Genesco Inc (GCO) 2009 Q4 法說會逐字稿

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

Just a reminder, 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.

Good morning.

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

Participating with me on the call today 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 materially different.

We refer you to our earnings release and to our recent SEC filings including the 10-Q for the third quarter 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 stream.

Sales in the fourth quarter were choppy.

The early part of the quarter was weak and the weakness continued until a few days before Christmas.

Sales then accelerated through early January when they softened dramatically again.

All in, we ended with total sales down 3% and comp sales down 5% for the quarter, a bit below our mid January expectations that comps might be down between one and 4%.

This choppiness has continued into the new fiscal year but so far in a direction that we like.

Comps were up 7% for February.

Needless to say, we hope that this at last, represents a sustainable trend but we aren't planning on it at this point.

Given the large swings in the fourth quarter along with all of the the negative news on the economic front we are remaining quite cautious about near-term sales.

A primary focus for us in the fourth quarter as it progressed was inventory management.

We made it a priority to enter the new year with clean inventories given the sales uncertainties.

We feel good about the results of that initiative.

When we finished the year, inventories were a little less than 2% above last year-- last year's end levels.

Inventory per square foot was down 7%.

The inventory we have on hand is exceptionally fresh and we have the capacity to buy into a trend if we see one.

Earnings from continuing operations with the adjustments we break out in the press release were $1.06 per share for the quarter, versus $1.01 last year.

This year's number reflects operating income that was short of what was reflected in our earnings expectations when we updated mid January due primarily to the end of January short fall and sales, and the promotional activity to insure clean inventory more than offset by a lower tax rate.

That was a relatively good, and disappointing end to a year that began on a strong positive note and indeed continued strong into the early third quarter.

Even with the severe disruption to the economy in the second half, we achieved slightly positive comps for the company for the year.

Total sales for the company were up 3.3% to $1.55 billion, and adjusted EPS was $1.81 versus $1.84 last year.

The Journeys groups comps were up 1%, Hat World's comps were up 2%, Underground Station comps were flat.

Our licensed brands division had another record year in sales and earnings.

Only Johnston & Murphy had a negative comp sales result with comps down 10%.

Of course Johnston & Murphy's customers tend to be extremely sensitive to the financial markets and have been hit particularly hard by this recession.

We think these are solid results given the economic climate and that they highlight the essential growth of our business model.

With a seasoned management team that has survived more than one business cycle a strong financial position and a leadership position in our market niches, we expect to emerge from the downturn with a stronger competitive position than we went into it.

As we have pointed out before, current conditions carry a number of opportunities for long-term improvement for us.

The first of these silver linings involves the real estate market.

We are being much more selective and limiting our new-store growth to the highest quality must-have locations.

This selectivity and the increasing supply of mall space as other retailers slow store openings and close stores is already enabling us to negotiate better deals.

This is a significant reversal of leverage in the developer/retailer relationship of recent years when occupancy costs has been one of our more significant strategic challenges.

We are fortunate that market forces have enhanced our ability to negotiate for improved occupancy costs at time our lease renewal cycle when it really matters.

45% of our store base or 1,008 stores are either up for renewal or kick out in the next three years.

In the current year, we have 313 stores or 14% of our store base up for renewal or kick out.

Second, stepping back for the time being from our aggressive new store growth of recent years allows us to focus on construction costs.

This focus in combination with the fact that land lords are more flexible on remodeling lease renewals, means that we should see continued material reductions in capital expenditures, further enhancing our cash flows and strengthening our balance sheet.

Longer-term, of course, we will also see correspondingly lower depreciation and the process improvement will drive proportionately more savings as we resume a more normal growth rate in the future.

Third, the competitive landscape is likely to be much cleaner when this is over.

It is likely that a number of retailers, especially small independent operators, will not survive.

We expect to be a relative beneficiary of consolidation, and see real potential to increase our market share.

With all of that in mind I want to say a few words about our approach to this upcoming year.

We are assuming that the economy will not improve near term and consumer demand will not begin to recover before the second half at the very earliest.

We recognize the possibility that this recession might extend well into our next fiscal year and indeed the news that comes out daily seems to make this scenario increasingly likely.

We are managing with the primary goal of maintaining maximum flexibility to be able to respond appropriately as we gain visibility over the course of the year.

This means, in the near term, buying on the conservative side, continuing to control inventory levels to clear slow-moving inventory rigorously and to be prepared to move with the market.

It also means maximizing cash flow in other ways including a high degree of selectivity in capital expenditures especially for new store opportunities.

Finally, in terms of talking with you about our guidance for the year, it means that we will try to help you understand what levels of earnings we expect to produce given various economic and sales scenarios.

And what the relevant variables are so that you can develop estimates for Genesco based on your expectations for the economic climate.

Clearly, the economic environment introduces greater than normal uncertainty into the coming year.

The two key issues are: first, how long the recession lasts, does the consumer spending turn positive late the this year or some time next year?

And second, how deep might the consumer pull back be.

As you well know there is a wide range of opinion out there on these two issues.

We will never claim to be better predictors of the outcome than the experts but rather will manage the business in a way that accommodates this wide range of possibilities.

And rather that throw up our hands and say we don't know what our future entails and suspend guidance, we thought it would be more helpful to our investors if we outlined the range of scenarios we have prepared for, the range of outcomes we expect for Genesco in these various scenarios, and describe how we plan to be reactive to what the world actually brings our way.

Our base-line plan contemplates a difficult first half followed by a modest consumer recovery in the fourth quarter and positive comps for Genesco in the fourth quarter.

Remember, this is coming off of a negative 5% comp for the quarter just completed.

During the year, we will monitor all available metrics both internal such as sales trends and external such as consumer confidence, to see if this assumption looks reasonable.

Unless we see evidence to the contrary, our buying teams will be purchasing to these targets.

We have also examined a downsize scenario, essentially a stress test that contemplates a deeper and longer recession.

In this scenario our performance naturally suffers but our liquidity is more than adequate.

Jim Gulmi will have a lot more to say in his remarks about the specific numbers behind this thinking.

Now, turning to the fourth quarter performance of the various business units beginning with Journeys.

The overall comp decrease for the Journeys group was 2% for the quarter compared to 7% decrease for the same period last year.

Comps in the Journeys group for February were positive 10%.

During the quarter, we opened one new Journeys store and ended the year with 816 stores in operation.

Looking at components of the Journeys group in the fourth quarter.

In the Journeys' stores alone, fourth quarter comps were down 3% compared to a 7% decline in the fourth quarter last year.

Men's footwear made up about 44% of Journeys' footwear sales for the quarter and women's and kids footwear represented about 56% compared with 52% last year.

February comps were positive 9%.

Footwear comps decreased 3.2% and unit comps decreased 3.2% and average selling price increased 1.7%.

For the full year, ASPs were up about 1%.

This was the first annual ASP increase in the Journeys' stores since fiscal year 2001.

As we have said many times over the years, the primary reason for the ASP decrease has been fashion-driven mix changes and this was true of last year's increase as well.

This ASP dynamic underscores an interesting point about the teen customer in particular.

One of the very hottest products in the Journeys' stores in the fourth quarter, was one of the highest priced products, UG boots.

This once again supports our belief that this customer is very brand and style driven.

Pricing is not the key driver for the teen customer in making a decision to purchase footwear.

Even in this tough environment, if the product is right it seems that teenagers will somehow find the money to make the purchase.

For that reason, we are reasonably comfortable that this ASP trend could continue.

That would be a positive development for many reasons, obviously higher ASPs are a key driver of higher comps and have a meaningful impact on earnings and operating margin.

They also bring significant operational advantages.

Even with this constant drop in ASPs from fiscal 2001, we've had positive comp sales in most of those years And obviously, in order to have positive comp sales with negative ASPs, we had to sale more pairs of shoes per store.

At a small store, this taxes available stock room space to the limit and requires more staff to handle the products.

More square footage is needed to support the added inventory, hence our store expansion strategy of recent years.

So if (inaudible) to customer preferences move back toward higher price merchandise we could benefit from lower selling expenses and make more efficient use of store space.

In Journeys Kidz, comps rose 3% in the quarter versus a 3% decline last year.

In the fourth quarter, footwear unit comps decreased about 1% and ASPs rose 6.6%.

For the full year, ASPs rose 3.2%.

February comps were positive 15%.

During the quarter we opened four new Journeys Kidz stores and now have 141 stores in operation.

For the full year we opened 26 new stores of which 17 stores were conversions of highly profitable but size-constrained Journeys stores.

These conversions are particularly appealing to us as we convert and reopen the stores in a Journeys Kidz format at a fraction of the normal buildup cost and get a larger space for a proven Journeys store that will enable it to generate more sales.

Shi by Journeys comps in the fourth quarter were positive 11%.

We continue to adjust our product offering in Shi by increasing our selection of athletic products and higher priced branded fashion merchandise.

As a result, ASPs were up 12.7%.

Also, we were particularly pleased with the strong gross margin we were able to maintain in our shoe stores.

February comps were positive 21%.

We opened two stores in the fourth quarter and ended the year with 55 Shi stores.

We expect to open two or three Shi stores in the new year as we continue to work on getting the store economics right.

We are learning that in the right malls our Shi stores can do quite well.

Turning now to Hat World, comps decreased 4% during the quarter on top of a 4% decrease for the same period last year.

From a product standpoint, major league baseball continues to be Hat World's largest category.

Core major league baseball performed well and action brands were once again extremely strong.

Comps were hurt in the quarter due in part to weakness in the NFL sideline hat.

For the full-year, Hat World had a positive comp and increased operating margins to 9% from 8.4% last year.

All in this was a good rebound from fiscal 2008 even with the weaker fourth quarter.

February comps were positive 12%.

During the quarter, we opened a total of 13 new Hat stores and closed seven to end with year with 885 stores in the Hat World group.

In addition, we now have embroidery in 380 stores.

This category is up 13% year-over-year.

Even though this remains a small part of the business, representing about 5% of sale, it is highly profitable.

During the quarter, we also made a small acquisition, Impact Sports, which will be managed by the Hat World organization.

Impact Sports is a team dealer which sells branded athletic and team products to college and high school teams.

It is a national dealer of major brand merchandise.

Turning to the Underground Station group, comps decreased 12% during the fourth quarter compared to negative 5% last year.

Footwear unit comps decreased 7% and ASPs declined 3%.

For February, comp sales declined 1%.

As you recall, the loss of Nike from Underground Station's mix in fiscal 2006 led the merchandising team to reposition the concept placing more focus on the women's and kids businesses.

This strategy delivered strong comps in the first half of this past year through back to school.

And the comps were up 10% year-to-date at the end of August.

However, in the back half of the year, business softened considerably with Q4 comps of minus 12%.

For the year, Underground Station finished with a flat comp.

We had expected to have Underground Station profitable in fiscal 2010.

Given how economic conditions have deteriorated, that is now unlikely.

As a result we continue to closely review our options for managing this business to best benefit shareholders.

The following point summarize our current analysis of the Underground Station situation.

First the Underground Station core customer is particularly challenged in this environment.

We highlight one measure of this.

While unemployment in the US has moved up to 7.6%, in the African American community it stands at 12.6%, and in certain states where Underground Station has a significant presence it is in the high teens.

Second, despite that, Underground Station has 109 profitable stores, and 71 stores that are unprofitable on a four wall basis.

Third, we ended last year with 180 stores in the Underground Station group down from 223 just two years ago.

We expect to be down to approximately 170 stores by the end of this year, as we continue to close underperforming stores.

We have progressively shortened the average lease term of the Underground Station chain.

If we treat all kick outs as potential lease termination events our average lease has 3.2 years remaining.

102 of our 180 stores expire or kick out in the next three years.

Likewise, 42 of our 71 unprofitable stores expire or kick out in the next three years.

Therefore, for many of our worst stores we expect an upcoming opportunity to close them, and on many other stores, we expect enormous flexibility on rent terms from landlords.

Indeed, on the last ten renewals or kick out renegotiations for Underground Station, we have achieved an average rent reduction of 30%.

Fourth, for those stores without an upcoming kick out or lease termination, landlords are certain to press us to keep these stores open given their focus on occupancy rates.

Put another way, they would make it enormously expensive to close these stores.

Finally, Underground Station's loss of $5.7 million this year includes the absorption of an estimated 3 to $5 million of corporate overhead costs that do not disappear regardless of the path that we take with Underground Station.

With these facts in mind we have examined a scenario of closing the chain all at once in the near future and have rejected it as too expensive.

It would require a significant cash outlay.

Instead we believe it is prudent to continue to operate the chain while we continue to shorten lease life, close the most unprofitable stores as the opportunity presents itself, and secure rent relief on the other locations.

In this scenario, even if we repeat a flat comp, the chain is cash-flow positive in each of the next three years.

Indeed, even with this year's operating loss, Underground Station had a positive cash flow and was not a cash drain on the company.

By taking this approach we preserve the upside possibility of Underground Station's new strategy taking root as it seemed to do in the earlier part of this year.

Now, turning to Johnston & Murphy.

This business continues to be hurt by the tough economic climate.

We obviously are not alone here as many up scale brands are having tough times.

Fourth quarter sales for the group were approximately $45.6 million.

Wholesale sales were down 25%, and same-store sales for Johnston & Murphy's retail stores declined 17%, compared to a 1% decline last year.

Johnston & Murphy's February comps were down 18%.

Even in this tough environment, Johnston & Murphy wholesale is continuing to gain market share in the department store national chain channel according to NPD's retail tracking service.

Non-footwear sales for Johnston & Murphy shops continue to increase and accounted for 40% of sales in the fourth quarter versus 38% last year.

In the fourth quarter, we opened two Johnston & Murphy shops and one Johnston & Murphy factory store and we closed two shops and one factory store.

We ended the year with 157 stores in operation.

While economic conditions clouded the test of the Johnston & Murphy's women product we were pleased with what we saw.

Women's products account for approximately 10% of sales in the women's test Johnston & Murphy shops.

This is a little below our expectations probably because of the economic climate.

But we are learning a lot in our first season of sales and overall we like what we see.

As a result, we have decided to add approximately seven more stores to the 28 store test group by the end of the first quarter.

From a financial standpoint we look at the women's business as incremental sales with little added fixed costs.

We are able to piggy back on the Johnston & Murphy infrastructure as we have done when testing new concepts in other parts of Genesco waiting to add infrastructure until the new concept is proven.

Journeys Kidz is the best example of this approach.

This allows us upside opportunity with little down side exposure.

Finally, turning to license brands, sales decreased 6.2% to $20 million this quarter compared to a 3% increase in the same period last year.

For the full year the division had record sales up 5% to $92 million on top of a 14% increase last year.

Operating earnings for the year were also a record.

License brands operating margin increased in a tough economy which was quite an accomplish especially given the absorption of bad debt in the second quarter.

According to NPD, Dockers is now the number two men's footwear brand in the brown shoe segment across the department store, national chain store, and shoe chain store channels.

In dress casual product, Dockers is number one in all channels.

And 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.

Fourth quarter sales decreased 3% to $452 million compared to $467 million last year.

Total comp sales decreased 5%.

Journeys group sales increased 1% to $230 million, and comps were down 2% for the quarter.

Hat World group sales rose 1% to $122 million.

Comp sales for the quarter decreased 4%.

The Underground Station group sales were down 21% to $34 million, reflecting a 12% comp decline and a 6% reduction in store count to 180 stores.

Johnston & Murphy group sales were down 16% to $46 million.

Johnston & Murphy wholesale sales decreased 25% for the quarter.

Comp sales for the Johnston & Murphy shops and factory stores were down 17%.

License brand sales decreased 6% to $20 million.

Now turning to gross margin, total gross margin for Genesco was down slightly to 48.6% compared to 48.8% last year.

This was due to higher mark downs in the quarter mostly related to the inventory disciplines that Bob has already mentioned.

Journeys' gross margin was actually up about 50 basis points in the quarter due primarily to higher initial mark downs.

License brands gross margin declined 140 basis points primarily due to mix changes and increased product costs.

Hat World's gross margin declined in the quarter primarily due to timing differences on vendor discounts.

Johnston & Murphy's and Underground Station's gross margin were lower due to higher mark downs to keep inventory fresh.

Now for the restructuring and other line on the P&L.

In the current quarter, this led us to a small gain, a profit of about $300,000 compared with a loss of $2.9 million last year in the fourth quarter.

This year's amount is made up of asset impairments and store buy out costs totaling $3.5 million offset by a gain of about $3.8 million from the landlord's buy out of a store lease on 5th Avenue in New York City.

Last year's restructuring charges of $2.9 million were primarily asset impairments and payments by us to terminate leases.

For the full year, asset impairments and lease buy outs in FY '08 and FY '09 were $10.2 million in both years.

Close to 85% of those charges were noncash items in both years.

Now turning to SG&A.

Total SG&A as a percentage of sale decreased to 40% in the quarter compared to 42.2% last year.

This year's numbers include $200,000 in merger-related expenses and expenses of $1.7 million related to the 5th Avenue store lease termination I mentioned earlier.

This compares to $16 million of merger-related expenses last year.

Excluding these items in both periods, SG&A increased to 39.5% from 38.8% last year.

The major driver of this increase was an increase in rent in the 4% square footage growth in the fourth quarter.

Journeys' SG&A as a percent of sales was flat with last year which was a great achievement on negative comps.

We were not able to leverage expenses in Johnston & Murphy, Underground Station or Hat World due to their negative comps.

We experienced good leverage improvements in licensed brands due in part to lower bonus accruals.

We reported operating income of $39.1 million or 8.7% of sales in the quarter compared with $27.8 million or 5.9% of sales last year.

Included in year's operating income is a pretax loss of $1.7 million from asset impairments, store buy outs, and merger-related fees partially offset by the net gain on the termination of 5th Avenue store lease.

Last year, operating income included about $16 million or about 342 basis points of merger-related expenses and a $3.7 million charge for asset impairments and lease termination.

Excluding those items from both periods, operating income in the current quarter was $40.8 million or 9% of sales compared with $47.5 million or 10.2% of sales last year.

Journeys' operating income increased to $25.5 million from $24 million last year.

This was adjusted for expenses related to the sale of the 5th Avenue store.

Operating margin was 11.1% compared with 10.6% last year.

Hat World's operating income was $14.8 million or 12.1% of sales compared with $17.3 million or 14.2% of sales last year.

Underground Station's operating income was $600,000 or 1.7% of sales compared with $2.3 million or 5.3% last year.

Johnston & Murphy's operating income was $1.9 million or 4.1% of sales compared with $7.3 million or 13.6% last year.

Licensed brands operating margin was $2.4 million compared with $1.8 million last year.

Operating margin was 11.9% compared with 8.4% last year.

Net interest expense was down to $2.6 million from $3.5 million last year.

The lower net interest expense was partly due to the cash with the merger litigation settlement last March.

Even after we paid the initial installment of taxes and bought $91 million of stock earlier in the year, positive timing differences, primarily in connection with the schedule, the remaining tax payments on the settlement have continued to reduce our need for working capital related bank borrowings.

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

Pretax earnings from continuing operations for the fourth quarter of FY 2009 is $36.5 million which includes the net $1.7 million loss I mentioned earlier related to asset impairments, store buy outs, and merger-related expenses partially offset by the net gains for the 5th Avenue store lease.

Last year's pretax income for the same quarter was $24.3 million, which included $16 million of merger-related expenses and $3.7 million of charges for asset impairments and lease terminations.

As you know, our guidance for the year excluded merger-related expense, litigation expense, tax effects of the merger related settlement, asset impairments and lease terminations.

Excluding those items from both year's results and excluding the gain on the store lease termination, pretax earnings would have been $38.2 million this quarter, and $44 million for the same quarter of last year.

Earnings from continuing operations were $23.7 million or $1.05 per share compared with $3.6 million or $0.16 per share last year.

Included in this quarters pretax earnings our net charges of $1.7 million made up of merger-related expenses, impairment charges and lease buy outs, offset by the net gain on the lease termination.

Last year's number included approximately $19.7 million of pretax merger-related expenses, asset impairments and lease buy outs.

After adjusting for those items, diluted EPS this quarter was $1.06 compared with $1.01 last year.

As Bob pointed out, this quarter benefited from a lower than expected tax rate due to year-end adjustments.

Again, we refer you to the schedule in the morning press release for a more detailed reconciliation.

For the full-year, of EPS on the adjusted basis we have been discussing was $1.81 compared with $1.84 last year.

Now turning to balance sheet we have very pleased with our year-end balance sheet and cash flow.

Our bank debt at year end was $32 million which is down considerably from last year's $69 million.

Our unused borrowing availability under our $200 million of committed lines of credit was about $154 million at quarter end.

This includes about $14 million of letters of credit outstanding.

As I mentioned earlier, borrowings were considerably below our plan due to the merger litigation settlement and our strong operating cash flow.

Inventories are up 2% from last year's levels.

Inventory per square foot was down 7% at year end.

For the quarter, capital expenditures were $9 million, depreciation was $11.8 million.

Year-to-date capital expenditures were $49 million plus $4.5 million from the small acquisition by Hat World that Bob mentioned.

Depreciation for the full year was $47 million.

In the fourth quarter, we opened 23 stores and closed 17.

Year-to-date, we have opened 102 stores and closed 43.

We ended the year with 2,234 stores compared with 2,175 last year.

This represented a net new store increase of 59 stores or a 2.7% year-over-year increase while total square footage increased 4.3% to 3.2 million square feet.

We expect capital expenditures for fiscal 2010 to be in the $49 million range, assuming that we open 72 new stores.

This compares with 102 new stores last year and 229 new stores in fiscal 2008.

Depreciation for the full year is expected to be about $49 million.

As Bob discussed, we were taking a very conservative approach in opening stores this year..

Stores will only be open where there's a compelling reason to open a store in a specific location.

If we are not able to find 72 locations we will not hit this number.

In short we will not open stores at a predetermined number if we don't feel the location is outstanding.

The 72 possible new stores and our store closing plans for the year break down as follows: we expect to open 12 Journeys stores and close 10 stores.

We expect to open up to 10 Journey Kidz stores and three Shi by Journeys stores.

We expect to open, up to 40 Hat World group stores which includes up to 15 new stores in Canada where our performance has been outstanding and to close 34 stores.

We expect to close about 10 Underground Station stores.

We expect to open up to five Johnston & Murphy shops and close three shops and open no more than two Johnston and Murphy factory stores.

All together again, subject to what we said about our selective appetite for new stores, we plan to open as many as 72 stores and to close 57 stores this year.

Assuming we open and close stores in line with these plans, we would end FY 10 with 818 Journeys stores, 151 Journeys Kidz stores, 58 Shi by Journeys stores, 891 Hat World group stores including 65 stores in Canada, 170 Underground Station stores, 116 Johnston & Murphy shops and 45 Johnston & Murphy factory stores.

This is a total of 2,249 stores or an increase of 1% for the year.

These plans would also increase square footage-- retail square footage by about 2%.

Now I would like to discuss guidance for the full year.

As Bob said we are approaching guidance for the year from the perspective of two different scenarios, a baseline plan that our merchant teams will be buying to, unless they see evidence to the contrary, and a second scenario that assumes a longer and deeper recession.

The baseline scenario assumes quarterly comps of about minus 3% for the first two quarters, flat for the third quarter, and plus 2% for the fourth quarter for an overall decrease of about 1% for the full year.

Total sales for the year in this scenario would be about $1.59 billion.

We expect gross margins will be flat , up slightly from last year.

On slightly negative comps for the year, it will be tough to leverage expenses.

We expect that the overall tax rate for the year will be approximately 40.5%, and the share count for EPS purposes will be about 23.3 million shares.

In the first two quarters this could be lower to 19 million shares due to the GAAP treatment of the shares underlying our convertible debt on a lower earnings in those quarters.

These assumptions would allow us to (inaudible) EPS of $1.70 to $1.80 for the year.

This EPS guidance does not include about $10.1 million or $0.26 per share in expected asset impairments in store payments which is consistent with the past two years.

Once again, about 85% of those items represent noncash expenses.

This guidance also does not include any potential impairment of goodwill.

As you know, with the stock market at 10 to 15 year lows, we, like a lot of other companies, are trading below book value.

This poses a threat of needing to write down some or all of the $112 million of goodwill on our balance sheet which is primarily associated with acquisition of Hat World in 2004.

We believe we have passed the impairment test at this year end and will not be required to reflect any goodwill mark down in our audited financial statements.

This is a quarterly test and we will be vulnerable until our trading price to book value ratio improves.

Of course, any impairment involves a noncash charge of earnings.

Again, our guidance for FY 2010 does not include any impairment of goodwill.

In terms of how this guidance flows quarter to quarter, we expect earnings to be down from last year in the first half of this year, and we-- as we go against a stronger comp comparisons.

Also as you know, we normally have a hard time leveraging expenses in the first half, as sales are seasonally lower than in the back half, where we historically have made 70 to 75% of our annual operating income due to seasonality.

In the current year, this could even be more back-end loaded if the economic recovery occurs later in the year.

Scenario B assumes that is the recession is deeper and more prolonged with no recovery into FY 2011.

In this scenario, we would be canceling merchandise orders where possible, pushing out receipts of managed down immediate inventory commitments and taking targeted mark downs to unload the slower selling items.

In this scenario, we contemplate quarterly comps to be about negative 4% in the first two quarters and down about 3% in the third and fourth quarters, adding to minus 3% for the full year.

Total sales for the year in this scenario would be about $1.55 billion.

We also assume we give up 50 to 100 basis points in gross margin to accelerate the inventory liquidation.

In this scenario we achieve EPS of $1.20 to $1.30.

Obviously there's a lot of territory between these scenarios that are also possible.

One call out that is particularly important to us, even in the more pessimistic scenario we still have strong liquidity, and still end the year with bank borrowings below this year end levels.

In the baseline plan, we would expect to end the year with no bank borrowing and more cash.

As part of our stress testing work we evaluated them (inaudible) credit available under our credit facility at peak usage levels during the year, and feel very comfortable with the amount of credit we have available throughout the year.

Our cash flow will be strong and we are very pleased that our depreciation and capital expenditures will essentially offset each other this year.

As you know in earlier years we are spending a good deal more than we were depreciating.

In addition, we expect to be very careful in managing inventories throughout the year which would favorably impact cash flow.

One last point on our convertible notes.

In May, 2008, the FASB issued a staff position on accounting for convertible debt instruments that may be settled in cash or stock upon conversion.

As you know, we have $86 million in convertible notes outstanding.

The APB will now require us to account for our convertible notes separately as nonconvertible debt and as equity, representing the conversion option value.

This new requirement will become effective for us in the first quarter of the current fiscal year.

It will also require restatement back to FY 2004.

The new accounting pronouncement will have a minor impact on our current balance sheet reducing the face amount of the note to about $82 million in the first quarter.

However, we will begin accruing interest on a debt at a rate of 8.5% in the first quarter, as if it was not convertible.

The actual coupon rate in this debt is 4.125 %.

Interest expense will therefore increase by $3.4 million for fiscal 2010 on a pretax basis, reflecting this accounting charge.

This is a noncash adjustment.

The annual EPS guidance I mentioned earlier will not be impacted by this new accounting pronouncement.

The quarterly diluted EPS could be impacted depending on earnings levels.

Once again, all of this is noncash, and we will call out the impact as noncash accounting charge if it should impact earnings per share.

Now I will turn the call back to Bob for some closing

Thanks, Jim.

In summary, we will continue to operate cautiously in these uncertain times with our attention more tilted towards cash and our balance sheet until we feel we have improved visibility and more certainty about our future.

In the short term we believe our positioning is favorable relative to the average mall-based retailer.

First, within our two largest businesses, Journeys and Hat World, we focus on the more affordable end of the price spectrum with an assortment of brands that are irreplaceable to our customers.

Indeed, our customers have demonstrated a willingness to pay up for for fashion right items as they did with UG boots this past season.

Also these two businesses focused primarily on teenagers, who relative to the average shopper are less affected by declines in 401-K values, by dips in real estate values and by fear of unemployment.

Indeed, the fall of gas prices is a bigger factor for this demographic and these teenagers are driven heavily by must-have fashion items and brands and are less likely to compromise their look to tough times.

Finally our strong balance sheet will allow us to merchandise to levels and manage our assortment in ways that maximize our business potential.

Also, we like our longer-term prospects.

As we said earlier, we believe we emerge stronger at the other end of this recession for several reasons.

Landlords are much more flexible in negotiate rents and the time is perfect, given the number of existing leases we get to negotiate in the near term.

Likewise, both the economic environment and a slower pace of store openings will allow us to reduce our average construction costs significantly.

Finally we expect fallout among competition in these tough times to allow us to gain share.

It is also worth reminding you of the strength and experience of our executive team.

This is not new territory for us, our management of inventories over the past 12 months is a testament to our leadership group's savvy for operating in challenging times.

And now, we will be happy to take your questions.

(Operator Instructions).

We will take our first question from Jeff Klinefelter of Piper Jaffray.

Yes.

Thanks guys for all of the great information today, and congratulations on a strong start to the year.

A couple of questions on mall vacancies, first Bob if you can address that.

We have seen the data coming out and accelerating every quarter.

Given your significant scale nationally, across a couple of your chains, can you give us a little update on, on how you see this impacting traffic in some of those, maybe more B&C type volume malls.

Can you give us an update on your options with respect to vacancy clauses in some of those leases and your expectations going forward?

Yeah, Jeff.

We are keeping a very careful eye on that, and about a month ago, we launched a program very focused on exactly this situation.

We are auditing all of our mall vacancy, both anchors and specialty stores and matching it up to what the leases say, which is a big task.

You have to go through every lease.

Every lease is often different but we are finding great opportunity there.

So for example just yesterday we uncovered a mall where the Steve and Barrys closed, that dropped them below the threshold for both Journeys and Hat World and they go from what their lease rent is down to percentage rent to either 6 or 7% rent which is a major reduction for them.

And the auditor due in this week or next week, so over the next few weeks we are going to get a lot of visibility on what has changed out there, and obviously that's something we will have to keep updating as people like Macy's continue to close anchors.

Anchors is where the real opportunity is.

So we are very alert to it.

And we do have lease language in many situations that gives us relief before the mall becomes a complete disaster.

And Bob, what generally speaking, is that vacancy rate or does it vary by mall.

Oh, it varies by mall and it can happen in a hurry.

What the landlord worries about it a domino effect because once they start losing tenants it can trigger the tenancy language and then store after store can start closing, in the mall that I just cited that seems to be the situation.

So flipping that around though, and say you get lower rent, how much concern is there that these higher vacancy rates are just simply going to drag down traffic and that may not recover for a long time.

So, do you run into the danger of having issues with potential impairment charges against your own stores because of lower volumes into the foreseeable future.

There's a possibility of impairment but I think the benefit outweighs that.

To use this one mall as an example, I was talking to someone who lived near it and it has declined to the point where every one who lives near that mall now goes to another mall where, in fact, we have a Hat World and a Journeys store.

So, it would presumably drive our comps.

I'm not sure the closing of a mall means that people spend less money, I think they spend it in the malls that stay open and stay healthy.

Since we are just about everywhere with our main chains, we would see it in comp on the other side.

So if you were to tell me that 50 malls in this country were to close tomorrow, we might have some impairments but net-net that would probably be a positive for us because the sales would swing to other stores.

Okay.

One other thing on malls, the hour reductions we are hearing about, are you seeing that as well or hearing it from your developers.

I saw your note on that, Jeff.

We have checked it out.

Westfield has made the move they made.

I think we have 55 malls or something like that.

Simon made some changes in the northeast but they put a release out, I assume you saw it, that said it was not connected to the economy.

It was somehow an effort to align the northeast hours with hours elsewhere in the Simon portfolio.

We haven't heard much beyond that yet.

But it, there's a logic to it.

And we would be with a beneficiary as you noted in your note.

But we really don't see it as being across the whole mall universe yet.

Okay.

Lastly, on the comps, for both Journeys and Hat World, but really Journeys, it seems you mentioned February up 15%; correct.

No.

Journeys in February was up--

seven or eight.

seven or eight.

Kids was up 15.

Okay.

The adult chain up seven or eight, kids up 15.

Hat World was also up strong.

What-- can you just shed some light--

Journeys, the store Journeys was up nine.

The group was up 10.

Okay.

So, but quite strong results, obviously for the month.

And can you shed some light on what it is about this volatility during the month that still has you so cautious as you look forward?

Because that would seem to be such an acceleration of business that it would have to be related to a very strong product trend or a very strong conversion.

Why are you concerned about that abruptly changing.

Well, there might be a little bit of what we have done to drive that because we really focused on inventories in the fourth quarter when we were so soft mid December, we said lets-- we're presuming it is going to get better but we can't count on it.

We got aggressive with inventories and we ended low.

So, we are getting some nice new receipts in February which are helping drive things, but remember we went through this situation, Jeff, where in the middle of January, we were on a roll, had terrific comps in the first two weeks, and then business fell off a cliff.

And we couldn't even guide the quarter with three weeks to go, correctly.

And so that just leaves us very cautious about how choppy it is out there.

I've had a glimpse at what people released this morning at retail, and it looks like February was a stronger month than January for a lot of other people, so part of it was presumably traffic driven.

It just doesn't-- it isn't enough for us to turn around and say here is a trend that we can rely on for this fiscal year, especially given all of the negative news out there.

Was the cadence of the month weakening toward the back half versus the front half of February.

It was a little choppy but I'm not sure it is front or back.

It was almost day-to-day or week to week.

Okay.

Okay.

Thank you.

You bet.

(Operator Instructions).

We will go now to Scott Krasik of CL King.

Thanks.

Bob, Skate was really driving Journeys performance last year.

You had the benefit of [Pacsun] exiting.

As we anniversary that, just from an assortment perspective, how do you see athletic playing out and Skate in particular, and then are there any other trends this should pick up some of that growth in fiscal '10.

Well, Skate was very strong for Journeys and we expect it to continue to be strong.

There was some tail wind presumably from Pacsun's exit.

As you know, we have never been able to quantify that.

But we just think that Skate is a very strong category for our teen customer and expect to continue to do that.

Our vendors are all being-- continue to be innovative.

So there's new product out there that is compelling and gives the teen a reason to buy.

It will still be a big part of our business.

We should continue to benefit from Pacsun.

The best I can remember, Pacsun announced the exit from Skate in April, really didn't execute the exit until some time in the summer.

So for roughly the first half of the year, up to back to school we should continue to have some help presuming that we are getting-- picking up some of that business.

In terms of other trends, we don't see anything that is dramatically changing the mix at Journeys.

So the team is alert to what's new, and they're testing, but you shouldn't expect any big dramatic turns in terms of what the Journeys' assortment look like.

How has the Dock Martin tests been and is that something to expand.

We are not going to comment on specific brands..

Okay.

And then maybe, Hat World you talked about the NFL sideline hat.

Other than the fashion brands, (inaudible) seem to be continuing to do pretty well.

Where do you see major league baseball and can you start to comp positively there on a sustainable basis do you think.

Football was a big part of the fourth quarter.

It is every year, naturally, and it had an off year.

So, that created a bit of a drag.

The football business is very seasonal.

So we are done, and we are back into a normalized world where baseball takes over and baseball has been very strong as well as the action brands have been and as you saw they had a very strong February.

And so we think to your question, it's already taken hold.

Hat World has good momentum and major league baseball just continues to be the hat of choice for people out there.

Not just for fans, but from a fashion standpoint it is the item.

It is taken a lot away from our NCA college business.

We would love college to be stronger because of the margins but we just can't entice the customer back into the college business because baseball is the name of the game right now.

Okay.

Then just lastly, in your scenario B on the guidance, how are you modeling Johnston & Murphy, will that be a profitable business in that situation?

How big a delta year-over-year do you expect the operating income to go there.

It is going with a tough year for Johnston & Murphy in both scenarios relative to where they had been.

The comp assumptions I'm not sure, you didn't give those.

Just assume it is a very tough year at Johnston & Murphy just because the-- until the banking sector straightens up, a lot of our customers aren't in the mood to buy.

So we are assuming a-- a softer Johnston & Murphy for the year.

But a profitable?

Yes, profitable, definitely profitable.

Okay.

Thanks, guys.

We will take our next question from Mitch Kummetz of Robert W.

Baird.

Thank you.

A few questions, outlook for 2010, what does that assume in terms of comps by concept, can you give us a little bit of help there?

Yeah.

In terms of the baseline.

I will give you the baseline,

Okay.

And again, as we said in there for the full year we are down about 1%.

If you look at the different concepts, if you look at-- I am just going to do it by group of concepts.

Journeys would be essentially flat for the year, okay?

And Hat World would be down slightly.

Okay.

No, it should be-- and Hat World would be up slightly.

My mistake.

In the upper case, Underground Station would be low negative for the full year, in the upper case, and Johnston & Murphy would be low negative.

Okay.

That's helpful.

And then, Jim, you and Bob both made the comment that the buying team will be purchasing according to scenario one in term of your outlook.

At what point in the year does a decision have to be made in terms of how they're actually buying.

If all of a sudden it would appear that we are not playing out to scenario one, how far into the year, given that I guess the biggest difference in terms of your full-year outlook is scenario one versus two in terms of the back half.

At what point does the decision have to be made that they're no longer buying to scenario one, buying to some other scenario.

Realistically, the big delta here is what is going to happen at Christmas.

So the-- the team is going to have to have those orders placed largely by early of midsummer.

So that's why realistically as we think about a down side scenario, we're looking at it knowing that we're going to have to adjust our assortments a little bit.

With that said, Journeys had bought this year for a pretty aggressive fourth quarter and part of the advantage of our size is they get to pull on all sorts of different levers to make adjustments to their inventory which is what they did this year.

They cancel where they can, they push out to January and February stuff that is isn't fully seasonal and then they take some very targeted mark downs.

So the result of this year really is a great demonstration of how well Journeys can adjust when late in the game, and in this case, it was really going into holiday, Thanksgiving and early December, we realized we may not hit the sales numbers that we were hoping for.

And even at that point they made a very adequate adjustment and the results speak for themselves.

So, we are pretty confident that even if we buy for a presumed up tick in consumer spend in the fourth quarter, the adjustments that need to be made, if that doesn't pan out, we can make.

The other businesses, as you know have a lot more carry-over merchandise .

And for them their options are to either get more promotional to move stuff but in many cases to let inventories grow a little bit and handle it on a receipt basis into the spring which is really what, for example, Johnston & Murphy is

Okay.

And then on the rents, Jim, I think you made the comment, correct me if I'm wrong that rent expense was up 4% in Q4.

First of all, is that-- was that accurate and what would be the basis point impact on SG&A from that increase?

That was right.

I did say 4%.

What was the basis point, I don't have that in front of me.

But it was by far the most significant driver of the SG&A increase.

Okay.

How are you guys-- Bob, you made the comment about the silver lining to this environment is that you would expect occupancy rates to go down.

Is some of that baked into your 2010 guidance or at what point would you expect better deals with your landlords to actually have a real impact on your P&L from lower occupancy?

I will tell you what.

Let me talk about that for a while, for a few minutes.

If you look at our SG&A over the last few year, the major driver, if you look at SG&A increasing as a percentage of sales, the major driver has been rent, no question about it.

And that has been caused by two factors, one is we have been opening a lot of stores, and we've had a lot of renewals.

And going forward, we have-- actually we already-- we saw a little bit in the fourth quarter.

I mean that 4% was a lot, but we had been seeing increases greater than that and so there's a real opportunity going forward to see in moderation in that deleveraging of rent for two factors: one is we have slowed down store growth, which is important, plus we are already seeing deals.

We are seeing it on new stores and we're seeing it on renewals.

So, we do expect to see some rent reductions going forward.

If for no other reason, the slow down of our new store growth.

And I think that's going to have an impact on SG&A, no question about it.

But in term of looking at comp stores, the opportunity is to, in many cases to go back to the landlord at expiration or renewal and again, 45% of our stores in the next three years are in this situation, and say look we can't do business on this basis anymore, we need a better deal.

And especially for Underground, the example we used the last ten stores we have turned over have seen a 30% reduction, that's probably at the high end because they're all down in the B&C malls where our leverage is the greatest.

But, we think we can really reverse that impact.

It just won't happen all at once because a lot of it happens over time when you get the opportunity.

By the way I said that the actually, I said in my script that the rent was up, the square footage growth was 4%, but actually the rent was up about the same amount.

Okay.

So it is about equivalent.

All right.

And then, last question,.

Now is almost 90 basis points.

Oh it was.

Thanks.

That's helpful.

And then on the Journeys ASPs in the quarter up 1%.

You guys called out UG as being a driver of that.

Can you say how much of an impact UG had on that ASP increase.

I would assume ASPs wouldn't have been up if not for the UG business.

Can you talk a little bit, just about mix in general the impact on ASPs in Journeys because I'm guessing that the promotional environment in general for holiday was more difficult.

And Scott asked the question about Dock Martins and I've heard that skate price point versus come up.

Can you talk about mix in general and the impact you expect that to have on Journeys and specifically what the impact UG was in Q4?

I don't have the specific amount.

Remember we sold a lot of UGs last year, we sold a lot of UGs this year.

Our merchants will point to a lot of other things going on in the mix in terms of ASP.

Great value added occurring in the Skate category both in terms of treatment and in technology that is justifying higher price points.

Obviously, Crocks has become a lower-- a smaller piece of our business, and that was sitting at a lower price point.

But our guidance just sends a general trend of the teenager shifting their mix preference away from some of the lowest price categories and so they will point to a lot of things other than UG that gives them reasonable confidence that this is a trend.

It isn't just UGs driven.

Okay.

Great.

Thanks and good luck.

And Mitch, one other thing.

On the comps on Johnston & Murphy, I said it was low single digits.

Really more like mid single digits on negative for Johnston.

Okay.

Thanks.

And we will go now to [Christopher Spenzia] at Susquehanna

Hi, guys, it is actually Tom Haggerty for Chris.

I just have one question.

You talked about the occupancy costs on SG&A, but if you moved to scenario B on your guidance, is there any other leverage you can pull on or are you just going to see kind of incremental deleverage on that line?

You are just going to see incremental deleverage.

It is too short of a time frame to do anything else.

It is just a reflection of sales and everything that all-- when you lose your sales, buying all of the bad things that follow behind that is what drives down the earnings.

So, it is really as simple as that.

Okay.

And we have talked before about our small stores and the number of people you need to have in a store, if sales come down you have one or two people in the store, so you really can't do much from a staffing standpoint other than reduce your number of hours.

A lot of flexibility.

That's why comps are so important.

And you normally leverage on the three to four comp.

It is --

On the occupancy benefits come along.

That's what we have been estimating three to four.

Hopefully with the rent coming down maybe we can begin to reduce that some, going forward, but right now that's the number we have been using.

Thanks and good luck, guys.

Thanks.

We will will take our next question from Jill Caruthers from Johnson Rice

Good morning.

Could you talk about the possibility-- I know Hat World is such is a large player and surpasses its closest competitor, but I know you mentioned a small acquisition this past quarter it seems it is a little different arena, just if you can talk about what's out there and what other opportunities you see for growth.

Within Hat World are you talking, Jill?

Yes, in Hat World.

There are still regional players out there in the hat space that we would have our eye on as a way of growing our business, but to be honest, every year that ticks by makes those acquisitions less likely because at this point we have been pursuing a scenario of essentially going into their malls, either going on top of them or replacing them.

So we have more and more been making headway on an organic basis.

From Hat World's standpoint I would set your expectations more for continued store growth as the way that we continue to grow the core business at Hat World rather than any really bigger acquisitions.

And the acquisition you made in the quarter, is that based-- I know you quantified as a dealer of selling products to high school teens.

Is that a new format or new vehicle of growth for Hat World.

It is, and it is an area that we like.

We think that the team dealer business is consolidating, and so this is our first step into it.

We like the company, and the people had a terrific-- we have known them for a long time.

The Hat World guys have, and so we see it as another good avenue of growth that's the licensed merchandise business which is what Hat World's in and so it's very tangential to what they already do..

And we are very excited about the growth prospects.

Okay.

And then just last question, in the fourth quarter, I know gift cards typically play a pretty strong part at Journeys and some of the other divisions, how did at that trend versus last year?

Jill, I don't know.

I don't have the gift card information handy here.

Jim, do you have?

No, I don't.

Sorry.

We can follow up with you on that.

All right.

Thank you.

We will take our next question from Ken [Sunhauser] of Sterne Agee.

thanks for taking the questions.

Just a couple of quick questions for you guys Number one: Jim, as far as inventory goes and subsequent year, I think you said that you believed it to be a generator of cash.

I was just wondering if you could kind of give us an idea of how far down on the per square foot basis we can potentially see inventory go under the base line scenario and secondly on the bare case.

We didn't say that inventory was going to be a generator of cash.

Inventory will be up, okay.

And so it probably be up, I can't answer your question how far we can take it down.

We have got inventories going up a small amount.

Let me just calculate it here.

We got inventories going up anywhere from 2 to 3% probably at year end, from where they were this year.

Roughly in line, maybe a little bit better than the sales growth.

But, generally, we are not talking about slashing inventories or anything like that.

I mean we are adjusting to be very controlled in our inventories and try not to let inventories grow any faster than-- than sales and hopefully we can grow sales a little bit faster than inventories.

So the cash flow we're generating for next year, basically is going to come from earnings.

There will be nothing from a depreciation and CapEx -- will be equal, so there'll be no drain there.

And hopefully from some of the other line items in the balance sheet, we can pick up cash flow from the work capital standpoint, but it is not going to come from slashing inventories.

Okay.

Just to go back to, renegotiations.

I know it is probably very difficult to estimate, but in the-- what kind of concessions do you guys think you will get, on the rent renegotiations next year, in aggregate and then secondly by A versus B versus C if you can give just a range of the order of magnitude you expect to see for the concessions.

We haven't broken it out that way.

It is a deal by deal basis, we're attacking every opportunity we see, individually, knowing what the mall situation is, and what our economics are, but we haven't really broken it out by (inaudible) In general we are not expecting to get decreases in As.

The A malls are still generally running with full occupancy.

Hopefully, we can decelerate what gains they have been getting.

So it really is going to be a B and C mall story for us in terms of seeing those improvements.

And in those stores would you say like 10% rent reductions is aggressive or could it be something greater than that.

10%-- it depends on the mall and the concept.

10 would be good.

Obviously we are much, we are seeking much bigger gains than that, and Underground Station and a few of our other concepts but a store by store situation.

Okay.

And then just one other question, in the Johnston & Murphy that did have the women's products, how is productivity year-over-year versus the stores without the women's products, was it incrementally better?

It is, it would be, it is hard to answer, and I will tell you that it would l be dangerous to answer.

The reason is a number of the stores that is have gotten the women's products are more or less flag ship type stores for example our Madison Avenue stores and these stores relative to the rest of the chain got clobbered by the meltdown in the financial markets.

So there's too much other noise going on for that analysis, I think to be meaningful.

Okay.

Thanks for taking the questions.

Sure.

And ladies and gentlemen, that does conclude today's question-and-answer session.

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

Dennis for additional or closing remarks.

Just simply thanks for taking the time to be with us today and we thank you all for your interest in Genesco.

So have a good rest of the day.

This does conclude today's conference.

Thank you for joining us today and hope you have a lovely day.