Genesco Inc (GCO) 2008 Q4 法說會逐字稿

Good day, everyone and welcome to the Genesco fourth-quarter year-end fiscal year 2008 conference call.

Just as a reminder, today's conference is being recorded.

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.

Well, good morning and thank you for joining us for our fourth-quarter fiscal 2008 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 expectations 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 year 2007 and the third-quarter 10-Q for some of the factors that could cause differences from our expectations.

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

To begin, let me address the settlement of our litigation with the Finish Line and UBS.

As you know, last week, just before the solvency trial of the Southern District of New York was to begin, we reached an agreement to settle all the litigation related to the merger for a cash payment of $175 million and a 12% equity stake in the Finish Line.

The value of the entire package will be taxable to Genesco, so we expect to net about $95 million to $100 million in cash in the transaction.

The settlement agreement requires Finish Line to register the stock with the SEC and to list it on NASDAQ, which will make it fully tradable.

It also requires us to distribute the stock to shareholders once it is registered and listed.

And a record date for that dividend will be set promptly on completion of the registration process.

I thought it might be helpful to give some insight into our analysis of the settlement and why we think it was the best available alternative for the Company.

First, we believe that continued litigation was not sufficiently likely to yield a better outcome to justify the delay and risk associated with it.

We had won a clear victory in Tennessee and December.

Finish Line was subject to an order to complete the acquisition in accordance with the merger agreement, but Finish Line didn't have the cash to acquire us.

And their ability and frankly their willingness to hold UBS to its commitment was increasingly open to question.

While we had good arguments that the merge entity would have been solvent, both Finish Line and UBS were in a position to argue the opposite to a judge who was showing some signs of skepticism about the question.

If there had been an insolvency finding or UBS had otherwise succeeded in avoiding its commitment, we would have been left to pursue Finish Line for damages.

They were prepared to argue that we could only recover out-of-pocket losses from their breach, not the merger premium based on one of the few cases addressing the question of damages for breach of a merger agreement, that being the Con Ed case from New York.

Now, we disagreed with that argument, but saw it as a risk.

Even if we won on that point, we would've had another nice victory and an enormous claim against a bankrupt debtor.

In fact, we believed that Finish Line might file for Chapter 11 bankruptcy rather than returning to court in Tennessee for a damages trial.

Ultimately, recovering damages from Finish Line in excess of this settlement seemed to us at best an uncertain possibility.

It would have required months or even years of appeals with all the expense and distraction that litigation brings.

Second, we did not believe that a repriced transaction was a viable alternative.

We had the clear sense that Finish Line's management had reached the point that they did not want a transaction.

Also, UBS was adamant that they were not required to fund a repriced deal under the commitment letter and it was not clear what the New York court would say on that question.

Further, any repriced transaction would have been subject to delay or a renegotiated merger agreement, due diligence, a new proxy statement, likely SEC review and so forth.

Because the UBS commitment letter would have expired on April 30, it was doubtful that we could have completed a transaction within the time remaining.

Finally, we frankly have no assurance that Finish Line or UBS would not once again be subject to buyers or lenders' remorse before the new deal could close and that we wouldn't find ourselves back in the same situation three months down the road.

This settlement has at least two obvious benefits for Genesco and our shareholders.

Most importantly, it puts a long episode of distraction behind us and allows us to focus anew on executing our strategies.

While we will talk a little later about how current economic and market uncertainties have affected our recent performance, we remain convinced that our long-term prospects are strong.

Fortunately, we have managed to hold the core team together through these months of uncertainty.

We have the same talented people executing the same long-term strategies for the same industry-leading businesses that we had a year ago and we look forward to working with renewed commitment to realize our potential.

The other benefit of the settlement is that it gives us some unexpected cash that allows us to do more than talk about our long-term value.

As we announced this morning, our Board has authorized us to buy back up to $100 million of our common stock.

This is a great opportunity to return settlement proceeds to the market, to enhance our future earnings per share and to demonstrate our belief in this company's inherent value.

Needless to say, we view Genesco as a great investment, especially at current prices and we expect to be an active buyer starting next Monday when our trading window opens.

Now I am going to ask Bob Dennis to discuss our operations in the fourth quarter.

Thanks, Hal.

Before discussing results, let me emphasize that our operating teams, a very experienced group of merchants and field management led by Jim Estepa, Jon Caplan and Ken Kocher are all anxious to continue building their businesses absent the distractions of the last year.

We are fortunate not to have had significant losses of people as a result of the litigation.

Now to our results.

Overall, our fourth quarter reflected a challenging economic and market environment as evidenced by the results that many retailers have reported for the holiday season.

Comp store sales for the Company were down 5% in Q4 compared to a 1% increase last year.

Total sales were $467 million, down 2% from last year and earnings from operations were $28.6 million, including $8.8 million of merger-related and restructuring expenses.

Looking ahead, we expect the consumer environment to remain challenging, but we also believe we have some specific opportunities in several of our businesses as an offset during the year, which I will call out as we review each segment.

Also, we scaled back our store opening plans this year, originally due to the Finish Line deal, to a level we think is appropriate given the challenging environment.

Now I will briefly review each segment.

Comps for the Journeys group were down 7% for the quarter with the Journeys stores also down 7% compared to a 6% increase last fourth quarter.

The combination of a tough retail environment, the lack of a fashion driver in footwear and the continued effect of Heelys overdistribution affected Journeys group during the quarter.

Year-over-year, Heelys revenue was off $13.5 million and gross profit was off $8.8 million in the fourth quarter.

However, by the quarter's end, we had right-sized the Heelys inventory and taken reserves that should allow us to sell the remaining shoes at a normalized profit margin.

Heelys strength in the first half of last year will continue to challenge Journeys comps, but Heelys recent poor performance should create an opportunity for us in the back half of the year.

As you may know, PacSun is exiting a significant portion of their footwear business.

We regard this move as a confirmation of Journeys' position as the destination shoe store for the team.

As PacSun liquidates their inventories, we might feel some short-term impact in skate product.

Longer term of course, the exit of a significant competitor from this segment of our market should be a strong positive for Journeys.

Women's casual shoes performed well in the quarter with particular strength in brands by Converse, Uggs and Crocs.

On the men's side, Vans, Nike and DC performed well.

During fiscal 2008, we opened a total of 41 new Journeys stores and ended the year with 805 stores.

We expect Journeys' comps for the year to be positive low single digits with a stronger performance in the back half of the year than in the first half.

Turning briefly to Shi by Journeys, this business was also impacted by the weak retail environment, but we remain convinced of its potential.

In the fourth quarter, we were especially successful with boots and other closed up footwear.

We were pleased with the gross margins we achieved and the high multiples we are getting from our Shi customers.

We see an opportunity to layer on a higher-priced line to what we currently offer and overall, we continue to like what we see in this business.

We opened 35 stores in fiscal 2008 and ended the year with 47 Shi stores.

Journeys Kidz had a comp decline of 3% in the quarter compared to an 8% increase last year.

This was primarily due again to weakness in Heelys.

We expect comps to be challenged by Heelys in the first half, but face comparisons that will be easier in the back half.

Overall, we anticipate comps in the low single digits for the year.

For the fiscal year, we opened 42 stores and now have 115 Journeys Kidz stores in operation.

Turning now to Hat World.

Comps declined 4% for the fourth quarter on top of a 1% decline last year.

The tough retail environment and weakness in fashion MLB and NCAA categories hurt sales.

Major League Baseball remains our largest product category.

Core MLB product continues to be a significant part of the business while action brands such as DC, Fox and Hurley were strong once again.

Recall that at this time last year, we were depleted in the on-field MLB hat due to the transition to a new SKU.

This has made comparisons easier in January and February, a trend that should continue to April 1.

Although it is still a small part of the business, we were very pleased with the performance of our Canadian stores as comps increased 9% for the quarter.

We are especially ambitious to add more stores in Canada this year.

During fiscal 2008, we opened a total of 98 new stores and ended the year with 862 stores in Hat World group.

Overall, we expect comps for Hat World this year to be in the low single digits.

Underground Station group's comps declined approximately 5% for the quarter, again reflecting the general retail environment and the ongoing challenges in the urban market.

Weakness in one of our major boot brands also hurt the quarterly comp.

On the positive side, we did see improvement in the comp trend during the quarter, which has continued into the current quarter.

We continue to make progress on our new merchandising strategy.

Women's footwear made up about 42% of Underground Station's footwear sales in the fourth quarter this year compared with 35% last year.

We are pleased with customer response and also the increased effort many of the urban vendors are making in this category.

We had real success with brands such as Baby Phat and Pastry and are adding several other key brands, which will position Underground Station to be a true dual-gender retailer and further differentiated from other footwear concepts in the mall.

The kids business was also strong for Underground Station, accounting for 9% of Q4 footwear sales.

We ended the fiscal year with 192 stores in the Underground Station group.

Our previously announced program to close underperforming stores is proceeding on track.

We closed 33 stores in the group during fiscal 2008 and we will not open any new Underground stores in fiscal 2009.

We expect comps in the mid to high single digits for the year, which we believe is achievable given Underground Station's negative 16% comp in fiscal 2008 and our continued commitment to the repositioning of the business.

We expect these comps to drive meaningful improvement to Underground Station's gross margins and operating margins in the coming year.

The Johnston & Murphy group had another solid quarter despite the macroenvironment with sales of $54 million.

Operating earnings were up 7.5% and operating margin increased 150 basis points to 13.6%.

Same-store sales declined approximately 1% in the Johnston & Murphy shops during the fourth quarter after an increase of approximately 5% last year.

Footwear comp ASPs for the Johnston & Murphy shops were up 7% and unit comps were down 12% during the fourth quarter.

ASPs for all three footwear product categories -- casual, dress and dress casual -- increased.

This, along with fewer markdowns, improved gross margins.

Johnston & Murphy's strategic push to expand the brand's reach beyond footwear continues successfully.

Non-footwear in shops accounted for 38% of sales for the quarter compared to 33% last year.

Our wholesale business also remained strong despite overall weakness from many of our major accounts.

In fiscal 2008, we opened 11 stores, eight Johnston & Murphy shops and three Johnston & Murphy factory stores and we ended the year with 154 stores.

We anticipate comps for fiscal 2009 in the low single digits.

Finally, turning to licensed brands, sales increased 3% and operating income increased 29% in the quarter.

The Dockers footwear business continued to benefit from gross margin expansion during the quarter.

Dockers product styling, comfort and value equation continues to resonate with its core customer.

Our product team continues to find ways to add newer technologies that differentiate the brand.

Despite the challenging retail environment, Dockers' order backlog is currently above last year's comparison.

Thanks, Bob.

It is obvious that our performance in the second half of last year reflected general economic conditions and the lack of must-have products in the footwear market.

While we are expecting a continuation of these trends in the first half of this year, as Bob points out, we do have comparisons playing in our favor in some of our businesses even in the first half.

Even while we plan prudently for this year, we are focused on opportunities to make process improvements that we believe will have multiyear benefits for us.

To offer just one potentially significant example, as Bob has mentioned and as Jim will discuss in more detail, we are planning to reduce our pace of store openings across the board for this year only.

We will take advantage of this brief breathing space to analyze our store opening process, focusing first on how we build and fixture stores.

We believe that a more systematic approach to these processes can yield potentially significant long-term savings and capital expenditures.

We will also be able to be much more selective and much stronger in our negotiations for new space this year given our temporarily lower demand.

By turning external challenges into internal opportunities in this way, we believe we will be able to emerge from this cycle stronger and better prepared to resume and sustain the pace of growth that we are accustomed to.

And now, I will ask Jim to discuss the financial results for the quarter and our outlook for the year.

Thanks, Hal.

I will now run through the P&L for the quarter starting at the top.

Fourth-quarter sales declined 2% to $467 million compared to $477 million last year.

Comp store sales decreased 5% in total.

We estimate the extra week in last year's final quarter added about $25 million in sales.

Without the actual week last year, sales would have increased about 3%.

Journeys group sales decreased 3% to $227 million and comps were down 7% for the quarter.

Adjusting for the extra week, sales would have been up 2%.

Hat World group sales rose 5% to $122 million.

Adjusting for the extra week, sales rose 10%.

Comp sales for the quarter declined 4%.

The Underground Station group sales were down 13% to $43 million.

Adjusting for the extra week, sales declined 7%.

Comps were down 5% for the quarter.

Johnston & Murphy group sales decreased 4% to $54 million.

The Johnston & Murphy wholesale sales were down for the quarter, but up about 4% for the full year.

Adjusting for the extra week, total Johnston & Murphy sales for the quarter increased about 2%.

Comp sales for the Johnston & Murphy shops declined 1% and factory stores were down 2%.

Licensed brand sales increased 3% to $21 million on top of a 51% increase last year.

Adjusting for the extra week, sales increased by 7% in the current quarter.

Now turning to gross margin.

Total gross margin for Genesco was 48.8% compared to 49.2% last year.

The gross margin decrease reflects a generally conservative posture on year-end inventory reserves due to the sales weakness in the fourth quarter.

Journeys group gross margins for the quarter were down due primarily to heavier markdown reserves.

Underground Station group's gross margin was down about 60 basis points, which was due primarily to lower discounts from vendors as markdown reserves were close to last year's levels.

Hat World's gross margin improved 100 basis points in the quarter.

This was good to see as we had been trending down in the previous three quarters of the fiscal year.

Licensed brands also posted a strong improvement in gross margin of 290 basis points on top of a 50 basis point increase in last year's fourth quarter.

Johnston & Murphy's gross margin continued to show a good improving, up 140 basis points.

This was on top of a 190 basis point improvement last year in the fourth quarter.

Now turning to SG&A.

Total SG&A as a percentage of sales increased 42% compared to 36.7% last year.

Included in this expense percent is about $15.1 million or 323 basis points of costs associated with the merger litigation.

Total expense dollars, excluding merger costs, were lower than our earlier internal forecasts.

Much of the remaining increase in SG&A as a percent of sales reflects lower than expected sales and relatively fixed nature of SG&A expenses, particularly in our retail business and incremental expenses associated with store growth.

This was essentially true with each of our retail concepts in the quarter due to the weaker comps and the square footage growth in the Journeys group and the Hat World group.

The Johnston & Murphy group was able to improve leverage in the quarter even with the sales decrease.

Licensed brands was not able to leverage SG&A due primarily to higher bonus accruals.

For the quarter, operating income was $28.6 million and operating margin was 6.1% compared to 12.6% last year.

The current quarter included $15.1 million of merger-related litigation expenses and $3.7 million in store closing and impairment charges that reduced operating margin by 400 basis points.

Last year, we had a net restructuring gain of almost $600,000, which added 12 basis points to operating margin.

Operating margin declined to 10.6% at Journeys, 14.2% at Hat World, 5.3% at Underground Station and rose to 13.6% in Johnston & Murphy and 8.4% in licensed brands.

In addition, corporate expenses, excluding merger-related litigation expenses, were down in dollars and as a percent of sales from last year.

Johnston & Murphy's 150 basis point improvement in operating margin reflected expense leverage and a better gross margin.

Obviously, the strong turnaround at Johnston & Murphy continues with a 3% increase in sales for the year and a 29% increase in operating income.

Operating margin is 10.3% fiscal year, which compares with 2.6% four years ago.

Licensed brand's operating margin also increased once again by 170 basis points due to gross margin expansion.

Licensed brand sales increased 18% and operating earnings increased 62% for the fiscal year.

Operating margin was a record 11.8% of sales for the year.

Net interest expense during the quarter increased to $3.5 million from $2.9 million last year due to increased borrowings.

Earnings before discontinued operations of $4.5 million or $0.19 per diluted share compared with $1.36 last year in the fourth quarter.

Included in this year's fourth-quarter earnings are merger and impairment charges of $18.8 million pretax and a higher tax rate primarily due to the non-tax deductibility of merger-related fees.

As we have talked about before, merger-related fees are not tax deductible unless the transaction should not be completed.

We estimate those item caused EPS to be lower by about $.81.

Last year's EPS for the quarter included a gain of approximately $0.01 per share net, primarily from the recognition of gift card-related income and a favorable litigation settlement.

For the full year, earnings before discontinued operations were $9.4 million or $0.40 per diluted share compared with $68.2 million last year or $2.61 per diluted share.

Included in this year's earnings are merger and impairment costs of $37.3 million pretax and a higher tax rate due primarily to the non-tax deductible merger-related fees I mentioned earlier.

We estimate that those items reduced EPS for the year by about $1.26.

Last year, EPS for the 12 months included a loss of $0.03 per share net primarily from impairment charges.

Now turning to the balance sheet.

We ended the quarter with $69 million in bank debt compared to $23 million last year.

This increase in bank debt is due to a variety of factors, including the lower than anticipated net earnings in part due to the merger-related non-tax deductibility costs of $27 million and the higher than anticipated inventory levels at year-end.

Our inventory levels increased 15% from the same period last year and our square footage increased 11% for the year.

We are comfortable with the quality of our year-end inventory and have plans to bring the overall inventory level in line with sales expectations in the first half of the year.

Now I will turn to capital expenditures.

For the quarter, capital expenditures were $12 million and depreciation was $12 million.

For the 12 months, capital expenditures were $81 million and depreciation was $45 million.

We ended the quarter with 2175 stores compared with 2009 last year.

This represented a net new store increase of 166 stores or 8.3% year-over-year while square footage increased 11% to three million square feet.

In the fourth quarter, we opened 41 stores and closed 38, of which 23 were in the Underground Station group.

In the fourth quarter of last year, we opened 49 stores and closed 14.

All together for the fiscal year, we opened 229 new stores and closed 63, of which 33 closed stores were in the Underground Station group.

As Hal and Bob have mentioned, we are planning a slower than usual pace of store closings this -- store openings this year in response to economic conditions.

Reflecting this, we are planning capital expenditures for FY '09 to be in the $61 million range, about $20 million below last year's level.

Depreciation for the full year is expected to be about $47 million.

Here is a breakdown of our new store plans for FY '09.

We expect to open about 28 Journeys stores and to close three.

We expect to open 24 Journeys Kidz stores and about 13 Shi by Journeys stores.

Hat World expects to open about 40 stores and to close all together 13 for the year.

We expect to close about six Jarman and 22 Underground Station stores.

We expect to open six Johnston & Murphy shops and to close two and to open four Johnston & Murphy factory stores.

All together, we expect to open about 115 stores and to close 46 this year.

We expect to end FY '09 with 830 Journeys stores, 139 Journeys Kidz stores, 60 Shi by Journeys stores, 889 Hat World stores, including 15 Lids Kids stores and 44 stores in Canada, 164 Underground Station stores, 117 Johnston & Murphy shops and 45 Johnston & Murphy factory stores.

This is a total of 2244 stores or an increase of 3%.

We also expect retail square footage to increase about 3%.

Now let me discuss our outlook for the current fiscal year.

We expect sales for the year in the range of approximately $1.6 billion, operating income in the range of $92 million to $96 million, not including items I will mention in a moment.

Our EPS guidance for the fiscal year is in the range of $1.83 to $1.91.

None of our earnings guidance reflects any merger-related litigation expenses, any restructuring charges and any positive tax adjustments from the deduction of FY '08 merger-related costs or the gain from the merger-related litigation settlement.

It also assumes current shares outstanding and thus, does not reflect the benefit of our planned share repurchase.

We estimate restructuring charges primarily in connection with our previously announced plans to close a total of 57 Underground Station and Hat World stores and asset impairments to be in the range of $10 million to $12 million pretax in FY '09.

In addition, we are expecting merger-related litigation fees of about $5 million to $6 million pretax in quarter one and a tax benefit of approximately $10 million in quarter one from the tax deduction of merger-related fees in FY '08.

In addition, we will be recording the merger-related settlement gain in the first quarter of the fiscal year.

Again, none of this is included in the guidance.

Comps are expected to be in the low single digit range for the fiscal year.

We are expecting a modest decline in our comps in the first quarter as we are going against tougher comparisons in the first quarter.

We expect to improve comps as we move into the back half of the year.

From an earnings standpoint, we expect a decline in the first quarter, which was by far our strongest quarter last year, due to the general economic environment.

A current outlook is for EPS in the range of $0.08 to $0.10 for the first quarter, again, excluding all the non-operating items we mentioned in connection with the annual guidance.

We expect to see some improvement as the year progresses as the comparisons become easier and we hope the economy begins to show some improvement.

We are also expecting a nice positive cash flow in FY '09 with the lower capital expenditures, lower inventory levels and improved earnings.

As Hal has said, we expect to resume the higher new store growth levels in the following year.

Now I'll turn the call back to Hal.

Thanks, Jim.

After all the distractions in the past 13 months, it feels good to be able to focus exclusively on the business once again.

I hope that you can also tell that we are excited about the opportunities ahead of us.

Despite an uncertain economic environment, we are confident of our position and our plans and we look forward to re-engaging with our investors.

As I have already mentioned, we are excited about the chance to sharpen up some of our key processes.

If we are right about that, we should see tangible benefits from this work in future years.

And we also know from experience that strong companies like ours emerge from these periods of uncertainty even stronger and better positioned as competitors leave the field.

So we are prudent in our near-term plans and outlook, but we are bullish as ever on Genesco's long-term haul.

So with that, let's open it up for questions.

(OPERATOR INSTRUCTIONS).

John Shanley, Susquehanna Financial.

Thank you and good morning.

Jim, the 15% increase in inventory, can you give us an idea of what components of the business that inventory is heavily concentrated in and how much of it may be dated inventory versus currencies and goods?

Well, it is -- really the increase is primarily in Journeys and Hat World and I will start with Hat World.

From the standpoint of dated, the fashion risk there is not as great as it might be in some of the other businesses and Bob might want to talk about that some in a minute, but there's really -- we don't -- we feel definitely there is a value [problem].

There is no risk from the standpoint of obsolescence or fashion.

In the case of Journeys, we looked at the Journeys inventory very closely at year-end and we feel very comfortable that what we have on hand that we will be able to sell in the first half of the year without taking any meaningful markdowns.

We think we have got the inventory valued properly and we don't really feel like we have much inventory risk going forward because, again, we have looked at it, we feel we can sell it through in the first half and we have been pretty conservative we think in our year-end inventory reserves.

And just on Hat World, John, what we have done is right-size the fashion Major League Baseball, the hip-hop-inspired inventory and that is not bigger than we want it to be.

So it is much more in-stock hats and as you know, we can manage our inventories down on stock hats with just receipts.

John, another point is that you also have to remember that our square footage is up 11%.

Now I know sales and inventories are the key metric here, but also we have got more stores, more square footage and we obviously need more inventory in those stores or they look empty.

So some of that is just square footage growth, but we do have more inventory than we need, but we do believe we can right-size it in the first half of the year.

That is good to hear.

I wonder if one of you can comment on whether or not the Company has set up any reserves for any pending litigation that may be coming up down the road.

Is there any special provisions that you have made for litigation expenses?

No, we haven't, John.

We will have to address that when it happens, but there is no reserve that has been set up for it.

Okay.

All right.

The last question I have is on Underground Station.

You are down to 192 stores.

You are going to close another 28 or so this year.

Why not just shut that division down rather than have a slow bleed like you have been doing for the last couple of years?

Well, John, we actually still believe in the promise of Underground Station and as we said on the call, the most recent results have been very encouraging.

This is a very different business today than what it was just a year ago in terms of the commitment to the women's side of the business, the corresponding reduction and our exposure on the men's side.

Kids is playing an important role there and so we have modeled it out and we believe that it is a better outcome to stick with the plan we have got.

Needless to say, if this plan doesn't pan out, we will take another look at it, but we have been committed to this strategy and we knew it was going to take a little time for it to take hold and right now, we really like what we are seeing.

Is the division, Bob, making you money?

Well, it didn't make money last year.

Jim, can give you the numbers.

But we expect it to come -- to make really good progress this year and to be making money next year.

The issue with these kinds of businesses, John, is you can't shut these things down for nothing and when you look at the over/under on it, we think that the strategy we have got is viable and so it is much better to stick with it.

Okay.

All right.

Fair enough.

I appreciate it.

Thank you.

Scott Krasik, C.L.

King.

Hey, guys.

Thanks for the first-quarter guidance.

Just wanted to dig a little further.

Second quarter last year, you guys were essentially breakeven.

Are you thinking that you are going to make money in the second quarter this year?

Scott, we are not -- I will answer that in a minute, but we're really not giving guidance going forward, but I can -- but we do obviously believe we're going to make money in the second quarter.

Okay, that's helpful.

And then, Hal, maybe talk a little bit about Journeys.

I know the last time you reported the third quarter, the Heelys ASP was $62 a pair.

I'm sure that came down a lot in the fourth quarter.

Maybe talk about where that fits now and maybe some of the other brands, what your expectations are.

Scott, on Heelys, as Bob pointed out, we have right-sized that inventory down to a price that is acceptable in the market now, which obviously is lower than it was at the time.

We feel pretty good about that now where we are.

We are well-positioned with that.

We are still selling Heelys; albeit, we are not selling as many as we were nor at the prices that we were.

As far as the other brands, there hasn't been a great deal of movement in pricing at this point.

Bob pointed out one of our major boot brands had some downturn this past fourth quarter that affected us, but I think pricing, with the exception of Heelys, is relatively stable.

Okay, so does that -- so your back half, assuming positive comps, are you expecting ASP increases in the back half of the year, units?

I think that, at this point, it is a little early to tell on that.

I think this.

Remember on the back half is when we get out from under the Heelys umbrella of the higher prices for the first half and I think it is going to be mix as much as anything.

So there is not a great deal of movement there, but we are feeling more positive about that back half.

As you always know, the back half is our stronger part of the year.

Then just lastly, how do the Journeys guys feel?

Obviously, PacSun getting out is a big positive for you, but at the same time, the family footwear channel seems to be a bigger player in skate with access to brands.

How do you balance those things?

Well, I think still if you look at the breadth and depth of the brands that Journeys has and the newness, they are really first to market with whatever comes.

We still believe that Journeys is the destination shop for the team and especially for skate footwear.

Some of the family chains if you will may have some of it.

It may not be as fresh or the new most recent releases.

So we are still confident about Journeys' position there and feel very strongly and as they do.

Good.

Well good luck, guys.

Thanks.

[Scott Wissink], Piper Jaffray.

This is Stephanie.

I'm sorry.

Can you hear me?

Yes.

Thank you.

Congratulations, guys.

I can sense there is very much a sense of relief to have this past you.

Just a couple of questions.

First of all, can you talk about inventory?

I know the question was already asked, but are you getting increased support from your vendors, particularly at Journeys and then any initiatives in systems or IT that will enable you to tighten your working inventory levels going forward?

Well, in terms of -- let me do the second half.

In terms of the system support, the management of the inventories is just a matter of managing sales and buying to your sales plan and then reacting and what happens as you can be aware is in the fourth quarter, it all happened so very quickly over Christmas that if you're missing your sales plan, you are going to be -- you run the risk of being a little bit heavy and then you have to right-size it and so I don't think that our systems in terms of managing the inventory is in any way a real problem.

We know what we need to do.

Our merchants are very tuned in to sell-throughs and so I think they are really on top of that.

So I am not really looking for a systems solution in that space.

In terms of vendors working with us, most of our vendors to recognize the importance of Journeys in their retail strategy and they generally work with us as needed.

Great.

And then my second question is just on your level of confidence in your comp guidance should the environment remain challenging through the year, is it easier compares or are there merchandise initiatives that you are seeing down the road that give you that increased confidence?

Thanks.

Well, you have to almost go by banner.

Hat World, as you know, is going to get a lot of help in the beginning of the year because they were depleted in the on-field hat.

They also spent a lot of the year trying to right-size that hip-hop inventory and therefore, took some hits there in terms of the pricing that they went through to right-size it.

In the case of Journeys, the big event they have got is Heelys and so we had committed a -- it was going to be our number one vendor in terms of dollar commitment for the back half of the year and that turned out to be a problem for us.

So as we look forward, we have the opportunity to take a significant chunk of our inventory commitment that was not productive last year and it will be productive this year.

So we think that eases up the comparison.

And then on Underground Station where we are most bullish in terms of the comps, that is definitely tied to last year's comps.

Underground was in the negative 20s in the first three quarters of last year because we were off the Nike strategy, we were really only testing the women's strategy and working our way into refixturing the stores and this is the point at which we can make really the full-blown commitment to the strategy and we thing that is going to make an enormous difference.

(OPERATOR INSTRUCTIONS).

Jill Caruthers, Johnson Rice.

Good morning.

Possibly could you take the valuation you did on Heelys and how big of an impact that was and may be relate it to the Crocs brand?

I know that is an important brand of the Journeys division.

How important is that?

Is there a risk that if the Crocs brand does fade, does it have an impact like Heelys had in the back half of '07?

Well, first of all, Crocs continues to be a solid brand for us.

They certainly are widely distributed, but our commitment, our exposure to Crocs is very different from what it is to Heelys just in terms of magnitude.

We really bet on Heelys and on a percent sale basis, we are a lot less dependent on Crocs.

So we really don't have that same kind of exposure.

Any way you can quantify that percentage of Crocs in your mix?

No, I don't think we are going to call out what percent we are doing in Crocs.

Jill, I think, just to remember that we have no brand that is higher than single digit share within Journeys.

So while Heelys was certainly a tremendous impact, it was done in such a short period of time.

It had a strong negative impact.

Our other brands have been more tempered than that as their ebb and flow.

Okay, and just to reiterate, I know you touched on it earlier in the call, but given all the uncertainty that has built over the past few months with the pending merger and whatnot, could you just talk about your merchant team, particularly in the Journeys division, if that was basically held intact and your feelings there?

Thanks.

We are delighted and feel very fortunate that our teams are largely kept in place and certainly on the operations side, meaning the people that work within our divisions, very lucky to have virtually no disruption there.

We lost a few key people in more of our support infrastructure and so we are going to have to do a small amount of rebuilding there.

But it is nothing that really causes us to lose any momentum.

So we feel very fortunate in that way.

Thank you.

Heather Boksen, Sidoti & Co.

Good morning, guys.

First, a quick housekeeping question.

Can you tell us how much of the $0.81 in charges in the fourth quarter was store closure costs and how much was the merger and the litigation costs?

In the first quarter?

In the fourth?

In the fourth quarter I mean.

Yes, the restructuring costs were about $3.7 million in the fourth quarter and the merger-related cost was about $15 million.

Okay.

That's helpful.

And with respect to Heelys, did I hear you correctly when -- I think you said in the prepared remarks that you took the appropriate write-downs for it in the fourth quarter, so going forward, even though it is going to be a comp issue in the first half, it won't really be a margin one?

That's correct.

Okay, all right.

That's helpful.

Thank you.

That's all I had.

Mitch Kummetz, Robert Baird.

Thanks.

Just was hoping to get a little bit more color on the comps.

So for the fourth quarter, you mentioned Journeys negative seven comp.

Heelys was a drag on the top line of $13.5 million.

So what was it as far as -- how does that translate in terms of the comp?

What was the comp on Journeys in Q4 ex Heelys?

Mitch, I don't think we have calculated that.

I think it is a pretty easy calculation.

It was better.

I think Bob culled out was $13 million was the impact in the fourth quarter.

Just take that off of the sales and you can get a pretty good sense for it.

Okay.

And obviously the expectation is that Heelys is a drag on the first half and then that eases up in the back half of fiscal '09.

Is it a similar drag per quarter?

It wouldn't be as big a drag because obviously Q4 is a bigger quarter than Qs 1 or 2, but in terms of its comp impact, do you expect a similar comp impact in the first half of '09 from Heelys as you saw in the fourth quarter of '08?

I would have to go back and look at it by quarter.

We haven't quantified it in that way.

But the first quarter is bigger than the second quarter.

We began to see it in mid second quarter kind of easing off.

Certainly in July.

Yes, yes.

So it was really heavy in the first quarter, began to ease off in the second quarter.

So it wasn't as great in the second quarter as it was in the first quarter.

And then on Underground, Bob, you mentioned that you saw improvement in the comp performance of that business over the course of the fourth quarter.

I mean were you at a positive comp in January or maybe even if you could speak to February seeing how the comp trend has improved beyond just the fourth quarter.

Are you at a positive comp yet on a monthly basis in that business?

No, we are not going to disclose what is going on in the current quarter.

We saw nice improvement throughout the fourth quarter.

It gave us a lot of confidence that we are trending in the right direction that we have got.

The customer is recognizing what the store is all about now, but we are not going to give out any numbers beyond what we have just provided.

It has gone from the third to the fourth quarter.

We saw a nice improvement right there I mean going from 18% down to about 4% or 5%.

Right.

But we saw a big improvement and I think all along last year as we were talking about the new merchandising strategy, we said that we'd begin to see some impact of that in the fourth quarter because that is when the Nike comparisons began to drop off in a material way, plus some of the new product was going to hit the stores.

So we did see a nice improvement in the fourth quarter and now we just need to continue that momentum.

Okay.

And then what are some of the merchandise trends that you're seeing at retail right now?

I mean we transitioned into the spring season, although it is obviously early.

Is it flip-flops, is it -- what is going on in Journeys and Underground right now on the merchandise side?

What is working?

It is really too early to tell at this point.

There is nothing that -- as I mentioned, there is nothing that is a must-have and new emerging on the market to take the market by storm, but at the same time, you are moving in to what is an earlier Easter.

We will see how that works out.

I would say that there has not been any big shift in this whole merchandising strategy at this point.

Okay.

And then maybe a couple of housekeeping items for Jim.

You're obviously not assuming any share repurchase in your guidance, so what kind of share count, tax rate, interest expense is embedded in that '09 outlook?

Well, tax rate -- I mean -- when I gave the guidance, I excluded many, many, many things.

But if you just look at the pure tax rate on the ongoing business, probably around 38.3% -- 39.8% and then interest expense will -- excluding the -- again, all these numbers do not take into consideration the settlement.

And so based on where we were, we obviously started the year with a higher debt level, $69 million versus $23 million in the previous year.

So based on that, you can get some sense for what interest expense will be up for the full year.

Okay.

And then what was the pro forma tax rate in the fourth quarter?

I haven't calculated that yet.

I don't know if you guys can give it to me.

Backing out everything, all the stuff that I talked about, it was about 40.2% I think it was.

Okay.

All right.

It was a very high rate from a GAAP standpoint as you notice because the merger-related costs are not deductible, 70% or so, but really if you talk about pure rate, it was about 40.2%.

Great, thanks.

Good luck.

Brad Cragin, Goldman Sachs.

Yes, hello.

With respect to your store growth as you think about potentially ramping up the following year, can you just talk about what you need to see to be able to pursue that?

Do you have to see the improvement in comps in the second half to commit to that?

I think the biggest driver of that, Brad, will be the economic environment that we are in.

We will be looking to see how that plays out.

We will have the time during the back half of the year to plan for the following year.

So I think certainly the comps are going to reflect what is in the marketplace, but I think it is probably a broader question than that.

And the other thing to keep in mind you, are still opening stores and we constantly do a look-back and make sure we are comfortable with how the new stores are performing.

So it will be a little bit based on what we see in terms of the newest stores we put out there and of course, that all gets decided on a banner-by-banner basis.

We won't really be making a company decision; we will do it by brand.

Okay.

And then with respect to some of the process reviews that you alluded to, will you be looking at some of the formats for new stores at all?

I am trying to get a sense -- I don't want to misinterpret that.

Does that have any implications for the long-term store potentials for each of your concepts that you guys have talked about in the past?

Yes, we are not really referencing any big changes in the format of the stores.

What we have done is we have done a look-back at our construction costs and we have looked at the growth of the cost per square foot in a lot of our concepts and it has made us see that there is an opportunity there to probably bring that down a bit.

We have had a lot of pressure to get our stores open on time and that sometimes becomes a trade-off with some of the decisions you make, but we recognize that if we really buckle down on the construction process just by executing better, some design elements might be in this, but things that would probably not be visible to the customer that we can find ways to bring the cost of our stores down.

So no change in any view on your store potentials?

No, we are still -- the store format is still the same.

We are, as you probably know, ambitious to do a bigger footprint on Journeys, which we have been doing recently than we had in the past just because of the volumes and ditto for Johnston & Murphy.

So a little bit -- we will continue to pursue those slightly larger stores, but no different from what we have been doing in the past year.

Okay, thank you.

Steven Martin, Slater Capital Management.

Hi, guys.

As everyone else has commented, it sounds like you are much relieved over the situation.

Well, we are looking forward to the future now of executing those strategies, closing the chapter on this particular episode and looking ahead.

Good.

Just a couple of follow-ups.

In malls where you have closed Underground Station, what impact have you seen on the Journeys store in that mall?

Steve, we would have to go back and look at it, but a large number of those Underground stores are -- first of all, some of them -- most of those don't have Journeys.

I think it is most of them.

In some instances, we have seen an opportunity -- we have closed an Underground and our deal with the landlord is to open a Journeys in some instances in that space.

So you would have to go -- but there is not really -- if you are going to say, well, is there an additional benefit to closing Undergrounds by seeing a pickup in Journeys, we are not expecting that.

The SKU overlap between Underground and Journeys is very small, so you really don't expect to close one store and get a big pickup in the other.

Okay.

In terms of corporate overhead staffing restructuring, one of the comments you made during the trial was that you had lost a number of people who were fearful of not having a job under the newer company.

What are you going to do about replacing that and right-sizing your corporate staff?

Steve, in the reference to that, we lost a few key people in the support areas, as Bob had mentioned earlier, a couple in our tax area, a couple in finance.

We will be looking for replacements for those.

These we will be careful about because we want to have the best that we can find out there, but there is no wholesale restructuring going on.

Okay.

And back to somebody's question on the Heelys impact on Journeys.

If Heelys was down $13.5 million for the fourth quarter and Journeys last year was $235 million, wouldn't the simplistic answer be that it was roughly 6% of your sales or 6% of the comp decline?

Or am I not doing the math correctly?

That is roughly right.

That is the way to think about it.

Okay.

Thanks a lot.

Adam Comora, EnTrust Capital.

Hi, guys.

A quick question on the PacSun exiting.

Where are we in that process?

Have you seen them exit footwear and what kind of overlap do you have with their stores?

Well, our overlap is tremendous, the overlap between Journeys and PacSun in malls.

Not only are we in the same malls, but we typically co-locate and so we are across the hall or next door in many cases.

We are not privy to exactly how they are going about the liquidation and exactly -- we only know what they have said publicly, so you can pick up what we have picked up.

Thus far, we haven't seen anything that has been sort of any very aggressive liquidation that has affected us much.

Okay.

What other kind of color can you give us on Shi?

Are there any metrics?

What can you tell us about why you are pleased and when you said you were moving up average price points there, is that higher-priced private-label stuff?

Are you moving more branded?

Just any other color you can give us around Shi, maybe how the new store openings went?

Well, at Shi, the -- what we see is an opportunity to do a layer of better shoes, so it is going to be both branded and our own brands both in that space.

The average price for Shi this year was about $40.

It was in the high $30s in the first half of the year, in the low $40s in the back half of the year, which is when the boot business picks in -- picks up, but our guys recognized that there was a customer coming in who would have an appetite for an even higher priced shoe and we were walking that opportunity.

So we are going to be able to go out there with another layer of shoes.

Overall the business, we like what we see.

The customers loved this concept.

As you know, the women's business has been difficult, so we are weighing that end as we observe the results and project out what we think the potential is for it, but we are still pretty excited.

Okay, thanks a lot.

Good luck, guys.

At this time, I would like to turn the conference back over to Mr.

Pennington for any closing or additional remarks.

Well, thank you all for joining us this morning.

We look forward to seeing you along the way, seeing more of you and we will be talking with you.

Take care, have a good day.

That does conclude today's conference.

We appreciate your participation.

You may disconnect at this time.