Genesco Inc (GCO) 2010 Q2 法說會逐字稿

Good day, everyone and welcome to the Genesco second-quarter fiscal year 2010 release conference call. Just a reminder, today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Bob Dennis, President and Chief Executive Officer of Genesco. Please go ahead.

Good morning. Thank you for joining us for our second-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. 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 most recent 10-Q for fiscal year 2010 for some of the factors that could cause differences from our expectations. And for those listening to the replay of this call on the Internet, some of these factors can be read on the opening screen.

We were pleased with our bottom-line performance during the quarter given that sales remain choppy. May started slow as we noted on our last conference call, but the sales improvements in the quarter that we anticipated failed to materialize. Despite the sales shortfall, the bottom line benefited from expense control. Looking ahead, we are confident with both our merchandise and inventory position and we continue to be cautiously optimistic about the balance of the year.

Now let me briefly review our second-quarter results. Net sales were $335 million versus $353 million for the same period last year. Total Company same-store sales declined 8% versus a 4% increase last year. After a solid first quarter, our comps in May were soft and the consumers' seeming reluctance to spend continued through June and July. Looking back, we may have underestimated the scale of the offset from last year's stimulus checks.

We had a loss of $0.02 per share this year before the items listed in Exhibit B of this morning's press release. This compares to a profit of $0.18 last year also adjusted as outlined in the press release. Our financial position remains strong with bank debt $8 million below where it was at year-end and total debt, including the remaining convertible notes, down about $47 million on a year-over-year basis.

Through August 24, comps for the month for the total Company were minus 4% against plus 7% in last year's comparable period. We note that August was our last strong trump month last year and that overall comps were negative in September through December last year. We also believe that this year's Labor Day offset will move some comp sales from August into September and so overall, we are pleased with the current trends. As you know, the second half, when we have historically generated approximately 55% of our total sales and 75% of our total operating income for the year, is extremely important to our profitability.

As we look to drive improvements in the back half of the year, we are focused on three key areas -- comps, occupancy and other expenses. Let me walk through each of these. First, we still expect stronger comps in the back half beginning in September and especially in November and December. Why? First, economic conditions look to be slowly improving and as we noted earlier, our comparisons eased considerably. On a two year basis, our fourth-quarter comp was down 10%, 5% in each of the past two years. As a result, we are comfortable forecasting a positive comp in the fourth quarter and we are planning and buying accordingly. We will also call out specific initiatives to maximize comps within our operating companies that drive comp sales. We will review this when we talk about their individual performance.

Second, occupancy costs continue to be a major focus for us. Occupancy per square foot stayed essentially flat year-over-year in the second quarter, a big improvement over past trends. We are definitely seeing a significant redirection on occupancy costs due to reductions or at least reduced increases when renewing our leases, as well as lower rents negotiated in situations where we have kick-out clauses or some type of co-tenancy issue with the mall. In total, the 143 renewed or renegotiated leases that have taken effect this year are 10% lower than their original occupancy, a trend that we expect will continue as we move forward as long as vacancy rates are in our favor.

In addition, year-to-date, we have closed 24 stores across all divisions. These were largely unprofitable stores and their absence should improve year-over-year performance in the back half. Over the next 12 months, we have 227 more stores that will either come up for renewal or are eligible for a kick-out negotiation. In addition, we continue to be aggressive in pursuing relief in malls that are violating co-tenancy or occupancy covenants.

Third, we are very pleased with our operating team's ability to control expenses. SG&A expenses were down modestly in the quarter, falling 2.8% even with a 2.7% increase in square footage. That said, the weaker than expected comps made it difficult to leverage expenses. However, we note that our team has more opportunities to drive expense leverage in the back half because of our higher sales volumes, which provide more flexibility in the staffing model.

We also continue to manage our inventories effectively. At quarter-end, year-over-year inventories were up 2% while inventories per square foot were flat. We have found it necessary to become somewhat more promotional to keep our inventories in line, especially in the Journeys group and this did affect our gross margin during the quarter. We expect to continue this promotional posture through back-to-school. We had previously projected up to 73 new stores for this fiscal year. We now expect to open about 69 stores in total having applied the appropriate level of caution in our new store openings.

Now let me review our individual businesses beginning with Journeys. For the Journeys group, same-store sales declined 9% for the quarter compared to a 2% gain for the same period last year. Through August 24, comps for the month in the Journeys group were minus 3% against plus 9% in last year's comparable period. Inventories for the Journeys group ended up less than 1% compared to last year.

Looking at the components of the Journeys group in the second quarter, in the Journeys stores alone, second-quarter comps were down 9% compared to a 2% increase last year. Footwear unit comps decreased 9.4% and average selling price increased 1.8%.

We experienced softness in many of our key product categories during the quarter with the exception of canvas and women's fashion, which continue to perform very well. We were also pleased to generate another increase in ASPs to approximately $48 in the quarter, primarily driven by women's fashion, canvas and core skate. In total, athletic was up slightly as a percent of overall sales.

We believe that Journeys heads into back-to-school with a compelling merchandise position based on our strong assortment and depth in canvas and core skate. However, a few vendors within these categories are becoming more widely distributed and as a result, we have adopted a somewhat more promotional posture. As we mentioned on our last call, our vendors have done a good job of staying fresh with existing trends, but no real breakout of new fashions has occurred. Of course, we continue to test different possibilities, but we have not yet seen signs of the sort of fresh and compelling fashion change that provide a meaningful spark for incremental demand. The good news is that our early read on boots for the fall and holiday season is very encouraging.

All that said, we are really excited about a couple of initiatives we have recently implemented to help us drive comp sales within Journeys. We have now completed a rollout of a new POS system that is much faster and has persistent connection capability. We call out four benefits of this system that should all help boost comps. First, we now have swivel screen registers in all stores to allow salespeople to show products representing our full assortment from our website to our customers, supplementing what we have on display in the store.

Second, we also now have an enhanced system to facilitate special orders to locate and deliver shoes when a store is out of stock. Third, we have introduced online systems that help reduce paperwork enabling the sales team to spend more time on the floor selling shoes. And finally, the whole checkout process is quicker, which is especially important on high-volume days.

A second initiative involves increasing the amount of cross-stocked product, which will get certain product in the stores faster and at a lower distribution cost per pair.

In real estate, we opened three new Journeys stores in the second quarter and closed three stores. We remain on track to open 10 stores and close 10 stores and end the year with 816 stores.

In Journeys Kidz, comps declined 13% in the quarter versus a 2% decrease last year. Footwear unit comps fell 9.4% and ASPs decreased 4.4%. Our sense is that the kids business is more price-sensitive in this economy as moms choose to trade down; hence, the lower ASPs in this business. We opened three new Journeys Kidz stores during the quarter. We expect to open 10 new stores and end the year with 151 stores in operation.

Shi by Journeys comps in the second quarter were down 10% compared to a 3% increase last year. We continue to increase our selection of athletic product in the stores. Athletic represented 27% of the total for the quarter compared to 21% last year. Footwear unit comps declined 15.1%, but we were pleased that footwear ASPs on a comp basis were up 5.5% as a result of more higher-priced athletic product and our overall merchandise selection.

We believe that we now have the appropriate athletic mix in the stores and we are encouraged with the early trends in our fall casual and boot categories. It is simply a difficult environment to develop new customers and so we will not be expanding this business until we have better visibility on a sustained positive comp trend. We currently have 55 Shi stores in operation and plan to open one new Shi store in fiscal 2010 to end the year with 56 stores.

Turning now to Hat World, comps fell 2% during the quarter versus a 7% increase for the same period last year, which was Hat World's most difficult quarterly comparison in fiscal 2009. We have experienced some headwinds in our more urban stores, but have achieved solid results in the rest of the business. Comps in Hat World's urban stores fell 5% and comps in the non-urban stores declined less than 1%. Through August 24, Hat World's comps for the month were minus 1% versus plus 4% for the comparable period last year.

Our branded and core Major League Baseball categories continue to be very strong, but NCAA and Major League Baseball fashion remained weaker. We opened a total of eight new Hat World stores and closed five in the second quarter. We expect to open 40 new Hat World stores and to close 32 stores to end this year with 893 stores. In addition, we now have embroidery in 404 stores. This category is up 15% year-over-year and black hats, which are driven primarily by embroidery, are up 3%. Both are high gross margin businesses. Our goal is to have embroidery capabilities in 80% of our stores within four to five years.

As we look at the second half of fiscal 2010, comparisons for Hat World get significantly easier. In addition, we are encouraged about Hat World's near-term prospects for a number of reasons. First, the Major League Baseball teams are aligning nicely for the playoffs with important teams like the Yankees, Red Sox, Dodgers and Tigers all in the running. Once again, the Cubs managed to tease us, but now seem poised to disappoint.

Second, we believe we have upside in NFL this year as last year's sales were weak. Third, our Canadian business continues to perform very well and we will be opening three stores in Quebec in the third quarter, our first venture in to French-speaking Canada. And finally, we continue to see store rationalization within the industry as mom-and-pop stores continue to struggle with credit and liquidity.

Turning to the Underground Station group, comps decreased 19% during the second quarter compared to positive 9% last year. Through August 24, comps for the month were down 13% versus positive 14% last year. Footwear unit comps for the second quarter were down 14.2% and ASPs declined 3%.

Women's and kids footwear made up about 45% of Underground Station's footwear unit sales and about 38% of its footwear dollar sales for the second quarter this year compared to 43% and 39% respectively last year. Canvas was strong during the quarter, offset by weaker than expected results in women's athletic. We continue to believe that this customer is being disproportionately affected by the economy, which hurt Underground's results. As we look to the back half of the year, we feel good about our positioning in canvas, brown shoes and boots in general.

With Underground Station, we remain very focused on the bottom line and cash flow. We note that despite a $5 million sales decline in the quarter, operating income was only $750,000 worse than last year. We still expect Underground Station to be cash flow positive for the year and we continue to believe we are taking a strategically sound approach with this business.

We are doing what we can from a real estate standpoint to maximize our strategic flexibility. Over the past 12 months, we have closed nine Underground Station stores, taking the total store count down to 176. In addition, we have adjusted rents on 11 stores through kick-out extensions and co-tenancy violations. For all these stores, we have achieved an average decrease in occupancy cost of 36%. As we have said previously, we will not open any Underground Station stores this year and expect our store count for Underground Station group will be down to 170 stores by year-end.

Now for Johnston & Murphy. Second-quarter sales for the Johnston & Murphy group were approximately $39 million versus $44 million last year and comp sales in Johnston & Murphy stores fell 16% compared to a 4% decline last year. We are encouraged by the fact that comps have improved in every month since May and business has improved dramatically in some of our big city stores.

Through August 24, comps for the month are down 10% compared with minus 8% last year. For the rest of this fiscal year, J&M is going against double-digit negative comps as customers reacted dramatically to the serious stress in the financial markets beginning in September last year. Johnston & Murphy's direct sales decreased 8.3% compared to last year.

Our core customers remain loyal to the brand and continue to buy Johnston & Murphy. It has just become more difficult to attract new customers in this environment, but this also represents a big opportunity for us once the economy improves. Transactions from first-time buyers were down 15% during the quarter compared to repeat buyers whose transactions were down only 1%.

Johnston & Murphy's wholesale business was down 11% compared to last year; however, we believe that we continue to gain share in the wholesale channel. The main issue now is that retailers are cutting back their overall open-to-buys to manage their overall inventories and are taking a more conservative stance on inventory in general.

For fall, we are shifting the SKU mix towards the lower price points in the range and away from more expensive dress-oriented product. Given the development cycle for the J&M line, we could not implement this exchange for spring and this probably hurt our first-half sales results given the weakness at the higher end of the assortment. We are encouraged that this will help generate more business in the second half of the year and we already see a positive reaction to the shift.

We continue to work our inventory position down and expect it to be below last year by the end of the third quarter, a terrific accomplishment for the team given that inventories were up 20% year-over-year in January. 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. While the environment remains challenging, we believe we may be seeing the early signs of a bottoming out for this business. Coupled with easier comparisons, particularly in the fourth quarter, the trends make us cautiously optimistic about the business for the second half of the fiscal year.

Finally, turning to Licensed Brands, sales were $19.4 million for the second quarter compared to $22.1 million for the same period last year. We believe the year-over-year sales decline is due to overall inventory reduction initiatives by some key retail customers even though our product continues to perform well. As a matter of fact, according to NPD's retail tracking service, Dockers net sales in the department store national chain and shoe change channels for the year-to-date period through July are up 1.6% while the overall men's brown shoe market in those channels is down 9.2%.

As a result of this performance, Dockers has solidified a number two position in the men's fashion footwear segment and on traditional channels of distribution and the brand has also maintained its position as the market leader in dress casual footwear for the same period according to NPD. We believe Dockers' value-based positioning demonstrated by both the growth at retail and the marketshare gains bodes well for the brand. 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. Sales decreased 5% to $335 million compared to $353 million last year. Total comp store sales decreased 8%. Journeys group sales decreased 8% to $149 million and comps were down 9%. Hat World sales rose 7% to $109 million. Comp sales decreased 2%. Underground Station sales were down 21% to $19 million, reflecting a 19% comp decline and a 5% reduction in store count to 176 stores. Johnston & Murphy group sales were down 11% to $39 million. Johnston & Murphy wholesale sales declined 11%. Comp sales for the Johnston & Murphy shops and factory stores were down 16%. Licensed Brand sales decreased 12% to $19 million.

Now turning to gross margin. Total gross margin for Genesco was down 50 basis points to 50.8% compared to 51.3% last year. This was due primarily to higher markdowns. Gross margin for the Journeys group was down 20 basis points. As Bob mentioned, we have found it necessary to be more promotional than in past years to keep inventory in line, resulting in higher markdowns for the quarter.

Hat World's gross margin was down about 120 basis points. Most of this decrease was due to the recent acquisition of Impact Sports, a wholesale business with a lower gross margin. Gross margin for Johnston & Murphy was down about 250 basis points due in part to a lower initial markdown due to mix and increased promotional activity to keep inventories in line. Underground Station's gross margin was down about 190 basis points due to higher markdowns. Licensed Brands' gross margin increased by 40 basis points due primarily to lower costs.

Now turning to SG&A. Total SG&A as a percentage of sales was 50.4% compared with 49.1% last year. Expense dollars were down 2.8%. Much of the increase in SG&A as a percent of sales was caused by the deleveraging of expenses from the negative comp. For example, occupancy expense increased by 2.8% in the quarter driven by a retail square footage increase of 2.7% year-over-year. Even with this increase in absolute occupancy expense in the quarter, the comparison with last year's second quarter is very favorable.

Last year, the year-over-year increase in occupancy expense was 10.2% driven by a retail square footage increase of 7%. Journeys, Underground Station and Johnston & Murphy were not able to leverage expenses due to their negative comps. Hat World also did not leverage due to the operating expenses of its recent acquisition. Without these expenses, Hat World's expenses as a percent of sales would have been about flat with last year. Licensed Brands' expense percent was down in the quarter as compared to last year when bad debt expense was driven upward by two customer bankruptcies in the quarter.

The restructuring, another line item in the P&L, reflects $3.3 million primarily in retail store fixed asset impairments. These were all non-cash charges during the quarter. Last year's restructuring and other amount was essentially the same amount as this year.

Adjusting for the restructuring amounts in the income statement in both years and acquisition expenses of $300,000 last year, we reported operating income of $1.3 million, or 4/10 of 1% of sales in the second quarter this year compared with $8.3 million, or 2.3% of sales last year.

Journeys lost money in the quarter primarily due to the negative expense leverage from the negative comp. This was also true for Underground Station and Johnston & Murphy. Hat World's operating income was $10.5 million, or 9.7% of sales, compared with $11.5 million or 11.2% last year. Licensed Brand earned about $2 million or 10.2% of sales, up from 9.4% last year, helped by a stronger gross margin and reduced bad debt expense this year.

Net interest expense for the quarter was $1.9 million compared with $2.9 million last year. This reduction is due to the conversion of approximately $56 million in convertible notes to common equity in the first quarter of this year.

In this quarter's interest expense, there is an additional $286,000 pretax in interest expense that relates to the new accounting standard for convertible debt under APB 14-1. Last year's second-quarter interest expense has also been restated by $759,000 pretax as APB 14-1 requires a restatement of the previous year. The added interest amounts in both years are non-cash expenses and are excluded for purposes of guidance. The pretax loss for the second quarter was $3.8 million compared with earnings of $1.8 million last year. Again, both years include non-cash charges of about $3.3 million, primarily fixed assets store impairments.

The loss from continuing operations, excluding all the items listed in Schedule B of our press release, was about $400,000, or a $0.02 loss per share compared with a profit last year of $3.6 million, or $0.18 per share.

Now turning to the balance sheet. We are pleased with our balance sheet at the end of the quarter. Our bank debt was $24 million, which is down from the year-end amount of $32 million. Our unused borrowing availability under our $200 million of committed lines of credit was about $165 million at quarter-end, including outstanding letters of credit.

Inventories were up about 2% from last year's levels. Excluding inventory from our recent acquisition late last year, inventories were essentially flat with last year. We continue to believe our inventories are in good shape and are positioned well for the back half of the year.

The balance sheet now reflects long-term debt of $53 million versus $99.8 million last year. In both years, the convertible notes on the balance sheet have been adjusted to reflect APB 14-1 for convertible notes. The amount of the convertible notes on our balance sheet and long-term debt this year is $29 million and last year, the amount was $80 million. The face amount of these convertible notes is $29.8 million and was $86.2 million last year. The reduction is, of course, due to the exchange offer. At quarter-end, we had over $500 million in shareholders' equity and approximately $53 million in outstanding debt, which includes the convertible notes of $29 million.

For the quarter, capital expenditures were $10.1 million and depreciation was $11.7 million. In the second quarter, we opened 14 stores and closed nine. We ended the quarter with 2,241 stores compared with 2,202 stores last year. This represented a net new store increase of 39 stores or a 1.8% year-over-year increase while square footage increased 2.7% to 3.2 million square feet.

We expect capital expenditures for fiscal 2010 to be in the $48 million range, assuming that we actually open the 69 new stores in the current forecast. Depreciation for the full year is expected to be about $47 million. Assuming we open and close stores in line with the real estate plan Bob reviewed, we would end FY '10 with 816 Journeys stores, 151 Journeys Kidz stores, 56 Shi by Journeys stores, 893 Hat World stores, including 62 stores in Canada, 170 Underground Station stores, 117 Johnston & Murphy shops and 45 Johnston & Murphy factory stores. That is a total of 2,248 stores, or an increase of 1% for the year. These plans will also increase retail square footage by about 1.3%.

Now to update guidance. We continue to believe that our better case EPS scenario of $1.70 to $1.80 is achievable; however, our ability to hit our target depends in part on whether we see some improvement in the economy and consumer demand. Although still negative, we are encouraged by the improving comp trend thus far in August, particularly given the tough positive 7% comparison against the same period last year and the later back-to-school related to the Labor Day holiday shift.

And while our second-half visibility is still obviously limited, comparisons get progressively easier through the rest of the year. August was the last strong sales month for most of our businesses last year and overall comps were negative from September through December and essentially flat in January.

During fiscal 2009, comps were positive 4% in the second quarter, positive 2% in the third quarter and negative 5% in the fourth quarter. As Bob mentioned, comps were down 5% for the second year in a row in the first quarter of fiscal 2009. This bodes well for a positive comp in the fourth quarter and the fourth quarter will be even more important than usual in determining where we end up this year.

We expect comps to be flat to down low single digits for the third quarter. Fourth-quarter comps are expected to be positive low single digits. For the fiscal year, we expect comps to be flat to down low single digits. For the full year, we expect total sales in the $1.57 billion range.

Consistent with the past two years, our annual EPS guidance does not include approximately $15 million or about $0.38 in expected asset impairments, lease terminations and legal matters. Once again, over 90% of these items represent non-cash expenses.

As discussed in our 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.

For guidance purposes, we expect the overall tax rate for the remaining quarters of this year will be about 39.9% and that sharecount for EPS purposes will be about 23.6 million shares.

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. We remain on plan to fully repay our bank borrowings by year-end, again assuming the base scenario. Now I will turn the call back over to Bob for some closing comments.

Thanks, Jim. While the environment remains challenging, we see many opportunities to drive improvement in our business in the second half of the year. As mentioned, we expect comps to improve from Q2 levels in Q3 and we are forecasting a positive comp in Q4, primarily due to easier comparisons and the various initiatives we discussed. We remain focused on reducing rent and better leveraging expenses that we remain comfortable with our better case EPS scenario of $1.70 to $1.80.

Our team is focused and energized. Our industry leadership position is intact and we are confident with our market position both in the near and long term.

Finally, I would like to salute our team of operators at Genesco who have proven that they know how to navigate in turbulent times as well as anyone. They continue to provide the best assortments possible in each line of business and have maintained service levels that continue to delight our customers. At the same time, they have kept inventories nicely in line, have tightly managed expenses and have attacked the real estate opportunity created by this economy with enthusiasm. We continue to believe we will be in great shape as the economy straightens up and our various operating teams are a big reason for that belief. And now we will be happy to take your questions.

(Operator Instructions). Sam Poser, Sterne Agee.

Good morning, everybody. I have a couple of questions. Number one, on the inventory levels, can you just walk through, excluding the acquisition comment, Jim, that you made that inventory was flat, I just have a follow-up on that.

I am not sure what else there is to say. I mean we backed out -- inventories are flat with last year and we feel good about those levels. Actually it is below our plan at this point.

Could you back out the sales too then? I mean shouldn't you back out the sales from the acquisition if you are going to back out the inventory?

Yes, I am just giving one fact. I am just saying without that, the reason it is up --.

But Sam, on a square-foot basis, the acquisition does not have square footage; it is a wholesale business.

Looking at the square footage, we are flat.

And what are sales on a square-foot basis?

What are sales per square foot?

For the quarter?

I mean on a year-over-year basis, if inventories are flat, where were sales? They were down slightly, correct?

Yes, they were down. That's right.

I guess the question is it looks like you are going to comp probably down, down somewhere low to mid singles this quarter and then you're looking for up next quarter. I mean are most of those inventory levels at Journeys right now and that is where you're promoting to clear through? Is that --?

Let's just go through that. We have been talking since the beginning of the year that Johnston & Murphy had too much inventory. So the overage, a good amount of the overage is Johnston & Murphy. As Bob said, at year-end, Johnston & Murphy was about 20% over and we expect Johnston & Murphy to be under where they were last year by the end of the third quarter. So we're working our way through that.

We feel very good about the inventory levels at Journeys. We are working our way through. We saw the comps are coming down and we were adjusting accordingly. We are not in a position today where we feel like we have too much inventory at Journeys.

Okay. And then --.

Sam, you manage inventory in two ways. You've got your absolute level going into the next quarter and then you have got your receipts. Our teams are buying to a certain comp level and they believe they have got their inventories aligned with their target comps. So you will see it in the flow of receipts as a way of managing overall inventory levels.

Right. Okay. Good, yes. The accounts receivable was up about 23% in absolute dollars over last year. It looks like accounts payable was down 10%, about 10%. Can you walk through that?

Yes. Our receivables are up primarily because the business we acquired was a wholesale business with receivables. So that is why that jumped up. Most of our retail businesses -- our retail business don't have any receivables, so the only receivables -- except for credit card, which is a finite number. But most of the receivables are all -- basically all the receivables are related to our wholesale businesses and because of the acquisition of another wholesale business, it jumped up our accounts receivable.

On payables, the reason payable is down -- we think it's a timing difference and it is because we took in inventory a little earlier than we did last year and as a result of that, we had worked through the payable process because we had taken inventories in earlier. Also last year, we had more inventory in transit, which bumped up our accounts payable.

Okay, thank you. And then one last question. Where do you think you are -- two questions. Where do you think you are in the back-to-school cycle due to the shift? I mean are you 50% of your way through, are you 40% of your way through right now?

Can't put a number on it sitting here, Sam. But we will tell you that we went back and looked at 2004 within our various businesses and we know that there is a pretty sizable shift back in terms of where the sales fall. So I can't put -- I don't know we are 40% or 50% through it, but there is a lot to come and it shifts back. So some sales will presumably move out of the month of August into the month of September.

And you also commented that you are able to buy -- you are going to be buying to a positive comp for the fourth quarter. I mean are you going to -- that sounds very optimistic. I'll put it that way. Are you going to have ways to get out if it doesn't come?

Sure. Last year, Sam, we bought for a positive fourth quarter and we ran negative five and our inventories at the end of the quarter were where we wanted them to be except in Johnston & Murphy. So our guys are very good at watching current sales trends and looking at the less productive end of the assortment and taking marks as they need to. Plus, at our size, we get some nice flexibility out of our vendors. And so it is a combination of return to vendors, cancellations and targeted markdowns if that turns out to be the scenario. And we did it last year, so we are very comfortable.

Okay, great. Thank you very much. Good luck.

Scott Krasik, C.L. King.

Thanks, guys, for taking my questions. Your guidance adjustment table in the back -- on the back page of the release, you are reducing your contribution from continuing operations by $0.04 and increasing the impairment addback by $0.04. Is that based on something that happened this quarter or is that something that you expect in the third and fourth quarters?

The impairment?

Well, you lowered the -- (multiple speakers).

Excuse me. The impairments -- what is happening is we have increased impairments some, which is causing that increase and that impairment adjustment.

Okay, so that $0.04 from $0.35 to $0.39, that happened this quarter?

Yes, well, it's not this quarter. I mean actually what happened is the guidance -- it's a little bit this quarter, but also it is a relook of the back half of the year and based on a situation where we would see ourselves today and it's really just a guess as to what the impairments will be in the back of the year and we decided to up that some. So a little bit this year; it is not all this quarter. Some this quarter, but also some in the back half.

Okay. And then, Bob, just you made a point in your comments that skate is more widely distributed at this point. You have got Pac Sun last week saying that they are going to be coming back into footwear. How do you view your athletic assortment going forward? Will skate decline as a percent of your athletic and is this an issue for Journeys, which had always been very heavy in skate, a lot of exclusive product, etc.?

Well, Scott, I don't think I said that skate was widely distributed. I just called out a couple of vendors that have broadened their distribution. Did not single out skate. We have heard the reports that the skate business is off. Our athletic business at Journeys is up as a percent to total. There have been shifts within that mix, as there always are and that is pretty much all we are going to say about that, except that Jim Estepa, who runs Journeys, has asked me to suggest that all other retailers get out of the skate business.

On Pac Sun, we see what they have said. They plan to operate -- what they've said is they plan to operate differently with a more edited and impactful assortment, which sounds like they want to cherry pick top-selling products from each important line. We will see if footwear vendors will be interested in that. Obviously, we think it undermines the efforts of chains that are fully committed to the major footwear brands.

Okay. That's helpful. The comment that you made about your boot reads being positive and the outlook is good for the back half, is that strictly UGG-related? Are you getting reads on other boots early on and what do you expect your percent of boots I guess to be in the back half of the year?

We are not going to tip our hand on anything other than to just say the boot category looks like it has another good year ahead of it.

Okay. The comment then about fourth-quarter inventory being up or planning for the comp, is that more than dollar-related just because of a higher percentage of boots or are you going to be up in units as well?

Haven't looked at it that closely. It is certainly dollars. I don't think boots are gaining so much that it is going to be all in average cost. It has got to be some units as well.

Okay, that's fair. And then just lastly, any change to your strategy of closing smaller Journeys stores, transitioning them to Journeys Kidz and opening larger Journeys stores in the same mall? And if not, how many more stores do you have an opportunity to do this?

We like that model, as you know, because the construction costs get minimized. We get a two for one because we can backshift into a small Journeys store and we have opened a bunch of them. We are probably temporarily slowing that a little bit as we are with everything in the real estate world right now just because developing new customers is so difficult. And even when you go to a larger Journeys store, you have got some essentially business development to do with the store level.

So we are still doing some of those, but probably fewer than we have done in the past, at least for the next 12 months. In terms of quantifying how many stores fit that criteria, Scott, I don't have that handy. We basically have been looking at Journeys stores that are under 1500 or so and are doing up near $1 million or more.

Okay. Thanks very much. Good luck.

Stephanie Wissink, Piper Jaffray.

Thank you, guys. If you could just talk a little bit about your leverage threshold now that you are seeing the improvement in occupancy rates and if there is any more color you can give us in terms of the performance by mall type, maybe where you are getting those renewal benefits? Thanks.

Well, on the mall types, it is pretty clear that the more distressed the mall, the better deal that we are able to construct. The Underground Station results are a great indication of that. Those are all pretty stressed-out malls where we have restructured the rent. And then as you get up to A malls, the opportunity is different. It is not as much of a reduction in rent as it is an opportunity to get more stores in certain malls where we weren't able to find the right location and position; hence, we are not taking our store openings down to zero. Those are opportunities for us. So we are not breaking it out by type of mall, but that should give you a flavor for it. Jim, do you want to --?

I think a little bit more on that is that if you just look at the benefit we are receiving -- Bob talked about Underground Station, which is a huge number, but there is a variation between Johnston & Murphy and Underground Station. Johnston & Murphy would be the higher-end malls and we are not seeing anything like that in Johnston & Murphy and then Journeys is right in between. We don't have A, B and C broken out, but there is a big difference between a Johnston & Murphy benefit and the benefit we are seeing at Underground Station.

Okay, that's helpful. And then, Jim, just in terms of your overall leverage threshold for the business, where do you need to comp in terms of occupancy and SG&A?

Tell you what, the one that we've really looked at so far is Journeys. We have been saying all along that we felt like, for the Company and primarily for Journeys, it was probably 3% to 4%. But a lot is going on now and it is not only reductions in rent; it is the slowing of the growth of the overall business. Because as you are growing a business (inaudible), you've got a lot of new stores coming on and they are not performing as strongly as a more mature store would be. So as we slow down the growth, it is allowing us to lower that leverage point. And again, we are still working on it, but it is certainly by at least a percent and probably more. So we are still working at that, but it is bringing down that leverage point and some of it has to do with what kind of assumption you make going forward on new stores. But again, bringing it basically down with very little growth. The leverage point has dropped at least 1%.

And the other factor is that -- the other big number in the stores is obviously store level wages. And our teams in the quarter, if you look at overall Genesco stores, they took down the overall wages we were paying per store down about 2%. So that again helps what the leverage point ultimately is, at least for now given that trend.

Okay, great. Last question just related to the acquisition that you made, if you could just give us some insight into your decision around that acquisition, what drew you to it, what was attractive about it and then are you continuing to look for acquisitions and of what size or of what type? Thank you, guys.

Yes, we acquired Impact Sports, which is a team dealer. We like the team dealer business. Impact Sports -- we like the team dealer business. It is highly fragmented and we think that due to technology and available efficiencies it ought to be consolidated. We entered the space with the Impact acquisition and we are investing right now in infrastructure to grow it to be an important business in the industry and for Genesco. And we think there are strong synergies with Hat World that further drive the logic of the initiative.

It is basically a licensed athletic product sold to the youth market via a separate channel and our systems and operations team will be helpful to try and scale it. And we also think that there is a possibility for some retail outlets, really for clearance purposes, that they don't currently do all related to scaling the business and so we are very interested in that.

We are continuing to consider other possibilities of growth by acquisition and we really don't want to go into detail on that beyond that. We are not expecting any right now. There is nothing anything big that is on our horizon. We like the growth potential of doing some of these smaller deals where we can leverage what we own and then do the growth organically.

Great. Good luck to you guys.

Mitch Kummetz, Robert Baird.

Thank you. A question for you, Jim. Sales guidance for the full year has come down $20 million. Does that just reflect a slight shortfall to the second quarter? Is there no change to the back half then?

Well, it is $20 million and those are all rounded numbers, so it is not quite $20 million, but nevertheless to answer your question. It is second quarter and then also we brought down some of the third quarter.

Okay. And then your full-year comp outlook essentially remains the same, flat to down slightly. You didn't address your comp outlook by concept for the full year. Could you either say if it is unchanged or if there are any updates to that?

Yes. We said, as you know, low -- flat to low single digit negative in the second quarter and where we are right now for Journeys is in that range where it is slightly positive in the fourth quarter for Journeys.

In Underground Station, we're looking at a high single digit negative, basically flat to slightly positive in the fourth quarter because we are going against such a tough comparison.

In Johnston & Murphy, we are looking in the third quarter at low to mid negative single digits and then positive in the fourth quarter.

And then in Hat World, slightly positive in the third quarter and a little more positive in the fourth quarter.

Okay. That's helpful. And then, Bob, just to follow up on the occupancy, maybe to clarify some things. So for the second quarter, I believe you guys said that occupancy was up 2.8% and then, Bob, I think you made a comment that you expect it to be flat. And I don't know if that pertains to the back half or the fourth quarter in particular.

No, I think we said that occupancy per square foot was roughly flat because occupancy (multiple speakers). The square footage was up about the same, so rent per square foot was roughly flat.

Okay. And then you referred to 343 stores that were up for renewal and kick-out, where I think you said the occupancy -- was it occupancy per square foot down 10%?

No, we said -- we looked at the stores that we have either renewed a lease or we have renegotiated rent based on a kick-out and we totaled those stores up and they, as a group, got a 10% improvement in occupancy costs. Just to give you some sense of -- and that was 143 stores that have already taken effect in this fiscal year. Then we called out that we have -- in the next 12 months, we have 227 stores that face that same situation.

So that is over the next 12 months. Okay. So what is your outlook for occupancy then into the back half? And then maybe even into next year, especially as you have more stores up for renewal and kick-out?

Well, let me just talk once more about the second quarter, just get the full impact because this is really meaningful I think. We had an expense reduction of 2.8% with rent up 2.8%, rent up. So obviously there were some good working down of expenses in the other areas. And square footage was up 2.7%. So basically, we are saying, on a rent per square-foot basis, we are basically flat. Last year, in the quarter, rents were up 10% on a square footage increase of 7%. So we made a lot of improvement in just bringing it down to flat and it would be great if we could just hold that flat going forward.

Because it sounds like it could be better than flat.

It could be better, but again, some of these are one-year deals. We are getting kick-out clauses and we are getting them extended and getting a nice break. So it is not like we've got ten-year deals here. So as Bob said very clearly, that as long as the kind of environment remains the same, yes, we could do better than that. But if we can just hold it flat going forward, it would be a huge benefit compared to where we have been in the past few years.

And remember, we talk about 200 something stores that are up in the next 12 months. We have over 2000 stores. So 90%-ish of our stores are on lease and are going to be untouched in terms of their rent. So that whole chunk is a big flat.

Okay. And then Jim, lastly, based on your sales and earnings guidance for the full year, could you maybe just speak to the gross margin and the SG&A side of it in terms of your expectations for the back half?

Well, I think that the key is that the fourth quarter last year was really tough. And I think we have said all along that we expect to see some improvement in gross margin in the fourth quarter and that continues to be true. Hopefully being a little conservative here and hopefully a little benefit. But on the SG&A, we are saying about flat with last year and then get the benefit in gross margin. So I think there is some opportunity in gross margin hopefully. (multiple speakers). I mean not gross margin, but SG&A. Excuse me.

Okay. Because you didn't lose a lot of gross margin in the fourth quarter last year as I recall, not as much as one might think given --.

Well, if you go back two years though, remember we had two bad years in a row. And if you look historically, certainly in Journeys case, we have done better in the fourth quarter from a gross margin standpoint. So there definitely is an opportunity there.

Okay, great. Thanks, good luck.

David Turner, Avondale Partners.

Thanks, good morning. I am curious about ASP trends or I guess average price trends at Journeys. You had mentioned -- I think they were up about 2% for the quarter, which contrasts the commentary that promotional activity has picked up. So I guess was that 2% relatively consistent throughout the quarter or did it -- I mean it would go hand in hand that it would decelerate as the quarter progressed. And I guess is there anything you can add to the outlook regarding ASPs and what sounds like will be continued promotional activity?

Dave, we have promoted a little bit more in the second quarter, as we said. But generally, the driving force for our ASPs has been more mix issues and we are a little more promotional and again, our markdowns a little heavier, but we are a little -- it is still a mix issue more than anything else, a mix issue and individual category is what is going on rather than markdowns. So markdowns might have some impact, but I don't really think it is going to have a major impact on ASPs going forward.

I got you. Thank you. And then also on -- you have talked a lot about occupancy savings, but my guess is -- even payroll, I think you had mentioned and I guess that is what I am more curious about. Cost items other than occupancy I would imagine are subtly going in your favor as well and I guess trying to get how sustainable those savings are. Is this the sort of thing -- if sales improve in Q4 as you have telegraphed, are you going to have to ramp payrolls back up or do other supplies start to pick up in cost as well?

Well, I will just talk to payroll first and hand it to Jim for more. The issue for us in the first half of the year is our volumes are pretty low and so we work with generally a fairly fixed staffing model because, as I have said before, you have to have -- you can't have a half a person in the store on Tuesday. And so we are kind of stuck with what is required there.

Now that said, the team did a nice job overall in the second quarter and we took down the average per store wage about 2%. Remember that we are very commission-driven in most of our businesses and so to some extent, our staffing costs are variablized and so our associates in the stores have an opportunity to make a little more money when things are good. And so that is structured into the business, so to that extent, if comps get better that part of it kicks in.

And the good news on the back half is that we have more flexibility in managing the size of the hours because, all of a sudden, we have a lot of days where we are well beyond minimum staffing and the operating teams can choose what the right level is. And if sales are soft, they can actually react to that, particularly with part-timers. So that gives you some color on the first half/second half. Jim?

Well, basically the same thing. In order to have a drop in expenses of 2.8% and an increase in rent of 2.8%, a lot of other things have to be going down and one of the major ones, as Bob said, is compensation. And it's compensation in the stores, which he talked about, but also Bob said we are very commission-oriented. We are very bonus-oriented around here to and so it is a variability factor there. If we are doing well, we are going to have increased bonus. If we are not doing well, bonuses will come down quite a bit.

But let's put it in perspective this rent thing. Again, rent -- we have been growing square footage anywhere from 7% to 10%. If you go back a few years ago and we were getting rent increase over and above that, basically our square footage has now grown at 1% to 2% and if we can just maintain our rent increases with the square footage increase, that is a big bonus for us. And so I mean that is a very important factor going forward, so we just have to watch ourselves on that. Rent right now represents close to a third of our expenses, so it is not a small number.

All right. Thank you very much. Good luck.

Jill Caruthers, Johnson Rice.

Good morning. A little bit more understanding around the promotional environment. You said that you did have to take more markdowns to lower inventory in the second quarter. Just wondering, into August, have you have to ramp up promotions in order to see some type of improvement in comps and kind of how is that customer reacting?

Well, let's go by chain. The real change in promotional posture is isolated to Journeys and a little bit on Underground Station. What we have seen is, as you well know, Jill, a very promotional mall and our team looked at that situation at comps and at inventory position and made the judgment call that they needed to ramp up year-over-year the amount of promotion that we did in the store just to stay -- to get to the level of inventory liquidation we needed.

So we are thinking that that is just a back-to-school event and we don't anticipate maintaining that posture. As you know, we really pride ourselves on being a full-price retailer and so we really -- internally, we resist doing something that is more storewide as we did and we expect to get back to our old promotional posture and hopefully stay there.

Are you able to adjust promotions per region or per market versus just chainwide, conceptwide?

We can with some of our chains. It is a little tricky and basically because we hold back so much inventory, it is kind of unnecessary because it is mostly about inventory liquidation rates. And we know what the comp trends are in each region, so the store models are reflecting that. So we haven't really felt a pull to have to be regionalized with our promotion.

Thank you.

Chris Svezia, Susquehanna Financial Group.

Good morning, everyone. Just a couple quick follow-up questions here. Just I guess on the inventory for a second and obviously planning for a positive fourth quarter, but I believe that you have made -- because you have gone through summertime -- you have obviously made your buys for the fourth quarter. I was wondering have you made any adjustment to your buys in terms of product mix relative to your original plan or maybe to some degree some opportunistic buys. So if in fact there is some cadence to be more promotional as you go into the back half, you can probably offset that with just better buying in terms of how you are buying product or opportunistic buys, etc. maybe incrementally as a percentage of your business. Maybe just talk about that sort of mix of inventory to some degree for the fourth quarter.

Well, it's a simple answer, Chris. We are not fully bought for fourth quarter. Our team thinks there are certain categories in which they can still react and so as back-to-school -- back-to-school is generally a pretty good read for holiday sales and again, I am talking about the Journeys business. And so our team has left some flexibility in their buy plan both for how much they buy and what that mix looks like. So that is a process ongoing.

Okay, so there is still opportunity to make some adjustments, depending on obviously the next three or four weeks how back-to-school unfolds relative to that inventory commitment, the mix, etc. for fourth quarter, correct?

Yes, and I don't want to overdo it. We are bought, more bought than not bought obviously, but when you are talking and about whether there is a 5% swing in comp, that is a 5% swing in inventory and our guys have retained that degree of flexibility in order to react to both mix trends and overall comp trends.

And when you talk about -- one of the key products obviously -- everyone talks about vulcanized canvas, Chuck Taylor's, distribution of that product has opened up significantly over the past 12 months and generally speaking, skate, some brands have opened up some distribution as well. Nike has done a nice job in terms of opening up some distribution on their side. Are you doing more SMUs and relative to pricing on those SMUs, are they increasing, are they coming down or does your mix continue to increase toward special makeups at Journeys and at Shi?

That's all detail -- that is more detail than we want to disclose. Thanks.

Okay. One last question just on Johnston & Murphy for a second. When you talk about reduction, just what you are doing in the second half from a pricing and product pricing perspective, have you locked up, from a sourcing perspective, margins to adjust your product to that pricing as well? Or is it still kind of working through that inventory piece and then it gets easier as you go through fourth quarter into spring of next year from a product sourcing and pricing perspective?

I am not sure what you mean when you say have we locked in margins. We regularly source with an eye for quality and reliability and pricing. And so each of our different price points target a similar final margin. There is not a big difference. Where we source the stuff differs dramatically. Obviously, our more opening price points are Asian and our very highest in the line is still done in Italy. So when our guys are sourcing, they are going to the appropriate factory and they are buying and have margins top of mind as they create their arrangements. So I am not sure I got your question. So Jim, do you --?

Yes, let me try. I think what you are saying is that you read into what Bob said that we are lowering the price points on Johnston & Murphy and do we have sourcing that allows us to have adequate margins on the lower-priced product. Well, that is not exactly what we were saying. We are saying that we are going to sell more casual, more product at the lower end. We have been selling that product all along, but we have more SKUs. So the sourcing is in place for an adequate margin on that product. It isn't going to be a lag effect.

Okay. I got you. I got you. Okay, thank you very much. I appreciate it.

Scott Krasik, C.L. King.

Thanks. Just a final follow-up. You said, Bob, that you are expecting the economy to recover a little bit and the guidance is predicated on that. There is sort of a balance. Right? You want to get less promotional at Journeys, but the mall is going to be promotional around you. Does that account for you having -- does your guidance account for you having to be promotional at Journeys the rest of the year and the gross margin that that would have? Or do you expect to get back to a non-promotional stance in your guidance?

We expect to get back to a non-promotional stance.

Okay. Thanks.

That does conclude our question-and-answer session. I will now turn the call over to Mr. Bob Dennis for any closing or additional remarks.

Well, thank you all for joining us on this call and we look forward to talking to you all soon. Thank you very much for coming out.

And that does conclude our conference call. Thank you for your participation today.