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[GENESCO LOGO]
(Mark One) FORM 10-K
[X] Annual Report Pursuant To
Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended
February 2, 2002
[ ] Transition Report Pursuant To
Section 13 or 15(d) of the
Securities Exchange Act of 1934
Securities and Exchange Commission
Washington, D.C. 20549
Commission File No. 1-3083
GENESCO INC.
A Tennessee Corporation
I.R.S. No. 62-0211340
Genesco Park
1415 Murfreesboro Road
Nashville, Tennessee 37217-2895
Telephone 615/367-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
EXCHANGES ON WHICH
TITLE REGISTERED
Common Stock, $1.00 par value New York and Chicago
Preferred Share Purchase Rights New York and Chicago
5 1/2% Convertible Subordinated
Notes due 2005 New York
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT
Subordinated Serial Preferred Stock, Series 1
Employees' Subordinated Convertible Preferred Stock
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the June 27, 2001
annual meeting of shareholders are incorporated into
Part III by reference.
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 and (2) has been
subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Common Shares Outstanding April 26, 2002 - 21,911,914
Aggregate market value on April 26, 2002 of the voting
stock held by nonaffiliates of the registrant was
approximately $591,000,000.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 29
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 70
PART III
Item 10. Directors and Executive Officers of the Registrant 70
Item 11. Executive Compensation 70
Item 12. Security Ownership of Certain Beneficial Owners and Management 70
Item 13. Certain Relationships and Related Transactions 72
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 73
2
PART I
ITEM 1, BUSINESS
GENERAL
Genesco is a leading retailer and wholesaler of branded footwear with net sales
for Fiscal 2002 of $746.8 million. During Fiscal 2002, the Company operated four
reportable business segments (not including corporate): Journeys, comprised of
Journeys and Journeys Kidz retail footwear chains; Jarman, comprised primarily
of the Jarman and Underground Station retail footwear chains; Johnston & Murphy,
comprised of Johnston & Murphy retail stores, direct marketing and wholesale
distribution; and Licensed Brands, comprised of Dockers and Nautica Footwear.
The Company ended its license to market footwear under the Nautica label,
effective January 31, 2001. The Company sold Nautica-branded footwear for the
first six months of Fiscal 2002 in order to fill existing customer orders and
sell existing inventory. The Company sold certain assets of its Volunteer
Leather business on June 19, 2000, and has discontinued all Leather segment
operations.
At February 2, 2002, the Company operated 908 retail stores and leased footwear
departments throughout the United States and Puerto Rico. It currently plans to
open a total of approximately 140 new retail stores in Fiscal 2003. At February
2, 2002, Journeys operated 533 stores, including 14 Journeys Kidz; Jarman
operated 227 stores, including 97 Underground Station stores and Johnston &
Murphy operated 148 stores and factory stores.
The following table sets forth certain additional information concerning the
Company's retail stores and leased departments during the five most recent
fiscal years:
FISCAL FISCAL FISCAL FISCAL FISCAL
1998 1999 2000 2001 2002
------ ------ ------ ------ ------
Retail Stores and Leased Departments
Beginning of year 475 561 674 679 836
Opened during year 102 162 113 181 153
Closed during year (16) (49) (108) (24) (81)
------ ------ ------ ------ ------
End of year 561 674 679 836 908
====== ====== ====== ====== ======
The Company also designs, sources, markets and distributes footwear under its
own Johnston & Murphy brand and under the licensed Dockers brand, to more than
1,300 retail accounts in the United States, including a number of leading
department, discount, and specialty stores.
Reference to Fiscal 2002 refers to the Company's fiscal year ended February 2,
2002. Reference to Fiscal 2001 refers to the Company's fiscal year ended
February 3, 2001. Reference to Fiscal 2000 refers to the Company's fiscal year
ended January 29, 2000. Reference to Fiscal 1999 refers to the Company's fiscal
year ended January 30, 1999. Reference to Fiscal 1998 refers to the Company's
fiscal year ended January 31, 1998. For further information on the Company's
business segments, see Note 17 to the Consolidated Financial Statements included
in Item 8 and Management's Discussion and Analysis of Financial Condition and
Results of Operations. All information
3
contained in Management's Discussion and Analysis of Financial Condition and
Results of Operations which is referred to in Item 1 of this report is
incorporated by such reference in Item 1. This report contains forward-looking
statements. Actual results may turn out materially different from the
expectations reflected in these statements. For a discussion of some of the
factors that may lead to different results, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
SEGMENTS
Journeys
The Journeys segment accounted for approximately 51% of the Company's net sales
in Fiscal 2002. Operating income attributable to Journeys was $51.9 million in
Fiscal 2002, with an operating margin of 13.6%. The Company believes its
innovative store formats, mix of well-known brands, new product introductions,
and experienced management team provide significant competitive advantages for
Journeys.
At February 2, 2002, Journeys operated 519 stores, averaging approximately 1,550
square feet, throughout the United States and Puerto Rico, selling footwear for
young men and women.
Journeys added 94 net new stores in Fiscal 2002 and achieved a comparable store
sales increase of 6% from the prior fiscal year. Journeys stores, located
primarily in the Southeast, Midwest, California, Texas, and Puerto Rico, target
customers in the 12-19 year age group through the use of youth-oriented decor
and popular music videos. Journeys stores carry predominately branded
merchandise across a wide range of prices, including such leading brand names as
Dr. Martens, Skechers, Timberland, adidas, Lugz, Vans and Steve Madden. From a
base of 176 Journeys stores at the end of Fiscal 1998, the Company opened 82 net
new Journeys stores in Fiscal 1999, 65 net new stores in Fiscal 2000, 102 net
new stores in Fiscal 2001 and 94 net new stores in Fiscal 2002 and plans to open
approximately 87 net new Journeys stores in Fiscal 2003.
The Company introduced a new concept, named "Journeys Kidz," in Fiscal 2001.
Journeys Kidz is an offshoot of Journeys and is aimed at the "tween" customer,
ages five to 12. Journeys Kidz stores carry predominately branded merchandise,
including such leading brand names as Dr. Martens, Skechers, Timberland, adidas
and Converse. The Company opened 14 Journeys Kidz stores in Fiscal 2002
averaging approximately 1,400 square feet. The Company plans to open
approximately 25 Journeys Kidz stores in Fiscal 2003.
Jarman
The Jarman segment accounted for approximately 16% of the Company's net sales in
Fiscal 2002. Operating income attributable to Jarman was $5.3 million in Fiscal
2002, with an operating margin of 4.4%.
At February 2, 2002, Jarman operated 227 stores, including 97 Underground
Station stores, averaging approximately 1,400 square feet, throughout the United
States, selling footwear primarily for men.
Jarman had a comparable store sales decrease of 4% from the prior fiscal year.
Jarman stores are located primarily in urban and suburban areas in the Southeast
and Midwest, target male consumers
4
in the 20-35 age group and sell footwear in the mid-price range ($50 to $100).
The Jarman stores which operate under the name Underground Station are located
primarily in urban areas. For Fiscal 2002, most of the footwear sold in Jarman
stores was branded merchandise of national brands other than the Company's, with
the remainder made up of Genesco and private label brands. The product mix at
each Jarman store is tailored to match local customer preferences and
competitive dynamics. The Company opened 20 net new Jarman stores, including 40
net new Underground Station stores, in Fiscal 2002, increasing the total number
of stores to 227. The Company plans to open approximately 11 net new Jarman
stores in Fiscal 2003, including approximately 16 net new Underground Station
stores. Going forward, the Company will not open any new Jarman stores. All new
store openings in this segment will be Underground Station stores.
Johnston & Murphy
The Johnston & Murphy segment accounted for approximately 23% of the Company's
net sales in Fiscal 2002. Operating income attributable to Johnston & Murphy was
$14.1 million in Fiscal 2002, with an operating margin of 8.4%. All of the
Johnston & Murphy wholesale sales are of the Genesco-owned Johnston & Murphy
brand and approximately 93% of the Johnston & Murphy retail sales are of
Genesco-owned brands.
At February 2, 2002, Johnston & Murphy operated 148 retail stores and factory
stores, averaging approximately 1,500 square feet, throughout the United States
selling footwear for men.
Johnston & Murphy Wholesale Operations. In its 150-year history as a
high-quality men's footwear label, Johnston & Murphy has come to symbolize
superior craftsmanship, quality materials, and classic styling. The Company's
strategy for Johnston & Murphy is to take these brand attributes to the growing
casual lifestyle market by expanding the product line to include a wide
selection of dress casual and casual styles. The Company has also introduced a
line of contemporary, European-influenced dress and dress casual footwear. In
addition to sales through Company-owned Johnston & Murphy retail shops and
factory stores, Johnston & Murphy footwear is sold primarily through better
department and independent specialty stores.
Johnston & Murphy Retail Operations. Johnston & Murphy retail shops are located
primarily in better malls nationwide and sell a broad range of men's dress and
casual footwear and accessories. Johnston & Murphy stores target business and
professional consumers primarily between the ages of 25 and 54. Retail prices
for Johnston & Murphy footwear generally range from $110 to $240. Casual and
dress casual products accounted for 60% of total Johnston & Murphy retail sales
in Fiscal 2002, with the balance consisting of dress shoes and accessories.
Johnston & Murphy comparable store sales were down 9% in Fiscal 2002 from the
prior fiscal year.
Licensed Brands
The Licensed Brands segment accounted for approximately 10% of the Company's net
sales in Fiscal 2002. Operating income attributable to Licensed Brands was $8.0
million in Fiscal 2002, with an operating margin of 10.4%. Substantially all of
the Licensed Brands sales are of footwear marketed under brands for which
Genesco has an exclusive footwear license. See "Trademarks and Licenses."
5
Dockers. In 1991, Levi Strauss & Co. granted the Company the exclusive license
to market men's footwear under the Dockers brand name in the United States. The
Dockers brand name is well recognized in the men's casual fashion industry. The
Company uses the Dockers brand name to market a line of comfortable,
moderately-priced, casual lifestyle footwear. Dockers footwear is marketed
through many of the same national retail chains that carry Dockers slacks and
sportswear. Suggested retail prices for Dockers footwear generally range from
$50 to $94.
Nautica. The Company ended its license to market footwear under the Nautica
label, effective January 31, 2001. Sales for the first half of Fiscal 2002
included sales of Nautica footwear permitted under the termination arrangement
with the licensor. For additional information on Nautica, see Note 2 to the
Consolidated Financial Statements included in Item 8 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
MANUFACTURING AND SOURCING
The Company relies primarily on independent third-party manufacturers for
production of its footwear products. The Company sources footwear products from
foreign manufacturers located in China, Italy, Mexico, Brazil, Indonesia, Taiwan
and the United Kingdom. During Fiscal 2002, Genesco manufactured Johnston &
Murphy footwear in one facility in Nashville, Tennessee, but shoes manufactured
in the Johnston & Murphy factory have not accounted for a significant portion of
its sales of footwear products. In the fourth quarter of Fiscal 2002, the
Company announced plans to close the Nashville factory by the end of Fiscal
2003.
COMPETITION
Competition is intense in the footwear industry. The Company's retail footwear
competitors range from small, locally owned shoe stores to regional and national
department stores, discount stores, and specialty chains. The Company competes
with hundreds of footwear wholesale and manufacturing operations in the United
States and throughout the world, most of which are relatively small, specialized
operations, but some of which are large, more diversified companies. Some of the
Company's competitors have certain resources that are not available to the
Company. The Company's success depends upon its ability to remain competitive
with respect to the key factors of style, price, quality, comfort, brand
loyalty, and customer service. The location and atmosphere of the Company's
retail stores is an additional competitive factor for the Company's retail
operations. Any failure by the Company to remain competitive with respect to
such key factors could have a material adverse effect on the Company's business,
financial condition, or results of operations.
TRADEMARKS AND LICENSES
The Company owns its Johnston & Murphy footwear brand through a wholly-owned
subsidiary. The Nautica and Dockers brand footwear lines, introduced in Fiscal
1993, are sold under license agreements. The Nautica license agreement was
cancelled effective January 31, 2001. The Dockers license agreement expires on
December 31, 2004 with an option to renew through December 31, 2008. Net sales
of Nautica and Dockers products were approximately $77 million in Fiscal 2002
and approximately $82 million in Fiscal 2001. The Company licenses certain of
its footwear brands, mostly in foreign markets. License royalty income was not
material in Fiscal 2002.
6
RAW MATERIALS
Genesco is not dependent upon any single source of supply for any major raw
material. In Fiscal 2002 the Company experienced no significant shortages of raw
materials in its principal businesses. The Company considers its available raw
material sources to be adequate, although the effects of unforeseen disruptions
are unpredictable.
BACKLOG
Most of the Company's orders are for delivery within 90 days. Therefore, the
backlog at any one time is not necessarily indicative of future sales for an
extended period of time. As of March 30, 2002, the Company's wholesale
operations had a backlog of orders, including unconfirmed customer purchase
orders, amounting to approximately $24.7 million, compared to approximately
$35.0 million on March 31, 2001. The backlog is somewhat seasonal, reaching a
peak in spring. The Company maintains in-stock programs for selected anticipated
high volume sales.
EMPLOYEES
Genesco had approximately 5,325 employees at February 2, 2002, approximately
5,240 of whom were employed in operations and 85 in corporate staff departments.
Retail footwear stores employ a substantial number of part-time employees during
peak selling seasons and approximately 2,450 of the Company's employees were
part-time during such seasons.
PROPERTIES
At February 2, 2002, the Company operated 908 retail stores and leased
departments throughout the United States and Puerto Rico. New shopping center
store leases typically are for a term of approximately 10 years and new factory
outlet leases typically are for a term of approximately five years. Both
typically provide for rent based on a percentage of sales against a fixed
minimum rent based on the square footage leased. The Company's two leased
departments are operated under agreements which are generally terminable by
department stores upon short notice.
The Company operates one manufacturing facility (which is leased) and four
distribution centers (two of which are owned and two of which are leased)
aggregating approximately 810,000 square feet. All of the facilities are located
in Tennessee. The Company's executive offices and the offices of its footwear
operations, which are leased, are in Nashville, Tennessee where Genesco occupies
approximately 60% of a 295,000 square foot building.
Due to the Company's retail growth, the Company began construction of a new
distribution center in Fiscal 2002. The Company purchased 215 acres in Wilson
County, Tennessee to develop a new 322,000 square foot distribution facility
expected to be completed in the Spring of 2002.
Leases on the Company's Nashville, Tennessee, plant, offices, and warehouses
expire in 2007, including renewal options. The Company believes that all leases
(other than the long-term Nashville leases) of properties that are material to
its operations may be renewed on terms not materially less favorable to the
Company than existing leases.
ENVIRONMENTAL MATTERS
The Company's manufacturing operations are subject to numerous federal, state,
and local laws and regulations relating to human health and safety and the
environment. These laws and regulations address and regulate, among other
matters, wastewater discharge, air quality and the generation,
7
handling, storage, treatment, disposal, and transportation of solid and
hazardous wastes and releases of hazardous substances into the environment. In
addition, third parties and governmental agencies in some cases have the power
under such laws and regulations to require remediation of environmental
conditions and, in the case of governmental agencies, to impose fines and
penalties. The Company makes capital expenditures from time to time to stay in
compliance with applicable laws and regulations. Several of the facilities owned
or operated by the Company (currently or in the past) are located in industrial
areas and have historically been used for extensive periods for industrial
operations such as tanning, dyeing, and manufacturing. Some of these operations
used materials and generated wastes that would be considered regulated
substances under current environmental laws and regulations. The Company
currently is involved in certain administrative and judicial environmental
proceedings relating to the Company's former and current facilities. See "Legal
Proceedings."
ITEM 2, PROPERTIES
See Item 1.
ITEM 3, LEGAL PROCEEDINGS
New York State Environmental Proceedings
The Company is a defendant in a civil action filed by the State of New York
against the City of Gloversville, New York, and 33 other private defendants. The
action arose out of the alleged disposal of certain hazardous material directly
or indirectly into a municipal landfill and seeks recovery under a federal
environmental statute and certain common law theories for the costs of
investigating and performing remedial actions and damage to natural resources.
The environmental authorities have selected a plan of remediation for the site
with a total estimated cost of approximately $12.0 million. The Company was
allocated liability for a 1.31% share of the remediation cost in non-binding
mediation with other defendants and the State of New York. The State has offered
to release the Company from further liability related to the site in exchange
for payment of its allocated share plus a small premium, totaling approximately
$180,000, and the Company has accepted. Assuming the settlement is completed as
agreed, the Company believes it has fully provided for its liability in
connection with the site.
The Company has received notice from the New York State Department of
Environmental Conservation (the "Department") that it deems remedial action to
be necessary with respect to certain contaminants in the vicinity of a knitting
mill operated by a former subsidiary of the Company from 1965 to 1969, and that
it considers the Company a potentially responsible party. In August 1997, the
Department and the Company entered into a consent order whereby the Company
assumed responsibility for conducting a remedial investigation and feasibility
study ("RIFS") and implementing an interim remediation measure with regard to
the site, without admitting liability or accepting responsibility for any future
remediation of the site. In conjunction with the consent order, the Company
entered into an agreement with the owner of the site providing for a release
from liability for property damage and for necessary access to the site, for
payments totaling $400,000. The Company estimates that the cost of conducting
the RIFS and implementing the interim remedial measure will be in the range of
$3.9 million to $4.1 million, $3.3 million of which the Company has already
paid. The Company believes that it has adequately reserved for the costs of
conducting the RIFS and implementing the interim remedial measure contemplated
by the
8
consent order, but there is no assurance that the consent order will ultimately
resolve the matter. The Company has not ascertained what responsibility, if any,
it has for any contamination in connection with the facility or what other
parties may be liable in that connection and is unable to predict whether its
liability, if any, beyond that voluntarily assumed by the consent order will
have a material effect on its financial condition or results of operations.
Whitehall Environmental Sampling
Pursuant to a work plan approved by the Michigan Department of Environmental
Quality ("MDEQ") the Company has performed sampling and analysis of soil,
sediments, surface water, groundwater and waste management areas at the
Company's Volunteer Leather Company facility in Whitehall, Michigan. On June 29,
1999, the Company submitted a remedial action plan (the "Plan") for the site to
MDEQ and subsequently amended it to include additional upland remediation to
bring the property into compliance with regulatory standards for non-industrial
uses. The Company, with the approval of MDEQ, previously installed horizontal
wells to capture groundwater from a portion of the site and treat it by air
sparging. The Plan proposed continued operation of this system for an indefinite
period and monitoring of groundwater samples to ensure that the system is
functioning as intended.
On June 30, 1999, the City of Whitehall filed an action against the Company in
the circuit court for the City of Muskegon alleging that the Company's and its
predecessors' past wastewater management practices have adversely affected the
environment, and seeking injunctive relief under Parts 17 and 201 of the
Michigan Natural Resources Environmental Protection Act ("MNREPA") to require
the Company to correct the alleged pollution, primarily lake sediment
contamination. Further, the City alleged violations of City ordinances
prohibiting blight and litter, and that the Whitehall Volunteer Leather plant
constitutes a public nuisance. The Company, the City of Whitehall and MDEQ
settled their disagreement over lake sediments for a lump sum payment of $3.35
million by the Company in the first quarter of Fiscal 2003. In connection with
the settlement, the City's lawsuit has been dismissed with prejudice.
The Company believes it has fully provided for the Plan, which remains subject
to MDEQ approval. Although the Company does not expect remediation of the site
to have a material effect on its financial condition or results of operations,
there can be no assurance that the Plan, as amended, will be approved, and the
Company is unable to predict whether any further remediation that might
ultimately be required would have such an effect.
ITEM 4, SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of Fiscal 2002.
9
EXECUTIVE OFFICERS OF GENESCO
The officers of the Company are generally elected at the first meeting of the
board of directors following the annual meeting of shareholders and hold office
until their successors have been chosen and qualify. The name, age and office of
each of the Company's executive officers and certain information relating to the
business experience of each are set forth below:
BEN T. HARRIS, 58, Chairman. Mr. Harris joined the Company in 1967 and in 1980
was named manager of the leased department division of the Jarman Shoe Company.
In 1991, he was named president of the Jarman Shoe Company and in 1995 was named
president of Retail Footwear, which included the Jarman Shoe Company, Journeys,
Boot Factory and General Shoe Warehouse. Mr. Harris was named executive vice
president - operations in January 1996. He was named president and chief
operating officer and a director of the Company as of November 1, 1996 and was
named chief executive officer as of February 1, 1997. Mr. Harris was named
chairman as of November 4, 1999.
HAL N. PENNINGTON, 64, President and Chief Executive Officer. Mr. Pennington has
served in various roles during his 40 year tenure with Genesco. He was vice
president-wholesale for Johnston & Murphy from 1990 until his appointment as
president of Dockers Footwear in August 1995. He was named president of Johnston
& Murphy in February 1997 and named senior vice president in June 1998. Mr.
Pennington was named executive vice president, chief operating officer and a
director of the Company as of November 4, 1999. Mr. Pennington was named
president of the Company as of November 1, 2000. He has responsibility for
operational support functions including human resources and information systems,
in addition to oversight of the Company's operating divisions. Mr. Pennington
was named chief executive officer of the Company as of April 25, 2002.
JAMES S. GULMI, 56, Senior Vice President - Finance and Chief Financial Officer.
Mr. Gulmi was employed by Genesco in 1971 as a financial analyst, appointed
assistant treasurer in 1974 and named treasurer in 1979. He was elected a vice
president in 1983 and assumed the responsibilities of chief financial officer in
1986. He was again elected treasurer in February 1995. Mr. Gulmi was appointed
senior vice president - finance in January 1996.
JAMES C. ESTEPA, - 50, Senior Vice President. Mr. Estepa joined the Company in
1985 and in February 1996 was named vice president operations of Genesco Retail,
which included the Jarman Shoe Company, Journeys, Boot Factory and General Shoe
Warehouse. Mr. Estepa was named senior vice president operations of Genesco
Retail in June 1998. He was named president of Journeys in March 1999. Mr.
Estepa was named senior vice president of the Company in April 2000. He was
named president and chief executive officer of the Genesco Retail Group in 2001,
assuming additional responsibilities of overseeing Jarman and Underground
Station.
10
DAVID W. ZUMBACH, - 47, Senior Vice President. Mr. Zumbach joined the Company in
1999 as president of Nautica Footwear. He was named chief executive officer for
Johnston & Murphy in 2001. Mr. Zumbach was named president and chief executive
officer of the Company's newly formed Genesco Branded division in January 2002,
with responsibility for overall management of the Johnston & Murphy and Dockers
Footwear divisions. Mr. Zumbach was also named senior vice president of the
Company in January 2002. Before joining the Company, Mr. Zumbach was vice
president/general manager - U.S. marketing for Reebok International Ltd.
JOHN W. CLINARD, 54, Vice President - Administration and Human Resources. Mr.
Clinard has served in various human resources capacities during his 29 year
tenure with Genesco. He was named vice president - human resources in June 1997.
He was named vice president administration and human resources in November 2000.
ROGER G. SISSON, 38, Secretary and General Counsel. Mr. Sisson joined the
Company in January 1994 as assistant general counsel and was elected secretary
in February 1994. He was named general counsel in January 1996. Before joining
the Company, Mr. Sisson was associated with the firm of Boult, Cummings, Conners
& Berry for approximately six years.
MATTHEW N. JOHNSON, 37, Treasurer. Mr. Johnson joined the Company in April 1993
as manager, corporate finance and was elected assistant treasurer in December
1993. He was elected treasurer in June 1996. Prior to joining the Company, Mr.
Johnson was a vice president in the corporate and institutional banking division
of The First National Bank of Chicago.
PAUL D. WILLIAMS, 47, Chief Accounting Officer. Mr. Williams joined the Company
in 1977, was named director of corporate accounting and financial reporting in
1993 and chief accounting officer in April 1995.
11
PART II
ITEM 5, MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the New York Stock Exchange (Symbol:
GCO) and the Chicago Stock Exchange. The following table sets forth for the
periods indicated the high and low sales prices of the common stock as shown in
the New York Stock Exchange Composite Transactions listed in the Wall Street
Journal.
Fiscal Year ended February 3
2001 1st Quarter 14.25 8.25
2nd Quarter 18.00 12.25
3rd Quarter 18.50 13.4375
4th Quarter 26.50 15.75
Fiscal Year ended February 2
2002 1st Quarter 29.00 21.70
2nd Quarter 35.00 26.59
3rd Quarter 25.80 15.65
4th Quarter 26.10 18.20
There were approximately 5,900 common shareholders of record on February 2,
2002.
See Notes 9 and 11 to the Consolidated Financial Statements included in Item 8
for information regarding restrictions on dividends and redemptions of capital
stock.
12
ITEM 6, SELECTED FINANCIAL DATA
FINANCIAL SUMMARY
IN THOUSANDS EXCEPT PER COMMON SHARE DATA, FISCAL YEAR END
FINANCIAL STATISTICS AND OTHER DATA 2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
RESULTS OF OPERATIONS DATA
Net sales $ 746,821 $ 680,166 $ 553,032 $ 532,164 $ 506,889
Depreciation and amortization 16,239 13,200 10,514 9,691 8,893
Earnings before interest and taxes 63,428 60,187 46,969 37,101 16,396
Pretax earnings 55,864 52,987 40,982 30,490 7,534
Earnings before discontinued operations and
extraordinary loss 38,323 32,831 25,335 54,558 7,494
Discontinued operations (1,253) (3,233) 587 815 1,326
Loss on early retirement of debt (net of tax) -0- -0- -0- 2,245 169
--------- --------- --------- --------- ---------
Net earnings $ 37,070 $ 29,598 $ 25,922 $ 53,128 $ 8,651
========= ========= ========= ========= =========
PER COMMON SHARE DATA
Earnings before discontinued operations and
extraordinary loss
Basic $ 1.74 $ 1.51 $ 1.12 $ 2.13 $ .28
Diluted 1.54 1.35 1.03 1.87 .27
Discontinued operations
Basic (.06) (.15) .03 .03 .05
Diluted (.05) (.12) .02 .03 .05
Extraordinary loss
Basic .00 .00 .00 (.09) .00
Diluted .00 .00 .00 (.07) (.01)
Net earnings
Basic 1.68 1.36 1.14 2.07 .33
Diluted 1.49 1.23 1.05 1.83 .31
========= ========= ========= ========= =========
BALANCE SHEET DATA
Total assets $ 363,554 $ 352,163 $ 301,165 $ 307,198 $ 246,817
Long-term debt 103,245 103,500 103,500 103,500 75,000
Capital leases 27 28 34 36 279
Non-redeemable preferred stock 7,634 7,721 7,882 7,918 7,945
Common shareholders' equity 153,553 130,504 100,360 108,661 64,019
Additions to plant, equipment and capital leases 43,723 34,735 22,312 23,512 24,725
========= ========= ========= ========= =========
FINANCIAL STATISTICS
Earnings before interest and taxes as a percent of net sales 8.5% 8.8% 8.5% 7.0% 3.2%
Book value per share $ 7.03 $ 6.02 $ 4.73 $ 4.56 $ 2.43
Working capital $ 155,530 $ 144,926 $ 138,007 $ 155,778 $ 119,313
Current ratio 3.1 2.5 2.8 3.1 2.6
Percent long-term debt to total capitalization 39.0% 42.8% 48.9% 47.0% 51.1%
========= ========= ========= ========= =========
OTHER DATA (END OF YEAR)
Number of retail outlets* 908 836 679 674 587
Number of employees 5,325 4,700 4,250 3,650 4,300
========= ========= ========= ========= =========
* Includes 78 Jarman Leased departments in Fiscal 1999 which were
divested during the first quarter of Fiscal 2000 and 26 Boot Factory
stores in Fiscal 1998 which were divested during the second quarter of
Fiscal 1999. Also includes Nautica Retail leased departments of 57, 47,
24 and 4 in Fiscal 2001, 2000, 1999 and 1998, respectively.
Reflected in the earnings for Fiscal 2002, 2001, 1999 and 1998 were
restructuring and other charges of $5.1 million, $4.4 million, ($2.4) million
and $17.7 million, respectively. See Note 2 to the Consolidated Financial
Statements for additional information regarding these charges.
Reflected in the earnings for Fiscal 2002 and 1999 was a tax benefit of $3.5
million and $24.1 million, respectively.
Long-term debt and capital leases include current obligations. On April 9, 1998,
the Company issued $103.5 million of 5 1/2% convertible subordinated notes due
2005. The Company used $80 million of the proceeds to repay all of its 10 3/8%
senior notes including interest and expenses incurred in connection therewith.
The Company has not paid dividends on its Common Stock since 1973. See Note 11
to the Consolidated Financial Statements for a description of limitations on the
Company's ability to pay dividends.
13
ITEM 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and the notes to the Consolidated Financial Statements include
certain forward-looking statements, including all statements that do not refer
to past or present events or conditions. Actual results could differ materially
from those reflected by the forward-looking statements in this discussion and a
number of factors may adversely affect future results, liquidity and capital
resources. These factors include lower than expected consumer demand for the
Company's products, whether caused by weakness in the overall economy or changes
in fashions or tastes that the Company fails to anticipate or respond
appropriately to, changes in buying patterns by significant wholesale customers,
disruptions in product supply or distribution, including the impact of opening a
new distribution center, the inability to adjust inventory levels to sales and
changes in business strategies by the Company's competitors, among other
factors. Other factors that could cause results to differ from expectations
include the Company's ability to open, staff and support additional retail
stores on schedule and at acceptable expense levels, and the outcome of
litigation and environmental matters involving the Company, including those
discussed in Note 16 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, future revenue and margin trends cannot be reliably predicted
and the Company may alter its business strategies to address changing
conditions.
SIGNIFICANT DEVELOPMENTS
Johnston & Murphy Plant Closing and Reductions in Operating Expenses
On January 31, 2002, the Company's board of directors approved a plan to close
its one remaining manufacturing plant and to implement other initiatives
designed to streamline its operations and reduce operating expenses. The Company
expects to end operations of the plant early in the third quarter of Fiscal
2003. The Johnston & Murphy plant employs approximately 170 people.
Included in the Company's plan referred to above, is a reduction in expenses due
to eliminating approximately 40 positions from its Nashville headquarters
workforce. In addition, the Company recognized asset impairments for assets to
be held and used in twelve underperforming stores, primarily in the Jarman
group.
In connection with the plant closing, employee severance and asset impairments,
the Company recorded a pretax charge to earnings of $5.4 million ($3.4 million
net of tax) in the fourth quarter of Fiscal 2002. The charge includes $0.3
million in plant asset write-downs, $3.7 million of other costs, including
primarily employee severance and facility shutdown costs and $1.0 million of
retail store asset impairments. See Note 8 to the Consolidated Financial
Statements. Also included in the charge was a $0.4 million inventory write-down,
primarily related to inventory of product offerings affected by the plant
closing, which is reflected in gross margin on the income statement.
Minimum Pension Liability Adjustment
The return on pension plan assets was a negative 2.3% for Fiscal 2002 compared
to an expected return of 8.5% for the year. The interest rate applicable to
present value calculations with respect to plan
14
assets and liabilities also decreased from 7.875% to 7.375% in Fiscal 2002. As a
result, plan assets were less than the accumulated benefit obligation, resulting
in a pension liability of $14.0 million on the balance sheet and a minimum
pension liability adjustment of $17.2 million (net of tax) in other
comprehensive income in shareholders' equity.
Revolving Credit Agreement
On July 16, 2001, the Company entered into a revolving credit agreement with
five banks, providing for loans or letters of credit of up to $75 million. The
agreement, as amended September 6, 2001, expires July 16, 2004. This agreement
replaced a $65 million revolving credit agreement with three banks that was to
expire September 24, 2002, providing for loans or letters of credit.
Nautica Footwear License Cancellation
The Company ended its license to market footwear under the Nautica label,
effective January 31, 2001. The Company sold Nautica - branded footwear for the
first six months of Fiscal 2002 in order to fill existing customer orders and
sell existing inventory.
In connection with the termination of the Nautica Footwear license agreement,
the Company recorded a pretax charge to earnings of $4.4 million ($2.7 million
net of tax) in the fourth quarter of Fiscal 2001. The charge included
contractual obligations to Nautica Apparel for the license cancellation and
other costs, primarily severance. See Note 8 to the Consolidated Financial
Statements. Also included in the charge was a $1.0 million inventory write-down
which is reflected in gross margin on the income statement.
During the second quarter of Fiscal 2002, the Company recorded a restructuring
gain of $0.3 million in connection with the termination of the Nautica Footwear
license agreement. Included in the gain is a $0.1 million reversal of inventory
write-down which is reflected in gross margin on the income statement. The
remaining $0.1 million of anticipated costs associated with the Nautica license
termination are expected to be incurred within the next twelve months.
Volunteer Leather Divestiture
On May 22, 2000, the Company's board of directors approved a plan to sell its
Volunteer Leather finishing business and liquidate its tanning business, to
allow the Company to be more focused on the retailing and marketing of branded
footwear.
Certain assets of the Volunteer Leather business were sold on June 19, 2000. The
plan resulted in a pretax charge to earnings of $4.9 million ($3.0 million net
of tax) in the second quarter of Fiscal 2001. Because Volunteer Leather
constitutes the entire Leather segment of the Company's business, the charge to
earnings was treated for financial reporting purposes as a provision for
discontinued operations. The provision for discontinued operations included $1.3
million in asset write-downs and $3.6 million of other costs, including
primarily employee severance and facility shutdown costs. See Note 8 to the
Consolidated Financial Statements. The Volunteer Leather business employed
approximately 160 people.
In the third quarter ended November 3, 2001, the Company reached an agreement
with the Michigan Department of Environmental Quality to contribute a lump sum
of $3.35 million toward sediment removal in a lake adjacent to the Company's
former Volunteer Leather tannery in Whitehall, Michigan. See Note 16 to the
Consolidated Financial Statements. The Company recorded an additional charge to
earnings of $1.1 million ($0.7 million net of tax) reflected in
15
discontinued operations in the third quarter of Fiscal 2002 to provide for the
portion of the settlement payment not provided for in earlier periods.
In the fourth quarter ended February 2, 2002, the Company recorded an additional
charge to earnings of $0.9 million ($0.6 million net of tax) reflected in
discontinued operations to provide $0.5 million for the Michigan site and $0.4
million primarily for additional anticipated costs for a remedial investigation
and feasibility study at its former knitting mill in New York.
Share Repurchase Program
The Company's board of directors has authorized the repurchase of 7.2 million
shares of the Company's common stock on the open market or in privately
negotiated transactions since the third quarter of Fiscal 1999. As of February
2, 2002, the Company had repurchased 6.7 million shares at a cost of $65.4
million pursuant to all authorizations, 270,500 of which shares were repurchased
during Fiscal 2002.
CRITICAL ACCOUNTING POLICIES
Inventory Valuation
As discussed in Note 1 to the Consolidated Financial Statements, 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.
In its retail operations, 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 inaccurate cost figures. To reduce the
risk of inaccuracy, 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.
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. An analysis of the sensitivity of the judgments inherent in this process
indicates that changes in the valuation percents of 10% would result in a
decrease in inventory value of approximately $1.0 million as of February 2,
2002.
16
Impairment of Long-Term Assets
As discussed in Note 1 to the Consolidated Financial Statements, the Company
periodically assesses the realizability of its long-lived assets and evaluates
such assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Asset impairment is
determined to exist if estimated future cash flows, undiscounted and without
interest charges, are less than 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 long-lived assets.
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 16 to the
Company's Consolidated Financial Statements. The Company has made provisions for
certain of these contingencies, including approximately $2.0 million reflected
in Fiscal 2002 and $2.6 million reflected in Fiscal 2001. The Company monitors
these matters on an ongoing basis and at least quarterly management reviews the
Company's reserves and accruals in relation to each of them, adjusting
provisions as management deems necessary in view of changes in available
information. Changes in estimates of liability are reported in the periods when
they occur. Consequently, management believes that its reserve in relation to
each proceeding is a reasonable estimate of the probable loss connected to the
proceeding, or in cases in which no reasonable estimate is possible, the minimum
amount in the range of estimated losses, based upon its analysis of the facts
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.
BUSINESS SEGMENTS
The Company currently operates four reportable business segments (not including
the corporate segment): Journeys, comprised of Journeys and Journeys Kidz retail
footwear chains; Jarman, comprised primarily of the Jarman and Underground
Station retail footwear chains; Johnston & Murphy, comprised of Johnston &
Murphy retail stores, direct marketing and wholesale distribution; and Licensed
Brands, comprised of Dockers and Nautica Footwear. The Company ended its license
to market footwear under the Nautica label, effective January 31, 2001. The
Company also operated the Leather segment during part of Fiscal 2001. The
Company sold certain assets of its Volunteer Leather business on June 19, 2000
and has discontinued all Leather segment operations. See "Significant
Developments."
RESULTS OF OPERATIONS - FISCAL 2002 COMPARED TO FISCAL 2001
The Company's net sales for Fiscal 2002 (52 weeks) increased 9.8% to $746.8
million from $680.2 million in Fiscal 2001 (53 weeks). Gross margin increased
8.4% to $349.6 million in Fiscal 2002 from $322.5 million in Fiscal 2001 but
decreased as a percentage of net sales from 47.4% to 46.8%. Selling and
administrative expenses in Fiscal 2002 increased 8.7% from Fiscal 2001 but
decreased as a percentage of net sales from 38.1% to 37.7%. Explanations of the
changes in results of operations are provided by business segment in discussions
following these introductory paragraphs.
17
Earnings before income taxes and discontinued operations ("pretax earnings") for
Fiscal 2002 were $55.9 million compared to $53.0 million for Fiscal 2001. Pretax
earnings for Fiscal 2002 included restructuring and other charges of $5.1
million related to the closing of the Johnston & Murphy plant, elimination of
staff in the Company's headquarters and asset impairments. Pretax earnings for
Fiscal 2001 included a restructuring charge of $4.4 million related to the
termination of the Nautica Footwear license.
Net earnings for Fiscal 2002 were $37.1 million ($1.49 diluted earnings per
share) compared to $29.6 million ($1.23 diluted earnings per share) for Fiscal
2001. Net earnings for Fiscal 2002 included a $1.3 million ($0.05 diluted
earnings per share) charge to earnings (net of tax) for additional environmental
clean-up costs at the Company's former Volunteer Leather tannery in Whitehall,
Michigan, and other adjustments to discontinued operations, primarily for
additional anticipated costs for a remedial investigation and feasibility study
at its former knitting mill in New York. Net earnings for Fiscal 2001 included a
$3.0 million ($0.11 diluted earnings per share) charge to earnings (net of tax)
related to the divestiture of the Company's Volunteer Leather business. The
Company recorded an effective federal income tax rate of 31.4% for Fiscal 2002
compared to 38.0% for Fiscal 2001. The Company determined that approximately
$3.5 million of previously accrued income taxes was no longer required. Because
this amount is reflected as current year income tax benefit, it reduced the
Company's effective federal income tax rate for Fiscal 2002.
Journeys
Fiscal Year Ended
%
2002 2001 Change
(dollars in thousands)
Net sales............................................... $ 381,736 $ 300,758 26.9%
Operating income........................................ $ 51,925 $ 41,869 24.0%
Operating margin........................................ 13.6% 13.9%
Reflecting primarily both a 27% 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 year divided by thirteen) and a
6% increase in comparable store sales, net sales from Journeys increased 26.9%
for Fiscal 2002 compared to Fiscal 2001. The average price per pair of shoes
decreased 4% in Fiscal 2002, primarily reflecting changes in product mix, but
unit sales increased 31% during the same period. The store count for Journeys
was 533 stores at the end of Fiscal 2002, including 14 Journeys Kidz stores,
compared to 425 Journeys stores at the end of Fiscal 2001.
Journeys operating income for Fiscal 2002 increased 24.0% to $51.9 million
compared to $41.9 million for Fiscal 2001. The increase was due to increased
sales from both store openings and a comparable store sales increase and
increased gross margin as a percentage of net sales.
18
Jarman
Fiscal Year Ended
%
2002 2001 Change
(dollars in thousands)
Net sales............................................... $ 120,242 $ 109,791 9.5%
Operating income........................................ $ 5,319 $ 8,395 (36.6)%
Operating margin........................................ 4.4% 7.6%
Primarily due to a 16% increase in average stores operated, partially offset by
a 4% decrease in comparable store sales, net sales from the Jarman division
(including Underground Station stores) increased 9.5% for Fiscal 2002 compared
to Fiscal 2001. The increase in sales was driven primarily by Underground
Station stores. The Jarman division had sequential quarter over quarter
comparable store sales improvements after the second quarter, with an 11%
decrease in the second quarter to a 2% decrease in the fourth quarter and ending
the year with a same store sales gain of 14% in January. The average price per
pair of shoes decreased 5% in Fiscal 2002, primarily reflecting increased
markdowns and changes in product mix, but unit sales increased 12% during the
same period. Jarman operated 227 stores at the end of Fiscal 2002, including 97
Underground Station stores. Going forward, the Company does not intend to open
any new Jarman stores. All new store openings in this segment are planned to be
Underground Station stores. During Fiscal 2002, eight Jarman stores were
converted to Underground Station stores. The Company had operated 207 stores at
the end of Fiscal 2001, including 57 Underground Station stores.
Jarman operating income for Fiscal 2002 was $5.3 million compared to $8.4
million for Fiscal 2001 and decreased as a percent of sales to 4.4% from 7.6% in
Fiscal 2001. The decrease was due to decreased gross margin as a percentage of
net sales, due primarily to increased markdowns and changes in product mix and
increased expenses as a percentage of net sales.
Johnston & Murphy
Fiscal Year Ended
%
2002 2001 Change
(dollars in thousands)
Net sales............................................... $ 167,989 $ 188,060 (10.7)%
Operating income........................................ $ 14,125 $ 24,636 (42.7)%
Operating margin........................................ 8.4% 13.1%
Johnston & Murphy net sales decreased 10.7% to $168.0 million for Fiscal 2002
from $188.1 million for Fiscal 2001, reflecting a 9% decrease in comparable
store sales for Johnston & Murphy retail operations and a 20% decrease in
Johnston & Murphy wholesale sales. Retail operations accounted for 68% of
Johnston & Murphy segment sales in Fiscal 2002, up from 64% in Fiscal 2001. The
store count for Johnston & Murphy retail operations at the end of Fiscal 2002
included 148 Johnston & Murphy stores and factory stores compared to 147
Johnston & Murphy stores and factory stores at the end of Fiscal 2001. The
average price per pair of shoes for Johnston & Murphy retail decreased 4% in
Fiscal 2002, reflecting primarily changes in product mix and increased
markdowns, and unit sales decreased 4% during the same period. Unit sales for
the Johnston & Murphy wholesale business
19
decreased 16% in Fiscal 2002, and the average price per pair of shoes decreased
8% for the same period, reflecting increased promotional activities and mix
changes.
Johnston & Murphy operating income for Fiscal 2002 decreased 42.7% from $24.6
million for Fiscal 2001 to $14.1 million, primarily due to decreased sales,
decreased gross margin as a percentage of net sales, due primarily to increased
promotional activities and markdowns and changes in product mix and to increased
expenses as a percentage of net sales.
Licensed Brands
Fiscal Year Ended
%
2002 2001 Change
(dollars in thousands)
Net sales............................................... $ 76,854 $ 81,557 (5.8)%
Operating income........................................ $ 8,001 $ 4,695 70.4%
Operating margin........................................ 10.4% 5.8%
Licensed Brands' net sales decreased 5.8% to $76.9 million for Fiscal 2002 from
$81.6 million for Fiscal 2001. The sales decrease reflected a 13% increase in
net sales of Dockers Footwear, offset by $12.7 million in declining sales of
Nautica Footwear. Unit sales for the Licensed Brands wholesale businesses were
flat for Fiscal 2002, while the average price per pair of shoes decreased 5% for
the same period, reflecting increased promotional activities.
Licensed Brands' operating income for Fiscal 2002 increased 70.4% from $4.7
million for Fiscal 2001 to $8.0 million, primarily due to decreased expenses as
a percentage of net sales.
For additional information regarding the Company's decision to exit the Nautica
Footwear business, see "Significant Developments - Nautica Footwear License
Cancellation." Net sales for Nautica footwear were $6.1 million and $18.8
million for Fiscal 2002 and Fiscal 2001, respectively, while operating losses
were $0.6 million and $2.5 million for Fiscal 2002 and Fiscal 2001,
respectively.
Corporate, Interest Expenses and Other Charges
Corporate and other expenses for Fiscal 2002 were $10.5 million compared to
$14.9 million for Fiscal 2001 (exclusive of a restructuring charge of $5.1
million and other charges of $0.4 million, primarily litigation and severance
charges, in Fiscal 2002 and a restructuring charge of $4.4 million and other
charges of $0.1 million, primarily litigation and severance charges, in Fiscal
2001), a decrease of 29.6%. The decrease in corporate expenses in Fiscal 2002 is
attributable primarily to decreased bonus accruals partially offset by costs
associated with the construction of a new distribution center.
Interest expense was flat for Fiscal 2002 compared to Fiscal 2001.
Interest income decreased 20% from $1.4 million in Fiscal 2001 to $1.1 million
in Fiscal 2002 due to decreases in average short-term investments. Borrowings
under the Company's revolving credit facility averaged $20,000 for Fiscal 2002
compared to zero borrowings for Fiscal 2001.
20
RESULTS OF OPERATIONS - FISCAL 2001 COMPARED TO FISCAL 2000
The Company's net sales for Fiscal 2001 (53 weeks) increased 23.0% to $680.2
million from $553.0 million in Fiscal 2000 (52 weeks). Total retail sales
attributable to the extra week were $9.4 million. Excluding net sales
attributable to the divested Other Retail business from Fiscal 2000, the
Company's net sales increased 25.0% to $680.2 million in Fiscal 2001 from
$544.2 million in Fiscal 2000. Gross margin increased 25.9% to $322.5 million
in Fiscal 2001 from $256.3 million in Fiscal 2000 and increased as a percentage
of net sales from 46.3% to 47.4%. Selling and administrative expenses in Fiscal
2001 increased 23.7% from Fiscal 2000 and increased as a percentage of net
sales from 37.8% to 38.1%. Selling and administrative expenses were reduced
$1.4 million in Fiscal 2001, reflecting a reduction in pension expense to $0.3
million from $1.7 million in Fiscal 2000. Explanations of the changes in
results of operations are provided by business segment in discussions following
these introductory paragraphs.
Earnings before income taxes and discontinued operations ("pretax earnings")
for Fiscal 2001 were $53.0 million compared to $41.0 million for Fiscal 2000.
Pretax earnings for Fiscal 2001 included a restructuring charge of $4.4 million
related to the termination of the Nautica Footwear license.
Net earnings for Fiscal 2001 were $29.6 million ($1.23 diluted earnings per
share) compared to $25.9 million ($1.05 diluted earnings per share) for Fiscal
2000. Net earnings for Fiscal 2001 included a $3.0 million ($0.11 diluted
earnings per share) charge to earnings (net of tax) related to the divestiture
of the Company's Volunteer Leather business. Net earnings for Fiscal 2000
include a gain from discontinued operations, net of tax, of $0.6 million ($0.02
diluted earnings per share). The Company recorded an effective federal income
tax rate of 38.0% for Fiscal 2001 compared to 38.2% for Fiscal 2000.
Journeys
Fiscal Year Ended
------------------------- %
2001 2000 Change
-------- -------- ------
(dollars in thousands)
Net sales .................... $300,758 $215,318 39.7%
Operating income ............. $ 41,869 $ 29,719 40.9%
Operating margin ............. 13.9% 13.8%
Reflecting both a 30% 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 year divided by thirteen) and a 12%
increase in comparable store sales, net sales from Journeys increased 39.7% for
Fiscal 2001 compared to Fiscal 2000. The average price per pair of shoes
increased 1% in Fiscal 2001, primarily reflecting changes in product mix, and
unit sales increased 38% during the same period. The store count for Journeys
was 425 stores at the end of Fiscal 2001 compared to 323 stores at the end of
Fiscal 2000.
Journeys operating income for Fiscal 2001 increased 40.9% to $41.9 million
compared to $29.7 million for Fiscal 2000. The increase was due to increased
sales from both store openings and a comparable store sales increase and
increased gross margin as a percentage of sales.
21
Jarman
Fiscal Year Ended
------------------------ %
2001 2000 Change
-------- ------- ------
(dollars in thousands)
Net sales .................... $109,791 $86,897 26.3%
Operating income ............. $ 8,395 $ 4,336 93.6%
Operating margin ............. 7.6% 5.0%
Primarily due to a 17% increase in average stores operated and a 6% increase in
comparable store sales, net sales from the Jarman division (including
Underground Station stores) increased 26.3% for Fiscal 2001 compared to Fiscal
2000. The increase in sales and comparable store sales was driven primarily by
Underground Station stores. The average price per pair of shoes increased 2% in
Fiscal 2001, primarily reflecting changes in product mix, and unit sales
increased 22% during the same period. Jarman operated 207 stores at the end of
Fiscal 2001, including 57 Underground Station stores. Going forward, the
Company does not intend to open any new Jarman stores. All new store openings
in this segment are planned to be Underground Station stores. The Company had
operated 161 stores at the end of Fiscal 2000, including 21 Underground Station
stores.
Jarman operating income for Fiscal 2001 was $8.4 million compared to $4.3
million for Fiscal 2000 and increased as a percent of sales to 7.6% from 5.0%
in Fiscal 2000. The increase was due to increased sales and increased gross
margin in dollars and as a percentage of sales, due primarily to changes in
product mix, and to decreased expenses as a percentage of sales.
Johnston & Murphy
Fiscal Year Ended
------------------------- %
2001 2000 Change
-------- -------- ------
(dollars in thousands)
Net sales .................... $188,060 $167,459 12.3%
Operating income ............. $ 24,636 $ 22,187 11.0%
Operating margin ............. 13.1% 13.2%
Johnston & Murphy net sales increased 12.3% to $188.1 million for Fiscal 2001
from $167.5 million for Fiscal 2000. Johnston & Murphy retail sales increased
14%. The increase reflects primarily a 3% increase in comparable store sales
and a 6% increase in average Johnston & Murphy retail stores operated. Retail
operations accounted for 64% of Johnston & Murphy segment sales in Fiscal 2001,
up from 63% in Fiscal 2000. The store count for Johnston & Murphy retail
operations at the end of Fiscal 2001 included 147 Johnston & Murphy stores and
factory stores compared to 143 Johnston & Murphy stores and factory stores at
the end of Fiscal 2000. The average price per pair of shoes for Johnston &
Murphy retail decreased 1% in Fiscal 2001, primarily due to increased
markdowns, while unit sales increased 10% during the same period. There was a
10% increase in Johnston & Murphy wholesale sales. Unit sales for the Johnston
& Murphy wholesale business increased 15% in Fiscal 2001, while the average
price per pair of shoes decreased 4% for the same period, reflecting increased
promotional activities and mix changes.
22
Johnston & Murphy operating income for Fiscal 2001 increased 11.0% from $22.2
million for Fiscal 2000 to $24.6 million, primarily due to increased sales.
Licensed Brands
Fiscal Year Ended
----------------------- %
2001 2000 Change
------- ------- ------
(dollars in thousands)
Net sales .................... $81,557 $74,518 9.4%
Operating income ............. $ 4,695 $ 2,488 88.7%
Operating margin ............. 5.8% 3.3%
Licensed Brands' net sales increased 9.4% to $81.6 million for Fiscal 2001 from
$74.5 million for Fiscal 2000. The sales increase reflected a 36% increase in
net sales of Dockers Footwear, offset by $9.6 million in declining sales of
Nautica Footwear. Unit sales for the Licensed Brands wholesale businesses
increased 9% for Fiscal 2001, while the average price per pair of shoes
decreased 2% for the same period, reflecting increased promotional activities
in the Nautica business and changes in product mix.
Licensed Brands' operating income for Fiscal 2001 increased 88.7% from $2.5
million for Fiscal 2000 to $4.7 million, primarily due to increased sales and
decreased expenses as a percentage of sales.
For additional information regarding the Company's decision to exit the Nautica
Footwear business, see "Significant Developments - Nautica Footwear License
Cancellation." Net sales for Nautica footwear were $18.8 million and $28.4
million for Fiscal 2001 and Fiscal 2000, respectively, while operating losses
were $2.5 million and $2.2 million for Fiscal 2001 and Fiscal 2000,
respectively.
Other Retail
Fiscal Year Ended
------------------------- %
2001 2000 Change
-------- -------- ------
(dollars in thousands)
Net sales .................... $-0- $ 8,840 (100.0)%
Operating loss ............... $-0- $ (500) NA
Operating margin ............. NA (5.7)%
The Jarman Leased departments business was closed in the first quarter of
Fiscal 2000 and the remaining five Other Retail stores, which were General Shoe
Warehouse stores, were transferred to the Jarman and Johnston & Murphy
operating segments during the first quarter of Fiscal 2001. The Company will no
longer report results from the Other Retail segment.
Corporate, Interest Expenses and Other Charges
Corporate and other expenses for Fiscal 2001 were $14.9 million compared to
$10.9 million for Fiscal 2000 (exclusive of a restructuring charge of $4.4
million and other charges of $0.1 million, primarily litigation and severance
charges, in Fiscal 2001 and other charges of $0.4 million, primarily litigation
and severance charges, in Fiscal 2000), an increase of 37.3%. The increase in
corporate expenses in
23
Fiscal 2001 is attributable primarily to increased bonus accruals based upon the
improved financial performance of the Company.
Interest expense increased 5.7% from $8.2 million in Fiscal 2000 to $8.6
million in Fiscal 2001, primarily due to increased bank activity fees related
to the increase in the number of individual bank accounts because of new store
openings.
Interest income decreased 34% from $2.2 million in Fiscal 2000 to $1.4 million
in Fiscal 2001 due to decreases in average short-term investments. There were
no borrowings under the Company's revolving credit facility during either
Fiscal 2001 or Fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain financial data at the dates indicated.
Feb. 2, Feb. 3, Jan. 29,
2002 2001 2000
------- ------- --------
(dollars in millions)
Cash and cash equivalents .................................. $ 46.4 $ 60.4 $ 57.9
Working capital ............................................ $155.5 $144.9 $138.0
Long-term debt (includes current maturities) ............... $103.2 $103.5 $103.5
Current ratio .............................................. 3.1x 2.5x 2.8x
Working Capital
The Company's business is somewhat seasonal, with the Company's investment in
inventories and accounts receivable normally reaching peaks in the spring and
fall of each year. Cash flow from operations is generated principally in the
fourth quarter of each fiscal year.
Cash provided by operating activities was $27.9 million in Fiscal 2002 compared
to $36.1 million in Fiscal 2001. The $8.1 million decrease in cash flow from
operating activities reflects primarily an $8.9 million increase in inventories
for Fiscal 2002 compared to Fiscal 2001 primarily due to new store openings,
and to decreased accrued liabilities of $16.7 million primarily due to payments
of incentive compensation accruals and an $8.4 million increase in taxes paid
offset by increased earnings of $7.5 million in Fiscal 2002 and a $3.5 million
decrease in accounts receivable due to decreased wholesale sales. The $8.9
million increase in inventories at February 2, 2002 from February 3, 2001
levels reflects increases in retail inventory to support the net increase of
129 stores, excluding Nautica Leased departments, in Fiscal 2002.
Cash provided by operating activities was $36.1 million in Fiscal 2001 compared
to $47.2 million in Fiscal 2000. The $11.1 million decrease in cash flow from
operating activities reflected primarily a $3.1 million increase in accounts
receivable due to increased wholesale sales and extended terms, increased
inventories and a $6.8 million increase in taxes paid. The $25.8 million
increase in inventories at February 3, 2001 from January 29, 2000 levels
reflects increases in retail inventory to support the net increase of 147
stores, excluding Nautica Leased departments, in Fiscal 2001 as well as
increases to support the Company's continued growth.
24
Cash provided (or used) due to changes in accounts payable and accrued
liabilities are as follows:
Fiscal Year Ended
---------------------------------------
2002 2001 2000
-------- ------- -------
(in thousands)
Accounts payable ....................... $(11,479) $ 4,635 $ (348)
Accrued liabilities .................... (16,733) 10,468 4,385
-------- ------- -------
$(28,212) $15,103 $ 4,037
======== ======= =======
The fluctuations in accounts payable for Fiscal 2002 from Fiscal 2001 and for
Fiscal 2001 from Fiscal 2000 are due to changes in payment terms negotiated
with individual vendors, inventory levels and buying patterns. The change in
accrued liabilities in Fiscal 2002 was due primarily to payment of incentive
compensation accruals, income tax payments and restructuring payments and the
change in Fiscal 2001 was due primarily to increased bonus accruals and income
tax accruals.
The average daily revolving credit borrowings for Fiscal 2002 were $20,000 and
there were no revolving credit borrowings during Fiscal 2001 or 2000, as cash
generated from operations and cash on hand funded seasonal working capital
requirements and capital expenditures. On July 16, 2001, the Company entered
into a revolving credit agreement with five banks, providing for loans or
letters of credit of up to $75 million. The agreement, as amended September 6,
2001, expires July 16, 2004.
The following table sets forth aggregate commitments as of February 2, 2002.
(in thousands) Payments Due by Period
-----------------------------------------------------------------------
Significant Contractual Less than 1 1 - 3 4 - 5 After 5
Cash Obligations Total year years years years
-------- ----------- -------- -------- --------
Long-Term Debt $103,245 $-0- $-0- $103,245 $-0-
Capital Lease Obligations 27 1 2 2 22
Operating Leases 456,888 59,970 117,876 110,260 168,782
-----------------------------------------------------------------------
Total Significant Contractual
Cash Obligations $560,160 $59,971 $117,878 $213,507 $168,804
=======================================================================
(in thousands) Amount of Commitment Expiration Per Period
----------------------------------------------------------------------------
Total Amounts Less than 1 1 - 3 4 - 5 Over 5
Commercial Commitments Committed year years years years
------------- ----------- -------- -------- --------
Letters of Credit $ 7,491 $ 7,491 $-0- $-0- $-0-
-----------------------------------------------------------------------
Total Commercial Commitments $ 7,491 $ 7,491 $-0- $-0- $-0-
=======================================================================
Capital Expenditures
Capital expenditures were $43.7 million, $34.7 million and $22.3 million for
Fiscal 2002, 2001 and 2000, respectively. The $9.0 million increase in Fiscal
2002 capital expenditures as compared to Fiscal 2001 resulted primarily from
capital expenditures for a new distribution center. The $12.4
25
million increase in Fiscal 2001 capital expenditures as compared to Fiscal 2000
resulted primarily from an increase in retail store capital expenditures due to
the increase in new stores.
Due to the Company's retail growth, the Company began construction of a new
distribution center in Fiscal 2002. The Company purchased 215 acres in Wilson
County, Tennessee to develop a new 322,000 square foot distribution facility.
The Company expects a total cost of $28 million for the distribution center
with a completion date in Spring 2002. The Company had capital expenditures of
$14.3 million in Fiscal 2002 for the distribution facility.
Total capital expenditures in Fiscal 2003 are expected to be approximately
$44.2 million. These include expected retail expenditures of $24.4 million to
open approximately 90 Journeys stores, 25 Journeys Kidz stores, 9 Johnston &
Murphy stores and factory stores, and 16 Underground Station stores, and to
complete 19 major store renovations. Capital expenditures for wholesale and
manufacturing operations and other purposes, including a new distribution
center, are expected to be approximately $19.8 million, including approximately
$2.0 million for new computer systems to improve customer service and support
the Company's growth and approximately $13.9 million for a new distribution
center.
Future Capital Needs
The Company expects that cash on hand and cash provided by operations will be
sufficient to fund all of its capital expenditures through Fiscal 2003,
including costs associated with construction of a new distribution center. The
Company may borrow from time to time, particularly in the fall, to support
seasonal working capital requirements should cash provided by operations not be
sufficient to fund these items listed above. The approximately $7.8 million of
costs associated with the prior restructurings and discontinued operations that
are expected to be paid during the next twelve months are also expected to be
funded from cash on hand.
In October 2001, the Company authorized the additional repurchase, from time to
time, of up to 0.4 million shares of the Company's common stock of which there
are 501,100 shares remaining to be repurchased under this and prior
authorizations. These purchases will be funded from available cash. The Company
has repurchased a total of 6.7 million shares at a cost of $65.4 million from
all authorizations for Fiscal 1999 - Fiscal 2002. The Company repurchased
270,500 shares during Fiscal 2002 for a total cost of $4.8 million, which was
more than offset by the exercise of stock options and shares issued in the
employee stock purchase plan.
There were $7.5 million of letters of credit outstanding under the revolving
credit agreement at February 2, 2002, leaving availability under the revolving
credit agreement of $67.5 million. The revolving credit agreement requires the
Company to meet certain financial ratios and covenants, including minimum
tangible net worth, fixed charge coverage and debt to EBITDAR ratios. The
Company was in compliance with these financial covenants at February 2, 2002.
Violation of the fixed charge coverage ratio, the most restrictive covenant, at
the current level of fixed charges would require earnings to decline by
approximately $26 million for a rolling twelve month period.
The Company's revolving credit agreement restricts the payment of dividends and
other payments with respect to capital stock, however the Company may make
payments with respect to preferred stock. At February 2, 2002, $20.1 million
was available for such payments related to common stock. The aggregate of
annual dividend requirements on the Company's Subordinated Serial Preferred
26
Stock, $2.30 Series 1, $4.75 Series 3 and $4.75 Series 4, and on its $1.50
Subordinated Cumulative Preferred Stock is $294,000.
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 16 to
the Company's Consolidated Financial Statements. The Company has made
provisions for certain of these contingencies, including approximately $2.0
million reflected in Fiscal 2002, $2.6 million reflected in Fiscal 2001 and
$472,000 reflected in Fiscal 2000. The Company monitors these matters on an
ongoing basis and at least quarterly management reviews the Company's reserves
and accruals in relation to each of them, adjusting provisions as management
deems necessary in view of changes in available information. Changes in
estimates of liability are reported in the periods when they occur.
Consequently, management believes that its reserve in relation to each
proceeding is a reasonable estimate of the probable loss connected to the
proceeding, or in cases in which no reasonable estimate is possible, the
minimum amount in the range of estimated losses, based upon its analysis of the
facts 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.
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
$103.2 million 5 1/2% convertible subordinated notes due April 2005 bears
interest at a fixed rate. Accordingly, there would be no near term impact on
the Company's interest expense due to fluctuations in market interest rates.
The fair value of the Company's long-term debt was $128.3 million at February
2, 2002 based on a dealer quote.
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 February 2, 2002. As a result, the Company considers the
interest rate market risk implicit in these investments at February 2, 2002, 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 February 2, 2002, the Company had $12.1 million of 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 loss on contracts outstanding at February 2, 2002 was $0.3
million based on current spot rates. As of
27
February 2, 2002, a 10% adverse change in foreign currency exchange rates from
market rates would decrease the fair value of the contracts by approximately
$1.4 million.
Accounts Receivable - The Company's accounts receivable balance at February 2,
2002 is concentrated in its two remaining wholesale businesses, which sell
primarily to department stores and independent retailers across the United
States. One customer accounts for 11% of the Company's trade accounts
receivable balance as of February 2, 2002. 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.
Summary - Based on the Company's overall market interest rate and foreign
currency rate exposure at February 2, 2002, the Company believes that the
effect, if any, of reasonably possible near-term changes in interest rates or
fluctuations in foreign currency exchange rates on the Company's consolidated
financial position, result of operations or cash flows for Fiscal 2002 would
not be material.
NEW ACCOUNTING PRINCIPLES
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations. This statement eliminates the pooling-of-interests method of
accounting for business combinations except for qualifying business
combinations initiated prior to July 1, 2001. The Company does not expect this
statement to have a material impact on its results of operations or financial
condition.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. This statement establishes new rules on the accounting for goodwill and
other intangible assets. The Company does not expect this statement to have a
material impact on its results of operations or financial condition.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement establishes accounting standards for recognition
and measurement of a liability for an asset retirement obligation and the
associated asset retirement cost. The Company does not expect this statement to
have a material impact on its results of operations or financial condition.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. The Company
does not expect this statement to have a material impact on its results of
operations or financial condition.
The Company implemented Statement of Financial Accounting Standards SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, in the first
quarter of Fiscal 2002. This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. SFAS 133
requires 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
28
and the resulting designation. For Fiscal 2002, the Company recorded an
unrealized loss on foreign currency forward contracts of $0.2 million in
accumulated other comprehensive income.
In July 2000, the Emerging Issues Task Force issued EITF: Issue 00-10,
"Accounting for Shipping and Handling Fees and Costs." The new pronouncement
requires shipping and handling billings to customers be recorded as revenue.
Amounts for shipping and handling costs can no longer be netted with related
shipping and handling billings. The Company has restated its financial
statements for Fiscal 2001 and 2000 to reflect the change in accounting for
shipping and handling fees and costs.
INFLATION
The Company does not believe inflation has had a material impact on sales or
operating results during periods covered in this discussion.
ITEM 7A, QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company incorporates by reference the information regarding market risk to
appear under the heading "Market Risk" in Management's Discussion and Analysis
of Financial Condition and Results of Operations.
29
ITEM 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Reports of Independent Accountants 31
Consolidated Balance Sheet, February 2, 2002 and February 3, 2001 33
Consolidated Earnings, each of the three fiscal years ended 2002, 2001 and 2000 34
Consolidated Cash Flows, each of the three fiscal years ended
2002, 2001 and 2000 35
Consolidated Shareholders' Equity, each of the three fiscal years ended
2002, 2001 and 2000 36
Notes to Consolidated Financial Statements 37
30
Report of Independent Accountants
To the Board of Directors and Shareholders of Genesco Inc.
We have audited the consolidated balance sheet of Genesco Inc. and Subsidiaries
as of February 2, 2002, and the related consolidated statements of earnings,
shareholders' equity, and cash flows for the year then ended. Our audit also
included the financial statement schedule listed in the Index at Item 14(a) as
of February 2, 2002 and for the year then ended. These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the fiscal year 2002 consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Genesco Inc. and Subsidiaries at February 2, 2002, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein as
of February 2, 2002 and for the year then ended.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 26, 2002
31
To the Board of Directors and
Shareholders of Genesco Inc.
Report of Independent Accountants
In our opinion, the consolidated balance sheet and the related consolidated
statements of earnings, shareholders' equity, and of cash flows, present
fairly, in all material respects, the financial position of Genesco Inc. and
its subsidiaries (the "Company") at February 3, 2001, and the results of their
operations and their cash flows for each of the two years in the period ended
February 3, 2001, in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 14, presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
Nashville, Tennessee
February 27, 2001
32
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Balance Sheet
In Thousands
AS OF FISCAL YEAR END
- --------------------------------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 46,384 $ 60,382
Accounts receivable 19,857 22,700
Inventories 142,856 134,236
Deferred income taxes 7,942 15,263
Other current assets 12,717 10,806
Accounts receivable of discontinued operations -0- 359
- --------------------------------------------------------------------------------------------------------
Total current assets 229,756 243,746
- --------------------------------------------------------------------------------------------------------
Plant, equipment and capital leases 112,550 87,747
Deferred income taxes 15,730 3,396
Other noncurrent assets 5,019 16,644
Plant and equipment of discontinued operations 499 630
- --------------------------------------------------------------------------------------------------------
TOTAL ASSETS $363,554 $352,163
========================================================================================================
- --------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 67,497 $ 94,252
Provision for discontinued operations 6,729 4,568
- --------------------------------------------------------------------------------------------------------
Total current liabilities 74,226 98,820
- --------------------------------------------------------------------------------------------------------
Long-term debt 103,245 103,500
Other long-term liabilities 24,391 7,354
Provision for discontinued operations 505 4,264
- --------------------------------------------------------------------------------------------------------
Total liabilities 202,367 213,938
- --------------------------------------------------------------------------------------------------------
Contingent liabilities (see Note 16)
SHAREHOLDERS' EQUITY
Non-redeemable preferred stock 7,634 7,721
Common shareholders' equity:
Common stock, $1 par value:
Authorized: 80,000,000 shares
Issued: 2002 - 22,330,914; 2001 - 22,149,915 22,331 22,150
Additional paid-in capital 98,622 95,194
Retained earnings 67,793 31,017
Accumulated other comprehensive loss (17,336) -0-
Treasury shares, at cost (17,857) (17,857)
- --------------------------------------------------------------------------------------------------------
Total shareholders' equity 161,187 138,225
- --------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $363,554 $352,163
========================================================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
33
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Earnings
In Thousands, except per share amounts
- -----------------------------------------------------------------------------------------------------------------------------
FISCAL YEAR
---------------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Net sales $ 746,821 $ 680,166 $ 553,032
Cost of sales 397,212 357,653 296,772
Selling and administrative expenses 281,376 258,893 209,291
Restructuring and other charges, net 4,805 3,433 -0-
- -----------------------------------------------------------------------------------------------------------------------------
Earnings from operations before interest 63,428 60,187 46,969
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense 8,698 8,618 8,152
Interest income (1,134) (1,418) (2,165)
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense, net 7,564 7,200 5,987
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and discontinued operations 55,864 52,987 40,982
Income taxes 17,541 20,156 15,647
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before discontinued operations 38,323 32,831 25,335
Discontinued operations:
Operating income (loss) -0- (226) 587
Provision for future losses (1,253) (3,007) -0-
- -----------------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 37,070 $ 29,598 $ 25,922
=============================================================================================================================
Basic earnings per common share:
Before discontinued operations $ 1.74 $ 1.51 $ 1.12
Discontinued operations $ (.06) $ (.15) $ .03
Net earnings $ 1.68 $ 1.36 $ 1.14
Diluted earnings per common share:
Before discontinued operations $ 1.54 $ 1.35 $ 1.03
Discontinued operations $ (.05) $ (.12) $ .02
Net earnings $ 1.49 $ 1.23 $ 1.05
=============================================================================================================================
The accompanying Notes are an integral part of these Consolidated Financial
Statements.
34
GENESCO INC.
AND CONSOLIDATED SUBSIDIARIES
Consolidated Cash Flows
In Thousands
- -----------------------------------------------------------------------------------------------------------------------------------
FISCAL YEAR
---------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net earnings $ 37,070 $ 29,598 $ 25,922
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 16,239 13,200 10,514
Deferred income taxes 6,071 351 10,687
Provision for losses on accounts receivable (263) 457 434
Impairment of long-lived assets 1,010 -0- -0-
Restructuring charge 4,117 4,433 -0-
Provision for discontinued operations 2,008 4,854 -0-
Other 1,039 467 1,690
Effect on cash of changes in working
capital and other assets and liabilities:
Accounts receivable 3,515 (3,093) 671
Inventories (8,941) (25,772) (282)
Other current assets (1,911) (1,925) (2,162)
Accounts payable and accrued liabilities (28,212) 15,103 4,037
Other assets and liabilities (3,836) (1,620) (4,358)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 27,906 36,053 47,153
- --------------------------