Genesco Inc (GCO) 2009 Q2 法說會逐字稿

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

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

At this time for opening remarks and introductions I would like to turn the call over to Mr.

Bob Dennis, President and Chief Executive Officer of Genesco.

Please go ahead, sir.

Thank you.

Good morning, everyone.

Thank you for joining us for our second-quarter fiscal 2009 conference call.

Participating with me on the call are Hal Pennington, our Chairman, 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 maturely different.

We refer you to our earnings release and to our recent SEC filings including the 10-Q for the first quarter for some of the factors that could cause differences from our expectations.

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

We were pleased with our results for the second quarter, especially in light of the challenging consumer environment.

Net sales increased approximately 8% to $353 million.

Total company same-store sales increased 4%.

Through Monday, August 25th, the last day for which we have reliable data, third-quarter to date comps where positive 7%.

We remind you that this represents a little more than three weeks of sales and we have a long way to go in the quarter.

We are reporting diluted EPS from continuing operations of negative $0.27 per share for the quarter on a GAAP basis; this includes the tax anomaly we discussed in the press release and other items we break out on the schedule to the release which amount to $0.45 per share.

Before those items, on a basis consistent with our annual guidance and the pro forma disclosure we gave last quarter, EPS from continuing operations was $0.18 per share.

We also effectively managed inventories; year-over-year inventories were down 6% at quarter end.

Journeys, Hat World and Underground Station all posted nice comp gains in the quarter.

In fact, after a solid comp performance in the first quarter of this year, same-store sales in all three divisions accelerated in the second quarter.

Moreover, each of these divisions achieved operating margin expansion during the quarter.

We are benefiting from the ongoing success of our merchandising strategies.

In addition, our year-over-year performance is benefiting from several offsets from last year that set up easier comparison and these remain in play in the back half of the year.

And while we realize that we are only three weeks into the third quarter, we are pleased with the positive comps in Journeys, Hat World and Underground Station.

Johnston & Murphy's business, like a number of premium retailers, was negatively impacted by the economic climate.

However, we are confident in the long-term strength and direction of the brand.

Meanwhile the Dockers footwear business continues to perform extremely well with strong sales gains.

Now to look at individual businesses beginning with Journeys.

The overall comp increase for the Journeys group was 2% for the quarter; this comp momentum has continued so far into August.

Through last Monday third-quarter to date comps in the Journeys group were up 9% despite the loss of the Florida tax-free period in early August.

Journeys Direct, which includes both the Internet and catalog businesses, was up 7% in the second quarter.

Turning to the Journeys stores alone, second-quarter comps were up 2% compared to a 7% decline last year in the second quarter.

Again through Monday August to date comps were up 9%.

Overall for the quarter footwear unit comps increased 2% and average selling price increased 2%.

If you exclude Heelys from this year and last, Journeys' overall average footwear selling price was up 4% for the quarter.

Note that in the back half of last year Heelys' sales were off 60% from the previous year and the realized gross margin was well below Journeys' normal range.

So the Heelys comparison for the balance of this year should benefit Journeys.

The solid comp results were driven by ongoing strength in Journeys' skate business, modestly offset by weakness in the women's casual business.

Men's footwear made up about 56% of Journeys' footwear sales for the quarter and women's and kid's footwear represented about 44%.

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

We also expanded 19 Journeys stores in the first half and plan to expand 14 more stores during the year.

We expect that the same categories and brands that were strong in Q2 will continue to drive our business through the remainder of back to school, and we feel we are appropriately merchandised and inventoried to take advantage of these trends.

In Journeys Kidz comps decreased 2% in the quarter compared to a 5% decline last year.

This is a significant improvement from the first quarter when Kidz comps were down 8% and it reflects easier Heelys comparisons.

Kidz has had the same positive start that we have seen with the Group going into third quarter.

August to date through last Monday Kidz is comping up 6%, an early reflection of the anniversary of Heelys and the continued strong trends in the skate category.

In the second category footwear unit comps were down 3% and ASPs increased 2%.

Excluding Heelys overall footwear ASPs were up 7%.

As with Journeys, Kidz anniversaried the difficult Heelys comparison in the first half and easier comparisons should be in play in the back half.

We opened five new Journeys Kidz stores during the quarter and expect to have 145 stores in operation by the end of fiscal 2009.

Turning briefly to Shi by Journeys, beginning this quarter we will start reporting Shi's comps as we now have 29 comp stores, more than half our total.

We are encouraged with Shi's performance as comps in the second quarter were up 3% and ASPs were up 8%.

Third quarter to date comps are up 13%.

The product team has made some meaningful changes to the merchandising selection, in particular adding more athletic and more women's branded footwear at higher price points, and we are already benefiting from these changes.

We currently have 52 Shi stores in operation and plan to open eight additional Shi stores in fiscal 2009 to end the year with 60 stores.

Turning now to Hat World -- we were very pleased with the continued improvement in this division as comps increased 7% during the quarter versus a 2% decline for the same period last year and compared to a 3% increase in the first quarter this year.

Urban stores comped up 9% and non-urban stores were up 6%.

Third quarter to date Hat World comps are up 4%.

Hat World's Internet sales were up 23% during the second quarter.

From a product standpoint Major League Baseball continues to be Hat World's largest category.

Both core and fashion MLB performed well and action brands were once again very strong.

The efforts by the Hat World team to right size and freshen the MLB inventory throughout last year is paying off nicely now.

In addition, the NFL business is off to a strong start.

Overall Hat World's operating margin expanded by 300 basis points during the quarter.

We opened a total of five new hat stores in the second quarter and expect to open an additional 27 stores for the balance of the fiscal year to end with 891 stores in the Hat World group.

Our Lids Kids stores have not performed up to expectations.

We have benefited significantly from the kids program by greatly expanding the assortment of kid's sizes in our regular stores; kid's merchandise is now roughly 4% of the business.

However, we will not be expanding this store concept further and we will be looking at each of the Lids Kids stores on a case-by-case basis to determine their future.

We fortunately built a lot of flexibility into most of the leases which gives us a wide range of options for these stores; in fact a few have already been converted.

The Hat World team is very positive as they move through back to school.

They have right sized their inventory and they are confident that they have the right product mix in place, leaving them well-positioned for back to school.

Turning to the Underground Station group -- we continue to be pleased with Underground Station's turnaround.

Comps increased 9% during the second quarter versus a 23% decline last year and compared to a 9% gain in the first quarter this year.

Third quarter to date Underground Station comps are up 14%.

For the second quarter footwear unit comps rose 13% and ASPs declined 1%.

However, women's ASPs were up 17%.

The Underground Station merchandise strategy of broadening its focus to include a greater emphasis on women's and kid's product continues to drive this turnaround.

Women's and kid's footwear made up about 43% of Underground Station's footwear unit sales and about 39% of its footwear dollar sales in the second quarter this year.

These categories were 40% of units and 31% of dollars in the second quarter last year.

During the quarter gross margin increased nicely due to fewer markdowns and with the strong comp performance Underground Station was once again able to leverage expenses leading to operating margin improvement.

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

At the end of the quarter we had 185 stores in operation.

As we have said before, while Underground Station's operations are improving dramatically, we do not expect it to return to profitability this year and we are expecting to be breakeven or better by fiscal year 2010.

During the quarter Johnston & Murphy's business was hurt by the tough economic climate coupled with difficult comparisons from last year.

Total sales were approximately $44 million with wholesale sales down 9% compared to an 18% growth in the same period a year ago and same-store sales declined 4% compared to a 5% gain last year.

Third quarter to date Johnston & Murphy comps are down 8%.

Johnston & Murphy's direct business, including both catalog and Internet, was up 5% for the second quarter.

Non-footwear sales for Johnston & Murphy shops continued to increase and accounted for 32% of sales during the quarter versus 28% last year.

Johnston & Murphy remains on track to open 10 new stores this year and we expect to end the fiscal year with 160 stores in operation.

The Johnston & Murphy brand remains strong.

According to NPD's retail tracking service and the department and national chain channels, Johnston & Murphy was the only leading fashion footwear brand with an average price over $100 that had a sales increase in the first six months of 2008 versus the same time last year.

This tells us that we continue to take share in the premium market.

On August 17th, we launched a test of Johnston & Murphy women's product in 26 of our Johnston & Murphy retail stores.

The product spans both footwear and non-footwear and we are excited to learn how this initiative will be received in the marketplace.

The participating stores can be identified on our corporate website, www.Genesco.com.

Finally, turning to licensed brands -- sales increased 16% to $22 million on top of an 18% increase in the same period last year.

Our Dockers team continues to do a great job, even in this challenging retail environment.

Dockers' operating margin was hurt by 340 basis points of bad debt expense associated with Mervyn's, Boscov's and Goody's bankruptcies.

Without this increase in bad debt reserves Dockers' still very strong operating margin would have improved over last year.

The Dockers footwear business remains solid across all channels of distribution with particular strength in the specialty footwear retail chains.

According to NPD's retail tracking service, Dockers ranked as the number two brown shoe brand in the department store, national chain and shoe chain channels for the first six months of 2008.

Dockers' positive momentum, solid backlog and strong market position give us confidence in its prospects for both the near and longer term.

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.

Second-quarter sales increased 8% to $353 million compared to $328 million last year.

Comp store sales increased 4% in total.

Journeys group sales increased 9% to $161 million and comps were up 2% for the quarter.

Hat World group sales rose 13% to $102 million; comp sales for the quarter increased 7% which was better than expected.

The Underground Station group's sales were down 4% to $24 million due to fewer stores versus the same period last year.

The overall Underground Station group store count dropped 16% to 185 stores compared with 219 last year.

Comps increased 9% for the quarter.

Johnston & Murphy group sales were down 4% to $44 million.

The Johnston & Murphy wholesale sales decreased 9% for the quarter.

Comp sales for the Johnston & Murphy shops declined 3% and factory stores were down 7%.

Licensed brand sales increased 16% to $22 million on top of an 18% increase last year.

Now turning to gross margin -- total gross margin for Genesco was up nicely to 51.3% compared to 49.9% last year with increases in the Journeys, Underground Station, Hat World and Johnston & Murphy groups.

Licensed brands' gross margin for the quarter was down due primarily to mix and increased product cost.

Now turning to SG&A -- total SG&A as a percentage of sales decreased to 49.1% in the quarter compared to 50.6% last year.

This includes about $300,000 or 10 basis points of expenses related to the follow-up to the merger related litigation and settlement.

In addition, we incurred about $750,000 or 20 basis points of added bad debt expense for the licensed brand division in connection with recent bankruptcies, primarily Mervyn's.

Included in last year's expenses were about $5.4 million or approximately 160 basis points of cost associated with the Finish Line merger.

Both Hat World and Underground Station had nice leverage improvements in the quarter due to their strong comp sales coupled with good expense control.

Journeys' SG&A increased due in part to higher rent expenses.

It is difficult to leverage rent in seasonally the slowest quarter with a square footage gain of 13% year-over-year.

Johnston & Murphy was not able to leverage in the quarter due to its negative comps and Dockers did not leverage due to the added bad debt expense.

We incurred restructuring charges for the quarter of $3.3 million.

This includes about $1.8 million in non-cash charges from the impairment of Lids Kids fixed assets that Bob mentioned earlier.

Additionally, we incurred some litigation settlement cost of about $320,000, added costs associated with the closing of Underground Station stores which we had previously announced, and some additional miscellaneous impairment charges.

All of this cost about $3.3 million or about 1% of sales.

Last year restructuring charges were about $200,000.

We reported operating income of $4.6 million in the quarter which compared to a loss of $2.6 million last year.

As I mentioned before, included in this year's operating income is about $300,000 of merger litigation fees and about $3.3 million in restructuring charges.

In total the added merger fees and restructuring charges this year negatively impacted operating margin by 100 basis points or about $0.09 per share.

Last year's operating loss of $2.6 million included merger-related fees of $5.4 million and restructuring charges of roughly $200,000 that negatively impacted operating margin by 170 basis points or $0.13 per share.

Excluding litigation, restructuring and merger-related charges listed on the schedule in the press release from both years, operating income in the current quarter was $8.3 million or 2.3% of sales and $2.9 million or 0.9% of sales last year in the same quarter.

Journeys' operating margin increased to 1.5% or about 80 basis points improvement due primarily to higher gross margin.

Hat World's operating margin was up 300 basis points to 11.2% due to higher gross margin and SG&A leverage.

Underground Station continued to show improvement with a loss of $3 million this year which was down from last year's loss of $4.9 million.

Johnston & Murphy's operating margin was down to 6.8% primarily reflecting negative expense leverage from the comp sales decline.

Licensed brands operating margin declined to 9.4% from 11.3% last year primarily reflecting increased bad debt expense.

Interest expense was down to $2.1 million from $3 million last year.

The lower net interest expense was due to the additional cash received in connection with the merger litigation settlement which has partially been used to pay taxes and buy in $91 million of stock in the first quarter.

Timing differences primarily in connection with taxes have allowed us to reduce our working capital-related bank borrowings.

In addition, our operating cash flow has been very strong which has further allowed us to borrow less money than anticipated, further reducing interest expense.

As we discussed during our first-quarter conference call and our analyst day in Nashville, we had anticipated that our effective tax rate would be extremely high this quarter.

This is due to the accounting for the $23 million of appreciation of the Finish Line shares received in the merger settlement between the date we received it and the date it was distributed to our shareholders.

For accounting purposes we could not recognize the gain from this appreciation, but we were required to recognize it as income for tax purposes and to provide this quarter with the majority of the tax liability on that income.

This liability was almost $6.4 million this quarter.

Obviously this is a highly unusual situation since there is no book income to cover the tax liability.

It is important to note that even with the tax complications the Finish Line share component of the settlement had real value to our shareholders.

Since the date of the dividend the 6.5 million shares have further appreciated in value.

The shares were worth $29 million at the time of the settlement, $43 million on the date the dividend was declared, $52 million by the time they were distributed, and $75 million at market close on August 26th or about $3.91 per share for each Genesco shareholder.

Pretax earnings from continuing operations for the current quarter are $2.5 million which includes $3.3 million of restructuring charges and a little over $300,000 in merger-related expenses.

Last year's pretax loss for the same quarter was $5.6 million which included $5.4 million in merger-related expenses and less than $200,000 in restructuring charges.

As you know, our guidance for the year excluded merger-related expenses, litigation expense, tax effects of the merger-related settlement and restructuring charges.

As we noted in the press release on an adjusted basis we made $0.18 from continuing operations in the second quarter this year versus a breakeven last year.

The reported loss from continuing operations was $4.9 million or $0.27 per share compared with a loss of $2.9 million or $0.13 per share last year.

Included in this quarter's number is added tax of $6.4 million on the Finish Line share appreciation or an impact on a per-share basis of $0.36.

Also included is $3.3 million of restructuring charges and merger-related expenses of about $300,000 for a total of $0.09 per share.

Both the restructuring charges and merger-related expenses of $0.09 per share and the merger-related settlement tax impact of $0.36 per share, or a combined $0.45 per share, were specifically excluded from our earlier guidance.

Last year's number included $0.13 per share of restructuring and merger-related expenses.

Again, with all those adjustments which are spelled out in the schedule to the press release, we made $0.18 this year compared to breaking even last year.

The provision for discontinued operations includes $5.4 million or $0.29 per share for an environmental liability relating to settlement negotiations with the EPA concerning the site of a former operation in New York that we closed about 40 years ago.

Now turning to the balance sheet -- we are very pleased with our balance sheet and cash flow in the first half of the year.

Our bank debt at quarter's end was $20 million which is down considerably from last year's $102 million.

Borrowings are considerably below our plan, as I mentioned before, due to the cash received from the merger litigation settlement and also due to our very strong operating cash flow.

Much of the operating cash flow strength is due to be very tight management of inventories.

Compared to last year inventories are down 6% with sales up 8%.

For the six months we have purchased 4 million shares of stock at a cost of $91 million or an average of $22.73 per share.

For the quarter capital expenditures were $12.7 million and depreciation was $11.6 million.

In the second quarter we opened 15 stores and closed 12.

We ended the quarter with 2,202 stores compared with 2,111 stores last year.

This represented a new story increase of 91 or 4.3% year over year while total square footage increased 7% to 3.1 million square feet.

We expect 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's a breakdown of our new store outlook for FY '09.

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

We expect open about 30 Journeys Kidz stores and about 13 Shi by Journeys stores.

Hat World expects to open about 43 stores and to close 14 for the year.

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

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

Altogether we expect to open about 124 stores and to close 38 this year.

We expect to end FY '09 with 831 Journeys stores, 145 Journeys Kidz stores, 60 Shi by Journeys stores, 891 Hat World group stores including 50 stores in Canada, 174 Underground Station group stores, 116 Johnston & Murphy shops, and 44 Johnston & Murphy factory stores.

That is a total of 2,261 stores or an increase of 4% for the year.

We also expect retail square footage to increase by about 5%.

Now with regard to outlook.

We are revising our fiscal 2009 EPS outlook upward modestly to $2.15 to $2.20 compared to our previous $2.09 to $2.19.

I would like to make a view points here.

First, as you know, over 75% of our earnings are historically generated in the second half of the year.

And while we are pleased with our first-half performance we believe it is prudent to be conservative, especially given the macro environment.

Second, while we continue to feel good about expectations for Journeys, Hat World and Underground Station for the back half of the year and the continued positive comp trends in these divisions are very encouraging, we are adjusting primarily our Johnston & Murphy projections downward for the second half of the fiscal year to reflect ongoing challenges in that market.

Finally, we have not provided any quarterly guidance this year.

And while we beat our budget in the second quarter, the First Call EPS consensus estimate for the second quarter was lower than our internal plan.

As with the earlier guidance, this does not include any of the items broken out in the reconciliation schedule included with the press release.

To be clear, this guidance does not reflect any asset impairments, store closings or the tax effects of the merger-related settlement, including the tax liability associated with the appreciation of the Finish Line stock.

Additionally, as with earlier guidance, this does not include restructuring charges 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 borrowings.

Now I'll turn the call over to Bob for some closing comments.

Thanks, Jim.

We are pleased with our second-quarter results.

The consumer climate continues to be difficult, as you all know.

At the same time, we are benefiting from year-over-year offsets in Journeys, Underground Station and Hat World which we expect will extend into the back half.

Taking a longer-term perspective, our teams continue to drive initiatives that build on the strong strategic positions we have in each of our businesses.

Journeys continues to be managed as the destination fashion footwear store for the teen.

Their merchandise assortment remains unmatched.

Underground Station's turnaround and repositioning continues to succeed as our team develops an overall assortment that is truly distinctive in the mall.

Hat World's sharpened merchandising approach is delivering nice results and they too have a merchandise assortment that remains unmatched.

Johnston & Murphy's business is difficult, but we are excited about the recent share gains, the brand's future growth potential and, in particular, our women's test.

We thank you for joining us and we are ready for your questions.

(OPERATOR INSTRUCTIONS).

Scott Krasik, C.L.

King.

Congratulations.

Jim, maybe if you could just comment on inventory -- 6% down is great, what is it on a same-store basis?

I assume it's even better than that.

Just one second.

Inventories per square foot are down for total Genesco about 11%.

That's great.

So are you going to have to invest in inventory for the fourth quarter to get that comp or can you get these comps on this inventory level?

The inventories obviously in the back half go up relative to where we are now because of holiday.

But on a year-over-year basis we think we're much cleaner, we're going to continue to be a little conservative with the way we buy.

It's an environment right now where you can chase product because most of the vendors are not as tied up as they normally would be with stocks.

So we're going to be conservative, but we're playing to our plan.

Let me just add one thing there.

The situation is we had too much inventory this time last year, as I think you knew.

And we expect to -- by the end of the year we probably will not be down 6%.

We'll begin to build inventory.

We still should be close to where we were last year, but I don't expect us to be down 6% a year.

Jeff Klinefelter, Piper Jaffray.

Hi, guys.

It's Steph for Jeff.

I just want to come back to the guidance comment you made.

You gave us a lot of great detail on the quarter and month to date, but just help us reconcile the strong performance across the P&L sales and margins with the guidance.

It would seem that you're expecting a slowdown.

And maybe just give us some direction on Q3, Q4 since we were a little bit out of range in Q2?

Thanks so much.

You were out of range in Q2, but you were really -- we did not give any guidance in the second quarter and you were below our expectations, our internal numbers.

So essentially we did do a little bit better in the second quarter, but we did not -- we certainly exceeded your numbers, the analyst average numbers out there, but it did not exceed our internal expectations by that much.

So our back half we're holding pretty close to where it was, we've added a little bit there.

But again, we did not beat the second quarter by that much internally.

John Shanley, Susquehanna International.

Good morning, everybody.

Bob, I wonder if you can comment on which division contributed most of the 150 basis point improvement in gross margin that the Company recorded in the second quarter.

And also, is it possible that Journeys could get back to their historical double-digit operating margin in the near future?

John, I'm going to turn the gross margin question to Jim Gulmi, he's got the numbers in front of him.

And then we'll come back to Journeys.

John, we really had some nice gross margin improvement in both Journeys, Underground Station -- they were the two largest.

And then Hat World also was up nicely.

And then of course Johnston & Murphy was up also.

But the two largest were -- I think it's Journeys and Underground Station, but both Hat World and Johnston & Murphy were also up.

And John, on Journeys getting back to double-digit, it's a very strongly positioned retailer from a strategic standpoint again, such a destination store and it's very unique.

And that's a profile that would typically get you to double-digit operating margins.

The key in your question is "in the near future" and what will drive it for Journeys will be comps.

It will need a strong rebound from what we gave up in Journeys last year.

And a lot of that is going to be hinged to when the consumer comes back and really starts buying in a slightly more robust way.

Obviously we're very pleased with Journeys comps and so it allows them to maintain a little bit of leverage.

But to get the operating margin up they need a lot of leverage, and to do that they're going to need a pretty nice spike in comps.

And to predict the timing on that is pretty tricky.

Jillian Caruthers, Johnson Rice.

Good morning.

Wonder if you could talk about the strength you're seeing month to date in August, pretty strong numbers across the board, whether you're seeing that mainly on average selling price or just higher traffic and just kind of relate that to the promotional environment you see right now in back to school.

I don't think we've really drilled down those numbers down to ASPs, not to have them handy here.

We're a little surprised by how strong it has started, especially within Journeys; we're obviously very pleased with it.

There is a promotional environment out there, but obviously thus far we're doing fine.

We're not being very promotional.

As you know, Journeys is really a full price retailer with our discounting really related to items that we're clearing at end of season or midseason if they're particularly slow sellers.

But we're not using promotions in the store to generate traffic, we're just doing what we always do which is really using the unique assortment we have to drive the business.

And so we're very pleased with the start, we're actually a little surprised by how strong it is at Journeys and we'll see how the rest of the quarter goes.

Mitch Kummetz, Robert Baird.

Thanks.

First question on Heelys, Bob, what was the drag on Q2?

I think you had said it was a couple dollars in terms of ASP, but what was the drag in terms of the overall Journeys group comp on the quarter and the impact on the margin on that business in the quarter?

And then when you look at the quarter to date results for Q3 there, how much of a benefit are you getting now that the decline there has been anniversaried.

And then just as a follow-up, on Hat World -- I don't want to get ahead of myself here, but if the Cubs were to win the World Series what kind of impact might that have on your back half, if you can relate that to the impact that you saw with the Red Sox when they won it a few years ago?

Jim is flipping through for your first question to get some numbers.

On the Cubs, the Red Sox are the best model for it and I'd have to go back and look at what the comp gain was, but it was an unusual gain.

And it was something that we had to call out because it was an outlier to what we were expecting.

It surely is speculative of course because it is the Cubs.

But we'll probably get more -- as we get closer to seeing what the teams look like we'll probably do more analysis to quantify what the Red Sox meant to us so people can look at a model that would compare the two.

And there's no guarantee of course that the Cubs will reproduce what the Red Sox did, but I think you're correct in assuming it would be directionally like the Red Sox event.

So we'll get some more information out there as we get closer to the World Series.

That first question on Heelys was so long, I am not sure I'm going to be able to answer all of it.

I'm not sure I remember all of it, but let me give you a couple of data points on Heelys.

The Heelys business for the Journeys Group in the second quarter, which is what you asked for, was off about $4 million to $5 million, but gross margin was up about 10 basis points.

So we lost a couple of million dollars from a gross margin standpoint over FY '08.

Scott Krasik, C.L.

King.

Thanks.

I guess this is a two-parter on Journeys.

First, Bob, can you quantify or do you have a sense of what sort of benefit you are getting from the Pac Sun decision to exit the footwear category, and how long that should run?

Then secondly, ASPs being up across the board at Journeys is very, very good.

How do you see that for the back-half of the year?

On Pac Sun, because our stores overlap with Pac Sun virtually 100%, it is very difficult for us to try and do the comparison of how much we are getting from them.

We are assuming we are picking up business anecdotally.

We know that in some cases customers even get referred in our direction, but it is very hard for us to nail it.

We assume we're getting something, and based on that assumption we assume that we get that help all the way through to the time when we anniversary their reduction in footwear.

So we still have -- the back-half should get help from that.

In terms of ASPs, the pickup in ASPs in Journeys is largely related to mix.

So to the extent that the customer continues to move with that direction in mix, with that mix shift, it should stay with us.

Obviously, as we get into the big half, boots play a bigger part in our business, so the overall ASP goes up.

We think we are very well positioned for boots.

We are predicting that it will be a strong season, so that would probably be something that also supports ASPs nicely, but we will see.

Sam Poser, Sterne Agee.

Good morning.

First of all, if you continue at the current comp rate, can you lever -- what kind of SG&A leverage would you see?

Well, generally -- it varies by business, but in Journeys, we've thrown out numbers around 4% or so depending on the growth rate.

And in Lids it's lower then at probably around 3%.

And Johnston & Murphy a little higher.

So for a total company, if we're at 4% to 5% comps we should be leveraging.

We leveraged this quarter, as you can see, even at this rate.

Great.

And then I wanted to follow up on the -- you mentioned on the prepared remarks, Bob, about the Shi mix shift in women's and how you were adding some higher-end brands.

And if you could give us a little more color there and then if there is any -- if any of it was applicable to your other stores like Journeys?

Sure.

Well, we're not going to be calling out brands, Sam, so you can go in the store and you can see what we've bought, what's really helping us we're going to keep to ourselves.

And what we've done is we've layered in another level of non-athletic branded women's footwear that the customer in general is being very receptive to that layer that we've added on.

That's helping ASPs; it helps productivity in the store.

And on the other side of the store we've beefed up the athletic.

When we first started doing athletic we were catching the downside of that low-profile trend.

And so we probably didn't get good visibility because we probably were not that well positioned.

Now we think we're more on trend and the athletic business is turning out to be very good.

We have some overlap with the Journeys' assortment in the store, but we're convinced we get a very different customer within Shi, so the overlap doesn't concern us.

So you'll find some skews are the same, but more of them are different than the same.

Adam Comora, EnTrust Capital.

Just first congratulations on just about every business.

My question is really on the guidance.

It sounded like the guidance of $2.15 to $2.20 is predicated on a low single-digit comp increase for the year.

Is that correct?

Yes.

And so far for the first six months comps are up 3%.

And it sounds like we've accelerated into the high single digits, up 7% so far.

Now I know we're only one month into (technical difficulty).

Less than one month.

Just a comment on that.

Again, we're, Adam, very surprised at the start for August, so our guidance does not in any way anticipate a continuation of that.

So we're still seeing a very difficult economic climate out there, we see our peers, many of them struggling.

So we're keeping a more modest comp assumption in place for the back half of the year, we think that's the right target to shoot for.

Jim, do you want to add to that?

No, that's basically it.

We have not rolled forward this first three weeks into our comp estimate; we're still pretty conservative in the back half.

If it continues obviously a lot of good things might happen.

John Shanley, Susquehanna International.

I wonder if you could comment on how the Journeys stores have addressed the growing strength of technical athletic footwear while there still remains a growing interest in skate products.

And also if you could finish, Bob, answering the question about what kind of comps the Journeys operation would have to be able to get back to a double-digit operating performance?

On the technical footwear, as you know, we're not in the technical footwear business.

There are other people who do that better than we do.

We're a small box and our focus is more on fashion footwear.

And to the extent that athletic has a fashion -- a big fashion component outside of technical, that's where we play and that is predominantly skate right now, as you know.

So we're really pressing on the skate category as the place where we make our major statement in athletic.

And if technical gets hot again we're going to let the technical guys play in that space.

In terms of what comp you need from Journeys, if you do the math, John, you go back to last year, Journeys' comps down -- Jim's going to grab the number.

But we need a year where we make that up to get back to where their comps were.

And so, if you think about a 4% comp as being neutral in terms of leveraging the SG&A, then we need a 4% plus getting back what we gave up last year in order to bring the operating margins.

We can have that happen in one year, that can happen in multiple years.

And as I said before, John, I don't think that happens without a change in the consumer environments.

Jim will give you the --.

We were minus 4%, so that means against SG&A leverage we gave up 7%.

Because to stay neutral on leveraging you need a 3% or a 4%, we were minus 4% so we gave up 7% or 8%.

We've got to get that 7% or 8% back on top of a normalized 3% to 4%.

Does that make sense?

David Turner, BB&T.

I guess a question first on the ASP trends.

There's then a lot of commentary in footwear about inflation coming out of China and subsequently the vendor base charging more.

So I guess -- curious how much of the ASP improvement, if there's anyway to get this granular, was just pass through or how much is mix?

And I guess have you seen any change in your ordering pattern on costs?

Are you paying more for the back half of the year into holiday?

Are your merchandise costs running higher?

Here's the story on cost.

Obviously we see it from both sides because we're vertical and we're dealing with factories and Johnston & Murphy and Dockers predominately and then we're dealing with vendors out of Journeys.

And all the factories are really working hard to push through cost increases because of the various pressures that they have in the currency.

And so we're seeing that, but it really isn't flowing through that much to product that is flowing through a vendor and then landing in our retail stores.

It is starting to probably squeeze possibly some of the vendors, and we called that out for Dockers, that one of the reasons that we had a little bit of a reduction in gross margin is costs are starting to go up.

So what you'll have to look at in that timing difference between when price increases, which are inevitably going to come, when those price increases hit the vendors and then when those price increases go to retail.

Obviously what we're trying to do with Journeys is any cost increase that we incur we want to translate that into suggested retail which is where we'll be selling.

And so we hope to preserve margins on the side on that end.

And obviously on our wholesale side what we're trying to do is make sure that we can cover our cost with the next round of sales.

So that push and shove hasn't really come into play yet, but it will be a big part of the back half and it's a little too soon to predict where it comes out in terms of who's taking the hit.

Jeff Klinefelter, Piper Jaffray.

It's Steph again for Jeff.

Two follow-ups.

The first one is if there was any outperformance in the back half where would you expect it to be generated?

And then just a follow-up on the last question on cost inflation.

What magnitude are you seeing at wholesale and then what is the component so far at detail that you're passing through?

Thank you.

On outperformance it's hard to say.

We're giving our best -- our guidance is on our best judgment of how each of those businesses are expected to perform.

And the one you can obviously point to is the possibility at Hat World that the World Series situation gives them a lift.

But other than that it would be tough for me to pick out a business that we would assign upside to it.

The magnitude of the cost increases that we've seen at wholesale, we're in the midst of negotiating a lot of that now, both with the factories and with the retailers.

And it's got all the dynamics that you would expect.

We're pushing back on the factories and trying to find out how much they'll eat and we're trying to get our retailers oriented to a realization that their costs and prices will go up.

The retailers -- the happy news is the retailers seem to get it.

So in our wholesale businesses our retail customers largely recognize the inevitable.

And so they are writing their merchandise plans accordingly.

So that should give us hopefully some room to pass on some cost increases.

Mitch Kummetz, Robert Baird.

Let me start with a housekeeping question.

Tax rate and shares, first of all on the second quarter given the $0.18 pro forma earnings what was the tax rate that got you to that number?

And then also you guys are showing a basic share count, unless I'm not seeing something in the reconciliations.

But what would the diluted share count have been to get to that $0.18?

And then in terms of your guidance for the year, what kind of tax and shares are you using there?

And then a quick follow-up.

As I look at operating income Q2 by division it looks like you saw the biggest increase at Hat World.

And Jim, I know you had mentioned better gross margin and leveraging the SG&A, but could you be a little bit more specific as to what drove that big increase there?

For the first one in terms of the tax rate, the normalized tax rate that we're using, and we referenced this also in one of the tables to the press release, the normalized -- just as a reference point I said that -- the normalized tax rate is about 40.2% we're using now.

Okay?

And in the second quarter, to get to the $0.18 we're using a share count of about 23.3 million shares.

And then for the full year the share count that we're using is about 24 million shares.

And then the second question was at Hat World, what drove that increase.

The increase at Hat World was -- it was the best of all possible situations in that we saw some very nice increase in gross margins and then, due to the strong comps, we also levered.

And to put it into business terms here's what's going on there.

Last year, remember, we were very long on MLB fashion, hip-hop inspired stuff, and we were doing two things -- we were trying to drive down that inventory both with markdowns and also with slower receipts.

And so we ended up really struggling on gross margin because of that and then we started to hit our sales line because we weren't fresh enough.

So what's happening now is we're using a much more fashion driven markdown pattern within Hat World and that allows us to stay fresh.

So we're seeing a business that is run in that part of the store more properly as a fashion business.

And then as Jim said, you get it both on the gross margin and the sales line and then the sales line gives you leverage on the SG&A.

With a comp increase of 7% and good expense control you would expect to get good leverage and we did.

David Turner, BB&T.

Just one more question on the PacSun scaling back their footwear business -- and I know there's no way to drill down on what it means at comp.

But I'm wondering if there's been any change in product.

A lot of the same brands ship to PacSun as they do to you.

So are you getting more of the better product, are you getting fill ins more quickly, has there been any way to look at it from a merchandise standpoint, the impact from PacSun?

In the short-term obviously there was some product available and our merchants took advantage of that where they thought it would benefit the business.

Once the vendors have right sized their order flow to reflect what PacSun did there really shouldn't be that much change.

There was no product that was big in PacSun that we now get access to because they're not in the business anymore.

We pretty much had -- anything they had we would be able to get.

That does conclude our question-and-answer session for today.

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

Bob Dennis for any additional or closing remarks.

We just thank you all for your time and for your interest in Genesco and we look forward to seeing you all soon.

Thanks a lot.

This does conclude today's teleconference.

We thank you all for your participation.

Have a great day.