Genesco Inc (GCO) 2010 Q1 法說會逐字稿

Good day, everyone.

Welcome to the Genesco first quarter fiscal year 2010 release conference call.

Just a reminder today's call is being recorded.

At this time for opening remarks and introductions I'd 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 first quarter fiscal 2010 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 that reflect our expectations as of today but actual results could be materially different.

We refer you to our earnings release and to our recent SEC filings including the 10-K for fiscal year 2009 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.

First, let me briefly review our first quarter results.

We exceeded our internal expectations for both sales and operating earnings for the quarter.

Net sales increased 4% to $370 million.

Total Company same-store sales increased 2%.

We earned $0.17 per share this year before the items listed in Exhibit B of this mornings press release, this was even with EPS of $0.17 last year also adjusted as outlined in the press release.

We continue to manage inventories effectively.

At quarter end, year-over-year inventories were up about 5% while inventories per square foot were up only 2%.

We were pleased with the solid performance of our two major businesses, Journeys Group and Hat World, from both a comp and a profitability perspective.

Comps increased 3% at Journeys Group and 7% at Hat World and operating earnings increased 4% at Journeys Group and 75% at Hat World.

Sales at our licensed brands business were also strong, up 15%; however Johnson & Murphy and Underground Station remained weak for the quarter.

On our last call, we cited the resilience of teen spending along with the controlled distribution of key brands by our vendors and reasons for our strength in Journeys and Hat World.

We also suspect that we may be benefiting from some financially weaker competitors being unable to keep their inventories as fresh as they would like or even leaving the marketplace altogether.

That said, our overall sales remain choppy.

As we reported on our last call, February was strong.

March comps were weaker as expected reflecting the Easter offset.

April comps were up strongly in the first two weeks due in part to Easter but slowed down after that and have not yet regained positive momentum.

Comps for May through Memorial Day, May 25, were minus 9%; however, May comparisons are especially challenging since comps were up 5% for the month last year, we think due partly to the first wave of stimulus checks that arrived in late April of 2008.

Just as we believe that February's plus 7% comp was stronger than the quarter would ultimately turn out, these early May results are worse than we expect for the full second quarter.

What is particularly notable about our first quarter results is the strength of our gross margins which were up 30 basis points year-over-year.

Given the limited distribution of our product brands whether owned as with Johnston & Murphy or third party as with Journeys and Hat World we remain somewhat insulated from the price competition that has intensified in the mall.

It is relatively more difficult to wander down a mall and find a product that is comparable to what we offer, especially for Journeys and Hat World.

As a result, we rarely need to succumb to competitive pricing pressure and we rarely use aggressive promotions to drive traffic.

This has proven to be a solid strategy.

With regard to guidance, on our last conference call, we outlined two scenarios for the year, a baseline of $1.70 to $1.80 and a downside of $1.20 to $1.30.

Given our solid first quarter performance with earnings well in excess of the baseline case, we are now a little more comfortable with that $1.70 to $1.80 baseline case.

The weakness of May sales so far surely has our attention but we would remind you that our original plan for the year included minus 3% comps for the second quarter.

We have adjusted that expectation down somewhat based on quarter to date sales, but with the better than expected earnings in the first quarter and the back end weighting of sales and earnings for the year, we believe our baseline guidance is within reach for fiscal 2010 barring any serious worsening of the economic climate.

Accordingly we continue to target a positive comp in the fourth quarter by far our most important quarter, and we are buying with that target in mind.

We also remind you that our previous two fourth quarters were both down 5% so we believe the baseline we are going against in the fourth quarter sets us up for an easier comparison.

But it goes without saying that there is a general lack of visibility with respect to the second half and the economic climate will ultimately have a great deal to do with where we end up for the year.

Before we talk about our individual businesses first quarter results, an update on the real estate initiatives we outlined for this year on our last conference call.

We have said that we are being selective in signing new leases this year and that we intend to use the opportunity provided by market conditions to make good deals on new stores, renewals and kick out renegotiations.

Looking at the 181 leases we have renewed or renegotiated for the last year, this year, and next year, we have achieved a mid single digit reduction in rent.

We are also continuing to look for attractive opportunities for new stores and we will not hesitate to open new stores when attractive deals are available for good locations.

Indeed, we are suddenly getting access to several attractive malls in which we had previously not been able to make an acceptable deal.

We are also not hesitating to close underperforming stores when we cannot negotiate favorable renewals.

In the past 12 months we have closed 50 stores where the trailing 12 month four wall operating loss was approximately $1.3 million.

We have also called out our financial condition, as a strong positive factor in this environment.

As we announced last month, we were able to strengthen our already solid balance sheet by inducing the conversion of $56.4 million of convertible notes into common stock, leaving us with only $29.8 million in face value of convertible notes outstanding.

Overall, we were pleased with the quarter.

Our ability to deliver these relatively solid results despite the current environment is a tribute to our talented and experienced Management team.

Now let me review our individual businesses beginning with Journeys which had a solid first quarter.

The overall comp increase for the Journeys Group was positive 3% for the quarter compared to a flat comp for the same period last year.

Through May 25, comps for the month in the Journeys group were minus 12% against plus 8% in last years comparable period, reflecting the general softening and the challenging May comparison I mentioned earlier.

Looking at components of the Journeys Group in the first quarter, in the Journeys stores alone, first quarter comps were up 3% compared to a 1% increase last year in the first quarter.

Footwear unit comps decreased 1.3% and average selling price increased 5.1%.

Higher ASPs are significant to Journeys business and it is encouraging to see this trend continue.

Both the solid comp results and the increase in ASPs were fueled by women's fashion, canvas, and core skate.

Journeys Direct business was another pocket of strength, up 5% for the quarter.

We believe the Journeys group heads into Summer and back-to-school with a solid overall assortment based on continued strength in several categories especially skate and vulcanized fashion canvas.

While vendors have done a good job staying fresh with the current trends and updates we are not seeing any breakthrough ideas in the marketplace.

We opened four new Journeys stores during the first quarter and closed two stores.

We remain on track to open 12 stores this fiscal year and to end the year with a total of 818 stores.

In Journeys Kidz, comps rose 5% in the quarter versus an 8% decrease last quarter which was still being hurt by the Heely's comparison.

In the first quarter footwear unit comps increased 1.8% and ASPs rose 4.3%.

The same product trends driving the Journeys stores are at work at Kidz.

We opened four new Journeys Kidz stores during the quarter and we expect to have 151 stores in operation by the end of the fiscal year.

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

We have continued to increase our selection of athletic products.

Athletic products represented 28% of the total for the quarter compared to 17% last year.

In addition as we noted last quarter, we added the larger selection of higher priced merchandise that was well received.

As a result, footwear ASPs on a comp basis were up 12%.

We currently have 55 Shi stores in operation and plan to open three additional Shi stores in fiscal 2010 to end the year with 58 stores.

Turning now to Hat World, which had a stellar quarter.

Comps increased 7% during the quarter versus a 4% increase for the same period last year.

Through May 25, Hat World's comps for the month were plus 1% versus plus 3% for the comparable period last year.

The strong sales increase in the first quarter was better than we had expected especially given that the Super Bowl pairing this year was fairly neutral for sales.

We think Hat World strength may be partly due to credit issues and further store rationalization in the industry with fall out particularly in the mom and pop retail category.

We suspect the relatively inexpensive price of a ball cap is also in our favor.

From a product standpoint, Major League Baseball continues to be Hat World's largest category, both core and fashion MOB performed well and our branded business continued to be strong ranging from action brands to marshall arts to fashion labels.

Overall, Hat World's operating margin expanded 240 basis points during the quarter driven by both improved gross margin and the leveraging of expenses.

We opened a total of five new Hat World stores and closed 10 in the first quarter.

It is worth noting that for the first time under Genesco ownership, Hat World closed more stores in a quarter than we opened.

This is a measure of our resolve not to keep stores open just to have a larger store count.

The economics are not working and the landlord is inflexible, we will move on.

We expect to open an additional 35 stores for the balance of the fiscal year and to close 21, to end with 894 stores for Hat World.

In addition, we now have embroidery in 385 stores.

This category is up 19% year-over-year and blank hats which are driven primarily by embroidery are up 7%.

Both are high gross margin businesses.

Turning to Underground Station Group.

Comps decreased 5% during the first quarter compared to positive 9% last year.

Through May 25, comps for the month were down 13% versus positive 9% last year.

Footwear unit comps for the first quarter were roughly flat and ASPs declined 2.7%.

It is worth noting that despite negative comps, Underground Station reduced its loss in the quarter by about $500,000 versus last year.

Women's and kids footwear made up about 50% of Underground Stations footwear unit sales and about 45% of its footwear dollar sales in the first quarter this year roughly the same as last year.

As we said on our last conference call given the persistent challenges in the urban market we continue to look at the long term prospects for this business and we continue to shorten lease terms where we can to give us maximum strategic flexibility.

Over the past 12 months we have closed 13 Underground Station stores taking the total store count down to 177.

We will not open any Underground Station stores this year and expect that our store count for the Underground Station group will be down to 169 stores by year-end.

Johnston & Murphy, like all high end retailers continues to be negatively impacted by the tough economic climate.

first quarter sales for the group were approximately $39 million.

Comp sales in Johnston & Murphy stores declined 18% compared to a 2% decline last year.

We remain cautious about this business for the near term until there is visibility of a more favorable external environment.

Through May 25, comps for the month are minus 20% compared with flat comps last year.

Johnston & Murphy's direct sales did a little better in the quarter than the stores down 10% compared to last year.

Our merchants are enthusiastic about the launch of several footwear collections for Fall with featuring new comfort technologies and more accessible price points as classic products priced above $200 have been hit the hardest.

Non-footwear sales for Johnston & Murphy stores continue to be an important piece of the business accounting for 34% of sales during the quarter this year versus 32% last year.

We have increased the number of stores carrying the new women's products from 28 to 35 locations, even though it is a tough environment to be offering a new high end product line we are pleased with the initial feedback we are receiving in the stores carrying women's products.

Johnston & Murphy's wholesale business is also soft.

Sales for the quarter were off 20% compared to last year; however we believe that we continue to gain share in the wholesale channel.

According to NPD's retail tracking service for men's footwear priced over $100, Johnston & Murphy continues to be the number one premium dress, dress casual footwear brand in the department store and national chain channel.

Inventories remain high but they are concentrated in ongoing styles with limited markdown risks.

We expect to be back in line by the end of the third quarter based on slower receipts.

Johnston & Murphy expects to open eight new stores and close three stores this year and expects to end the fiscal year with 162 stores in operation.

Finally, turning to license brands, sales increased 15% to $29 million on top of a 5% increase in the same period last year.

Docker's brand sales were up 14% during the quarter to $27 million versus $24 million last year, driven by seasonal product introductions and solid performance across all channels.

As you know, however, department stores, the big retail chains and the national shoe chains all had a tough first quarter and are providing a muted outlook so we do not expect that Dockers growth will continue into this quarter.

Dockers operating earnings for the quarter were only up slightly due to gross margin pressure as we remain vigilant on clearing slow moving inventory.

According to NPDs retail tracking service, Dockers continues to gain market share over the 12 month period ended in March.

The brand has risen to the number two position in the men's fashion and footwear category in our traditional channels of distribution.

Dockers has maintained its position as the market leader for dress casual footwear for the same period.

Dockers continued strong performance in this economic environment is quite outstanding and once again highlights the strength of the management team.

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

Thank you, Bob.

As usual, I'll run through the P&L for the quarter.

Sales increased 4% to $370 million compared to $357 million last year.

Total comp store sales increased 2%.

Journeys Group sales increased 5% to $177 million and comps were up 3%.

Hat World sales rose 13% to $99 million.

Comp sales increased 7%.

Underground Station sales were down 8% to $27 million reflecting a 5% comp decline and a 7% reduction in store count to 177 stores.

Johnston & Murphy group sales were down 16% to $39 million.

Johnston & Murphy wholesale sales decreased 20%.

Comp sales for the Johnston & Murphy shops and factory stores were down 18%.

License brand sales increased 15% to $29 million.

Now turning to gross margin.

Total gross margin for Genesco was up 30 basis points to 51.1% compared to 50.8% last year.

Gross margin for the Journeys Group was up by over 100 basis points due primarily to higher initial mark downs.

License brands gross margin declined due to increased product costs which we believe will reverse later in the year as well as less margin contribution on close out sales.

Hat World's gross margin was up due in part to benefits from some price increases which will eventually disappear as we work our way through certain on hand inventory.

Gross margin for Johnston & Murphy was lower due primarily to higher markdowns to keep inventory fresh.

Underground Stations gross margin was up about 20 basis points due to a strong initial markdown.

Now turning to SG&A.

Total SG&A as a percentage of sales was 49% compared to a 50.4% last year.

Last year's SG&A includes $7.2 million or 200 basis points of merger related litigation expense.

Excluding the merger related litigation expense, this increase in SG&A as a percent of sales was due to increased bonus accruals from better than planned performance in the quarter.

Hat World and Underground Station both had very good leverage in the quarter.

Journeys was not able to leverage due in part to increased bonus accruals.

Johnston & Murphy was not able to leverage due to their negative comps and license brand saw some negative leverage due to higher bonus accruals and increased advertising expense.

The restructuring and other line item in the P&L reflects $5 million in retail store fixed asset impairments, lease terminations, and other legal matters.

We have talked before about how challenging it is to meet expectations when opening stores in an economic downturn.

Roughly 70% of the impairments this quarter are stores that are less than three years old.

New stores have a more difficult time hitting their pro formas in early years when business is slow.

This is one of the reasons we have significantly cut back in new store growth until we are confident the economy has bottomed out and we are on the way to economic recovery.

Last year's restructuring and other amount was a gain of $202 million which included impairments and lease termination costs of $2.2 million, offsetting the $204 million gain for the litigation settlement.

Adjusting for the restructuring amounts and income statement in both years, we reported operating income of $7.9 million or 2.1% of sales in the first quarter this year compared with $8.6 million or 2.4% of sales last year.

All of our business units except for Johnston & Murphy showed an increase in operating income for the quarter.

Journeys, Hat World and Underground Station all showed flat or improved operating income margins which was great to see in this economic environment.

Journeys operating income increased to $5.5 million from $5.3 million last year or a 4% increase in earnings.

Operating margin was 3.1% which was flat with last year.

Hat World's operating income was $6.5 million or 6.6% of sales compared to $3.7 million or 4.2% last year.

That was a strong 75% increase to earnings.

Underground Station's operating loss was $500,000 or negative 1.7% of sales compared with a loss of $1 million or negative 3.4% of sales last year.

Johnston & Murphy's operating income was $200,000 or 0.4 of a percent of sales compared with $3.7 million or 7.9% last year.

License brands operating income was $3.6 million, slightly above last year.

Operating income was 12.7% of sales compared with 14.4% last year.

As you know, in the quarter, we were able to induce the conversion of about 65% of our convertible notes to common stock.

We offered 255,000 incremental shares to our convertible noteholders to induce this conversion.

This transaction was very favorable to the balance sheet in that $56.4 million of debt was converted into common equity.

The details of the P&L impact of the exchange are very complicated.

I would be glad to go through the details if anybody is interested after the call but for now, the pre-tax charge from this transaction was $5.1 million in the quarter.

Most of the pre-tax charge results from the value of the inducement shares.

One last point on the restructuring charge and the convertible exchange related charges.

Only about $1.8 million is cash and the balance of about $8.3 million is a non-cash charge.

Net interest expense for the quarter was $3.1 million compared with $2.9 million last year.

Last year in the first quarter we received cash of $175 million in connection with the Finish Line merger litigation settlement.

That obviously had a favorable impact on last year's interest expense.

In this quarter's interest expense, there is an additional $809,000 that relates to the new accounting standard for convertible debt under APB14-1.

Last year's first quarter interest expense was also restated by $742,000 as APB14-1 requires a restatement of the previous year.

The added interest amount in both years are non-cash expenses.

The pre-tax loss for the first quarter was $5.3 million compared with earnings last year of $200 million.

Excluding the merger related settlement last year, impairments charge in both years, the incremental interest from the new accounting requirement and the cost of the convertible exchange we earned $5.6 million pre-tax this year and $6.4 million last year.

Refer to Schedule B in this morning's press release for a more detailed break down.

Earnings from continuing operations, again excluding all of the items I just mentioned which are listed in Schedule B of our press release were $3.5 million or $0.17 per share compared with $3.8 million or $0.17 per share last year.

Now turning to the balance sheet.

We are very pleased with our balance sheet at the end of the quarter.

Our bank debt was $23 million which is down from the year-end amount of $32 million.

Our unused borrowing availability under a $200 million of committed lines of credit was about $164 million at quarter end including outstanding letters of credit.

Inventory drove 5% from last years levels.

We feel very good about these levels as inventory is below plan at quarter end.

The balance sheet now reflects long term debt of $51.6 million versus $79 million last year.

In both years, the convertible notes on the balance sheet have been adjusted to reflect APB14-1 for convertible notes.

The amount of the convertible notes on the balance sheet this year is $28 million and last year the amount was $79 million.

The face amount of these convertible notes is $29.8 million this year and it was $86.2 million last year.

The reduction is of course due to the exchange rate.

At quarter end we had over $500 million in shareholders equity and approximately $52 million in outstanding debt.

For the quarter, capital expenditures were $11 million and depreciation was $12.1 million.

In the first quarter we opened 17 stores and closed 15.

Last year, in quarter one we opened 32 stores and closed 8.

We ended the quarter with 2236 stores compared with 2199 stores last year.

This represented a net new store increase of 37 stores or 1.7% year-over-year increase while total square footage increased 3.1% to 6.2 million square feet.

We expect capital expenditures for fiscal 2010 to be in the $49 million range, assuming that we actually open the 73 new stores in the forecast.

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

We also plan to close 55 stores this year.

The opening and closing plans include opening up to 12 Journeys stores and closing 10.

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

We expect to open up to 40 Hat World stores which includes up to 15 new stores in Canada where our performance has been outstanding and we expect to close 31 Hat World stores.

We expect to close 11 Underground Station stores.

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

As we discussed we are taking a 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.

We will not open stores at a predetermined number if we don't feel the location and the rent deal are outstanding.

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

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, 894 Hat World stores including 65 stores in Canada, 169 Underground Station stores, 117 Johnston & Murphy shops and 45 Johnston & Murphy factory stores.

That is a total of 2252 stores or an increase of 1% for the year.

These plans will also increase retail square footage by about 1%.

Now to update you on guidance.

As Bob said, based on our better than expected first quarter results, we are now more comfortable with our previously announced baseline case of $1.70 to $1.80 for the fiscal year although we are still somewhat cautious because of the lack of a consistent sales trend, or of sufficient visibility for the second half, both for our business and the overall economy.

This range assumes quarterly comps of about negative 5 to negative 6% for the second quarter, essentially flat for the third quarter, up about 2% for the fourth quarter and flat to down slightly 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 to up slightly from last year.

Our slightly negative comps for the year, on slightly negative comps for the year will be tough to leverage expenses.

We expect for guidance purposes that the overall tax rate for the remaining quarters of the year will be 40.8% and a share count for EPS purposes will be about 23.5 million shares.

In the second quarter the share count could be lowered to 22 million shares due to the GAAP treatment of the shares underlying our convertible debt on the lower earnings in that quarter.

As we talked about on the last quarterly conference call the new accounting pronouncement for convertible notes will not impact full year EPS, although it could impact quarterly EPS depending on earnings levels.

Our annual EPS guidance does not include approximately 11 million to $13.5 million or $0.28 to $0.34 per share and is expected asset impairments, lease terminations and legal matters which is consistent with the past two years.

Once again, 85% of these items represent non-cash expenses.

This guidance also does not include the pre-tax charge of $5.1 million in the first quarter from the convertible exchange offer.

As you can see, we have taken down our comp guidance for the second quarter due in part to the early second quarter trends Bob had already talked about.

Additionally, based on information received a few weeks ago, we now know the back-to-school, sales tax holiday in a number of states will fall in the third quarter compared to the second quarter last year.

In short all those items will put added pressure on the second quarter which earlier we had not anticipated.

One call out that remains particularly important to us is our strong liquidity.

The balance sheet has been further strengthened in the first quarter with the exchange of $56.4 million of convertible notes into common equity.

Cash flow in the first quarter was better than anticipated and we remain on plan to fully repay our bank borrowings by year-end, again assuming the base scenario.

Now, we'll turn the call back to Bob for some closing comments.

Thanks, Jim.

Well, we were pleased with how well our business has held up overall in the quarter given economic conditions, same-store sales were positive, gross margins were up, expenses were nicely controlled, and as a result we matched last years EPS after adjustments.

This didn't happen by accident.

We have a senior team of Operators who know how to manage through times like these and indeed they delivered.

And our businesses are positioned in a way that we remain distinctive and compelling for our customers which has allowed us to avoid being drawn into the more severe price driven competition that others are experiencing.

At the same time, we're still experiencing an up and down sales pattern, currently down, that causes us to be cautious in our out lack and in our approach to managing the business in the near term.

Finally we are seeing benefits accrue from these difficult conditions that give us an opportunity to see the glass half full.

Industry rationalization, real estate flexibility on rents, lower remodeling requirements and increased accessibility to attractive malls on attractive terms all represents substantial benefits, many of which will extend into better times that are surely ahead.

With a strong balance sheet and a strong outlook on cash flow for this year, we feel we are well positioned to capitalize on all these opportunities and now we'll be happy to take your questions.

Thank you.

(Operator Instructions) We'll take our first question from Scott Krasik with CL King.

I missed the number.

What was the Journeys Group comp in May?

The May to date number on Journeys comp?

Hold on one second.

Down 12.

And then just going back, what was June and I know you said that the stimulus into May, what were the June and July '08 comps, did they get worse, better?

Well, we haven't released comps last year by month but what we said is May was the toughest month, and again, we hook that to the stimulus checks that went out and so we're having a challenging May as are a lot of people and we think that's related to the stimulus checks and we expect that the overall comp results for the quarter will be better than where we are month to date, not just for Journeys but for the whole chain.

The whole Company.

Okay, and then Q3 was your best comp for Journeys last year.

I know you had Heely's coming out at that point.

What else went into that positive comp?

In last years third quarter?

Right.

We had a strong back-to-school, so that's what drives it.

Last year we had a good assortment and it was sort of an across-the-board trend that wasn't any one product that popped it and it was a situation that made us pretty confident about holiday, and it ended up that last year back-to-school and holiday were two very different events.

Also, May was weak, remember that.

Right.

And then just in the third quarter of last year, did you have some early Ug sales that you didn't have in the year before?

Did that go into it?

Did you get some product early?

Scott, I don't know.

Okay, that's good and then just Hat World, never heard you really talk about the economics not making sense for a box, so what happened with the stores you were opening that didn't make sense?

Was it just you were just paying up in rent and how did that look going forward in terms of ultimately the number you can get to at Hat World?

Well as you know, it's not just Hat World, for all of our businesses, the rent situation just kept escalating and so we had to really stretch our pro forma so if you look at stores, again not just for Hat World that were open two years ago, we were at the end of a big run on rents being challenging and in a very robust consumer environment and if you turn those two things upside down and you particularly bring sales down and you don't hit your pro forma, as you know, the operating leverage in our small box stores is very high so you can go from a good result to a result that's disappointing with a swing in comps and as Jim also noted, in his remarks, new stores are more exposed to a difficult economic climate.

Customers tend not to be seeking out another venue to shop so the new stores tend to feel this economy more than the rest of our businesses, so those factors combined again not just for Hat World but for all of our businesses are making these two and three year old stores look less good than we had hoped and then the good news is that many of those have kick outs associated with them so we're in the process right now of taking a look at renegotiating rents and in the case of Hat World as we noted if we can't get a rent deal to come in line with the economics we'll shut the store.

Hat World's operating margins declined for several years after you acquired it.

Now, sort of a rational approach to occupancy, you think that can get back towards--?

Well first of all, the first year of operating margins on Hat World is a, really not accurate because it's 10 months and it leaves out the two most challenging months so it's artificially high and then it ran pretty well in low double digits for three years and it had a more challenging period and we've talked a lot about the inventory correction we had to make through the end of two years ago into last year.

Now, we've got the inventory mix right and then in a robust consumer environment a lot of other people had come into the business particularly in the mom and pop area, and now we think with times tougher, a lot of that capacity is going away to Hat World's benefit.

That's our thesis about why their business has gotten so much better, so they're on a good run right now and we've said before that we think it is a low double digit operating margin business and we continue to believe that's what it is and it's trending in that direction.

Okay, so 1300, 1500 doors whatever it is at a low double digit margin still seems realistic?

Yes, we're taking a look at the store count again about how big it can get, that's a whole other topic because the development community as you know has completely stalled, locked up, and so we're doing a process right now in all of our businesses looking at their growth plans over five years and taking into account as we do that the new development environment.

So the store count part of that we're going to have to revisit but certainly the operating margin is what we're confident about for Hat World.

Okay, I'll jump back in queue.

Thanks guys.

Moving on we'll hear from Pipe Jaffray's Jeff Klinefelter.

All right, thank you, congratulations on a strong start to the year.

Thanks, Jeff.

Wanted to talk to you a little bit about this lease renegotiation.

It sounds like you've conducted a number of them, initiated several others and I guess the 181 is what you will plan in the near term.

Just curious if you can give us a sense now with those renegotiations and maybe future, near term future plan.

What is it doing to the four wall model that down mid single digit reduction?

Is it changing your leverage point and occupancy and expenses, just give us a sense for how it's changing the profitability formula?

Well, we've always said that our operating leverage point is around 3 to 4% comp in order to do that, and that's one of the drivers of that has been the history of having to absorb rent increases when stores come up to renewal.

Now, we flip that on its head and so with the first 181 stores that we've signed over last year, this year, next year, the indication is that we can take rents backwards a little bit.

So what that will do is if we can keep that up and there's nothing in the 181 stores that look like they're in any way ringers so we think as long as the economics of retailing are soft and as long as occupancy rates are soft in the malls, we'll be able to continue on that trend and that will lower it.

We haven't calculated out how much lower it goes in terms of what the new leverage point would be.

Jim?

Roughly, I was just ballparking the other day that if we were able to renegotiate 45% of our leases at a 5% reduction, probably would have about a 30 basis points improvement in our operating.

Okay, so 30 basis point improvement to your op margins?

If we were able to--.

Sustain that over the three years.

Yes.

So 45% of our stores.

Okay, great.

That's helpful.

Thank you.

And also just on Journeys and looking forward into the second half, you had a very strong comp in Q1 or stronger than planned in Q1.

It's tough here so far in Q2.

We're hearing a lot of seasonal weakness right now in footwear for footwear retailers and it sounds like your strength in Q1 is really your core skate and canvas.

Can you give us a sense for the concentration of those core styles in Q1 versus Q2 and trying to get a sense for the importance of having strengthen skate and canvas in the back half versus what it would represent in Q2?

Yes, well canvas and skate are a big part of our business and it's been strong right now and we're anticipating just continued strength.

It's another category where there's a lot of mom and pop retailing going on and we think that's the retail sector that is probably most challenged by today's situation because they generally run more on a shoe string and we also saw your note, Jeff, on seasonal, this whole sandals business, we're not as high as your note said in terms of concentration historically in seasonal on a dollar basis.

If you walk into our stores, it looks like we are because with sandals in particularly, we carry a lot more of the product in the store.

We carry the full pair and we put a lot of hanging product out there as opposed to a single shoe, but it's not in the 15 to 20% range that you had estimated.

It's substantially less than that and that is a slowing down category and we anticipated and bought for it so we neither have the concentration in that category nor do we have the exposure.

Okay.

Just two quick last things.

Hat World comp expectations for the balance of the year, I'm sorry if I missed that if you said it earlier and then your inventory comfort being up 2% per square foot, how are you going to rationalize that to your current comp plans?

Thank you.

I'll do the inventory and let Jim talk to the comps.

The inventory up 2% we're very comfortable with it and as we noted in our remarks, the division who is up the most on a percentage basis in inventory by far is Johnston & Murphy and that is heavily concentrated in dress and dress casual shoes that are in line product, and so we don't have markdown exposure, we're working that inventory down with receipts and we think by the end of the third quarter that will be fine.

So the balance of the business, I can't give you the number but the balance of the business is even better than an up 2% per square foot which leaves us very comfortable with where we are.

And to answer your question on comps, for Hat World for the balance of the year, we're expecting the comps in Hat World to be down in the second quarter low single digits and then up slightly 1 to 2% in the back half.

Thank you.

(Operator Instructions) Next we'll hear from Chris Svezia from Susquehanna Financial.

Good morning everyone and nice job on the quarter.

Jim, just a quick question for you.

Just based upon if you could remind us again on your outlook here, can you maybe just walk through the comp expectations by each one of your formats for the year, coming to that sort of flat to down low single for the total Company if you could?

Sure.

You want it for the full year?

Right.

Okay.

For Journeys, essentially flat for the full year.

For Underground Station, down mid single digits.

Johnston & Murphy down mid to high single digits and Hat World slightly positive, low single digits, so for the total Company, slightly flat to down slightly.

Okay.

Another question I have here is just I guess can you remind us on the inventory piece, and Dennis you mentioned that you're -- you're obviously looking at Q4, you're thinking about positive comp here and you're building inventory for it, I guess given the volatility in the comp you're seeing by month, how quickly I guess can you kind of renegotiate some of those buys for the fourth quarter or for back-to-school either up or down without having too much inherent risk in the product or merchandise margins?

Can you just maybe talk about how quickly you can react there?

Yes, we're very comfortable with the buy plan that our teams are working with and the reason for that is there's a variety of things that we do.

There's no one solution.

We can cancel some orders.

We can push out some orders to a later date.

We can get markdown assistance selectively to accelerate some sales where we need to, and the reason our comfort is high with that is when we planned last year's fourth quarter, we planned for a positive comp and particularly within Journeys because they had come off a good back-to-school and back-to-school is generally a fair indicator of holiday, at least indicator that the assortment is right and so it softened and we were alert to that as we went into holiday last year having bought for a positive comp and having ended up at a minus 5 and by the end of January, the end of the fourth quarter we had our inventories nicely in line.

So our team can use a variety of tools to react to what's going on in the marketplace and get it back to where we need it.

So we're not being, we feel, overly aggressive and what we're doing is we're not, we're being very alert to the fact we don't want to guarantee a negative fourth quarter by buying to the negative fourth quarter.

We are -- have a belief that the comparisons in the fourth quarter are easier, relatively easier for us and so we are buying to and expecting to be positive.

And Dennis, those buys usually happen somewhere around early Summer?

Yes.

We're in the heart of it right now.

Okay, and then two other just quick questions here.

Just on first the ASP trends, it seems like the past year you've seen good improvement in ASPs.

I guess talk briefly about sustainability there.

I think some of it is mix and some of it is also special makeups as well, probably getting a lot more of that.

Just talk about sustainability and the other question I had is just on SG&A, you guys are slowing the store growth year-over-year store growth was not significant and I know you're anniversarying store growth from last year, but SG&A seemed to be up quite a bit.

I'm just curious how we should think about that as we move forward?

Is this sort of the peak dollar increase year-over-year we should see?

Any color there would be helpful.

Thanks.

I'll let Jim do the SG&A.

Let me just talk to the ASPs quickly.

We are very pleased with the ASP gains in the Journeys Group and the nice thing about the ASPs is it's hard to pin it down to any one thing.

There is a bit of a mix factor when we have a slowdown in seasonal product on a relative basis, that helps because that's lower priced product and so the move from some of our customers out of that into canvas and into skate are helping.

There are a lot of product innovations going on by our vendors which are justifying a higher price point that the customers are accepting, so that's another driver and we saw it across most of our important categories, we saw ASP increases.

So it really is more than mix.

It is just a value presentation and the consumer is recognizing the value and they're paying up for it, so that all gives us reason to believe because it is such a disbursed driver, it's not any one thing, it seems like it should be sustainable.

I'll let Jim speak to the SG&A question.

On the SG&A, the first quarter SG&A was insulated to some degree because we did so well compared to our plan.

We added a lot of bonus accruals.

If you back out the bonus accruals as I said in my comments we were pretty close from a leverage standpoint with last year, so the big increase in SG&A as a percent of sales related to bonus accruals.

Now going forward depending on how we do versus plan will obviously have some impact on SG&A and in terms of leverage, this quarter we had overall Genesco comps were positive 2% and if you adjust for the bonus accruals we basically were pretty close to where we were last year from beverage standpoint and going forward, I think the relationship of SG&A to sales will depend on comps.

We have positive comps in the 3% range, then I hope we would be very close if not leveraging a little bit but if we have negative comps, it can be very hard to leverage.

Okay, thanks guys.

Our next question will come from Jill Caruthers with Johnson Rice.

Good morning.

If you could talk a little bit more about May month to date comps, it looks as though the biggest variance from first quarter to May was Journeys.

Is the weakness mainly in the seasonal or are you still seeing core canvas shoe holding up well?

Just a little bit more on that.

I wouldn't say that the weakness in May is seasonal because that is a weak category but we wouldn't turn around and say the reason the business is weak is because of seasonal.

We are anticipated that was going to be a less important category year-over-year and bought accordingly and so given that new anticipated mix the weakness for the business is really sort of across-the-board.

It's really more of a traffic driven thing and having listened to a lot of the retailers who reported last week, we are apparently not alone in that in terms of seeing a reduced traffic pattern in May, so when we think about Journeys having a weak quarter we don't really think about it as a Journeys problem and we think of it more as a mall problem.

Also I'd like to put this in perspective.

The month of May is really one of our weakest months.

It's the weakest month of the weakest quarter in terms from a sales standpoint normally and it's a transitional month coming out of Easter and getting ready for back-to-school so we're just getting fresh inventory in now.

So obviously the trend is we're concerned about the trend but nevertheless it's not a big season, it's not a big month for us and actually, if you look at the six weeks of the month of May and two weeks into April, that six week period was one of the strongest periods from a comp standpoint that we had last year, so we're going against a very strong period and we're in a transition month and it's one of the slowest months of the year so again it's an indication of -- obviously an indication of what's going on right now but again it's not a big month and we need to get new product in and see how that flows through the stores and the products coming in now.

I appreciate the additional comments.

Last question if you could just talk about the competitive market out there, particularly focus on the skate shoe, I know you mentioned some mom and pops you feel are possibly exiting the business, and then could you talk about Foot Locker's agressive push into the skate market as well, if you're feeling that pressure in the mall base and a little bit more from the other competitors?

I'd appreciate it, thanks.

Sure.

We look at Journeys as a fairly unique concept.

It is the only true national fashion footwear chain for the teams so others will nibble around the edges of it.

Our customers view a skate is built around some brands with very established position in the skate world really that's their roots and then income Nike has done their work in terms of gaining a nice position in that world.

When we look at the athletic guys looking to get into skate, we don't see them getting the brands that we have that represent the core of what we do and so given the very appealing assortment we can present to our customer, we think we still have a pretty huge competitive advantage in terms of offering that broad assortment so we're pretty comfortable we are well positioned on a go forward basis.

And then the mom and pops, it's very hard to quantify because virtually none of them -- none of them are public and the reporting on it is pretty thin.

It's all very anecdotal but in both the skate space and in the hat space, you hear of a situation here and a situation there where either store doors have closed or there are credit issues and so when we look at our performance in the first quarter and we try to explain it, we are of the belief that that's part of what's going on and so the strength of our businesses both 800 plus stores with scale advantages and great awareness among the kids and great relationship with the landlords, we think that's doing the trick and we think we can continue to prevail on that basis.

Thank you.

Our next question will come from Slater Capital Management, Steven Martin.

Hi, guys.

Most of my questions have been answered.

Two though, one related to ASPs.

When you look out into the back half and in your current inventory, what percentage of that inventory growth and what percentage of your comps do you expect to be ASP increases?

Steve, we don't have that number for you and our buyers don't really buy on that basis.

They are buying by categories, they're buying to a dollar target and I guess you'd have to take the whole buy plan and divide it by units to find out exactly how they're buying but they don't buy saying I'm anticipating an ASP improvement.

They buy saying I need to have this many dollars in skate and here is all the different options for buying shoes and when they finally make their buy with a dollar purchase in mind, we can turnaround and figure out where the ASPs is.

There's no logic to say let's buy to an ASP number.

No, no I get that, but your inventories were up slightly and your ASPs were up so inventories on a per pair basis were probably flattish or maybe down a little?

Well, the ASPs were up so the ASP on a cost basis were likely up since margins were reasonably flat and the guys were writing the buys for the fourth quarter now and as I said they don't buy to an ASP.

They buy to a dollar number and as we go into the season, we can probably look at the inventory on hand and give you a better answer but we're not there yet.

And Shi had very impressive comps, Jim has always talked about as the evolution of Shi and when is he comfortable, he's waiting to get comfortable but he's got the formula right.

Where are you guys on that?

And obviously now is not the time to get aggressive in general about store openings but it's also the time that the competitors are weaker and the real estate market is better.

Yes.

That said we're not ready to greenlight Shi in terms of aggressive store growth at this point.

We still want to see more improvement.

It hasn't hit the hurdle rate that we would want to pull the trigger yet and so that's going to be the driving factor rather than the attractiveness of the real estate market which is definitely in place but we're going to continue to look for improvement and hopefully part of the improvement will be the benefit of others being weak.

It's another category where you can probably point to some mom and pops being part of the reason that we can drive our businesses nicely as we have.

We're very pleased with the direction it's on.

Obviously because the trends are great but we're not there yet to greenlight it.

Okay, thanks a lot.

At this time we'll take a follow-up with Scott Krasik with CL King.

Thanks.

A few things.

This is the second consecutive year you had a big feat relative to expectations in the first quarter.

I think last quarter you said you didn't beat your internal plan by that much.

Can you characterize it this year?

Was it again just analysts mismodeling?

How did you do versus your internal plan?

We did better than our internal plan but you just take a look at the comps and that tells most of the story.

We had said that we were targeting a minus 3 for the first quarter and we came in at a plus 1.5 or 2 whatever it was and the leverage particularly in the first quarter where sales are so light and you have already budgeted your expense side down to your minimum that every bit of additional gross margin that you generate from additional sales flows through the P&L, first and second quarters are the most leveraged quarters because of that.

Jim?

And the gross margin improvement we had not anticipated so to answer your question, we were, the analysts weren't way off from where we were.

We were pleasantly surprised and a main driver was the comp increase.

That really drove everything.

That's good.

Shi, the athletic branded piece, is that the same vendors that have been working Puma, Diesel?

Is there anything new on the athletic side?

There are only so many athletic guys out there so you walk the stores and there's a big overlap in terms of vendors, a lot less overlap in terms of product.

Some overlap with Journeys but we've discovered that Shi attracts a very different customer so we're okay with that and what we're really pleased with is that that makes the presentation of the overall store pretty distinct.

We have such good relationships with these vendors that we have a great fit in terms of what we want to do and what support we can get from vendors so we love that trend and we love obviously the impact it has on average price, because the athletic guys do command a nice average price for us.

I get it, and then skate at Journeys, do you have any sense what percent of skate of athletic business will be exclusive to Journeys for back-to-school and holiday?

No.

I don't have that for you.

We drive a lot towards some form, exclusive is all sorts of levels, exclusive in the mall, a special makeup for us, I just can't give you the mix.

We obviously drive for an awful lot of exclusive in order to be more compelling and more distinctive, and yet there are certain shoes you just got to have because it is a mainstream shoe and the customer expects to see it.

I can't give you the break down.

But Jim and the guys, they are comfortable with their assortments I would take it?

Oh, yes.

Absolutely.

And then just lastly, some of these impairment charges, that you're taking after the fact, how does that affect your EVA based comp?

Do you have to hurdle that and since you're taking it for past years?

You don't have to give back incentive comp do you?

Does it just impact the hurdle for the next year?

Well, it's really a non-cash item so it's really no impact on EVA.

Okay.

Thanks guys.

At this time we'll take our final question from Sam Poser with Sterne Agee.

Hold on one second.

Hello, thank you.

Can you just give me an idea of is what you're seeing to get to that 5 to 6 comp in the second quarter and what the full effect of the tax free holidays are looking at on the switch from Q2 to Q3?

So why are you seeing an improvement there and I'd say why are you looking for slightly better in the third quarter?

Slightly better in the third quarter?

Well, again, we're talking about the month of May.

It's all critical right now in the month of May which is initial trends are bad.

We think it's caused to some degree by the stimulus checks.

We're going against very strong comps right now, this whole six week period and just based on the product that we're getting in and the way we feel about back-to-school we think that as we get into the months of June and July we don't see a pick up and then once we get into the third quarter which is really the back-to-school period, we'll have a pretty good back-to-school.

So we think, as I said before in a transition month, it's an indication right now that we think things will improve and the impact of the sales tax is only about seven states.

It doesn't include Texas.

It will have some impact in a couple days but again, but again, we felt like -- we feel like we've built that into our comp numbers.

Okay, and to what degree, could you maybe give us a percentage are you seeing -- or in first quarter did you see traffic down in the malls and where are you seeing traffic down right now and how are you looking at that going forward?

Well, Sam we don't measure traffic, so the best indication we have is what gets reported more broadly, and so the way we can assign it the issue of sales to traffic is by watching other retailers results in the mall along with ours so clearly it's been a soft May in the mall.

In terms of the expectations going forward, we're being, we think, reasonably conservative about it because there's not a lot of visibility.

You've got on the one hand consumer confidence is ticking up every month which should be a plus and then on the other hand, you got what's going on in May which has some of the offsets to last year with the stimulus checks but even with that said with a little bit of a surprise to us and I think to others, so it's tricky.

Where our comp expectations are what they are in terms of balancing what we think is an offset in May and again the stimulus checks with a current trend and when we crunch all the numbers it goes from we're minus 9 in May and we're saying we can end the quarter at a minus six is our best estimate.

And keep in mind one of the businesses that's having the most challenging time, we have more than Journeys within Genesco I'll remind you and Johnston & Murphy is really challenged in this environment, we had expected a comeback in Johnston & Murphy that we start to see some visibility on it when we wrote the plan for this year and we're not seeing that yet.

So part of the adjustments we've had to make are to other parts of our businesses like Johnston & Murphy and then another adjustment that's been going on is the softening in the wholesale business and you've seen what's gone on with other retailers, particularly the department stores so we're being very cautious about our wholesale business going forward and that also weighs a little bit on our outlook.

That does conclude the question and answer session.

Mr.

Dennis I'll turn things back over to you for any additional or closing remarks.

Well, just simply that we appreciate everybody joining for the call and we appreciate all of your questions and your interest in Genesco and we look forward to talking to you in about three months.

See you all.

And that does conclude today's teleconference.

Thank you all for joining.