Genesco Inc (GCO) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to this Genesco fourth-quarter fiscal year 2007 earnings release conference call.

Just a reminder, today's call is being recorded.

And now 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 of Genesco.

Please go ahead, sir.

Good morning and thank you for joining us for our fourth-quarter fiscal 2007 conference call.

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

As you saw in the press release, we reported a net sales increase of 17% to $477 million, a same-store sales increase of 1%, and diluted earnings per share of $1.36 before discontinued operations for the fourth quarter compared to our previous guidance of $1.29 to $1.31.

This includes some positive items related to taxes and gift cards that we described in the release and that Jim will talk about later.

But even without these items these were solid results for the quarter despite ongoing challenges in the urban market.

For the year total sales increased approximately 14% to roughly $1.5 billion, comps were up 2%, and diluted earnings per share before discontinued operations rose 10% to $2.61, again reflecting some items that Jim will discuss.

During fiscal 2007 we faced a number of challenges with Underground Station, and to a lesser extent Hat World, primarily due to the changing dynamics in the urban market.

We're taking a number of steps to make improvements, however we do expect that some of these factors will continue to have a negative impact on our business during the first half of fiscal 2008.

Before we turn to the fourth-quarter results and next year's outlook, let me review some of our accomplishments in fiscal 2007 that we believe have enhanced our leadership position in our markets and set the stage for continued growth and profitability.

First, we opened 224 new stores giving us a 13% increase in doors and 14% in square footage.

In addition to new mall locations we also increased our presence in non-mall locations.

Second, we also continue to develop new concepts that are brand extensions of our existing businesses and to grow some earlier brand extensions, most notably Journeys Kidz which performed extremely well, ending the year with 73 stores and solidifying its position as another important growth vehicle in our portfolio.

We also launched Shi by Journeys in November 2005 which, as you know, is our new concept targeting the 20- to 35-year-old woman.

The ability to leverage the Journeys' infrastructure allowed Shi to be profitable in its first year.

We view the ability to identify and incubate new retail concepts, like Journeys Kidz and Shi, as one of our most significant strategic attributes as a company.

We opened 11 Shi stores during the year and continue to be pleased with what we see.

If it continues to test out we see the potential for another national chain here.

In addition, we opened the first three Lids Kids stores in the fall.

And while we will do our usual cautious test before we make a material commitment to this concept, we feel good about the opportunity here as well.

Third, during fiscal 2007 we saw the most dramatic evidence yet that the new strategy we put in place at Johnston & Murphy is succeeding.

Johnston & Murphy has reaffirmed its leadership status in the men's dress and dress casual footwear market and expanded its lifestyle positioning and has generated significant increases in sales and profitability.

Similarly, Dockers Footwear substantially improved its productline, expanded its shelf space with key retailers, grew market share and posted strong top- and bottom-line gains for the year.

And finally, we acquired the 49 store chain Hat Shack, another great head where retailer that solidifies Hat World's status as a leading hat retailer in North America.

So now let's go through each division.

The Journeys group's total sales for the fourth quarter increased 22% to $234 million.

Dollar comps were up 6% on top of 10% for the same period last year.

For our Journeys stores comp sales were up 6%, footwear unit comps increased 12%, and average selling price declined 4% during the quarter due in large part to a drop in ASPs in the men's category.

The product mix in the stores was fairly consistent with the reads we saw earlier in the year.

As expected, athletic shoes were up 27% and represented 52% of total sales compared to 46% last year.

Athletic unit comps increased 23% and the average selling price was down 2%.

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

And we continue to be pleased with the performance of brands like Vans, Heelys and DC.

The Kid's Towers continue to perform well in the Journeys stores with increases in both unit comps and ASPs.

In addition, we're continuing to see strong growth in our Journeys catalog and eCommerce business, which was up 29% in the quarter.

Journeys' store growth plans remain on track.

We opened 61 stores this past year, a net increase of 8% over fiscal 2006, and ended the year with 768 stores in operation.

Journeys' total square footage increased 11% for the year.

And our current plan is to open 50 to 60 new Journeys stores in fiscal 2008.

We are encouraged by the strong sales trends we have seen in several of the City Street stores that just came into the comp base, giving us increased confidence in the potential of these venues.

We also expanded 31 size constrained mall base stores this year by an average square foot increase of 77% and the sales gains we have experienced from these initiatives have met our expectation.

We estimate that there are another 80 high-volume stores that are strong candidates for expansion.

Journeys continued to build on its status as a destination retailer for branded footwear among its customers.

The chain's ongoing success is predicated on having a broad variety of the right brands and the right product at the right time.

And our ongoing ability to do this is our competitive advantage and sets us apart from other retailers in the space.

And now for Journeys Kidz.

Total sales for the fourth quarter were more than $15 million, up 59% compared to the same period a year ago.

Comp store sales rose 8% on top of a 12% increase last year and footwear unit comps increased 12%.

We also opened six new Kidz stores during the quarter ending the year with 73 stores.

During fiscal 2007 Kidz total sales increased 50% to $42 million; same-store sales were up 9%.

During the year we launched the stand-alone Kidz catalog for back to school and holiday and we're very pleased with the results.

We also increased our store base by 46% as we opened 24 stores compared to 10 last year and we will accelerate our store opening plan in fiscal 2008 to 40 additional stores.

We now believe that there is an opportunity to open 250 to 300 Journeys Kidz stores nationwide.

And now for Shi by Journeys.

We currently have 12 Shi stores in operation as two additional stores were opened in the fourth quarter.

As I mentioned earlier, we're excited about our progress with Shi.

We believe that we have the right product mix, store design and strategy and we're becoming more and more confident that this concept could become a meaningful growth vehicle for us into the future.

Now many of our investors have asked us for some indication of how many Shi stores are possible.

While we're still learning and making improvements every day, we are encouraged enough by our results to target 50 stores by the end of this fiscal year, which represents a net addition of 38 doors.

And although we still believe it is too soon to set a longer-term target and timetable, we can indicate to you that the price points and demographics of this chain make it suitable for a broad set of mainstream malls, probably at least 500.

I would like to point out again that Shi was profitable in its first year of operation, highlighting our flexible platform and entrepreneurial approach.

In testing and opening the Shi stores, much like we did with Journeys Kidz and as we are currently doing with Lids Kids, we are utilizing the existing merchandising and operational talent of the parent company so we can test new concepts without building incremental infrastructure until we are confident that we have a viable growth opportunity.

We think that this proven approach to rolling out brand extensions is a compelling precedent for future opportunities.

Now let's talk about Hat World.

Total sales for the quarter increased 19% to $116 million while same-store sales declined 1% compared to a 6% gain for the same period a year ago.

The modest decline in the same-store sales primarily reflected weakness in the urban markets.

Our core 113 urban stores experienced a negative 8% comp while comps for the rest of the chain were up about 1%.

It is important to note that these urban stores had very strong comp increases throughout 2004 and 2005 and as a result achieved levels of four wall profitability above the rest of the chain's average during this period.

Their recent comp losses have brought their profitability as a group more nearly in line with the rest of the chain.

These stores are still nicely profitable.

To address the urban softness the Hat World team is managing down their commitments to more urban oriented product styles and have identified several areas of growth opportunity for shifting these inventory dollars, most notably to both the authentic and the relaxed fitted major league baseball hats, and we expect this shift to take place over the next three to four months.

The Hat World stores were also impacted by the difficult comparison of Florida this year versus Texas last year in the national championship.

Hat sales benefited from the NFL playoff line-up this year, but the somewhat tougher Colts versus Steelers comparison post Super Bowl has affected the early first quarter of fiscal 2008.

On product we continue to see strength in our major league baseball branded category, action brands like Hurley, DC shoes and Fox racing and the fashion brands, especially Kangol.

As you probably know, major league baseball is introducing a new design this year for their authentic on field hat.

Hat World is managing down inventories of the old wool hat to make room for the new synthetic cap which will be available in stores on April 1st.

During the wind down phase we expect sales to be negatively impacted due to inventory shortages and size gaps; however, we expect the marketing splash behind the new hat to drive category sales above last year's levels once it is available on our shelves.

Last year on field authentic hats were 9% of total sales for both the first and the second quarters.

As we mentioned earlier, during the quarter we acquired 49 Hat Shack stores.

We expect this business to be slightly accretive in the first year as we optimize the support functions of both businesses and enhance gross margins.

In addition, we're excited about the embroidery expertise the Hat Shack team can add to our business.

As you know, embroidery is a very profitable segment of our business which we are presently doing in about 20% of the Hat World stores.

Hat Shack has embroidery capability in all stores and embroidery is a higher percent of their business, creating an opportunity for us to learn from them.

For the year Hat World sales increased 15% to $343 million and same-store sales were down 1% versus a 4% gain last year.

In general we are very pleased with our new store performance both in the U.S. and Canada.

We opened 104 new stores during the year, bringing the total chain to 785 stores, which is up 22% from last year including Hat Shack and Lids Kids.

In light of the continued strong performance of the newly opened Hat World stores and the variety of venues and formats in which the concept works, we are raising our target for total stores in North America to 1200 to 1300 from our previous target of 900 to 1000, and this does not include Lids Kids.

The Lids Kids stores delivered exceptional results, but with all three located in Indiana at least part of their strong performance is attributable to the Colts.

That said, we have enough visibility into their performance to commit to 15 new Lids Kids stores in the coming year.

We remain excited about Hat World's growth prospects.

We expect a challenging first quarter due to the Steeler's comparison, the major league baseball on-field hat transition, and the challenge within the urban segment.

However, as we work our way through the early part of fiscal 2008 and begin to anniversary the easier comparisons in the urban market, we're expecting a solid increase in sales and operating profits for the full fiscal year.

And now turning to Underground Station.

Total sales for the Underground Station group were down 8% to $49 million and same-store sales declined 15% compared to a 4% gain in the fourth quarter last year.

Underground Station continued to experience challenges during the fourth quarter.

Overall weakness in the athletic category was particularly pronounced in Nike as expected where we had only the remains of the last shipments we received in August.

The men's and the women's rugged casual business was also tough during the quarter.

As you know, we are working to reposition Underground Station away from it strong athletic emphasis and back towards casual and dress styles, which is the concept's original roots, but now with more emphasis on women's than ever before.

We will still carry athletic products, but with more emphasis on styles which have limited distribution in malls.

We expect over time that the stores will approach more of an equal weighting between men's and women's product as we now have at Journeys, and we also expect to build on the continued success of the Kid's Towers in Underground Station.

Our strategy received some confirmation during the fourth quarter as the total women's casual and dress styles at Underground Station, while still a very small part of the business, comped up over 30%.

To support the new direction we have put in place a new fixture package chainwide for a better presentation of the nonathletic assortment.

We expect that the new product supporting this shift will fully hit the stores during the second quarter.

We expect the improvements at Underground Station to be steady but gradual.

Nike percent to total sales was at it's peak in last year's first half making it our most challenging comparison in the year, but it moderates as a percent of total in the second half.

We remain encouraged about the prospects for Underground Station and we believe it can fill what we view as an underserved niche in the urban marketplace.

Now turning to Johnston & Murphy which had an excellent quarter.

Total sales rose 17% to $57 million and same-store sales increased 5% on top of a 9% gain last year.

Operationally we generated improvements in both gross margin and SG&A leverage which enabled us to increase our operating margin by 380 basis points to 12.1% during the quarter.

Johnston & Murphy wholesale sales increased 12% as we continued to gain retail shelf space.

We have been expanding our Shuler and premium collections and our customers continue to embrace our combination of style, performance and comfort enthusiastically.

In the Johnston & Murphy shops comps rose 5% and shoe ASPs were flat.

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

And apparel and accessories are also growing at our shops and during the quarter accounted for about a third of the business and we're seeing its strength in all our non-footwear categories.

During the quarter we opened one Johnston & Murphy shop and one factory store.

We ended the quarter with 148 retail outlets compared to 142 last year.

Johnston & Murphy's direct business increased 26% during the quarter when we recently revamped the Johnston & Murphy catalog to give it a newer more updated look and the feedback has been excellent.

For the year Johnston & Murphy's net sales rose 10% to $187 million and operating margin increased almost 210 basis points to over 8.2%.

In fact, over the past three years Johnston & Murphy generated a 55% compound annual growth rate in operating income.

It's great to see that the strategy launched more than three years ago to enhance brand image, strengthen consumer advertising and, of course, improve the productline continues to be validated and is showing great progress.

And now for licensed brands.

Licensed brands posted an outstanding quarter with sales up 51% to $21 million.

The Dockers Footwear product is retailing well and we're excited about the response to the new introductions from fall and spring.

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

We are particularly pleased with the strength in orders we are seeing from our larger customers.

For the year licensed brand's sales increased 34% to $78 million and operating margin increased 150 basis points to 8.6%.

The Dockers Footwear team has really done a great job rejuvenating this business and driving market share.

Dockers is the number one men's brand in dress casual footwear and is ranked third in overall market share in all men's fashion footwear according to NPD retail tracking service for department stores, volume moderates and footwear chains.

And now I'm going to ask Jim to take you through the numbers.

Thank you, Hal.

The fiscal year ended on February 3rd, reflecting a 14-week fourth quarter and a 53-week fiscal year.

Fourth-quarter sales increased 17% to $477 million compared to $406 million last year.

Sales in fiscal 2007 for the 14th week of the fourth quarter and the 53rd week of the total year which are included in the above amounts are estimated to be almost $25 million.

On a comparable 13-week period in both quarters the sales increase in the fourth quarter was about 11%.

Now looking at each group on a 14-week basis in FY '07.

For the fourth quarter Journeys group sales increased 22% and comps increased 6% compared to a 10% gain for the same period last year.

Hat World group sales rose 19% and comps declined 1% compared to a 6% gain for the same period last year.

The Underground Station group sales were down 8% and comps were down 15% compared to a 4% gain for the same period last year.

Sales of the Underground Station stores decreased 2% and comps were down 15% in the fourth quarter compared to a 6% gain for the same period last year.

Jarman retail sales were down 33% and comps were down 16% for the quarter.

The decline in sales at Jarman was due in part to 19 fewer stores in operation at the end of the quarter compared to last year as we continue with our plans to close or convert the remaining Jarman stores.

We ended the year with 30 Jarman stores, down from 64 two years ago.

The Johnston & Murphy group total sales for the quarter increased 17%.

Johnston & Murphy's retail comps increased 5% compared to a 9% gain for the same period last year.

Johnston & Murphy's wholesale sales rose 12%.

Licensed brand sales were up 51% to $21 million.

Now turning to gross margin.

Total gross margin this quarter for Genesco was 49.2% compared with 50.6% last year.

While the Journeys group gross margin was lower than last year due to higher markdown, this quarter's gross margin actually exceeded our expectations.

Underground Station group's gross margin was down due to higher markdowns.

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

The Johnston & Murphy group's gross margin was strong during the quarter with meaningful improvement in retail gross margins driven by lower markdowns and better initial markups.

License brands gross margin were also up in the quarter due to product mix.

Now turning to SG&A.

It was good to see an improvement in overall Genesco SG&A leverage in the quarter, with SG&A as a percentage of sales down 70 basis points to 36.7% from 37.4% last year.

Included in the current quarter is an additional 40 basis points or $1.9 million pretax or $0.05 per share related to stock option and restricted stock expense.

During the fourth quarter last year the restricted stock expense was $0.1 per share.

Obviously without the addition of the stock based compensation expense of 40 basis points the SG&A margin would have been even lower and leverage even greater.

The Journeys group SG&A percent decreased about 60 basis points in the quarter driven by strong comps and good expense control.

We were pleased to see a decrease in Hat World's SG&A percentage even with a negative 1% comp for the quarter.

The Hat World management team has been working hard to tighten up selling expenses and it was good to see that effort contributing to the improved leverage.

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's fourth quarter.

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

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

Operating margin was 12.6% in the fourth quarter compared with 13.2% last year.

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

Journeys' group operating margin in the fourth quarter was essentially flat at 16% compared with 16.1% last year.

Underground Station group was profitable in the fourth quarter with an operating margin of 7.8% which was down from last year as expected.

Hat World's group operating margin was a strong 16.4%, but down from last year's 18.2%.

Johnston & Murphy's group operating margin increased about 50% to 12.1% from 8.3%.

Finally, license brands' operating margin increased over 45% to 6.7% from 4.6% last year.

Net interest expense during the water was $2.9 million compared with $2.4 million last year.

This was primarily due to increased revolver borrowings as a result of stock repurchases amounting to about $32 million and the Hat Shack acquisition which used approximately $18 million of cash.

Earnings before discontinued operations for the fourth quarter were $35.7 million or $1.36 per share compared with $31.2 million or $1.15 per share for the same period last year.

This year's results include the expensing of stock based compensation of $1.9 million pretax or $0.05 per share compared to the cost of restricted stock which was about $0.01 per share last year.

We had a number of small unusual items that added about $0.01 net to EPS during the quarter including -- we settled litigation on a net favorable basis; we incurred some expense in exiting a licensing arrangement; we recognized some gift card breakage income from periods prior to quarter four and we impaired assets in some underperforming stores.

In addition, our effective tax rate was lower in the fourth quarter due to our recording items impacting the full fiscal year tax rate in the fourth quarter tax provision.

We estimate this had a favorable impact on the fourth quarter of about $0.02 per share.

Now for the 12 months.

Net sales increased 14% to $1.46 billion for the 53-week period ending February 3rd compared to $1.28 billion for the 52-week period ending January 28, 2006.

Excluding the sales from the 53rd week we estimate net sales increased 12% year-over-year.

Earnings per share before discontinued operations for the 53 weeks ending February 3rd were $2.61 compared with $2.38 for the 52 weeks ending January 28, 2006.

This year's annual results include a net unfavorable adjustment of $0.03 per share, similar to those in the fourth quarter including a full year of impairments.

Last year's EPS included a litigation settlement, impairment charges and lease terminations resulting in a negative impact on EPS of $0.05.

Also this year's annual results included $0.18 of stock based compensation compared to $0.01 last year.

Therefore these items net to $0.21 per share negative this year; last year the negative amount was $0.06 per share.

Now turning to the balance sheet.

We ended the quarter with $17 million in cash compared with $60 million last year.

This lower cash balance was caused in part by the $32 million of stock buybacks during the year and the recent Hat Shack acquisition of $18 million.

We ended the year with $86 million in convertible debt and $23 million in bank revolver borrowings.

As we planned, we were able to pay down the $52 million revolving bank debt and $20 million acquisition term debt in the fourth quarter.

However, we did end the year with $23 million in revolving bank debt due largely to the closing of the Hat Shack acquisition in January and some acceleration of capital spending in the fourth quarter for stores opening early in FY '08.

Therefore, aside from the acquisition expenditure, the small year-end bank borrowing was caused primarily by timing differences.

During the fiscal year we purchased $32 million or 1.1 million shares of stock at an average cost of $30.20 per share.

We did not buy any stock in the fourth quarter.

For the quarter capital expenditures were $15.7 million and depreciation was $11 million.

For the fiscal year capital expenditures were $73.3 million and depreciation was $40.3 million.

We ended the quarter with 2,009 stores compared with 1,773 last year.

This represented a net store increase of 236 including the newly acquired Hat Shack 49 stores or an increase of 13% year-over-year.

The square footage increase was 14% to 2.7 million square feet.

In the fourth quarter we opened 49 and closed 14 stores and we acquired the 49 Hat Shack stores.

In the fourth quarter last year we opened 67 stores and closed 12.

Altogether we added 273 stores and closed 37 in fiscal 2007 compared to 193 new store openings and 38 closings in fiscal 2006.

Now for our outlook for FY '08.

To date we have not given any detailed guidance for fiscal 2008, so let me now outline our top- and bottom-line target.

Our annual guidance for fiscal 2008 is sales of about $1.6 billion representing a 10% increase over the previous year.

We are forecasting diluted earnings per share of $2.78 to $2.81 per share.

On a comparable 52-week to 52-week basis the sales growth is about 12%.

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

The comp guidance for each business unit is as follows -- Journeys is planning positive low to mid single-digit comps throughout the year;

Hat World is expecting a negative low single-digit comp in quarter one.

For the remaining three quarters Hat World is forecasting flat to slightly positive comps.

Underground Station is expected to be negative low double digits in quarter one, improving steadily throughout the year and ending with a slight positive comp in quarter four.

Johnston & Murphy is planning positive low to mid single-digit comps throughout the year.

We expect that the first quarter of fiscal 2008, and to a lesser extent the second quarter, will be impacted by the current factors at Underground Station and Hat World that Hal spoke about earlier.

There are also a few other items we are factoring into our annual guidance.

We expect to incur expenses this year from the upgrade of our store systems; this will be a two-year project so we really won't see a full benefit this year.

We estimate the net expense will be about $1 million to $1.5 million pretax in the fiscal year or about $0.03 per share.

We also have factored into this plan the added cost of a federal and state minimum wage increase which should have an impact primarily on Journeys due to its relatively greater use of part-time employees.

We estimate this will impact earnings by about $0.05 per share.

The guidance also reflects an additional $0.02 per share in added stock option expense due to large part to increased costs from stock price appreciation impacting the valuation of the more recently granted options.

We are not assuming any further gift card breakage income from prior periods nor favorable litigation settlements for FY '08.

In FY '07 these items contributed income of about $0.02 per share.

In addition, we estimate that the impact of the 14th week in the fourth quarter had a favorable impact on earnings of about $0.05 per share in fiscal 2007.

So taken altogether, if we look at our fiscal 2008 diluted EPS guidance and compare it to our fiscal 2007 actual reported diluted EPS on an apples-to-apples basis, we estimate that there is about $0.17 in unusual items.

FY '08 will be negatively impacted by approximately $0.10 per share from the items I just mentioned that were not in FY '07.

In addition, FY '07 was favorably impacted by $0.07 from the positive items we mentioned above and the 53rd week.

We believe that it is important to note those items when comparing the two years.

We are also assuming annual impairment charges of about $0.05 in our guidance which is similar to the amount in FY '07.

Again, we have not given any detailed guidance for FY '08, so let me do it now.

For the first quarter we expect sales of approximately $339 million to $341 million and EPS of about $0.28.

For the second quarter we are expecting sales of approximately 355 to $357 million and EPS of $0.34 to $0.35.

For the third quarter we expect sales of approximately 392 to $394 million with EPS of $0.63 to $0.64.

And then finally in the fourth quarter we expect sales of approximately 512 to $514 million with EPS at $1.53 to $1.54.

Now for fiscal year 2008 capital expenditures.

We are planning capital expenditures to be approximately $90 million.

Depreciation for the full year is planned to be about $46 million.

With regard to new stores in FY '08, we plan to open 50 to 60 Journeys stores and close three.

We plan to open 40 Journeys Kids stores and 38 Shi by Journeys stores.

Hat World plans to open about 105 stores including 15 Lids Kids stores and will close six for the year.

We have committed to two new Underground Station stores and two conversions to Underground Station from Jarman.

We will consider opening six additional stores late in the year if we see sufficient progress in the execution of the new business plan at Underground Station.

We also expect to close two Underground Station stores in FY '08.

We also plan to close seven Jarman stores and convert two to Underground Station.

We are planning to open seven Johnston & Murphy shops and open three Johnston & Murphy factory stores.

Altogether we plan to open 245 to 255 stores and close 18 stores this fiscal year.

Square footage is expected to grow about 11% to 3 million square feet.

In addition, we expect to spend approximately $9 million in upgrading our store systems.

Thank you.

Now before we open it up to Q&A I just want to reiterate that we have pinpointed the near-term challenges that we expect to experience in the first half of this year and we believe we are taking the necessary steps to address those challenges.

We remain very confident about our brands, our platform and our growth potential.

Our established brands have continuing growth potential and we continue to create new concepts with exciting prospects.

In fact, based on the successes we are having in a number of our businesses, we see increasing growth prospects.

As I previously mentioned, we now believe that if Shi continues to test out well it could potentially support at least 500 stores nationwide.

Journeys Kidz can be a 250 to 300 store chain, and Hat World can grow to 1200 to 1300 stores compared to our previous expectation of more than 900 stores in North America and that does not include Lids Kids.

And we expect continued margin expansion and square footage growth at Johnston & Murphy.

So now let's turn this over to the operator for your questions.

(OPERATOR INSTRUCTIONS).

Scott Krasik, C.L.

King & Assoc.

I guess first on Hat World, how many stores did you say comprise the urban piece of the business?

113.

And what gives you confidence that deurbanizing or adding more baseball, that that's actually going to help?

Scott, that's not what me mean.

When those stores became comped so strong we intensified the inventory in those stores, so their average inventory went up.

Now that they're coming back to the field we're going to lower the amount of inventory committed to those stores and those inventory dollars will start going to the other stores in the chain where we see some opportunity.

Okay, so you're not changing the mix per se?

Correct.

Okay, good.

And then when you look at Journeys for the first half of this year, is there anything going on from a product side that should meaningfully impact ASPs one way or the other?

I figure Crocs was pretty powerful last year, it should be again [Reeves] etc., but what are you seeing there?

We don't see anything in the spring that would lead us to believe there's going to be any great shift in that, Scott.

So relatively flattish on ASPs for Journeys?

Well, from -- if you compare to the fourth quarter you're going to have -- in the spring you're going to have more of your sandalized footwear; you're going to have little boots early in the first quarter.

But remember, fourth quarter is when you have all your closed up heavier footwear.

So I think it's going to be -- looking at it from a seasonal standpoint it should compare pretty favorably to the same period last year.

Okay.

And then do you have -- will you have a full spring complement in Uggs or did that really come down a lot?

Well, we'll have what is appropriate for spring in Uggs.

Certainly it won't be as prevalent as in the colder winter months or around holiday, but there will be an Uggs offering there that is appropriate for whatever they have in their line.

Okay.

And then, as you invest in Shi this year, it's great that it was profitable on 10 doors or 12 doors this year, but will it be profitable again in 2008?

Yes.

Okay.

Just last question, Jim, what was the sales guidance for Q2 for 2008?

It was 355 to $357 million.

Okay, thanks.

Jill Caruthers, Johnson Rice.

Good morning.

Wondering if you could possibly quantify the Nike impact.

I know maybe a few quarters ago when you announced the pull out of the Nike product in the Underground Station, but if maybe you could quantify that as well as if you see any carryover to the other productlines as in losing some traffic given the absence of the Nike brand and if you see any carryover in the other productlines?

Jill, we have said before that on an annual basis Nike accounted for low double-digit, low teens in overall.

That was heavier of course in the first half of this past year than the last half because you remember the last shipments of Nike we had were in August.

So it shifts more to the first half than the second half, begins to moderate particularly toward the fourth quarter.

Are you seeing any carryover since the Nike product wasn't in the full line for the holiday period?

Have you seen any significant drops in traffic that you might be able to relate to the lack of Nike?

Nothing that's directly related.

I think the athletic category in general in that channel has been weaker, so there's nothing we can attribute directly to that.

I think it's more of an overall industry and category issue.

Okay.

And I guess just maybe your thoughts -- given your success on the Journeys Kidz side as well as Shi by Journeys, but the continuing drive from Underground Station -- is there a point to where you look at this concept of Underground Station and realize that you possibly might need to close, sell or restructure the concept?

Jill, we continually look at every piece of our business off of an EVA driven economical look.

And we believe that we've got a viable concept here that speaks to a void in the marketplace, but we will continue to evaluate that just like we would any other part of our business on an ongoing basis and then adjust accordingly.

Okay.

And then just last question on Hat Shack, what are you -- do you expect any cost to flow through as you integrate this concept or is that not really a big impact in the first quarter?

Excuse me, what was the question, Jill?

Just with the acquisition of Hat Shack -- I know they entered the store base in the fourth quarter.

Are you expecting any additional cost in the first quarter as you integrate this concept?

Just kind of wondering what's included in the guidance for the first quarter?

It's all in in the first quarter, Jill.

And Hat Shack is already mostly integrated; it's a fairly simple integration for us because of the similarities of the businesses.

So what we did after we acquired it is we had an overhead reduction that went on from some of the things they needed that were redundant with us.

So the costs really being taken into the business are really the store costs.

Okay, thank you very much.

Brad Cragin, Goldman Sachs.

Good morning and hello.

Could you just give us a little bit more detail on your real estate strategy, in particular with the increased potential for some of your concepts?

Have you identified potential locations that gives you the confidence that you can increase the number of rollouts?

We've seen -- at this point this year we're actually further ahead with commitments on our plan for the year than we have been in some time.

Now it never gets easier as we're out there, but I think as our concepts grow and as we have more critical mass it gives our real estate team a great deal more ammunition to look for a proper venue.

So we continue to believe if we look at Journeys and the number of stores they have, that leads us and gives us a lot of information on a lot of different malls that lets us understand what might be appropriate for a given mall.

Consequently with Shi, that's what leads us to believe that it could be so powerful is because we already know what Journeys is doing.

And Brad, what we do from a methodology standpoint is all of our businesses from the operations standpoint, they give us a bottom-up view of where they think additional opportunities exist in their markets.

So one of the inputs as we set the goals is taking a look at this list and trying to assess how many of those sites seem to be credible and viable.

And the more we have success in other venues the more we can assign credibility to some of the sights on that list.

And in Hat World in particular, how many of the increased store potential is coming from second locations whether it's kiosks or something else in a mall?

It's an increasing number for Hat World, but still a very small proportion of the 105 stores that are going to be opened in the next year.

Okay.

And then as far as Jarman goes, I know you guys gave some guidance for store closures and conversions, when are you expecting at this point to have exited that concept as you roll off leases?

That is going to be driven more by lease expirations as well as working with the mall operators perhaps to do some conversions or to move to another place in the mall.

So there's no absolute timetable on that.

These stores are profitable, so there's no great rush to do that, so we can pick our time without any great urgency to do that.

As Hal said -- we've talked about this before -- this is not a drag on the Company.

The return on sales is pretty good and return assets is very good on these stores because most of the stores that we are losing money have been closed.

So what is left are really more of the profitable stores, so the return on assets is pretty good in these stores.

We will wind it down over time as the leases expire, but there's no need to accelerate any of those closings.

Quickly as well, on Underground Station as you change the merchandise mix and shift a little bit more toward a female consumer, are you doing any sort of advertising to communicate that to customers?

I think it is going to be primarily inside the mall itself, there will be -- the best advertising we have is the store itself.

And I think as we reconfigure the store with its presentation and make a much stronger statement as far as women's, particularly women's fashion, I think that is the way that people will learn about it.

A lot of that will happen at the lease line, a lot of it with fixturing, and some reasonably low-cost ways of softening the look of the store to make it more appealing to women is all part of the plan.

Okay, thank you.

Chris Svezia, Susquehanna.

Good morning, gentlemen.

I have a handful of questions for you guys.

I guess first just on Hat World, as you kind of look I guess over the next six months and you talk about the weakness on the urban side and that continuing to trend in that direction incrementally; you talk about the transition with the major league baseball to the synthetic hats.

I guess can you quantify is it more the issue on the urban consumer and to a lesser extent in terms of the transition you are making to the major league baseball hats?

Is that kind of how we should view it at this juncture?

They are almost two separate events, first of all, Chris.

The MLB transition is a core product in the stores; it's probably our most basic item, if you will.

So we are just going through an inventory transition where we're going to be de-inventorying up until April 1st, and they are running it like a release much like some of the shoe guys would do.

So there will be a big splash on April 1st.

So we will suffer a little bit on comps, and that will be all stores going into April 1st.

And then we think we get a benefit on the other side of that because the league and the manufacturer plan on making a pretty big splash with this.

You might have seen already there has been some PR out in some of the newspapers on this.

The urban side is more as Hal had described, some stores that have comped up very, very strongly on the hip-hop trend.

We're seeing that coming back to something that is more normal, and we expect over the first quarter or two that those stores will continue to come back to the norm.

So that is what is baked into our guidance.

Okay, that is understandable.

When you look at -- you talked about bringing those back more into the overall comp, but when you talk about product that is selling in the nonurban stores, you talk about the trends that you are seeing, and is there any move or drive to increase those SKUs that are stronger, whether they are lifestyle or board-inspired type SKUs within those stores?

Absolutely.

One big push in the core nonurban stores is what you just cited, which is a lot of the board sports where we are seeing a lot of interest from the customers, obviously most intense on the West Coast and interestingly in Canada.

Then we are also, as we mentioned, intensifying obviously up on the core on field baseball hat because of the splash that will have.

And we also see a bit of an opportunity, we think, in the relaxed fitted hat in baseball and actually in some of the other sports as well where we think our inventories might have come down a little light as we tried to feed the big urban dog.

Correct me if I am wrong, are the price points on the new synthetic hat sort of coming in, are they more favorable relative to the wool hats they are replacing?

They are; they are higher.

Quickly just on Underground Station when you talk about on the women's side of the business and you talk about how strong it was in the most recent quarter, I guess can you quantify how big?

It is relatively small at this point, but how big the women's end of the business is at this point, and any color at all on which prices on footwear relative to men's, and maybe any color at all on margin trends relative to the men's business on the women's side?

As far as the size of the business, it is still relatively small.

We are down in the low double-digit categories, I think.

It is still a small part of it.

As far as the prices, Jim, do you have the number?

Women's is about 32%.

The women's is overall about 32%.

That is total category.

Okay.

But as far as pricing goes, in the men's a little harder to pinpoint just now, because we are just getting into that category with some of the fresher goods for women.

But I would expect it is going to be slightly lower than the men's because a lot of the men's, probably in the athletic price points, it might be a little higher.

This is going to be more fashion for women, and it is going to be higher margin with those national brands.

Just more color on that, what you will see by late spring/summer when you go to an Underground store, it should be a presentation that really feels a little bit more 50-50.

We are not going to buy to a 50/50 depth because we want to be a little bit cautious on the pace at which we grow the women's business.

We need the women to rediscover the business we are in, but the objective is to become much like Journeys which is ballpark 50-50.

Then lastly on Johnston & Murphy, you have seen pretty significant improvement; congratulations there.

Does that continue as you look into fiscal year '08?

Is there still an opportunity -- you talked about positive comp -- is there still an opportunity for margin improvement and maybe just a little color in terms of what the drivers might be if there is still so?

We feel there is room for improvement there as we've talked about before.

As they continue to broaden their non-footwear categories, as they also continue to adjust some in their sourcing capability, some direct cost opportunity there.

We do see opportunity both for margin increase and for sales increase.

And then also on Johnston & Murphy, on the non-shoe business they have been buying it appropriately, cautiously as they learn what works and what our customers want.

As a result they're gaining confidence in where their opportunities are there and they can buy more into the opportunities so that should provide upside.

So that more than likely will continue to grow as a percentage of Johnston & Murphy's business -- the shirts, the bags, belts, etc.?

Well, for two reasons.

One, they'll be buying in that direction and then also we continue to try and find opportunities to expand our stores to increase the presentation of the non-shoe product.

So that should be having an impact as well.

All right.

Thank you, gentlemen.

I appreciate it.

Stephanie Wissink, Piper Jaffray.

Good morning, gentlemen.

I've got three questions.

First, on your fiscal Q1 guidance for Underground Station, are you factoring any consideration in for the 74 stores from PacSun's demo concept that are being closed?

I think their plan is to close those in the first and second quarters of the year.

Just wondering if that had any impact on your first-quarter guidance for Underground Station?

No, it did not.

Is there any crossover in any of those stores?

They're in some of the same malls.

But as you know, demo is very focused on the apparel side of the business and Underground is very focused on the shoe side of the business.

So we're not anticipating that their liquidation is going to be a major event in terms of Underground's business performance.

What percentage of Underground Station is apparel currently?

About 18, I think 18 to 20%, that neighborhood. 17 this quarter, 17 to 18.

Okay.

And then how about on your Canadian stores?

How many stores in the chain total and how are those stores performing relative to the domestic stores?

You're talking about the Canadian hatwear stores?

Yes, is it just Hat World now (multiple speakers)?

It's just Hat World.

Those stores, when we bought them we felt that they were significantly under inventoried and a little bit wrong inventoried relative to our chain.

So it took a while for us to get the change going.

But the comp for the year in the Canadian stores, of which there are now 26, the Canadian stores had a stronger comp this year than the U.S. base, which is a reflection of more inventory and the right inventory.

We're very pleased with what's going on there.

Great, that's very encouraging.

And then last, on the systems, the $9 million of system spend at the store level, is that just point-of-sale or is that also back office, mark down optimization, software suite, anything additional to what's happening at the ticket counter?

Well, there is some stuff going on there too.

It's primarily POS terminals, but we're adding what's called persistent connections so we have online communications with our stores throughout the day.

And so it's a combination of the persistent connection and also be POS terminals which will give us more efficiencies in the stores.

Is that all stores, Journeys, Hat World, all retail or is it just the Journeys?

It's all stores except for Hat World, their systems are -- their POS terminals are a little more updated than ours.

Okay, great.

Thank you.

John Rouleau, Wachovia.

Bob, a quick one for you.

The major league baseball transition, do you expect -- if you kind of look at sales before April 1st and sales after April 1st -- do you fully expect to offset some of the weakness or lost sales before the transition with sales -- after the transition?

Or how should we look at that?

For the first quarter?

Yes -- I mean, whether you want to say first quarter or not, but will we gain it all back eventually?

Yes, over the year we expect we'll gain it back.

We're not expecting we gain it back in the first quarter.

Not in the first quarter, but a little bit in the first and then more in the second?

Yes, we're expecting this to be a nice positive for the business once we get through this.

Okay.

And then looking at the first quarter again -- I know you guys haven't put guidance out there, so it's tough to comment relative to where the Street expectations were.

But if you kind of isolate the urban weakness out of Hat World and then the major league baseball transition issue, which is a bigger magnitude I guess is the best way to say it for the first quarter?

Yes, it's both really.

We're calling both out because both are impacting the first quarter.

Okay.

Regarding the hip-hop trend in Hat World, when do we start to kind of anniversary that?

Because in just looking at total comps out of Hat World it looks like we start to face easier comparisons beginning in the first quarter with it I think being down one the first quarter of last year.

So when does that hip-hop trend kind of work through?

Really the summer is when you -- if you break the chain down and do the comparison of urban versus nonurban it's summer time when we start to see a big delta between the two sets of stores.

So was there something else going on outside of the hip-hop trend that caused some of the weakness in the first half, because the comparisons get a little bit easier?

I guess you were up against upper comparisons in '05?

Yes, I think that's where it gets tricky because then you've got to go back another year and then you start to run into the tail end of the Red Sox.

Yes, we could do that all day long, right?

Yes.

Okay.

Switching gears a little bit, the assortment in Underground Station, I think I heard you say and I think you've been planning for that to be kind of re-assorted where you want it to be what -- at the end of first quarter, is that accurate?

We've said in the second quarter we would expect for the product to be in the stores during the second quarter.

It will be coming in in stages, but during the second quarter is a good time to expect to see it there.

Fixturing has already been completed.

Okay, good.

And then I guess last but not least, regarding ASPs -- I know it's something that you don't really forecast, you just follow the trends, whatever they may be at retail.

But we did have some fairly significant pressures last year against ASPs.

It doesn't look like styling is changing all that much this year.

So one would think that you might mitigate some of this pressure or face easier comparisons this year on the ASP side.

Any comments on that?

John, I would say just looking forward we don't see anything in our product mix compared to last year that should create any great shift in it.

There was a shift last year, but you know there was a lot of product coming in at lower price points, very popular product.

And I think we're anniversarying that now.

So I wouldn't anticipate there's anything that would cause a great shift.

Yes.

So that's my point; we're probably a little bit more apples-to-apples.

Right.

Okay, terrific.

Thanks, guys.

Adam Comora, EnTrust Capital.

I just have a couple of quick questions, just regarding what's happening here in the first quarter.

Can you give us a sense for how much you think Underground Station loses in the first quarter on an operating income basis, what's baked into that guidance?

Underground Station last year, as you know, if you look at the first quarter last year versus second quarter last year, in the first quarter last year they made $2 million 4; in the second quarter last year they lost $2 million 7.

So the loss in the first quarter -- there's going to be a small loss in the first quarter, but it's coming off $2 million 4 last year in the first quarter.

So it's not going to be a huge loss, but there will be a loss in the first quarter and the loss in the second quarter will be a little larger than it was -- it will be larger than it is in the first quarter.

So there will be a loss (multiple speakers)

And is there any you could help us quantify the first-quarter impact from this baseball shift?

If we're looking at Hat World year-over-year what kind of a drag that would be?

We've really been looking at it on a comp basis and rolling it through.

We haven't actually sat down and tried to isolate it down to the income level.

I suppose we could do that, but we're not prepared to do that right now.

Okay.

And can you just remind us where you are in the share repurchase program, how much is left?

The Board has authorized $50 million altogether and we -- as we said, we've bought in around $32 million.

Okay, thanks.

David Turner, Branch Banking & Trust.

Good morning, guys.

A couple questions.

I was curious about the monthly comp trend at Journeys and the reason I'm asking, you don't have to give specifics.

But it seems like as the quarter progress there were some other mall based retailers chasing a look that I would associate more closely with a Journeys and in particular Finish Line and Footlocker seems to be getting in the this fashion athletic product more and more.

And did that in any way manifest or drag on comps as your Q4 progressed or I guess into Q1 at this point?

I don't have it in front of me, David, but my sense is as I remember it, during the quarter it was fairly level.

And I guess the other question is historically you guys have given some sense of how -- I know it's early -- but how sales are progressing thus far in Q1.

I'm most interested in Underground Station now that they are -- I think you had mentioned that they're going against their toughest Nike or I guess the peak assortment from Nike.

So any insight as to how the Q1 is progressing either relative to plan or just absolute numbers would be appreciated.

Well, business is tough in Underground Station but we anticipate it to be tough.

It's built into our guidance.

The guidance was pretty conservative.

Fair enough.

Any insight into Journeys quarter to date?

As you know, we just report our comps on a quarterly basis, we really don't comment on those during the quarter.

So I think we'll just have to play that one through for the quarter.

Okay.

And I guess we'll root for the Cubs this year.

Always.

Forever.

That's all I've got.

Thanks.

Steve Martin, Slater Capital.

Most of my questions have been answered.

Given everything that's gone on in Underground Station over the last, I don't know -- two years, three years, it's been sort of checkered.

At what point do you guys consider some form of management change or something else a little more dramatic than tweaking the merchandise assortment?

I think we have probably the most experienced and strongest management team that there is in the business focused on that.

It's not an easy business to manage; however, we feel confident that we have the right people there.

I think the dynamics in the marketplace, not just with our division but with all who find themselves in that space, over this past year there have been some challenges with it.

But I think that the team that's there now, particularly with their past experience that they have in being able to move back to a more casual category, both for men and women of which they're experienced, I think they're a strong team to do that.

We're looking forward to this transition, we believe we'll be successful with it.

The question may be if you look at what's happened to everybody who has gotten into various aspects of the urban business, maybe it was never meant to be a national chain and maybe that should be considered.

I think you have to fold all these considerations in, Steve.

As Jim has pointed out, certainly we're going to be very cautious about any further store openings that we make.

We're going to be looking at this business very carefully and we'll be looking at it on an EVA model to be sure that we're evaluating it properly just as we would any other part of our business.

I think what would be more appropriate to call out, Steve, is that in the urban business there's a lot of evidence that there's a lot of micromerchandising that needs to be done because market to market things can be very different.

That's what we're very good at.

So we anticipate that this team should be able to do that.

And I'll also point out that last year, not this year just completed, but the year before that was actually a very strong year for Underground.

So that team can get it done; they just had some trends go against them and a vendor shift that went against them.

Jim, the guidance for away from Q1 is -- I mean the guidance for Q2 is great and the guidance for Q4 looks strong.

Why is Q3 -- what about Q3 last year?

If you look at the guidance for Q2, it's very good in terms of sales then it's down in the third quarter.

And you really need to look at those two quarters together because of the week shift; we're picking up one week of sales which is back to school this year (multiple speakers).

Oh, this is a calendar shift, so there's a back to school week that's going to be in Q2 that was in Q3 last year.

Exactly.

And it's a huge week.

As you know, it's the week where in the past a lot of the tax holidays take place.

So switching that one week makes a big difference.

So you've got to look at those two quarters together.

So does that mean we don't have to fear that July comp number?

I'll tell you in August.

And in terms of the buyback -- and I know you've answered the question about how much remains -- you didn't buy back any in the fourth quarter, was that a function of price?

And how committed are you to utilizing your capacity for that since, as we've discussed in the past, it doesn't seem like you need a whole bunch to grow?

A whole bunch to grow?

A whole bunch of your debt capacity to grow your store chain.

As we generate excess cash we will be looking at the stock buyback among other alternatives.

And obviously when the stock was low we jumped in and bought it and it was over $40 and we backed off.

We'll have to just evaluate where we're at in the process.

And you're right, we've got some more capacity and we bought in the mid 30s before and we'll have to evaluate it when we get there.

All right, thanks.

Scott Krasik.

Just what's the tax rate you're looking for in 2008?

This past year I think the tax rate was around 38.6 and it would be a little higher than that next year, but it will be under 39.

Thanks, guys.

Adam Comora, EnTrust Capital.

Already asked and answered, thanks.

Jarl Ginsberg, Columbia.

First, could you please repeat the revenue and EPS guidance for Q2 through 4?

I couldn't write quickly enough.

For the first quarter, sales of 339 to 341.

Right, Q1 was in the release, but you went through Q2 (multiple speakers)

[$0.28].

And in second quarter, sales of 355 to 357 and EPS of $0.34 to $0.35.

Q3 392 to 394 and EPS of $0.63 to $0.64.

And Q4 512 to 514 and EPS of $1.53 to $1.54.

Great.

And then to follow-up on the commitment to USG, you talked about Q1 and Q2.

Do you expect to have an operating profit for the year in the group?

Yes.

Can you give us some sense of magnitude, how much lower versus last year's [33] are we expecting that to go?

It will be profitable but it will probably be down from where it was last year.

But still a sequential improvement off of Q2 -- obviously?

Say that again.

Obviously a sequential improvement off of Q2 since you've got losses the first two quarters, so it's got to be somewhat dramatic.

Obviously the fourth quarter is when we make money normally anyway, so that's the key quarter, the fourth quarter.

Okay, great.

Thanks for keeping the call running this long.

That concludes your question-and-answer session.

I'd like to turn the conference back over to Mr. Hal Pennington for any closing remarks.

Thank you all for joining us this morning and have a good rest of the day.

That concludes today's teleconference.

Thank you for your participation and you may now disconnect.

Have a good day.