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Table of Contents

]

Genesco Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
     
Note 7
   
Defined Benefit Pension Plans and Other Benefit Plans
   
Components of Net Periodic Benefit Cost
                                 
    Pension Benefits  
    Three Months Ended     Six Months Ended  
    July 30,     July 31,     July 30,     July 31,  
In thousands   2005     2004     2005     2004  
 
Service cost
  $ 61     $ 582     $ 127     $ 1,124  
Interest cost
    1,656       1,670       3,326       3,402  
Expected return on plan assets
    (1,920 )     (1,872 )     (3,861 )     (3,769 )
Amortization:
                               
Prior service cost
    -0-       (35 )     -0-       (70 )
Losses
    1,087       1,022       2,329       2,070  
 
Net amortization
    1,087       987       2,329       2,000  
 
Curtailment gain
    -0-       (605 )     -0-       (605 )
 
Net Periodic Benefit Cost
  $ 884     $ 762     $ 1,921     $ 2,152  
 
                                 
    Other Benefits  
    Three Months Ended     Six Months Ended  
    July 30,     July 31,     July 30,     July 31,  
In thousands   2005     2004     2005     2004  
 
Service cost
  $ 37     $ 44     $ 74     $ 88  
Interest cost
    44       24       88       48  
Expected return on plan assets
    -0-       -0-       -0-       -0-  
Amortization:
                               
Prior service cost
    -0-       -0-       -0-       -0-  
Losses
    14       20       28       40  
 
Net amortization
    14       20       28       40  
 
Net Periodic Benefit Cost
  $ 95     $ 88     $ 190     $ 176  
 
Curtailment
The Company’s board of directors approved freezing the Company’s defined pension benefit plan in the second quarter ended July 31, 2004, effective January 1, 2005. The action resulted in a curtailment gain of $0.6 million in the second quarter ended July 31, 2004 which is reflected in the restructuring and other, net line on the accompanying Statements of Earnings.

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Table of Contents

Genesco Inc.
and Consolidated Subsidiaries
Notes to Consolidated Financial Statements
     
Note 8
   
Earnings Per Share
   
                                                 
    For the Three Months Ended     For the Three Months Ended  
    July 30, 2005     July 31, 2004  
(In thousands, except   Income     Shares     Per-Share     Income     Shares     Per-Share  
per share amounts)   (Numerator)     (Denominator)     Amount     (Numerator)     (Denominator)     Amount  
 
Earnings from continuing operations
  $ 6,766                     $ 4,825                  
 
                                               
Less: Preferred stock dividends
    (69 )                     (73 )                
 
 
                                               
Basic EPS
                                               
Income available to common shareholders
    6,697       22,702     $ .29       4,752       21,903     $ .22  
 
                                           
 
                                               
Effect of Dilutive Securities
                                               
Options
            478                       424          
Convertible preferred stock(1)
    -0-       -0-               -0-       -0-          
4 1/8% Convertible
Subordinated Debentures(2)
    617       3,899               616       3,899          
Employees’ preferred stock(3)
            63                       64          
 
 
                                               
Diluted EPS
                                               
Income available to common shareholders plus assumed conversions
  $ 7,314       27,142     $ .27     $ 5,368       26,290     $ .20  
 
(1)   The amount of the dividend on the convertible preferred stock per common share obtainable on conversion of the convertible preferred stock is higher than basic earnings per share for all periods presented. Therefore, conversion of the convertible preferred stock is not reflected in diluted earnings per share, because it would have been antidilutive. The shares convertible to common stock for Series 1, 3 and 4 preferred stock would have been 30,395, 37,263 and 21,310, respectively.
 
(2)   These debentures are included in diluted earnings per share effective for periods ending after December 15, 2004. The EITF issued Consensus No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” in November 2004. The Consensus requires companies to include the convertible debt in diluted earnings per share regardless of whether the market price trigger has been met and prior periods should be restated. Results for the second quarter of Fiscal 2005 have been restated to include these shares.
 
(3)   The Company’s Employees’ Subordinated Convertible Preferred Stock is convertible one for one to the Company’s common stock. Because there are no dividends paid on this stock, these shares are assumed to be converted.
The weighted shares outstanding reflects the effect of the stock buy back programs of up to 7.5 million shares announced by the Company in Fiscal 1999 — 2003. The Company had repurchased 7.1 million shares as of January 31, 2004. There were 398,300 shares remaining to be repurchased under these authorizations. The board subsequently reduced the repurchase authorization to 100,000 shares in Fiscal 2005 in view of the Hat World acquisition. The Company has not repurchased any shares since Fiscal 2004.

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Table of Contents

Genesco Inc.
and Consolidated Subsidiaries
Notes to Consolidated Financial Statements
     
Note 8
   
Earnings Per Share, Continued
   
                                                 
    For the Six Months Ended     For the Six Months Ended  
    July 30, 2005     July 31, 2004  
(In thousands, except   Income     Shares     Per-Share     Income     Shares     Per-Share  
per share amounts)   (Numerator)     (Denominator)     Amount     (Numerator)     (Denominator)     Amount  
 
Earnings from continuing operations
  $ 15,192                     $ 10,631                  
 
                                               
Less: Preferred stock dividends
    (142 )                     (146 )                
 
 
                                               
Basic EPS
                                               
Income available to common shareholders
    15,050       22,613     $ .67       10,485       21,833     $ .48  
 
                                           
 
                                               
Effect of Dilutive Securities
                                               
Options
            445                       412          
Convertible preferred stock(1)
    -0-       -0-               -0-       -0-          
4 1/8% Convertible Subordinated Debentures(2)
    1,233       3,899               1,227       3,899          
Employees’ preferred stock(3)
            63                       64          
 
 
                                               
Diluted EPS
                                               
Income available to common shareholders plus assumed conversions
  $ 16,283       27,020     $ .60     $ 11,712       26,208     $ .45  
 
(1)   The amount of the dividend on the convertible preferred stock per common share obtainable on conversion of the convertible preferred stock is higher than basic earnings per share for all periods presented. Therefore, conversion of the convertible preferred stock is not reflected in diluted earnings per share, because it would have been antidilutive. The shares convertible to common stock for Series 1, 3 and 4 preferred stock would have been 30,395, 37,263 and 21,310, respectively.
 
(2)   These debentures are included in diluted earnings per share effective for periods ending after December 15, 2004. The EITF issued Consensus No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” in November 2004. The Consensus requires companies to include the convertible debt in diluted earnings per share regardless of whether the market price trigger has been met and prior periods should be restated. Results for the first six months of Fiscal 2005 have been restated to include these shares.
 
(3)   The Company’s Employees’ Subordinated Convertible Preferred Stock is convertible one for one to the Company’s common stock. Because there are no dividends paid on this stock, these shares are assumed to be converted.
The weighted shares outstanding reflects the effect of the stock buy back programs of up to 7.5 million shares announced by the Company in Fiscal 1999 — 2003. The Company had repurchased 7.1 million shares as of January 31, 2004. There were 398,300 shares remaining to be repurchased under these authorizations. The board subsequently reduced the repurchase authorization to 100,000 shares in Fiscal 2005 in view of the Hat World acquisition. The Company has not repurchased any shares since Fiscal 2004.

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Table of Contents

     
 
  Genesco Inc.
 
  and Subsidiaries
 
 
  Notes to Consolidated Financial Statements
Note 9
Legal Proceedings
Environmental Matters
New York State Environmental Matters
In August 1997, the New York State Department of Environmental Conservation (the “Department”) and the Company entered into a consent order whereby the Company assumed responsibility for conducting a remedial investigation and feasibility study (“RIFS”) and implementing an interim remediation measure (“IRM”) with regard to the site of a knitting mill operated by a former subsidiary of the Company from 1965 to 1969. The Company undertook the IRM and RIFS voluntarily, without admitting liability or accepting responsibility for any future remediation of the site. The Company estimates that the cost of conducting the RIFS and implementing the IRM will be in the range of $6.1 million to $6.3 million, net of insurance recoveries, $3.0 million of which the Company has already paid.
The Company has not ascertained what responsibility, if any, it has for any contamination in connection with the facility or what other parties may be liable in that connection and is unable to predict the extent of its liability, if any, beyond that voluntarily assumed by the consent order. The Company’s voluntary assumption of responsibility for the IRM and the RIFS and its willingness to implement a remedial alternative with respect to the supply wells (described below) were based upon its judgment that such actions were preferable to litigation to determine its liability, if any, for contamination related to the site. The Company intends to continue to evaluate the costs of further voluntary remediation versus the costs and uncertainty of litigation.
As part of its analysis of whether to undertake further voluntary action, the Company has assessed various methods of preventing potential future impact of contamination from the site on two public wells that are in the expected future path of the groundwater plume from the site. The Village of Garden City has proposed the installation at the supply wells of enhanced treatment measures at an estimated cost of approximately $2.6 million, with estimated future costs of up to $2.0 million. In the third quarter of Fiscal 2005, the Company provided for the estimated cost of a remedial alternative it considers adequate to prevent such impact and which it would be willing to implement voluntarily. The Village of Garden City has also asserted that the Company is liable for historical costs of treatment at the wells totaling approximately $3.4 million. Because of evidence with regard to when contaminants from the site of the Company’s former operations first reached the wells, the Company believes it should have no liability with respect to such historical costs.

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Table of Contents

     
 
  Genesco Inc.
 
  and Subsidiaries
 
 
  Notes to Consolidated Financial Statements
Note 9
Legal Proceedings, Continued
Whitehall Environmental Matters
The Company has performed sampling and analysis of soil, sediments, surface water, groundwater and waste management areas at the Company’s former Volunteer Leather Company facility in Whitehall, Michigan.
The Company has submitted to the Michigan Department of Environmental Quality (“MDEQ”) and provided for certain costs associated with a remedial action plan (the “Plan”) designed to bring the property into compliance with regulatory standards for non-industrial uses. The Company estimates that the costs of resolving environmental contingencies related to the Whitehall property range from $0.7 million to $5.0 million, and considers the cost of implementing the Plan to be the most likely cost within that range. While management believes that the Plan should be sufficient to satisfy applicable regulatory standards with respect to the site, until the Plan is finally approved by MDEQ, management cannot provide assurances that no further remediation will be required or that its estimate of the range of possible costs or of the most likely cost of remediation will prove accurate.
Related to all outstanding environmental contingencies, the Company had accrued $5.1 million as of July 30, 2005, $5.5 million as of January 29, 2005 and $2.7 million as of January 31, 2004. All such provisions reflect the Company’s estimates of the most likely cost (undiscounted, including both current and noncurrent portions) of resolving the contingencies, based on facts and circumstances as of the time they were made. There is no assurance that relevant facts and circumstances will not change, necessitating future changes to the provisions. Such contingent liabilities are included in the liability arising from provision for discontinued operations on the accompanying Consolidated Balance Sheets.
Insurance Matter
In May 2003, the Company filed a declaratory judgment action in the U.S. District Court for the Middle District of Tennessee against former general liability insurance carriers that underwrote policies covering the Company during periods relevant to the New York State knitting mill matter described above and the matters described above under the caption “Whitehall Environmental Matters.” The action sought a determination that the carriers’ defense and indemnity obligations under the policies extend to the sites. During the third quarter of Fiscal 2005, the Company and the carriers reached definitive settlement agreements and the Company received cash payments from the carriers totaling approximately $3.0 million in exchange for releases from liability with respect to the two sites. Net of the insurance proceeds, additional pretax provisions totaling approximately $1.0 million for future remediation expenses associated with the New York State knitting mill matter described above and the Whitehall matter described above, are reflected in the loss from discontinued operations for Fiscal 2005.

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Table of Contents

     
 
  Genesco Inc.
 
  and Subsidiaries
 
 
  Notes to Consolidated Financial Statements
Note 9
Legal Proceedings, Continued
Other Matters
Patent Action
In January 2003, the Company was named a defendant in an action filed in the United States District Court for the Eastern District of Pennsylvania, Schoenhaus, et al. vs. Genesco Inc., et al., alleging that certain features of shoes in the Company’s Johnston & Murphy line infringe the plaintiff’s patent, misappropriate trade secrets and involve conversion of the plaintiff’s proprietary information and unjust enrichment of the Company. On January 10, 2005, the court granted summary judgment to the Company on the patent claims, finding that the accused products do not infringe the plaintiff’s patent. The plaintiffs have appealed the summary judgment to the U.S. Court of Appeals for the Federal Circuit, pending which the trial court has stayed the remainder of the case.
California Employment Matter
On October 22, 2004, the Company was named a defendant in a putative class action filed in the Superior Court of the State of California, Los Angeles, Schreiner vs. Genesco Inc., et al., alleging violations of California wages and hours laws, and seeking damages of $40 million plus punitive damages. On May 4, 2005, the Company and the plaintiffs reached an agreement in principle to settle the action, subject to court approval and other conditions. In connection with the proposed settlement, to provide for the settlement payment to the plaintiff class and related expenses, the Company recognized a charge of $2.6 million before taxes included in restructuring and other, net in the accompanying Consolidated Statements of Earnings for the first six months of Fiscal 2006. On May 25, 2005, a second putative class action, Drake vs. Genesco Inc., et al., making allegations similar to those in the Schreiner complaint on behalf of employees of the Company’s Johnston & Murphy division, was filed by a different plaintiff in the California Superior Court, Los Angeles. The Drake action is stayed pending final resolution of the Schreiner action.

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  Genesco Inc.
 
  and Subsidiaries
 
 
  Notes to Consolidated Financial Statements
Note 10
Business Segment Information
The Company currently operates five reportable business segments (not including corporate): Journeys, comprised of Journeys and Journeys Kidz retail footwear operations; Underground Station Group, comprised of the Underground Station and Jarman retail footwear operations; Hat World, comprised of Hat World, Lids, Hat Zone, Cap Connection and Head Quarters retail headwear operations; Johnston & Murphy, comprised of Johnston & Murphy retail operations and wholesale distribution; and Licensed Brands, comprised of Dockers Footwear and Perry Ellis Footwear. The Company plans to introduce Perry Ellis footwear beginning with the Holiday 2005 season. All the Company’s segments sell footwear or headwear products to either retail or wholesale markets/customers.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
The Company’s reportable segments are based on the way management organizes the segments in order to make operating decisions and assess performance along types of products sold. Journeys, Underground Station Group and Hat World sell primarily branded products from other companies while Johnston & Murphy and Licensed Brands sell primarily the Company’s owned and licensed brands.
Corporate assets include cash, deferred income taxes, deferred note expense and corporate fixed assets. The Company charges allocated retail costs of distribution to each segment and unallocated retail costs of distribution to the corporate segment. The Company does not allocate certain costs to each segment in order to make decisions and assess performance. These costs include corporate overhead, interest expense, interest income, restructuring charges and other, including a $2.6 million charge for a litigation settlement in the first six months of Fiscal 2006.
                                                         
   
Three Months Ended           Underground                                  
July 30, 2005           Station             Johnston     Licensed     Corporate        
In thousands   Journeys     Group     Hat World     & Murphy     Brands     & Other     Consolidated  
 
Sales
  $ 118,928     $ 32,186     $ 69,055     $ 41,008     $ 13,970     $ 75     $ 275,222  
Intercompany sales
    -0-       -0-       -0-       -0-       (54 )     -0-       (54 )
 
Net sales to external customers
  $ 118,928     $ 32,186     $ 69,055     $ 41,008     $ 13,916     $ 75     $ 275,168  
 
 
                                                       
Segment operating income (loss)
  $ 6,951     $ (681 )   $ 9,258     $ 2,418     $ 1,018     $ (4,954 )   $ 14,010  
Restructuring and other
    -0-       -0-       -0-       -0-       -0-       (177 )     (177 )
 
Earnings (loss) from operations
    6,951       (681 )     9,258       2,418       1,018       (5,131 )     13,833  
Interest expense
    -0-       -0-       -0-       -0-       -0-       (2,821 )     (2,821 )
Interest income
    -0-       -0-       -0-       -0-       -0-       253       253  
 
Earnings (loss) before income taxes from continuing operations
  $ 6,951     $ (681 )   $ 9,258     $ 2,418     $ 1,018     $ (7,699 )   $ 11,265  
 
 
                                                       
Total assets
  $ 194,590     $ 59,687     $ 239,165     $ 64,564     $ 18,570     $ 107,373     $ 683,949  
Depreciation
    3,185       979       2,218       706       12       1,339       8,439  
Capital expenditures
    3,256       850       5,649       469       3       619       10,846  

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  Genesco Inc.
 
  and Subsidiaries
 
 
  Notes to Consolidated Financial Statements
Note 10
Business Segment Information, Continued
                                                         
 
Three Months Ended           Underground                                
July 31, 2004           Station     Hat World/     Johnston     Licensed     Corporate        
In thousands   Journeys     Group     Lids     & Murphy     Brands     & Other     Consolidated  
 
Sales
  $ 105,785     $ 28,462     $ 57,956     $ 39,413     $ 14,283     $ 100     $ 245,999  
Intercompany sales
    -0-       -0-       -0-       -0-       (60 )     -0-       (60 )
 
Net sales to external customers
  $ 105,785     $ 28,462     $ 57,956     $ 39,413     $ 14,223     $ 100     $ 245,939  
 
 
                                                       
Segment operating income (loss)
  $ 6,083     $ (1,483 )   $ 7,451     $ 1,400     $ 1,311     $ (4,884 )   $ 9,878  
Restructuring charge
    -0-       -0-       -0-       -0-       -0-       160       160  
 
Earnings (loss) from operations
  6,083     (1,483 )   7,451       1,400       1,311       (4,724 )     10,038  
Interest expense
    -0-       -0-       -0-       -0-       -0-       (2,899 )     (2,899 )
Interest income
    -0-       -0-       -0-       -0-       -0-       3       3  
 
Earnings (loss) before income taxes from continuing operations
  $ 6,083     $ (1,483)     $ 7,451     $ 1,400     $ 1,311     $ (7,620)     $ 7,142  
 
 
                                                       
Total assets
  $ 190,223     $ 61,288     $ 223,090     $ 64,325     $ 21,620     $ 84,992     $ 645,538  
Depreciation
    3,109       915       1,848       694       31       1,437       8,034  
Capital expenditures
    2,338       1,745       3,747       639       13       1,939       10,421  
                                                         
 
Six Months Ended           Underground                                  
July 30, 2005           Station             Johnston     Licensed     Corporate        
In thousands   Journeys     Group     Hat World     & Murphy     Brands     & Other     Consolidated  
 
Sales
  $ 247,772     $ 72,022     $ 131,202     $ 82,516     $ 27,869     $ 133     $ 561,514  
Intercompany sales
    -0-       -0-       -0-       -0-       (261 )     -0-       (261 )
 
Net sales to external customers
  $ 247,772     $ 72,022     $ 131,202     $ 82,516     $ 27,608     $ 133     $ 561,253  
 
 
                                                       
Segment operating income (loss)
  $ 20,719     $ 1,935     $ 14,740     $ 4,948     $ 1,764     $ (10,799 )   $ 33,307  
Restructuring and other
    -0-       -0-       -0-       -0-       -0-       (3,044 )     (3,044 )
 
Earnings (loss) from operations
    20,719       1,935       14,740       4,948       1,764       (13,843 )     30,263  
Interest expense
    -0-       -0-       -0-       -0-       -0-       (5,877 )     (5,877 )
Interest income
    -0-       -0-       -0-       -0-       -0-       605       605  
 
Earnings (loss) before income taxes from continuing operations
  $ 20,719     $ 1,935     $ 14,740     $ 4,948     $ 1,764     $ (19,115 )   $ 24,991  
 
 
                                                       
Total assets
  $ 194,590     $ 59,687     $ 239,165     $ 64,564     $ 18,570     $ 107,373     $ 683,949  
Depreciation
    6,464       1,931       4,373       1,418       22       2,679       16,887  
Capital expenditures
    8,407       2,517       10,116       1,205       72       827       23,144  

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  Genesco Inc.
 
  and Subsidiaries
 
 
  Notes to Consolidated Financial Statements
Note 10
Business Segment Information, Continued
                                                         
 
Six Months Ended           Underground                                
July 31, 2004           Station     Hat World/     Johnston     Licensed     Corporate        
In thousands   Journeys     Group     Lids     & Murphy     Brands     & Other     Consolidated  
 
Sales
  $ 220,026     $ 63,591     $ 76,041     $ 79,954     $ 32,085     $ 150     $ 471,847  
Intercompany sales
    -0-       -0-       -0-       -0-       (382 )     -0-       (382 )
 
Net sales to external customers
  $ 220,026     $ 63,591     $ 76,041     $ 79,954     $ 31,703     $ 150     $ 471,465  
 
 
                                                       
Segment operating income (loss)
  $ 15,246     $ 142     $ 9,002     $ 3,785     $ 3,055     $ (10,012 )   $ 21,218  
Restructuring charge
    -0-       -0-       -0-       -0-       -0-       92       92  
 
Earnings (loss) from operations
    15,246       142       9,002       3,785       3,055       (9,920 )     21,310  
Interest expense
    -0-       -0-       -0-       -0-       -0-       (4,934 )     (4,934 )
Interest income
    -0-       -0-       -0-       -0-       -0-       156       156  
 
Earnings (loss) before income taxes from continuing operations
  $ 15,246     $ 142     $ 9,002     $ 3,785     $ 3,055     $ (14,698)     $ 16,532  
 
 
                                                       
Total assets
  $ 190,223     $ 61,288     $ 223,090     $ 64,325     $ 21,620     $ 84,992     $ 645,538  
Depreciation
    6,170       1,806       2,428       1,388       62       2,932       14,786  
Capital expenditures
    5,168       3,085       5,075       1,507       21       2,973       17,829  

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This discussion and the notes to the Consolidated Financial Statements include certain forward-looking statements, which include statements regarding our intent, belief or expectations and all statements other than those made solely with respect to historical fact. Actual results could differ materially from those reflected by the forward-looking statements in this discussion and a number of factors may adversely affect the forward looking statements and the Company’s future results, liquidity, capital resources or prospects. These factors (some of which are beyond the Company’s control) include:
    Weakness in consumer demand for products sold by the Company.
 
    Weakness in consumer demand and increased distribution costs due to increased fuel prices.
 
    Effects on local consumer demand or on the national economy related to Hurricane Katrina.
 
    Fashion trends that affect the sales or product margins of the Company’s retail product offerings.
 
    Changes in the timing of the holidays or in the onset of seasonal weather affecting demand or period to period sales comparisons.
 
    Changes in buying patterns by significant wholesale customers.
 
    Disruptions in product availability or distribution.
 
    Unfavorable trends in foreign exchange rates and other factors affecting the cost of products.
 
    Changes in business strategies by the Company’s competitors (including pricing and promotional discounts).
 
    The Company’s ability to open, staff and support additional retail stores on schedule and at acceptable expense levels and to renew leases in existing stores on schedule and at acceptable expense levels.
 
    Variations from expected pension-related charges caused by conditions in the financial markets, and
 
    The outcome of litigation and environmental matters involving the Company, including those discussed in Note 9 to the Consolidated Financial Statements.
Forward-looking statements reflect the expectations of the Company at the time they are made, and investors should rely on them only as expressions of opinion about what may happen in the future and only at the time they are made. The Company undertakes no obligation to update any forward-looking statement. Although the Company believes it has an appropriate business strategy and the resources necessary for its operations, predictions about future results, revenue and margin trends are inherently uncertain and the Company may alter its business strategies to address changing conditions.
Overview
Description of Business
The Company is a leading retailer of branded footwear and of licensed and branded headwear, operating 1,654 retail footwear and headwear stores throughout the United States and Puerto Rico and 18 headwear stores in Canada as of July 30, 2005. The Company also designs, sources, markets and distributes footwear under its own Johnston & Murphy brand and under the licensed Dockers brand to over 950 retail accounts in the United States, including a number of leading

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department, discount, and specialty stores. On April 1, 2004, the Company acquired Hat World Corporation (“Hat World”), a leading retailer of licensed and branded headwear. On July 1, 2004, the Company acquired the assets and business of Edmonton, Alberta — based Cap Connection Ltd., a leading Canadian specialty retailer of headwear, operating 18 stores at July 30, 2005. See “Significant Developments.”
The Company operates five reportable business segments (not including corporate): Journeys, comprised of Journeys and Journeys Kidz retail footwear chains; Underground Station Group, comprised of the Underground Station and Jarman retail footwear chains; Hat World, comprised of Hat World, Lids, Hat Zone, Cap Connection and Head Quarters retail headwear operations; Johnston & Murphy, comprised of Johnston & Murphy retail operations and wholesale distribution; and Licensed Brands, comprised of Dockers® Footwear and Perry Ellis® Footwear. The Company plans to introduce Perry Ellis Footwear beginning with the Holiday 2005 season.
The Journeys retail footwear stores sell footwear and accessories primarily for 13 — 22 year old men and women. The stores average approximately 1,700 square feet. The Journeys Kidz retail footwear stores sell footwear primarily for younger children, ages four to eleven. These stores average approximately 1,400 square feet.
The Underground Station Group retail footwear stores sell footwear and accessories for men and women in the 20 to 35 age group. The Underground Station Group stores average approximately 1,600 square feet. In the fourth quarter of Fiscal 2004, the Company made the strategic decision to close 34 Jarman stores subject to its ability to negotiate lease terminations. These stores are not suitable for conversion to Underground Station stores. The Company intends to convert the remaining Jarman stores to Underground Station stores and close the remaining Jarman stores not closed in Fiscal 2005 as quickly as it is financially feasible, subject to landlord approval. During the first six months of Fiscal 2006, four Jarman stores were closed and two Jarman stores were converted to Underground Station stores. During Fiscal 2005, 20 Jarman stores were closed and twelve Jarman stores were converted to Underground Station stores.
Hat World retail stores sell licensed and branded headwear to men and women primarily in the mid-teen to mid-20’s age group. These stores average approximately 700 square feet and are located in malls, airports, street level stores and factory outlet stores nationwide and in Canada.
Johnston & Murphy retail stores sell a broad range of men’s dress and casual footwear and accessories to business and professional consumers. These stores average approximately 1,300 square feet and are located primarily in better malls nationwide. Johnston & Murphy shoes are also distributed through the Company’s wholesale operations to better department and independent specialty stores. In addition, the Company sells Johnston & Murphy footwear in factory stores located in factory outlet malls. These stores average approximately 2,400 square feet.
The Company entered into an exclusive license with Levi Strauss and Company to market men’s footwear in the United States under the Dockers® brand name in 1991. The Dockers license agreement was renewed October 22, 2004. The Dockers license agreement, as amended, expires on December 31, 2006 with a Company option to renew through December 31, 2008, subject to certain conditions. The Company uses the Dockers name to market casual and dress casual footwear to men aged 30 to 55 through many of the same national retail chains that carry Dockers slacks and sportswear and in department and specialty stores across the country. The Company

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expects to sell footwear under the Perry Ellis license primarily to department and specialty stores across the country.
Summary of Operating Results
The Company’s net sales increased 11.9% during the second quarter of Fiscal 2006 compared to the second quarter of Fiscal 2005. The increase was driven primarily by the addition of new stores and a 6% increase in comparable store sales for all concepts. Gross margin increased as a percentage of net sales during the second quarter of Fiscal 2006 primarily due to improved gross margins in the Journeys, Underground Station, Hat World and Johnston & Murphy businesses. Selling and administrative expenses decreased as a percentage of net sales during the second quarter of Fiscal 2006 due to decreased expenses in Underground Station, Johnston & Murphy and Licensed Brands businesses. Operating income increased as a percentage of net sales during the second quarter of Fiscal 2006 due to improved operating income in Underground Station, Hat World and Johnston & Murphy businesses.
Strategy
The Company’s strategy is to seek long-term growth by: 1) increasing the Company’s store base, 2) increasing retail square footage, 3) improving comparable store sales, 4) increasing operating margin and 5) enhancing the value of its brands. Our future results are subject to various risks, uncertainties and other challenges, including those discussed under the caption “Forward Looking Statements,” above. Among the most important of these factors are those related to consumer demand. Conditions in the external economy can affect demand, resulting in changes in sales and, as prices are adjusted to drive sales and control inventories, in gross margins. Because fashion trends influencing many of the Company’s target customers (particularly customers of Journeys, Underground Station and Hat World) can change rapidly, the Company believes that its ability to detect and respond quickly to those changes has been important to its success. Even when the Company succeeds in aligning its merchandise offerings with consumer preferences, those preferences may affect results. The Company believes its experience and discipline in merchandising and the buying power associated with its relative size in the industry are important to its ability to mitigate risks associated with changing customer preferences. Also important to the Company’s long-term prospects are the availability and cost of appropriate locations for the Company’s retail concepts. The Company is opening stores in airports and on streets in major cities, tourist venues and college campuses, among other locations in an effort to broaden its selection of locations for additional stores beyond the malls that have traditionally been the dominant venue for its retail concepts.
Significant Developments
Hurricane Katrina
The Company has 11 stores that will be impacted for an extended period of time as a result of Hurricane Katrina. The Company has not been able to assess the extent of damage to these stores. Management believes that the Company’s maximum uninsured exposure is approximately $1.0 million, which does not include business lost during the period of time the stores are closed. These stores had sales of $7.2 million and operating income of $1.1 million for the twelve months ended July 30, 2005.
Restatement of Financial Statements
On April 14, 2005, the Company filed its annual report on Form 10-K. In that report, the Company restated its financial statements for fiscal years 2004 and 2003 and the first three quarters of Fiscal

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2005. Accordingly, the prior year financial results for the fiscal quarter and six months ended July 31, 2004 reflect the impact of the restatement.
The issue requiring restatement related to the Company’s lease-related accounting methods. The Company determined that its methods of accounting for (1) amortization of leasehold improvements, (2) leasehold improvements funded by landlord incentives and (3) rent expense prior to commencement of operations and rent payments, while in line with common industry practice, were not in accordance with generally accepted accounting principles. As a result, the Company restated its consolidated financial statements for each of the fiscal years ended January 31, 2004 and February 1, 2003, and the first three quarters of Fiscal 2005.
See Note 2 to the Consolidated Financial Statements for a summary of the effects of this restatement on the Company’s Consolidated Balance Sheet as of July 31, 2004, as well as the Company’s Consolidated Statements of Earnings and Cash Flows for the three months and six months ended July 31, 2004.
Cap Connection Acquisition
On July 1, 2004, the Company acquired the assets and business of Edmonton, Alberta-based Cap Connection Ltd. The purchase price for the Cap Connection business was approximately $1.7 million. At July 30, 2005, the Company operated 18 Cap Connection and Head Quarters stores in Alberta, British Columbia and Ontario, Canada.
Hat World Acquisition
On April 1, 2004, the Company completed the acquisition of Hat World Corporation for a total purchase price of approximately $179 million, including adjustments for $12.6 million of net cash acquired, a $1.2 million subsequent working capital adjustment and direct acquisition expenses of $2.8 million. Hat World is a leading specialty retailer of licensed and branded headwear operating under the Hat World, Lids and Hat Zone names. The Company believes the acquisition has enhanced its strategic development and prospects for growth. The Company funded the acquisition and associated expenses with a $100.0 million, five-year term loan and the balance from cash on hand.
Restructuring and Other Charges
The Company recorded a pretax charge to earnings of $0.2 million ($0.1 million net of tax) in the second quarter of Fiscal 2006. The charge was primarily for retail store asset impairments and lease terminations of two Jarman stores. These lease terminations are the continuation of a plan previously announced by the Company in Fiscal 2004.
The Company recorded a pretax charge to earnings of $2.9 million ($1.8 million net of tax) in the first quarter of Fiscal 2006. The charge included a $2.6 million charge for an anticipated settlement of a previously disclosed class action lawsuit (see Note 9), $0.2 million in retail store asset impairments and $0.1 million related to lease terminations of two Jarman stores.
The Company recorded a pretax credit to earnings of $0.2 million in the second quarter of Fiscal 2005. The credit was primarily for the recognition of a gain on the curtailment of the Company’s defined benefit pension plan, offset by charges for retail store asset impairments and lease terminations of four Jarman stores. In connection with the lease terminations, $30,000 in inventory markdowns are reflected in gross margin on the Consolidated Statements of Earnings.

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The Company recorded a pretax charge to earnings of $0.1 million in the first quarter of Fiscal 2005. The charge was primarily for lease terminations of six Jarman stores.
Results of Operations — Second Quarter Fiscal 2006 Compared to Fiscal 2005
The Company’s net sales in the second quarter ended July 30, 2005 increased 11.9% to $275.2 million from $245.9 million in the second quarter ended July 31, 2004. Gross margin increased 14.0% to $139.0 million in the second quarter this year from $121.9 million in the same period last year and increased as a percentage of net sales from 49.6% to 50.5%. Selling and administrative expenses in the second quarter this year increased 11.5% from the second quarter last year but decreased as a percentage of net sales from 45.5% to 45.4%. The Company records buying and merchandising and occupancy costs in selling and administrative expense. Because the Company does not include these costs in cost of sales, the Company’s gross margin may not be comparable to other retailers that include these costs in the calculation of gross margin. Explanations of the changes in results of operations are provided by business segment in discussions following these introductory paragraphs.
Earnings before income taxes from continuing operations (“pretax earnings”) for the second quarter ended July 30, 2005 were $11.3 million compared to $7.1 million for the second quarter ended July 31, 2004. Pretax earnings for the second quarter ended July 30, 2005 included restructuring and other charges of $0.2 million, primarily for retail store asset impairments and lease terminations of two Jarman stores. These lease terminations are the continuation of a plan previously announced by the Company in Fiscal 2004. Pretax earnings for the second quarter ended July 31, 2004 included a restructuring and other credit of $0.2 million, primarily for the gain on the curtailment of the Company’s defined benefit pension plan, offset by retail store asset impairments and lease terminations of four Jarman stores.
Net earnings for the second quarter ended July 30, 2005 were $6.8 million ($0.27 diluted earnings per share) compared to $4.8 million ($0.20 diluted earnings per share) for the second quarter ended July 31, 2004. The Company recorded an effective income tax rate of 39.9% in the second quarter this year compared to 32.4% in the same period last year. Income taxes for the second quarter last year included a favorable tax settlement of $0.4 million.
Journeys
                         
    Three Months Ended        
    July 30,     July 31,     %  
    2005     2004     Change  
    (dollars in thousands)          
Net sales
  $ 118,928     $ 105,785       12.4 %
Operating loss
  $ 6,951     $ 6,083       14.3 %
Operating margin
    5.8 %     5.8 %        
Net sales from Journeys increased 12.4% for the second quarter ended July 30, 2005 compared to the same period last year. The increase reflects primarily a 6% increase in comparable store sales and a 4% increase in average Journeys stores operated (i.e., the sum of the number of stores open on the first day of the fiscal quarter and the last day of each fiscal month during the quarter divided by four). Footwear unit comparable sales also increased 9% for the second quarter ended July 30, 2005. The average price per pair of shoes decreased 3% in the second quarter of Fiscal 2006,

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reflecting changes in product mix, while unit sales increased 16% during the same period. The strong comparable sales performance was primarily driven by continued growth in comparable unit sales. Journeys operated 711 stores at the end of the second quarter of Fiscal 2006, including 41 Journeys Kidz stores, compared to 680 stores at the end of the second quarter last year, including 41 Journeys Kidz stores.
Journeys operating income for the second quarter ended July 30, 2005 was up 14.3% to $7.0 million compared to $6.1 million for the second quarter ended July 31, 2004. The increase was due to increased net sales, reflecting increased comparable store sales, and to increased gross margin as a percentage of net sales, primarily reflecting changes in product mix and decreased markdowns as a percentage of net sales.
Underground Station Group
                         
    Three Months Ended        
    July 30,     July 31,     %  
    2005     2004     Change  
    (dollars in thousands)          
Net sales
  $ 32,186     $ 28,462       13.1 %
Operating loss
  $ (681 )   $ (1,483 )     54.1 %
Operating margin
    (2.1 )%     (5.2 )%        
Net sales from the Underground Station Group (comprised of Underground Station and Jarman retail stores) increased 13.1% for the second quarter ended July 30, 2005 compared to the same period last year. Comparable store sales were up 9% for the Underground Station Group, 12% for Underground Station stores and 1% for Jarman retail stores. Footwear unit comparable sales were up 8% in the Underground Station stores. The strong comparable sales performance was primarily driven by continued increases in average selling prices and continued growth in unit comparable sales. The average price per pair of shoes increased 3% in the second quarter of Fiscal 2006, primarily reflecting lower markdowns and changes in product mix, and unit sales increased 9% during the same period. Underground Station Group operated 226 stores at the end of the second quarter of Fiscal 2006, including 168 Underground Station stores. The Underground Station Group operated 230 stores at the end of the second quarter last year, including 148 Underground Station stores.
Underground Station Group operating loss for the second quarter ended July 30, 2005 was $(0.7) million compared to $(1.5) million for the second quarter last year. The decreased operating loss was due to increased net sales, to increased gross margin as a percentage of net sales, primarily reflecting lower markdowns and changes in product mix, and to decreased expenses as a percentage of net sales.
Hat World
                         
    Three Months Ended        
    July 30,     July 31,     %  
    2005     2004     Change  
    (dollars in thousands)          
Net sales
  $ 69,055     $ 57,956       19.2 %
Operating income
  $ 9,258     $ 7,451       24.3 %
Operating margin
    13.4 %     12.9 %        

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Net sales from Hat World increased 19.2% for the second quarter ended July 30, 2005 compared to the same period last year. The increase reflects primarily a 16% increase in average Hat World stores operated and a 4% increase in comparable store sales. Hat World’s comparable store sales increase was primarily driven by the strength of its core and fashion Major League Baseball products. Hat World operated 593 stores at the end of the second quarter of Fiscal 2006, including 18 stores in Canada, compared to 519 stores at the end of the second quarter last year, including 17 stores in Canada.
Hat World operating income for the second quarter ended July 30, 2005 increased 24.3% to $9.3 million compared to $7.5 million for the second quarter ended July 31, 2004. This increase was due to increased net sales, reflecting increased average stores operated and increased comparable store sales, and to increased gross margin as a percentage of net sales, primarily reflecting the strength of certain product categories and decreased stock shortages.
Johnston & Murphy
                         
    Three Months Ended        
    July 30,     July 31,     %  
    2005     2004     Change  
    (dollars in thousands)          
Net sales
  $ 41,008     $ 39,413       4.0 %
Operating income
  $ 2,418     $ 1,400       72.7 %
Operating margin
    5.9 %     3.6 %        
Johnston & Murphy net sales increased 4.0% to $41.0 million for the second quarter ended July 30, 2005 from $39.4 million for the second quarter ended July 31, 2004, reflecting primarily a 9% increase in comparable store sales for Johnston & Murphy retail operations offset by a 4% decrease in Johnston & Murphy wholesale sales. Unit sales for the Johnston & Murphy wholesale business increased 6% in the second quarter of Fiscal 2006 while the average price per pair of shoes decreased 9% for the same period primarily due to changes in product mix. Retail operations accounted for 76.6% of Johnston & Murphy segment sales in the second quarter this year, up from 74.6% in the second quarter last year. The average price per pair of shoes for Johnston & Murphy retail operations decreased 11% (15% in the Johnston and Murphy Shops) in the second quarter this year primarily due to changes in product mix, while unit sales increased 17% during the same period. The store count for Johnston & Murphy retail operations at the end of the second quarter of Fiscal 2006 and 2005 included 142 Johnston & Murphy stores and factory stores.
Johnston & Murphy operating income for the second quarter ended July 30, 2005 increased to $2.4 million from $1.4 million or 72.7% compared to the same period last year, primarily due to increased net sales, to increased gross margin as a percentage of net sales, reflecting improvements in sourcing and decreased markdowns, and to decreased expenses as a percentage of net sales.

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Licensed Brands
                         
    Three Months Ended        
    July 30,     July 31,     %  
    2005     2004     Change  
    (dollars in thousands)          
Net sales
  $ 13,916     $ 14,223       (2.2 )%
Operating income
  $ 1,018     $ 1,311       (22.3 )%
Operating margin
    7.3 %     9.2 %        
Licensed Brands’ net sales, primarily consisting of sales of Dockers® branded footwear sold under a license from Levi Strauss & Co., decreased 2.2% to $13.9 million for the second quarter ended July 30, 2005, from $14.2 million for the second quarter ended July 31, 2004. Unit sales for Dockers Footwear decreased 2% while the average price per pair of shoes was flat compared to the second quarter last year. The sales decrease reflected a change in merchandising strategy of a key customer and other customers pursuing private label initiatives at the expense of branded product offerings. The Company expects continued near-term pressure on sales of Dockers Footwear due to the impact of these changes in customers’ merchandising strategies.
Licensed Brands’ operating income for the second quarter ended July 30, 2005 decreased 22.3% from $1.3 million for the second quarter ended July 31, 2004 to $1.0 million, primarily due to decreased net sales and to decreased gross margin as a percentage of net sales, reflecting increased closeout sales.
Corporate, Interest Expenses and Other Charges
Corporate and other expenses for the second quarter ended July 30, 2005 were $5.1 million compared to $4.7 million for the second quarter ended July 31, 2004. This year’s second quarter included $0.2 million in restructuring and other charges, primarily for retail store asset impairments and lease terminations of two Jarman stores. Last year’s second quarter included a $0.2 million restructuring and other credit, primarily for the gain on the curtailment of the Company’s defined benefit pension plan, offset by retail store asset impairments and lease terminations of four Jarman stores. Excluding the listed items in both periods, corporate expenses were up 1% in the second quarter this year compared to the second quarter last year.
Interest expense decreased 2.7% from $2.9 million in the second quarter ended July 31, 2004 to $2.8 million for the second quarter ended July 30, 2005, primarily due to lower outstanding debt in the second quarter this year as a result of the Company paying $22.0 million early on the $100.0 million term loan. There were no borrowings under the Company’s revolving credit facility during the three months ended July 30, 2005 and there was an average of $8.2 million of borrowings under the Company’s revolving credit facility during the three months ended July 31, 2004.
Interest income increased from $3,000 for the second quarter ended July 31, 2004 to $0.3 million for the second quarter ended July 30, 2005 due to the increase in average short-term investments.
Results of Operations — Six Months Fiscal 2006 Compared to Fiscal 2005
The Company’s net sales in the six months ended July 30, 2005 increased 19.0% to $561.3 million from $471.5 million in the six months ended July 31, 2004. The sales increase included Hat World sales of $131.2 million in the first six months this year compared to $76.0 million in the first six

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months last year. Hat World was acquired April 1, 2004 and last year’s first six months only included four months of sales. Gross margin increased 22.8% to $285.5 million in the first six months this year from $232.6 million in the same period last year and increased as a percentage of net sales from 49.3% to 50.9%. Selling and administrative expenses in the first six months this year increased 19.3% from the first six months last year and increased as a percentage of net sales from 44.8% to 44.9%. The Company records buying and merchandising and occupancy costs in selling and administrative expense. Because the Company does not include these costs in cost of sales, the Company’s gross margin may not be comparable to other retailers that include these costs in the calculation of gross margin. Explanations of the changes in results of operations are provided by business segment in discussions following these introductory paragraphs.
Earnings before income taxes from continuing operations (“pretax earnings”) for the six months ended July 30, 2005 were $25.0 million compared to $16.5 million for the six months ended July 31, 2004. Pretax earnings for the six months ended July 30, 2005 included restructuring and other charges of $3.0 million, primarily $2.6 million for an anticipated settlement of a previously announced class action lawsuit (see Note 9), retail store asset impairments and lease terminations of two Jarman stores. These lease terminations are the continuation of a plan previously announced by the Company in Fiscal 2004. Pretax earnings for the six months ended July 31, 2004 included a restructuring and other credit of $0.1 million, primarily for the gain on the curtailment of the Company’s defined benefit pension plan, offset by retail store asset impairments and lease terminations of ten Jarman stores.
Net earnings for the six months ended July 30, 2005 were $15.3 million ($0.61 diluted earnings per share) compared to $10.6 million ($0.45 diluted earnings per share) for the six months ended July 31, 2004. The Company recorded an effective income tax rate of 39.2% in the first six months this year compared to 35.7% in the same period last year. Income taxes for the first six months ended July 31, 2004 included a favorable tax settlement of $0.5 million.
Journeys
                         
    Six Months Ended        
    July 30,     July 31,     %  
    2005     2004     Change  
    (dollars in thousands)          
Net sales
  $ 247,772     $ 220,026       12.6 %
Operating income
  $ 20,719     $ 15,246       35.9 %
Operating margin
    8.4 %     6.9 %        
Net sales from Journeys increased 12.6% for the first six months ended July 30, 2005 compared to the same period last year. The increase reflects primarily a 7% increase in comparable store sales and a 4% increase in average Journeys stores operated (i.e., the sum of the number of stores open on the first day of the fiscal year and the last day of each fiscal month during the six months divided by seven). Footwear unit comparable sales also increased 10% for the first six months ended July 30, 2005. The average price per pair of shoes decreased 3% in the first six months of Fiscal 2006, reflecting changes in product mix, while unit sales increased 16% during the same period driven by fashion athletic, Euro casuals, board sport shoes, and women’s fashion footwear. The strong comparable sales performance was primarily driven by continued growth in comparable unit sales.

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Journeys operating income for the six months ended July 30, 2005 was up 35.9% to $20.7 million compared to $15.2 million for the six months ended July 31, 2004. The increase was due to increased net sales, reflecting increased comparable store sales, to increased gross margin as a percentage of net sales, primarily reflecting changes in product mix, and to decreased expenses as a percentage of net sales.
Underground Station Group
                         
    Six Months Ended        
    July 30,     July 31,     %  
    2005     2004     Change  
    (dollars in thousands)          
Net sales
  $ 72,022     $ 63,591       13.3 %
Operating income
  $ 1,935     $ 142     NM
Operating margin
    2.7 %     0.2 %        
Net sales from the Underground Station Group (comprised of Underground Station and Jarman retail stores) increased 13.3% for the six months ended July 30, 2005 compared to the same period last year. Comparable store sales were up 9% for the Underground Station Group, 12% for Underground Station stores and 2% for Jarman retail stores. Footwear unit comparable sales were up 7% in the Underground Station stores. The strong comparable sales performance was primarily driven by continued increases in average selling prices and continued growth in unit comparable sales. The average price per pair of shoes increased 4% in the first six months of Fiscal 2006, primarily reflecting changes in product mix and lower markdowns as a percentage of net sales, and unit sales increased 8% during the same period.
Underground Station Group operating income for the first six months ended July 30, 2005 increased to $1.9 million compared to $0.1 million in the first six months ended July 31, 2004. The increase was due to increased net sales, to increased gross margin as a percentage of net sales, primarily reflecting changes in product mix and lower markdowns as a percentage of net sales, and to decreased expenses as a percentage of net sales.
Hat World
                         
    Six Months Ended*        
    July 30,     July 31,     %  
    2005     2004     Change  
    (dollars in thousands)          
Net sales
  $ 131,202     $ 76,041     NM
Operating income
  $ 14,740     $ 9,002     NM
Operating margin
    11.2 %     11.8 %        
 
*   The Company acquired Hat World on April 1, 2004. Results for the six month period ended July 31, 2004 are for the period April 1, 2004 — July 31, 2004.
Hat World comparable store sales increased 5% for the first six months ended July 30, 2005. Hat World’s comparable store sales increase was primarily driven by an increased number of units sold and higher selling prices.

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Johnston & Murphy
                         
    Six Months Ended        
    July 30,     July 31,     %  
    2005     2004     Change  
    (dollars in thousands)          
Net sales
  $ 82,516     $ 79,954       3.2 %
Operating income
  $ 4,948     $ 3,785       30.7 %
Operating margin
    6.0 %     4.7 %        
Johnston & Murphy net sales increased 3.2% to $82.5 million for the six months ended July 30, 2005 from $80.0 million for the six months ended July 31, 2004, reflecting primarily a 6% increase in comparable store sales for Johnston & Murphy retail operations and a 2% increase in Johnston & Murphy wholesale sales. Unit sales for the Johnston & Murphy wholesale business increased 4% in the first six months of Fiscal 2006 while the average price per pair of shoes decreased 2% for the same period. Retail operations accounted for 74.9% of Johnston & Murphy segment sales in the first six months this year, up from 74.6% in the first six months last year. The average price per pair of shoes for Johnston & Murphy retail operations decreased 7% (10% in the Johnston and Murphy Shops) in the first six months this year primarily due to changes in product mix, while unit sales increased 9% during the same period.
Johnston & Murphy operating income for the six months ended July 30, 2005 increased 30.7% compared to the same period last year, primarily due to increased net sales, to increased gross margin as a percentage of net sales, reflecting improvements in sourcing and a healthier product mix resulting in less promotional selling, and to decreased expenses as a percentage of net sales.
Licensed Brands
                         
    Six Months Ended        
    July 30,     July 31,     %  
    2005     2004     Change  
    (dollars in thousands)          
Net sales
  $ 27,608     $ 31,703       (12.9 )%
Operating income
  $ 1,764     $ 3,055       (42.3 )%
Operating margin
    6.4 %     9.6 %        
Licensed Brands’ net sales, primarily consisting of sales of Dockers® branded footwear sold under a license from Levi Strauss & Co., decreased 12.9% to $27.6 million for the six months ended July 30, 2005, from $31.7 million for the six months ended July 31, 2004. Unit sales for Dockers Footwear decreased 13% while the average price per pair of shoes was flat compared to the first six months last year. The sales decrease reflected some product quality issues, a change in merchandising strategy of a key customer and other customers pursuing private label initiatives at the expense of branded product offerings.
Licensed Brands’ operating income for the six months ended July 30, 2005 decreased 42.3% from $3.1 million for the six months ended July 31, 2004 to $1.8 million, primarily due to decreased net sales, to decreased gross margin as a percentage of net sales, reflecting increased closeout sales, and to increased expenses as a percentage of net sales.

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Corporate, Interest Expenses and Other Charges
Corporate and other expenses for the six months ended July 30, 2005 were $13.8 million compared to $9.9 million for the six months ended July 31, 2004. This year’s first six months included $3.0 million in restructuring and other charges, primarily for the anticipated settlement of a previously announced class action lawsuit, retail store asset impairments and lease terminations of four Jarman stores. Last year’s first six months included a $0.1 million restructuring and other credit, primarily for the gain on the curtailment of the Company’s defined benefit pension plan, offset by retail store asset impairments and lease terminations of ten Jarman stores. Excluding the listed items in both periods, the increase in corporate expenses in the first six months this year is attributable primarily to higher bonus accruals and increased audit department costs resulting from additional work to comply with the Sarbanes-Oxley legislation and related regulations.
Interest expense increased 19.1% from $4.9 million in the six months ended July 31, 2004 to $5.9 million for the six months ended July 30, 2005, primarily due to the additional $100.0 million term loan, which was used to purchase Hat World and was included in only four months of last year’s first six months versus the full six months this year, and to the increase in bank activity fees as a result of new stores added due to the acquisition of Hat World offset by less revolver borrowings in the first six months this year versus the first six months last year. There were no borrowings under the Company’s revolving credit facility during the six months ended July 30, 2005 and there was an average of $4.1 million of borrowings under the Company’s revolving credit facility during the six months ended July 31, 2004.
Interest income increased from $0.2 million for the first six months ended July 31, 2004 to $0.6 million for the first six months ended July 30, 2005 due to the increase in average short-term investments.
Liquidity and Capital Resources
The following table sets forth certain financial data at the dates indicated.
                 
    July 30,     July 31,  
    2005     2004  
    (dollars in millions)  
Cash and cash equivalents
  $ 38.8     $ 15.3  
Working capital
  $ 182.3     $ 157.8  
Long-term debt (includes current maturities)
  $ 151.3     $ 202.3  
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. Historically, cash flow from operations has been generated principally in the fourth quarter of each fiscal year.
Cash provided by operating activities was $3.3 million in the first six months of Fiscal 2006 compared to cash used in operating activities of $8.5 million in the first six months of Fiscal 2005. The $11.9 million increase in cash flow from operating activities from last year reflects primarily an increase in cash flow from changes in accounts payable of $20.4 million and an increase in cash flow from a $4.6 million increase in net earnings offset by a decrease in cash flow from an $11.0 million change in other accrued liabilities. The $20.4 million increase in cash flow from accounts payable was due to changes in buying patterns. The $11.0 million decrease in cash flow from other

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accrued liabilities was due to increased bonus payments and tax payments in the first six months of Fiscal 2006.
The $63.5 million increase in inventories at July 30, 2005 from January 29, 2005 levels reflects seasonal increases in retail inventory and inventory purchased to support the net increase of 54 stores in the first six months this year.
Accounts receivable at July 30, 2005 decreased $0.2 million compared to January 29, 2005.
Cash provided (or used) due to changes in accounts payable and accrued liabilities are as follows:
                 
    Six Months Ended  
    July 30,     July 31,  
    2005     2004  
    (in thousands)  
Accounts payable
  $ 44,284     $ 23,902  
Accrued liabilities
    (12,123 )     (1,141 )
 
           
 
  $ 32,161     $ 22,761  
 
           
The fluctuations in cash provided due to changes in accounts payable for the first six months this year from the first six months last year are due to changes in buying patterns and payment terms negotiated with individual vendors. The change in cash used due to changes in accrued liabilities for the first six months this year from the first six months last year was due primarily to increased bonus payments and tax payments in the first six months of Fiscal 2006.
There were no revolving credit borrowings during the first six months ended July 30, 2005 and there was an average of $4.1 million of revolving credit borrowings during the first six months ended July 31, 2004, as cash generated from operations and cash on hand funded seasonal working capital requirements and capital expenditures for the first six months of Fiscal 2006. On April 1, 2004, the Company entered into a new credit agreement with ten banks, providing for a $100.0 million, five-year term loan and a $75.0 million five-year revolving credit facility.
The Company’s contractual obligations over the next five years have increased from January 29, 2005. Operating lease obligations increased to $650 million from $606 million due to new store openings. Purchase obligations increased to $254 million from $208 million due to seasonal increases in purchases of retail inventory. These increases to contractual obligations were offset by a decrease to long-term debt of $10 million from $161 million at January 29, 2005 to $151 million at July 30, 2005.
Capital Expenditures
Total capital expenditures in Fiscal 2006 are expected to be approximately $56.3 million. These include expected retail capital expenditures of $49.3 million to open approximately 65 Journeys stores, ten Journeys Kidz stores, five Johnston & Murphy stores, 25 Underground Station stores and at least 90 Hat World stores and to complete 68 major store renovations, including five conversions of Jarman stores to Underground Station stores. The amount of capital expenditures in Fiscal 2006 for other purposes are expected to be approximately $7.0 million, including approximately $1.6 million for new systems to improve customer service and support the Company’s growth.

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Future Capital Needs
The Company expects that cash on hand and cash provided by operations will be sufficient to fund all of its planned capital expenditures through Fiscal 2006. The Company plans to borrow under its credit facility from time to time, particularly in the fall, to support seasonal working capital requirements. The approximately $3.7 million of costs associated with the prior restructurings and discontinued operations that are expected to be incurred during the next twelve months are also expected to be funded from cash on hand and borrowings under the revolving credit facility.
In total, the Company’s board of directors has authorized the repurchase, from time to time, of up to 7.5 million shares of the Company’s common stock. There were 398,300 shares remaining to be repurchased under these authorizations as of January 29, 2005. The board reduced the repurchase authorization to 100,000 shares in Fiscal 2005 as a result of the Hat World acquisition. Any purchases would be funded from available cash and borrowings under the revolving credit facility. The Company has repurchased a total of 7.1 million shares at a cost of $71.3 million under a series of authorizations since Fiscal 1999. The Company did not repurchase any shares during the first six months of Fiscal 2006.
There were $11.0 million of letters of credit outstanding at July 30, 2005, leaving availability under the revolving credit facility of $64.0 million. The revolving credit agreement requires the Company to meet certain financial ratios and covenants, including minimum tangible net worth, fixed charge coverage and lease adjusted debt to EBITDAR ratios. The Company was in compliance with these financial covenants at July 30, 2005.
The Company’s revolving credit agreement restricts the payment of dividends and other payments with respect to common stock, including repurchases. The aggregate of annual dividend requirements on the Company’s Subordinated Serial Preferred Stock, $2.30 Series 1, $4.75 Series 3 and $4.75 Series 4, and on its $1.50 Subordinated Cumulative Preferred Stock is $283,000.
Environmental and Other Contingencies
The Company is subject to certain loss contingencies related to environmental proceedings and other legal matters, including those disclosed in Note 9 to the Company’s Consolidated Financial Statements. The Company has made accruals for certain of these contingencies, including approximately $0.9 million reflected in Fiscal 2005 and $1.8 million reflected in Fiscal 2004. The Company monitors these matters on an ongoing basis and, on a quarterly basis, management reviews the Company’s reserves and accruals in relation to each of them, adjusting provisions as management deems necessary in view of changes in available information. Changes in estimates of liability are reported in the periods when they occur. Consequently, management believes that its reserve in relation to each proceeding is a reasonable estimate of the probable loss connected to the proceeding, or in cases in which no reasonable estimate is possible, the minimum amount in the range of estimated losses, based upon its analysis of the facts and circumstances as of the close of the most recent fiscal quarter. However, because of uncertainties and risks inherent in litigation generally and in environmental proceedings in particular, there can be no assurance that future developments will not require additional reserves to be set aside, that some or all reserves may not be adequate or that the amounts of any such additional reserves or any such inadequacy will not have a material adverse effect upon the Company’s financial condition or results of operations.

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Financial Market Risk
The following discusses the Company’s exposure to financial market risk related to changes in interest rates and foreign currency exchange rates.
Outstanding Debt of the Company — The Company’s outstanding long-term debt of $86.3 million 4 1/8% Convertible Subordinated Debentures due June 15, 2023 bears interest at a fixed rate. Accordingly, there would be no immediate impact on the Company’s interest expense due to fluctuations in market interest rates. The Company’s $65.0 million outstanding under the term loan bears interest according to a pricing grid providing margins over LIBOR or Alternate Base Rate. The Company entered into three separate interest rate swap agreements as a means of managing its interest rate exposure on the $65.0 million balance remaining on the term loan. The aggregate notional amount of the swaps is $65.0 million. At July 30, 2005, the net gain on these interest rate swaps was $0.4 million. As of July 30, 2005, a 1% adverse change in the three month LIBOR interest rate would increase the Company’s interest expense on the $65.0 million term loan by approximately $0.1 million on an annual basis.
Cash and Cash Equivalents — The Company’s cash and cash equivalent balances are invested in financial instruments with original maturities of three months or less. The Company does not have significant exposure to changing interest rates on invested cash at July 30, 2005. As a result, the Company considers the interest rate market risk implicit in these investments at July 30, 2005 to be low.
Foreign Currency Exchange Rate Risk — Most purchases by the Company from foreign sources are denominated in U.S. dollars. To the extent that import transactions are denominated in other currencies, it is the Company’s practice to hedge its risks through the purchase of forward foreign exchange contracts. At July 30, 2005, the Company had $12.6 million of forward foreign exchange contracts for Euro. The Company’s policy is not to speculate in derivative instruments for profit on the exchange rate price fluctuation and it does not hold any derivative instruments for trading purposes. Derivative instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract. The unrealized loss on contracts outstanding at July 30, 2005 was $0.4 million based on current spot rates. As of July 30, 2005, a 10% adverse change in foreign currency exchange rates from market rates would decrease the fair value of the contracts by approximately $1.3 million.
Accounts Receivable — The Company’s accounts receivable balance at July 30, 2005 is concentrated in its two wholesale businesses, which sell primarily to department stores and independent retailers across the United States. One customer accounted for 16% of the Company’s trade accounts receivable balance and another customer accounted for 11% as of July 30, 2005. The Company monitors the credit quality of its customers and establishes an allowance for doubtful accounts based upon factors surrounding credit risk, historical trends and other information; however, credit risk is affected by conditions or occurrences within the economy and the retail industry, as well as company-specific information.
Summary — Based on the Company’s overall market interest rate and foreign currency rate exposure at July 30, 2005, the Company believes that the effect, if any, of reasonably possible near-term changes in interest rates on the Company’s consolidated financial position, results of operations or cash flows for Fiscal 2006 would not be material. However, fluctuations in foreign currency exchange rates could have a material effect on the Company’s consolidated financial position, results of operations or cash flows for Fiscal 2006.

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New Accounting Principles
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the Statements of Earnings based on their fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. The Company’s board of directors has amended the Company’s Employee Stock Purchase Plan to provide that participants may acquire shares under the Plan at a 5% discount from fair market value on the last day of the Plan year. Under SFAS No. 123(R), shares issued under the Plan as amended are non-compensatory and are not required to be reflected in the Consolidated Statements of Earnings.
SFAS No. 123(R) is effective for public companies at the beginning of the first fiscal year beginning after June 15, 2005 (Fiscal 2007 for the Company).
SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:
  1.   A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.
 
  2.   A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosure of all prior periods presented.
As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)’s fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net earnings and earnings per share in Note 1. The pro forma amounts were calculated using a Black-Scholes option pricing model and may not be indicative of amounts which should be expected in future years. As of the date of this filing, the Company has not determined which option pricing model is most appropriate for future option grants or which method of adoption the Company will apply. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot

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estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $0.5 million and $0.8 million for the second quarter of Fiscal 2006 and 2005, respectively, and $1.5 million and $1.1 million for the first six months of Fiscal 2006 and 2005, respectively.
In November 2004, the EITF reached a consensus on Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.” The Issue addressed when to include contingently convertible debt instruments in diluted earnings per share. The Issue required companies to include the convertible debt in diluted earnings per share regardless of whether the market price trigger had been met. The Company’s diluted earnings per share calculation for the second quarter and first six months of Fiscal 2006 includes an additional 3.9 million shares and a net after tax interest add back of $0.6 million and $1.2 million, respectively. The Issue was effective for periods ending after December 15, 2004 and required restatement of prior period diluted earnings per share. Earnings per share for the second quarter and first six months of Fiscal 2005 were previously restated.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company incorporates by reference the information regarding market risk appearing under the heading “Financial Market Risk” in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 4. Controls and Procedures
(a)   Evaluation of disclosure controls and procedures. The Company’s management, including its chief executive officer and its chief financial officer, have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, the Company’s chief executive officer and chief financial officer have concluded that as of July 30, 2005, the Company’s disclosure controls and procedures effectively and timely provide them with material information relating to the Company and its consolidated subsidiaries required to be disclosed in the reports the Company files or submits under the Exchange Act.
(b)   Changes in internal control over financial reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act).
There have been no changes in the Company’s internal control over financial reporting during the quarter ended July 30, 2005 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
During the quarter ended July 30, 2005, the Company continued to evaluate processes and implement changes to enhance the effectiveness of internal controls surrounding information systems security and program changes and inventory purchase pricing relating to one of the Company’s business units.

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
California Employment Matter
On October 22, 2004, the Company was named a defendant in a putative class action filed in the Superior Court of the State of California, Los Angeles, Schreiner vs. Genesco Inc., et al., alleging violations of California wages and hours laws, and seeking damages of $40 million plus punitive damages. On May 4, 2005, the Company and the plaintiffs reached an agreement in principle to settle the action, subject to court approval and other conditions. In connection with the proposed settlement, to provide for the settlement payment to the plaintiff class and related expenses, the Company recognized a charge of $2.6 million before taxes included in restructuring and other, net in the accompanying Consolidated Statements of Earnings for the first six months of Fiscal 2006. On May 25, 2005, a second putative class action, Drake vs. Genesco Inc., et al., making allegations similar to those in the Schreiner complaint on behalf of employees of the Company’s Johnston & Murphy division, was filed by a different plaintiff in the California Superior Court, Los Angeles. The Drake action is stayed pending final resolution of the Schreiner action.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company’s annual meeting of shareholders held on June 22, 2005, shares representing a total of 22,790,679 votes were outstanding and entitled to vote. At the meeting, shareholders of the Company:
1)   elected nine directors nominated by the board of directors by the following votes:
                 
            Votes  
    Votes “For”     “Withheld”  
Leonard L. Berry
    20,259,478       527,325  
William F. Blaufuss, Jr.
    20,258,557       528,246  
Robert V. Dale
    20,259,363       527,440  
Matthew C. Diamond
    20,259,789       527,014  
Marty G. Dickens
    19,825,712       961,091  
Ben T. Harris
    20,318,118       468,685  
Kathleen Mason
    17,279,266       3,507,537  
Hal N. Pennington
    19,476,629       1,310,174  
William A. Williamson, Jr.
    19,416,683       1,370,120  
2)   approved the Genesco Inc. 2005 Equity Incentive Plan by a vote of 12,337,288 for and 5,652,488 against, with 154,670 abstentions and 2,642,357 broker non-votes; and
3)   ratified the appointment of Ernst & Young LLP as independent registered public accounting firm for the fiscal year ending January 28, 2006 by a vote of 20,647,374 for and 127,812 against, with 11,617 abstentions and no broker non-votes.

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Item 6. Exhibits
(a) Exhibits
  (10)a.   Amended and Restated Genesco Employee Stock Purchase Plan dated August 24, 2005.
 
  (10)b.   Genesco Inc. 2005 Equity Incentive Plan. Incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed June 28, 2005 (File No. 1-3083).
 
  (31.1)   Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
  (31.2)   Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
  (32.1)   Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
  (32.2)   Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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
   
September 8, 2005
   

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