Genesco Inc (GCO) 2011 Q1 法說會逐字稿

Good day, everyone and welcome to the Genesco first-quarter fiscal year 2011 conference call.

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

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

They reflect the 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 Form 10-K 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 would like to turn the call over to Mr.

Bob Dennis, Chairman, President and Chief Executive Officer of Genesco.

Good morning, everybody and thanks for joining us.

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

Sticking with last quarter's format, Jim is going to talk through the financials and other key metrics for the quarter and then I will follow-up with some color about the performance of our individual businesses and provide comments on our prospects going forward.

But before handing it to Jim, let me touch on five items that represent the major highlights from the first quarter.

First, the top line showed some solid evidence of recovery.

Total sales for the quarter were up 8% driven primarily by a comparable store sales increase of 5%.

Lids Sports Group and Johnston & Murphy Group showed especially strong comps while Journeys Group was up 2% against its strongest comp quarter last year.

Underground Station comped flat with last year, but it recorded its first operating profit in the opening quarter since 2006.

And our Licensed Brands business increased year-over-year profits despite slightly lower sales.

Our direct businesses in the aggregate all performed well with sales increasing by 14% versus last year.

And the overall sales recovery continued into May with month-to-date comp sales at plus 3% through last Saturday.

Second, these sales gains helped us improve our financial performance, especially given our solid expense control.

The first quarter's EPS more than doubled on a basis consistent with the adjustments described in the release due to improvements in all components of the business -- a nice sales increase, improved gross margin and the leveraging of operating expenses.

Noteworthy is that we continue to make good progress resetting rents.

We had about 100 rent opportunities, either renewals or defaults or kick-out renegotiations, in the quarter and in those stores, we reduced rent by an average of 9%.

Third, with the improving economy, we are increasingly comfortable at pursuing growth initiatives.

We have been quite pleased with the results Lids has achieved in Canada and building on that success, we are testing Journeys in the Canadian market.

On May 1, we opened our first Journeys store in the Toronto market.

We will open two more stores there in the next few weeks.

In addition, we continue to execute our strategy of leveraging the Lids brand franchise.

Earlier this month, we acquired a small team dealer, Brand Innovators, which adds to our Lids Team Sports business.

Also, as we announced yesterday, we have entered into an agreement to acquire Sports Avenue, a team sports retailer.

If all goes as planned, this transaction should close by late summer.

I will discuss these two acquisitions later in the call.

They obviously represent progress on the strategic path that we laid out for the Lids sports business on our fourth-quarter call.

Fourth, a cautionary note about our business involves supply chain issues.

As the economy recovered and the industry sought to re-inventory from unprecedented low levels, capacity issues emerged.

Complicating this dynamic was the failure by many Chinese workers to return to their factories after Chinese New Year.

Our inventory positions at Licensed Brands and Johnston & Murphy have been affected most by this situation.

Lids and Journeys fared much better due, we believe, to their size and importance to their vendors.

Right now, we do not see this as a major issue for the year, but it could be a slight drag on the second quarter.

I will return to this issue as we discuss our individual businesses.

My last highlight before I turn the call over to Jim is that our balance sheet remains very strong.

We ended the first quarter with no debt and $105 million in cash.

This is a dramatic improvement from last year's cash balance of $17 million and debt of $52 million at the end of the first quarter and equips us well to fund our growth initiatives.

We are off to a good start for the year and we are looking to build on this success as we move forward.

Now I will ask Jim to walk us through the numbers.

Thank you, Bob.

First-quarter sales increased 8% to $401 million from $370 million last year.

Comp sales increased 5% in the quarter.

As Bob mentioned, our direct businesses were once again particularly strong with a 14% sales increase, which represented about 3% of total Genesco sales in the quarter.

Comp sales for May in our stores are running at 3% through May 22.

Total gross margin for Genesco increased by 80 basis points to 51.9% compared to 51.1% last year.

This was driven by a higher overall initial mark on and lower margin reductions.

Total SG&A decreased to 47.7% of sales in the quarter compared to 49.2% last year.

We were able to leverage occupancy, depreciation and advertising expenses.

The restructuring and other line item amount of $2.4 million in the P&L this quarter reflects retail store non-cash fixed asset impairments and compares with $5 million last year.

Genesco's operating income was $14.6 million in the quarter compared with a loss of $3.2 million last year.

Included in this year's operating income is the net restructuring and other expense amount of $2.4 million.

Last year's operating income included $5 million from asset impairments and other items I mentioned earlier and costs of $5.1 million associated with our inducing convertible noteholders to convert their stock into common stock.

Excluding these items from both periods, operating income in the quarter was $17 million, or 4.2% of sales this year, compared with $6.9 million or 1.9% of sales last year.

This operating margin improvement was driven by the improvement in gross margins and the leveraging of expenses.

Net interest expense for the quarter was $235,000 compared with $2.2 million last year.

Last year's interest expense included incremental interest of $809,000 from a change in accounting for convertible notes.

In addition, as noted in our 10-K, we reclassified bank charges in the fourth quarter.

Bank charges are now recorded in SG&A, but were previously included in interest expense.

In the quarter, bank charges were $900,000, flat with a reclassified amount for last year.

Pretax earnings for the first quarter were $14.3 million, which includes the net restructuring and other expense items of $2.4 million.

Last year, the pretax loss was $5.3 million, which included the total of $10.1 million of net restructuring items and costs associated with the convertible notes and the $800,000 of incremental interest that 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 $16.8 million this quarter versus $5.6 million last year.

Net earnings in the quarter were $8.6 million, or $0.36 per share compared to the loss of $0.31 per share last year.

Excluding the items we have already called out and listed in Schedule B of our press release, diluted earnings per share was $0.42.

This compares with the adjusted $0.17 per share last year.

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

First, Lids Sports Group.

Lids Sports Group sales increased 21%.

Excluding Sports Fan-Attic, now referred to as Lids Locker Room, which we acquired in November, sales increased 16%.

Comp sales increased 10% on top of 7% last year.

Direct sales increased 17% in the quarter and represented about 4% of total sales.

May comps for the Lids Sports Group are running at 5% -- are up 5% through May 22.

Lids Sports Group's gross margin was lower in the quarter.

Operating income was $9.8 million, or 8.2% of sales compared with 6.5% or 6.6% of sales last year.

Gross margins were lower due to the acquisition of Sports Fan-Attic and the lower gross margin of Lids Team Sports, which is a wholesale business.

Gross margin was actually up for the Lids hat stores.

Expenses were leveraged nicely, which was the driver of the higher operating margin.

Occupancy expense again was an important contributor to expense leverage in the quarter.

Journeys Group sales increased 3% to $182 million from $177 million last year.

Direct sales increased 13% and represented 2% of sales.

Comp sales in the quarter increased by 2%.

Journeys Group's operating income improved to $9.1 million from $5.5 million.

Operating margin was 5% compared to 3.1% last year.

This improvement in margin was driven by both an increased gross margin and the leveraging of expenses.

Margin reductions were down in the quarter and we were able to leverage occupancy expense and depreciation.

Comp footwear ASPs for the Journeys stores were down 1.4%.

This was caused by lower ASPs in athletics, offset by increases in men's and women's casual.

May comps for the Journeys Group are running at 5% through May 22.

Underground Station's sales were down 2% to $26 million, reflecting a flat comp and an 8% reduction in store count to 163 stores.

Underground Station earned $765,000, or 2.9% of sales compared with a loss last year of $450,000.

This was driven by a strong 260 basis point gross margin improvement due to an improved initial mark on and lower markdowns.

Underground Station was also able to leverage overall expenses due to a strong leveraging of occupancy costs and depreciation.

May comps for Underground Station are running at negative 13% month-to-date.

Johnston & Murphy's Group sales increased 13% to $45 million.

Johnston & Murphy wholesales sales increased 16%.

Comp sales for the Johnston & Murphy shops and factory stores increased 10% in the quarter.

Direct sales increased 11% in the quarter to 11% of total quarterly sales for the Johnston & Murphy Group.

Johnston & Murphy's operating income of 5.1% was up from 0.4% last year due to an improved gross margin reflecting lower mark owns at retail, higher initial markdowns and a better wholesale gross margin.

Also expenses as a percent of sales were down due primarily to leveraging (inaudible) -- occupancy, selling salaries and depreciation.

May comps for Johnston & Murphy as of May 22 were running at minus 1%.

Licensed Brands sales decreased 1% to $28 million in the quarter.

As Bob mentioned, we feel that we probably missed some business in the quarter from unusually low inventories due to reduced manufacturing and shipping capacity in China in the quarter.

Also, we had fewer closeout sales this year and last year's 15% sales increase was the strongest quarter of the year for Dockers.

Operating margin improved to 16.5% of sales from 12.7% last year.

This was driven by a strong improvement in gross margin due in part to fewer closeouts and the leveraging of expenses.

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

As Bob noted, we ended the quarter with the balance sheet in great shape.

Cash was $105 million, up from $17 million last year.

We ended the quarter with zero debt compared to $52 million last year, including bank debt of $23 million.

Inventories were down 1% at quarter-end compared with last year, even with the $14 million of additional inventory from the Sports Fan-Attic acquisition in November.

Shareholders' equity was $592 million compared with $510 million last year.

For the quarter, capital expenditures were $6.5 million and depreciation was $11.7 million.

We opened 13 stores and closed 22 stores.

We ended the quarter with 2,267 stores compared with 2,236 stores last year.

This year's number was made up of 885 Lids hat stores, including 62 stores in Canada, 37 Lids Locker Room stores, 817 Journeys stores, including one in Canada, 150 Journeys Kidz stores, 56 Shi by Journeys stores, 163 Underground Station stores and 159 Johnston & Murphy stores.

Now to discuss guidance for the year.

We obviously had a good first quarter led by better than expected comp sales.

Because we remain cautious about the economic environment, especially for the Underground Station customer and the need to be sure the supply chain issues are fully behind us, we have built some flexibility into our guidance in case conditions should change.

We continue to be optimistic about our full-year growth prospects and therefore are raising our annual guidance by $0.10 and now expect diluted earnings per share between $2.10 and $2.20, up from our previous guidance of $2 to $2.10.

Consistent with previous years, this EPS guidance does not include about $9 million to $11 million at $0.22 and $0.27 per share in expected non-cash asset impairments.

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

While this guidance also does not include any write-downs from the national stores impacted by the flooding that occurred in the Nashville area on May 1 and 2, it does reflect the anticipated lost earnings from these stores for at least the next two quarters.

We estimate the write-down will be in the $900,000 range and will be taken in the second quarter.

Even though we are not giving quarterly EPS guidance, we do want to note once again 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.

Bonus accrual difference will cost us about $0.10 in the second quarter this year versus last year.

And as a reminder, the majority of our earnings are in the back half of the year.

Particularly, the fourth quarter, which represents historically approximately 30% of sales and 55% to 60% of annual earnings.

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

Comps in the remaining quarters of FY 2011 are expected to be positive 1% to 3%.

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

We continue to expect to have a positive cash flow from operations in FY '11, though not as strong as 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 fiscal year.

This assumes 69 new stores, which are made up of 45 Lids stores, including 15 Canadian hat stores and five Lids Locker Room stores, 12 Journeys stores, 3 Journeys Kidz stores, 5 Johnston & Murphy shops and 4 factory stores.

We also plan to close about 64 stores, which consists of the following -- 21 Underground Station stores, 10 Journeys stores, 5 Journeys Kidz stores, 4 Johnston & Murphy shops and 24 Lids stores.

Depreciation in the year should run in the $46 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 full year.

Now I will turn it back to Bob.

Thanks, Jim.

Let me spend a few minutes giving you some additional color on each of our businesses starting with the Lids Sports Group.

Lids strong operating performance continued.

We see the 10% comp increase as an indication that we continue to take marketshare from our competitors.

In terms of merchandise, we generated excellent increases in Major League Baseball, NCAA and the NHL.

We also continue to roll out in-store embroidery and saw nice increases in that business.

The direct business was strong, running up 17% in the quarter and finally, we are pleased to see that Lids comps month-to-date through last Saturday were up 5%.

Each of the component businesses -- Lids headwear stores, Lids Locker Room and Lids Team Sports -- made nice advances in their growth strategies.

We opened 8 new Lids hat stores in the first quarter, one in particular, which is worth highlighting.

In April, we opened a new store near Times Square on 7th Avenue and 47th Street, which, at this point, looks to be competing for the number one volume ranking in the chain.

Noteworthy is that we also have a store at 47th Street and Broadway, literally on the opposite side of the building and it continues to comp positively.

This is another good example of the impulse orientation of the Lids brands.

These two stores see very different traffic flows and as such can both be successful despite their proximity.

This is why our confidence in continued store growth is high for the Lids headwear business.

Lids Locker Room's profile will change significantly with the addition of Sports Avenue.

Sports Avenue operates 46 stores, of which about a third are broadly assorted and two-thirds are operated under license for specific teams and universities, including the New York Yankees, the New York Mets, St.

Louis Cardinals, Kansas University and Old Miss to name a few.

In addition, they operate 13 websites, both under their own retail brand and for specific teams.

Every addition of scale to the Locker Room business allows us to leverage our infrastructure, our inventory position and our overall clout in the marketplace.

We hope to continue to find acquisitions like this one down the road.

Finally, the acquisition of Brand Innovators, a West Coast team dealer, expands Lids Team Sports from 30 states to 43 states and also leverages our existing resources.

The brand also has the exclusive rights to market Nike Golf to colleges and high schools nationwide.

Now for the Journeys Group.

Comps for the quarter in the Journeys Group were up 2% compared with plus 3% last year.

While this comp performance is not yet as strong as we would like to see, our core skate business remains solid and we have identified some exciting and potentially beneficial merchandise trends in the marketplace.

The group's comps are up 5% for the month of May through last Saturday.

While we are not yet ready to say that there is a clear and dramatic consumer move from white to brown footwear, we are definitely seeing it drift in that direction.

And we also see an increased blurring of what is an athletic style as opposed to an athletic-influenced casual shoe.

For example, we have noticed significant developments in textured uppers on vulcanized soles after a strong, but evolving performance for more basic vulcanized styles.

And much of this is from vendors not traditionally thought of as athletic.

Importantly, we think that the direction of the trend may be moving toward casual assortments that are beyond the core competency of the mall-based athletic retailers.

That could be a significant catalyst for us in the fall if we are right and we end up with true product advantages, something we have lacked for some time now at Journeys.

Let me address Journeys' recent performance within the context of the overall retail industry.

Many investors and analysts have compared Journeys to other footwear retailers who are successfully riding the toning wave.

We have tested toning in selected stores and our early read reinforces our belief that it is not the breakout event for us that it has been for others.

Because of that, we think the more relevant comparison for benchmarking Journeys' performance is to look at the eight largest teen-oriented apparel retailers in the mall.

In the past fiscal year, Journeys' sales were minus 3% versus minus 3% from this peer group.

Over two years, Journeys' sales were plus 1% versus minus 2% for the peer group.

Thus, we believe Journeys has been keeping pace with team spending, which is good given our lack of overall product advantages over this period.

In terms of store growth, Journeys remains very selective about new store locations in the US where we are concerned about the prospects for more marginal malls.

That said, we are very excited about the initiative in Canada.

And we also believe opportunity exists for more street stores building on our strong performance in New York and in Miami.

Journeys Kidz showed nice improvement year-over-year with solid performance across the merchandise assortment.

Shi by Journeys has also shown some nice improvement.

Comps for the quarter were up 6% and for May through last Saturday are up 12%.

These gains have been driven by strong performance across our casual offerings.

We have reduced the athletic assortment in favor of more casual SKUs, much of it in first-cost product, which led to nice gross margin improvements.

Remember however that we opened the bulk of the Shi stores at the beginning of the recession and are still battling high rent and still have a lot of work to do to get operating margins up to acceptable levels.

But this year's strong start is encouraging.

Finally, the Journeys direct business has remained very healthy and was up 13% in the first quarter.

Journeys is continuing to drive its digital marketing strategy.

First, we are very pleased with the early results from our new mobile website, which was launched in April.

Second, for back-to-school, we are partnering with a leading game company, Scavenger, that creates location-based games.

These games are played on mobile devices and allow the players to interact with the Journeys brick-and-mortar stores in ways that allow users to earn points and prizes.

And we will continue to seek ways to use digital media to our advantage as this seems to be a consuming obsession with teens today.

As I mentioned, Underground Station reported its first first-quarter profit since April 2006.

However, the business is clearly challenged by a customer base severely impacted by ongoing unemployment issues.

Comps for the quarter were flat, but were running at negative 13% month-to-date as of last Saturday.

We have continued to shed unprofitable Underground Station stores, closing seven locations during the first quarter.

We will continue our efforts to focus this chain in on its best 100 performing stores and will either allow leases to expire as they come up for renewal or negotiate occupancy costs that make the store profitable.

We expect to be able to close 21 stores over the course of the year.

And once again our focus with the Underground Station business is to continue driving positive cash flow.

Johnston & Murphy's 10% comp increase for the quarter reflected generally improved traffic and higher transaction counts.

As you know, the premium sector of the retail world has shown a stronger recovery this year off of a bigger decline during the recession.

J&M is no exception.

Comp sales month-t- date are running at minus 1%.

However, we chose to be significantly less promotional in May than last year and as a result, expect gross margin gains over this period.

Additionally, several new seasonal collections have significantly depleted inventory due to the strong demand in Q1, coupled with the supply chain issues I mentioned earlier.

Inventory levels at the end of the quarter were down almost 30% and well below plan.

We will likely be chasing our optimal inventory level until Q3.

The first-quarter top-line improvement reflects strength in the spring footwear line, including some exciting new casual and active styles that have been well-received, along with a very strong performance in non-footwear categories, especially shirts.

Our non-footwear business was up 20% in the quarter, increasing to 37% of the total sales mix.

This tends to improve overall gross margin, which also increased due to pure promotions partly reflecting very lean inventories.

Women's footwear and accessories also remain a big opportunity for us.

While women's currently make up only about 3% of sales for the chain, it is not yet merchandised in all stores.

In those stores that do carry women's, it accounted for approximately 8% of sales in the quarter.

On the wholesale side, J&M's sales were up 16% reflecting stronger overall demand and our wholesale customers rebuilding inventories, which they reduced dramatically in the second half of last year.

Now for Licensed Brands.

Licensed Brands had another strong profit quarter, but sales were constrained by supply due to delivery issues we discussed earlier resulting in a 1% decline.

Fewer closeout sales were also a reason for the sales falloff, but contributed to a significantly stronger gross margin.

The improved gross margin drove our profit gain with operating earnings up 28% and operating margin at a very strong 16.5%.

Inventory levels should be normalized by the end of May and service levels have been steadily improving in the second quarter.

Overall, we view the strong first-quarter results as confirmation of our thesis for the recession.

That prudent management of strategically powerful businesses will produce competitive advantages that would be fully evident in the recovery and would generate cash to enable future growth.

With the exception of Underground Station, our businesses benefited from a return of consumer demand.

In our retail store chains, we are optimizing our merchandise mix and our inventory levels to take advantage of the opportunities for the growth that we see in back-to-school and into fall.

In our wholesale businesses, the favorable comparisons that result from last year's emphasis by our retail customers on inventory reduction and promotions create opportunity for improvement of both sales and margin.

Overall, we are excited by the position each business has staked out for itself in this recovering economy.

Let me close by thanking the many of you who checked in with us after the great Nashville flood of 2010.

We are pleased to report that our facilities are all fine, except for the retail stores we lost in Opry Mills and the Gaylord Opryland Hotel.

We have had some employees personally displaced from their homes by the flood and we are doing what we can to help them recover.

Beyond these specific circumstances, life is getting back to normal, but we appreciated your concern.

And now I'd like to turn the call over to questions.

(Operator Instructions).

Sam Poser, Sterne Agee.

Good morning.

I hope everybody is doing well there.

A few questions.

What is the leverage point on the SG&A, the comp leverage point on the SG&A?

Overall, Sam?

I am going to get to it a little differently, Sam.

We previously had said that we felt like we could leverage at 3% to 4%.

And now, it is probably down to 2% overall on an annual basis.

And you can see this quarter, we had a 4.25% to 4.5% increase in comps and we leveraged very strongly, even with increased bonus accruals.

Okay, thanks.

And then can you tell us, like on your 2% increase month-to-date, or 3% total, 2% increase month-to-date, can you tell us what the comparison is there on a month-to-date basis?

No, Sam, we haven't broken out what May was last month, I don't think.

(multiple speakers).

Just what you are up against so far.

Okay.

Let's just say this, Sam.

Let's just say this.

For the quarter last year, it was over negative 8%.

Right, I know.

You have to be just a little careful, Sam, because we are going into a Memorial Day offshift, so I am just a little concerned about making too much deal of comps on that short timeline.

I think the quarterly number is the one to recognize about the comparison.

Within your guidance, is your guidance really more weighted towards more positive second quarter and then sort of uncertainty back half?

Can we think of it that way just because of the easier comparison to the entire second quarter?

No, you have got to remember the second quarter is our slowest quarter, so the answer to your question is no.

It is more weighted to the back.

We have got a big hurdle with the comp -- I mean with the bonus adjustment in the second quarter.

So the second quarter is going to be tough as we've said all along.

And we are talking about on the top line, not on the bottom line.

What's the question there, sales growth?

On the 1% to 3% comp, is that more weighted in -- from a comp guidance perspective, is that more weighted in the second quarter with unknown in the back?

I understand with the bonus accruals.

Sam, the weighting is based on where our sales are concentrated.

So obviously the comp weighting is most heavily in the fourth quarter because we do more business there.

Okay.

And then lastly, as you've commented, a lot of your direct businesses, your e-commerce businesses were very, very good.

Are you looking to do more streamlining, shall I say, involved with the brick-and-mortar operations and what kind of expense -- how do you look at spending against your e-commerce growth and so on?

We are doing a lot to make sure that our e-commerce is very much aligned with the stores and the new POS rollout at Journeys that we did last year is a good example of that where if you walk into a Journeys store now and if you don't find either your size or if you can't find the color you want in a more narrowly assorted store, the sales person can walk you up to the cash wrap and swing a screen around and show you the Internet screen and walk you through what the full assortment is for Journeys, including inventory both at the warehouse and in other stores.

And so we can close sales that way.

And the stores get credit for that sale in terms of their numbers.

So they have a clear incentive to go do that.

So that is one example, but we have got -- all of our stores are aligned with the websites in terms of presentation of merchandise, the ability to handle returns and so it is a seamless world for all of our chains.

And yes, we want to continue to grow it.

It is a higher operating margin piece of our business and so we will continue to drive growth in ways that we see opportunity.

Stephanie Wissink, Piper Jaffray.

Hi, guys, thanks for taking our questions.

I'm going to try to sneak in a few here as well.

Just first, Jim, on the clarification question, does your dotcom business flow through your comp report -- your comp reported?

No, it does not.

Okay.

And then just a two-part question on Q2.

I think this is a follow-up to Sam's question.

So the May trend to date would be relative to last year, the more difficult three weeks of the month.

So should we use your May month-to-date as a base trend for the Q2 outlook starting with this level and moving slightly higher given the calendar shift?

And then the rent relief, Bob, that you mentioned, about 9%, is that a level we should anticipate through the balance of the year?

I will do the rent question and let Jim ponder the other one.

We think that the rent opportunity just continues to be there as long as occupancy rates are challenging for landlords, which they are.

And we see no evidence of that mitigating this year or really probably next year at the minimum because there is very few people on the calls I have listened to significantly ramping up their new stores.

In fact, there are still people who have essentially pipelines of stores that they are looking to close upon lease expiration.

So we expect that to continue and we continue to have a lot of opportunities come our way both through lease expirations and kick-outs and in some cases landlord defaults based on tenancy.

So we expect to continue to see that trend continue for us.

Let me answer the other question.

Stephanie, you asked about the comps.

Let me put May in perspective and then I will try to answer your question.

May, the second quarter is the, from a sales standpoint, the lowest sales quarter of the year and May is the slowest month of the quarter.

So if you look at the full year, May is probably the lowest sales month of the year.

So it is not an important month from a sales standpoint.

But take it one step further, you might say, okay, well, at least it gives us a trend and if you look at where we are estimating for the quarter, we are estimating in that range -- actually we are not estimating a 3% comp, maybe a little lower than that, but in that range.

A little lower than 3%.

Jill Caruthers, Johnson Rice & Co.

Good morning.

If you could talk about -- it seemed like first-quarter beat was very strong just versus consensus numbers, about $0.20 above.

Could you talk about where you saw, versus your guidance, where you saw the biggest variances?

Where we saw the variances?

(multiple speakers).

Or the biggest surprises, I guess.

The biggest surprises in the first quarter?

Jill, we were strong across every one of our businesses, so it was a pretty broad-based improvement.

There is not, relative to how we budgeted the month, there is not a single business that was the big outlier.

Every business showed improvement over budget.

They did it in different ways as we noted on the call.

Dockers sales were short, but they killed it on gross margin as opposed to Lids and Johnston & Murphy who had very strong comps.

But everyone on the bottom line was much improved.

Okay.

And then as the Lids platform grows through more acquisitions, could you talk about maybe the synergies you see and how quickly you can integrate new businesses or kind of what that timeline is?

Sure.

There is a lot of synergies and we believe that first the brand has meaning in the marketplace and so having the Lids name all over the place at the beginning is a plus.

And that was the thrust of having the three subunits underneath the overall umbrella brand.

And then let's just use, on the retail side, use Sports Fan-Attic as an example.

The day we closed that deal, we started to convert them and they are now fully converted onto our POS system.

And what that provides is first the ability to actually do replenishment.

A lot of these small chains don't do replenishment and that inhibits sales or makes them carry too much inventory, one or the other.

And so we are flowing all of the merchandise now through our warehouse, which should have a sales and gross margin effect.

A lot of the vendors who they deal with we deal with and back in the days when we were rolling up the hat business, we knew that we got about a 400 basis point gross margin improvement with the difference between our purchase discounts and what a smaller regional person typically got.

And so we essentially captured that immediately.

And then the overall theme that we think is very powerful here has to do with inventory.

I just got a catalog in the mail, which is a good demonstration of this.

It was for the World Cup and they had all the teams represented with home and away jerseys.

But they had youth sizes for only the top four teams, which is a disappointment to my son and I was trying to figure out why and the reason is, if you don't have a ton of doors, and I would include websites as doors, it limits what your assortment can be.

And the more doors you carry, the more variety and the more assortment you can have.

And this is an industry where the more assortment you present, the more compelling you are to the customer.

And so you can see that there is a virtual circle of performance here.

The bigger you get, the more you can do with assortment and then the better you are for customers, so you can get even bigger.

And that is really the heart of what we are trying to do here, which is to become really the biggest player in the licensed merchandise category and as such have a dominating assortment.

When we go to Lids Team Sports, the opportunities there start to -- the synergies there are more around the brand and then some specific things that we can do with regard to marketing.

Because we are thinking about this and the tagline you might've heard us use is we want to be the brand that kids think of either for the teams they play for or the teams they root for.

And there is a database marketing component beyond that, which we think is -- behind that, which we think is very compelling.

Again, using my son as an example, if he is a big soccer player, we should know that if he is in our team sports network and therefore the way we market to him ought to reflect what he really likes in terms of sports.

And we can start using points and award points to say if you do business with us over here, you are part of our club and we will give you incentives to do business with us over there.

And so we think there is just a big marketing synergy that ties the overall business together and is the biggest tie for the Team Sports side.

Is that helpful?

Very much.

Thank you.

Mitch Kummetz, Robert W.

Baird.

Bob, let me start with the Sports Avenue acquisition and I have got a number of questions regarding that.

I will just throw them out there.

How much are you paying for this, is it going to be accretive to earnings this year?

What do the margins look like compared to the rest of Hat World?

You talked about, I think, two-thirds Team Sports stores versus a third not.

What does the mix look like in terms of e-com to bricks and mortars and then anything else you want to add.

Let me first point out we don't own this.

This was a purpose agreement and because, particularly because of all the relationships with teams, there is a longer runway to get all the approvals in place to complete the transaction.

When you look at the business, they are -- as we've said, they have a large chunk of business that they do, which is hooked to the relationships they have with teams and colleges, both operating stores for them under license and having websites for them.

And I ran off a number of the stores, but the full numbers are -- on the retail side, they have 15 stores that are fully assorted.

They have 22 Major League Baseball relationships.

They have six university relationships.

Those are stores -- sorry -- not relationships.

One in the NFL and then some odds and (inaudible).

And then on the website side, they have their website, but then they operate seven college websites and two professional sports websites.

We just think that this sets the platform for doing a lot more of that.

And again, the premise is what I had just outlined before, which is essentially he who has the most inventory and the most assorted inventory wins.

And even a team is going to find, I believe, that we can more broadly assort than the team themselves can.

When you look at the overall distribution, it is about -- it is roughly 12% e-commerce and the rest is retail between the college stores, the pro stores and their own full assortment stores.

And assuming you will own this by later in the year, what is the opportunity on the roll-out side?

Is it on the Team Sports side?

And how do you go about doing that?

I mean if they have a license for Yankees, Mets, Cardinals, Dodgers, if you were to want to get other teams, how does that process work?

Well, it is just a matter of getting to a team and pitching for them the benefits that we bring as a professional operator of retail stores in this space and demonstrate to them that the financial outcome is a better one for them on this basis than otherwise.

And obviously when you have -- when you are no longer in startup mode on that and you can say, hey, it works for the Cardinals, it works for the Yankees, it works for the Cubs, you are pretty compelling when you go to other teams with that pitch.

And the same storyline I believe will apply to the colleges.

And then if you think about what we have got behind that, Sports Avenue is doing that essentially on their own.

Now they are backed by almost 1000 stores and again, the assortment story gets even more powerful in terms of what we can do.

Once we get Lids Locker Room, the broadly assorted stores, as a national footprint, then I think the offer to the pros and the colleges is going to be very, very compelling.

It just keeps getting better.

Robin Murchison, SunTrust.

Okay, so your bonus accrual last year in the first quarter, the negative or the reversal was about $3.6 million, does that sound about right?

About what did you say, about how much?

$3.6 million.

After-tax?

No, before tax.

It's a little bit more than that I believe.

That's close.

Okay, all right.

And then I wanted to go back for a minute to revisit the lease renewals and that topic.

Will you remind us how many stores you have in the next two, three years for lease renewals or if you to say percent of store base or what have you?

We also know that, like last year, Underground Station was getting significantly more concessions, I think about maybe 35% and that is just due to the nature of the stores and the malls they were in.

But sort of the complexion of stores that are coming up?

Then you guys are indicating that, I guess, that from the mall landlord perspective, it's looking very similar to last year I suppose in terms of complexion and willingness to negotiate.

Is that correct?

Yes, because basically our posture is, with the landlords is when we have a lease event, we could close this door and in a lot of cases, we are actually planning to do that and the landlord then comes back and says no, I am going to do whatever it takes.

And so and obviously we are not talking about [a] mall here.

For all the other malls in the universe, that sort of whatever it takes mentality is still in place.

And look, we are going to close doors and a lot of times, we wring our hands a little bit because we get a big rent improvement, but we wonder if it is even enough.

So we still believe that we own the leverage and the decision-making process and that always makes it the landlord's choice.

And our financial results will improve either way, whether we close the store or whether we go ahead and get the rent reduction.

And so right now, we are getting the rent reduction and for the long term, that is probably the better play for us.

We did 100 stores, we addressed 100 stores in the first quarter and that is kind of the run rate that we have for the next three quarters.

It is 300 odd stores that are up for the rest of the year and then next year is not too dissimilar.

I think it is a little less next year than this year, but order of magnitude, it is in the same ballpark.

Chris Svezia, Susquehanna Financial Group.

Good morning, guys.

I guess my first question revolves around the sourcing and inventory.

So I guess I just want to make sure I understand this.

Your primary concern is it more just in terms of missed revenue opportunities because you can't get -- third party can't get production line up and running or is there a margin impact and how should we be thinking about inventory?

You mentioned Johnston & Murphy, you are short some product.

Maybe you can just talk about the other businesses as you look out to the fall and then I have a follow-up question please.

In the short term, it was supply, not margin and the pressure just came from the factories getting overwhelmed with orders.

And this is not new news.

You can just read Footwear News or anybody else to get a recap on this situation.

And so it just took longer to get shoes on the boats to get them over here.

And our guys work real hard to work the factories to try to push to the front of the line, but it is what it is.

And Dockers probably had the biggest dip, but they've also had a better recovery and so they definitely missed at-once business on the revenue side in the first quarter and they are making a lot of that up and their fill rates are improving throughout the month.

And Andy believes that he is going to have that inventory back where it needs to be by the end of this year month, early next month.

Johnston & Murphy has a longer timeline to get replenished from the factories and so John and his team is anticipating more like third quarter when they will be fully inventoried.

And they have got -- a lot of it has to do with hot items.

You get hot on something and you get depleted faster and you just can't wait for that boat to get here and that is a little bit of what is going on with Johnston & Murphy.

In the longer term, there is obviously an implication when you have a demand and supply imbalance and it is a little hard to read what that is going to be because there was a bubble of demand that was related to this re-inventoring we believe and that seems to have subsided a little bit, but when you look out further and you look at what is going on in the traditional part of China where we have sourced, it is just going to get tight.

It is also tight on leather.

So the raw material piece is affected as well.

And again that is not new news; that has been written about.

And so we are looking forward and being proactive in how we think about what our sourcing options are and looking to develop other ways to source shoes, other parts of China, other countries.

But in the near term, the infrastructure is not there and so we, as an industry, are a little stuck with what we've created and so we will see what happens in terms of cost and pricing as we move forward.

Okay, thank you.

And my other question just on Journeys real quick.

When you think about Canada and the opportunity there, you have got some formidable competitors doing some other things, Forzani and Foot Locker.

Just what do you need to see in your Journeys stores to get more aggressive?

And as you look to Shi, I know it is a real estate issue to a degree, but as you see improving comps, would you take advantage of attractive real estate maybe to get more productive on opening stores in this environment on Shi?

Well Journeys in Canada, we are not thinking about this in terms of competition in the sense that we think that Canada is a relatively underserved market.

That was the conclusion as we shopped the market.

There are some retailers up there, some people doing what Journeys does.

I mean let's be clear.

Foot Locker doesn't do what Journeys does, so we don't consider that the competitive threat.

But there are some Canadian people that do a nice job, but we thought there was a big enough hole or a big enough opening and we had discovered with our Lids roll-out that the productivity of stores on average up there is higher just because of the real estate being scarcer.

And so we have got -- our first three stores went up, two more come in very shortly and we will see how it looks from there.

But we are pretty excited about what we think the prospects are.

On the Shi side, it is really the same store we've repeated.

It is not hitting pro forma and I think on the last call we said we need probably a year or two of sustained double-digit comps, plus some rent renegotiations in order to bring that business up to a pro forma level.

Now arguably, you can back out the rent catch and what we ought to be doing and we do this a little bit is look at a pro forma on sort of a rent-adjusted basis saying what could we get rents for today and make our judgment as to whether there is a new store opportunity there.

But for right now, we have not really gotten the productivity up to the level where we are ready to open stores, even with a kind of reset rent pro forma.

We hope we do and we are very encouraged by the trend we see.

Justin Boisseau, Gates Capital Management.

Just wondered if you could talk for a minute about your expected uses of cash.

I know you have talked about buying stock back here in the recent past.

This quarter I wanted to get some thoughts going forward.

Thanks.

Well, right now, we have been fueling the opportunities at Hat World and Lids.

And we continue to see growth as being a big piece of the equation.

And then we also are just still a little more cautious than -- given the economy's staggered recovery and so it doesn't quite give us the level of courage that we would, right now, to change our balance sheet.

When we first got the authorization from the Board, the stock was trading down in the low $20s and that was really in our minds a bit of a different situation.

So right now, we don't have any plans on a go-forward basis.

I think we have been pretty consistent throughout saying that we will buy stock if we had no other use for the money.

We are not going to sit with excess cash and we have been having a use as we've been finding good acquisition opportunities and we have been using the cash for that reason.

Stephanie Wissink, Piper Jaffray.

Hi, guys.

Just a real quick follow-up for us.

Bob, as you look at this business overall, what would you say the operating margin targets are for each of the business units?

Are we looking at prior peak as kind of the goal is there an opportunity to push past peak?

Thank you.

Well, Stephanie, we have said in the past, and we still believe this, that the peak levels for each of the businesses is a terrific goal.

And we think that is doable for each of them.

Dockers obviously is already there.

They are at their peak.

Hat World is sneaking up on its peak.

Journeys needs some pretty robust comps to bring it back to where it was.

And the same with Johnston & Murphy.

But Johnston & Murphy's dip was so deep that we are pretty confident that that rebound is coming.

And so I think the posture we are taking right now and the way we are planning the business is that we can get back to the peaks at a minimum.

Is there a reason to believe that we can get beyond those peaks in many of our businesses?

We think yes, but it is a little bit one step at a time.

There is nothing we are doing right now that would -- in terms of what our overall objective is, we are thinking about getting back to peak and when we get there, then we will think about how far higher we can take it.

And so it is a little bit of first things first philosophy.

Thanks, guys.

Good luck.

Mitch Kummetz, Robert W.

Baird.

Maybe I will ask a few this time.

Jim, first question, could you update us on your comp outlook by business unit for the year?

I assume that has changed from the end of last quarter?

Well, Mitch, you didn't disappoint me.

You ask that every quarter, so I am ready for you.

In the case of Journeys, we are essentially looking at -- it fluctuates up and down a little bit, but it is around 3%.

Underground Station, we have adjusted that down primarily because of the movement in early May and maybe we are being conservative here, but we are looking at -- this quarter, as we said, we are down 13 month-to-date so we are looking at basically minus 10 or so and then low single digit negative for the balance of the year.

And then Johnston & Murphy, we are looking at low single digit positive for the balance of the year.

And then Hat World, Hat World remember had a fantastic fourth quarter last year due to the Yankees and so what we are looking there is low single digits for Hat World also.

And then for the total Company, again in the high end, we are looking at 2% to 3% on the high end for the balance of the year.

Just to clarify on the Journeys, you said 3%.

That was for the balance of the year, not for the full year?

That was for the balance of the year, that's right.

Okay.

And then obviously in the quarter, you reported you saw nice margin improvement and it was gross margin and SG&A.

It sounds like you got a little SG&A pressure in the second quarter.

How should we be thinking about kind of the mix of gross margin and SG&A for the balance of the year based on your new earnings guidance on the year?

This quarter, we are going to be hit -- as you know, we talked about the leverage issues as a result of the bonus accrual.

Let me just go back to one question that Robin earlier asked about the amount.

And she said how much was the reversal last year and I said $3.6 million ballpark.

That is really the swing between the two quarters.

Last year, we had a reversal.

This year, we are adding to it.

And if you really look at it and if you assume a 40% tax rate and you assume 24 million shares, it is a little more than that.

It is around 4 million or so, a little more than that.

That is about the ballpark number.

So as a result, that is going to be hard for us to leverage this quarter on SG&A.

I would hope that, from a gross margin standpoint, it would be flat, basically flat to the second quarter.

And then for the third quarter, we might get a little bit of leverage in the third quarter and we are counting on being a little more aggressive from a pricing standpoint, so gross margin might be down slightly.

And then in the fourth quarter, we may be a little more aggressive on -- from a margin standpoint, but we are looking at basically flat gross margin up slightly and then our SG&A in the fourth quarter, because of additional bonus accruals over last year primarily, we might see a little bit negative leverage in the fourth quarter.

And then on Journeys in the quarter, your ASPs were down a little bit despite what I think, Bob, you characterized as a bit of a drift from white to brown.

Is that because you saw a good quarter on the sandal side that maybe dropped -- put a little pressure on the ASPs there or how should we be thinking about that?

Mitch, it wasn't a big move.

It was 1%.

In my world, that rounds to flat.

So I haven't -- to be honest with you, I haven't looked at it closely to tease it apart, but added up to a minus 1%.

I am more interested in just the general merchandise trends in terms of selling more stuff, finding more opportunities for the chain to be distinctive in its offering.

And so what I am really excited about is the growth in categories that we think are really what Journeys is all about with distinctive fashion product.

So I am sorry.

I didn't really look at ASPs; I can't answer that.

Jim might have some perspective.

Yes, Mitch, the ASP issue is not on the casual side.

The issue -- I use that very loosely because we don't really think 1% is an issue, but nevertheless, it is not on the casual side, it is more on the athletic side.

Okay.

And then one last question.

On Underground, Bob, you mentioned first time you were profitable in the first quarter since '06.

You were profitable for the year back then.

It doesn't sound like you believe that will be the case this year given some issues with that consumer.

But do you think you could show continued operating margin improvement in that business over the balance of this year?

Yes, the thing about Underground and the way we are managing it, I will lead with this and I'll come back to your question is we are really focused on cash generation on it and through that really maximizing shareholder value.

But in the process of doing that, we are resetting rents, we are closing the lousy stores and then our headwind against that is still these challenging comps.

And so with that said, and because a lot of those factors, we had the good first quarter.

And I know our original plan this year was for further improvement.

And as Jim said, we have adjusted that down and so, from a profit standpoint, Jim, in terms of year-over-year, are we still expecting it to improve?

Well, he is asking for the quarters too.

For the quarters, in the second quarter, probably operating margin will be down some from last year.

But then the third quarter, would expect it to be maybe a little improved.

Fourth quarter, flat slightly, maybe slightly up slightly down and then for the full year right now, we are looking at -- we are looking at actually a slight improvement in operating margin percent.

That does conclude today's question-and-answer session.

I would now like to turn the call back over to Mr.

Dennis for any additional comments or closing statements.

Well, we just appreciate you all joining us and we look forward to talking to you in three months.

Thanks, everybody.

That does conclude today's conference and we thank you for participating.