Genesco Inc (GCO) 2009 Q1 法說會逐字稿

Good day, everyone and welcome to the Genesco first-quarter fiscal year 2009 release conference call.

Just as a reminder, today's call is being recorded and at this time, for opening remarks and introductions, I would like to turn our call over to Mr.

Hal Pennington, Chairman and Chief Executive Officer at Genesco.

Please go ahead, sir.

Well, good morning and thank you for joining us for our first-quarter fiscal 2009 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 the fiscal year ended 2008, 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.

As you saw in our press release, we are off to a good start for the year, especially given the challenging retail environment, with first-quarter results that exceeded our expectations.

Net sales increased 7% to $357 million.

Total same-store sales increased 2% and we estimate that diluted earnings per share was $0.14 per share for the quarter compared to our guidance of $0.08 to $0.10 before the items we break out in the schedule in our news release.

We also effectively managed inventories.

Year-over-year, they were up less than 1% for the quarter compared to up 15% at year-end.

And we repurchased approximately $91 million of stock or 4 million shares at an average price of $22.73.

Our strategies for individual businesses are working.

Journeys, Hat World and Underground Station all posted comps above expectations.

Johnston & Murphy delivered operating earnings as planned despite some market-related pressure on COGS and the Dockers footwear business remains solid.

So again, we are encouraged by these results, particularly in light of the ongoing challenges in the marketplace and I would like to thank our entire team for their continued hard work and dedication.

And now I will turn the call over to Bob to discuss each division in detail.

Thanks, Hal.

Let's begin with Journeys.

Comps for the Journeys group were flat for the quarter and comps in the Journeys stores were up 1% compared to 3% last year.

The better-than-expected comp was driven primarily by strength in our skate business.

Overall, unit comps increased more than 5% while average selling price declined about 5% during the quarter, primarily reflecting a 39% drop in Heelys ASPs.

Excluding the Heelys business, average selling price was roughly flat.

We estimate that Heelys negatively impacted Journeys' comp by approximately 6% and net sales by $7.6 million.

However, we expect that the Heelys negative impact will moderate later in the year beginning in July.

Men's footwear made up about 54% of Journeys footwear sales for the quarter and women's footwear was about 42% while kids was 4%.

As planned, we were aggressive in managing our inventories at Journeys during Q1.

At the end of the quarter, inventories were actually below plan to a more conservative level that is appropriate for the current business environment.

We opened seven new stores during the quarter and remain on track to open 28 this fiscal year to end the year with a total of 831 stores.

We also expanded seven Journeys stores and plan to expand 22 more stores during the year.

Finally, our Journeys direct business, which represented about 3% of the Journeys group's total business, was up 37% during the quarter.

While we did increase the number of catalogs mailed, the sales increase was disproportionately higher than the circulation increase.

As we move into summer and back-to-school, we feel good about our positioning.

We believe Journeys' first-quarter performance is an encouraging sign that our product selection is right.

Longer term, Journeys' position is the go-to footwear retailer for teens, seems to be as strong as ever and leaves us confident about the future.

In Journeys Kidz, comps declined 8% in the quarter compared to a 6% increase last year.

This was again primarily due to weakness in Heelys, which represented an even higher percentage of Kidz sales than in the Journeys stores last year.

We estimate that Heelys negatively impacted Journeys Kidz comp by about 7% in the first quarter.

As with Journeys, we expect the Kidz business to reflect the Heelys effect fairly dramatically through the end of June and then to benefit from the easier comparisons once we anniversary the decline of that business beginning in July.

We opened eight new Journeys Kidz stores during the quarter and expect to have 140 stores in operation by the end of fiscal 2009.

Turning briefly to Shi by Journeys, we saw nice gains in the sandals and fashion athletic business, but this was offset by broader weakness in dress and casual footwear.

With 50 stores in operation, Shi remains a work in progress.

We continue to fine-tune our merchandising, pricing and presentation and we remain encouraged about the prospects for this concept.

Our current plan is to open 13 new Shi stores in fiscal 2009 to end the year with 60 stores.

Turning now to Hat World, we were very pleased with the 3% comp gain during the quarter versus minus 4% last year.

And after eight consecutive quarters of negative comps, we saw a positive comp in the urban stores, which is quite encouraging.

From a product standpoint, Major League Baseball remains our largest category.

This category's performance in the quarter reflected favorable comparisons in February and March related to MLB's transition out of their old authentic on-field hat during last year.

Core MLB product continues to perform well and branded was also very strong, comping up approximately 20% during the quarter.

Once again, brands like DC, Hurley, Fox and Famous lead the way.

Our NCAA category continues to be challenging.

We were once again pleased with the performance of our Canadian stores where comps increased 10% for the quarter.

We recently opened a warehouse in Canada in order to land goods directly, which will enhance Canadian gross margins in the future.

Hat World Internet sales, which represent about 5% of the total business, were another pocket of strength, increasing 21% in the quarter.

Hat World's results for the quarter demonstrate the leverage reported by a solid comp gain.

Total sales were up 11%, operating margin increased 80 basis points and earnings increased 40%.

During the quarter, we opened a total of 11 new stores and we expect to open an additional 29 stores for the balance of the fiscal year to end with 890 stores in the Hat World group.

Longer term, we continue to believe the strength of Hat World's leading position in the category bodes well for its future growth and profitability.

Turning now to Underground Station group.

Comps increased 9% during the first fiscal quarter versus a 22% decline last year and unit comps rose 13%.

These results speak well of our efforts over the past several months as we have remerchandised and repositioned this concept to focus more on women's and kids.

Women's and kids footwear made up about 46% of Underground Station's footwear sales in the first quarter this year compared with 34% last year.

Women's and kids unit sales were more than half of total footwear sales for the chain.

We are excited by these results and we believe this new positioning gives us a more distinctive voice in the urban mall, especially vis-a-vis the athletic retailers.

With this comp performance, we were able to generate leverage during the quarter and were pleased with the significant improvement in operating margin to negative 3.4% from negative 7.3% for the same period last year.

We will not open any new Underground Station stores this year and expect that our store count for Underground Station group will be down to 174 stores from 192 last year as we continue to close underperforming stores.

We believe we have turned the corner on Underground Station.

We have a long way to come back, but we are very pleased with the trend.

Johnston & Murphy posted a solid quarter despite the economic environment.

Total sales were approximately $47 million with wholesale sales up 4% and same-store sales down 2%.

Gross margins increased 60 basis points, driven by continued sourcing improvements in pricing leverage.

This increase comes on top of a 270 basis point increase in Johnston & Murphy's gross margin for the same period last year.

Compared to this time five years ago, Johnston & Murphy's gross margin has improved 880 basis points.

Anticipated cost pressures in China and more broadly pressures from US dollar exchange rates cause us to think that we have probably captured much of the available benefit from managing down sourcing costs.

Continued gross margin improvement at this pace is unlikely.

However, we still anticipate taking price increases where we can.

To that end, on a comp basis, footwear ASPs for the Johnston & Murphy shops were up 4.6% with pairs down approximately 9%.

Non-footwear sales for Johnston & Murphy shops continued to increase and accounted for 32% of sales during the quarter versus 29% last year.

Johnston & Murphy remains on track to open 12 new stores this year and expects to end the fiscal year with 163 stores in operation.

Finally, turning to Licensed Brands, sales increased 5% to $25 million.

Operating income rose 17% to $3.6 million and operating margin increased 150 basis points to 14.4% during the quarter.

The Dockers footwear business remains solid across all channels of distribution.

We are particularly pleased with the retailers' acceptance of the new [Excelar] line, which was recently introduced for fall 2008.

This productline incorporates some new fit and comfort technologies that promise to reinforce Dockers' reputation for offering its customers one of the best value equations in the industry.

Now Jim will take you through the financials for the quarter.

Thank you, Bob.

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

First-quarter sales increased 7% to $357 million compared to $335 million last year.

Comp store sales increased 2% in total.

Journeys group sales increased 8% to $169 million and comps were essentially flat for the quarter.

This is better than we had been expecting.

Hat World group sales rose 11% to $88 million.

Comp sales for the quarter increased 3%; again, better than we had expected.

The Underground Station group sales were down 3% to $29 million due to fewer stores versus the same period last year.

The overall Underground Station group store count dropped 15% to 190 stores compared with 223 last year.

Comps increased 9% for the quarter.

Johnston & Murphy group sales were flat at $47 million.

The Johnston & Murphy wholesale sales increased 4% for the quarter, which was good to see in this tough environment.

Comp sales for the Johnston & Murphy shops declined 1% and factory stores were down 3%.

Licensed Brands' sales increased 5% to $25 million on top of a 25% increase last year.

Now turning to gross margin.

Total gross margin for Genesco was 50.8% compared to 51.4% last year.

The gross margin decline reflects fairly aggressive markdowns during the quarter to bring inventories in line with sales.

Journeys group gross margins for the quarter were down, due primarily to heavier markdowns.

Hat World's gross margin improved in the quarter and exceeded our expectations.

Underground Station group's gross margin was off slightly from last year.

Johnston & Murphy group's gross margin continued to show excellent improvement, up 60 basis points.

This is on top of a 270 basis point improvement last year.

As Bob noted, this was driven by continued sourcing improvement and a strong acceptance of the productline.

Licensed Brands also was off 60 basis points during the quarter.

Last year's first-quarter gross margin was up 150 basis points over the previous year.

Now turning to SG&A.

Total SG&A as a percentage of sales increased to 50.4% compared to 47.5% last year.

Included in this expense percent is about $7.2 million or approximately 200 basis points of costs associated with the merger litigation.

As you know, we had talked in the past about the difficulty of leveraging expenses in the first quarter as it is seasonally the lowest sales quarter of the year.

Also at the same time, we build expenses early in the year in order to optimize sales and earnings in the seasonally stronger second half of the year.

The majority of the negative leverage was due to higher rents on square footage growth of 9% and store renewals.

We did get some leverage in both Underground Station and Hat World due to strong comp increases combined with good expense control.

Licensed Brands was also able to leverage in the quarter.

Both Johnston & Murphy and Journeys were not able to leverage due to rent and in the case of Johnston & Murphy, higher advertising expenses, which is more of a quarterly timing difference.

Turning to operating income, this morning's press release includes a schedule of items mostly related to the Finish Line/UBS settlement that needed to be taken into account to be able to compare earnings as reported to our guidance.

Excluding relevant items on that list from the calculation of operating income, the operating margin percent was 2.4% compared with 3.8% last year.

Operating margin declined to 3.1% at Journeys, which is slightly under our expectations due primarily to higher markdowns from working down inventory levels.

Hat World's operating margin percent was up 80 basis points to 4.2% for the quarter.

Underground Station had a nice improvement in its operating income percent to negative 3.4%, more than cutting in half last year's negative operating margin of 7.3%.

Licensed Brands' operating income percent increased to 14.4% from 12.9% last year.

Johnston & Murphy's operating margin was down to 7.9%.

The cash proceeds from the merger settlement enabled us to lower net interest expense in the quarter to $2.2 million from $2.4 million last year.

Our EPS guidance for the first quarter was $0.08 to $0.10, excluding all the items on the schedule in the press release that I mentioned earlier.

On the same basis, our adjusted EPS is $0.14 for the quarter.

We were pleased to exceed our earlier EPS guidance.

Now turning to the balance sheet.

The cash settlement proceeds enabled us to fully pay down our bank debt during the quarter.

At the end of the quarter, we had zero bank debt compared to $46 million last year.

We began this quarter with $69 million in bank debt.

Our inventory levels increased 1% from the same period last year and our square footage increased 9%.

We ended FY '08 with inventories up 15%.

We had said on last quarter's conference call that inventories should be back in line by mid year and we are obviously ahead of schedule as all of our operating divisions did an excellent job of managing inventories.

During the quarter, we purchased 4 million shares of stock at a cost of $90.9 million or $22.73 per share.

At the beginning of the quarter, we had 22.8 million shares outstanding, excluding the shares from the convertible.

We ended the quarter with 19.2 million shares outstanding.

For the quarter, capital expenditures were $17 million and depreciation was $11.7 million.

In the first quarter, we opened 32 stores and closed 8.

We ended the quarter with 2199 stores compared with 2068 last year.

This represented a net new store increase of 131 or 6.3% year-over-year.

Our total square footage increased 9% to 3.1 million square feet.

As we talked about on our last quarter conference call, we are planning a slower than usual pace of store openings this year in response to economic conditions.

We now expect capital expenditures for FY '09 to be in the $60 million range, about $20 million below last year's level.

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

Here is the breakdown of our new store outlook for FY '09.

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

We expect to open about 25 Journeys Kidz stores and about 13 Shi by Journeys stores.

Hat World expects to open about 40 stores and to close altogether 12 for the year.

We expect to close about five Jarman and 13 Underground Station stores.

We expect to open nine Johnston & Murphy shops and to close three and open three Johnston & Murphy factory stores.

Altogether, we expect to open about 118 stores and to close 35 this year.

We expect to end FY '09 with 831 Journeys stores, 140 Journeys Kidz stores, 60 Shi by Journeys stores, 890 Hat World stores, excluding -- including -- excuse me -- including 15 Lids Kids stores and 44 stores in Canada, 174 Underground Station group stores, 119 Johnston & Murphy shops and 44 Johnston & Murphy factory stores.

That is a total of 2258 stores or an increase of 4%.

We also expect retail square footage to increase about 4%.

In late April, we announced that we would be distributing about 6.5 million shares of the Finish Line Class A common stock that we received in a merger settlement.

The record date for the distribution is May 30.

We expect that the distribution of the Finish Line shares will take place at June 13.

We estimate that each Genesco share will receive approximately 0.34 shares of Finish Line stock with cash to be paid in lieu of issuing any fractional shares.

That ratio will change as the common share count changes.

We will not be reserving any of the Finish Line shares for distribution to convertible bond holders, but instead we will be announcing an adjustment to the conversion ratio for those bonds before the distribution takes place.

Since we received the Finish Line stock in March, the value has increased upwards of $15 million.

Because the stock is restricted, we will not book this gain as income.

However, we expect to incur a tax expense of 35% to 39% of the gain or $5 million to $6 million based on current values in the second quarter.

Now for the outlook.

We are raising our guidance for the full year.

Our previous guidance was $1.83 to $1.91.

We are now raising our EPS guidance to $2.09 to $2.19 to reflect lower interest expense and fewer shares outstanding due to the stock buyback program.

The new EPS guidance represents a 15% increase.

As with our earlier guidance, this does not include any of the items broken out in the reconciliation schedule in the press release, except for the lower interest expense and new share count.

To be clear, this guidance does not reflect any asset impairments, store closings, a lower effective tax rate, the tax liability associated with the Finish Line stock nor any further reduction in share count.

It does, however, reflect about 400,000 shares in the fully diluted share numbers related to the anti-dilution adjustment to our convertible notes, which I mentioned earlier.

Additionally, as with the earlier guidance, this does not include restructuring primarily in connection with our previously announced plans to close 57 Underground Station and Hat World stores.

We currently estimate this to be in the range of $10 million to $12 million for the full year.

We continue to expect comps in the low single-digit range for the fiscal year.

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

Now I will turn the call back to Hal for closing comments.

Well, let me just reiterate that we are pleased to have been begun the new fiscal year on such a positive note and we are encouraged to see the momentum continue.

At the same time, we are keenly aware of the economic issues affecting retail as a whole and believe it is prudent to remain somewhat conservative in our outlook at this time.

Our first-quarter results highlight a couple of key points for Genesco.

First, they speak of the talent of our management team, which continues to reach our customers with the right product selection.

Second, these results validate the strategic strengths of our core businesses and the leadership positions they occupy in their respective markets.

Journeys remains the destination footwear retailer for teens.

Hat World is the leading retailer for headwear.

Both Johnston & Murphy and Dockers consistently rank among the top brown shoe brands in the industry and while we still have work to do, we believe that Underground Station is well-positioned to become a leader in a consolidating urban market.

Genesco's ability to build and maintain leadership positions in niche markets has been and will continue to be our core strength.

And we think this is more important than ever given the current environment in which we compete.

And now we will open up the call for your questions.

(OPERATOR INSTRUCTIONS).

John Shanley, Susquehanna International.

Good morning, everybody.

I wonder if you could give us a little bit further clarification in terms of the 380 basis points decline in Journeys operating income.

Was it due to primarily the fall-off in the Heelys business or the reduction in inventory that the Company or the division may have taken during the period or are there declining product margins overall in terms of Journeys' merchandise mix and is that something that is likely to be an ongoing issue?

I wonder if you can elaborate a little bit more on that issue for me please.

John, this is Bob.

It was a combination of things.

First, as you know, we wanted to bring their inventory levels down.

So on some of their older product, they got more promotional in order to make sure we moved that down to the levels that we needed to get to.

With respect to Heelys, year-over-year, we are a lot weaker in Heelys.

The average price is down and so that contributed to a softer comp and then as you know in Journeys, when you can't achieve the kind of comps, positive comps that we would like to see, you lose leverage.

So it really is related more to sales, which is connected to Heelys and then margins related to markdowns, but we think our overall product mix is strong.

Let me just jump in there.

As Bob said, it really is markdowns and leverage.

If you look at the IMO in Journeys, I believe the IMO is flat or essentially up or down a little bit, so there was not really a major variation in IMO.

It's in markdowns and it's in leverage.

Are you expecting a substantial improvement in Journeys' margins as we get into the back half of the year and you basically complete the anniversarying of the Heelys' downtick?

In terms of operating margin?

Operating margins, correct.

Certainly.

Yes, because -- and it is driven first by Heelys and then again, even in a normal year, John, we get better margins in Journeys in the back half of the year because we leverage on sale.

We get back-to-school and we get Christmas and given the fixed cost nature of our business, that causes a pretty big expansion of operating margins even in an ordinary time and then you can pile on to that the fact that we will anniversary some very difficult Heelys numbers from last year where we essentially were making no or very little margin on the product we bought and we won't have that flowing through this year.

I think we said in the last conference call that Journeys would have its toughest comparison in the first quarter.

The comp comparisons get easier in the back half, so we expect to have better comps and that will give us, as Bob said, gives the ability to leverage some in the back half we hope.

That's great.

That's great to hear.

I wonder if you can also give us some insight in terms of how the business trended at both Journeys and Hat World on a monthly basis as the quarter progressed and maybe some insight in terms of how May sales results may have been in those two key businesses.

We will let Jim take a look at how it progressed in the month, but speaking of the momentum on into May, we are pleased with the momentum that has continued, but at the same time, we put that in perspective of understanding that our second quarter is largely backloaded to the latter part of July and the strength of the second quarter, as you know, is one of our least productive quarters we have in the year.

So while we are pleased about this momentum continuing, we also recognize that the second quarter is largely dependent on the late part of July as we prepare for back to school.

John, on trends for the month, if you look at Hat World, they had a unique situation affected from last year in terms of comparisons.

They were, last year in February and March, severely depleted in their on-field baseball hat because we were winding out of the wool hat and into the synthetic and so their comps this year reflected the benefit they got and then conversely, when April hit, they had the launch of the new hat last year with no equivalent launch this year.

So they trended stronger in the beginning of the quarter, but it was very situational.

It really I think is less of a traffic trend and more related to what was going on last year.

I see.

And Journeys?

Journeys -- April was off a little bit, but we think that was due to primarily the Easter switch from -- we, unlike a lot of other retailers, are four or five weeks and Easter fell into the month of March for us, so there was little impact in the month of April.

But we felt very good throughout the whole quarter about Journeys.

Okay.

The last question I have is concerning Underground Station.

Though the comps have improved nicely in the ongoing units that you are still operating, the business is still losing money.

Is there a timeline in place in looking at this business where it is either expected to turn a profit or you are going to give some serious consideration to shuttering the operation.

Yes, John, we are actually very pleased with where Underground Station went and as both Hal and Jim have referenced, the first quarter, even in ordinary times, is a very difficult period for us to get leverage out of Underground Station or really any of our chains.

What we see right now though is a very positive comp trend and we believe that we understand why that is happening and are very confident that we are going to be able to stick with it.

So the timeline, it will still probably lose money this year, but we are expecting it next year to break through to breakeven or to be positive and so that is the kind of expectations we have right now for it and on that basis, we are very excited about where it is headed.

Okay, fair enough.

Thanks a lot.

I appreciate it.

Jeff Klinefelter, Piper Jaffray.

Yes, thank you, guys.

Just a few questions for you.

In terms of the real estate environment as you are looking at opening new stores, closing some stores, rationalizing your real estate, could you provide some overall view of the market?

Are lease rates improving for you, where do you have leverage with developers today that you might not have over the last couple of years?

Sure.

It's what you would expect.

There is obviously a lot of square footage opening up as certain chains cut back.

We are doing it in Underground Station.

Other people are doing it more dramatically and then we have an advantage, Jeff, this year by the fact that we are opening fewer stores than we have in the past, so we get to be a little more selective.

The general pattern that we recognize is when we see a deal that we ordinarily might have done, but it doesn't really pass our threshold this year, we pass on it and lo and behold, the landlord improves the deal.

So what we are finding is in terms of the trading environment, if you will, for the push and shove on trying to get deals done, we are finding a lot more flexibility in the landlords.

So would you say overall looking forward this year, next year, over the next three years, would you anticipate that the lease costs as an enterprise cost is starting to gradually improve or would you call it on a mix basis kind of neutral?

Well, as you know, I think the rent as a percent of total has been trending up.

So what we would like to do is first reduce the rate of increase and then hopefully flatten it out.

It is a little too soon to say how much relief we are going to get, but we certainly expect a better environment than we have been facing in the last three or four years.

Okay and then, Bob, also Hat World, you commented that your urban locations have started improving after several quarters of negative trends.

Underground Station, I think you are characterizing it as turning the corner or close to turning the corner.

How much of this is easier comparisons versus something you see happening in that market?

There is kind of mixed reads right now on what is happening in some other corners of the urban market.

So just curious as to what you think is the catalyst here for this improvement?

My guess, Jeff, is it is probably a little less related to a rebound in the urban market and more related to some specific things we have done.

We think Underground is better positioned as a men's, women's and kids concept.

Obviously, from a comp standpoint, that is proving out to be the case.

So I think the rebound in Underground I'd point as much to the remerchandising that got done more than I would expect the market.

And then in the case of Hat World, what we had done and we have been speaking to this for a year now is we have been trying to get our fashion inventory, which is really what drives those stores, both right-sized and at the same time that we did that to make it fresher.

This is a very -- this is a faster business than most of the other hat business and so you need to be able to get in and out of the latest trends and our team has figured out how to do that well.

So I think if you had a measure of freshness in our urban stores, you would find that they are as fresh as they have ever been and that is what we point to as the comp trend.

Plus, just as you note, easier comparisons.

And then just two quick things.

Underground Station, do you feel at this point or I guess how do you feel about the size of the business?

You're down to I think 174 stores by year-end.

Do you feel like that is an appropriate size?

You will continue to prune that and as you look across your enterprise, do you still feel like the most productive use of those leases and that real estate is actually in Underground versus converting some of that real estate to the other concepts?

Well, first of all, with Underground, the size of it right now -- we are not going to grow it.

We are not opening stores, so we are not going to put capital against it until we see the kind of returns on capital that we require.

When you look at redeploying real estate, there really is no practical way to do that for a number of reasons.

First, your leases constrain you, but more importantly, Underground Station is in malls.

The ones we are closing, some of them have been converted because they were in malls where it wasn't appropriate for Underground to be.

It didn't have their customer there and in some instances, our exit from that store was a conversion to either Journeys or a Hat World or Shi.

So what we are doing is we are getting it focused down onto its core customer, which is a very urban demographic and then once we get to the level of performance where we think the return on investment makes sense, then we will take a look at what size it ought to be.

But to the extent that down the road, and we are way ahead of ourselves here, but down the road to the extent that we look at doing something with it, we will remain very focused on its core customer.

Okay, thank you.

And just last question on Journeys and Hat World, would you care at this point to provide kind of updated thoughts on where, over the longer term, next several years, you ultimately see those op margins headed given the current size and scale of the business?

Well, we think that Hat World -- they both are going to have improvement.

We think that they belong more in the territory they were in in the past years than where they were last year.

But I don't think we are prepared to put a precise number on it right now.

Thank you.

Good luck, guys.

Scott Krasik, C.L.

King.

Thanks, guys.

One of your mall competitors cited PacSun's exiting the footwear business as a boon to their business, footwear business.

Can you comment on that for Journeys?

I would -- certainly it is hard to measure, but I would expect that there are some of those customers that were shopping there probably helped us in the skate business in Journeys as much as any category, but as I said, it is difficult to measure, but I expect some of those customers are shopping with Journeys.

You probably have quite a bit of overlap.

Did you look at those stores specifically and come up with some --?

We didn't look at those stores specifically.

There was some overlap, but also I think you would agree that Journeys had a much broader and deeper assortment to begin with than Pac.

And then when you look at the mall in general and you hear Hibbitts has some good performance athletic product; Footlocker feels that there is some upturn in performance athletics, what does that do sort of towards your thinking outlook for the next 6, 9, 12 months and how do you adapt?

Do you change at all?

Obviously not going towards performance, but do you try to sort of have your own lifestyle version of performance if you will?

I think we have been through some cycles of this before, Scott.

And I think we -- in Journeys, they are known as core skate.

They are known for that by their customer and that is where we would continue our focus, but we have been through cycles where performance has been stronger one time or another.

We have continued to perform well with our focus during those periods.

Okay.

Bob, any noticeable tick-up in Hat World from Penguins or basketball?

Basketball -- both basketball and hockey are pretty de minimis businesses for us.

Hockey is more important in our Canadian Hat World stores, but there is no Canadian team in the Cup this year.

So I haven't looked at the numbers, but I don't expect to see a big pop there.

But they are really not that important.

We are much more baseball, football, college and brands.

Those are the four big drivers.

Sure, okay.

And then Jim, great job paying down the bank debt.

Do you expect to be back into the revolver next quarter or third quarter or is that going to be at these levels?

Thank you for giving me credit for paying down the bank debt.

I appreciate that very much.

Yes, we do expect to be back in the banks.

We are a very seasonal borrower.

We would be expecting to normally peak in October, early November and obviously the reason that we pay down the banks, we received the cash settlement and we paid down the banks before we were able to buy in the stock.

So we bought in a lot of the stock already and so we will be back in the banks certainly -- we are already in a little bit.

We will back in the banks this fall.

Okay, great.

Thanks very much, guys.

Mitch Kummetz, Robert Baird.

A couple of modeling questions for you, Jim, to start with in terms of the guidance.

So what sort of share count and interest expense is now assumed in your 2009 to 2019?

For the full year -- as you know, we have about 3.9 million shares that are -- that we have in connection with convertible and that will increase by about -- we expect 400,000.

Overall for the full year, we are modeling somewheres around 24 million shares, including the convert, which is about 4.2, 4.3.

And then on interest expense, I think from an interest expense standpoint, the biggest issue is the benefit from the settlement, the cash settlement and we are estimating that the benefit from that is somewhere from an interest expense standpoint is somewheres between $1.5 million and $1.8 million.

So you can just adjust your interest expense by that.

And then as far as -- when I was going through your reconciliations both for the quarter and for the year on what the guidance was for Q1 and what the guidance is for the full year, there are a couple of items on the Q1 that don't show up in the full year, including the interest on settlement proceeds and the effect of shares repurchased.

So when I think about the full-year guidance and what kind of Q1 number is implied in that, is it really $0.17 and not $0.14 since those two items aren't showing up in the full year?

Yes, that's about it.

I haven't done the calculation, but that's -- you are exactly right.

Take those two items out and it comes in around $0.16 to $0.17.

Okay, good, thanks.

And then a few questions just on the business.

Journeys, obviously better-than-expected comp there driven by skate.

Can you just remind us how big is your skate business now, what was the actual comp on that business and what was the driver of the comp?

Hal mentioned maybe a little bit of benefit on the PacSun side, but is there some trend happening there?

Is it a matter of color in the business and are you seeing ASPs going up in your skate business?

This is Bob.

The skate business continues to be a very important part of it.

Our overall athletic business in Journeys is, ballpark, half the business.

That is not changing dramatically.

What we did do is we went into the quarter with some extra inventory in skate, so a lot of the winding down that we did that affected margins was in the skate category.

So that, in a way, it sort of distorts what is going on, but the big story there is that skate is still a very strong business.

Our guys are on top of what is the latest and greatest, which obviously in terms of forward-looking we are not going to speak to, but we think we are still rock-solid there.

Okay, and then Bob, you mentioned on -- go ahead.

No, go ahead.

Okay.

On the Heelys impact, you mentioned it was about 6% on your comp in the quarter.

You also mentioned that you expect that the moderate starting July.

Can you say what you think the impact of Heelys will be in Q2 and Q3 and I am not exactly sure what moderate -- can you quantify what that means?

We haven't quantified it, but I'll give you a little more color on it.

If you look to last year, what happened was we actually had a pretty strong Heelys business through the first quarter and well into the second quarter and then that product got more broadly distributed and some time at the end of July, a lot of retailers started to wake up to the fact that they weren't getting the kind of movement that they were expecting on Heelys and that began a series of price cuts that occurred through July and August.

Eventually taking the price down to close to our cost and so in the back half of the year, we were basically clearing our Heelys at cost because we had to go with the rest of the market.

And so it has a sales impact as you can imagine because we sold what we bought.

We canceled a lot of backend orders, but it has a margin impact too because we ended up not really making money, any gross profit on that portion of the inventory commitment that we made in the back half of the year.

So whatever we look to do to replace that business, the margins will obviously be better than what we achieved on Heelys.

So that is the dynamic that we are looking at.

Would you expect a similar drag in Q2 as Q1?

Well, again, we expect in July, the back half of July is when we started to see the change occurring.

So certainly in May and June, the dynamics in Heelys are the same as they were in February, March and April.

Okay.

And then one last question.

Obviously, better comp in underground as you transition that business more towards the women's and the kids.

And I think, Bob, you said there was about 46% of the total versus, what was it, 34% last year?

Of the footwear.

We sort of talk about the footwear to keep it apples to apples.

So it was 46% of the footwear this year was women's and kids versus 34% last year.

Do you have a target percentage in mind, or is that where you want it to be?

No, I think where we have always wanted to have the store positioned is essentially one side of the store is women's and one side of the store is men's, and then let the customers tell us how deep we ought to buy into both sides of the store.

So it is going to be a learning experience, and we are going to go more with where the customer takes us than to necessarily try and force it.

Okay.

That's helpful.

Thanks, good luck.

Adam Comora, EnTrust Capital.

Almost all of mine have been asked and answered.

I will just offer congratulations on running the business.

But I do have one quick one.

Where are we in terms of tax payments on the settlement from Finish Line?

Do you guys have a sense for how much it is going to be and when you are going to have to pay them?

Well, we are going to have to pay it over the balance of this year and it is -- we are still doing some work on some tax planning, but right now, we have already paid a little bit and the balance will be paid as we -- at least at this point in time, the balance we paid -- some we paid in July and then two final payments we made in October and January.

So we probably -- by the end of the year, we will have it all paid, but it is going to be still broken out over the balance of the year.

Okay, so how much left do we have to pay approximately?

Well, we paid about I think close to $10 million, I think that is about right, $9 million or $10 million so far and again, the exact tax amount -- we are still doing some tax planning, but you just apply a tax rate to the settlement, anywheres from 35% to 40% and then you can balance it out and come up with your own number.

Okay, thanks.

And also sometimes you guys give the next quarter out, just trying to give a rough cuff of earnings guidance and notice you didn't do it this time.

Can you offer us any color on what you are thinking about for this quarter?

Well, the position that we are taking on that is, as I said, while we are encouraged by the momentum that we see, at the same time, we think it is prudent to be cautious as we look ahead with the uncertainty in the marketplace, with cost of fuel, cost of food, consumer confidence.

There are a lot of moving parts out there, so we have -- we are taking the position there that we will adjust our forward guidance based on the share buyback and our interest, but at this point, that is as far as we are going to go.

Okay, thanks a lot, guys.

Jill Caruthers, Johnson Rice.

Good morning.

I wonder if you could talk about Hat World.

Showed an increase in operating margins, which hasn't been seen year-over-year in over two years.

I know you had some easy year-over-year comparisons in the first quarter.

Could you just talk about for the duration of the year do you still expect operating margins to show an increase?

Yes, we do, Jill.

The dynamics of Hat World are such that we had a pretty big rotation to go through in our inventory.

We were committed to a fashion business, which we had a terrific run with, but then we had to go out and right-size that.

So that took a lot of work from our team.

We took some markdowns in order to make that work.

We think that we are now through that and we now are going to rotate the fashion product more quickly.

We recognize that it is a very fast business, but we think we have got it fresh enough that it is much more meaningful for the customer and that is reflected in the urban comps.

So we think we will get nice help on margin and then again having what the customer wants, more fully assorted is also good for sales.

So as long as they maintain those kinds of comps, they should be able to see margin expansion and the comparisons aren't all that challenging.

So we are pretty encouraged to see a good year out of Hat World.

Okay and just a little bit more into the improvement of the urban stores.

Did you see any regional difference that much or is it pretty much steady across the board in those urban markets?

Jill, I haven't dug down that deep.

I would have to go and look at it.

Nothing that jumps out at me.

Okay.

And then just last question, kind of just on back-to-school.

I know it seems every year we hear the same statement as though business -- shoppers continue to shop closer to need and that back-to-school business shifts from late July to August.

Are you seeing that phenomenon occur this year and are you expecting that to possibly negatively impact second quarter a little bit more as that business shifts to third?

Jill, it's really early to make any determination on that.

We are getting some information about tax-free days, but it is very spotty at this point and as you have well-stated, we know more about that very close to the event.

Much too early at this point to draw any conclusion.

Okay.

And then I guess last one, no comment on Crocs product or any negative impact?

It seems though demand has kind of softened with that product.

Any comment there?

Well, we have seen a little softening in our Crocs business versus first quarter last year and as you probably know, they have broadened distribution a bit.

This is not a big issue for us because Crocs has never been a huge part of our business.

It doesn't really compare to the Heelys situation.

It is more visible in our store because we put so much more of the stock out on the floor, but it is smaller than Heelys was at its peak and the broadened distribution was not a surprise to us.

We knew that they were broadening distribution and so we got our buys in line all the way, anticipating a little less business for us in Crocs and they've got an average selling pricing there that is very different too.

It is in the $30s versus Heelys were up in the $70s and so we feel that that is a business that, if we need to, we can replace those sales much more easily and right now in the marketplace, we see a little bit broader distribution of it, but we don't see any desperate discounting.

We think it's just going to be a product that is out there, it is going to be sort of a steady business, may not be as big as it was for us in its prime, but we will just continue to do some business and keep an eye on it.

Okay, thank you very much.

Justin Maurer, Lord, Abbett.

Hi, guys.

Jim, on the share count, just so I am clear, you said that the beginning of the quarter, it was [22.8] and it is now [19.2], so that difference is [3.6], but I thought the 400,000 you are talking about was related to the convert, which wouldn't be in that share count.

Does that make sense?

It is not.

What happened is we also issued some stock in connection with employee stock during the quarter.

So it is not obviously options-related because that would be in diluted shares too, right?

It is primarily restricted stock.

Got you.

Okay.

And it sounds like you are largely through that.

Do you guys have an authorization above and beyond what was already purchased or is that it?

Yes, the authorization is $100 million, so we are at $91 million right now.

Got it.

Okay.

And then related to free cash flow, a lot of puts and takes with the tax payments and the less CapEx and so on.

What do you contemplate this year specifically as it relates to the bank debt too?

As you said, it will peak.

Do you expect to be back out of that by the end of the year or what is your thoughts there?

Right now, no.

We ended last year with $69 million in bank debt and we do not expect to be down to zero, but we, right now, are anticipating more than cutting that in half.

Okay, thanks, guys.

Good luck.

Steven Martin, Slater Capital.

Thanks.

Most of my questions have been asked and answered.

On that follow-up on the buyback, Jim, do you guys intend or -- Hal -- to finish out the $100 million and would the Board consider a reauthorization?

Well, it has been -- of course, the authorization, as Jim has pointed out, is $100 million.

We spent $91 million of that.

So there is still some room there.

As far as any authorization for additional, that would be a Board decision, but as we've demonstrated with the buyback we have already paid, we felt that was a good investment we made.

(Multiple speakers).

That would be a Board decision.

Okay.

Would it be your intention to finish out the last $9 million?

I think at this point, we are just -- we are watching the market, we are seeing what happens here and we will just take a good look at it as we go along.

Okay.

And on Dockers and Johnston & Murphy, the Dockers numbers were pretty impressive in a very weak footwear wholesale [tape].

Given that you have a little more visibility on that business in terms of forward orders, how do those wholesale businesses look out for the next three to six months?

All retailers are being a little bit cautious, but we think that the Johnston & Murphy -- both Johnston & Murphy and Dockers and their respective retailers still seem to be achieving sell-throughs that are above the category average, which I think speaks to having the product right.

And so it is very dependent, Steve.

It is a little tricky for us because some of these retailers, as you know, don't necessarily buy on how well your shoe is performing, but on how well the category is doing because they are restricted by their open to buy.

So we are taking a cautious view of things, but we are very encouraged by what is going on with our specific product in those chains.

Good.

Thank you very much and congratulations on an impressive quarter and a dismal quarter.

That is all the time we have for questions today.

Mr.

Pennington, I'll turn it back over to your for closing remarks, sir.

Very good.

Well, thank you all for joining us this morning and we look forward to seeing you along the way.

Take care.

And that concludes today's conference.

We do appreciate your participation.

Everyone, have a great day.