GENESCO INC (GCO) FY 2023 MD&A

ITEM 7, MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Consolidated Financial Statements and related Notes and other financial information appearing elsewhere in this Annual Report on Form 10-K, and with Part II, Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) of our Annual Report on Form 10-K for the fiscal year ended January 29, 2022, filed with the SEC on March 23, 2022, which provides a discussion of our financial condition and results of operations for Fiscal 2022 compared to our Fiscal 2021.

Summary of Results of Operations

•
Net sales decreased 1.5% in Fiscal 2023 compared to Fiscal 2022.

•
Journeys Group sales decreased 6% and Genesco Brands Group sales decreased 8%, partially offset by an increase of 2% at Schuh Group and 24% at Johnston & Murphy Group.

•
Comparable direct sales were flat for Fiscal 2023.

•
Gross margin decreased as a percentage of net sales from 48.8% in Fiscal 2022 to 47.6% in Fiscal 2023.

•
Selling and administrative expenses increased as a percentage of net sales from 42.7% in Fiscal 2022 to 43.7% in Fiscal 2023.

•
Operating margin decreased as a percentage of net sales from 6.4% in Fiscal 2022 to 3.9% in Fiscal 2023.

•
The effective income tax rate decreased from 24.9% in Fiscal 2022 to 19.8% in Fiscal 2023.

•
Diluted earnings per share from continuing operations were $5.69 per share in Fiscal 2023 compared to $7.92 per share in Fiscal 2022.

Significant Developments

Asset Impairment and Other Charges

We recorded a pretax charge to earnings of $0.9 million in Fiscal 2023, including $1.6 million for asset impairments, partially offset by a $0.7 million gain on the termination of our pension plan, which is included in asset impairments and other, net on the Consolidated Statements of Operations for Fiscal 2023.

Key Performance Indicators

In assessing the performance of our business, we consider a variety of performance and financial measures. The key performance indicators we use to evaluate the financial condition and operating performance of our business are comparable sales, net sales, gross margin, operating income and operating margin. These key performance indicators should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the U.S. GAAP financial measures presented herein. These measures may not be comparable to similarly-titled performance indicators used by other companies.

Comparable Sales

We consider comparable sales to be an important indicator of our current performance, and investors may find it useful as such. Comparable sales results are important to achieve leveraging of our costs, including occupancy, selling salaries, depreciation, etc. Comparable sales also have a direct impact on our total net revenue, cash and working capital. We define "comparable sales" as sales from stores open longer than one year, beginning with the first day a store has comparable sales (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

30

calculation if closed for more than seven days. Expanded stores are excluded from the comparable sales calculation until the first day an expanded store has comparable prior year sales. Current year foreign exchange rates are applied to both current year and prior year comparable sales to achieve a consistent basis for comparison. We have not disclosed comparable sales for Fiscal 2023 or Fiscal 2022, as we believe that overall sales are a more meaningful metric for these periods due to the impact of the COVID-19 pandemic and related extended store closures that occurred in Fiscal 2021 and the first quarter of Fiscal 2022.

Results of Operations—Fiscal 2023 Compared to Fiscal 2022

Our net sales for Fiscal 2023 decreased 1.5% to $2.38 billion from $2.42 billion in Fiscal 2022. The decrease in net sales was driven by the unfavorable impact of $58.5 million in sales due primarily to foreign exchange pressure on the Schuh business from the strengthening dollar, partially offset by increased sales in the store and wholesale channels, while comparable direct sales were flat for Fiscal 2023. Schuh Group sales increased 2% and Johnston & Murphy Group sales increased 24%, while Journeys Group sales decreased 6% and Genesco Brands Group sales decreased 8% for Fiscal 2023 compared to Fiscal 2022. Schuh's sales increased 15% on a local currency basis for Fiscal 2023.

Gross margin decreased 3.8% to $1.1 billion in Fiscal 2023 from $1.2 billion in Fiscal 2022 and decreased as a percentage of net sales from 48.8% in Fiscal 2022 to 47.6% in Fiscal 2023, reflecting gross margin decreases as a percentage of net sales in all of our operating business units except Schuh Group. The gross margin decrease is primarily due to a more promotional environment in the Journeys business and increased freight and logistics costs in the Johnston & Murphy and Genesco Brands Group businesses. Altogether, freight and logistics costs put approximately $16.1 million of pressure on total gross margin comparison of Fiscal 2023 to Fiscal 2022.

Selling and administrative expenses increased as a percentage of net sales from 42.7% in Fiscal 2022 to 43.7% in Fiscal 2023, reflecting increased expenses as a percentage of net sales in all of our operating business units except Johnston & Murphy Group. The overall increase in expenses as a percentage of net sales in Fiscal 2023 is due to more normalized occupancy expense as a result of the one-time benefits for rent credits and government tax relief in the U.K. related to the COVID-19 pandemic in Fiscal 2022, as well as increased selling salaries and marketing and compensation expenses, partially offset by decreased performance-based compensation expense. While our selling salaries increased for Fiscal 2023, the competitive environment and legislated increases in minimum and living wages continue to pressure our store selling salaries. 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 2023 were $90.1 million, compared to $153.0 million for Fiscal 2022. Pretax earnings for Fiscal 2023 included an asset impairment and other charge of $0.9 million which included $1.6 million for asset impairments, partially offset by a $0.7 million gain on the termination of the pension plan. Pretax earnings for Fiscal 2022 included an asset impairment and other gain of $8.1 million which included an $18.1 million gain on the sale of a distribution warehouse and a $0.6 million insurance gain, partially offset by $8.6 million for professional fees related to the actions of a shareholder activist and $2.0 million for asset impairments.

Net earnings for Fiscal 2023 were $71.9 million, or $5.66 diluted earnings per share compared to $114.9 million, or $7.92 diluted earnings per share for Fiscal 2022. The effective income tax rate was 19.8% for Fiscal 2023 compared to 24.9% for Fiscal 2022. The effective tax rate for Fiscal 2023 was lower compared to Fiscal 2022, reflecting a reduction in the effective tax rate we expect for jurisdictions in which we are profitable combined with the impact of a release of a valuation allowance related to our UK jurisdiction and the benefit from accrued interest related to our IRS refund. See Item 8, Note 11, "Income Taxes", to our Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information.

31

Journeys Group

Net sales from Journeys Group decreased 6.0% to $1.5 billion for Fiscal 2023 compared to $1.6 billion for Fiscal 2022, primarily due to decreased store sales, partially offset by increased digital comparable sales. We believe the Journeys consumer benefitted most from the government stimulus in Fiscal 2022 and is currently more affected by the U.S. macroeconomic environment and footwear industry promotional activity than customers of our other North American businesses. The store count for Journeys Group was 1,130 stores at the end of Fiscal 2023, including 233 Journeys Kidz stores, 45 Journeys stores in Canada and 34 Little Burgundy stores in Canada, compared to 1,135 stores at the end of Fiscal 2022, including 229 Journeys Kidz stores, 47 Journeys stores in Canada and 37 Little Burgundy stores in Canada.

Journeys Group operating income for Fiscal 2023 decreased 42.9% to $94.4 million, compared to $165.3 million for Fiscal 2022. The decrease in operating income was primarily due to (i) decreased net sales, (ii) decreased gross margin as a percentage of net sales, primarily reflecting increased markdowns with a return to a more normalized promotional environment and (iii) increased selling and administrative expenses as a percentage of net sales reflecting the deleverage of expenses, especially selling salaries, occupancy and marketing expenses as a result of decreased revenue in Fiscal 2023, partially offset by decreased performance-based compensation expenses.

Schuh Group

Net sales from the Schuh Group increased 2.0% to $432.0 million for Fiscal 2023 compared to $423.6 million for Fiscal 2022, primarily due to increased store sales, partially offset by an unfavorable impact of $53.8 million due to changes in foreign exchange rates and decreased digital comparable sales. Fiscal 2023 was a record year for Schuh Group sales. Stores were only open about 80% of possible operating days in Fiscal 2022 versus 100% of possible operating days in Fiscal 2023. Schuh's sales increased 15% on a local currency basis for Fiscal 2023. Schuh Group operated 122 stores at the end of Fiscal 2023 compared to 123 stores at the end of Fiscal 2022.

Schuh Group operating income for Fiscal 2023 was $17.6 million compared to $19.3 million for Fiscal 2022. The 8.6% decrease in operating income this year reflects increased selling and administrative expenses as a percentage of net sales, reflecting more normalized operating expenses due to the one-time benefits for rent credits and government property tax relief and other government relief of approximately $19.9 million in Fiscal 2022 related to the COVID-19 pandemic. Excluding these one-time benefits last year, decreased occupancy, marketing and performance-based compensation expenses more than offset the deleverage in selling salaries and compensation expense. In addition, operating income included an unfavorable impact of $2.6 million for Fiscal 2023 due to changes in foreign exchange rates compared to last year. Gross margin increased as a percentage of net sales, reflecting decreased shipping and warehouse expense.

32

Johnston & Murphy Group

Johnston & Murphy Group net sales increased 24.5% to $314.8 million for Fiscal 2023 from $252.9 million for Fiscal 2022 primarily due to increased store sales, wholesale sales and e-commerce sales. Johnston & Murphy has repositioned its brand to offer more casual and comfortable footwear and apparel in this post-pandemic environment, which in addition to recovery from the pandemic, has fueled top line growth. Fiscal 2023 was a record year for Johnston & Murphy Group sales. Retail operations accounted for 76.0% of Johnston & Murphy Group's sales in Fiscal 2023, down from 78.5% in Fiscal 2022. The store count for Johnston & Murphy retail operations at the end of Fiscal 2023 included 158 Johnston & Murphy shops and factory stores, including six stores in Canada, compared to 167 Johnston & Murphy shops and factory stores, including eight stores in Canada, at the end of Fiscal 2022.

Johnston & Murphy Group operating income for Fiscal 2023 increased 104.4% to $14.4 million compared to $7.0 million in Fiscal 2022. The increase was primarily due to (i) increased net sales and (ii) decreased selling and administrative expenses as a percentage of net sales due to greater leverage of expenses as a result of revenue growth, especially occupancy expense, selling salaries and compensation expense, partially offset by increased marketing expense. Gross margin as a percentage of net sales decreased in Fiscal 2023 compared to Fiscal 2022 reflecting increased freight and logistic costs of $8.6 million as well as a difficult comparison to decreased inventory reserves in Fiscal 2022 as the brand began to recover from the pandemic.

Genesco Brands Group

Net sales for Genesco Brands Group decreased 7.8% to $155.9 million for Fiscal 2023 from $169.2 million for Fiscal 2022, primarily due to repositioning the distribution of the mix of the Levi's brand to elevate distribution and rely less on the value channel, partially offset by an increase in sales of private label and Dockers footwear.

The operating loss for Genesco Brands Group was $0.7 million in Fiscal 2023 compared to operating income of $6.6 million in Fiscal 2022. The $7.3 million decrease in operating income was primarily due to (i) decreased net sales, (ii) decreased gross margin as a percentage of net sales primarily due to increased freight and logistics costs of $7.5 million and (iii) increased selling and administrative expenses as a percentage of net sales reflecting deleverage of expenses as a result of decreased revenue and changes in sales mix, partially offset by decreased performance-based compensation expense.

Corporate, Interest Expenses and Other Charges

Corporate and other expense for Fiscal 2023 was $32.5 million compared to $42.6 million for Fiscal 2022. Corporate and other expense in Fiscal 2023 included $1.6 million for asset impairments, partially offset by a $0.7 million gain on the termination of our pension plan. Corporate and other expense in Fiscal 2022 included an $18.1 million gain on the sale of a distribution warehouse and a $0.6 million insurance gain, partially offset by $8.6 million for professional fees related to the actions of a

33

shareholder activist and $2.0 million for asset impairments. Corporate and other expense, excluding asset impairment and other charges, decreased $19.1 million reflecting decreased performance-based compensation expense.

Net interest expense increased 19.3% to $2.9 million in Fiscal 2023 from $2.4 million in Fiscal 2022 primarily due to increased average borrowings and higher interest rates in Fiscal 2023.

Liquidity and Capital Resources

Working Capital

Our business is seasonal, with our 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.

Reasons for the major variances in cash provided by (used in) the table above are as follows:

Cash used in operating activities was $164.9 million for Fiscal 2023 compared to cash provided by operating activities of $239.9 million for Fiscal 2022, reflecting primarily the following factors:

•
A $194.4 million decrease in cash flow from changes in inventory, primarily reflecting increased inventory growth in all of our business units in Fiscal 2023 as we rebuilt inventory levels following the significant supply chain disruptions resulting from the COVID-19 pandemic;

•
A $100.2 million decrease in cash flow from changes in other accrued liabilities, primarily reflecting the payment of Fiscal 2022 performance-based compensation accruals in Fiscal 2023 and significantly lower performance-based compensation accruals for Fiscal 2023 compared to Fiscal 2022;

•
A $74.4 million decrease in cash flow from changes in other assets and liabilities and prepaids and other current assets combined, primarily reflecting income taxes paid in Fiscal 2023 compared to a tax refund in Fiscal 2022; and

•
A $42.9 million decrease in cash flow from decreased earnings in Fiscal 2023.

Cash used in investing activities was $26.0 million higher for Fiscal 2023 compared to Fiscal 2022, primarily related to increased capital expenditures related to investments in retail stores, partially offset by decreased capital expenditures for our new headquarters building and Fiscal 2022 included cash proceeds from the sale of a distribution center.

Cash used in financing activities was $55.6 million lower in Fiscal 2023 as compared to Fiscal 2022 primarily reflecting an additional payment of debt in Fiscal 2022 for the first in-last out term loan of $17.5 million and increased U.S. revolver borrowings in Fiscal 2023.

34

Sources of Liquidity and Future Capital Needs

We have three principal sources of liquidity: cash flow from operations, cash on hand and our credit facilities discussed in Item 8, Note 8, "Long-Term Debt", to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

On January 28, 2022, we entered into a Third Amendment to our Credit Facility to, among other things, extend the maturity date to January 28, 2027 and remove the first in-last out term loan that was in an amount equal to $17.5 million. The Total Commitments (as defined in the Credit Agreement) for revolving loans is $332.5 million. As of January 28, 2023, we have $30.0 million in U.S. revolver borrowings and $14.9 million (£12.0 million) related to Genesco (UK) Limited. We had outstanding letters of credit of $9.7 million under the Credit Facility at January 28, 2023. These letters of credit support lease and insurance indemnifications.

On November 2, 2022, Schuh entered into a facility agreement (the "Facility Agreement") with Lloyds Bank PLC (“Lloyds”) for a £19.0 million revolving credit facility. The Facility Agreement expires November 2, 2025, with options to request two one-year extensions to this termination date subject to lender approval, and bears interest at 2.35% over the Bank of England Base Rate. This Facility Agreement replaced Schuh's Facility Letter that would have expired in October 2023. The Facility Agreement includes certain financial covenants specific to Schuh. Following certain customary events of default outlined in the Facility Agreement, payment of outstanding amounts due may be accelerated or the commitments may be terminated. The Facility Agreement is secured by charges over all of the assets of Schuh, and Schuh's subsidiary, Schuh (ROI) Limited. Pursuant to a Guarantee in favor of Lloyds in its capacity as security trustee, Genesco Inc. has guaranteed the obligations of Schuh under the Facility Agreement and certain existing ancillary facilities on an unsecured basis. As of January 28, 2023, we have not borrowed under the Schuh Facility Agreement.

We were in compliance with all the relevant terms and conditions of the Credit Facility and Facility Agreement as of January 28, 2023.

We believe that cash on hand, cash provided by operations and borrowings under our amended Credit Facility and the Schuh Facility Agreement will be sufficient to support our liquidity needs in Fiscal 2024 and the foreseeable future.

In the fourth quarter of Fiscal 2021, we implemented tax strategies allowed under the 5-year carryback provisions in the CARES Act which we believe will generate approximately $55 million of net tax refunds. We received approximately $26 million of such net tax refunds in Fiscal 2022 and anticipated receipt of the remaining outstanding net tax refund in Fiscal 2023. However, in the third quarter of Fiscal 2023, we were notified the IRS would conduct an audit of the periods related to the outstanding net tax refund. While we do not believe any uncertainty with the technical merits of the positions generating the net tax refunds exists, we do anticipate the timing of the net tax refund will be extended as a result of the audit process. Accordingly, we have recorded the outstanding refund as non-current prepaid income taxes on the Consolidated Balance Sheets as of January 28, 2023.

Contractual Obligations

The following table sets forth aggregate contractual obligations as of January 28, 2023.

35

(1) Operating lease obligations excludes $12.1 million for leases signed but not yet commenced.

(2) As a result of the Togast acquisition, we also have a commitment to Samsung C&T America, Inc. (“Samsung”) related to the ultimate sale and valuation of related inventories owned by Samsung. If the product is sold below Samsung’s cost, we are committed to Samsung for the difference between the sales price and its cost.

We issue inventory purchase orders in the ordinary course of business, which represent authorizations to purchase that are cancelable by their terms. We do not consider purchase orders to be firm inventory commitments. If we choose to cancel a purchase order, we may be obligated to reimburse the vendor for unrecoverable outlays incurred prior to cancellation.

Capital Expenditures

Capital expenditures were $59.9 million and $53.9 million for Fiscal 2023 and 2022, respectively. The $6.0 million increase in Fiscal 2023 capital expenditures as compared to Fiscal 2022 is primarily due to increases for new stores and renovations, partially offset by decreased capital expenditures for our new corporate headquarters.

We expect total capital expenditures for Fiscal 2024 to be approximately $55-$60 million of which approximately 53% is for computer hardware, software and warehouse enhancements for initiatives to drive traffic and omni-channel initiatives and other projects and 47% is for new stores and renovations. We do not currently have any longer term capital expenditures or other cash requirements other than as set forth in the contractual obligations table. We also do not currently have any off-balance sheet arrangements.

Common Stock Repurchases

We repurchased 1,380,272 shares during Fiscal 2023 at a cost of $72.7 million or an average of $52.66 per share. The Consolidated Statements of Cash Flows include an additional $4.8 million of share repurchases in Fiscal 2023 for accruals made as of January 29, 2022 due to timing of the cash settlement. We were operating under a $100.0 million repurchase authorization from September 2019. In February 2022, we announced a $100.0 million increase to the existing $100.0 million share repurchase authorization. As of January 28, 2023, we have $34.1 million remaining under the expanded share repurchase authorization. We repurchased 1,360,909 shares during Fiscal 2022 at a cost of $82.8 million or an average of $60.88 per share. We did not repurchase any shares in Fiscal 2021. During the first quarter of Fiscal 2024, through March 22, 2023, we repurchased 135,000 shares at a cost of $5.0 million or an average of $36.67 per share.

Environmental and Other Contingencies

We are subject to certain loss contingencies related to environmental proceedings and other legal matters, including those disclosed in Item 8, Note 15, "Legal Proceedings", to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

Financial Market Risk

The following discusses our exposure to financial market risk.

Outstanding Debt – We have $44.9 million of outstanding U.S. revolver borrowings, which includes $14.9 million (£12.0 million) related to Genesco (UK) Limited, at a weighted average interest rate of 6.74% as of January 28, 2023. A 100 basis point increase in interest rates would increase annual interest expense by $0.4 million on the $44.9 million revolver borrowings.

Cash – Our cash balances are held in our bank accounts and not invested at this time. We did not have significant exposure to changing interest rates on invested cash at January 28, 2023. As a result, we consider the interest rate risk implicit in these investments at January 28, 2023 to be low. We did not hold any cash equivalents at January 28, 2023.

36

Summary – Based on our overall market interest rate exposure at January 28, 2023, we believe that the effect, if any, of reasonably possible near-term changes in interest rates on our consolidated financial position, results of operations or cash flows for Fiscal 2024 would not be material.

Accounts Receivable – Our accounts receivable balance at January 28, 2023 is concentrated in our wholesale businesses, which sell primarily to department stores and independent retailers across the United States. In the wholesale businesses, one customer accounted for 25%, one customer accounted for 18% and one customer accounted for 7% of our total trade receivables balance, while no other customer accounted for more than 6% of our total trade receivables balance as of January 28, 2023. We monitor the credit quality of our customers and establish 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 – We are exposed to translation risk because certain of our 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 our financial statements of foreign businesses into United States dollars affects the comparability of financial results between years. Schuh Group's net sales and operating income for Fiscal 2023 were negatively impacted by $53.8 million and $2.6 million, respectively, due to the change in foreign exchange rates.

New Accounting Principles

Descriptions of recently issued accounting pronouncements, if any, and the accounting pronouncements adopted by us during Fiscal 2023 are included in Note 2, "New Accounting Pronouncements", to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data".

Critical Accounting Estimates

Inventory Valuation

In our footwear wholesale operations and our Schuh Group segment, cost for inventory that we own is determined using the first-in, first-out ("FIFO") method. Net realizable 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. We provide a valuation allowance when the inventory has not been marked down to net realizable value based on current selling prices or when the inventory is not turning and is not expected to turn at satisfactory levels.

In our retail operations, other than the Schuh Group segment, we employ 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, we employ the retail inventory method in multiple subclasses of inventory with similar gross margins, and analyze markdown requirements at the stock number level based on factors such as inventory turn, average selling price and inventory age. In addition, we accrue 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 allowances, we maintain reserves 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

37

overstatement or understatement of inventory value. A change of 10% from the recorded amounts for markdowns, shrinkage and damaged goods would have changed inventory by $0.7 million at January 28, 2023.

Impairment of Long-Lived Assets

We periodically assess the realizability of our long-lived assets, other than goodwill, and evaluate 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.

We annually assess our goodwill and indefinite lived trademarks for impairment and on an interim basis if indicators of impairment are present. Our annual assessment date of goodwill and indefinite lived trade names is the first day of the fourth quarter.

In accordance with ASC 350, "Intangibles - Goodwill and Other" ("ASC 350") we have the option first to assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that goodwill is impaired. If, after such assessment, we conclude that the asset is not impaired, no further action is required. However, if we conclude otherwise, we are required to determine the fair value of the asset using a quantitative impairment test. The quantitative impairment test for goodwill compares the fair value of each reporting unit with the carrying value of the reporting unit with which the goodwill is associated. If the fair value of the reporting unit is less than the carrying value of the reporting unit, an impairment charge would be recorded for the amount, if any, in which the carrying value exceeds the reporting unit's fair value. We estimate fair value using the best information available, and compute the fair value derived by a combination of the market and income approach. The market approach is based on observed market data of comparable companies to determine fair value. The income approach utilizes a projection of a reporting unit’s estimated operating results and cash flows that are discounted using a weighted-average cost of capital that reflects current market conditions. A key assumption in our fair value estimate is the weighted average cost of capital utilized for discounting our cash flow projections in our income approach. The projection uses our 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. For additional information regarding impairment of long-lived assets, see Item 8, Note 3, "Goodwill and Other Intangible Assets" and Note 4,"Asset Impairments and Other Charges" to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

The quantitative impairment test for indefinite lived trademarks compares the fair value of the trademark with the carrying value of the related trademark. If the fair value of the trademark is less than the carrying value of the trademark, an impairment charge would be recorded for the amount, if any, in which the carrying value exceeds the trademark’s fair value. We estimate fair value using the best information available, and compute the fair value using an income approach that estimates the savings that the trademark owner would realize from owning that asset instead of having to pay rent or a royalty for the use of it. Key assumptions in our fair value estimate are the selected royalty rate and discount rate. Other significant estimates and assumptions include terminal value growth rates and future profitability expectations.

38

Revenue Recognition

In accordance with ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASC 606"), revenue shall be recognized upon satisfaction of all contractual performance obligations and transfer of control to the customer. Revenue is measured as the amount of consideration we expect to be entitled to in exchange for corresponding goods. The majority of our sales are single performance obligation arrangements for retail sale transactions for which the transaction price is equivalent to the stated price of the product, net of any stated discounts applicable at a point in time. Each sales transaction results in an implicit contract with the customer to deliver a product at the point of sale. Revenue from retail sales is recognized at the point of sale, is net of estimated returns, and excludes sales and value added taxes. Revenue from catalog and internet sales is recognized at estimated time of delivery to the customer, is net of estimated returns, and excludes 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. Actual amounts of markdowns have not differed materially from estimates. Shipping and handling costs charged to customers are included in net sales. We elected the practical expedient within ASC 606 related to taxes that are assessed by a governmental authority, which allows for the exclusion of sales and value added tax from transaction price.

A provision for estimated returns is provided through a reduction of sales and cost of goods sold in the period that the related sales are recorded. Estimated returns are based on historical returns and claims. Actual returns and claims in any future period may differ from historical experience. Revenue from gift cards is deferred and recognized upon the redemption of the cards. These cards have no expiration date. Income from unredeemed cards is recognized in our Consolidated Statements of Operations within net sales in proportion to the pattern of rights exercised by the customer in future periods. We perform an evaluation of historical redemption patterns from the date of original issuance to estimate future period redemption activity.

Income Taxes

As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each of the tax jurisdictions in which we operate. 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 our Consolidated Balance Sheets. We then assess the likelihood that our 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 it is more likely than not that some portion or all of a deferred asset will not be realized, valuation allowances are established. To the extent valuation allowances are established or increased in a period, we include an expense within the tax provision in our Consolidated Statements of Operations. These deferred tax valuation allowances may be released in future years when we consider 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, we 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 negative evidence that may exist at such time. In the event the deferred tax valuation allowance is released, we would record an income tax benefit for a portion or all of the deferred tax valuation allowance released. At January 28, 2023, we had a deferred tax valuation allowance of $36.5 million.

39

Income tax reserves for uncertain tax positions are determined using the methodology required by the Accounting Standards Codification (“ASC”) Income Tax Topic, ("ASC 740"). 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 our determinations and estimates prove to be inaccurate, the resulting adjustments could be material to our future financial results. See Item 8, Note 11, "Income Taxes", to our Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information related to income taxes.

Leases

We recognize lease assets and corresponding lease liabilities for all operating leases on the Consolidated Balance Sheets as described under ASU No. 2016-02, “Leases (Topic 842).” We evaluate renewal options and break options at lease inception and on an ongoing basis, and include renewal options and break options that we are reasonably certain to exercise in our expected lease terms for calculations of the right-of-use assets and liabilities. Approximately 3% of our leases contain renewal options. To determine the present value of lease payments not yet paid, we estimate incremental borrowing rates corresponding to the reasonably certain lease term. As most of our leases do not provide a determinable implicit rate, we estimate our collateralized incremental borrowing rate based upon a synthetic credit rating and yield curve analysis at the lease commencement or modification date in determining the present value of lease payments. For lease payments in foreign currencies, the incremental borrowing rate is adjusted to be reflective of the risk associated with the respective currency. See Item 8, Note 9, "Leases", to our Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information related to leases.