Genesco Inc (GCO) 2010 Q4 法說會逐字稿

Good day, everyone, and welcome to the Genesco fourth-quarter fiscal year 2010 release conference call.

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

Participants in the call expect to make forward-looking statements.

They reflect participants' expectations as of today, but actual results could be different.

Genesco refers you to this morning's earnings release and to the Company's SEC filings, including the most recent quarterly report on Form 10-Q for some of the factors that could cause differences from the expectations reflected in the forward-looking statements made during the call today.

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

Bob Dennis, President and Chief Executive Officer of Genesco.

Please go ahead.

Good morning and thanks for joining us.

With me on this call this morning as always is Jim Gulmi, our Chief Financial Officer.

Today for the first time in many years we are missing Hal Pennington on the call.

I presume you have seen the announcement last week of Hal's retirement plans.

In view of that announcement and while he is not here to be embarrassed by it, I want to take the opportunity to say just a word of recognition of Hal's tremendous contribution to Genesco.

It would be hard to find someone with a higher level of commitment to a company than Hal has shown for more than 48 years.

As I said in the announcement we made last week, the Company's current strength in many ways bears witness to Hal's focus throughout his tenure as CEO on improving its strategic position.

And as everyone who knows him will attest, through everything he has done here at Genesco and for the greater Nashville community, he has always been a distinguished gentleman, a model of integrity and a true pleasure to work with.

Fortunately, he remains available to help us over the next year and I look forward to continuing to benefit from Hal's wisdom.

For those of you who regularly join our earnings call, you will notice that we are going to change it up a bit today.

Jim Gulmi is going to provide the play-by-play for the quarter, that is talk through the financials and other key metrics, and then I will follow up with some color about the business performance in the quarter and provide comments on our prospects going forward.

Before handing it to Jim, let me hit three key points.

First, we were pleased with the outcome for the quarter with earnings coming in above our expectations.

Sales were choppy overall and particularly challenging at the Journeys stores for reasons I will discuss later, but business at Hat World was especially strong and our direct businesses outperformed in every division.

As a result, overall sales were close to our expectations.

Gross margins and expenses were well-managed, and so earnings ended up above the high end of our guidance.

Second, the businesses all have good momentum going into Q1 with February comps of 6% and every business unit positive.

Last year, February comps were up 7%.

In addition, the direct businesses have continued to be strong, up 17% in February.

And we believe we have some attractive growth opportunities in this coming year, especially within Hat World, as well as an opportunity to improve operating margins in all of our businesses, due in part to our continued success in managing rents, which means we get economic leverage off modest comps.

So while uncertainty about the economy is still in play, we are optimistic about our prospects.

As such, we have reaffirmed our earlier fiscal 2011 guidance of $2.00 to $2.10.

I will speak to our go-forward prospects in more detail after Jim's section.

Finally, we ended the year with a strong balance sheet containing no debt and $82 million in cash.

We bought back $2 million in stock during January, and the board has subsequently raised our share repurchase authorization to $35 million.

We will continue to weigh the trade-off between stock buyback and business investment over the coming year, and make the appropriate decisions for improving shareholder value.

However, at our stock's recent price range, we expect to be a buyer.

Now, let me hand it to Jim.

Thanks, Bob.

Fourth-quarter sales increased 6% to $479 million from $452 million last year.

Comp sales were flat with last year.

As Bob mentioned, our direct businesses were particularly strong with a 21% sales increase, which represented about 4% of total Genesco sales in the quarter.

Comp sales included in the direct businesses increased about 1%.

Comp sales for February in our stores were up 6% compared with 7% last year.

Total gross margin for Genesco increased by 80 basis points to 49.4% compared to 48.6% last year, which was driven by lower margin reductions and higher overall initial mark-on.

Total SG&A decreased to 39.7% of sales in the quarter compared to 40% last year.

Last year's number included $200,000 in merger-related expenses end expenses of $1.7 million related to the termination of a store lease.

Excluding these items in the prior year, SG&A increased slightly to 39.7% compared to 39.5% last year.

It's worth noting that last year's SG&A was reduced by the reversal of bonus accruals when the business downturn took hold in the fourth quarter.

This year's fourth-quarter SG&A actually reflects the increase in bonus accruals related to better than expected performance in some parts of our business.

Without these bonus timing differences, the SG&A percent would have been strongly down.

The restructuring and other line item amount of $2.5 million in the P&L this quarter reflects $3.1 million in retail store non-cash fixed asset impairments and store buyout costs, partially offset by a gain of $600,000 in other legal matters.

Impairments and store buyout costs last year were $3.5 million in the fourth quarter, which were offset by a gain of $3.8 million from the buyout of a store lease, resulting in a gain of $300,000 in the restructuring and other line.

Genesco's operating income was $44.1 million in the quarter compared to $39.1 million last year.

Included in this year's operating income is the net restructuring and other expense amount of $2.5 million.

Last year's operating income included $1.7 million from asset impairments, store buyouts, and merger-related fees, partially offset by the net gain from the termination of the store lease.

Excluding these items from both periods, operating income in the quarter was $46.6 million or 9.7% of sales this year, compared with $40.8 million or 9% of sales last year.

The operating margin improvement was driven by the strong improvement in gross margins I discussed earlier.

Net interest expense for the quarter was $1.4 million compared with $3.4 million last year.

This reduction is due primarily to the conversion of approximately $86 million in convertible notes to common equity during the year and to our strong cash flow in the quarter, which lowered our bank borrowings.

In the fourth quarter in both this year and last year, there is additional interest expense relating to the new accounting standard for convertible debt under APB 14-1, which I have talked about every quarter this year.

The added interest amount this quarter is $37,000, while last year's fourth-quarter interest expense was restated for an increase of $792,000.

This added interest expense in both years is a non-cash expense and was excluded for purposes of guidance.

Pretax earnings for the fourth quarter were $42.2 million, which includes the net restructuring and other expense item of $2.5 million, and expenses of $400,000 from the conversion of convertible notes in the fourth quarter.

Last year, pretax income was $35.7 million, which includes the items I mentioned earlier.

Excluding these items from both years' results, which is consistent with the basis on which we gave guidance for the full year, pretax earnings would have been $45.2 million this year versus $38.2 million last year.

Net earnings in the quarter were $25.9 million or $1.08 per share.

Excluding the items we have already called out and listed in Schedule B of our press release, diluted EPS was $1.16 compared to our guidance of $1.07 to $1.13.

This compares with the adjusted $1.06 per share last year.

Net earnings for the full year were $28.8 million, which included $13.4 million in pretax non-cash impairment charges and $5.5 million in charges related to the negotiated conversion of our convertible notes.

Excluding all of this, EPS was $1.87 compared to November guidance of $1.78 to $1.84.

Last year, excluding the items discussed earlier and the gain from the Finish Line litigation, EPS was $1.81.

Now I'd like to spend some time talking about each business unit.

Hat World Group sales rose 25% to $152 million.

Excluding Sports Fan-Attic, which was purchased in early November, Hat World sales increased 15%.

Comp sales increased 6%.

We estimate that the Yankees World Series victory contributed 2 percentage points of the strong comp increase in the fourth quarter.

Direct sales increased 38% in the quarter and represented almost 5% of total sales for the Hat World Group.

Hat World's operating income was $20 million or 13.1% of sales compared to $14.8 million or 12.1% of sales last year.

Gross margins were lower due to the recent acquisition of Sports Fan-Attic and the lower wholesale margin of Impact Sports.

Hat World did leverage nicely in the quarter due to the strong comp sales increase, and it reduced occupancy costs as a percentage of sales.

February comps for that Hat World Group were 10% compared to a 12% last year.

Journeys Group sales decreased 2% to $225 million in the quarter, and comps were down 3%.

Direct sales increased 20% in the quarter and represented about 3% of the group's total sales.

In the quarter, the Journeys Group operating income was $24 million or 10.7% of sales, compared with $25.5 million or 11.1% of sales adjusted for expenses related to the termination of the store lease last year.

An improved gross margin of almost 70 basis points due to lower markdowns was more than offset by a negative leverage -- negative expense leverage this year.

We were not able to leverage expenses due to the negative comp for the quarter.

ASPs for the Journeys stores increased 4.6% in the quarter, which was driven by improvements in casual footwear, primarily women's footwear, including women's boots.

February comps for the Journeys Group were up 4% compared to a 10% last year.

Breaking this down further for the month of February this year, the Journeys stores' comps were up 3%, Journeys Kidz stores' comps were up 6%, and Shi by Journeys' comps were up 10%.

Underground Station sales were down 5% to $32 million, reflecting a 2% comp decline and a 6% reduction in store count to 170 stores.

Underground Station earned $1.5 million or 4.7% of sales, compared with earnings of $600,000 or 1.7% of sales last year.

This was driven by a strong 470 basis point gross margin improvement due to an improved initial mark-on and lower markdowns.

Underground Station was not able to leverage expenses in the quarter due to a year-to-year swing in bonus accruals and the negative comps.

February comps for Underground Station were up 13% compared with negative 1% last year.

Johnston & Murphy Group sales increased 4% to $47 million.

Johnston & Murphy wholesale sales increased 4%.

Comp sales for the Johnston & Murphy shops and factory stores increased 2%.

Direct sales increased 5% in the quarter to 13% of total quarterly sales for the Johnston & Murphy Group.

Johnston & Murphy's operating margin of 8.7% was up from 4.1% last year, due to an improved gross margin reflecting lower markdowns at retail and a better wholesale gross margin.

Also, expenses as a percent of sales were down, due primarily to lower advertising expenses.

February Johnston & Murphy comps were up 4% compared with a negative 18% last year.

Licensed brand sales increased 8% to $22 million in the quarter.

Its operating margin improved to 13.2% of sales from 11.9% last year.

This was driven by a strong improvement in gross margin due to product mix and lower margin reductions, offset by some negative expense leverage from increased bonus accruals.

Now I would like to talk about our balance sheet, cash flow and capital expenditures.

We ended the year with the balance sheet in great shape.

Cash was $82 million, up from $18 million last year.

Overall cash flow from operations was nearly $100 million for the fiscal year.

During the year, we also paid down $32 million of bank debt and converted $86 million in convertible notes in equity.

We ended the year with zero debt compared to $114 million last year.

Inventories were down 5% at year-end compared with last year, even with $7 million of additional inventory from the Sports Fan-Attic acquisition in November.

Actually, our inventories may have been a little low, which probably had some impact on fourth-quarter comp sales.

Shareholders equity was $582 million compared with $450 million last year.

Late in the quarter, we bought 85,000 shares at an average price of $23.84.

The total cost for these shares was about $2 million.

We have stated our desire to make value-creating acquisitions, but we will also be opportunistic in buying our stock.

As Bob has said, our board has recently raised our share repurchase authorization to $35 million.

Our intention is to put our cash to work.

For the quarter, capital expenditures were $5.9 million and depreciation was $11.7 million.

Capital expenditures for fiscal 2010 were $33.8 million.

Depreciation for the full year was $47 million.

In the fourth quarter we opened at 17 stores, acquired 37 Sports Fan-Attic stores, and closed 21 stores.

For the full year, we opened 61 new stores, acquired 38 stores including the Sports Fan-Attic stores, and closed 57 stores.

That was a net increase of 42 stores or 2%.

Square footage was up 5% during the quarter.

Excluding store acquisitions, which were made late in the year, square footage increased by about 1%.

We ended the year with 2276 stores compared with 2234 stores last year.

This was made up of 921 Hat World stores, including 60 stores in Canada and 37 Sports Fan-Attic stores, 819 Journeys stores, 150 Journeys Kidz stores, 56 Shi by Journeys stores, 107 Underground Station stores, 116 Johnston & Murphy shops, and 44 Johnston & Murphy factory stores.

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

We remain comfortable with our earlier EPS guidance of $2.00 to $2.10 for the new fiscal year.

Consistent with previous years, this EPS guidance does not include about $9 million to $11 million or $0.23 to $0.28 in expected non-cash asset impairments.

Impairments in store terminations in FY '10 were $14 million or $0.36 per share.

Even though we are not giving quarterly EPS guidance, we do want to note that in the second quarter last year we were reversing bonus accruals, which will make the comparison especially hard this year in our seasonally lowest sales quarter.

Our comp guidance is in the range of 2% to 3% for the full year.

We planned based on the assumption that comps in the first quarter will be flat to up slightly, and positive 2% to 4% for the remaining quarters of the fiscal year.

Our financial plans were completed in January before we saw the February comps.

Obviously, our February comps make us feel good about the comp guidance for the first quarter.

Sales are expected to be in the $1.7 billion range for the fiscal year.

We expect to have a positive cash flow in FY '11, though not as strong as in the year just ended, as we believe inventories were a little low late in the year.

Capital expenditures are expected to be in the $40 million to $45 million range for the new fiscal year.

This assumes 69 new stores, which are made up of 45 Hat World stores, including 15 Canadian stores and 5 Sports Fan-Attic stores, 12 Journeys stores, 3 Journeys Kidz stores, 5 Johnston & Murphy shops, and 4 factory stores.

We also plan to close about 59 stores which consist of the following; 21 Underground Station stores, 10 Journeys stores, 5 Journeys Kidz stores, 4 Johnston & Murphy shops, and 19 Hat World stores.

Depreciation in the year should run in the $45 million range.

We are estimating an effective tax rate for the fiscal year in the 40% range.

We are also assuming a share count of about 24 million shares for the year.

Now, I will turn the call back to Bob.

Thanks, Jim.

Let me spend a few minutes giving you some additional color on each of our businesses, starting with Hat World.

Hat World had a terrific performance in the fourth quarter.

They Yankees gave the business some help, but this only explains a portion of the upside performance, roughly 2% of the 6% comp gain.

The rest can be attributed to a general strength in the business, reduced competition, the continued rollout of in-store embroidery, and better execution of the NFL business this year versus last year.

Within the core hat business, strength came once again in Major League Baseball, action brands, private-label and embroidery.

We will continue to expand the core hat business with 40 new stores planned for the coming year.

Our Sports Fan-Attic business acquired this past November added nicely to the fourth-quarter results.

This is a business we are anxious to grow, both through new store openings and acquisitions, with our target of achieving a national footprint over the next several years.

Finally, a quick comment about our Impact Sports performance.

Fiscal 2010 was an investment year in both systems and people.

In fiscal 2011, we expect substantial growth in the top line and in nicely positive bottom line.

We also see the possibilities of further acquisitions in this space.

From an investor's perspective, one thing we have noticed is that Hat World's importance seems to me underweighted relative to the role it plays in Genesco.

It is noteworthy that for the year just completed, Hat World represented 43% of the Company's operating profits before our unallocated corporate charge, roughly the same as the Journeys Group.

And because Hat World has recently achieved such strong returns on invested capital and has compelling new business opportunities, we plan for it to receive a disproportionate amount of the Company's investment in the near term.

To help investors get a better handle on our plans for Hat World, we are going to get out on the road with a presentation focused exclusively on this business in the near future.

But here is a quick summary of Hat World's strategy.

The overall theme is that under the Lids brand umbrella, we are building three interrelated marketing machines that each provide very nice returns and have significant growth potential.

The first, of course, is the hat business, of which we have more than 800 stores and the most significant website in the category.

We believe we can take this to over 1000 stores in North America.

The second is a fan-oriented specialty chain built on the Sports Fan-Attic acquisition and to be renamed Lids Locker Room that sells a broad array of licensed merchandise.

We see the opportunity to build this out to cover a national footprint and in addition, we plan to add e-commerce capabilities.

The third leg is a team sport business built on the Impact Sports acquisition, which is a wholesale model and is being renamed Lids Team Sports.

These three businesses are all supported with one leadership team and one back-end support system that provide lots of synergies which in turn drive cost efficiencies.

On the front end, our goal is to have the customer think of Lids first, whether they are thinking about the teams they play for or the teams they root for.

Again, we see lots of synergies in the way we market to this customer.

For example, with loyalty points that reward their overall business with Lids, and with a common customer database supporting cross-selling capabilities.

We look forward to engaging with you on this strategy in greater depth during the coming year.

Now let me cover Journeys.

Overall, the footwear industry this past season was driven by two key categories, women's boots and the emerging fitness toning category.

The core Journeys business had the advantage of participating in the strong boot business, but did not participate in the enormous success of the toning category.

Going forward, we have decided to move carefully into the toning category.

We are not yet fully convinced that teens have grabbed onto this trend as of yet.

However, certain vendors have produced product for spring that we judge to meet more fashion-oriented, and as such, better suited for our customer.

Therefore, we will give it a shot.

And likewise, we also see the possibility for the category in Shi by Journeys.

The biggest point of merchandise weakness for Journeys was athletic, while our casual business again helped by boots had a nice increase.

But within athletic, our traditional Sk8 brands held up nicely.

Finally, we were too ambitious on our expectations for inventory turns and probably tried to do too much with too little in the fourth quarter.

This will be an opportunity for improvement in the coming year.

We will not be aggressive on new stores at Journeys this year.

We are particularly gun shy of opening in marginal malls in this environment because we expect that further store closures from other retailers will continue and cause these marginal malls to go even more downhill.

Our focus for sale gains will predominantly on comp.

That said, we think there is a good opportunity for Journeys in Canada where we have had great success rolling out the Hat World chain in recent years.

This spring Journeys will open its first 3 Canadian stores, all in the Toronto market.

The focus of the Journeys team right now is on improving operating margins where the group finished fiscal 2010 at roughly 6% versus recent historical historic levels in the low double digits.

They are working the expense equation hard, especially rents, but the key to getting back to these historic levels is comp sales.

And improving economy will be helpful as would some significant shifts in fashion away from traditional athletic styles and into brown shoes, a trend where we see some encouraging signs.

For now, Journeys is budgeting a low single-digit comp for the year and plans to leverage that comp into a slightly-improved operating margin.

Upside to that plan exists if fashion trends indeed become more advantageous.

Journeys Kidz performance in the fourth quarter was especially strong due to the destination it had in boots, and good results with accessories which were up 11%.

The kids athletic business also remains solid.

We continue to work the assortment at Shi by Journeys, but results are still below our expectations.

So we will continue to stand pat on stores until we can manage significant improvement.

Many of these stores were opened at the top of the real estate market, and we are entering a period where we get to address many of the leases via kickouts, which could improve financial performance considerably.

But we need some good comps as well to call this business a success.

One real bright spot for all the Journeys brands was our direct business, which was up 20% in the quarter.

The team has done a terrific job of using our new store POS to promote the direct business, engaging our customer through social media and providing better inventory of availability to our direct customers.

In the next few weeks, we are rolling out our e-commerce enabled mobile website and adding international fulfillment to direct.

Journeys finished the quarter with a lean inventory position, which has given them a great opportunity to present its new spring product, and they are off to a solid start in February.

Now for Underground Station.

We continue to drive positive cash flows at Underground Station with our strategy of gradually downsizing this business for now.

For the year, Underground Station had a positive cash flow of almost $2 million.

The team has done a nice job managing the expense side of the business with many stores achieving significant rent reductions, some over 50%.

February's comp of positive 13% has probably been helped by tax refunds and a good inventory position early in the month.

We keep in mind that these are still very difficult times for the Underground Station core customer, but that said, we also feel that we may be finding the bottom for this business and we see product trends that are definitely in our favor.

We remind you that Underground Station has a core group of about 100 stores that are profitable on a four-wall basis, and we have not wanted to throw out the baby with the bathwater.

Johnston & Murphy also looks to have found the bottom with positive 2% comps in the quarter and a positive 4% comp in February.

We continue to find good success in categories that we believe will be strong drivers of future growth -- more men's casual footwear, men's non-footwear categories, and women's.

Indeed in the 38 Johnston & Murphy shops that carry women's product, women's sales represented about 10% of fourth-quarter sales.

And men's non-footwear represented about 40% of sales in Johnston & Murphy shops, showing that Johnston & Murphy has been widely accepted as a lifestyle brand rather than simply a category player.

Licensed brands led by our Dockers business had a terrific year and delivered record earnings in fiscal 2010, achieving the highest operating margin in the Company.

Dockers continues to perform well at retail and has solidified its number two position in the men's fashion footwear segment in its traditional channels of distribution.

However, our ability to add more doors is limited since distribution is nicely built out.

As such, we are pleased to have found newer opportunities to grow the license business through our more recent licenses -- Chaps by Ralph Lauren, and Joe by Joseph Abboud.

Both of these brands have hit retail and are performing quite well, but have limited distribution for now.

As a result, we are excited about their potential for growth.

Given our great run in our license business, we are keen to find additional opportunities to grow this operation and to leverage the talents of the exceptional team we have in place.

So that wraps up our individual businesses.

Let me conclude with a few summary points.

First, we believe our portfolio of businesses is strategically well-positioned.

We continue to enhance each business's position as a leader in their niche and to execute initiatives that make them even more difficult for others to replicate.

Second, we have come through this recession in fine shape and we continue to consider the glass to be half-full.

We have a much stronger balance sheet.

We made important expense reductions, especially in rent, that should continue and which reduce our leverage point.

We've pursued several operational achievements that strengthened our core businesses, most notably Johnston & Murphy's continued diversification away from men's dress shoes, and Journeys new POS which delivered many operational advantages.

And finally, we completed two new acquisitions that give us terrific platforms for future growth.

Finally, we enter 2011, fiscal 2011, with good momentum on comps and some encouraging signs of fashion trends possibly moving in our favor within Journeys world.

Now, we will be happy to take your questions.

(Operator Instructions) Scott Krasik, BB&T Capital Markets.

Good morning, guys.

Just appreciate the extra color on Hat World, but just first on Journeys.

Over the next couple of years, I think given the fact you are not opening a lot of new stores, Sk8 appears to be holding its own but not growing as much as it was a couple of years ago; how do you feel about operating margins for the Journeys Group?

Well, the nice thing about Journeys, a couple of things.

First, the leverage point has come down, right, because we are attacking rents there.

We don't quite get the results we get in Underground because of the mix of malls they are in.

But small amounts of comp within Journeys is going to improve operating margin.

So the first thing to keep in mind is even in this year where they've drafted a budget in low single digit, they are going to get operating margin improvement.

Secondly, they need a fashion shift to really drive compts.

That is probably what is going to happen.

And we are seeing some initial signs that that might be beginning.

So there has been a bit of a stagnant position in terms of what the kids have been wearing, and that is not the best thing for comps.

So if we get a shift in that, that would be nice.

Then the third thing is we are looking for other ways, other opportunities, to continue to grow the business.

And I think the move into Canada, although it is only three stores to start, is a good measure of that.

As you know, the Canada business can become another 10% to 20% pickup in your store count, and those stores are typically more productive than they are in the United States.

So that is another nice point of increase.

So what you need to think about in Journeys is it is probably not business as usual, which is expect automatic big comps and a continued aggressive store rollout.

The story has changed there.

The last thing to keep in mind is we continue to work to try and get the Shi by Journeys business to be where we want it.

And that has significant rollout potential if we can get that thing positioned where we have always expected it to be.

You had some nice ASP increases I think in the first part of last year, and then they started to go the other way.

What do you see from a fashion perspective over the next few quarters?

Should prices be trending up, down, flat?

Let Jim talk to the ASPs.

Well, ASPs were up in the fourth quarter, Scott.

They were up 4.6% for Journeys, so we did see an increase.

I think they were down most of the year.

I think in the third quarter, they were down -- they were up for most of the year.

They were down in the third quarter, but they were up in the fourth quarter, 4.6%.

So strong improvement.

And then fiscal 2011?

You know, Scott, we've answered this the same way before.

We don't plan the business with a target ASPs.

We go where the kid takes us, you know, and the kid has taken us for the last seven or eight years down to lower ASPs, due to a trend into a lot of lower-priced athletic goods in particular.

So it will depend on whether we shift out of that.

If there is a shift into brown shoes, and particularly if those brown shoes are more boot-oriented, there should be an expectation that ASPs would go up in tune with that.

But Journeys has demonstrated that even in many years without an ASP increase, they had a comp increase.

So we really focus on just gaining share with the teen customer, and we don't focus as much absolutely on ASPs.

That is sort of a derivative event of what the kids buy.

That is fair.

And your comment, I guess, about maybe the beginnings of a shift, that would be a positive as well.

You are not committed to it, but --.

Right.

Okay, good.

Scott, let me just jump in.

One thing just on the brown shoe versus the white shoe issue, as you know, Journeys is not an athletic store.

It can sell either white shoes or brown shoes.

In the earlier years, it was selling primarily brown shoes and we were doing great.

So a move out of athletic into brown if it is really occurring is not a bad thing.

We have done well in brown shoes and we have done good in white shoes.

So we can do well in both.

Indeed, we actually think the shift to brown shoes with Journeys, it makes us more differentiated; whereas a lot of the athletic and a lot of those brands have relationships with others in the mall and there is pressure on them to try and accommodate them.

That doesn't exist with brown shoes, so we think that is a plus.

Okay, that is good.

The decision to rename Sports Fan-Attic and brand it Lids, does that in your mind accelerate the opportunity to either roll up some of these local stores or open your own, or has the strategy not changed?

Well, the strategy has been, since we looked at the opportunity, is to create three big legs of the stool that collectively address the kids' need in the sports space.

We have always contemplated the idea that there is one brand umbrella over that.

So our ambition to grow this business is the same as it has been.

And we are just articulating for you all right now exactly how we expect to do that, with cobranding being a piece of that.

So really nothing has changed in the way we are thinking about it, other than the way we are articulating it to you guys.

But are you going back and rebannering the stores?

We will, but it will take some time.

We are not going to do a big wholesale event.

A lot of times the prudent way to do that, particularly with stores, is on lease renewals.

So we will do it over time.

But in terms of the communications to the customer, the website branding and certainly the team sports side of it, we will be moving more and more towards that, but just doing it in a financially prudent way.

Okay.

All right, thanks, guys.

Good luck.

Mitch Kummetz, Robert W.

Baird.

Thank you.

Let me just follow up on Scott's questions about Hat World.

Again, we appreciate the color, but that just prompts me to want to know more about it, I guess.

Bob, you mentioned strengths in the quarter there, major league baseball, action sports, private-label, embroidery.

Is there some way to frame that for us or put some numbers behind it to give us some context as to how important those four components of the business are for you?

And I guess the mix kind of shifts as we go through the year.

I mean MLB was probably, I don't know, big in the quarter; maybe it becomes smaller as we -- in Q1, I don't know.

But maybe just a little help on that.

Sure.

Let me just give it a historical perspective.

This business shifts over time, and there's two pieces of it.

One is the sports fan and what they buy, which is a fairly predictable and steady business.

And there is a seasonality to it that hooks directly to the sports.

The other component of it is what kids wear for fashion.

When I first got involved with Hat World in 2001, college was all the rage.

And the kids wore to high school -- the number one brand was University of North Carolina on the heels of the old Jordan success, and the Carolina blue was hot.

That was a huge chunk of the business.

That has come down and the kids have moved into other products that they wear more on a fashion basis.

So you have to think about the business in those two components.

If you think about the seasonality and then the absolutes, Major League Baseball is our biggest category and it runs in the 30% to 40% range of -- Jim is showing me a number -- it is in the low 40%s now, which includes both the fashion component, which is very important right now, as well as the fan business.

And that stays pretty steady across the year.

Obviously, during baseball season it is a little higher, but it is a 12-month business.

And the NFL is a seasonal business, and that is really a fan-oriented item, which is big in the fourth quarter and is much less important in the second and beginning of the third quarter.

College is a steadier business.

And then what we call the action sports business, which is a component of our branded business, runs in the 15% to 20% range, and that has become very important.

And it is a lot of the same brands that you see in Journeys.

The thing the Hat World guys are good at doing is they rotate out of what the kids want from a fashion perspective and they move, and that has changed probably five times over the last 10 years as they went from trucker hats; they were in visors; at one point it was college.

And right now, it is a combination of action sports and Major League Baseball fashion.

Then can you remind us, where are you with the embroidery?

How many doors is that?

What is the outlook for that going forward?

Then remind us what the economics are when you add that to a store?

We have -- it's ballpark.

Jim is pulling the numbers.

Ballpark, half our stores have embroidery right now.

And when we add embroidery to a store, we get a lift in two ways.

One is the actual embroidery revenue we get, and then we get revenue from the customer who walks in and buys a blank hat and makes up a hat from scratch.

Now, not all embroidery is that way.

A lot it is the kids putting their name on the sides of a licensed hat.

But if you add it all up, we typically pick up about -- if everything is unchanged, so you are not cannibalizing sales when you retrofit embroidery, we pick up about 8% of revenue at a very, very good gross margin, much higher than the average.

So you would ask why is it only half the stores?

This is another item we are rolling out as quickly as we can, but we do it in a financially prudent way.

We have some stores where the footprint is just simply not adequate for supporting.

At an airport store would be a good example, just don't have enough space.

And then we have a bunch of stores where we are waiting for the lease renewal.

Because you don't want to do the retrofit in a store where you only have a little bit of lease life left.

It will -- it's too disruptive and you don't get a good return on the investment.

The ambition, though, is to have the large majority of our stores, including the Sports Fan-Attic format, to have embroidery.

What we like about it is it is a business that is not easy to do.

We had a couple of swings and misses as we tried to really make it work operationally, but we've cracked the code on it.

And again, we make this point about businesses that are difficult to replicate.

Because it is hard to do, we think it is hard to replicate, and that gives us a real advantage in the marketplace.

Okay and then -- go ahead, Jim.

We ended the year with about 450 stores with embroidery, up from about 370 the previous year.

Okay.

What is in the outlook for fiscal 2011?

On embroidery?

Yes.

Jim, do you have the number?

No, I don't.

I don't have it here, but it has continued to drive rollout.

Most of our new stores will have it, so there is 40 there.

And then we are planning to retrofit I believe all of the Sports Fan-Attic stores, so that is another 37.

And then there will be another handful of Hat World stores.

So it probably starts to sneak up towards 100, in terms of the stores we are targeting.

Okay, thanks, that is helpful.

Then maybe just a couple modeling questions.

One, what is your comp outlook by business unit for fiscal 2011?

Bob, you said low single digits on the Journeys side.

Can you -- maybe, Jim, can you talk about the other businesses?

Yes.

It is about the same for all of the businesses.

Yes, it is about the same for all the businesses with the exception of Underground Station, and they would be in the mid-single digit range.

And then Johnston & Murphy probably in the mid-single digit range also, and then Hat World and Journeys, the 2% to 3% range.

Okay.

Then just thinking about the operating margin in terms of versus SG&A, I'm having -- I've got to go back and look at the numbers.

But assuming some pickup on the operating margin side for the year, how would you expect that to break down?

And how much of that is going to be just better occupancy, given some of the things that you are doing with rents?

I think that if you look at the improvement in operating margin, we are expecting to see some improvement in gross margin.

And also even with the comps at 2% to 3%, we do think we can get some leverage.

So it is going to be a combination of gross margin SG&A.

And the benefit or the increase in operating margin will come, let's say, half and half from gross margin and SG&A leverage.

A lot of that is coming from, or at least some of that is coming from the leveraging of rent.

Because in the plan, our bonuses are going to be up -- we're going to be doing better.

So even with the bonus increase, it is going to be leveraging.

So most of it is coming out of rent.

Okay, that is helpful.

All right, thanks, guys.

Good luck.

Tom Haggerty, Susquehanna Financial Group.

Good morning.

Just a quick question on Underground Station.

You talked about a little bit on what was driving February's product.

Can you expand a little bit more on that and what you are actually seeing --?

I'm sorry, can you just talk a little louder?

We just can't quite hear you.

Sorry.

I'm wondering on the Underground Station station side, can you give a little more color on the product that is actually driving the comps (inaudible)?

Well, the boot business has become more important, and Underground Station was well-positioned there, and that is both men's and women's.

Our expectation is that there is a bit of a trend of guys to moving into wearing boots, which was an important trend years ago and gave up a lot of ground to athletic.

That is a sustained trend that plays in Underground Station's favor, because they are more distinctive and have better vendor access in that space than they do in athletic, given that they lack Nike.

So we like that trend and we are keeping an eye on it, and we are hopeful.

All right, very good.

Then just secondly, on the toning trend, you just kind of dip a toe in it seems.

Can you just give a little more color on how you think that is going to roll out into Journeys?

Well, we don't know.

We have been sort of a house divided on whether the teen is really going to look at this product as part of their closet.

It is obviously a very compelling trend for overall footwear.

It has been really driving in the family channel.

The first wave of shoes that we saw out there from the various vendors just didn't really look like they hit the fashion queue all that hard.

And that was the reason that we had a heavy level of skepticism.

A lot of the vendors recognizing that have come back and produced some product that our merchants judge to be more in line with what teens might find acceptable.

So we are going to see.

And the beauty of being a big chain like a Journeys is that we can test a lot of stuff without hurting the business.

And we have good relationships with vendors and if we see that it is working, we can make it a bigger part of our business as the year goes forward.

So it is hard to answer how it is going to roll out because we don't know what customer acceptance we are going to see.

But we are certainly going to learn a ton this spring, and we will move forward on the basis of that.

Fair enough.

Do you think that you would be differentiated from some of your other -- some of the other mall guys because they are getting into it as well?

You know, if it becomes important to us, our Journeys team has a great history of being able to work with vendors to at least make part of our assortment differentiated.

Now, when you dip your toe in, that is not the basis on which you can create big differentiation.

But if we committed to it, I would expect like every other category we can use our size to earn our way into some differentiation.

Great, thanks, guys.

Jillian Caruthers, Johnson Rice & Co.

Good morning.

If you could just quickly address the first-quarter comps.

If I heard you right, you said you were looking for flat to kind of up slightly.

Is that just due to it's your toughest quarterly year-over-year comparison?

Well, we said two things about the first quarter.

One, we said that our expectations were sort of flat to slightly positive.

And that was really -- we built that plan off of the fourth-quarter trend which, as you know for the overall Company, fourth quarter was a little more challenging.

Now that said, February has turned out to be much stronger than we expected, particularly given that we were going against a strong February last year.

So on the one hand, we have given some fairly modest guidance and on the other hand we have gotten out of the gate very strongly.

We keep in mind that last year we got out of the gate very strongly, and things really cooled off for us in March and April.

So there is some seasonality.

We don't know if that seasonality is a permanent effect or not.

So we are still staying a little cautious on our expectations.

But certainly can we -- we can feel a little upbeat given the start we have gotten.

Jill, last year the first quarter was our strongest comp quarter, and that was led by February.

So from a planning standpoint going into this year before we actually saw any February results, we were very cautious on the first quarter.

And obviously, we were surprised at the strength in the month of February.

Understood.

And maybe the strength -- it looks like all business has somewhat recovered from fourth quarter.

Was there a business or maybe a region that far exceeded your expectations that stuck out?

No.

Regionally, if you look across the businesses, the one thing that stands out is the weakness that existed in the Northeast, which is obviously tied to all of the snowstorms that went through there.

And it pretty much hit our businesses across the board, and so we were weak in the Northeast.

The other good callout is in February as a company, the West was positive.

And as you know, the West has been a challenge for a lot of retailers, so maybe there is some signs that that has bottomed out.

Okay, and then just switching gears.

On Sports Fan-Attic, I know the margins are lower than your core Hat World business is.

Maybe you could maybe quantify that variance or talk about ways to improve to get it up to the core Hat World level.

I will talk to part of that, and I will hand it to Jim.

The margins are lowered.

It's a category mix effect that is in there.

But at the same time, we believe there is a real opportunity to improve the margins there.

And right out of the box, the headwear category, which is one of their largest categories, we're obviously going to swing them into our discount structure, which we know is substantial.

So we will pick up something there.

And then as we continue to make this business bigger, we have the history of Hat World where we -- when we went from beginning of this decade, 150-store chain to an over 800-store chain, we know what that size brings us in terms of opportunities for margin enhancement.

And we expect to see the same kind of effect on Sports Fan-Attic renamed Lids Locker Room as we roll it out.

I will hand it to Jim for any more color.

Yes.

A little more color on that.

And I'm glad you asked the question because the implication may be that the gross margin of Sports Fan-Attic is not that strong.

Actually, the gross margin of Sports Fan-Attic is very nice.

It is just not as nice as Hat World.

And its differential is not that great, but it was enough to bring -- that along with wholesale business was enough to bring the Hat World retail business in total down.

But I want to emphasize, it is still a very nice gross margin and it is just slightly -- it is slightly below Hat World which has a very, very good gross margin.

Understood.

Thank you.

We currently have no questions in the queue.

I will now turn the conference over to Mr.

Bob Dennis for closing or additional remarks.

Well, thank you, everybody, for joining us, and we will talk to you in three months as we finish the first quarter.

Thanks.

That does conclude today's conference call.

Thank you for your participation.