10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
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x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended January 30, 2016
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the transition period from to
Commission File No. 1-3083
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Genesco Inc.
(Exact name of registrant as specified in its charter)
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Tennessee | | 62-0211340 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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Genesco Park, 1415 Murfreesboro Road Nashville, Tennessee | | 37217-2895 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (615) 367-7000
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of each class | | Name of Exchange on which Registered |
Common Stock, $1.00 par value Preferred Share Purchase Rights | | New York New York |
Securities Registered Pursuant to Section 12(g) of the Act:
Employees’ Subordinated Convertible Preferred Stock
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232-405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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. ¨
Indicate by check mark whether the registrant is a large accelerated filer; an accelerated filer; a non-accelerated filer; or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | x | | Accelerated filer | ¨ |
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Non-accelerated filer | ¨ (Do not check if smaller reporting company) | | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes ¨ No x
The aggregate market value of common stock held by nonaffiliates of the registrant as of August 1, 2015, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $1,539,000,000. The market value calculation was determined using a per share price of $64.69, the price at which the common stock was last sold on the New York Stock Exchange on such date. For purposes of this calculation, shares held by nonaffiliates excludes only those shares beneficially owned by officers, directors, and shareholders owning 10% or more of the outstanding common stock (and, in each case, their immediate family members and affiliates).
As of March 11, 2016, 21,312,624 shares of the registrant’s common stock were outstanding.
Documents Incorporated by Reference
Portions of the proxy statement for the June 23, 2016 annual meeting of shareholders are incorporated into Part III by reference.
TABLE OF CONTENTS
PART I
ITEM 1, BUSINESS
General
Genesco Inc. ("Genesco" or the “Company”) is a leading retailer and wholesaler of branded footwear, apparel and accessories with net sales for Fiscal 2016 of $3.02 billion. During Fiscal 2016, the Company operated five reportable business segments (not including corporate): (i) Journeys Group, comprised of the Journeys, Journeys Kidz, Shi by Journeys, Little Burgundy, acquired in the fourth quarter of Fiscal 2016, and Underground by Journeys retail footwear chains, e-commerce operations and catalog; (ii) Schuh Group, comprised of the Schuh retail footwear chain and e-commerce operations; (iii) Lids Sports Group, comprised of (a) headwear and accessory stores under the Lids® name and other names in the U.S., Puerto Rico and Canada, (b) the Lids Locker Room and Lids Clubhouse businesses, consisting of sports-oriented fan shops featuring a broad array of licensed merchandise such as apparel, hats and accessories, sports decor and novelty products, operating under various trade names, (c) licensed team merchandise departments in Macy's department stores operated under the name Locker Room by Lids and on macys.com under a license agreement with Macy's, (d) e-commerce operations and (e) an athletic team dealer business operating as Lids Team Sports, which was sold in the fourth quarter of Fiscal 2016; (iv) Johnston & Murphy Group, comprised of Johnston & Murphy retail operations, e-commerce operations and catalog and wholesale distribution of products under the Johnston & Murphy and Trask brands; and (v) Licensed Brands, comprised of Dockers® footwear, sourced and marketed under a license from Levi Strauss & Company; SureGrip®Footwear, occupational footwear primarily sold directly to consumers; and other brands.
At January 30, 2016, the Company operated 2,852 retail footwear, headwear and sports apparel and accessory stores and leased departments located primarily throughout the United States and in Puerto Rico, but also including 151 headwear and sports apparel and accessory stores and 82 footwear stores in Canada and 125 footwear stores in the United Kingdom, the Republic of Ireland and Germany. It currently plans to open a total of approximately 130 new retail stores and to close approximately 56 retail stores in Fiscal 2017. At January 30, 2016, Journeys Group operated 1,222 stores, Schuh Group operated 125 stores, Lids Sports Group operated 1,332 stores and Johnston & Murphy Group operated 173 retail shops and factory stores.
The following table sets forth certain additional information concerning the Company’s retail footwear, headwear and sports apparel and accessory stores and leased departments during the five most recent fiscal years:
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| Fiscal 2012 | | Fiscal 2013 | | Fiscal 2014 | | Fiscal 2015 | | Fiscal 2016 |
Retail Stores and Leased Departments | | | | | | | | | |
Beginning of year | 2,309 |
| | 2,387 |
| | 2,459 |
| | 2,568 |
| | 2,824 |
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Opened during year | 70 |
| | 104 |
| | 183 |
| | 273 |
| | 81 |
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Acquired during year | 85 |
| | 33 |
| | 15 |
| | 56 |
| | 37 |
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Closed during year | (77 | ) | | (65 | ) | | (89 | ) | | (73 | ) | | (90 | ) |
End of year | 2,387 |
| | 2,459 |
| | 2,568 |
| | 2,824 |
| | 2,852 |
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The Company also designs, sources, markets and distributes footwear under its own Johnston & Murphy brand, the Trask brand, the licensed Dockers® brand and other brands that the Company licenses for men's footwear to over 1,275 retail accounts in the United States, including a number of leading department, discount, and specialty stores.
Shorthand references to fiscal years (e.g., “Fiscal 2016”) refer to the fiscal year ended on the Saturday nearest January 31st in the named year (e.g., January 30, 2016). The terms "Company," "Genesco," "we," "our" or "us" as used herein and unless otherwise stated or indicated by context refer to Genesco Inc. and its subsidiaries. All information 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 vary materially and adversely from the expectations reflected in these statements. For a discussion of some of the factors that may lead to different results, see Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Available Information
The Company files reports with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and other reports from time to time. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F. Street, NE, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company is an electronic filer and the SEC maintains an internet site at http://www.sec.gov that contains the reports, proxy and information statements, and other information filed electronically. The Company’s website address is http://www.genesco.com. The Company’s website address is provided as an inactive textual reference only. The Company makes available free of charge through the website annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Copies of the charters of each of the Company’s Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, as well as the Company’s Corporate Governance Guidelines and Code of Ethics along with position descriptions for the Company's board of directors (the "Board of Directors" or the "Board") and Board committees are also available free of charge through the website. The information provided on the Company’s website is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically incorporated elsewhere in this report.
Segments
Journeys Group
The Journeys Group segment, including Journeys, Journeys Kidz, Shi by Journeys, Little Burgundy and Underground by Journeys retail stores, catalog and e-commerce operations, accounted for approximately 41% of the Company’s net sales in Fiscal 2016. For Fiscal 2016, same store sales increased 5%, comparable direct sales increased 18% and comparable sales, including both store and direct sales, increased 5% from the prior fiscal year. Earnings from operations attributable to Journeys Group was $126.2 million in Fiscal 2016, with an operating margin of 10.1%. The Company believes that the Journeys Group’s distinctive store formats, its mix of well-known brands and new product introductions, and its experienced management team provide significant competitive advantages for the Journeys Group.
At January 30, 2016, Journeys Group operated 1,222 stores, including 200 Journeys Kidz stores, 46 Shi by Journeys stores, 36 Little Burgundy stores and 98 Underground by Journeys stores averaging approximately 1,925 square feet, throughout the United States and in Puerto Rico and Canada, selling footwear and accessories for young men, women and children.
Journeys retail footwear stores target customers in the 13 to 22 year age group through the use of youth-oriented decor and multi-channel media. Journeys stores carry predominately branded merchandise across a wide range of prices. The Journeys Kidz retail footwear stores sell footwear and accessories primarily for younger children ages five to 12. Shi by Journeys retail footwear stores sell footwear and accessories to a target customer group consisting of fashion-conscious women in their early 20’s to mid 30’s. Little Burgundy retail footwear stores sell footwear and accessories to fashion-oriented men and women in the 18 to 34 age group ranging from students to young professionals. Underground by Journeys retail footwear stores sell footwear and accessories primarily for men and women in the 20 to 35 age group. In Fiscal 2016, the Journeys Group added 40 net new stores, which includes 36 Little Burgundy stores acquired in Fiscal 2016, and plans to open approximately 63 net new stores in Fiscal 2017.
Lids Sports Group
The Lids Sports Group segment, as described above, accounted for approximately 32% of the Company’s net sales in Fiscal 2016. For Fiscal 2016, same store sales increased 3%, comparable direct sales increased 46% and comparable sales, including both store and direct sales, increased 6% from the prior fiscal year. Earnings from operations attributable to Lids Sports Group was $17.0 million in Fiscal 2016, with an operating margin of 1.7%.
At January 30, 2016, Lids Sports Group operated 1,332 stores, including 919 Lids stores, 228 Lids Locker Room and Clubhouse stores and 185 Locker Room by Lids leased departments, averaging approximately 1,175 square feet, throughout the United States and in Puerto Rico and Canada. Lids Sports Group added 27 new stores and leased departments but closed 59 stores and leased departments in Fiscal 2016, and plans to open one net new store in Fiscal 2017.
The core headwear stores and kiosks, located in malls, airports, street-level stores and factory outlet stores throughout the United States and in Puerto Rico and Canada, target customers in the early-teens to mid-20’s age group. In general, the stores offer headwear from an assortment of college, MLB, NBA, NFL and NHL teams, as well as other specialty fashion categories. The Lids Locker Room and Lids Clubhouse stores, operating under a number of trade names, located in malls and other locations primarily in the United States and Canada, target sports fans of all ages. These stores offer headwear, apparel, accessories and novelties representing an assortment of college and professional teams. The Locker Room by Lids leased departments in Macy's department stores offer headwear, apparel, accessories and novelties representing an assortment of college and professional teams specific to that particular Macy's department store geographic location.
Schuh Group
The Schuh Group segment, including e-commerce operations, accounted for approximately 14% of the Company’s net sales in Fiscal 2016. For Fiscal 2016, same store sales increased 1%, comparable direct sales increased 13% and comparable sales, including both store and direct sales, increased 3%. Earnings from operations attributable to Schuh Group was $19.1 million in Fiscal 2016, with an operating margin of 4.7%. Earnings from operations for Schuh included $1.5 million in compensation expense related to a deferred purchase price obligation in connection with the Company's acquisition of Schuh during Fiscal 2012.
At January 30, 2016, Schuh Group operated 115 Schuh stores, averaging approximately 5,000 square feet, which include both street-level and mall locations in the United Kingdom, the Republic of Ireland and Germany. Schuh Group opened its first Schuh Kids store in Fiscal 2013. As of January 30, 2016, Schuh Group operated ten Schuh Kids stores averaging 2,675 square feet. Schuh Group opened 17 net new stores in Fiscal 2016 and plans to open approximately 7 net new Schuh and Schuh Kids stores in Fiscal 2017. Schuh stores target men and women in the 15 to 30 age group, selling a broad range of branded casual and athletic footwear along with a meaningful private label offering.
Johnston & Murphy Group
The Johnston & Murphy Group segment, including retail stores, catalog and e-commerce operations and wholesale distribution, accounted for approximately 9% of the Company’s net sales in Fiscal 2016. Same store sales for Johnston & Murphy retail operations increased 5%, comparable direct sales increased 11% and comparable sales, including both store and direct sales, increased 6% for Fiscal 2016. Earnings from operations attributable to Johnston & Murphy Group was $17.8 million in Fiscal 2016, with an operating margin of 6.4%. The majority of Johnston & Murphy wholesale sales are of the Genesco-owned Johnston & Murphy brand, and all of the group’s retail sales are of Johnston & Murphy branded products.
Johnston & Murphy Retail Operations. At January 30, 2016, Johnston & Murphy operated 173 retail shops and factory stores throughout the United States and in Canada averaging approximately 1,875 square feet and selling footwear, apparel and accessories primarily for men in the 35 to 55 age group, targeting business and professional customers. Women’s footwear and accessories are sold in select Johnston & Murphy locations. Johnston & Murphy retail shops are located primarily in better malls and airports nationwide and sell a broad range of men’s dress and casual footwear, apparel and accessories. The Company also sells Johnston & Murphy products directly to consumers through an e-commerce website and a direct mail catalog. Retail prices for Johnston & Murphy footwear generally range from $100 to $275. Total footwear accounted for 65% of total Johnston & Murphy retail sales in Fiscal 2016, with the balance consisting primarily of apparel and accessories. Johnston & Murphy Group added three net new shops and factory stores and plans to open approximately three net new shops and factory stores in Fiscal 2017.
Johnston & Murphy Wholesale Operations. Johnston & Murphy men’s and women's footwear and accessories are sold at wholesale, primarily to better department and independent specialty stores. Johnston & Murphy’s wholesale customers offer the brand’s footwear for dress, dress casual, and casual occasions, with the majority of styles offered in these channels selling from $100 to $195. Additionally, the Company offers the Trask brand, with men's and women's footwear and leather accessories offered primarily through better independent retailers and department stores, an e-commerce website and catalog. Suggested retail prices for Trask footwear range from $195 to $495.
Licensed Brands
The Licensed Brands segment accounted for approximately 4% of the Company’s net sales in Fiscal 2016. Earnings from operations attributable to Licensed Brands was $9.2 million in Fiscal 2016, with an operating margin of 8.4%. Licensed Brands sales include footwear marketed under the Dockers® brand, for which Genesco has had the exclusive men’s footwear license in the United States since 1991. See “Licenses”. Dockers footwear is marketed to men aged 30 to 55 through many of the same national retail chains that carry Dockers slacks and sportswear and in department and specialty stores across the country. Suggested retail prices for Dockers footwear generally range from $50 to $90. The Company acquired Keuka Footwear in the third quarter of Fiscal 2011 and subsequently launched its SureGrip Footwear line of slip-resistant, occupational footwear within the Licensed Brands segment from that base. The Company sources and distributes the SureGrip line to employees in the hospitality, healthcare, and other industries. The Company also sells footwear under other licenses and in March 2015 entered into a License Agreement to source and distribute certain men's and women's footwear under the G.H. Bass trademark and related marks.
For further information on the Company’s business segments, see Note 14 to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Manufacturing and Sourcing
The Company relies on independent third-party manufacturers for production of its footwear products sold at wholesale. The Company sources footwear and accessory products from foreign manufacturers located in Bangladesh, Brazil, Cambodia, Canada, China, Dominican Republic, El Salvador, France, Germany, Hong Kong, India, Indonesia, Italy, Mexico, Netherlands, Portugal, Peru, Romania, Taiwan and Vietnam. The Company’s retail operations source primarily branded products from third parties, who source primarily overseas.
Competition
Competition is intense in the footwear, headwear, sports apparel and accessory industries. The Company’s retail footwear, headwear, sports apparel and accessory competitors range from small, locally owned stores to regional and national department stores, discount stores, specialty chains and online retailers. The Company also competes with hundreds of footwear wholesale 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 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, customer service, store location and atmosphere and the ability to offer distinctive products.
Licenses
The Company owns its Johnston & Murphy®, H.S. Trask®, Keuka® and SureGrip® brands and owns or licenses the trade names of its retail concepts either directly or through wholly-owned subsidiaries. The Dockers® brand footwear line, introduced in Fiscal 1993, is sold under a license agreement granting the Company the exclusive right to sell men’s footwear under the trademark in the United States, Canada and Mexico and in certain other Latin American countries. The Dockers license agreement has been renewed for a term expiring on November 30, 2018. Net sales of Dockers products were approximately $78 million in Fiscal 2016 and approximately $82 million in Fiscal 2015. The Company licenses certain of its footwear brands, mostly in foreign markets. License royalty income was not material in Fiscal 2016.
Wholesale Backlog
Most of the orders in the Company’s wholesale divisions are for delivery within 150 days. Because most of the Company’s business is at-once, the backlog at any one time is not necessarily indicative of future sales. As of February 27, 2016, the Company’s wholesale operations had a backlog of orders, including unconfirmed customer purchase orders, amounting to approximately $32.8 million, compared to approximately $56.3 million on February 28, 2015. The backlog for Fiscal 2015 included Lids Team Sports, which the Company sold in the fourth quarter of Fiscal 2016. The backlog is somewhat seasonal, reaching a peak in the spring. The Company maintains in-stock programs for selected product lines with anticipated high volume sales.
Employees
Genesco had approximately 27,500 employees at January 30, 2016, approximately 130 of whom were employed in corporate staff departments and the balance in operations. Retail stores employ a substantial number of part-time employees, and approximately 18,275 of the Company’s employees were part-time at January 30, 2016.
Seasonality
The Company's business is seasonal with the Company's investment in inventory and accounts receivable normally reaching peaks in the spring and fall of each year and a significant portion of the Company's net sales and operating earnings generated during the fourth quarter.
Properties
At January 30, 2016, the Company operated 2,852 retail footwear, headwear and sports apparel and accessory stores and leased departments throughout the United States and in Puerto Rico, Canada, the United Kingdom, the Republic of Ireland and Germany. New shopping center store leases in the United States, Puerto Rico and Canada typically are for a term of approximately 10 years. New store leases in the United Kingdom, the Republic of Ireland and Germany typically have terms of between 10 and 15 years. Both typically provide for rent based on a percentage of sales against a fixed minimum rent based on the square footage leased.
The general location, use and approximate size of the Company’s principal properties are set forth below:
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Location | | Owned/Leased | Segment | | Use | | Approximate Area Square Feet | | |
Lebanon, TN | | Owned | Journeys Group | | Distribution warehouse | | 320,000 |
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Indianapolis, IN | | Leased | Lids Sports Group | | Distribution warehouse | | 311,600 |
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Nashville, TN | | Leased | Various | | Executive & footwear operations offices | | 306,455 |
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Indianapolis, IN | | Leased/Subleased | Lids Sports Group | | Distribution warehouse | | 271,825 |
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Bathgate, Scotland | | Owned | Schuh Group | | Distribution warehouse | | 244,644 |
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Chapel Hill, TN | | Owned | Licensed Brands | | Distribution warehouse | | 182,000 |
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Fayetteville, TN | | Owned | Johnston & Murphy Group | | Distribution warehouse | | 178,500 |
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Zionsville, IN | | Owned | Lids Sports Group | | Administrative offices | | 150,000 |
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Deans Industrial Estate, Livingston, Scotland | | Owned | Schuh Group | | Distribution warehouse and administrative offices | | 106,813 |
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Nashville, TN | | Owned | Journeys Group | | Distribution warehouse | | 63,000 |
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Mississauga, Ontario, Canada | | Leased | Lids Sports Group | | Distribution warehouses | | 43,611 |
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* | The Company occupies approximately 85% of the building and subleases the remainder of the building. |
** | The Company occupies approximately 25% of the building and subleases the remainder of the building. |
The lease on the Company’s Nashville office expires in April 2017, with an option to renew for an additional five years. The Company believes that all leases of properties that are material to its operations may be renewed, or that alternative properties are available, on terms not materially less favorable to the Company than existing leases.
Environmental Matters
The Company’s former manufacturing operations and the sites of those operations as well as the sites of its current 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, 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. Several of the facilities owned 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 facilities. See Item 3, "Legal Proceedings" and Note 13 to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data".
ITEM 1A, RISK FACTORS
Our business is subject to significant risks. You should carefully consider the risks and uncertainties described below and the other information in this Form 10-K, including our Consolidated Financial Statements and the notes to those statements. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we do not presently know about or that we currently consider immaterial may also affect our business operations and financial performance. If any of the events described below actually occur, our business, financial condition or results of operations could be adversely affected in a material way. This could cause the trading price of our stock to decline, perhaps significantly, and you may lose part or all of your investment.
Poor economic conditions and other factors can affect consumer spending and may significantly harm our business, affecting our financial condition, liquidity, and results of operations.
The success of our business depends to a significant extent upon the level of consumer spending. A number of factors may affect the level of consumer spending on merchandise that we offer, including, among other things:
•general economic, industry and weather conditions;
•energy costs, which affect gasoline and home heating prices;
•the level of consumer debt;
•pricing of products;
•interest rates;
•tax rates, refunds and policies;
•war, terrorism and other hostilities; and
•consumer confidence in future economic conditions.
Adverse economic conditions and any related decrease in consumer demand for discretionary items could have a material adverse effect on our business, results of operations and financial condition. The merchandise we sell generally consists of discretionary items. Reduced consumer confidence and spending may result in reduced demand for discretionary items and may force us to take inventory markdowns, decreasing sales and making expense leverage difficult to achieve. Demand can also be influenced by other factors beyond our control. For example, sales in the Lids Sports Group segment have historically been affected by developments in team sports, and could be adversely impacted by player strikes or other interruptions, as well as by the performance and reputation of certain teams and players.
Moreover, while the Company believes that its operating cash flows and its borrowing capacity under committed lines of credit will be more than adequate for its anticipated cash requirements, if the economy were to experience a renewed downturn, or if one or more of the Company’s revolving credit banks were to fail to honor its commitments under the Company’s credit lines, the Company could be required to modify its operations for decreased cash flow or to seek alternative sources of liquidity, and such alternative sources might not be available to the Company.
Our business involves a degree of fashion risk.
The majority of our businesses serve a fashion-conscious customer base and depend upon the ability of our buyers and merchandisers to react to fashion trends, to purchase inventory that reflects such trends, and to manage our inventories appropriately in view of the potential for sudden changes in fashion, consumer taste, or other drivers of demand, including the performance and popularity of individual sports teams and athletes. Failure to continue to execute any of these activities successfully could result in adverse consequences, including lower sales, product margins, operating income and cash flows.
Our business and results of operations are subject to a broad range of uncertainties arising out of world and domestic events.
Our business and results of operations are subject to uncertainties arising out of world and domestic events, which may impact not only consumer demand, but also our ability to obtain the products we sell, most of which are produced outside the countries in which we operate. These uncertainties may include a global economic slowdown, changes in consumer spending or travel, increase in gasoline and natural gas prices, and the economic consequences of natural disasters, military action or terrorist activities and increased regulatory and compliance burdens related to governmental actions in response to a variety of factors, including but not limited to national security and anti-terrorism concerns and concerns about climate
change. Any future events arising as a result of terrorist activity or other world events may have a material impact on our business, including the demand for and our ability to source products, and consequently on our results of operations and financial condition.
The increasing scope of our non-U.S. operations exposes our performance to risks including foreign economic conditions and exchange rate fluctuations.
Our performance depends in part on general economic conditions affecting all countries in which we do business. We are dependent on foreign manufacturers for the products we sell, and our inventory is subject to cost and availability of foreign materials and labor. In addition to the other risks disclosed herein, demand for our product offering in our non-U.S. operations is also subject to local market conditions. As a result, there can be no assurance that Schuh's or our Canadian operations' future performance will not be adversely affected by economic conditions in their markets.
As we expand our international operations, we also increase our exposure to exchange rate fluctuations. Sales from stores outside the U.S. are denominated in the currency of the country in which these operations or stores are located and changes in foreign exchange rates affect the translation of the sales and earnings of these businesses into U.S. dollars for financial reporting purposes. Additionally, inventory purchase agreements may also be denominated in the currency of the country where the vendor resides.
Our business is intensely competitive and increased or new competition could have a material adverse effect on us.
The retail footwear, headwear, sports apparel and accessory markets are intensely competitive. We currently compete against a diverse group of retailers, including other regional and national specialty stores, department and discount stores, small independents and e-commerce retailers, which sell products similar to and often identical to those we sell. Our branded businesses, selling footwear at wholesale, also face intense competition, both from other branded wholesale vendors and from private label initiatives of their retailer customers. A number of different competitive factors could have a material adverse effect on our business, results of operations and financial condition, including:
•increased operational efficiencies of competitors;
•competitive pricing strategies;
•expansion by existing competitors;
•entry by new competitors into markets in which we currently operate; and
•adoption by existing retail competitors of innovative store formats or sales methods.
Use of social media may adversely impact our reputation or subject us to fines or other penalties.
There has been a substantial increase in the use of social media platforms and similar devices, including blogs, social media websites, and other forms of internet-based communications, which allow individuals access to a broad audience of consumers and other interested persons. As laws and regulations rapidly evolve to govern the use of these platforms and devices, the failure by us, our associates or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices could adversely impact our reputation or subject us to fines or other penalties.
Consumers value readily available information concerning retailers and their goods and services and often act on such information without further investigation and without regard to its accuracy. Information concerning us may be posted on social media platforms and similar devices at any time and may be adverse to our reputation or business. The harm may be immediate without affording us an opportunity for redress or correction. Damage to our reputation could result in declines in customer loyalty and sales, affect our vendor relationships, development opportunities and associate retention and otherwise adversely affect our business.
If we are unsuccessful in establishing and protecting our intellectual property, the value of our brands could be adversely affected.
Our ability to remain competitive is dependent upon our continued ability to secure and protect trademarks, patents and other intellectual property rights in the U.S. and internationally for all of our lines of business. We rely on a combination of trade secret, patent, trademark, copyright and other laws, license agreements and other contractual provisions and technical measures to protect our intellectual property rights; however, some countries’ laws do not protect intellectual property rights to the same extent U.S. laws do.
Our business could be significantly harmed if we are not able to protect our intellectual property, or if a court found us to be infringing on other persons’ intellectual property rights. Any future intellectual property lawsuits or threatened lawsuits in which we are involved, either as a plaintiff or as a defendant, could cost us a significant amount of time and money and distract management’s attention from operating our business. If we do not prevail on any intellectual property claims, then we may have to change our manufacturing processes, products or trade names, any of which could reduce our profitability.
We are dependent on third-party vendors for the merchandise we sell.
We do not manufacture the merchandise we sell. This means that our product supply is subject to the ability and willingness of third-party suppliers to deliver merchandise we order on time and in the quantities and of the quality we need. In addition, a material portion of our retail footwear sales consists of products marketed under brands, belonging to unaffiliated vendors, which have fashion significance to our customers. Our core retail hat and sports apparel businesses are dependent upon products bearing sports and other logos, each generally controlled by a single licensee/vendor. If those vendors were to decide not to sell to us or to limit the availability of their products to us, or if they become unable because of economic conditions, work stoppages, strikes, political unrest, raw materials supply disruptions, or any other reason to supply us with products, we could be unable to offer our customers the products they wish to buy and could lose their business to competitors. Additionally, manufacturers are required to remain in compliance with certain wage, labor and environment-related laws and regulations. Delayed compliance or complete failure to comply with such laws and regulations by our vendors could adversely affect our ability to obtain products generally or at favorable costs, affecting our overall ability to maintain and manage inventory levels.
An increase in the cost or a disruption in the flow of our imported products may significantly decrease our sales and profits.
Merchandise originally manufactured and imported from overseas makes up a large proportion of our total inventory. A disruption in the shipping of our imported merchandise or an increase in the cost of those products may significantly decrease our sales and profits. We may be unable to meet our customers’ demands or pass on price increases to our customers. In addition, if imported merchandise becomes more expensive or unavailable, the transition to alternative sources may not occur in time to meet demand. Products from alternative sources may also be of lesser quality or more expensive than those we currently import. Risks associated with our reliance on imported products include:
disruptions in the shipping and importation of imported products because of factors such as:
▪raw material shortages, work stoppages, strikes and political unrest;
▪problems with oceanic shipping, including shipping container shortages and delays in ports;
▪increased customs inspections of import shipments or other factors that could result in penalties causing delays in shipments;
▪economic crises, natural disasters, international disputes and wars; and
•increases in the cost of purchasing or shipping foreign merchandise resulting from:
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• | imposition of additional cargo or safeguard measures; |
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• | denial by the United States of “most favored nation” trading status to or the imposition of quotas or other restriction on imports from a foreign country from which we purchase goods; |
•import duties, import quotas and other trade sanctions; and
•increases in shipping rates.
A significant amount of the inventory we sell is imported from the People’s Republic of China, which has historically been subject to efforts to increase duty rates or to impose restrictions on imports of certain products.
A small portion of the products we buy abroad is priced in foreign currencies and, therefore, we are affected by fluctuating currency exchange rates. In the past, we have entered into foreign currency exchange contracts with major financial institutions to hedge these fluctuations. We might not be able to effectively protect ourselves in the future against currency rate fluctuations, and our financial performance could suffer as a result. Even dollar-denominated foreign purchases may be affected by currency fluctuations, as suppliers seek to reflect appreciation in the local currency against the dollar in the price of the products that they provide. You should read Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information about our foreign currency exchange rate exposure and hedging activities.
Increased operating costs could have an adverse effect on our results.
Increased operating costs, including those resulting from potential increases in the minimum wage or wage increases reflecting competition in relevant labor markets, store occupancy costs, and other expense items, including healthcare costs, may reduce our operating margin and, by making it more difficult to identify new store locations that we believe will meet our investment return requirements, slow our growth. In addition, other employment and healthcare law changes may increase the cost of provided retirement, pension and healthcare benefits expenses. Increases in the Company’s overall employment costs could have a material adverse effect on the Company’s business, results of operations and financial and competitive position.
The operation of the Company’s business is heavily dependent on its information systems.
We depend on a variety of information technology systems for the efficient functioning of our business and security of information. Much information essential to our business is maintained electronically, including competitively sensitive information and potentially sensitive personal information about customers and employees. Our insurance policies may not provide coverage for security breaches and similar incidents or may have coverage limits which may not be adequate to reimburse us for losses caused by security breaches. We also rely on certain hardware and software vendors to maintain and periodically upgrade many of these systems so that they can continue to support our business. The software programs supporting many of our systems were licensed to the Company by independent software developers. The inability of these developers or the Company to continue to maintain and upgrade these information systems and software programs could disrupt or reduce the efficiency of our operations. In addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of our operations or leave the Company vulnerable to security breaches.
We also rely heavily on our information technology staff. If we cannot meet our staffing needs in this area, we may not be able to fulfill our technology initiatives or to provide maintenance on existing systems.
We are subject to payment-related risks that could increase our operating costs, expose us to fraud or theft, subject us to fraud or theft, subject us to potential liability and potentially disrupt our business.
As a retailer who accepts payments using a variety of methods, including credit and debit cards, PayPal, and gift cards, the Company is subject to rules, regulations, contractual obligations and compliance requirements, including payment network rules and operating guidelines, data security standards and certification requirements, and rules governing electronic funds transfers. The regulatory environment related to information security and privacy is increasingly rigorous, with new and constantly changing requirements applicable to our business, and compliance with those requirements could result in additional costs or accelerate these costs, For certain payment methods, including credit and debit cards, we pay interchange and other fees, which could increase over time and raise our operating costs. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards, and other forms of electronic payment. If these companies become unable to provide these services to us, or if their systems are compromised, it could disrupt our business.
The payment methods that we offer also subject us to potential fraud and theft by persons who seek to obtain unauthorized access to or exploit any weaknesses that may exist in the payment systems. The payment card industry established October 1, 2015 as the date on which it shifted liability for certain transactions to retailers who are not able to accept EMV card transactions. The Company did not implement the EMV technology and receive certification prior to October 1, 2015, and accordingly may be liable for costs incurred by payment card issuing banks and other third parties as a result of fraudulent use of credit card information improperly obtained from information captured by us until such time as the technology has been implemented and certified. The Company expects to complete the implementation and receive certification in its third quarter of Fiscal 2018.
A privacy breach could have a material adverse effect on the Company's business and reputation.
We rely heavily on digital technologies for the successful operation of our business, including electronic messaging, digital marketing efforts and the collection and retention of customer data and employee information. We also rely on third parties to process credit card transactions, perform online e-commerce and social media activities and retain data relating to the Company’s financial position and results of operations, strategic initiatives and other important information. Despite the security measures we have in place, our facilities and systems and those of our third-party service providers may be vulnerable to cyber-security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Any misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information, whether by us or by our third-party service providers, could adversely affect our business and operations, including loss of sales generated through our websites, severely damaging our reputation and our relationships with our customers, suppliers, employees and investors and expose us to risks of litigation and liability.
In addition, we may incur significant remediation costs in the event of a cyber-security breach or incident, including liability for stolen customer or employee information, repairing system damage or providing credit monitoring or other benefits to affected customers or employees. We may also incur increased costs to comply with various applicable laws or industry standards regarding use and/or unauthorized disclosure of personal information. These and other cyber-security-related compliance, prevention and remediation costs may adversely impact our financial condition and results of operations.
The loss of, or disruption in, one of our distribution centers and other factors affecting the distribution of merchandise, could have a material adverse effect on our business and operations.
Each of our operations uses a single distribution center to handle all or a significant amount of its merchandise. Most of our operations’ inventory is shipped directly from suppliers to our operations' distribution centers, where the inventory is then processed, sorted and shipped to our stores or to our wholesale customers. We depend on the orderly operation of this receiving and distribution process, which depends, in turn, on adherence to shipping schedules and effective management of the distribution centers. Although we believe that our receiving and distribution process is efficient and well positioned to support our current business and our expansion plans, we cannot offer assurance that we have anticipated all of the changing demands that our expanding operations will impose on our receiving and distribution system, or that events beyond our control, such as disruptions in operations due to fire or other catastrophic events, labor disagreements or shipping problems (whether in our own or in our third party vendors’ or carriers’ businesses), will not result in delays in the delivery of merchandise to our stores or to our wholesale customers or retail customers (e-commerce). In addition, we add capacity to distribution centers by either leasing or building new distribution centers or adding capacity at existing centers. Failure to execute on these initiatives may cause disruption in our business. We also make changes in our distribution processes from time to time in an effort to improve efficiency and maximize capacity. We cannot assure that these changes will not result in unanticipated delays or interruptions in distribution. We depend upon UPS for shipment of a significant amount of merchandise. An interruption in service by UPS for any reason could cause temporary disruptions in our business, a loss of sales and profits, and other material adverse effects.
Our freight cost is impacted by changes in fuel prices through surcharges. Fuel prices and surcharges affect freight cost both on inbound freight from vendors to our distribution centers and outbound freight from our distribution centers to our stores and wholesale customers. Increases in fuel prices and surcharges and other factors may increase freight costs and thereby increase our cost of goods sold.
Any acquisitions we make or new businesses we launch, as well as any dispositions of assets or businesses, involve a degree of risk.
Acquisitions have been a component of the Company’s growth strategy in recent years and we expect that we may continue to engage in acquisitions or launch new businesses to grow our revenues and meet our other strategic objectives. If any future acquisitions are not successfully integrated with our business, our ongoing operations could be adversely affected. Additionally, acquisitions or new businesses may not achieve desired profitability objectives or result in any anticipated successful expansion of the businesses or concepts, causing lower than expected earnings and cash flow and potentially requiring impairment of goodwill and other intangibles. Although we review and analyze assets or companies we acquire, such reviews are subject to uncertainties and may not reveal all potential risks. Additionally, although we attempt to obtain protective contractual provisions, such as representations, warranties and indemnities, in connection with acquisitions, we cannot offer assurance that we can obtain such provisions in our acquisitions or that they will fully protect us from unforeseen costs of, or liabilities associated with, the acquisitions. We may also incur significant costs and diversion of management time and attention in connection with pursuing possible acquisitions even if the acquisition is not ultimately consummated.
Additionally, we may decide to divest assets or businesses that are no longer material to our core business. Following such divestitures, we may incur liabilities relating to our previous ownership of the assets or business that we sell. Any required payments on retained liabilities or indemnification obligations with respect to past or future asset or business divestitures could have a material adverse effect on our business or results of operations.
Further, acquisitions and dispositions are often structured such that the purchase price paid or received by us, as applicable, is subject to post-closing adjustments, whether as a result of net working capital adjustments, contingent payments (i.e., earn-outs) or otherwise. Any such adjustments could result in a material change in the consideration paid to or received by us, as applicable, in such transactions.
We face a number of risks in opening new stores.
As part of our long-term growth strategy, we expect to open new stores, both in regional malls, where most of the operational experience of our U.S. businesses lies, and in other venues including outlet centers, major city street locations, airports and tourist destinations. We cannot offer assurances that we will be able to open as many stores as we have planned, that any new store will achieve similar operating results to those of our existing stores or that new stores opened in markets in which we operate will not have a material adverse effect on the revenues and profitability of our existing stores. The success of our planned expansion will be dependent upon numerous factors, many of which are beyond our control, including the following:
•our ability to identify suitable markets and individual store sites within those markets;
•the competition for suitable store sites;
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• | our ability to negotiate favorable lease terms for new stores and renewals (including rent and other costs) with landlords; |
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• | our ability to obtain governmental and other third-party consents, permits and licenses needed to construct and operate our stores; |
•the ability to build and remodel stores on schedule and at acceptable cost;
•the availability of employees to staff new stores and our ability to hire, train, motivate and retain store personnel;
•the effect of changes to laws and regulations, including minimum wage, over-time, and employee benefits laws on store expenses;
•the availability of adequate management and financial resources to manage an increased number of stores;
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• | our ability to adapt our distribution and other operational and management systems to an expanded network of stores; |
•our ability to attract customers and generate sales sufficient to operate new stores profitably; and
•the effect of changes in consumer shopping patterns, including an accelerated shift to online shopping at the expense of in-store shopping, during the term of a lease.
Additionally, the results we expect to achieve during each fiscal quarter are dependent upon opening new stores on schedule. If we fall behind, we will lose expected sales and earnings between the planned opening date and the actual opening and may further complicate the logistics of opening stores, possibly resulting in additional delays, seasonally inappropriate product assortments, and other undesirable conditions.
Our results of operations are subject to seasonal and quarterly fluctuations, which could have a material adverse effect on the market price of our stock.
Our business is seasonal, with a significant portion of our net sales and operating income generated during the fourth quarter, which includes the holiday shopping season. Because of this seasonality, we have limited ability to compensate for shortfalls in fourth quarter sales or earnings by changes in our operations or strategies in other quarters. A significant shortfall in results for the fourth quarter of any year could have a material adverse effect on our annual results of operations and on the market price of our stock. Our quarterly results of operations also may fluctuate significantly based on such factors as:
•the timing of new store openings and renewals;
•the amount of net sales contributed by new and existing stores;
•the timing of certain holidays and sales events;
•changes in our merchandise mix;
•general economic, industry and weather conditions that affect consumer spending; and
•actions of competitors, including promotional activity.
Changes in our effective income tax rate could adversely affect our net earnings.
A number of factors influence our effective income tax rate, including changes in tax law, tax treaties, interpretation of existing laws, and our ability to sustain our reporting positions on examination. Changes in any of those factors could change our effective tax rate, which could adversely affect our net earnings. In addition, our operations outside of the United States may cause greater volatility in our effective tax rate.
A failure to increase sales at our existing stores and in our e-commerce businesses may adversely affect our stock price and impact our results of operations.
A number of factors have historically affected, and will continue to affect, our comparable sales results, including:
•consumer trends, such as less disposable income due to the impact of economic conditions and tax policies;
•the lack of new fashion trends to drive demand in certain of our businesses;
•competition;
•timing of holidays including sales tax holidays and the timing of tax refunds;
•general regional and national economic conditions;
•inclement weather;
•changes in our merchandise mix;
•our ability to distribute merchandise efficiently to our stores;
•timing and type of sales events, promotional activities or other advertising;
•other external events beyond our control;
•our ability to adapt to changing customer preferences in the ways they digitally shop;
•new merchandise introductions; and
•our ability to execute our business strategy effectively.
Our comparable sales have fluctuated in the past, and we believe such fluctuations may continue. The unpredictability of our comparable sales may cause our revenue and results of operations to vary from quarter to quarter, and an unanticipated change in revenues or operating income may cause our stock price to fluctuate significantly.
We are subject to regulatory proceedings and litigation and to regulatory changes that could have an adverse effect on our financial condition and results of operations.
We are party to certain lawsuits, governmental investigations, and regulatory proceedings, including the suits and proceedings arising out of alleged environmental contamination relating to historical operations of the Company and various suits involving current operations as disclosed in Item 3, "Legal Proceedings" and Note 13 to the Consolidated Financial Statements. If these or similar matters are resolved against us, our results of operations, our cash flows, or our financial condition could be adversely affected. The costs of defending such lawsuits and responding to such investigations and regulatory proceedings may be substantial and their potential to distract management from day-to-day business is significant. Moreover, with retail operations in 50 states, Puerto Rico, Canada, the United Kingdom, the Republic of Ireland and Germany, we are subject to federal, state, provincial, territorial, local and foreign regulations, which impose costs and risks on our business. Numerous states and municipalities as well as the federal government of the U.S. are proposing or implementing changes to minimum wage, overtime, employee leave, and other requirements that will increase costs. Changes in regulations could make compliance more difficult and costly, and violations could result in liability for damages or penalties.
If we lose key members of management or are unable to attract and retain the talent required for our business, our operating results could suffer.
Our performance depends largely on the efforts and abilities of members of our management team. Our executives have substantial experience and expertise in our business and have made significant contributions to our growth and success. The unexpected future loss of services of one or more key members of our management team could have an adverse effect on our business. In addition, future performance will depend upon our ability to attract, retain and motivate qualified employees, including store personnel and field management. If we are unable to do so, our ability to meet our operating goals may be compromised. Finally, our stores are decentralized, are managed through a network of geographically dispersed management personnel and historically experience a high degree of turnover. If we are for any reason unable to maintain appropriate controls on store operations due to turnover or other reasons, including the ability to control losses resulting from inventory and cash shrinkage, our sales and operating margins may be adversely affected. There can be no assurance that we will be able to attract and retain the personnel we need in the future.
Goodwill recorded with acquisitions is subject to impairment which could reduce the Company's profitability.
Deterioration in the Company’s market value, whether related to the Company’s operating performance or to disruptions in the equity markets or deterioration in the operating performance of the business unit with which goodwill is associated, could require the Company to recognize the impairment of some or all of the $281.4 million of goodwill on its Consolidated Balance Sheets at January 30, 2016, resulting in the reduction of net assets and a corresponding non-cash charge to earnings in the amount of the impairment.
In connection with acquisitions, the Company records goodwill on its Consolidated Balance Sheets. This asset is not amortized but is subject to an impairment test at least annually, which consists of either a qualitative assessment on a reporting unit level, or a two-step impairment test if necessary, that is based on projected future cash flows from the acquired business discounted at a rate commensurate with the risk the Company considers to be inherent in its current business model. The Company performs the impairment test annually as of the close of its fiscal year, or more frequently if events or circumstances indicate that the value of the asset might be impaired.
Pension funding and costs are dependent upon several economic assumptions which if changed may cause our future earnings and cash flow to fluctuate significantly.
The impact of our pension plan on our U.S. generally accepted accounting principles earnings may be volatile in that the amount of expense we record for our pension plan may materially change from year to year because those calculations are sensitive to funding levels as well as changes in several key economic assumptions, including interest rates, rates of return on plan assets, and other actuarial assumptions including participant mortality estimates. Changes in these factors also affect our plan funding, cash flow and shareholders’ equity. In addition, the funding of our pension plan may be subject to changes caused by legislative or regulatory actions.
We will make contributions to fund the pension plan when considered necessary or advantageous to do so. The macro-economic factors discussed above, including the return on assets and the minimum funding requirements established by government funding or taxing authorities, or established by other agreement, may influence future funding requirements. A significant decline in the fair value of the assets in our pension plan, or other adverse changes to our pension plan could require us to make significant funding contributions and affect cash flows in future periods.
ITEM 1B, UNRESOLVED STAFF COMMENTS
None.
ITEM 2, PROPERTIES
See Item 1, "Business — Properties".
ITEM 3, LEGAL PROCEEDINGS
Environmental Matters
New York State Environmental Matters
In August 1997, the New York State Department of Environmental Conservation (“NYSDEC”) 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 remedial measure (“IRM”) with regard to the site of a knitting mill operated by a former subsidiary of the Company from 1965 to 1969. The Company undertook the IRM and RIFS voluntarily, without admitting liability or accepting responsibility for any future remediation of the site. The Company has completed the IRM and the RIFS. In the course of preparing the RIFS, the Company identified remedial alternatives with estimated undiscounted costs ranging from $0.0 million to $24.0 million, excluding amounts previously expended or provided for by the Company. The United States Environmental Protection Agency (“EPA”), which has assumed primary regulatory responsibility for the site from NYSDEC, issued a Record of Decision in September 2007. The Record of Decision specified a remedy of a combination of groundwater extraction and treatment and in site chemical oxidation.
In July 2009, the Company agreed to a Consent Order with the EPA requiring the Company to perform certain remediation actions, operations, maintenance and monitoring at the site. In September 2009, a Consent Judgment embodying the Consent Order was filed in the U.S. District Court for the Eastern District of New York.
In September 2015, the EPA adopted an amendment to the 2007 Record of Decision by eliminating the separate ground-water extraction and treatment systems and the use of in-situ oxidation from the remedy adopted in the 2007 Record of Decision. The amendment provides for the continued operation and maintenance of the existing wellhead treatment systems on wells operated by the Village of Garden City, New York (the "Village").
The Village has additionally asserted that the Company is liable for the costs associated with enhanced treatment required by the impact of the groundwater plume from the site on two public water supply wells, including historical total costs ranging from approximately $1.8 million to in excess of $2.5 million, and future operation and maintenance costs which the Village estimates at $126,400 annually while the enhanced treatment continues. On December 14, 2007, the Village filed a complaint (the "Village Lawsuit") against the Company and the owner of the property under the Resource Conservation and Recovery Act (“RCRA”), the Safe Drinking Water Act, and the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) as well as a number of state law theories in the U.S. District Court for the Eastern District of New York, seeking an injunction requiring the defendants to remediate contamination from the site and to establish their liability for future costs that may be incurred in connection with it, which the complaint alleges could exceed $41 million, undiscounted, over a 70-year period.
The Company has not verified the estimates of either historic or future costs asserted in the Village Lawsuit, but believes that an estimate of future costs based on a 70-year remediation period is unreasonable given the expected remedial period reflected in the EPA's Record of Decision. On May 23, 2008, the Company filed a motion to dismiss the Village Lawsuit on grounds including applicable statutes of limitation and preemption of certain claims by the NYSDEC's and the EPA's diligent prosecution of remediation. On January 27, 2009, the Court granted the motion to dismiss all counts of the plaintiff's complaint except for the CERCLA claim and a state law claim for indemnity for costs incurred after November 27, 2000. On September 23, 2009, on a motion for reconsideration by the Village, the Court reinstated the claims for injunctive relief under RCRA and for equitable relief under certain of the state law theories.
The Company and the Village have reached an agreement in principle providing for the Village to continue to operate and maintain the well head treatment systems in accordance with the Record of Decision and to release its claims against the Company asserted in the Village Lawsuit in exchange for a lump-sum payment by the Company. The agreement in principle is subject to the issuance by EPA of Statement of Work under the amended Record of Decision that is acceptable to the Company and the Village and to the execution by both parties of definitive documentation incorporating the agreement in principle. While there can be no assurance that a definitive agreement incorporating the agreement in principle will be concluded, the Company does not expect that such an agreement, the Village Lawsuit, or the implementation of the amended Record of Decision would have a material effect on its financial condition or results of operations.
In April 2015, the Company received from EPA a Notice of Potential Liability and Demand for Costs pursuant to CERCLA regarding the site in Gloversville, New York of a former leather tannery operated by the Company and by other, unrelated parties. The Notice demanded payment of approximately $2.2 million of response costs claimed by EPA to have been incurred to conduct assessments and removal activities at the site. The Company has requested additional information on the basis for EPA's assertion that the Company is a potentially responsible party with regard to the site and is assessing the claims asserted in the notice. The Company's environmental insurance carrier is providing coverage of the matter subject
to a $500,000 self-insured retention and the other terms and conditions of the insurance policy, subject to a standard reservation of rights.
Whitehall Environmental Matters
The Company has performed sampling and analysis of soil, sediments, surface water, groundwater and waste management areas at the Company's former Volunteer Leather Company facility in Whitehall, Michigan.
In October 2010, the Company and the Michigan Department of Natural Resources and Environment entered into a Consent Decree providing for implementation of a remedial Work Plan for the facility site designed to bring the site into compliance with applicable regulatory standards. The Work Plan's implementation is substantially complete and the Company expects, based on its present understanding of the condition of the site, that its future obligations with respect to the site will be limited to periodic monitoring and that future costs related to the site should not have a material effect on its financial condition or results of operations.
Accrual for Environmental Contingencies
Related to all outstanding environmental contingencies, the Company had accrued $14.5 million as of January 30, 2016, $14.1 million as of January 31, 2015 and $11.9 million as of February 1, 2014. All such provisions reflect the Company's estimates of the most likely cost (undiscounted, including both current and noncurrent portions) of resolving the contingencies, based on facts and circumstances as of the time they were made. There is no assurance that relevant facts and circumstances will not change, necessitating future changes to the provisions. Such contingent liabilities are included in the liability arising from provision for discontinued operations on the accompanying Consolidated Balance Sheets because it relates to former facilities operated by the Company. The Company has made pretax accruals for certain of these contingencies, including approximately $0.8 million reflected in Fiscal 2016, $2.8 million reflected in Fiscal 2015 and $0.5 million reflected in Fiscal 2014. These charges are included in provision for discontinued operations, net in the Consolidated Statements of Operations and represent changes in estimates.
Other Matters
On December 10, 2010, the Company announced that it had suffered a criminal intrusion into the portion of its computer network that processes payments for transactions in certain of its retail stores. Visa, Inc., MasterCard Worldwide and American Express Travel Related Services Company, Inc. have asserted claims totaling approximately $15.6 million in connection with the intrusion and the claims of two of the claimants have been collected by withholding payment card receivables of the Company. In the fourth quarter of Fiscal 2013, the Company recorded a $15.4 million charge to earnings in connection with the disputed liability. On March 7, 2013, the Company filed an action in the U.S. District Court for the Middle District of Tennessee against Visa U.S.A. Inc., Visa Inc. and Visa International Service Association seeking to recover $13.3 million in non-compliance fines and issuer reimbursement assessments collected from the Company in connection with the intrusion. The Company does not currently expect any future claims in connection with the intrusion to have a material effect on its financial condition, cash flows, or results of operations.
On May 17, 2013, a former employee filed a putative class and representative action, Garcia v. Genesco, Inc., in the Superior Court of California for the County of Ventura, alleging various claims under the California Labor Code, including failure to provide meal and rest periods, failure to timely pay wages, failure to provide accurate itemized wage statements, and unfair competition and violation of the Private Attorneys’ General Act of 2004, and seeking unspecified damages and penalties. On August 30, 2013, the Company removed the action to the United States District Court for the Central District of California. Subsequently, the Company reached an agreement to settle the matter. The court granted final approval of the settlement on May 8, 2015 and dismissed the case.
On April 30, 2015, an employee of a subsidiary of the Company filed an action, Stewart v. Hat World, Inc., et al., under the California Labor Code Private Attorneys General Act on behalf of herself, the State of California, and other non-exempt, hourly-paid employees of the subsidiary in California, seeking unspecified damages and penalties for various alleged violations of the California Labor Code, including failure to pay for all hours worked, minimum wage and overtime violations, failure to provide required meal and rest periods, failure to timely pay wages, failure to provide complete and accurate wage statements, and failure to provide full reimbursement of business-related costs and expenses incurred in the course of employment. The Company disputes the material allegations in the complaint and intends to defend the matter.
On March 3, 2016, plaintiffs filed an action Lacey, et al. v. Genesco Inc., in the U.S. District Court for the Western District of Pennsylvania, alleging that certain of the Company's internet websites are inaccessible to the blind, in violation of the Americans With Disabilities Act. The suit seeks injunctive relief and attorneys' fees. The Company is investigating the allegations in the complaint.
In addition to the matters specifically described in this Item 3, "Legal Proceedings", the Company is a party to other legal and regulatory proceedings and claims arising in the ordinary course of its business. While management does not believe that the Company's liability with respect to any of these other matters is likely to have a material effect on its financial statements, legal proceedings are subject to inherent uncertainties and unfavorable rulings could have a material adverse impact on the Company's financial statements.
ITEM 4, MINE SAFETY DISCLOSURES
Not applicable.
ITEM 4A, EXECUTIVE OFFICERS OF THE REGISTRANT
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 qualified or until their earlier resignation or removal. 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:
Robert J. Dennis, 62, Chairman, President and Chief Executive Officer. Mr. Dennis joined the Company in 2004 as chief executive officer of the Company’s acquired Hat World business. Mr. Dennis was named senior vice president of the Company in June 2004 and executive vice president and chief operating officer, with oversight responsibility for all the Company’s operating divisions, in October 2005. Mr. Dennis was named president of the Company in October 2006 and chief executive officer in August 2008. Mr. Dennis was named chairman in February 2010, which became effective April 1, 2010. Mr. Dennis joined Hat World in 2001 from Asbury Automotive, where he was employed in senior management roles beginning in 1998. Mr. Dennis was with McKinsey and Company, an international consulting firm, from 1984 to 1997, and became a partner in 1990.
Mimi Eckel Vaughn, 49, Senior Vice President - Finance and Chief Financial Officer. Ms. Vaughn joined the Company in September 2003 as vice president of strategy and business development. She was named senior vice president, strategy and business development in October 2006, senior vice president of strategy and shared services in April 2009 and senior vice president - finance and chief financial officer in February 2015. Prior to joining the Company, Ms. Vaughn was executive vice president of business development and marketing, and acting chief financial officer from 2000 to 2001 for Link2Gov Corporation in Nashville. From 1993 to 1999, she was a consultant at McKinsey and Company in Atlanta.
Jonathan D. Caplan, 62, Senior Vice President. Mr. Caplan rejoined the Company in 2002 as chief executive officer of the branded group and president of Johnston & Murphy and was named senior vice president of the Company in November 2003. Mr. Caplan first joined the Company in June 1982 and served as president of Genesco’s Laredo-Code West division from December 1985 to May 1992. After that time, Mr. Caplan was president of Stride Rite’s Children’s Group and then its Ked’s Footwear division, from 1992 to 1996. He was vice president, New Business Development and Strategy, for Service Merchandise Corporation from 1997 to 1998. Prior to rejoining Genesco in October 2002, Mr. Caplan served as president and chief executive officer of Hi-Tec Sports North America beginning in 1998.
James C. Estepa, 64, 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 the Company's former Underground Station segment.
Roger G. Sisson, 52, Senior Vice President, Secretary and General Counsel. Mr. Sisson joined the Company in 1994 as assistant general counsel and was elected secretary in February 1994. He was named general counsel in January 1996, vice president in November 2003, and senior vice president in October 2006.
Parag D. Desai, 41, Senior Vice President of Strategy and Shared Services. Mr. Desai joined the Company in 2014 as senior vice president of strategy and shared services. Prior to joining the Company, Mr. Desai spent 14 years with McKinsey and Company, including seven years as a partner. Prior to joining McKinsey, Mr. Desai also held business development and technology positions at Outpace Systems and Booz Allen & Hamilton.
Paul D. Williams, 61, Vice President and 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. He was named vice president in October 2006.
Matthew N. Johnson, 51, Vice President and Treasurer. Mr. Johnson joined the Company in 1993 as manager, corporate finance and was elected assistant treasurer in December 1993. He was elected treasurer in June 1996. He was named vice president finance in October 2006 and renamed treasurer in April 2011 after a period of service as chief financial officer of one of the Company's divisions. 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.
PART II
ITEM 5, MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company’s common stock is listed on the New York Stock Exchange (Symbol: GCO). 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 January 31
|
| | | | | | | |
| High | | Low |
2015 1st Quarter | $ | 80.52 |
| | $ | 68.52 |
|
2nd Quarter | 82.98 |
| | 70.87 |
|
3rd Quarter | 89.58 |
| | 71.24 |
|
4th Quarter | 82.89 |
| | 69.53 |
|
Fiscal Year ended January 30
|
| | | | | | | |
| High | | Low |
2016 1st Quarter | $ | 74.74 |
| | $ | 65.59 |
|
2nd Quarter | 70.47 |
| | 61.07 |
|
3rd Quarter | 65.78 |
| | 54.03 |
|
4th Quarter | 66.16 |
| | 50.64 |
|
There were approximately 2,500 common shareholders of record on March 11, 2016.
The Company has not paid cash dividends in respect of its Common Stock since 1973. The Company’s ability to pay cash dividends in respect of its common stock is subject to various restrictions. See Notes 6 and 8 to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Sources of Liquidity” for information regarding restrictions on dividends and redemptions of capital stock.
Recent Sales of Unregistered Securities
None.
Repurchases (shown in 000's except share and per share amounts):
ISSUER PURCHASES OF EQUITY SECURITIES
|
| | | | | | | | | | |
| | | | |
Period | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) |
| | | | |
November 2015 | | | | |
11-1-15 to 11-28-15 | — |
| $ | — |
| — | $ | — |
|
| | | | |
December 2015 | | | | |
11-29-15 to 12-26-15 | — |
| $ | — |
| — |
| $ | — |
|
| | | | |
January 2016 | | | | |
12-27-15 to 1-30-16 | 251,000 |
| $ | 63.24 |
| 251,000 |
| $ | 84,128 |
|
Share repurchases were made pursuant to the share repurchase program described under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company expects to implement the balance of the repurchase program through purchases made from time to time either in the open market or through private transactions, in accordance with the regulations of the SEC and other applicable legal requirements.
Equity Compensation Plan Information
Refer to Part III, Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters".
ITEM 6, SELECTED FINANCIAL DATA
Financial Summary
|
| | | | | | | | | | | | | | | | | | | |
In Thousands except per common share data, Financial Statistics and Other Data (End of Year) | Fiscal Year End |
| 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
Results of Operations Data | | | | | | | | | |
Net sales | $ | 3,022,234 |
| | $ | 2,859,844 |
| | $ | 2,624,972 |
| | $ | 2,604,817 |
| | $ | 2,291,987 |
|
Depreciation and amortization | 79,011 |
| | 74,326 |
| | 67,135 |
| | 63,697 |
| | 53,737 |
|
Earnings from operations | 151,251 |
| | 167,266 |
| | 163,435 |
| | 169,863 |
| | 161,485 |
|
Earnings from continuing operations before income taxes | 151,533 |
| | 156,989 |
| | 158,860 |
| | 164,832 |
| | 156,393 |
|
Earnings from continuing operations | 95,381 |
| | 99,373 |
| | 92,982 |
| | 112,897 |
| | 93,451 |
|
Provision for discontinued operations, net | (812 | ) | | (1,648 | ) | | (329 | ) | | (462 | ) | | (1,025 | ) |
Net earnings | $ | 94,569 |
| | $ | 97,725 |
| | $ | 92,653 |
| | $ | 112,435 |
| | $ | 92,426 |
|
Per Common Share Data | | | | | | | | | |
Earnings from continuing operations | | | | | | | | | |
Basic | $ | 4.17 |
| | $ | 4.23 |
| | $ | 3.99 |
| | $ | 4.78 |
| | $ | 3.89 |
|
Diluted | 4.15 |
| | 4.19 |
| | 3.94 |
| | 4.69 |
| | 3.83 |
|
Discontinued operations | | | | | | | | | |
Basic | (0.04 | ) | | (0.07 | ) | | (0.01 | ) | | (0.02 | ) | | (0.05 | ) |
Diluted | (0.04 | ) | | (0.07 | ) | | (0.02 | ) | | (0.01 | ) | | 0.04 |
|
Net earnings | | | | | | | | | |
Basic | 4.13 |
| | 4.16 |
| | 3.98 |
| | 4.76 |
| | 3.84 |
|
Diluted | 4.11 |
| | 4.12 |
| | 3.92 |
| | 4.68 |
| | 3.79 |
|
Balance Sheet and Cash Flow Data | | | | | | | | | |
Total assets | $ | 1,541,483 |
| | $ | 1,583,087 |
| | $ | 1,439,284 |
| | $ | 1,326,072 |
| | $ | 1,229,761 |
|
Long-term debt | 112,058 |
| | 29,155 |
| | 33,730 |
| | 50,682 |
| | 40,704 |
|
Non-redeemable preferred stock | 1,077 |
| | 1,274 |
| | 1,305 |
| | 3,924 |
| | 4,957 |
|
Common equity | 954,079 |
| | 995,533 |
| | 914,885 |
| | 817,936 |
| | 721,774 |
|
Capital expenditures | 100,652 |
| | 103,111 |
| | 98,456 |
| | 71,737 |
| | 49,456 |
|
Financial Statistics | | | | | | | | | |
Earnings from operations as a percent of net sales | 5.0 | % | | 5.8 | % | | 6.2 | % | | 6.5 | % | | 7.0 | % |
Book value per share (common equity divided by common shares outstanding) | $ | 43.70 |
| | $ | 41.43 |
| | $ | 38.25 |
| | $ | 34.09 |
| | $ | 29.74 |
|
Working capital (in thousands) | $ | 476,469 |
| | $ | 441,742 |
| | $ | 451,297 |
| | $ | 407,073 |
| | $ | 291,990 |
|
Current ratio | 2.5 |
| | 2.1 |
| | 2.5 |
| | 2.5 |
| | 2.0 |
|
Percent long-term debt to total capitalization | 10.5 | % | | 2.8 | % | | 3.5 | % | | 5.8 | % | | 5.3 | % |
Other Data (End of Year) | | | | | | | | | |
Number of retail outlets* | 2,852 |
| | 2,824 |
| | 2,568 |
| | 2,459 |
| | 2,387 |
|
Number of employees | 27,500 |
| | 27,325 |
| | 22,250 |
| | 22,700 |
| | 21,475 |
|
|
| |
* | Includes 36 Little Burgundy stores added in Fiscal 2016 that were acquired on November 3, 2015, 185, 190 and 26 Locker Room by Lids leased departments in Macy's stores in Fiscal 2016, 2015 and 2014, respectively, and 75 Schuh stores and concessions added in Fiscal 2012 that were acquired on June 23, 2011. |
Reflected in earnings from continuing operations for Fiscal 2016 was a gain of $4.7 million from the sale of Lids Team Sports, for Fiscal 2015 was a charge of $7.1 million for an indemnification asset write-off and for Fiscal 2012 was $7.4 million in acquisition-related expenses.
Also reflected in earnings from continuing operations for Fiscal 2016, 2015, 2014, 2013 and 2012 were asset impairment and other charges of $7.9 million, $2.3 million, $1.3 million, $17.0 million and $2.7 million, respectively. See Note 3 to the Consolidated Financial Statements for additional information regarding these charges.
Long-term debt includes current obligations. In December 2015, the Company entered into the first amendment to the third amended and restated credit agreement. See Note 6 to the Consolidated Financial Statements for additional information regarding the Company’s debt.
The Company has not paid dividends on its Common Stock since 1973. See Notes 6 and 8 to the Consolidated Financial Statements and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Sources of Liquidity” for a description of limitations on the Company’s ability to pay dividends.
ITEM 7, MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
This discussion and the notes to the Consolidated Financial Statements, as well as Item 1, "Business", include certain forward-looking statements, which include statements regarding our intent, belief or expectations and all statements other than those made solely with respect to historical fact. Actual results could differ materially from those reflected by the forward-looking statements in this discussion and a number of factors may adversely affect the forward-looking statements and the Company’s future results, liquidity, capital resources or prospects. These include, but are not limited to, the level and timing of promotional activity necessary to maintain inventories at appropriate levels, the timing and amount of non-cash asset impairments related to retail store fixed assets and intangible assets of acquired businesses, the impact of post-closing adjustments and payments related to asset and business acquisitions and divestitures, the effectiveness of our omnichannel initiatives, weakness in the consumer economy and retail industry, competition in the Company’s markets, fashion trends that affect the sales or product margins of the Company’s retail product offerings, changes in buying patterns by significant wholesale customers, bankruptcies or deterioration in financial condition of significant wholesale customers or the inability of wholesale customers or consumers to obtain credit, disruptions in product supply or distribution, unfavorable trends in fuel costs, foreign exchange rates, foreign labor and material costs, and other factors affecting the cost of products, the Company’s ability to continue to complete and integrate acquisitions, expand its business and diversify its product base, changes in the timing of holidays or in the onset of seasonal weather affecting period-to-period sales comparisons, and the performance of athletic teams, the participants in major sporting events such as the Super Bowl and World Series, developments with respect to certain individual athletes, and other sports-related events or changes that may affect period-to-period comparisons in the Company's Lids Sports Group retail business. Additional factors that could affect the Company’s prospects and cause differences from expectations include the ability to build, open, staff and support additional retail stores and to renew leases in existing stores and control occupancy costs, and to conduct required remodeling or refurbishment on schedule and at expected expense levels, deterioration in the performance of individual businesses or of the Company’s market value relative to its book value, resulting in impairments of fixed assets or intangible assets or other adverse financial consequences, unexpected changes to the market for the Company’s shares, variations from expected pension-related charges caused by conditions in the financial markets, and the cost and outcome of litigation, investigations and environmental matters involving the Company. For a full discussion of risk factors, see Item 1A, "Risk Factors".
Overview
Description of Business
The Company’s business includes the design and sourcing, marketing and distribution of footwear and accessories through retail stores, including Journeys®, Journeys Kidz®, Shi by Journeys®, Little Burgundy®, Underground by Journeys® and Johnston & Murphy® in the U.S., Puerto Rico and Canada and through Schuh® stores in the United Kingdom, the Republic of Ireland and Germany, and through e-commerce websites and catalogs, and at wholesale, primarily under the Company’s Johnston & Murphy brand, the Trask brand, the licensed Dockers® brand, and other brands that the Company licenses for men’s footwear. The Company’s wholesale footwear brands are distributed to more than 1,275 retail accounts in the United States, including a number of leading department, discount, and specialty stores. The Company’s business also includes Lids Sports, which operates (i) headwear and accessory stores under the Lids® name and other names in the U.S., Puerto Rico and Canada, (ii) the Lids Locker Room and Lids Clubhouse businesses, consisting of sports-oriented fan shops featuring a broad array of licensed merchandise such as apparel, hats and accessories, sports decor and novelty products, operating under various trade names, (iii) licensed team merchandise departments in Macy's department stores operated under the name Locker Room by Lids and on macys.com under a license agreement with Macy's, and (iv) e-commerce operations. Including both the footwear businesses and the Lids Sports business, at January 30, 2016, the Company operated 2,852 retail stores and leased departments in the U.S., Puerto Rico, Canada, the United Kingdom, the Republic of Ireland and Germany.
During Fiscal 2016, the Company operated five reportable business segments (not including corporate): (i) Journeys Group, comprised of Journeys, Journeys Kidz, Shi by Journeys, Little Burgundy and Underground by Journeys retail footwear chains, e-commerce operations and catalog; (ii) Schuh Group, comprised of the Schuh retail footwear chain and e-commerce operations; (iii) Lids Sports Group, comprised as described in the preceding paragraph plus an athletic team dealer business operating as Lids Team Sports which was sold in the fourth quarter of Fiscal 2016; (iv) Johnston & Murphy Group, comprised of Johnston & Murphy retail operations, e-commerce operations and catalog and wholesale distribution of products under the Johnston & Murphy and Trask brands; and (v) Licensed Brands, comprised of Dockers® Footwear, sourced and marketed under a license from Levi Strauss & Company; SureGrip®Footwear, occupational footwear primarily sold directly to consumers; and other brands.
The Journeys retail footwear stores sell footwear and accessories primarily for 13 to 22 year old men and women. The stores average approximately 2,025 square feet. The Journeys Kidz retail footwear stores sell footwear primarily for younger children, ages five to 12. These stores average approximately 1,450 square feet. Shi by Journeys retail footwear stores sell footwear and accessories to fashion-conscious women in their early 20’s to mid 30’s. These stores average approximately 2,150 square feet. The Underground by Journeys retail footwear stores sell footwear and accessories primarily for men and women in the 20 to 35 age group. These stores average approximately 1,850 square feet. The Journeys Group stores are primarily in malls and factory outlet centers throughout the United States, Puerto Rico and Canada. The Company's Canadian subsidiary acquired the Little Burgundy retail footwear chain in Canada during the fourth quarter of Fiscal 2016. Little Burgundy is being operated under the Journeys Group. Little Burgundy retail footwear stores sell footwear and accessories to fashion-oriented men and women in the 18 to 34 age group ranging from students to young professionals. These stores average approximately 1,900 square feet. With the 36 Little Burgundy stores, Journeys Group now operates 75 stores in Canada. Journeys also sells footwear and accessories through direct-to-consumer catalog and e-commerce operations.
The Schuh retail footwear stores sell a broad range of branded casual and athletic footwear along with a meaningful private label offering primarily for 15 to 30 year old men and women. The stores, which average approximately 5,000 square feet, include both street-level and mall locations in the United Kingdom, the Republic of Ireland and Germany. During the third quarter of Fiscal 2013, the Schuh Group opened its first Schuh Kids store. As of January 30, 2016, the Company has opened ten Schuh Kids stores that sell footwear primarily for younger children, ages five to 12, and average 2,675 square feet. The Schuh Group also sells footwear through e-commerce operations.
The Lids Sports Group includes stores and kiosks, primarily under the Lids banner, that sell licensed and branded headwear to men and women primarily in the early-teens to mid-20’s age group. The Lids store locations average approximately 875 square feet and are primarily in malls, airports, street-level stores and factory outlet centers throughout the United States, Puerto Rico and Canada. The Lids Sports Group also operates Lids Locker Room and Lids Clubhouse stores under a number of trade names, selling licensed sports headwear, apparel and accessories to sports fans of all ages in locations averaging approximately 2,825 square feet in malls and other locations primarily in the United States. The Lids Sports Group operates 151 stores in Canada. The Lids Sports Group also operates Locker Room by Lids leased departments in Macy's department stores selling headwear, apparel, accessories and novelties from an assortment of college and professional teams specific to particular Macy's department stores' geographic locations. As of January 30, 2016, the Company had 185 Locker Room by Lids leased departments averaging approximately 650 square feet. The Lids Sports Group also sells headwear and accessories through e-commerce operations. In addition, the Lids Sports Group operated Lids Team Sports, an athletic team dealer business that was sold in the fourth quarter of Fiscal 2016.
Johnston & Murphy retail shops sell a broad range of men’s footwear, apparel and accessories. Women’s footwear and accessories are sold in select Johnston & Murphy retail locations. Johnston & Murphy shops average approximately 1,550 square feet and are located primarily in better malls and in airports throughout the United States and in Canada. Johnston & Murphy opened its first store in Canada during the fourth quarter of Fiscal 2012. As of January 30, 2016, Johnston & Murphy operated seven stores in Canada. The Company also has license and distribution agreements for wholesale and retail sales of Johnston & Murphy products in various non - U.S. jurisdictions. The Company also sells Johnston & Murphy footwear and accessories in factory stores, averaging approximately 2,400 square feet, located in factory outlet malls, and through a direct -to-consumer catalog and e-commerce operations. In addition, Johnston & Murphy shoes are distributed through the Company’s wholesale operations to better department and independent specialty stores. Additionally, the Company sells the Trask brand, with men's and women's footwear and leather accessories distributed to better independent retailers and department stores.
The Licensed Brands segment markets casual and dress casual footwear under the licensed Dockers® brand to men aged 30 to 55 through many of the same national retail chains that carry Dockers slacks and sportswear and in department and specialty stores across the country. The Company entered into an exclusive license with Levi Strauss & Co. to market men’s footwear in the United States under the Dockers brand name in 1991. Levi Strauss & Co. and the Company have subsequently added additional territories, including Canada and Mexico and certain other Latin American countries. The Dockers license agreement has been renewed for a term expiring November 30, 2018. The Company acquired Keuka Footwear in the third quarter of Fiscal 2011 and subsequently launched its SureGrip® Footwear line of slip-resistant, occupational footwear from that base. The Company sources and distributes the SureGrip line to employees in the hospitality, healthcare, and other industries. The Company also sells footwear under other licenses and in March 2015 entered into a License Agreement to source and distribute certain men's and women's footwear under the G.H. Bass trademark and related marks.
Strategy
The Company’s long-term strategy has been to seek organic growth by: 1) increasing the Company’s store base, 2) increasing retail square footage, 3) improving comparable sales, both in stores and digital commerce, 4) increasing operating margin and 5) enhancing the value of its brands.
To supplement its organic growth potential, the Company has made acquisitions, including the acquisition of the Schuh Group in June 2011 and several smaller acquisitions of businesses in the Lids Sports Group's markets, and expects to consider acquisition opportunities, either to augment its existing businesses or to enter new businesses that it considers compatible with its existing businesses, core expertise and strategic profile. Acquisitions involve a number of risks, including, among others, inaccurate valuation of the acquired business, the assumption of undisclosed liabilities, the failure to integrate the acquired business appropriately, and distraction of management from existing businesses. The Company seeks to mitigate these risks by applying appropriate financial metrics in its valuation analysis and developing and executing plans for due diligence and integration that are appropriate to each acquisition. The Company also seeks appropriate opportunities to extend existing brands and retail concepts. For example, the Schuh Group opened its first Schuh Kids store in Scotland during the third quarter of Fiscal 2013. The Company typically tests such extensions on a relatively small scale to determine their viability and to refine their strategies and operations before making significant, long-term commitments.
More generally, the Company attempts to develop strategies to mitigate the risks it views as material, including those discussed under the caption “Forward Looking Statements,” above, and those discussed in Item 1A, "Risk Factors". Among the most important of these factors are those related to consumer demand. Conditions in the economy can affect demand, resulting in changes in sales and, as prices are adjusted to drive sales and manage inventories, in gross margins. Because fashion trends influencing many of the Company’s target customers can change rapidly, the Company believes that its ability to react quickly to those changes has been important to its success. Even when the Company succeeds in aligning its merchandise offerings with consumer preferences, those preferences may affect results by, for example, driving sales of products with lower average selling prices or products which are more widely available in the marketplace and thus more subject to competitive pressures than the Company's typical offering. Moreover, economic factors, such as persistent unemployment and any future economic contraction and changes in tax policies, may reduce the consumer’s disposable income or his or her willingness to purchase discretionary items, and thus may reduce demand for the Company’s merchandise, regardless of the Company’s skill in detecting and responding to fashion trends. The Company believes its experience and discipline in merchandising and the buying power associated with its relative size and importance in the industry segments in which it competes are important to its ability to mitigate risks associated with changing customer preferences and other changes in consumer demand.
Summary of Results of Operations
The Company’s net sales increased 5.7% during Fiscal 2016 compared to Fiscal 2015. The increase reflected a 6% increase in Journeys Group sales, an 8% increase in Lids Sports Group sales and a 7% increase in Johnston & Murphy Group sales, while Schuh Group and Licensed Brands sales remained flat for Fiscal 2016. Gross margin decreased as a percentage of net sales from 49.0% in Fiscal 2015 to 47.8% in Fiscal 2016, reflecting gross margin decreases as a percentage of net sales in Schuh Group, Lids Sports Group and Johnston & Murphy Group, partially offset by increased gross margin as a percentage of net sales in Journeys Group and Licensed Brands. Selling and administrative expenses decreased as a percentage of net sales from 43.0% in Fiscal 2015 to 42.5% in Fiscal 2016, reflecting decreased expenses as a percentage of net sales in Schuh Group, Lids Sports Group and Johnston & Murphy Group, partially offset by increased expenses as a percentage of net sales in Journeys Group and Licensed Brands. Earnings from operations decreased as a percentage of net sales from 5.8% in Fiscal 2015 to 5.0% in Fiscal 2016, reflecting decreased earnings in Lids Sports Group and Licensed Brands, partially offset by improved earnings from operations in Journeys Group, Schuh Group and Johnston & Murphy Group.
Significant Developments
Sale of Lids Team Sports Business
On January 19, 2016, the Company completed the sale of the assets of the Lids Team Sports business, which has operated within its Lids Sports Group segment, to BSN Sports, LLC. The Company recognized a gain on the sale estimated at $4.7 million, net of transaction-related expenses before tax. The results of operations for Lids Team Sports is not a strategic shift that will have a major effect on operations and financial results, and therefore this business has not been presented as a discontinued operation in the Company's Consolidated Financial Statements.
Pursuant to the purchase agreement, on March 18, 2016, the buyer submitted a proposed adjustment of $2.4 million to the purchase price based upon a final calculation of certain working capital items as of the closing date. The Company is reviewing the proposed adjustment and the adjustment is reflected in the Consolidated Financial Statements as having occurred in the fourth quarter of Fiscal 2016.
Indemnification Asset Write-off
During the third quarter of Fiscal 2015, the Company recorded a pretax charge of $7.1 million for the write-off of an indemnification asset related to formerly uncertain tax positions that were taken by Schuh at the time of the Company's acquisition of Schuh, which were favorably resolved during the third quarter of Fiscal 2015.
Change in EVA Incentive Plan
Under the Company's EVA Incentive Plan, bonus awards in excess of a specified cap in any one year were retained and paid over three subsequent years, subject to reduction or elimination by deteriorating financial performance and historically were subject to forfeiture if the participant voluntarily resigns from employment with the Company. As a result, the bonus awards were subject to service conditions that resulted in recognition of expense over the period of service by the respective employee. During the first quarter of Fiscal 2015, the Company amended the plan to remove the future service requirement for the payment of the retained bonuses. As a result, the bonus expense that would have been deferred under the previous plan terms is now recognized in the first year of service. The Company recorded a $5.7 million charge to earnings in the first quarter of Fiscal 2015 in connection with the amendment related to bonus amounts previously deferred to future years.
Acquisitions
During Fiscal 2016, the Company completed the acquisition of Little Burgundy, a small retail footwear chain in Canada for a total purchase price of $35.1 million. The stores acquired are operated within the Journeys Group. During Fiscal 2015, the Company completed acquisitions of primarily small retail chains and one small wholesale business for a total purchase price of $34.9 million. In Fiscal 2014, the Company completed other acquisitions of primarily small retail chains for a total purchase price of $13.6 million. The stores acquired in Fiscal 2015 and 2014 are operated within the Lids Sports Group. The wholesale business acquired in Fiscal 2015 was operated within Lids Team Sports which was sold January 19, 2016.
Asset Impairment and Other Charges
The Company recorded a pretax charge to earnings of $7.9 million in Fiscal 2016, including $3.1 million for retail store asset impairments, $2.5 million for asset write-downs, $2.2 million for network intrusion expenses and $0.1 million for other legal matters.
The Company recorded a pretax charge to earnings of $2.3 million in Fiscal 2015, including $3.1 million for network intrusion expenses, $1.9 million for retail store asset impairments and $0.7 million for other legal matters, partially offset by a $3.4 million gain on a lease termination of a Lids store.
The Company recorded a pretax charge to earnings of $1.3 million in Fiscal 2014, including $3.3 million for network intrusion expenses, $2.4 million for other legal matters, $2.3 million for retail store asset impairments and $1.6 million for a lease termination, partially offset by an $8.3 million gain on the lease termination of a New York City Journeys store.
Postretirement Benefit Liability Adjustments
The return on pension plan assets was a loss of $4.4 million for Fiscal 2016, compared to an expected return of $5.8 million. The discount rate used to measure benefit obligations increased from 3.55% to 4.30% in Fiscal 2016. As a result of the increase in the discount rate and a change in the mortality table, partially offset by lower than expected asset returns, the pension liability reflected in the Consolidated Balance Sheets decreased to $10.0 million compared to $22.2 million at the end of Fiscal 2015. There was an decrease in the pension liability adjustment of $9.8 million (net of tax) in accumulated other comprehensive income in equity. Depending upon future interest rates and returns on plan assets and other factors, there can be no assurance that additional adjustments in future periods will not be required.
Discontinued Operations
In Fiscal 2016, Fiscal 2015 and Fiscal 2014, the Company recorded an additional charge to earnings of $1.3 million ($0.8 million net of tax), $2.7 million ($1.6 million net of tax) and $0.5 million ($0.3 million net of tax), respectively, reflected in discontinued operations, primarily for anticipated costs of environmental remedial alternatives related to former facilities operated by the Company. For additional information, see Notes 3 and 13 to the Consolidated Financial Statements.
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 footwear wholesale operations and its Schuh Group segment, cost is determined using the first-in, first-out ("FIFO") method. Market value 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 for footwear wholesale. The Company provides reserves when the inventory has not been marked down to market value based on current selling prices or when the inventory is not turning and is not expected to turn at levels satisfactory to the Company.
The Lids Sports Group segment employs the moving average cost method for valuing inventories and applies freight using an allocation method. The Company provides a valuation allowance for slow-moving inventory based on negative margins and estimated shrink based on historical experience and specific analysis, where appropriate.
In its retail operations, other than the Schuh Group and Lids Sports Group segments, the Company employs the retail inventory method, applying average cost-to-retail ratios to the retail value of inventories. Under the retail inventory method, valuing inventory at the lower of cost or market is achieved as markdowns are taken or accrued as a reduction of the retail value of inventories.
Inherent in the retail inventory method are subjective judgments and estimates, including merchandise mark-on, markups, markdowns, and shrinkage. These judgments and estimates, coupled with the fact that the retail inventory method is an averaging process, could produce a range of cost figures. To reduce the risk of inaccuracy and to ensure consistent presentation, the Company employs the retail inventory method in multiple subclasses of inventory with similar gross margins, and analyzes markdown requirements at the stock number level based on factors such as inventory turn, average selling price, and inventory age. In addition, the Company accrues markdowns as necessary. These additional markdown accruals reflect all of the above factors as well as current agreements to return products to vendors and vendor agreements to provide markdown support. In addition to markdown provisions, the Company maintains provisions for shrinkage and damaged goods based on historical rates.
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. A change of 10% from the recorded provisions for markdowns, shrinkage and damaged goods would have changed inventory by $1.5 million at January 30, 2016.
Impairment of Long-Lived Assets
As discussed in Note 1 to the Consolidated Financial Statements, the Company periodically assesses the realizability of its long-lived assets, other than goodwill, 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 or understatement of the value of long-lived assets.
The goodwill impairment test involves performing a qualitative assessment, on a reporting unit level, based on current circumstances. If the results of the qualitative assessment indicate that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, a two-step impairment test will not be performed. However, if the results of the qualitative assessment indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then a two-step impairment test is performed. Alternatively, the Company may elect to bypass the qualitative assessment and proceed directly to the two-step impairment test, on a reporting unit level. The first step is a comparison of the fair value and carrying value of the business unit with which the goodwill is associated. The Company estimates fair value using the best information available, and computes the fair value derived by an income approach utilizing discounted cash flow projections. The income approach uses a projection of a reporting unit’s estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects current market conditions. A key assumption in the Company’s fair value estimate is the weighted average cost of capital utilized for discounting its cash flow projections in its income approach. The Company believes the rate it used in its annual test, which was completed at the end of fourth quarter, was consistent with the risks inherent in its business and with industry discount rates. The projection uses management’s best estimates of economic and market conditions over the projected period including growth rates in sales, costs, estimates of future expected changes in operating margins and cash expenditures. Other significant
estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements.
If the carrying value of the business unit is higher than its fair value, there is an indication that impairment may exist and the second step must be performed to measure the amount of impairment loss. The amount of impairment is determined by comparing the implied fair value of reporting unit goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. Specifically, the Company would allocate the fair value to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, the Company would record an impairment charge for the difference.
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 13 to the Company’s Consolidated Financial Statements. The Company has made pretax accruals for certain of these contingencies, including approximately $0.8 million reflected in Fiscal 2016, $2.8 million reflected in Fiscal 2015 and $0.5 million reflected in Fiscal 2014. These charges are included in provision for discontinued operations, net in the Consolidated Statements of Operations because they relate to former facilities operated by the Company. The Company monitors these matters on an ongoing basis and, on a quarterly basis, management reviews the Company’s 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 accrued liability in relation to each proceeding is a best estimate of probable loss connected to the proceeding, or in cases in which no best estimate is possible, the minimum amount in the range of estimated losses, based upon its analysis of the facts and 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 provisions, that some or all liabilities will be adequate or that the amounts of any such additional provisions or any such inadequacy will not have a material adverse effect upon the Company’s financial condition or results of operations.
Revenue Recognition
Retail sales are recorded at the point of sale and are net of estimated returns and exclude sales and value added taxes. Catalog and internet sales are recorded at time of delivery to the customer and are net of estimated returns and exclude sales and value added taxes. Wholesale revenue is recorded net of estimated returns and allowances for markdowns, damages and miscellaneous claims when the related goods have been shipped and legal title has passed to the customer. Shipping and handling costs charged to customers are included in net sales. Estimated returns are based on historical returns and claims. Actual amounts of markdowns have not differed materially from estimates. Actual returns and claims in any future period may differ from historical experience.
Income Taxes
As part of the process of preparing Consolidated Financial Statements, the Company is required to estimate its income taxes in each of the tax jurisdictions in which it operates. This process involves estimating actual current tax obligations together with assessing temporary differences resulting from differing treatment of certain items for tax and accounting purposes, such as depreciation of property and equipment and valuation of inventories. These temporary differences result in deferred tax assets and liabilities, which are included within the Consolidated Balance Sheets. The Company then assesses the likelihood that its deferred tax assets will be recovered from future taxable income. Actual results could differ from this assessment if adequate taxable income is not generated in future periods. To the extent the Company believes that recovery of an asset is at risk, valuation allowances are established. To the extent valuation allowances are established or increased in a period, the Company includes an expense within the tax provision in the Consolidated Statements of Operations. These deferred tax valuation allowances may be released in future years when management considers that it is more likely than not that some portion or all of the deferred tax assets will be realized. In making such a determination, management will need to periodically evaluate whether or not all available evidence, such as future taxable income and reversal of temporary differences, tax planning strategies, and recent results of operations, provides sufficient positive evidence to offset any other potential negative evidence that may exist at such time. In the event the deferred tax valuation allowance is released, the Company would record an income tax benefit for the portion or all of the deferred tax valuation allowance released. At January 30, 2016, the Company had a deferred tax valuation allowance of $3.4 million.
Income tax reserves for uncertain tax positions are determined using the methodology required by the Income Tax Topic of the Accounting Standards Codification (“Codification”). This methodology requires companies to assess each income
tax position taken using a two step process. A determination is first made as to whether it is more likely than not that the position will be sustained, based upon the technical merits, upon examination by the taxing authorities. If the tax position is expected to meet the more likely than not criteria, the benefit recorded for the tax position equals the largest amount that is greater than 50% likely to be realized upon ultimate settlement of the respective tax position. Uncertain tax positions require determinations and estimated liabilities to be made based on provisions of the tax law which may be subject to change or varying interpretation. If the Company’s determinations and estimates prove to be inaccurate, the resulting adjustments could be material to its future financial results. See Note 9 to the Company’s Consolidated Financial Statements for additional information regarding income taxes.
The Company recorded an effective income tax rate of 37.1% for Fiscal 2016 compared to 36.7% for Fiscal 2015 and 41.5% for Fiscal 2014. The effective tax rate for Fiscal 2016 benefited from increased foreign earnings and lowering of foreign tax rates combined with a release of $1.3 million in valuation allowance on foreign net operating losses no longer required. The tax rate for Fiscal 2015 was lower than Fiscal 2014 primarily due to a $7.0 million reversal of charges previously recorded related to formerly uncertain tax positions that were recorded by Schuh at the time of the purchase by the Company, which were favorably resolved during Fiscal 2015. Related to the same uncertain tax position, the Company wrote off a $7.1 million indemnification asset during Fiscal 2015.
Postretirement Benefits Plan Accounting
Full-time employees who had at least 1,000 hours of service in calendar year 2004, except employees in the Lids Sports Group and Schuh Group segments, are covered by a defined benefit pension plan. The Company froze the defined benefit pension plan effective January 1, 2005. The Company also provides certain former employees with limited medical and life insurance benefits. The Company funds at least the minimum amount required by the Employee Retirement Income Security Act.
As required by the Compensation – Retirement Benefits Topic of the Codification, the Company is required to recognize the overfunded or underfunded status of postretirement benefit plans as an asset or liability in their Consolidated Balance Sheets and to recognize changes in that funded status in accumulated other comprehensive loss, net of tax, in the year in which the changes occur.
The Company recognizes pension expense on an accrual basis over employees’ approximate service periods. The calculation of pension expense and the corresponding liability requires the use of a number of critical assumptions, including the expected long-term rate of return on plan assets and the assumed discount rate, as well as the recognition of actuarial gains and losses. Changes in these assumptions can result in different expense and liability amounts, and future actual experience can differ from these assumptions.
Long Term Rate of Return Assumption – Pension expense increases as the expected rate of return on pension plan assets decreases. The Company estimates that the pension plan assets will generate a long-term rate of return of 6.35%. To develop this assumption, the Company considered historical asset returns, the current asset allocation and future expectations of asset returns. The expected long-term rate of return on plan assets is based on a long-term investment policy of 50% U.S. equities, 13% international equities, 35% U.S. fixed income securities and 2% cash equivalents. For Fiscal 2016, if the expected rate of return had been decreased by 1%, net pension expense would have increased by $0.9 million, and if the expected rate of return had been increased by 1%, net pension expense would have decreased by $0.9 million.
Discount Rate – Pension liability and future pension expense increase as the discount rate is reduced. The Company discounted future pension obligations using a rate of 4.30%, 3.55% and 4.40% for Fiscal 2016, 2015 and 2014, respectively. The discount rate at January 30, 2016 was determined based on a yield curve of high quality corporate bonds with cash flows matching the Company’s plans’ expected benefit payments. For Fiscal 2016, if the discount rate had been increased by 0.5%, net pension expense would have decreased by $0.7 million, and if the discount rate had been decreased by 0.5%, net pension expense would have increased by $0.7 million. In addition, if the discount rate had been increased by 0.5%, the projected benefit obligation would have decreased by $6.9 million and the accumulated benefit obligation would have decreased by $6.9 million. If the discount rate had been decreased by 0.5%, the projected benefit obligation would have been increased by $7.7 million and the accumulated benefit obligation would have increased by $7.7 million.
Amortization of Gains and Losses – The Company utilizes a calculated value of assets, which is an averaging method that recognizes changes in the fair values of assets over a period of five years. At the end of Fiscal 2016, the Company had unrecognized actuarial losses of $21.4 million. Accounting principles generally accepted in the United States require that the Company recognize a portion of these losses when they exceed a calculated threshold. These losses might be recognized as a component of pension expense in future years and would be amortized over the average future service of employees, which is currently approximately nine years. Future changes in plan asset returns, assumed discount rates and various other
factors related to the pension plan will impact future pension expense and liabilities, including increasing or decreasing unrecognized actuarial gains and losses.
The Company recognized expense for its defined benefit pension plans of $3.9 million, $2.6 million and $4.4 million in Fiscal 2016, 2015 and 2014, respectively. The Company’s pension expense is expected to decrease in Fiscal 2017 by approximately $3.9 million due to a smaller actuarial loss to be amortized, resulting from a higher discount rate and experience study updates. Additionally, the amortization period for gains and losses has increased due to the experience study updates.
Comparable Sales
For purposes of this report, "comparable sales" are sales from stores open longer than one year, beginning in the fifty-third week of a store’s operation (which we refer to in this report as "same store sales"), and sales from websites operated longer than one year and direct mail catalog sales (which we refer to in this report as "comparable direct sales"). Temporarily closed stores are excluded from the comparable sales calculation for every full week of the store closing. Expanded stores are excluded from the comparable sales calculation until the fifty-third week of operation in the expanded format. Current year foreign exchange rates are applied to both current year and prior year comparable sales to achieve a consistent basis for comparison.
Results of Operations—Fiscal 2016 Compared to Fiscal 2015
The Company’s net sales for Fiscal 2016 increased 5.7% to $3.02 billion from $2.86 billion in Fiscal 2015. The increase in net sales was a result of increased sales in Journeys Group, Lids Sports Group and Johnston & Murphy Group, while Schuh Group and Licensed Brands sales remained flat for Fiscal 2016. Gross margin increased 3.1% to $1.44 billion in Fiscal 2016 from $1.40 billion in Fiscal 2015, but decreased as a percentage of net sales from 49.0% in Fiscal 2015 to 47.8% in Fiscal 2016, primarily reflecting decreased gross margin as a percentage of net sales in the Lids Sports Group, Schuh Group and Johnston & Murphy Group, offset slightly by increased gross margin as a percentage of net sales in Journeys Group and Licensed Brands. Selling and administrative expenses in Fiscal 2016 increased 4.3% from Fiscal 2015 but decreased as a percentage of net sales from 43.0% to 42.5%, primarily reflecting expense decreases in Schuh Group, Lids Sports Group and Johnston & Murphy Group, partially offset by increased expenses in Journeys Group and Licensed Brands. The Company records buying and merchandising and occupancy costs in selling and administrative expense. Because the Company does not include these costs in cost of sales, the Company’s gross margin may not be comparable to other retailers that include these costs in the calculation of gross margin. Explanations of the changes in results of operations are provided by business segment in discussions following these introductory paragraphs.
Earnings from continuing operations before income taxes (“pretax earnings”) for Fiscal 2016 were $151.5 million, compared to $157.0 million for Fiscal 2015. Pretax earnings for Fiscal 2016 included asset impairment and other charges of $7.9 million, including $3.1 million for retail store asset impairments, $2.5 million for asset write-downs, $2.2 million for expenses related to the computer network intrusion announced in December 2010 and $0.1 million for other legal matters. Pretax earnings for Fiscal 2016 also included a gain of $4.7 million on the sale of Lids Team Sports and $1.5 million in expense related to the deferred purchase price obligation related to the Schuh acquisition. Pretax earnings for Fiscal 2015 included asset impairment and other charges of $2.3 million, including $3.1 million for expenses related to the computer network intrusion, $1.9 million for retail store asset impairments and $0.7 million for other legal matters, partially offset by a $3.4 million gain on a lease termination. Pretax earnings for Fiscal 2015 also included an indemnification asset write-off of $7.1 million related to formerly uncertain tax positions that were taken by Schuh at the time of the purchase by the Company, which were favorably resolved during the year and $7.3 million in expense related to the deferred purchase price obligation related to the Schuh acquisition.
Net earnings for Fiscal 2016 were $94.6 million ($4.11 diluted earnings per share) compared to $97.7 million ($4.12 diluted earnings per share) for Fiscal 2015. Net earnings for Fiscal 2016 included a $0.8 million ($0.03 diluted loss per share) charge to earnings (net of tax), primarily for anticipated costs of environmental remedial alternatives related to former facilities operated by the Company. Net earnings for Fiscal 2015 included a $1.6 million ($0.07 diluted loss per share) charge to earnings (net of tax), primarily for anticipated costs of environmental remedial alternatives related to former facilities operated by the Company. The Company recorded an effective federal income tax rate of 37.1% for Fiscal 2016 compared to 36.7% for Fiscal 2015. The effective tax rate for Fiscal 2016 benefited from increased foreign earnings and lowering of foreign tax rates combined with a release of $1.3 million in valuation allowance on foreign net operating losses no longer required. The tax rate for Fiscal 2015 was lower primarily due to a $7.0 million reversal of charges previously recorded related to formerly uncertain tax positions that were taken by Schuh at the time of the purchase by the Company, which were favorably resolved during Fiscal 2015. See Note 9 to the Consolidated Financial Statements for additional information.
Journeys Group
|
| | | | | | | | | | |
| Fiscal Year Ended | | % Change |
| 2016 | | 2015 | |
| (dollars in thousands) | | |
Net sales | $ | 1,251,637 |
| | $ | 1,179,476 |
| | 6.1 | % |
Earnings from operations | $ | 126,248 |
| | $ | 114,784 |
| | 10.0 | % |
Operating margin | 10.1 | % | | 9.7 | % | | |
Net sales from Journeys Group increased 6.1% to $1.25 billion for Fiscal 2016 from $1.18 billion for Fiscal 2015. The increase reflects primarily a 5% increase in comparable sales which includes a 5% increase in same store sales and an 18% increase in comparable direct sales, and a 1% 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). The comparable store sales increase reflected a 4% increase in average price per pair of shoes, while footwear unit comparable sales remained flat. The store count for Journeys Group was 1,222 stores at the end of Fiscal 2016, including 200 Journeys Kidz stores, 46 Shi by Journeys stores, 98 Underground by Journeys stores, 39 Journeys stores in Canada and 36 Little Burgundy stores in Canada, acquired in the fourth quarter of Fiscal 2016, compared to 1,182 stores at the end of Fiscal 2015, including 189 Journeys Kidz stores, 49 Shi by Journeys stores, 110 Underground by Journeys stores and 35 Journeys stores in Canada.
Journeys Group earnings from operations for Fiscal 2016 increased 10.0% to $126.2 million, compared to $114.8 million for Fiscal 2015. The increase in earnings from operations was primarily due to increased net sales and increased gross margin as a percentage of net sales, reflecting higher initial margins due to changes in sales mix.
Schuh Group
|
| | | | | | | | | | |
| Fiscal Year Ended | | % Change |
| 2016 | | 2015 | |
| (dollars in thousands) | | |
Net sales | $ | 405,674 |
| | $ | 406,947 |
| | (0.3 | )% |
Earnings from operations | $ | 19,124 |
| | $ | 10,110 |
| | 89.2 | % |
Operating margin | 4.7 | % | | 2.5 | % | | |
Net sales from the Schuh Group decreased 0.3% to $405.7 million for Fiscal 2016, compared to $406.9 million for Fiscal 2015. The sales decrease reflects primarily a decrease of $33.0 million in sales due to the depreciation of the British Pound, offset by a 12% increase in average stores operated and a 3% increase in comparable sales which includes a 1% increase in same store sales and a 13% increase in comparable direct sales. Schuh Group operated 125 stores, including ten Schuh Kids stores at the end of Fiscal 2016 compared to 108 stores, including six Schuh Kids stores at the end of Fiscal 2015.
Schuh Group earnings from operations increased 89.2% to $19.1 million in Fiscal 2016 compared to $10.1 million for Fiscal 2015. Earnings included $1.5 million for Fiscal 2016 and $7.3 million for Fiscal 2015 in compensation expense related to a deferred purchase price obligation in connection with the Schuh acquisition in Fiscal 2014. Earnings also included $11.8 million for Fiscal 2015 related to accruals for a contingent bonus payment for Schuh employees provided for in the Schuh acquisition. The increase in earnings from operations was primarily due to decreased expenses as a percentage of net sales, reflecting the decreases in deferred purchase price expense and contingent bonus expense referred to above. The decrease in expense more than offset the decreased gross margin as a percentage of net sales, which reflected increased shipping and warehouse expense and increased promotional activity.
Lids Sports Group
|
| | | | | | | | | | |
| Fiscal Year Ended | | % Change |
| 2016 | | 2015 | |
| (dollars in thousands) | | |
Net sales | $ | 975,504 |
| | $ | 902,661 |
| | 8.1 | % |
Earnings from operations | $ | 17,040 |
| | $ | 48,970 |
| | (65.2 | )% |
Operating margin | 1.7 | % | | 5.4 | % | | |
Net sales from the Lids Sports Group increased 8.1% to $975.5 million for Fiscal 2016 from $902.7 million for Fiscal 2015. The increase primarily reflects a 6% increase in comparable sales, reflecting a 3% increase in same store sales and a 46% increase in comparable direct sales for Fiscal 2016 and a 2% increase in average Lids Sports Group stores operated, excluding leased departments. The comparable sales increase reflected a 14% increase in comparable store hat units sold while the average price per hat decreased 7% reflecting aggressive promotional activity to clear excess inventory positions throughout the year. Lids Sports Group operated 1,332 stores at the end of Fiscal 2016, including 113 Lids stores in Canada, 228 Lids Locker Room and Clubhouse stores, which include 38 Locker Room stores in Canada, and 185 Locker Room by Lids leased departments at Macy's, compared to 1,364 stores at the end of Fiscal 2015 including 117 Lids stores in Canada and 242 Lids Locker Room and Clubhouse stores, which include 37 Locker Room stores in Canada, and 190 Locker Room by Lids leased departments at Macy's.
Lids Sports Group earnings from operations for Fiscal 2016 decreased 65.2% to $17.0 million compared to $49.0 million for Fiscal 2015. The decrease in operating income was primarily due to decreased gross margin as a percentage of net sales, reflecting promotional activity, changes in sales mix and increased shipping and warehouse expenses.
Johnston & Murphy Group
|
| | | | | | | | | | |
| Fiscal Year Ended | | % Change |
| 2016 | | 2015 | |
| (dollars in thousands) | | |
Net sales | $ | 278,681 |
| | $ | 259,675 |
| | 7.3 | % |
Earnings from operations | $ | 17,761 |
| | $ | 14,856 |
| | 19.6 | % |
Operating margin | 6.4 | % | | 5.7 | % | | |
Johnston & Murphy Group net sales increased 7.3% to $278.7 million for Fiscal 2016 from $259.7 million for Fiscal 2015. The increase reflected primarily a 6% increase in comparable sales which includes a 5% increase in same store sales and an 11% increase in comparable direct sales, a 1% increase in average stores operated for Johnston & Murphy retail operations and an 8% increase in Johnston & Murphy wholesale sales. Unit sales for the Johnston & Murphy wholesale business increased 6% in Fiscal 2016 while the average price per pair of shoes was flat for the same period. Retail operations accounted for 71.7% of the Johnston & Murphy Group's sales in Fiscal 2016, down slightly from 72.0% in Fiscal 2015. The comparable sales increase in Fiscal 2016 reflects a 4% increase in the average price per pair of shoes for Johnston & Murphy retail operations and a 1% increase in footwear unit comparable sales. The store count for Johnston & Murphy retail operations at the end of Fiscal 2016 included 173 Johnston & Murphy shops and factory stores, including seven stores in Canada, compared to 170 Johnston & Murphy shops and factory stores, including seven stores in Canada, at the end of Fiscal 2015.
Johnston & Murphy earnings from operations for Fiscal 2016 increased 19.6% to $17.8 million from $14.9 million for Fiscal 2015, primarily due to increased net sales and decreased expenses as a percentage of net sales, due primarily to decreased advertising expenses and occupancy costs.
Licensed Brands
|
| | | | | | | | | | |
| Fiscal Year Ended | | % Change |
| 2016 | | 2015 | |
| (dollars in thousands) | | |
Net sales | $ | 109,826 |
| | $ | 110,115 |
| | (0.3 | )% |
Earnings from operations | $ | 9,236 |
| | $ | 10,459 |
| | (11.7 | )% |
Operating margin | 8.4 | % | | 9.5 | % | | |
Licensed Brands’ net sales decreased 0.3% to $109.8 million for Fiscal 2016 from $110.1 million for Fiscal 2015. The small sales decrease reflects decreased sales of Dockers Footwear, offset by increased sales of SureGrip Footwear and Chaps Footwear. The sales decrease in Dockers Footwear reflects weakness in the department store channel. Unit sales for Dockers Footwear decreased 6% for Fiscal 2016, while the average price per pair of shoes increased 2% for the same period.
Licensed Brands’ earnings from operations for Fiscal 2016 decreased 11.7%, from $10.5 million for Fiscal 2015 to $9.2 million, primarily due to increased expenses as a percentage of net sales, reflecting start-up costs for the launch of the Bass footwear line and increased compensation and bad debt expenses.
Corporate, Interest Expenses and Other Charges
Corporate and other expense for Fiscal 2016 was $38.2 million compared to $31.9 million for Fiscal 2015. Corporate expense in Fiscal 2016 included $7.9 million in asset impairment and other charges, primarily for retail store asset impairments, asset write-downs, network intrusion expenses and other legal matters. Corporate expense in Fiscal 2015 included $2.3 million in asset impairment and other charges, primarily for network intrusion expenses, retail store asset impairments and other legal matters, partially offset by a gain on a lease termination. Excluding the charges listed above, corporate and other expense increased primarily due to increased compensation expense and professional fees, partially offset by decreased foreign exchange losses.
Net interest expense increased 36.4% from $3.2 million in Fiscal 2015 to $4.4 million in Fiscal 2016 primarily due to increased revolver borrowings compared to the previous year as a result of the share repurchase program, Little Burgundy acquisition and increased borrowings to fund the Schuh contingent bonus and deferred purchase price payments.
Results of Operations—Fiscal 2015 Compared to Fiscal 2014
The Company’s net sales for Fiscal 2015 increased 8.9% to $2.86 billion from $2.62 billion in Fiscal 2014. The increase in net sales was a result of increased sales across all of the Company's business segments. Gross margin increased 7.8% to $1.40 billion in Fiscal 2015 from $1.30 billion in Fiscal 2014, but decreased as a percentage of net sales from 49.5% in Fiscal 2014 to 49.0% in Fiscal 2015, primarily reflecting decreased gross margin as a percentage of net sales in the Schuh Group, Lids Sports Group and Johnston & Murphy Group, offset slightly by increased gross margin as a percentage of net sales in Journeys Group and Licensed Brands. Selling and administrative expenses in Fiscal 2015 increased 8.5% from Fiscal 2014 but decreased as a percentage of net sales from 43.2% to 43.0%, primarily reflecting expense decreases in Journeys Group and Schuh Group, partially offset by increased expenses in Lids Sports Group, Johnston & Murphy Group and Licensed Brands. The Company records buying and merchandising and occupancy costs in selling and administrative expense. Because the Company does not include these costs in cost of sales, the Company’s gross margin may not be comparable to other retailers that include these costs in the calculation of gross margin. Explanations of the changes in results of operations are provided by business segment in discussions following these introductory paragraphs.
Pretax earnings for Fiscal 2015 were $157.0 million, compared to $158.9 million for Fiscal 2014. Pretax earnings for Fiscal 2015 included asset impairment and other charges of $2.3 million, including $3.1 million for expenses related to the computer network intrusion announced in December 2010, $1.9 million for retail store asset impairments and $0.7 million for other legal matters, partially offset by a $3.4 million gain on a lease termination. Pretax earnings for Fiscal 2015 also included an indemnification asset write-off of $7.1 million related to formerly uncertain tax positions that were taken by Schuh at the time of the purchase by the Company, which were favorably resolved during the year and $7.3 million in expense related to the deferred purchase price obligation related to the Schuh acquisition. Pretax earnings for Fiscal 2014 included asset impairment and other charges of $1.3 million, including $3.3 million for expenses related to the computer network intrusion announced in December 2010, $2.4 million for other legal matters, $2.3 million for retail store asset impairments and $1.6 million for a lease termination partially offset by an $(8.3) million gain on the lease termination of a New York City Journeys store. Pretax earnings for Fiscal 2014 also include $11.7 million in expense related to the deferred purchase price obligation related to the Schuh acquisition.
Net earnings for Fiscal 2015 were $97.7 million ($4.12 diluted earnings per share) compared to $92.7 million ($3.92 diluted earnings per share) for Fiscal 2014. Net earnings for Fiscal 2015 included a $1.6 million ($0.07 diluted loss per share) charge to earnings (net of tax), primarily for anticipated costs of environmental remedial alternatives related to former facilities operated by the Company. Net earnings for Fiscal 2014 included a $0.3 million ($0.02 diluted loss per share) charge to earnings (net of tax) primarily for anticipated costs of environmental remedial alternatives related to former facilities operated by the Company. The Company recorded an effective federal income tax rate of 36.7% for Fiscal 2015 compared to 41.5% for Fiscal 2014. The tax rate for Fiscal 2015 was lower primarily due to a $7.0 million reversal of charges previously recorded related to formerly uncertain tax positions that were taken by Schuh at the time of the purchase by the Company, which were favorably resolved during Fiscal 2015. See Note 9 to the Consolidated Financial Statements for additional information.
Journeys Group
|
| | | | | | | | | | |
| Fiscal Year Ended | | % Change |
| 2015 | | 2014 | |
| (dollars in thousands) | | |
Net sales | $ | 1,179,476 |
| | $ | 1,082,241 |
| | 9.0 | % |
Earnings from operations | $ | 114,784 |
| | $ | 97,377 |
| | 17.9 | % |
Operating margin | 9.7 | % | | 9.0 | % | | |
Net sales from Journeys Group increased 9.0% to $1.18 billion for Fiscal 2015 from $1.08 billion for Fiscal 2014. The increase reflects primarily an 8% increase in comparable sales which includes a 7% increase in same store sales and a 30% increase in comparable direct sales, and a 1% 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). The comparable store sales increase reflected a 6% increase in footwear unit comparable sales while the average price per pair of shoes remained flat. The store count for Journeys Group was 1,182 stores at the end of Fiscal 2015, including 189 Journeys Kidz stores, 49 Shi by Journeys stores, 110 Underground by Journeys stores and 35 Journeys stores in Canada, compared to 1,168 stores at the end of Fiscal 2014, including 174 Journeys Kidz stores, 50 Shi by Journeys stores, 117 Underground by Journeys stores and 31 Journeys stores in Canada.
Journeys Group earnings from operations for Fiscal 2015 increased 17.9% to $114.8 million, compared to $97.4 million for Fiscal 2014. The increase in earnings from operations was primarily due to increased net sales, increased gross margin as a percentage of net sales, reflecting lower markdowns, and to decreased expenses as a percentage of net sales, reflecting positive leverage from positive comparable sales.
Schuh Group
|
| | | | | | | | | | |
| Fiscal Year Ended | | % Change |
| 2015 | | 2014 | |
| (dollars in thousands) | | |
Net sales | $ | 406,947 |
| | $ | 364,732 |
| | 11.6 | % |
Earnings from operations | $ | 10,110 |
| | $ | 3,063 |
| | 230.1 | % |
Operating margin | 2.5 | % | | 0.8 | % | | |
Net sales from the Schuh Group increased 11.6% to $406.9 million for Fiscal 2015, compared to $364.7 million for Fiscal 2014. The sales increase reflects primarily a 7% increase in average stores operated, an increase of $12.2 million in sales due to the appreciation of the British Pound and a 1% increase in comparable sales which includes a 1% decrease in same store sales and a 12% increase in comparable direct sales. Schuh Group operated 108 stores, including six Schuh Kids stores at the end of Fiscal 2015 compared to 99 stores, including four Schuh Kids stores at the end of Fiscal 2014.
Schuh Group earnings from operations increased to $10.1 million in Fiscal 2015 compared to $3.1 million for Fiscal 2014. Earnings included $7.3 million for Fiscal 2015 and $11.7 million for Fiscal 2014 in compensation expense related to a deferred purchase price obligation in connection with the acquisition. Earnings also included $11.8 million for Fiscal 2015 and $13.1 million for Fiscal 2014 related to accruals for a contingent bonus payment for Schuh employees provided for in the Schuh acquisition. The increase in earnings from operations was primarily due to increased net sales and decreased expenses as a percentage of net sales, reflecting the decreases in deferred purchase price expense and contingent bonus
expense referred to above. The decrease in expense more than offset the decreased gross margin as a percentage of net sales, which reflected increased shipping and warehouse expense and increased markdowns.
Lids Sports Group
|
| | | | | | | | | | |
| Fiscal Year Ended | | % Change |
| 2015 | | 2014 | |
| (dollars in thousands) | | |
Net sales | $ | 902,661 |
| | $ | 820,996 |
| | 9.9 | % |
Earnings from operations | $ | 48,970 |
| | $ | 63,748 |
| | (23.2 | )% |
Operating margin | 5.4 | % | | 7.8 | % | | |
Net sales from the Lids Sports Group increased 9.9% to $902.7 million for Fiscal 2015 from $821.0 million for Fiscal 2014. The increase primarily reflects a 6% increase in average Lids Sports Group stores operated, excluding leased departments, and a 2% increase in comparable sales, reflecting a 1% increase in same store sales and a 14% increase in comparable direct sales for Fiscal 2015. The comparable sales increase reflected a 2% increase in comparable store hat units sold while the average price per hat remained flat. Lids Sports Group operated 1,364 stores at the end of Fiscal 2015, including 117 Lids stores in Canada, 242 Lids Locker Room and Clubhouse stores, which include 37 Locker Room stores in Canada, and 190 Locker Room by Lids leased departments at Macy's, compared to 1,133 stores at the end of Fiscal 2014, including 110 Lids stores in Canada and 177 Lids Locker Room and Clubhouse stores, and 26 Locker Room by Lids leased departments at Macy's.
Lids Sports Group earnings from operations for Fiscal 2015 decreased 23.2% to $49.0 million compared to $63.7 million for Fiscal 2014. The decrease in operating income was primarily due to decreased gross margin as a percentage of net sales, reflecting promotional activity, increased shipping and warehouse expenses and changes in sales mix, and to increased expenses as a percentage of net sales, primarily reflecting increased occupancy and central expenses to support growth initiatives.
Johnston & Murphy Group
|
| | | | | | | | | | |
| Fiscal Year Ended | | % Change |
| 2015 | | 2014 | |
| (dollars in thousands) | | |
Net sales | $ | 259,675 |
| | $ | 245,941 |
| | 5.6 | % |
Earnings from operations | $ | 14,856 |
| | $ | 17,638 |
| | (15.8 | )% |
Operating margin | 5.7 | % | | 7.2 | % | | |
Johnston & Murphy Group net sales increased 5.6% to $259.7 million for Fiscal 2015 from $245.9 million for Fiscal 2014. The increase reflected primarily a 5% increase in average stores operated for Johnston & Murphy retail operations, a 1% increase in comparable sales which includes a 1% increase in same store sales and a 1% decrease in comparable direct sales, and a 4% increase in Johnston & Murphy wholesale sales. Unit sales for the Johnston & Murphy wholesale business increased 3% in Fiscal 2015 and the average price per pair of shoes increased 1% for the same period. Retail operations accounted for 71.8% of the Johnston & Murphy Group's sales in Fiscal 2015, down slightly from 71.9% in Fiscal 2014. The comparable sales increase in Fiscal 2015 reflects a 3% increase in the average price per pair of shoes for Johnston & Murphy retail operations, while footwear unit comparable sales decreased 3%. The store count for Johnston & Murphy retail operations at the end of Fiscal 2015 included 170 Johnston & Murphy shops and factory stores, including seven stores in Canada, compared to 168 Johnston & Murphy shops and factory stores, including seven stores in Canada, at the end of Fiscal 2014.
Johnston & Murphy earnings from operations for Fiscal 2015 decreased 15.8% to $14.9 million from $17.6 million for Fiscal 2014, primarily due to decreased gross margin as a percentage of net sales, reflecting higher markdowns and increased shipping and warehouse expenses, and to increased expenses as a percentage of net sales, due primarily to increased advertising expenses, occupancy costs and selling salaries.
Licensed Brands
|
| | | | | | | | | | |
| Fiscal Year Ended | | % Change |
| 2015 | | 2014 | |
| (dollars in thousands) | | |
Net sales | $ | 110,115 |
| | $ | 109,780 |
| | 0.3 | % |
Earnings from operations | $ | 10,459 |
| | $ | 10,614 |
| | (1.5 | )% |
Operating margin | 9.5 | % | | 9.7 | % | | |
Licensed Brands’ net sales increased 0.3% to $110.1 million for Fiscal 2015 from $109.8 million for Fiscal 2014. The small sales increase reflects an increase in sales of SureGrip Footwear, mostly offset by decreased sales of Dockers Footwear. Unit sales for Dockers Footwear decreased 6% for Fiscal 2015, while the average price per pair of shoes increased 4% for the same period.
Licensed Brands’ earnings from operations for Fiscal 2015 decreased 1.5%, from $10.6 million for Fiscal 2014 to $10.5 million, primarily due to increased expenses as a percentage of net sales, reflecting license agreement expense and increased compensation and depreciation expenses.
Corporate, Interest Expenses and Other Charges
Corporate and other expense for Fiscal 2015 was $31.9 million compared to $29.0 million for Fiscal 2014. Corporate expense in Fiscal 2015 included $2.3 million in asset impairment and other charges, primarily for network intrusion expenses, retail store asset impairments and other legal matters, partially offset by a gain on a lease termination. Corporate expense in Fiscal 2014 included $1.3 million in asset impairment and other charges, primarily for network intrusion expenses, retail store asset impairments, other legal matters and a lease termination, partially offset by a gain on another lease termination. Excluding the charges listed above, corporate and other expense increased primarily due to increased bonus expense as a result of the reversal of bonus accruals last year.
Net interest expense decreased 29.5% from $4.6 million in Fiscal 2014 to $3.2 million in Fiscal 2015 primarily due to lower average borrowings under the Company's Credit Facility.
Liquidity and Capital Resources
The following table sets forth certain financial data at the dates indicated.
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| | | | | | | | | | | |
| Jan. 30, 2016 | | Jan. 31, 2015 | | Feb. 1, 2014 |
| (dollars in millions) |
Cash and cash equivalents | $ | 133.3 |
| | $ | 112.9 |
| | $ | 59.4 |
|
Working capital | $ | 476.5 |
| | $ | 441.7 |
| | $ | 451.3 |
|
Long-term debt (includes current maturities) | $ | 112.1 |
| | $ | 29.2 |
| | $ | 33.7 |
|
Working Capital
The Company’s business is seasonal, with the Company’s investment in inventory and accounts receivable normally reaching peaks in the spring and fall of each year. Historically, cash flow from operations has been generated principally in the fourth quarter of each fiscal year.
Cash provided by operating activities was $145.1 million in Fiscal 2016 compared to $189.8 million in Fiscal 2015. The $44.7 million decrease from operating activities from Fiscal 2015 reflects a decrease in cash flow from changes in other accrued liabilities and other assets and liabilities combined, accounts payable and prepaids and other current assets of $52.7 million, $25.1 million and $9.1 million, respectively, partially offset by a $58.8 million increase in cash flow from changes in inventory.
The $52.7 million decrease in cash flow from other accrued liabilities and other assets and liabilities combined reflects the Schuh contingent bonus, deferred purchase price and other acquisition related payments and an increase in income tax payments this year versus last year. The $25.1 million decrease in cash flow from accounts payable reflects changes in buying patterns and payment terms negotiated with individual vendors and is related to the reduction in inventory. The $9.1 million decrease in cash flow from prepaids and other current assets reflects changes in prepaid taxes and increased
prepaid rent from store growth. The $58.8 million increase in cash flow from inventory reflects a reduction in Lids Sports Group inventory, partially offset primarily by an increase in Journeys Group inventory.
The $27.8 million decrease in inventories at January 30, 2016 from January 31, 2015 levels reflects decreases in Lids Sports Group, partially offset by increased inventory in Journeys Group, Johnston & Murphy Group and Licensed Brands.
Accounts receivable at January 30, 2016 increased $6.7 million compared to January 31, 2015 due to increased footwear wholesale sales and the Company's processing of payroll for former Lids Team Sports employees during a transitional period following the sale of the Lids Team Sports business, for which the Company is due reimbursement as a result of the sale of that business.
Cash provided by operating activities was $189.8 million in Fiscal 2015 compared to $140.0 million in Fiscal 2014. The $49.8 million increase from operating activities from Fiscal 2014 reflects an increase in cash flow from changes in inventory, prepaids and other current assets and accounts payable of $27.4 million, $9.1 million and $7.8 million, respectively, and to increased earnings. The $27.4 million increase in cash flow from inventory reflects a reduction in Journeys Group inventory.
The $9.1 million increase in cash flow from prepaids and other current assets reflected changes in prepaid income taxes. The $7.8 million increase in cash flow from accounts payable reflects changes in buying patterns and payment terms negotiated with individual vendors.
The $31.0 million increase in inventories at January 31, 2015 from February 1, 2014 levels reflects increases in Lids Sports Group and Johnston & Murphy retail inventory, resulting from a net increase of 231 Lids Sports Group stores and leased departments, slower than expected holiday sales and increased wholesale inventory in Lids Team Sports and Johnston & Murphy.
Accounts receivable at January 31, 2015 increased $1.3 million compared to February 1, 2014.
Sources of Liquidity
The Company has three principal sources of liquidity: cash from operations, cash and cash equivalents on hand and the Credit Facilities discussed below. The Company believes that cash and cash equivalents on hand, cash from operations and availability under its Credit Facilities will be sufficient to cover its working capital and capital expenditures for the foreseeable future.
On December 4, 2015, the Company entered into the First Amendment to the Third Amended and Restated Credit Agreement dated as of January 31, 2014 (the “Credit Facility”) by the among the company, certain subsidiaries of the Company party thereto, as other Borrowers,with the lenders party thereto and Bank of America, N.A., as agent, providing for a revolving credit facility in the aggregate principal amount of $400.0 million, including a $70.0 million sublimit for the issuance of letters of credit and a domestic swingline subfacility of up to $40.0 million, a revolving credit subfacility for the benefit of GCO Canada, Inc. in an aggregate amount not to exceed $70.0 million, which includes a $5.0 million sublimit for the issuance of letters of credit, and revolving credit subfacility for the benefit of Genesco (UK) Limited in an aggregate amount not to exceed $50.0 million, which includes a $10.0 million sublimit for the issuance of letters of credit and a swingline subfacility of up to $10.0 million. The facility has a five-year term from January 31, 2014. Any swingline loans and any letters of credit and borrowings under the Canadian facilities will reduce the availability under the Credit Facility on a dollar-for-dollar basis.
The Company has the option, from time to time, to increase the availability under the Credit Facility by an aggregate amount of up to $150.0 million subject to, among other things, the receipt of commitments for the increased amount. In connection with this increased facility, the Canadian revolving credit facility may be increased up to no more than $85.0 million.
Genesco (UK) Limited has a one-time option to increase the availability of its subfacility under the Credit Facility by an additional amount of up to $50.0 million.
The aggregate amount of the loans made and letters of credit issued under the Credit Facility shall at no time exceed the lesser of the facility amount ($400.0 million or, if increased as described above, up to $550.0 million or $600.0 million, respectively) or the "Borrowing Base", which generally is based on 90% of eligible inventory plus 85% of eligible wholesale receivables plus 90% of eligible credit card and debit card receivables less applicable reserves (the "Loan Cap"). The relevant assets of Genesco (UK) Limited will be included in the Borrowing Base if the additional $50.0 million sublimit increase is exercised, provided that amounts borrowed by Genesco (UK) Limited based solely on its own borrowing base will be limited to $50.0 million and the total outstanding to Genesco (UK) Limited will not exceed 30% of the Loan Cap.
The Credit Facility also provides that a first-in, last-out tranche could be added to the revolving credit facility at the option of the Company subject to, among other things, the receipt of commitments for such tranche. For additional information on the Company’s Credit Facility, see Note 6 to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data".
In May 2015, Schuh Group Limited entered into a Form of Amended and Restated Facilities Agreement and Working Capital Facility Letter ("UK Credit Facilities") which replaced the former A, B and C term loans with a new Facility A of £17.5 million and a Facility B of £11.6 million (which was the former Facility C loan) as well as provided an additional revolving credit facility, Facility C, of £22.5 million and a working capital facility of £2.5 million. The Facility A loan bears interest at LIBOR plus 1.8% per annum with quarterly payments through April 2017. The Facility B loan bears interest at LIBOR plus 2.5% per annum with quarterly payments through September 2019. The Facility C bears interest at LIBOR plus 2.2% per annum and expires in September 2019.
There were $28.9 million in UK term loans and $24.8 million in UK revolver loans outstanding at January 30, 2016. The UK Credit Facilities contain certain covenants at the Schuh level including a minimum interest coverage covenant of 4.50x and thereafter, a maximum leverage covenant initially set at 2.25x declining over time at various rates to 1.75x beginning in April 2017 and a minimum cash flow coverage of 1.00x. The Company was in compliance with all the covenants at January 30, 2016. The UK Credit Facilities are secured by a pledge of all the assets of Schuh and its subsidiaries.
The Company's revolving credit borrowings averaged $49.6 million during Fiscal 2016 and $17.3 million during Fiscal 2015, as cash on hand, cash generated from operations and revolver borrowings primarily funded seasonal working capital requirements, capital expenditures and stock repurchases for Fiscal 2016 and Fiscal 2015, along with the acquisition of Little Burgundy in Fiscal 2016.
There were $13.5 million of letters of credit outstanding and $58.3 million of revolver borrowings outstanding, including $22.1 million (£15.6 million) related to Genesco (UK) Limited and $36.2 million (C$51.0 million) related to GCO Canada, under the Credit Facility at January 30, 2016. The Company is not required to comply with any financial covenants under the Credit Facility unless Excess Availability (as defined in the Credit Agreement) is less than the greater of $25.0 million or 10.0% of the Loan Cap. If and during such time as Excess Availability is less than the greater of $25.0 million or 10.0% of the Loan Cap, the Credit Facility requires the Company to meet a minimum fixed charge coverage ratio of (a) an amount equal to consolidated EBITDA less capital expenditures and taxes paid in cash, in each case for such period, to (b) fixed charges for such period, of not less than 1.0:1.0. Excess Availability was $279.3 million at January 30, 2016. Because Excess Availability exceeded $25.0 million or 10.0% of the Loan Cap, the Company was not required to comply with this financial covenant at January 30, 2016.
The Credit Facility contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness in excess of specified amounts and to agreements which would have a material adverse effect if breached, certain events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts and change in control.
The Company’s Credit Facility prohibits the payment of dividends and other restricted payments unless as of the date of the making of any Restricted Payment (as defined in the Credit Facility) or consummation of any Acquisition (as defined in the Credit Facility), (a) no Default (as defined in the Credit Facility) or Event of Default (as defined in the Credit Facility)exists or would arise after giving effect to such Restricted Payment or Acquisition, and (b) either (i) the Borrowers (as defined in the Credit Facility) have pro forma projected Excess Availability for the following six month period equal to or greater than 25% of the Loan Cap, after giving pro forma effect to such Restricted Payment or Acquisition, or (ii) (A) the Borrowers have pro forma projected Excess Availability for the following six month period of less than 25% of the Loan Cap but equal to or greater than 15% of the Loan Cap, after giving pro forma effect to the Restricted Payment or Acquisition, and (B) the Fixed Charge Coverage Ratio (as defined in the Credit Facility), on a pro-forma basis for the twelve months preceding such Restricted Payment or Acquisition, will be equal to or greater than 1.0:1.0 and (c) after giving effect to such Restricted Payment or Acquisition, the Company and the other Borrowers under the Credit Facility are Solvent (as defined in the Credit Facility). Notwithstanding the foregoing, the company may make cash dividends on preferred stock up to $500,000 in any fiscal year absent a continuing Event of Default. The Company’s management does not expect availability under the Credit Facility to fall below the requirements listed above during Fiscal 2017.
Off-Balance Sheet Arrangements
None.
Contractual Obligations
The following tables set forth aggregate contractual obligations and commitments as of January 30, 2016.
|
| | | | | | | | | | | | | | | | | | | |
(in thousands) | Payments Due by Period |
| | | | | | | | | |
Contractual Obligations | Total | | Less than 1 year | | 1 - 3 years | | 3 - 5 years | | More than 5 years |
Long-Term Debt Obligations | $ | 112,058 |
| | $ | 14,182 |
| | $ | 63,308 |
| | $ | 34,568 |
| | $ | — |
|
Operating Lease Obligations | 1,297,902 |
| | 238,660 |
| | 387,144 |
| | 295,662 |
| | 376,436 |
|
Purchase Obligations(1) | 678,582 |
| | 678,582 |
| | — |
| | — |
| | — |
|
Long-Term Obligations – Schuh(2) | 2,939 |
| | 984 |
| | 1,501 |
| | 454 |
| | — |
|
Other Long-Term Liabilities | 1,134 |
| | 176 |
| | 351 |
| | 351 |
| | 256 |
|
Total Contractual Obligations(3) | $ | 2,092,615 |
| | $ | 932,584 |
| | $ | 452,304 |
| | $ | 331,035 |
| | $ | 376,692 |
|
|
| | | | | | | | | | | | | | | | | | | |
(in thousands) | Amount of Commitment Expiration Per Period |
| | | | | | | | | |
Commercial Commitments | Total Amounts Committed | | Less than 1 year | | 1 - 3 years | | 3 - 5 years | | More than 5 years |
Letters of Credit | $ | 13,519 |
| | $ | 13,519 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Total Commercial Commitments | $ | 13,519 |
| | $ | 13,519 |
| | $ | — |
| | $ | — |
| | $ | — |
|
(1) Represents open purchase orders for inventory.
(2) Includes interest on the UK debt. For additional information, see Note 6 to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data".
(3) Excludes unrecognized tax benefits of $10.2 million due to their uncertain nature in timing of payments, if any.
The total accrued benefit liability for pension and other postretirement benefit plans as of January 30, 2016, was $16.8 million. This amount is impacted by, among other items, pension expense, funding levels, plan amendments, changes in plan demographics and assumptions, and the investment return on plan assets. Because the accrued liability does not represent expected liquidity needs, the Company did not include this amount in the contractual obligations table. There is no requirement for the Company to make a pension plan contribution. See Note 10 to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data".
Capital Expenditures
Capital expenditures were $100.7 million, $103.1 million and $98.5 million for Fiscal 2016, 2015 and 2014, respectively. The $2.4 million decrease in Fiscal 2016 capital expenditures as compared to Fiscal 2015 is primarily due to decreases in capital expenditures of Lids Sports Group partially offset by increased retail capital expenditures in Journeys Group. The $4.6 million increase in Fiscal 2015 capital expenditures as compared to Fiscal 2014 reflected an increase primarily due to major capital projects related to a fit-out of a new distribution center and construction of a new office building.
Total capital expenditures in Fiscal 2017 are expected to be approximately $125 million to $135 million. These include retail capital expenditures of approximately $114 million to $124 million to open approximately 40 Journeys stores, including 10 in Canada, 45 Journeys Kidz stores, two Little Burgundy stores, nine Schuh stores, including three Schuh Kids stores, nine Johnston & Murphy shops and factory stores, and 25 Lids Sports Group stores, including 20 Lids stores, with 5 stores in Canada, and 5 Lids Locker Room stores, and to complete approximately 231 major store renovations. The planned amount of capital expenditures in Fiscal 2017 for wholesale operations and other purposes is approximately $11 million, including approximately $5.6 million for new systems.
Future Capital Needs
The Company expects that cash on hand and cash provided by operations and borrowings under its Credit Facilities will be sufficient to support seasonal working capital, capital expenditure requirements and share repurchases during Fiscal 2017. The approximately $11.4 million of costs associated with discontinued operations that are expected to be paid during the next twelve months are expected to be funded from cash on hand, cash generated from operations and borrowings under the Credit Facilities during Fiscal 2017.
The Company had total available cash and cash equivalents of $133.3 million and $112.9 million as of January 30, 2016 and January 31, 2015, respectively, of which approximately $24.1 million and $25.2 million was held by the Company's foreign subsidiaries as of January 30, 2016 and January 31, 2015, respectively. The Company's strategic plan does not require the repatriation of foreign cash in order to fund its operations in the U.S., and it is the Company's current intention to permanently reinvest its foreign cash and cash equivalents outside of the U.S. If the Company were to repatriate foreign cash to the U.S., it would be required to accrue and pay U.S. taxes in accordance with applicable U.S. tax rules and regulations as a result of the repatriation.
Common Stock Repurchases
Pursuant to its Board-approved share repurchase program, the Company repurchased 2,383,384 shares at a cost of $144.9 million during Fiscal 2016, of which $7.2 million was not paid in the fourth quarter but included in other accrued liabilities in the Consolidated Balance Sheets. The Company has repurchased 663,200 shares in the first quarter of Fiscal 2017, through March 29, 2016, at a cost of $43.2 million. The Company has $40.9 million remaining as of March 29, 2016 under its current $100.0 million share repurchase authorization. The Company repurchased 64,709 shares at a cost of $4.6 million during Fiscal 2015. The Company repurchased 337,665 shares at a cost of $20.7 million during Fiscal 2014.
Environmental and Other Contingencies
The Company is subject to certain loss contingencies related to environmental proceedings and other legal matters, including those disclosed in Item 3, "Legal Proceedings" and Note 13 to the Company’s Consolidated Financial Statements. The Company has made pretax accruals for certain of these contingencies, including approximately $0.8 million reflected in Fiscal 2016, $2.8 million reflected in Fiscal 2015 and $0.5 million reflected in Fiscal 2014. These charges are included in provision for discontinued operations, net in the Consolidated Statements of Operations because they relate to former facilities operated by the Company. The Company monitors these matters on an ongoing basis and, on a quarterly basis, management reviews the Company’s 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 accrued liability in relation to each proceeding is a best estimate of the probable loss connected to the proceeding, or in cases in which no best estimate is possible, the minimum amount in the range of estimated losses, based upon its analysis of the facts and 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 provisions, that some or all liabilities may not be adequate or that the amounts of any such additional provisions 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.
Outstanding Debt of the Company – The Company has $28.9 million of outstanding U.K. term loans at a weighted average interest rate of 2.78% as of January 30, 2016. A 100 basis point increase in interest rates would increase annual interest expense by $0.3 million on the $28.9 million term loans. The Company has $24.8 million of outstanding U.K. revolver borrowings at a weighted average interest rate of 2.78% as of January 30, 2016. A 100 basis point increase in interest rates would increase annual interest expense by $0.2 million on the $24.8 million revolver borrowings. The Company has $58.3 million of outstanding U.S. revolver borrowings at a weighted average interest rate of 2.12% as of January 30, 2016. A 100 basis point increase in interest rates would increase annual interest expense by $0.6 million on the $58.3 million revolver borrowings.
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 did not have significant exposure to changing interest rates on invested cash at January 30, 2016. As a result, the Company considers the interest rate market risk implicit in these investments at January 30, 2016 to be low.
Summary – Based on the Company’s overall market interest rate exposure at January 30, 2016, the Company believes that the effect, if any, of reasonably possible near-term changes in interest rates on the Company’s consolidated financial position, results of operations or cash flows for Fiscal 2017 would not be material.
Accounts Receivable – The Company’s accounts receivable balance at January 30, 2016 is concentrated primarily in two of its footwear wholesale businesses, which sell primarily to department stores and independent retailers across the United States. In the footwear wholesale wholesale businesses, one customer accounted for 9%, two other customers each accounted for 8% while all other customers accounted for 7% or less of the Company’s total trade receivables balance as of January
30, 2016. The Company monitors the credit quality of its customers and establishes an allowance for doubtful accounts based upon factors surrounding credit risk of specific customers, historical trends and other information, as well as customer specific factors; however, credit risk is affected by conditions or occurrences within the economy and the retail industry, as well as company-specific information.
Foreign Currency Exchange Risk – The Company is exposed to translation risk because certain of its foreign operations utilize the local currency as their functional currency and those financial results must be translated into United States dollars. As currency exchange rates fluctuate, translation of the Company's financial statements of foreign businesses into United States dollars affects the comparability of financial results between years.
New Accounting Principles
In February 2016, the FASB issued ASU 2016-02, "Leases" ("ASU 2016-02"). The standard's core principle is to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, which would be the beginning of our Fiscal 2020 or February 2019. Early adoption is permitted. The Company is currently assessing the impact the adoption of ASU 2016-02 will have on its Consolidated Financial Statements and related disclosures and is expecting a material impact because the Company is party to a significant number of lease contracts.
In November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes" ("ASU 2015-17"). ASU 2015-17 requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. ASU 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and may be applied either prospectively or retrospectively. Early adoption is permitted. As of January 30, 2016, the Company has $29.0 million of current deferred tax assets that will be reclassed to noncurrent deferred tax assets on its Consolidated Balance Sheets. The change to noncurrent classification could have a significant impact on our working capital. The Company is currently assessing which transition method will be adopted.
In April 2015, the FASB issued ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"). In August 2015, the FASB issued ASU 2015-15, "Presentation and Subsequent measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements" ("ASU 2015-15"). ASU 2015-03 will require that debt issuance costs be presented in the balance sheet as a deduction from the carrying amount of the debt. ASU 2015-15 allows an entity to present debt issuance costs associated with a revolving line of credit arrangement as an asset, regardless of whether a balance is outstanding. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03 or ASU 2015-15. These ASU's are effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period, with early adoption permitted. ASU 2015-03 will require the Company to reclassify its deferred financing costs associated with its long-term debt from other noncurrent assets to long-term debt on a retrospective basis. The Company does not expect the new standards to impact the Company's results of operations or cash flows.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09"). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and merges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. ASU 2014-09 was originally effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, however, in August 2015, the FASB deferred this ASU for one year, which would be the beginning of our Fiscal 2019 or February 2018. The amendment is to be applied either retrospectively to each prior reporting period presented or with the cumulative effect recognized at the date of initial adoption as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets on the balance sheet). Early adoption is not permitted. The Company is currently assessing the impact the adoption of ASU 2014-09 will have on its Consolidated Financial Statements and related disclosures, including which transition method will be adopted.
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 appearing under the heading “Financial Market Risk” in Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
On Internal Control over Financial Reporting
The Board of Directors and Shareholders
Genesco Inc.
We have audited Genesco Inc. and Subsidiaries' internal control over financial reporting as of January 30, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). Genesco Inc. and Subsidiaries' management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Genesco Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of January 30, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Genesco Inc. and Subsidiaries as of January 30, 2016 and January 31, 2015, and the related consolidated statements of operations, comprehensive income, cash flows, and equity for each of the three fiscal years in the period ended January 30, 2016, and our report dated March 30, 2016 expressed an unqualified opinion thereon. Our audits also included the financial statement schedule listed in the Index at Item 15.
|
| |
| /s/ Ernst & Young LLP |
Nashville, Tennessee | |
March 30, 2016 | |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Genesco Inc.
We have audited the accompanying consolidated balance sheets of Genesco Inc. and Subsidiaries (the “Company”) as of January 30, 2016 and January 31, 2015, and the related consolidated statements of operations, comprehensive income, cash flows and equity for each of the three fiscal years in the period ended January 30, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15. 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 audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Genesco Inc. and Subsidiaries at January 30, 2016 and January 31, 2015, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended January 30, 2016, in conformity with U.S. generally accepted accounting principles. 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.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of January 30, 2016, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), and our report dated March 30, 2016 expressed an unqualified opinion thereon.
|
| |
| /s/ Ernst & Young LLP |
Nashville, Tennessee | |
March 30, 2016 | |
Genesco Inc.
and Subsidiaries
Consolidated Balance Sheets
In Thousands, except share amounts
|
| | | | | | | |
| As of Fiscal Year End |
Assets | January 30, 2016 | | January 31, 2015 |
Current Assets: |
Cash and cash equivalents | $ | 133,288 |
| | $ | 112,867 |
|
Accounts receivable, net of allowances of $2,960 at January 30, | | | |
2016 and $4,191 at January 31, 2015 | 47,265 |
| | 55,263 |
|
Inventories | 529,758 |
| | 598,145 |
|
Deferred income taxes | 28,965 |
| | 28,293 |
|
Prepaids and other current assets | 60,810 |
| | 53,090 |
|
Total current assets | 800,086 |
| | 847,658 |
|
| | | |
Property and equipment: | | | |
Land | 8,038 |
| | 7,653 |
|
Buildings and building equipment | 51,768 |
| | 32,872 |
|
Computer hardware, software and equipment | 183,985 |
| | 164,512 |
|
Furniture and fixtures | 209,337 |
| | 192,078 |
|
Construction in progress | 16,190 |
| | 25,587 |
|
Improvements to leased property | 359,591 |
| | 349,087 |
|
Property and equipment, at cost | 828,909 |
| | 771,789 |
|
Accumulated depreciation | (505,581 | ) | | (466,037 | ) |
Property and equipment, net | 323,328 |
| | 305,752 |
|
Deferred income taxes | 959 |
| | 31 |
|
Goodwill | 281,385 |
| | 296,865 |
|
Trademarks, net of accumulated amortization of $5,039 at | | | |
January 30, 2016 and $5,054 at January 31, 2015 | 86,740 |
| | 82,263 |
|
Other intangibles, net of accumulated amortization of $15,947 at | | | |
January 30, 2016 and $23,389 at January 31, 2015 | 3,569 |
| | 11,585 |
|
Other noncurrent assets | 45,416 |
| | 38,933 |
|
Total Assets | $ | 1,541,483 |
| | $ | 1,583,087 |
|
Genesco Inc.
and Subsidiaries
Consolidated Balance Sheets
In Thousands, except share amounts
|
| | | | | | | |
| As of Fiscal Year End |
Liabilities and Equity | January 30, 2016 | | January 31, 2015 |
Current Liabilities: | | | |
Accounts payable | $ | 154,241 |
| | $ | 176,307 |
|
Accrued employee compensation | 23,666 |
| | 88,030 |
|
Accrued other taxes | 24,508 |
| | 33,965 |
|
Accrued income taxes | 16,349 |
| | 12,921 |
|
Current portion – long-term debt | 14,182 |
| | 13,152 |
|
Other accrued liabilities | 79,282 |
| | 71,036 |
|
Provision for discontinued operations | 11,389 |
| | 10,505 |
|
Total current liabilities | 323,617 |
| | 405,916 |
|
Long-term debt | 97,876 |
| | 16,003 |
|
Pension liability | 9,957 |
| | 22,184 |
|
Deferred rent and other long-term liabilities | 149,020 |
| | 135,953 |
|
Provision for discontinued operations | 4,230 |
| | 4,254 |
|
Total liabilities | 584,700 |
| | 584,310 |
|
Commitments and contingent liabilities |
|
| |
|
|
Equity | | | |
Non-redeemable preferred stock | 1,077 |
| | 1,274 |
|
Common equity: | | | |
Common stock, $1 par value: | | | |
Authorized: 80,000,000 shares | | | |
Issued/Outstanding: | | | |
January 30, 2016 – 22,322,799/21,834,335 | | | |
January 31, 2015 – 24,515,362/24,026,898 | 22,323 |
| | 24,515 |
|
Additional paid-in capital | 224,004 |
| | 208,888 |
|
Retained earnings | 768,222 |
| | 820,563 |
|
Accumulated other comprehensive loss | (42,613 | ) | | (40,576 | ) |
Treasury shares, at cost (488,464 shares) | (17,857 | ) | | (17,857 | ) |
Total Genesco equity | 955,156 |
| | 996,807 |
|
Noncontrolling interest – non-redeemable | 1,627 |
| | 1,970 |
|
Total equity | 956,783 |
| | 998,777 |
|
Total Liabilities and Equity | $ | 1,541,483 |
| | $ | 1,583,087 |
|
The accompanying Notes are an integral part of these Consolidated Financial Statements.
Genesco Inc.
and Subsidiaries
Consolidated Statements of Operations
In Thousands, except per share amounts
|
| | | | | | | | | | |
| Fiscal Year |
| | 2016 |
| 2015 |
| 2014 |
|
Net sales | | $ | 3,022,234 |
| $ | 2,859,844 |
| $ | 2,624,972 |
|
Cost of sales | | 1,578,768 |
| 1,459,433 |
| 1,325,922 |
|
Selling and administrative expenses | | 1,284,322 |
| 1,230,864 |
| 1,134,274 |
|
Asset impairments and other, net | | 7,893 |
| 2,281 |
| 1,341 |
|
Earnings from operations | | 151,251 |
| 167,266 |
| 163,435 |
|
Gain on sale of Lids Team Sports | | (4,685 | ) | — |
| — |
|
Indemnification asset write-off | | — |
| 7,050 |
| — |
|
Interest expense, net: | | | | |
Interest expense | | 4,414 |
| 3,337 |
| 4,641 |
|
Interest income | | (11 | ) | (110 | ) | (66 | ) |
Total interest expense, net | | 4,403 |
| 3,227 |
| 4,575 |
|
Earnings from continuing operations before income taxes | | 151,533 |
| 156,989 |
| 158,860 |
|
Income tax expense | | 56,152 |
| 57,616 |
| 65,878 |
|
Earnings from continuing operations | | 95,381 |
| 99,373 |
| 92,982 |
|
Provision for discontinued operations, net | | (812 | ) | (1,648 | ) | (329 | ) |
Net Earnings | | $ | 94,569 |
| $ | 97,725 |
| $ | 92,653 |
|
| | | | |
Basic earnings per common share: | | | | |
Continuing operations | | $ | 4.17 |
| $ | 4.23 |
| $ | 3.99 |
|
Discontinued operations | | (0.04 | ) | (0.07 | ) | (0.01 | ) |
Net earnings | | $ | 4.13 |
| $ | 4.16 |
| $ | 3.98 |
|
Diluted earnings per common share: | | | | |
Continuing operations | | $ | 4.15 |
| $ | 4.19 |
| $ | 3.94 |
|
Discontinued operations | | (0.04 | ) | (0.07 | ) | (0.02 | ) |
Net earnings | | $ | 4.11 |
| $ | 4.12 |
| $ | 3.92 |
|
The accompanying Notes are an integral part of these Consolidated Financial Statements.
Genesco Inc.
and Subsidiaries
Consolidated Statements of Comprehensive Income
In Thousands, except as noted
|
| | | | | | | | | |
| Fiscal Year |
| 2016 | 2015 | 2014 |
Net earnings | $ | 94,569 |
| $ | 97,725 |
| $ | 92,653 |
|
Other comprehensive income (loss): | | | |
Pension liability adjustment net of tax of $6.3 million, | | | |
$4.0 million and $6.2 million for 2016, 2015 and | | | |
2014, respectively | 9,756 |
| (6,343 | ) | 9,510 |
|
Postretirement liability adjustment net of tax of $0.4 | | | |
million, $0.4 million and $0.3 million in 2016, 2015 | | | |
and 2014, respectively | 666 |
| (644 | ) | (542 | ) |
Foreign currency translation adjustments | (12,459 | ) | (16,822 | ) | 2,506 |
|
Total other comprehensive (loss) income | (2,037 | ) | (23,809 | ) | 11,474 |
|
Comprehensive Income | $ | 92,532 |
| $ | 73,916 |
| $ | 104,127 |
|
The accompanying Notes are an integral part of these Consolidated Financial Statements.
Genesco Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
In Thousands
|
| | | | | | | | | |
| Fiscal Year |
| 2016 |
| 2015 |
| 2014 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net earnings | $ | 94,569 |
| $ | 97,725 |
| $ | 92,653 |
|
Adjustments to reconcile net earnings to net cash | | | |
provided by operating activities: | | | |
Depreciation and amortization | 79,011 |
| 74,326 |
| 67,135 |
|
Amortization of deferred note expense and debt discount | 820 |
| 692 |
| 801 |
|
Deferred income taxes | (2,125 | ) | 5,212 |
| 14,983 |
|
Provision for (recoveries on) accounts receivable | 637 |
| 390 |
| (525 | ) |
Indemnification asset write-off | — |
| 7,050 |
| — |
|
Impairment of long-lived assets | 3,125 |
| 1,890 |
| 2,347 |
|
Restricted stock expense | 13,758 |
| 13,392 |
| 12,295 |
|
Provision for discontinued operations | 1,333 |
| 2,711 |
| 543 |
|
Gain on sale of Lids Team Sports | (4,685 | ) | — |
| — |
|
Tax benefit of stock options and restricted stock | (150 | ) | (3,061 | ) | (3,784 | ) |
Other | 3,708 |
| 894 |
| 1,301 |
|
Effect on cash from changes in working capital and other | | | |
assets and liabilities, net of acquisitions/dispositions: | | | |
Accounts receivable | (6,669 | ) | (1,325 | ) | (3,684 | ) |
Inventories | 27,827 |
| (30,955 | ) | (58,386 | ) |
Prepaids and other current assets | (8,879 | ) | 179 |
| (8,885 | ) |
Accounts payable | 2,505 |
| 27,646 |
| 19,850 |
|
Other accrued liabilities | (70,890 | ) | 52,694 |
| (10,093 | ) |
Other assets and liabilities | 11,223 |
| (59,696 | ) | 13,448 |
|
Net cash provided by operating activities | 145,118 |
| 189,764 |
| 139,999 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Capital expenditures | (100,652 | ) | (103,111 | ) | (98,456 | ) |
Acquisitions, net of cash acquired | (35,063 | ) | (34,918 | ) | (13,567 | ) |
Proceeds from asset sales and sale of business | 59,915 |
| 336 |
| 75 |
|
Net cash used in investing activities | (75,800 | ) | (137,693 | ) | (111,948 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Payments of long-term debt | (24,920 | ) | (31,583 | ) | (6,428 | ) |
Proceeds from issuance of long-term debt | 27,417 |
| 26,253 |
| 15,124 |
|
Borrowings under revolving credit facility | 401,276 |
| 280,950 |
| 402,200 |
|
Payments on revolving credit facility | (311,067 | ) | (280,950 | ) | (429,900 | ) |
Tax benefit of stock options and restricted stock | 150 |
| 3,061 |
| 3,784 |
|
Shares repurchased | (137,648 | ) | (4,635 | ) | (20,676 | ) |
Change in overdraft balances | (600 | ) | 3,489 |
| 6,025 |
|
Redemption of preferred shares | — |
| — |
| (1,462 | ) |
Dividends paid on non-redeemable preferred stock | — |
| — |
| (33 | ) |
Additions to deferred note cost | (655 | ) | — |
| — |
|
Exercise of stock options | 1,442 |
| 2,009 |
| 3,230 |
|
Other | (2,950 | ) | (43 | ) | (1,790 | ) |
Net cash used in financing activities | (47,555 | ) | (1,449 | ) | (29,926 | ) |
Effect of foreign exchange rate fluctuations on cash | (1,342 | ) | 2,798 |
| 1,527 |
|
Net Increase (Decrease) in Cash and Cash Equivalents | 20,421 |
| 53,420 |
| (348 | ) |
Cash and cash equivalents at beginning of period | 112,867 |
| 59,447 |
| 59,795 |
|
Cash and cash equivalents at end of period | $ | 133,288 |
| $ | 112,867 |
| $ | 59,447 |
|
Net cash paid for: | | | |
Interest | $ | 3,408 |
| $ | 2,632 |
| $ | 3,769 |
|
Income taxes | 58,940 |
| 42,816 |
| 52,618 |
|
The accompanying Notes are an integral part of these Consolidated Financial Statements.
Genesco Inc.
and Subsidiaries
Consolidated Statements of Equity
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
In Thousands | Total Non-Redeemable Preferred Stock |
| | Common Stock |
| | Additional Paid-In Capital |
| | Retained Earnings |
| | Accumulated Other Comprehensive Loss |
| | Treasury Shares |
| | Non Controlling Interest Non-Redeemable |
| | Total Equity |
|
Balance February 2, 2013 | $ | 3,924 |
| | $ | 24,485 |
| | $ | 170,360 |
| | $ | 669,189 |
| | $ | (28,241 | ) | | $ | (17,857 | ) | | $ | 1,927 |
| | $ | 823,787 |
|
Net earnings | — |
| | — |
| | — |
| | 92,653 |
| | — |
| | — |
| | — |
| | 92,653 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 11,474 |
| | — |
| | — |
| | 11,474 |
|
Dividends paid on non-redeemable preferred stock | — |
| | — |
| | — |
| | (33 | ) | | — |
| | — |
| | — |
| | (33 | ) |
Exercise of stock options | — |
| | 130 |
| | 2,904 |
| | — |
| | — |
| | — |
| | — |
| | 3,034 |
|
Issue shares – Employee Stock Purchase Plan | — |
| | 3 |
| | 193 |
| | — |
| | — |
| | — |
| | — |
| | 196 |
|
Employee and non-employee restricted stock | — |
| | — |
| | 12,295 |
| | — |
| | — |
| | — |
| | — |
| | 12,295 |
|
Restricted stock issuance | — |
| | 214 |
| | (214 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Restricted shares withheld for taxes | — |
| | (105 | ) | | 105 |
| | (6,938 | ) | | — |
| | — |
| | — |
| | (6,938 | ) |
Tax benefit of stock options and | | | | | | | | | | | | | | | |
restricted stock exercised | — |
| | — |
| | 3,784 |
| | — |
| | — |
| | — |
| | — |
| | 3,784 |
|
Shares repurchased | — |
| | (338 | ) | | — |
| | (20,338 | ) | | — |
| | — |
| | — |
| | (20,676 | ) |
Redemption of preferred shares | (1,462 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,462 | ) |
Other | (1,157 | ) | | 19 |
| | 1,141 |
| | — |
| | — |
| | — |
| | — |
| | 3 |
|
Noncontrolling interest – gain | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6 |
| | 6 |
|
Balance February 1, 2014 | 1,305 |
| | 24,408 |
| | 190,568 |
| | 734,533 |
| | (16,767 |