Genesco Inc (GCO) 2011 Q3 法說會逐字稿

Good day, everyone, and welcome to the Genesco third-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 participant's 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 and the second-quarter 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 would like to turn the call over to Bob Dennis, Chairman, President and Chief Executive Officer of Genesco.

Please go ahead, sir.

Good morning, thank you for joining us for our third-quarter earnings call.

With me today, as always, is Jim Gulmi, our Chief Financial Officer.

Similar to last quarter, we posted Jim's detailed review of the quarterly financials when we issued the earnings release this morning.

I'll begin today's call with some strategic and operational highlights from the third quarter, then Jim will talk about the financial highlights and our forward outlook.

Then I'll return with some comments about each of our individual businesses and our expectations for the holiday selling season.

The strong trends we witnessed at the start of back-to-school continued through September and October and, as a result, our third-quarter performance was better than we expected.

Total sales for the quarter increased 19%, our consolidated comp increase was 9%, and adjusted diluted earnings per share rose 45% to $0.77 per share as shown on the attachment to our press release.

Equally important, the fourth quarter is off to a very good start with comps running up 11% through the first three weeks of November.

This is particularly encouraging as Lids has been against some tough comparisons from last year's Yankee's World Series win.

This strong overall start to Q4 has given us confidence to raise our annual guidance by more than our third-quarter outperformance as we now see upside in the fourth quarter versus our earlier plan.

Our recent results are extremely gratifying and reflect the successful execution of several strategies aimed at strengthening the market positions of our portfolio businesses and enhancing the overall profitability of our company.

Like many retailers, we hunkered down when uncertainty was at its height.

Recently we have become more confident in pursuing our growth strategy and this is reflected in sales gains of 19% and 12% for the third quarter and the first nine months of the year respectively.

While we are benefiting from a decrease in competition in some of our segments, we have also done a very good job capitalizing on our size, experience and financial strength during this economic downturn to expand our market share through acquisitions and organic growth.

This strategy continues to unfold most recently with the closing of our Sports Avenue acquisition.

This is a key addition to our Lids Locker Room platform as it adds to the number of Locker Room shops we operate, puts us in the business of running clubhouse and stadium stores, and adds websites to our direct business.

Let me speak to a few items below the revenue line that are impacting our longer-term outlook.

On the positive side our growing size and importance to real estate developers continues to be integral in our ability to manage rent expense on both new and existing leases.

However, we see cost pressures arising out of the labor and capacity issues in China that may possibly impact next year.

Although it is not all that clear how it will play out, we believe our vertical and wholesale businesses, Johnston & Murphy and license brands, are most exposed.

They naturally are pushing to get corresponding price increases to anticipated cost increases which will be challenging in this economic environment.

Of course we compete on the other side as well and our branded retail businesses will look to their vendors and suppliers to absorb much of the increases.

The good news on the supply chain is that the inventory shortages we experienced in the first half of the year are largely behind us.

While the sluggish recovery makes it difficult to mark a clear end to the economic slowdown, we believe we have exited one of the most challenging periods in retail as a stronger company with even more compelling growth prospects than when the recession began roughly two years ago.

Each of our businesses continues to occupy the number one or two position in its niche, positions that in some cases have strengthened despite the challenging consumer market.

We have benefited from industry consolidation, the opportunity to improve our expense structure and we have set the stage in several of our operations to reignite growth.

Our balance sheet is also much stronger compared to pre-recession levels even with the number of acquisitions we have completed during the past two years and a fairly aggressive stock repurchase program this year.

To recap our recent activity, we spent $57 million on three acquisitions in the third quarter and $72 million on a total of four this year.

We have also used $25 million for stock repurchases so far this year, $14 million in the third quarter and $11 million in the second quarter.

After all that we ended the third quarter with bank debt of $30 million and $25 million in cash.

Earlier this month, as we announced, our Board authorized a new $35 million share repurchase program that will replace the existing program that had approximately $10 million left on it, further underscoring the Board's confidence in the Company's future.

After a strong third quarter and a positive start to November we feel very good about our prospects for the holidays as evidenced by our increased outlook for the full fiscal year.

And based on early reads we feel confident that our merchandise position will provide good momentum throughout the holiday and into Q1.

Now I'd like to turn the call over to Jim to provide some highlights on our financials.

Thank you, Bob.

As we did last quarter, much of the detailed financial information about the quarter has been posted online, so I will only be making a few comments.

The third-quarter results came in considerably better than expected.

This was driven by our same-store sales performance of 9% compared to guidance of 3% to 4% in the back half of the year.

Total sales were $465 million, an increase of 19% over last year.

This included five companies that were acquired over the past 12 months which contributed $26 million in sales.

Excluding these acquisitions total sales improved 12%.

For the nine months same-store sales increased 6%; total sales were $1.2 billion, an increase of 12% over last year.

This included sales of $41 million from acquisitions over the past 12 months.

Excluding acquisitions total sales increased 9% for the nine months.

As Bob mentioned, our overall sales growth is from good solid organic growth, not just growth from our recent acquisitions.

We earned $0.77 in earnings per share this quarter, adjusted as shown on an attachment to our press release, compared to last year's adjusted earnings per share of $0.53 or an increase of 45%.

For the nine months on an adjusted basis we earned $1.16 per share compared to $0.72 last year, or an increase of 61%.

The strong improvement in earnings in the quarter was driven by the strong sales increase and the leveraging of expenses.

Gross margin was 51.1% compared to 51.3% last year after adjusting for the one-time acquisition purchase price accounting adjustments referenced in the press release Schedule B.

The gross margin drop of 20 basis points was due primarily to a change in sales mix from the Lids Groups' recent acquisitions of two team sports companies.

Our retail businesses in aggregate had an improvement in gross margin for the quarter.

Wholesale businesses, like the team dealers we've acquired, normally carry a lower gross margin than retail businesses.

In the quarter our wholesale business increased its mix to 15% of Genesco total sales compared to 11% last year.

Adjusting for all the items broken out in the press release Schedule B, expense leverage improved by 120 basis points.

Adjusted expense as a percent of sales decreased to 44.7% of sales, down from 45.9% last year.

The reduction in expenses as a percent of sales was driven primarily by the leveraging of occupancy expenses and depreciation partially offset by added bonus accruals.

Month-to-date comps for Genesco are running at 11% which is a great way to start the quarter.

I thought it might also be helpful to make a few call outs on individual businesses in the quarter.

Journeys had a strong quarter with total sales and same-store sales up 9%.

The same-store sales increase enabled Journeys to leverage expenses, increase operating earnings by 25% in the quarter; operating margins improved 130 basis points to 10.3%.

As we have been saying for some time, with the relatively small size of our Journeys stores, and through the fixed cost component of our operating expenses, we are able to drive meaningful incremental earnings when we comp strongly.

The Lids Group had a total sales increase of 44% and a 13% increase in comp sales.

Operating earnings increased $5.7 million or 81% to 8.3% of sales in the current quarter.

The operating margin included 60 basis points of cost from the acquisition accounting adjustments reflected in the press release Schedule B.

Much like Journeys, this increase in earnings for Lids was driven by strong comps as we were able to leverage fixed expenses and drive incremental earnings over and above the sales increase.

We were pleased with the Underground Station same-store sales increase in the quarter of 3%.

This combined with the rent reductions we were receiving from landlords and the closing of underperforming stores has allowed us to leverage expenses on a comp sales increase resulting in a 32% reduction in operating loss in the quarter.

I would also like to spend a few minutes on cash flow.

At quarter end we had $25 million of cash and bank debt of $30 million.

The $30 million in bank debt is a seasonal borrowing that we would expect to pay down by the end of the fourth quarter excluding any future stock buybacks or acquisitions.

For the nine months we have about $25 million in stock and made four acquisitions that cost $72 million.

Inventories increased 25% which compares with a sales increase of 19%.

Adjusting for acquisitions, sales increased 12% and inventories increased 16%.

We are very comfortable with these inventory levels as we intentionally accelerated receipts late in the quarter to get a good start on the new season in November.

Finally a few points on guidance.

We are increasing our annual guidance from the previous range of $2.10 to $2.20 to a new range of $2.38 to $2.43, or a 27% to 30% increase over last year's adjusted earnings per share of $1.87.

This represents a pickup from our third-quarter overperformance plus some improvement over our previous expectations for the fourth-quarter same-store sales.

It also includes the benefits from the stock buyback and added earnings from the Sports Avenue acquisition in the fourth quarter.

Our increased guidance for the full year reflects fourth-quarter EPS guidance of approximately $1.23 to $1.28.

This guidance is subject to the same adjustments as shown in the press release Schedule B.

We are currently forecasting same-store sales in the fourth quarter to be in the range of 5% to 6%.

It is important to note the first three weeks of November only represent about 17% of our quarterly sales.

So we are being relatively conservative given we have so much of the fourth quarter in front of us.

Lastly, we'd like to give some early directional guidance on EPS for next year.

We would expect EPS growth of 12% to 15% next year.

Currently we are looking for low single-digit positive comps for fiscal 2012.

This guidance is subject to the same adjustments as in previous years' primarily non-cash impairments.

Also, for those beginning to model the quarterly breakdown for the next year, please remember we had an extremely strong first quarter this year.

As all of you know, the back half of our fiscal year is when we make the bulk of our money.

Historically we have had about 60% of our sales and about 70% of our operating income in the back half of the year, and we would expect a similar pattern next year.

In fact, the Locker Room business which we are building is even more of a back half loaded business.

Thank you.

Now I'll turn it back to Bob.

Thank you, Jim.

I'd like to now review each of our businesses briefly and give you some additional color beginning with the Lids Sports Group which had another fantastic quarter.

Lids Sports total sales were up 44% driven by a 13% comp increase, 14 new stores and several acquisitions including the 48 Sports Avenue stores acquired this quarter.

To give you a sense of the organic growth we experienced, sales for the Group excluding acquisitions made in the previous 12 months, increased 20%.

Importantly the strong top-line performance translated into a 170 basis point improvement in operating margin, demonstrating the earnings potential behind this unique business concept.

Major League Baseball performed better than expected in Q3.

We think the mix of teams that made the Playoffs benefited us overall in the quarter.

However, the World Series outcome created some headwinds for us early in the fourth quarter where comps are up 4% through last Saturday.

We estimate that the World Series offset has negatively impacted November comps this year by about 5% to 6%, but it is beginning to moderate.

For the overall fourth quarter last year the World Series had a favorable impact on comps of about 2% to 3% related to the Yankee's victory.

In the Lids headwear stores, the action brands business was also a standout in the quarter.

The NFL got off to a good start with new sideline and fashion product generating early demand and competitive parity within the league has sustained performance thus far in Q4.

On last quarter's call we walked through Hat World's recent transformation to the Lids Sports Group and outlined our strategy of becoming the largest player in both the licensed sports merchandise category, which we estimate to be about $14 billion, and the team dealer market, which we estimate to be approximately $4 billion.

We then reviewed the growth strategies for each of the four concepts under the Lids Sports Group umbrella, Lids headwear stores, Lids Locker Room and clubhouse stores, Lids Team Sports and Lids.com.

The feedback we have received from investors regarding our Lids Sports strategy has been overwhelmingly positive.

That said, we have heard from a fair number of you that the sports business in general is hard for the newly initiated to fully understand and model due to a lack of publicly traded or sizable competitors.

And while we view our uniqueness as a positive and clear advantage, we want to be as helpful as possible to investors as they value this growing segment of our business.

So today instead of looking at the Lids Sports Group by brand, another way to present the business is by channel -- retail, team dealers and Internet.

Retail is by far the largest channel within the Group consisting of more than 970 stores.

And this total includes 885 Lids headwear stores, 59 Lids Locker Room stores and 32 clubhouse stores.

Lids is the legacy headwear business that everyone is most familiar with.

We believe the potential exists to open at least another net 200 stores while also expanding our embroidery program beyond its current penetration of about 500 stores.

Our Locker Room stores are primarily mall-based, average about 3,000 square feet and sell a wide variety of licensed sports apparel and high margin accessories for both local and out of market teams.

Other than a few regional chains it's a pretty fragmented market that we believe is primed for continued consolidation.

Through acquisitions and new store openings under the Lids Locker Room banner, we think there is a long-term opportunity to grow this business to at least 500 locations.

Clubhouse stores are the newest concept within the Group having been part of the Sports Avenue acquisition.

These are team specific stores selling the same range of merchandise as the Lids Locker Room stores, but focused on a single team.

The store fronts feature professional team names like the New York Yankees, Chicago Cubs and St.

Louis Cardinals, as well as major collegiate teems including Auburn, Kansas and Kentucky, to name a few.

The licenses typically get us the exclusive right to use the team or school name as a retail banner.

They average about 2,500 square feet and are typically located in their respective downtown areas and college campuses.

In some instances we also operate the kiosks and booths in and around the stadiums on game days.

For at least some of these teams we see possibilities for mall-based stores as well.

We are currently targeting teams in all the major professional sports leagues, Major League Baseball, the NFL, the NBA and the NHL and top colleges nationwide.

And we estimate the number of potential license relationships is roughly 250.

We estimate the current annual sales run rates of the combined Locker Room and clubhouse stores to be around $70 million, and we expect our profitability will eventually be in the same range as our headwear stores.

The team dealer side of the Sports Group is called Lids Team Sports.

In this business model our team of sales reps are selling team product including apparel such as uniforms, T-shirts and outerwear that we customize in our company operated facilities, as well as footwear and hard goods.

These packages are sold directly to coaches and players on college, high school and club teams and their fan bases.

We are one of Nike's largest team dealers.

With the acquisitions of Brand Innovators and Anaconda Sports earlier this year, we now have a sales presence in 43 states and we believe we are at least the second largest dealer in the country.

This industry is even more fragmented than fan shops and operates on a very antiquated platform.

Consequently, we see a great opportunity to leverage our industry expertise, infrastructure and vendor relationships to capture a larger share of a market that includes more than 30,000 high schools and 1,000 colleges all with multiple teams to be outfitted.

We estimate that the annual sales run rate for the team sports business is around $100 million.

Finally, there is the Internet which, up until this year, consisted of one site, Lids.com, focused primarily on headwear.

Our acquisition of Sports Avenue brought with it 12 team and sports-related websites that substantially expand our eCommerce sales and we are building out a Lids Locker Room site to correspond to the broader assortment in those stores.

The Lids.com infrastructure will eventually serve as the backbone for the entire Sports Group's online business and licensed headwear, apparel and accessories all eventually utilizing the same inventory distribution, fulfillment and customer service.

We are still working on the integration and haven't even begun to scratch the surface of the cross-selling opportunities this platform has created for the Group.

And like the potential for additional clubhouse stores, there is an equal opportunity to partner with college and pro teams to operate many more than our existing team specific sites, especially when they can be coordinated with team stores that we also operate.

The combination of Lids.com and our newly acquired websites have a run rate of approximately $28 million.

Moving to the Journeys Group, our merchandise assortment has proven to be the competitive advantage that we thought it would be in the back half of the year.

Journeys comps rose 9% in the third quarter driven by the new casual trends we expected would benefit our marketing position.

Changes in category trends have proven to be beneficial to Journeys in the past as it creates a reason for consumers to come out and shop.

And the ongoing shift away from athletic towards casual has further set Journeys apart from its mall-based competition and is helping strengthen its leadership position as a destination retailer.

While casuals was especially strong, our overall athletic business was up nicely in the quarter and within that category skate was also especially strong.

This confirms our belief that Journeys' selection of narrowly distributed authentic brands continues to attract skate enthusiasts who regularly shop our stores for their unique assortments.

And like we have seen in our sports business, we believe we are also benefiting from less competition as independent skate shops in many areas of the country struggle to compete in the recession.

Our expectations that a strong back-to-school is a good indicator for holidays appears to be playing itself out.

After a slow start to our boot season in what was a very warm October, boot sales have accelerated this month helping drive an overall November comp increase of 15% in the Journeys Group through this past Saturday.

Based on current trends we are very optimistic about Journeys' fourth-quarter prospects and feel comfortable with a buying plan that will allow us to chase some additional upside to our current plan.

Meanwhile, Journeys in Canada continues to work very well.

With results that are surpassing our initial projections we are planning to accelerate our expansion plans next year to take advantage of this new market opportunity.

Journeys Kidz and Shi by Journeys also turned in better than anticipated performances.

Journeys Kidz comps in Q3 were plus 9% and comps in November are running up 17%.

Shi comps in Q3 rose 5% and are up 18% in November.

Turning to Underground Station, third-quarter comps increased 3%, its strongest comp in nine quarters.

And with comps running up 5% in November we think sales might have finally found a bottom.

We are optimistic that we have the right mix of product in place to continue this momentum through the holidays.

We are still well off historical rates of sales and profitability.

However, the business is generating positive cash flows as we continue to close underperforming locations and renegotiate rents when the opportunity presents itself.

During the quarter we closed five stores and now operate 157 stores, 17 fewer than this time last year.

Johnston & Murphy also delivered one of its best quarters in several years led by a strong casual business.

Sales increased 12% with comps up 7% for the Group.

Our efforts to reposition the Johnston & Murphy business during the recession are continuing to yield positive results in the form of better full price selling and stronger margins.

The product mix continues to shift further away from dress to include more casual footwear as well as apparel and accessories.

And although still a small piece of the business, women's has been growing steadily throughout the year and represents a meaningful long-term opportunity for us.

Comps are up 17% for the first three weeks of November at Johnston & Murphy.

We are continuing to see strength in Johnston & Murphy's wholesale segment with a sales increase in the quarter of 24% and an improved operating margin.

As I mentioned earlier we are now operating with a much improved supply-chain versus the first half of the year.

This allowed us to capture the uptick in demand we saw in Q3 and begin the fourth quarter with appropriate inventory levels.

Finally, our licensed business was up 21% in the quarter as it too benefited from a better inventory position versus earlier in the year and an improved retail environment.

The Dockers business continues to perform well, up 4% over last year for the quarter.

Meanwhile our Chaps business was up almost threefold as we expanded distribution of the line to additional retail customers.

And so to wrap up, all of our businesses are coming off a strong third quarter and enter the holiday season with good top-line momentum, with the exception of Lids which should clear its World Series headwind shortly.

As I said earlier, we have emerged from one of the most difficult periods in the recent history of retail as a stronger company with some compelling opportunities for growth in new territories and new product lines.

To be clear, we will continue to manage expenses and cash flow, but our focus is now squarely on pursuing growth in all of our major businesses.

To recap our five-year strategic plan ending in fiscal 2015, we are targeting annual organic sales growth of 8% and organic operating earnings growth of 15% to 20% annually.

This would return our operating margin to pre-recession levels of around 8%.

Included in these targets are assumptions for a 3% to 4% comp with a higher contribution from eCommerce sales, adding roughly 300 net new stores and continued leverage on rent and depreciation.

This plan also results in significant excess cash which could be used to fuel additional growth beyond what I have just described.

Before we open the call up to questions I want to congratulate the entire team here at Genesco not only for a great quarter, but also for a terrific operating performance over the past couple of difficult years.

I know that the team shares my excitement about our strong prospects for growth.

I want to also thank all of our stakeholders as well for their continued interest and support.

And with that we are now happy to answer your questions.

(Operator Instructions).

Jeff Klinefelter, Piper Jaffray.

Thank you.

Congratulations, guys, on execution here this season.

Thanks, Jeff.

Also, thank you for that helpful detail on the Lids Sports Group, that really does put it in perspective.

My first general question is, can you talk about the synergies or leverage that you see across your now Journeys, Lids and then the expanded team dealer business?

Is there anything beyond not just back-office operating leverage, but are there other synergies -- either your experience rolling up businesses like in the headwear, or other sort of product competencies that you're leveraging back-and-forth would be helpful to hear.

Then more specifically, in terms of the margin structure, could you just talk about the op margin contribution blending together between team dealers and retail on the Lids Sports Group and where the scale leverage points are?

Thank you.

Sure, Jeff.

Let me talk about the synergies.

The big bulk of our synergies, obviously, are more within our operating groups.

So we get that within Journeys, we get that for sure within Lids Sports across all of their sub platforms.

Within the businesses, beyond the businesses we do a lot of things centrally that we think give us leverage for what are essentially smaller possibly subscale on their own kind of platforms.

So the IT -- we are continuing to bring the IT platforms and have them converge, and we operate with one IT group to support most of the businesses.

Similarly, we do all of the HR together, so we have a payroll platform that really couldn't be put together without being one company, and so on.

Then the other part is softer.

There is not as much cross marketing as you might imagine, because all of our customers are a little bit different, and we make different kind of brand statements.

But we do share a lot of learning.

So with the learning that, I think, becomes very helpful.

So as a good example, the Hat World experience, now Lids experience up in Canada, gave us tremendous insight not only on what the potential in Canada was for Journeys but how to go about it.

And at this point with the rapid expansion in Canada, we are contemplating -- we will need a warehouse up there for Journeys.

And the first thing we are doing, of course, is looking at a way to do that jointly with Lids because we can get more scale out of that.

Then the flip of that existed in Puerto Rico where Lids had a good presence -- sorry, Journeys had a good presence there and basically showed the way for Lids.

So we spent a lot of time doing all of that.

Then the last area I'll highlight is real estate.

The real estate teams -- our leasing guys do report up to their operators, but they meet frequently.

And we are constantly working with the landlords to find ways to take the leverage of what is roughly 2,200 stores and make that work in our favor.

And the big thing we have right now is the potential rollout of Lids Locker Room and, as you can imagine, landlords are salivating over the prospects of a 3,000 square foot store that doesn't exist right now in their portfolio.

In order to get those deals we expect the landlords to work with us on other situations in other parts of our Company and that usually works out pretty nicely.

On the margin contribution I'll tilt that over to Jim.

Well, I think that from a margin standpoint, that in the team sports area that right now the margins are not what they're going to be.

We certainly expect them to get in the high single digit range.

And we certainly think that within the whole team dealer area that there are some synergies from putting all those businesses together.

And then of course you have the synergies from adding the Hat World infrastructure on top of that.

So we do think we can raise those operating margins from where they are to high single digits.

Okay, just to clarify.

Getting to your objective here of your prior peak, kind of 8 plus percent op margin, what are the assumptions for the various scaling businesses?

Well, the assumptions -- again, it's only organic growth.

So, it was 3% to 4% comp, basically flat gross margins, a little additional leverage out of real estate on rent, and that basically drives the formula.

Oh, and 300 net new stores, which would include what we're doing in Canada with Journeys, which would be a big chunk of it, and Lids Locker Room.

So the two big chunks in the new store group of net 300 is the Lids Locker Room rollout and the Journeys expansion in Canada.

Great, thank you very much.

Good luck.

Sam Poser, Sterne, Agee.

Good morning.

Just I have a few questions about the guidance given -- the preliminary guidance for 2011 and the guidance given for Q4.

When we're thinking about the gross margins right now, you're going to probably be under pressure next year just because of the mix change with wholesale.

Would that be the right way to think about it?

Well -- no, Sam, we don't think about it -- when it's a mix change we don't think about it as pressure.

No, no -- I mean just as far as let's say a comparison then.

I mean it's unlikely gross margins are going to be up next year because of the mix of wholesale to retail.

The mix change will probably be bringing it down.

But that's why we'll keep looking at it as what's our retail margin and what's our wholesale margin as a measure of performance.

But you are right.

Okay.

And then --.

And of course then SG&A is the flip of that because a wholesale business has less SG&A as a percent of sales, so you get it back on the other side of the ledger.

Correct, correct.

And then -- thank you.

And then when we're thinking about the fourth quarter, can you just give us some idea of your store growth plans, both in Q4 and how you're already looking at next year right now within the numbers that you gave us?

Yes.

I think that for next year -- we will end this year with new stores of somewhere in the range of -- in the 60 to 65 range probably of new stores.

And right now we -- I think the fourth quarter is maybe 20 new stores -- I can't remember offhand; I'll double check on that.

And then next year I would expect the stores to be in the range again of 60 or so.

With net openings -- with net closings of Underground Station continuing?

Yes.

Can you give us a more details on that right now by concept?

For next year?

Or for the -- or more in general for next year, but more specifically for Q4?

Well, for next year I don't think the trend is going to be that much different from this year in terms of new openings, okay.

And then for this year in the fourth quarter, I can't give you more details on that.

Again, as I said to Jeff, Sam, the two big drivers of growth in terms of new stores are going to be Journeys Canada and Lids headwear plus Lids Locker Room, those are the three big categories.

And then we expect to still have net reductions in Underground.

And then for the fourth quarter, Sam, right now the -- our projection right now for the fourth quarter is to open about 30 stores.

I don't think we're going to really end up there, I think we'll end up maybe 20, 25 stores, but that's a projection.

The breakdown would be -- of new stores would be Journeys would open about two; Kidz one -- or two, excuse me; Shi none; Johnston & Murphy shops none; and the Lids stores themselves altogether about -- they're planning 29, but I think it's going to be more like, again, 20 to 25.

So most of the new stores are going to come in the Lids Group.

And then Johnston & Murphy sort of net nothing?

Nothing, we're not going to open -- we have no plans right now to open any new stores in the fourth quarter.

And then closures of Underground?

Closures of Underground in the fourth quarter.

We expect to close altogether eight stores.

Okay, and are you seeing any -- the business in Underground has sort of shown life this year, then it sort of dwindled away, and then it's shown life.

Is this -- do you think over time this -- you'll find sort of a niche for this business at a certain size that will work and be a longer term business?

Or is this something that will just sort of continue to shrink over -- and just work your way out of it as leases come up and so on and so forth?

Well, let me just headline that question by saying it is now roughly 6% of our sales, so let's be aware of what we're talking about.

With that said it already has a very successful niche, Sam.

We've said this before, roughly the top 100 stores within the Underground chain make money.

And there's a subset of those that make really good money.

So it's a concept that in its niche does well and the real estate expansion got beyond where it belonged.

And so we're doing a course correction on that.

The advantage of it being within the Genesco Group and being within the Journeys Group, I'm not sure how well it could survive as an independent company.

But because we share a lot of elements with Journeys and with Genesco, it can run on a smaller platform with its profitable stores and be a nice contributor.

Mitch Kummetz, Robert Baird.

Yes, thank you.

Just a few questions to follow-up on Sam's questions about the guidance.

Let me start with your comp outlook both for the fourth quarter and then next year.

5% to 6% for Q4, could you kind of break that out by concept?

How are you thinking about that by concept?

And then also for next year as well, I'm sure it will be a little tougher to do that for next year.

But are there any parts of the business that you expect to comp better than others in that low single digit guidance for next year?

Well, I'll first start with this year before we talk about next year.

On this year for the fourth quarter we expect the Hat World, because of the uncertainty involving the World Series and the Yankees, we're planning in the range of 3% to 4% for Hat World.

And then for Johnston & Murphy in the mid-single digit; at Journeys a little -- let's say mid to high single digits; and Underground Station mid to high single digits.

Okay.

Gets me to 6%.

Now on the low single digits next year in the 3% to 4% range, there really isn't -- at this point in time there isn't much variation in that.

That's just generally what we're projecting for the full year.

And there really isn't that much variation between the different business units.

Okay.

So if you're looking at about a 3% to 4% comp next year, it sounds like, Jim, if you're opening 60 doors, closing some on the Underground Station side, that might be 1.5%, 2% on square footage growth.

Could you give us maybe sort of an overall top-line projection for next year, maybe talk about how much wholesale growth you're expecting just to kind of --

No.

-- no?

Yes.

Bob had said that over the five-year period our estimate of annual growth was about 8%.

Based on the acquisitions we've made and the comps that we're talking about and the new store growth we're talking about, the increase for next year will probably be in the 9% to 10% range.

Okay.

And then -- it sounds like gross margin may come down a little bit on mix, but SG&A gets helped by that.

On a 3 to 4 comp -- I mean, how much leverage can you get on your occupancy with that?

Well, we can -- I mean, we do believe that we can -- we've said all along that on an annual basis we think we can [begin] to comp in the range of 2%.

So we do feel like we can get --.

Most of the benefit from a leverage standpoint, just as it's been this year, will come from leveraging rent and depreciation.

Okay.

And then last question for Bob.

You talked -- in your preliminary comments you talked a little bit about the cost outlook next year and you made the comment that you're most exposed on the wholesale piece, the J&M and the licensed brands, not as much on kind of your branded retail business.

Can you talk a little bit about that?

Could you maybe talk about what you think the cost increases are to you on J&M wholesale and the licensed brands versus kind of what you would expect the cost increases to be on your branded retail business?

I mean, as we've been going through this earnings season a lot of the brands have been reporting and they're talking about some pretty big cost increases next year and they're saying that they're hoping to pass some of it along through higher prices.

So I'm just wondering how you guys are thinking about that as you kind of roll up your cost outlook for next year.

Sure.

I'll talk about it in general because there are a lot of negotiations going on as we speak which will shape how all this comes out.

You've heard what we've heard and what we've seen, which is the factories are feeling like they're pressed on capacity and there's upward pressure on labor.

And so people are talking high single digit increases on costs.

Our guys are doing all sorts of things to address that, including looking at other places to source, looking at ways to engineer shoes that will mitigate some of that.

We've got some work that's being done within our licensed brands looking at synthetic materials which nowadays compare so much more favorably to leather than they used to.

So there are a lot of balls in the air on how all this works out.

And then obviously there's the -- to the extent that there are cost increases that need to be absorbed, there's the old gamer who takes the hit.

And our belief is it starts at the factory and then it works its way through the wholesaler, and the retailer is the one that probably has the most ability to push back because I don't think the consumer will take the increase.

So that dynamic is playing out as we speak.

And as I said, we sit on both ends of it.

Certainly when you're vertical you've got nowhere to go.

So, Johnston & Murphy is the one that's going to be absorbing a lot of it -- only to the extent that they can push it back on the factory.

Contrast that with Journeys that has a lot more room to push back and similarly Lids.

So if you buy that premise then most of our businesses, Journeys and Lids are in the branded business, and so are far enough in the downstream part of the supply chain that they presumably would have more ability to push back.

Okay.

Appreciate that color.

Thanks, good luck.

Yes.

(Operator Instructions).

Steve Marotta, C.L.

King.

Good morning, guys.

You mentioned your five-year plan is for 8% sales increase -- that's correct, right?

Yes.

15% to 20% in net income?

Correct.

Okay.

And next year the guidance is for a 12% to 15% increase in EPS.

Can you talk a little bit about the dynamic of why next year would be on the low to slightly below five-year plan?

Well, let me start.

First of all, we wrote that plan -- this is year one, we're in year one.

And so when we talk about what our EPS growth is going to be, we're going to average 15% to 20%.

This year we're outperforming by a whole lot what we had expected to do this year.

Add so we're working off of a different base for next year than we had assumed.

Obviously we haven't gone through our budgeting process completely.

So we'll have a renewed look at it when we talk to you in three months.

But a lot of it has to do with what this year's -- the big move in this year, fiscal 2011's baseline, Jim?

I anticipated that question coming from somebody, I just didn't know who it was going to come from.

The first reason is what Bob said; when we were looking at -- when we did our five-year plan we were basically looking at a $2.20 EPS this year and we're going to far exceed that.

So, if you look at over the five years we still achieved our 15% to 20%.

The second reason is we're being conservative, hopefully we can do better than that.

But it's a combination of those two factors.

So there's no issue in next year that all of a sudden we're worried about.

It's more of a factor, again, of outperforming the current year and being conservative.

Terrific, thanks.

And one quick follow-up.

You mentioned that you're benefiting -- I think, Bob, you did this in your preamble -- from lower competition in some of the segments.

And then there was a comment later about some of the independent skate shops might be going under.

Is there more to that comment then simply some miscellaneous independent skate shops having a hard time?

No, absolutely nothing to it.

It's just we've always said to you guys that one of the reasons that we think we're getting such strong comps in the hat business is that independents have struggled.

And as we've had that conversation with our Journeys team and they've had conversations with vendors, it really is that Mom-and-Pop category on the independent skate side that has struggled as well.

We're not calling anybody out, we're not predicting anything.

It truly is the one-off guys who collectively do a lot of business.

But if they have a harder time getting credit and keeping their doors open, obviously that's business that can flow to us.

Sure, I understand.

Thank you very much.

Yes.

And that's all the time we have for questions today.

I will turn the call back over to our speakers for any additional or closing remarks.

Well, we just thank you all for joining us today.

We thank you for your support and we'll speak to you again in three months.

Thank you.

And with that we will conclude today's conference.

Thank you for your participation.

You may now disconnect.