Genesco Inc (GCO) 2007 Q3 法說會逐字稿

Welcome to the Genesco Third Quarter Fiscal Year 2007 Earnings Release Conference Call.

As a reminder this call is being recorded.

[OPERATOR INSTRUCTIONS]

At this time for opening remarks and introductions I would like to turn the call over to Mr. Hal Pennington, Chairman and Chief Executive Officer at Genesco.

Please go ahead, sir.

Good morning, and thank you for joining us for our third quarter fiscal 2007 conference call.

Participating with me on the call today are Jim Gulmi, our Chief Financial Officer, and Bob Dennis our President and Chief Operating Officer.

As always, we will make some forward-looking statements in this call.

They reflect our expectation as of today, but actual results could be materially different.

We refer you to our earnings release and to our recent SEC filings including the 10-K for fiscal 2006, and the 10-Q for the second quarter for a list of some of the factors that could cause differences from our expectations.

And for those listening to the replay of this call on the Internet, some of these factors can be read on the opening screen.

We were pleased with our results for the third quarter, particularly our ability to exceed expectation despite a very challenging quarter for Underground Station.

As you saw in the press release, we reported dilutive earnings per share of $0.62, compared to our previous guidance of $0.56 to $0.58 and the First Call consensus estimate of $0.59.

The Journeys Group posted a very strong quarter as did Johnston & Murphy and Dockers.

Hat World's business continued to be impacted by a challenging urban market as was Underground Station.

That was exacerbated by difficult year-over-year comparisons in some stores due to Hurricane Katrina, five named hurricanes during the quarter last year, temporarily closed stores, disrupted logistics and posed other challenges.

But sales in a number of stores actually improved after the storms as FEMA recovery money listed spending in the effected customer base.

We also continue to meet our store growth plans during the third quarter.

We opened 66 new stores compared to 58 last year.

And we ended the quarter with 1,925 stores which represents a unit increase of 12% and a square footage increase of 15% compared to the same period last year.

So now let's go through each division.

First with the Journeys Group.

The Journeys group's total sales for the third quarter increased 20% to $184 million.

Dollar comps were up 9% compared to 5% for the same period last year.

Footwear unit costs in the Journeys stores increased 18% and average selling price declined 6% because of a change in product mix largely related to strength in sandals and kids products.

In the Journeys stores the product mix was fairly consistent with the early reads we saw in the second quarter.

As expected athletic shoes were up 28% and represented 61% of sales compared to 56% last year.

Athletic unit comps increased 20% and the average selling price was down slightly at 1%.

The growth in the Athletic category was once again led by skate product which represents the largest segment of the athletic category for Journeys.

We continue to be pleased with the performance of brands like Vans, Heelys, Converse and Etnies.

As we said sandals also posted a strong increase during the quarter.

We continued to see meaningful gains in the Crocs business as well as in [rain boot].

The [Kid's] Towers continue to perform well in the Journeys stores.

We saw increases in both unit comps and ASPs with the Kidz products in the Journeys stores.

In addition we are continuing to see strong growth in our Journeys catalog and e-commerce business.

Journeys store growth plans remain on track.

We ended the quarter with 751 Journeys stores compared to 683 at this time last year.

Year-over-year square footage is up 14%.

We have opened in a number of lifestyle centers that have performed very well and that coupled with the success we have enjoyed in street locations like Harold Square and Fifth Avenue in Manhattan, and South Beach in Miami gives us additional venues for growth.

We're very pleased with Journeys strong performance in the quarter.

Our merchants believe we are well-positioned as we enter this important time of the year.

Historically a solid back-to-school season has indicated that we are well-positioned for a solid holiday season.

This group has proven its ability to move with its core customers' wants and needs and this quarter showcases their unique talents and success.

And now for Journeys Kidz, total sales for the third quarter were more than $11 million up 55% compared to the same period a year ago.

Comp store sales rose 9% on top of the 16% increase last year and footwear unit comps increased 19%.

Journeys Kidz once again experienced strong growth in athletic and sandals.

The strength of Heelys which we discussed in the second quarter conference call continued into Quarter 3.

During the third quarter we opened four Kidz stores and we remain on track to open 24 this year compared to ten last year.

The continued progress we are making with this business will mean a further increase in store openings next year, and indicates that we may even have the opportunity to expand beyond our previously stated target of 250 stores nationwide.

And now for Shi by Journeys we currently have ten Shi stores in operation as four additional stores were opened in the third quarter.

We continue to be pleased with the performance of this concept, and expect to more than double new store openings next year.

And now let's talk about Hat World.

Total sales for the quarter increased 13% to $78 million while same-store sales declined 1%.

Comp sales were modestly below our expectation during the quarter due, as I mentioned before, to continued weakness in the urban markets.

Our core 106 urban stores experienced a negative 6% comp, while comps for the rest of the chain were essentially flat.

Additionally, the Hat World stores like many other retailers were impacted by the Katrina comparison late in the third quarter.

Now while we expect same-store sales to be flat to slightly positive in the fourth quarter, it is important to remember that because the Hat World store reaches maturity in the first year of operation, we don't depend on large comp gains in order for this to be a very profitable business.

As we have stated before the financial model for this business focuses primarily on new store growth.

With regard to categories we continue to see strength in our major league baseball branded category, action brands like Quiksilver, Roxy and Fox Racing and the performance-related products from vendors like Nike and Under Armour.

However, these gains were slightly offset by ongoing weakness in NCAA product.

During the quarter we opened 34 stores up from 30 last year.

We now have 149 stores with embroidery stations, and we continue to be very pleased with both the sales and margin benefit from this initiative.

Included in the 34 stores are three Lids Kids stores now in operation and early results from these stores are encouraging.

In general we're very pleased with our new store performance both in the US and Canada.

At the end of the quarter we operated 718 stores, up 16% from last year, and we remain confident about Hat World's potential for continuing growth.

And turning now to Underground Station, total sales for the Underground Station group were down 9% to $35 million and same-store sales declined 11% compared to a 9% gain in the third quarter last year.

Store count for the quarter was down one store due to planned Jarman store closings.

Underground Station stores continued to experience the drop in men's and women's athletic sales that we talked about in the second quarter.

Overall, the men's shoe business was off about 10% while the women's shoe business was up 6%.

Women's footwear and accessories represented 27% of sales for the quarter, compared to 25% last year.

The women's non-athletic shoe business was actually up 15%.

As we pointed out improving the women's fashion offering is a major part of Underground Station's strategic repositioning, so it was especially good to see these strong results, and we're also pleased with the performance of the Kid's Towers in Underground.

Footwear ASPs were down 7% and units were down only 1% in the Underground Station stores on a same-store basis.

The drop in ASPs primarily reflected a decline in athletic ASPs.

We have talked about the lack of fashion direction and general economic factors impacting the Underground Station customer.

As we mentioned on our last call, we expected these difficult trends to continue into the third quarter.

The situation was magnified by the impact of the Katrina comparison in last year's numbers.

We estimate that the stores affected by Katrina negatively impacted our Underground Station comps by about 4% in the quarter this year.

Looking ahead to the fourth quarter while we don't really see any meaningful new fashion direction in this business, we do expect the seasonal transition into boots to have a positive impact.

In addition athletic product becomes less meaningful in Q4 and our comp comparisons begin to moderate late in the quarter.

Longer term we believe that our merchandise repositioning with a greater emphasis on women's fashion footwear and non-footwear offerings will begin to have a positive impact on the business in the spring.

Turning now to Johnston & Murphy which posted an excellent quarter total sales rose 14% to $44 million and same-store sales increased 6% compared to a 5% increase last year.

Johnston & Murphy wholesale sales increased 25% as we continued to gain retail shelf space.

We have been expanding our Schuler collection in our style, performance, and comfort proposition is resonating very well with our customers.

Operationally we generated meaningful improvement in both gross margin and SG&A leverage which enabled us to nearly double our operating margin during the quarter.

In the Johnston & Murphy shops comps rose 7% and shoe ASPs were flat.

The shoe mix keeps evolving as dress casual continues to grow as a percent of the business.

Apparel and accessories are also growing in our shops and now represent about 30% of the business compared to 26% last year and we're seeing strength in all of our non-footwear categories.

During the quarter we opened three Johnston & Murphy shops and one Factory store.

We ended the quarter with 149 retail outlets compared to 143 last year.

Johnston & Murphy's direct business increased 17% during the quarter.

We recently revamped our catalog to give it a newer, more updated look and the feedback has been excellent.

It's great to see positive results from all of the hard work that Johnston & Murphy's team has done to re-energize this business and this strong momentum continues.

And now for licensed brands, licensed brands posted another strong quarter with sales up 31% to $23 million.

The Dockers product continues to retail very well.

Our backlog is good, and we expect the strong momentum in this business to continue.

As you have probably seen, we were pleased to announce the renewal earlier this month of the Dockers license for an additional three-year term with a three-year option.

And now, I'll ask Jim to take you through the numbers.

Thank you, Hal.

Let's run through the P&L for the quarter starting at the top.

Third quarter sales increased 15% talk $364 million, compared to $316 million last year.

For the Journeys group sales increased 20% and comps were up 9%.

Hat World's group sales rose 13% and comps declined 1%.

The Underground Station group total sales were down 9% and comps were down 11%.

Underground Station sales decreased 4% and comps declined 11%.

Jarman retail sales were down 30% with comps down 10% for the quarter.

The decline in sales at Jarman was primarily due to 18 fewer stores in operation, or about one third of the total stores at the end of the quarter compared to last year, as we continued with our plans to close or convert the remaining Jarman stores.

The Johnston & Murphy group total sales increased 14%.

Johnston & Murphy's retail comps increased 6% and Johnston & Murphy's wholesale sales rose 25%.

Licensed brand sales were up 31%.

Now turning to gross margin, total gross margin for Genesco was 49.8% compared with 51.1% last year.

The Journeys group and Underground Station group gross margins were down, due to higher markdowns in the quarter.

Hat World group gross margin was down in the quarter, due in part to increased promotional activity.

The Johnston & Murphy group gross margin was strong during the quarter, with nice improvement in retail gross margins driven by lower markdowns and better initial [mark-ons].

Licensed brands gross margins were down in the quarter, due to product mix.

Now turning to SG&A, it was good to see an improvement in SG&A's leverage, with SG&A as a percent of sales down by 70 basis points to 41.4% from 42.1% last year.

Included in SG&A for the quarter is about 40 basis points or $1.7 million pretax, related to stock option and restricted stock expense which is, as you know, new this year due to the adoption of FAS 123R.

Obviously, without the addition of the stock option expensing this year, the SG&A percent would have been lower and leverage even greater.

Journeys group SG&A percent decreased about 90 basis points in the quarter, driven by strong comps and good expense control.

Hat World's group SG&A percent was up slightly because of the slight negative comp in the quarter.

In the case of the Underground Station group the negative comps really impacted leverage.

SG&A as a percentage of sales was up in the quarter over last year.

The Johnston & Murphy group generated solid leverage in the quarter, due to the strong comp and strong wholesale sales increase.

Licensed brands also experienced good leverage in the quarter, driven by expense control combined with a strong sales increase.

Operating margin was 8.1% compared with 9.2% last year.

Again operating margin for the quarter was negatively impacted by approximately 40 basis points from the expensing of stock-based compensation.

Also last year we had a gain of about 25 basis points from excess litigation reserves, and this year we had an expense from asset impairments of about 30 basis points.

Therefore the net impact on these two items impacted the operating margin comparison by about 55 basis points in the quarter.

Journeys group operating margin was 13.7% compared with 14.1% last year.

Operating earnings increased 17% over last year.

Underground Station group had a small loss in the quarter.

Hat World group operating margin was 9.9% down from the previous year due primarily to a lower gross margin.

Johnston & Murphy's group operating margin doubled to 7.2% from 3.6% last year.

Operating earnings more than doubled in the quarter.

And finally, licensed brands operating margin was a strong 10.2% which is flat compared to last year.

Operating earnings increased 31% year-over-year.

Net interest expense during the quarter was up slightly to $2.9 million, compared with $2.7 million last year.

This was primarily due to increased revolver borrowings, as a result of stock repurchased over the past four months.

Earnings before discontinued operations for the third quarter was $16 million or $0.62 per share, compared with $16.2 million or $0.62 per share for the same period last year.

This year's results include the expensing of stock-based compensation of $1.7 million pretax or $0.04 per share, and as I mentioned earlier last year's numbers included a $0.02 gain for the reversal of excess litigation reserve.

We were able to exceed or updating guidance for the quarter primarily due to stronger than expected sales increase and better than anticipated leverage.

Now turning to the balance sheet, we ended the quarter with $19 million in cash, compared with $33 million last year.

In addition we have purchased $31 million worth of outstanding stock or 1 million shares in conjunction with our buyback program announced in the second and third quarters this year.

We currently have $158 million in debt outstanding.

This is made up of our convertible notes of $86 million, the remaining $20 million of term debt from the acquisition of Hat World, and $52 million of bank revolver borrowings.

The bank revolver borrowings were incurred in connection with normal seasonal working capital requirements, and $31 million of stock buyback.

We expect to fully repay the bank revolver borrowings in the fourth quarter.

Inventories are healthy, and we are satisfied with our current inventory levels.

Inventories [rose] 18% and sales rose 15%.

In addition, square footage is up 15% [over] the same quarter last year.

Overall inventory per square foot is up only about 1.5%.

This is line with our expectation that we mentioned in last quarter's conference call, that the sales and inventory increase would be much more on line going forward.

Since we first announced our new stock buyback authorization in June we have purchased $31 million or 1 million shares of stock at an average cost of $30.13 per share.

For the quarter capital expenditures were $21 million and depreciation was $10 million.

We ended the quarter with 1,925 stores, compared with 1,718 stores last year.

This represented a net new store increase of 207 or 12% year over year.

Total square footage increased 15% to 2.6 million square feet.

In the third quarter we opened 66 stores and closed 11.

In the third quarter last year we opened 58 and closed 12 stores.

We have opened 175 stores and closed 23 stores in the first nine months of fiscal 2007 compared to 126 new store openings and 26 store closings in the first nine months of FY2006.

We are planning capital expenditures for the full year to be about $68 million.

Depreciation for the full year is expected to be about $40 million.

With regard to new stores in FY'07 we plan to open 61 Journeys stores and close three, and open 24 Journeys Kidz stores and open 12 Shi by Journeys stores.

Hat World plans to open about 101 stores including three Lids Kids stores, and will close nine for the year.

We plan to open about 11 Underground Station stores, and close one.

And we plan to close 16 Jarman's stores, and convert three to Underground Station.

We plan to open about seven Johnston & Murphy shops, and close four and open six Johnston & Murphy factory stores and close two.

Altogether, we plan to open 222 stores and close 35 stores this fiscal year.

Our original internal plan was to open 207 stores for the year, so we are quite pleased that it looks like we will be able to exceed that number.

Now, let me review our guidance for the current fiscal year.

We obviously beat expectations for the third quarter, and we are comfortable flowing through the upside to the fiscal year.

Therefore we are raising our guidance for FY2007.

We expect total sales for the fiscal year to be approximately $1.45 billion.

Our annual sales forecast assumes an increase in square footage of about 11% and a comp increase for the balance of the year of about 1%.

We are also increasing our fiscal 2007 EPS outlook to approximately $2.55 to $2.57, which includes approximately $0.17 in stock option and restricted stock expense for the year.

In the fourth quarter the comp guidance for Journeys is positive low to mid-single digits.

Hat World is expected to be flat to slightly positive.

Underground Station is expected to be negative high single digits, and Johnston & Murphy is positive low to mid-single digits.

For the fourth quarter we expect sales of approximately $467 million to $470 million, and we reiterate our previous EPS guidance of $1.29 to $1.31 with $0.05 of share expense.

We are still in the middle of our planning process for next year, and we will not be giving detailed guidance at this time.

As a general guideline for you, I can tell you that we are budgeting with a goal of 10 to 15% revenue growth, and an EPS growth rate of about 15%.

When we report our year-end results we will be in a better position to outline more detailed quarterly guidance for FY2008.

As we have previously discussed please keep in mind that our strongest quarters are Q3 and Q4.

This will be particularly true this year, as early in the year Underground Station will be the most impacted from the loss of Nike.

As the year progresses, we are hopeful comps will increase for Underground Station and its negative impact on earnings will lessen.

Our preliminary plan for new store openings in FY2008 is as follows; about 50 Journeys stores, 40 Journeys Kidz, 35 Shi by Journeys, six Johnston & Murphy shops and four Factory stores.

In addition, Hat World plans to open about 90 stores, including ten stores in Canada and ten Lids Kids stores.

We are looking at ten to 15 Underground Station stores on a preliminary basis.

Obviously we will be flexible with our Underground Station store openings depending first on how quickly we begin to see our re-merchandizing efforts pay off, and on the availability of locations that we feel confident would be successful.

Altogether, we expect to open about 235 to 240 stores in FY'08.

In addition we are planning to convert two Jarman stores to Underground Station stores.

We expect to close eight Jarman stores, one Underground Station, three Journeys, two Johnston & Murphy shops and one Johnston & Murphy Factory store.

Based on this plan, we expect to open approximately 220 to 225 net new retail stores, and end FY'08 with 2,185 stores.

This is an increase of 11%.

Capital expenditures will be in the 68 to $75 million and depreciation will be approximately $44 million.

Thank you, Jim.

Again, we are pleased with our financial results for the quarter.

And while we expect that Underground Station business will remain challenging in the fourth quarter, this is factored into our guidance.

As I stated earlier we expect some modest improvement at Hat World, and we're confident about the positioning of the entire Journeys group as we head into the holiday season.

Similarly, we expect the solid momentum at Johnston & Murphy and Dockers to continue.

So now, I'll pass the call back over to the operator for your questions.

[OPERATOR INSTRUCTIONS]

And our first question will come from Jeff Klinefelter with Piper Jaffray.

And caller your line is open.

Hello, Jeff?

If you're on the speaker phone, please depress your mute function.

And I will check that line.

Thank you.

And our next question will come from [Michael Kummetz] with Robert W. Baird.

Yes thanks, a few questions.

Just to begin with to clarify on the guidance for Q4 Jim you're saying EPS stays the same but sales is coming down a little bit.

Is that entirely a function of a tougher outlook for Underground Station in the fourth quarter?

Yes primarily that's the bulk of it.

As you can see we increased -- basically our comps I think are essentially where they were -- I mean our guidance for our comps were essentially where they were at the end of the second quarter with the exception of Underground Station.

I think our Underground Station we said the comps, the guidance at that point was I think low to mid-single digits and now it's high single digits so that's a big reduction in comps there and that's why we took sales down.

Okay, and then just to continue with Underground Station for a second Hal you mentioned the Nike situation, and then some expected improvement in Underground comps over the course of next year.

And then also in your prepared remarks, how you mentioned that you're going to focus more on women's and non-athletic and that should have impact by spring.

Could you just elaborate a little bit on what's happening with Nike, and then with the shift in mix towards women's and non-athletic?

Well, just to remind you that we had the full allocation for Underground Station, the Nike product for back-to-school, which was actually a stronger allocation than we had ever had before.

Athletic generally in the fourth quarter is less of a percentage of the total business as it moves forward through the year.

We're now working very hard with the women's fashion area, women other than the athletic part, to get that in position for spring of next year.

Some of that product is coming in.

We do expect some modest improvement in the fourth quarter as we turn to more boots, and as we have a little more of the women's fashion, and as the athletic has less of an influence on the business.

But I think it will be spring, as we see that really start to take hold.

Okay.

And then lastly, on Hat World I know that for Underground I think you'd mentioned that the impact, the comp impact from Katrina was 4% in the quarter.

I think you said that Katrina also had a negative impact on Hat World, although I don't know that you gave or you clarified the impact in terms of the comp.

But I'm also curious what gives you confidence that the comp could get better in Hat World, because I know you mentioned that Major League baseball was strong in the quarter, college was disappointing.

I'm curious as to whether or not there's any other trends to speak of that would suggest that the business gets better, or is it just a function of Katrina having a drag on Q3 and not having an impact on Q4?

I think that there are some strengthening categories that we have.

Bob, you may want to pitch in on that?

Well, we've got a very good NFL business going on this year.

And we're seeing some strength in some of the, what we would call the surf brands that have really started on the West Coast and spreading to other stores.

And also in performance brands which are the various soft feel performance fabric-oriented products mainly from Nike and Under Armour.

So we're seeing strength all along there and then we just expect on the Katrina question there were a whole host of stores which when you look at the comps at the end of the third quarter last year had gotten a big boost from FEMA money.

So the year-over-year comparisons for those stores were very difficult.

The toughest month for the Katrina store comparisons was October and so it will start to mitigate as we go into fourth quarter and by the end of the fourth quarter is really de minimis.

Okay great.

Thanks, good luck.

Thanks.

And our next question will come from Jeff Klinefelter with Piper Jaffray.

Hey guys can you hear me?

Yes got it.

Okay great thank you.

Congratulations on a strong quarter.

Thank you.

A couple of questions, I apologize if any of this was a repeat.

I was off with the operator but on Hat World a couple of things there.

In terms of the embroidery stations can you put any more detail behind the productivity improvements, the margin improvements in those stores that have them versus those that don't?

And any sense for how many you can ultimately roll it out to, what kind of return you're getting on that investment?

And the second on Hat World would be, I believe it's Foot Locker indicated they're going to testing a headwear concept, and I was just curious what your current thoughts are on the competitive landscape, how you'd feel about another mall-based competitor given your very strong market share at this point?

And then I have a follow up on Journeys.

Let me jump in -- Bob will jump in on this.

I'll start with the last question about the Foot Locker entry into the Hat World.

I think we have to put that in perspective that Hat World has more than 700 stores out there today.

We plan to open up 80 or 90 next year.

We have a very strong position in the marketplace with a very strong infrastructure of merchants and buyers that allow us to focus the merchandise into the local markets.

And we've found that this was the same model in Journeys that allowed us to have a very profitable store concept, and that is the same approach that's used over in Hat World or the Lids stores.

So we feel like we're well-positioned for that, and I think we just have to put that in perspective in order to maximize the small box and to get the greatest productivity out of that it takes a very skilled group of merchants and a very broad and deep group with a lot of talent.

Bob, I'll ask you to --?

Yes to build on that a little more, Jeff, just to put some numbers against it we have a merchant group right now of 30 people, most of whom have been in this game for quite some time.

And so, what that allows us to do is build on an existing base of knowledge to really micro merchandise these stores down to the SKU level.

And as you have heard us talk before, we think that's one of the real key factors that makes our business distinctive, and you only get there with a lot of resources and a lot of time to learn what works and what doesn't work.

On Embroidery we continue to build the Embroidery business, Jeff.

A typical store where we have enough space to add embroidery so if we did a retrofit it adds about 8% in terms of revenue both coming from the hats that are sold incrementally as part of the embroidery job and then the charge for the embroidery itself.

And the margins on that are very strong.

And so we continue to build that business.

Most of the stores that are going to have embroidery on a go-forward basis are going to be new stores where we have taken a footprint that allows us to add that.

And the real, the gating item on how fast we grow it is really just the training element of it.

And so right now, we're taking the largest stores that we're opening on a go-forward basis and putting embroidery into those.

And then, for all other stores with any reasonable volume expectation we're actually [prewiring] the stores and getting a lease that will allow us to do embroidery, so that the retrofit is pretty [inaudible] down the road.

So we're just going to continue to grow this business and we're quite excited about it.

Okay thank you.

That's helpful.

One other clarification on the competition side of it too just in terms of thinking maybe you could put some numbers to this as well, Bob, but the market share between mall-based hatwear or headwear retailers [those are] some of the big box sporting goods.

I mean to some extent is this a dynamic of a further shift towards the specialty model versus the big box, and so we're going to see more of this kind of competition coming into the mall because that's where more of the business is headed?

Any thoughts you have on that dynamic?

Well, we've always thought that this category gets serviced best out of the specialty environment, and particularly that we've demonstrated what an impulse purchase it is -- it is needs to be front and center in the mall and with a big open lease line.

So that would say yes to your hypothesis there.

The thing about competition though is that most of these malls in which we have a position really support one headwear store.

When you get to the super regional malls they can support two, and as you know in many of those malls we have already put a second store in.

In many of our leases, we actually have language that gives either protection against a second store coming in, or a right of first refusal to go in and be the second headwear retailer.

So we're pretty confident that we have a very large scale-based position, and we think that's going to be a big advantage for us going forward.

Okay great that's very helpful.

And then, just lastly on Journeys and I'll jump off.

And you might have hit on this, Hal, but in terms of just quickly some of the trends, brands, styles that seem to be particularly helpful right now in driving this conversion or driving the ASPs.

And then, when you think about your fleet at this point and growth going forward, how much do you think about sort of raising the average size of the prototype maybe adding a Shi store, recycling real estate, versus outright square footage growth or new store growth?

I think -- to answer the back end of that first, I think as you address Shi we look for a little different co-tenancy for Shi than we do with Journeys, so it's probably is going to be located in a different part of a mall than a Journeys store as far as recycling those.

We still believe though that Journeys one of the approaches we're using there is, the smaller Journeys stores are being used for the expansion of Journeys Kidz, and then moving to a larger space with the Journeys store within the small mall when that opportunity presents itself.

As far as the product itself some of the things that are continuing to drive to third quarter were what we saw in the second quarter.

We talked about that with the Crocs, where the sandals were big.

And that was what drove a lot of the average selling price deeper, but our unit -- the unit cost as you may remember were a double-digit increase there.

So it was a shift in product mix.

Now seasonally as we go forward, you're going to see, of course, in the fourth quarter we're going to see more boots being sold, more cold-weather gear, that sort of thing.

And some of that the Crocs and some of the canvas and so forth, we would expect also to roll into the fourth quarter.

Okay, thank you, very much.

Good luck.

Thanks.

And our next question will come from J.P.

Morgan, Robert Samuels.

Hi, good morning guys.

Can you give us a little bit more color on what's driving the strength at Johnston & Murphy?

Well I think the - it really boils down to the product.

I think that they've got their product very well-focused.

More of dress casual product, as opposed to the classic dress, if you will.

They've also increased the non-footwear categories in the shops themselves with more outerwear particularly this time of the year.

You may remember we introduced some luggage, pieces, small leather goods into the store as well.

So it boils down to the product.

The stores have certainly been improved, the look of the store is much sharper and more inviting, and the stores that have been outfitted a little differently.

So I think it's a matter of just having all the arrows pointed in the right direction from product, from store, from presentation, and the assortment they have within the store.

Great, and then with regards to Shi can you provide us a little bit more color on that business?

Maybe talk about what you've learned about the customer since opening the chain.

Well I think, we've really validated what we thought would be there particularly the customer, the young 20s to the mid-30s.

And then we are getting the customer on each side, a little younger, a little older -- is something particularly the younger one that might not have shopped at Journeys, might have felt that they would be more comfortable shopping in -- with the presentation for Shi's.

So we're validating that the customer is there that we felt that was there.

From a product standpoint, there haven't been a lot of surprises.

It's primarily a fashion story with women's fashion.

The athletic portion of it is very small around 15 to 20% I think in that neighborhood, and those are really the brands, the more athletic, [influx] European brands if you will.

But it's really a fashion story and we are very pleased with what we see.

The 80 to 85% of the fashion area; a large part of that were small house brands, brands that we might have of our own, or that we might have [found] from smaller vendors.

So it's a look and a price, and we feel like that we have understood that customer all along, and have validated now that that customer was looking for that specialty environment to shop in that might not have been available to them before.

The other thing that we've picked up from having these stores open for time now is, this is a woman who really appreciates service.

And so there's a service intensity that we've committed to in these stores that we think will be a distinguishing factor, and so we've actually adjusted some of our targets in terms of staffing levels to reflect that.

We think that will be a big distinguishing factor.

Great, and then finally can you just comment on what's not working at Journeys?

Well, I might have to search a bit for that.

I'd say the casual, the men's casual probably is an area that is not as strong as it might have been in some past times.

But we concentrate more on what is working, and really assort the store in that way and concentrate on the strength.

That's the strength of our merchants [who] really being able to identify the strong points of the market and speak to that, and micro merchandise it into the local markets.

So, I would say that we're well-focused and well-positioned.

Great, thanks a lot.

And our next question will come from Scott Krasik with C.L. King.

Yes, hi, guys.

A question on the markdown issue at Journeys last quarter that impacted gross margins, and the promotional activity; what do you expect for the fourth quarter?

Do you expect it to get even more aggressive?

Well, I think it's hard to look toward the fourth quarter as how promotional it's going to be but I would say to you that our model is not to be promotional.

Our model is to really sell the first-line products and concentrate on what is the newest and the freshest product.

When we use markdowns it might be a little different than some other models.

We use it to clean the inventory.

We use it and we're very aggressive to be sure that we take out that product which we don't want on the shelf.

We're really not using markdowns to drive sales per se.

It's really to keep our shelves fresh.

So it's just a little too early, in a few weeks you'd have a better --?

It's a function of the marketplace and we feel like we're very strong and positioned there.

Okay, and then quickly on Underground, how big an impact will declining ASPs have next spring if you're going to a fashion product, versus selling Nike and athletic a year ago?

I'm not sure.

We haven't looked at it in that light, and I'm going to venture to say that the average selling price may drop just a bit, because it will be more women's assorted.

It will be more fashion, and I would speculate that the ASPs might drop a bit.

However, I would say to you that Nike as the example, does not have the greatest initial margin going in.

So, our opportunity with more fashion and more women's at the end of the day we may not have a great deal of difference.

Okay and then I know Hat World isn't a comp story but as you look back you had a couple of pretty interesting fashion trends whether it was the trucker hat or urban [Kangol] type hats before that.

Do you need a fashion trend to really drive comps at that division better than low single digit otherwise you just sort of expect that going forward?

I think it's fair to say that without another big shift in fashion our low single-digit comp is a reasonable expectation and that's what we're been saying all along.

We do have some trends that are emerging, again looking at surf and skate brands that are becoming important in the headwear category, is one area where we get excited about the potential.

But again, this is a story where we believe that these stores -- we've shown that these stores opened at 100% of their potential.

And so really -- and the last class of stores is performing very well.

And so, what we're really focused on is trying to get as many stores as we can get opened in good locations, and that's the driver of the profitability model.

Yes I want to jump in here and make that point again that we've been saying all along that we think that Hat World can at least -- can potentially leverage at a 3% comp.

So again, if it's a fashion trend and we get better than 3% or 2% that's very good.

But let's say 3% comps we can maintain our margins, or maybe even increase our margins a little.

And with the operating margins that we're now driving in that business, we just need to open stores and that's where the value is going to be created.

Good, okay.

And have you completely [cycled] against the end of the trucker hat craze?

Yes.

Okay, thanks, guys.

And our next question will come from John Shanley with Susquehanna Financial.

Thank you, and good morning, guys.

Hi, John.

Hal, I wonder if you could kind of get into the reasons for the fairly impressive 28% comp gain that the Journeys division had in athletic.

And also, whether you feel that there's a correlation with the strong growth in athletic product sales at Journeys and a correspondingly weak performance in Underground?

Is Journeys getting the Underground customer?

Is that's a possibility that's [technical difficulty] strength in terms of their business experience in the third quarter at least?

John, that 28% was the overall increase for the previous year on the athletic.

Right I understand that.

Okay the thing that's driving the athletic business primarily is the skate.

In skate Vans has certainly come on very strong in that arena, as you know.

Heelys is also a big part of that.

So the skate has been a big part of that driver.

I don't believe that that is having the impact over in Underground Station.

I think Underground Station from an athletic standpoint, the Nike is the main product there as you remember.

Nike is not quite as strong as it was last year for us.

Still a meaningful part of that business, but the strength has weakened just a bit.

The other athletic brands in that channel have just not excited that urban customer.

So I don't believe that that's migrating over into the Journeys, and driving a Journeys growth pattern.

Okay.

But what brands, Hal, are you -- athletic brands are you bringing into Underground to help stimulate the business as you get into your merchandising for our spring '07 selling season?

John, it's going to be some of the classic brands.

You're going to be working with Reebok.

You're going to be working with of course with K-Swiss, some of these others in that arena.

But looking as we read the market currently our focus is going to be primarily on increasing this women's assortment in the fashion arena, so that we are less dependent on athletic and differentiate ourselves somewhat from other retailers that are in that arena.

Okay all right, fair enough.

Bob, I had a couple of questions on Hat World.

Can you give us an idea of what the chain has done to improve the productivity and sales opportunity in their urban stores?

I think you mentioned in the earlier conference calls that it's about 25% of the Hat World stores are located in those markets.

What are they doing merchandise-wise that's differentiated from the rest of the chain?

And then secondly, with 740 stores you must have some kind of sense in terms of what your overall share of market is currently whether through [NPD] or SportScan or one of the other data services, where do you see Hat World's total share of the casual cap and hat business right now?

Yes, I'll do that second question first John.

It's [perennially] a tough category to measure in terms of what the sales is, and NPD we don't think is very reliable.

That said most estimates of the size of the category would put us in the 20% neighborhood in terms of total share.

That would include all retailers place stadiums, and all the gift-oriented sales [hats] as well.

So that would be the number I'd suggest you'd have in your head.

Great.

In terms of what we've done to improve in the urban environment, we've got one vendor who is very important in that category which is New Era, which is the authentic baseball hat and all its variants.

And we're working very closely with them to figure out how to juice that market a little more.

It's a combination of a little more freshness in what we do, trying to get away from -- to move on from what was a very consistent trend of a white on white and black on black look, searching for what the next important look will be.

And also, what we've done in the third quarter what we mentioned -- Jim Gulmi mentioned the promotional activity.

We've got a little more aggressive on value for the customer in that category, just to move volume and keep inventories in balance which continue to be in good shape.

Does that seem to be working in the urban stores, in terms of being a little bit more promotional or more value driven?

Yes we can always -- we never struggle to keep the inventory in line because we know what simple promotions we can put on to keep it lined up properly.

Okay, and you mentioned in your comments that some of the Hat World stores have exclusivity arrangements in their leases.

Can you give us a sense of approximately what percentage of your store leases may have that type of terminology in their leases?

John, I can't quantify it for you.

We have to be go back and look at it.

We could do that -- it's something that we typically get.

The classic pattern would be the stronger the model the less likely we are to get that.

No surprise.

So, as we've worked our way down to the mall universe we get it more and more.

What we are searching to do with the stronger malls is, to make sure that they are aware of the fact that we are very keen to have a second store in that mall, and as we've said we've been doing that and we've had very good success with doing that.

So we're pleased with two approaches to that one of exclusivity down at the lower end of the mall universe, and second stores in a mall at the high end of the mall universe as our defensive play.

Okay, good enough.

And then just one last housekeeping question, Jim.

How many shares are remaining in the share buyback authorization?

And can give you give us a sense of whether the focus going forward is, in terms of your free cash flow usage, whether it's going to be a continued aggressive share repurchase or are you also focusing in on debt repayment?

Well first of all, to answer your first question the authorization was $50 million altogether -- stock buybacks, and we've bought in $31 million.

And in terms of aggressiveness, let's say we have bought in some at these current prices or around these current prices, but we were far more aggressive at the lower price points, as we can see by the average price of [about] $30.

So we're not going to be as aggressive as we were, but we will from time to time probably be in there buying.

Now the other side of that is the pay down of the term debt.

We would hope that we can continue to pay down -- we hope that we can pay down the term debt in the fourth quarter.

So we're going to continue with that.

Hopefully we can pay it down, and then we'll look -- we'll be opportunistic in terms of buying back stock over the next couple of quarters.

Okay, fair enough.

Thanks a lot, I appreciate it.

[OPERATOR INSTRUCTIONS]

And our next question will come from Wachovia Securities, John Rouleau.

Hey, guys, it's John Rouleau.

Hi, John.

A couple of questions, regarding the Journeys margins in the third quarter it sounds like they were down a little bit.

Was that just an overall macro environment that was a little bit more promotional?

Was there a style or two that you felt you needed to clear that impacted margins or -- was a mix shift maybe towards just some products that had a slightly lower initial mark up?

Could you just give a little more color there?

Let me just talk from a financial standpoint, and then maybe Bob and Hal could jump in.

We don't see -- I said that the markdowns were a little heavier.

We were not taking markdowns to drive traffic.

Right.

Again it was a question of, as Hal said, the store moving merchandise we marked down and move out which is what we've always done and continue the general strategy.

What is happening is, and really I've been talking about it all year, in that last year our gross margins were very strong.

Our markdowns were very light, because everything was hitting.

And so, we went in the year anticipating higher markdowns because we just felt like last year was an outlier.

Okay.

So, it's more of an issue of last year being somewhat of an outlier, than increased promotional activity or any major issues from a markdown standpoint.

And historically, what we'll do leading into that third quarter, we're going to be clearing merchandise very aggressively because we're moving into a holiday season getting the shelves clean, bringing in fresh product.

So as Jim's pointed out, we're not doing it to drive sales per se, except to position ourselves for the holiday selling season.

Got it, and then Jim going back to that really tough comparison versus last year, does that kind of continue through the end of the year this year and into the fourth quarter, or when does that start to kind of normalize?

Yes, we had a very strong fourth quarter last year.

Okay, okay.

Regarding boots right now -- I know we're heading into the seasonally strong period for boots there seems to be a little bit of a shift more towards fashion and a little bit less towards some of the chunkier, beefier styles maybe particularly in men's.

Can you just talk to kind of some movements on the boot side of the business and how you see that playing out?

Well I think you're very well thought through there.

I think it's a men's utility always comes a little bit later, a clunkier style.

Fashion always leads it.

The women's fashion boots we expect to be very strong.

We're just entering that season now.

We will see I think continue there will be a lot of fleece, a lot of the for lack of a better word, the UGG-look that will be out there which has been strong.

And I think we're just entering that period now and I think you'll see that play out as we go through the season.

Okay great and then I guess last question is in regards to Journeys comps, Jim did you say low to mid-single digits for the fourth quarter?

I just wanted to confirm that, and then ask a little bit of a question around that?

Yes, I did.

Okay, and then obviously third quarter comps came in above that.

We don't know how it played out over the course of the quarter, but are you trying to remain conservative there which is I know typically the way you like to guide, or is there something else going on there or how should we think about that?

I don't think you've ever heard me give guidance at 9% comps.

No, no.

And I doubt if you ever will

Okay, that's what I thought.

Just wanted to confirm.

Thanks.

And our next question will come from Adam Comora with EnTrust Capital.

[This] is a comment congratulations on nailing back-to-school.

But I'm just curious where do you guys think we are in the life cycle of this movement to skate?

Does it feel like it's gaining momentum, flattening out, just curious?

I think with skate that has been a core group within the Journeys merchandise from its very beginning.

So we consider that as being part of the foundation of Journeys.

We have enjoyed a lot of growth, and I think a lot of that can be attributed and should be attributed to the brands themselves.

They have offered up product which is very exciting.

We've expanded some product in our stores not during this past year, but I think the beginning of this last fiscal year we started to expand a bit.

We have all the [imported] brands and all the key brands, the national brands that the skateboard people like.

We see it continuing to be strong.

We see no weakening of that category.

It has been reported in some channels that it might have shown some weakness.

We haven't experienced that.

We continue to grow.

All right terrific.

Thanks a lot.

And at this time there appears to be no further questions in the queue.

Very good, well thanks very much for joining us, and we will look forward to talking with you later.

That does conclude our teleconference for today.

We'd like to thank everyone for your participation, and have a wonderful day.