Genesco Inc (GCO) 2011 Q4 法說會逐字稿

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

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

Participants on 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 and the third 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 Mr.

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

Please go ahead, sir.

Good morning and thank you for joining us for our fourth-quarter earnings call.

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

Once again 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 highlights from the fourth quarter and our forward perspective.

Next Jim will talk about the financial highlights and our guidance for this year, and then I'll return with some comments on our individual businesses.

We were very pleased with the strength of our fourth quarter.

As we predicted in our January update, our results exceeded the guidance we gave on our third-quarter call driven largely by continued strong sales trends in Journeys and Lids Sports.

The success of our merchandising initiatives coupled with the execution of our acquisition strategy helped us achieve our most profitable quarter in four years.

Sales for the quarter increased 17% to $560 million.

Consolidated comps increased 9%.

Our overall consumer direct business was up 46%.

And diluted EPS of $1.33 adjusted as discussed in the press release increased 15% year over year.

The Lids Sports Group delivered a solid quarter despite Lids being up against its toughest comparisons of the year due to the Yankee's World Series win in 2009.

The total Lids Group sales were up 30%.

Organic growth excluding sales from this year's acquisitions was up 11% driven by a 6% comp increase, a 29% increase in Lids.com and sales from 18 new stores.

We continue to execute on our strategy to create a national reader in licensed sports merchandise and athletic gear, and we remain excited about the opportunities for both sales and earnings growth in this business.

One cloud on the horizon is a potential work stoppage in the NFL which Jim will discuss later in the call.

To give some sense of the potential significance, let's first note that in our core Hat stores the NFL represents less than 10% of sales in a normal year.

If there were to be a stoppage we would still expect to sell some NFL headwear and to also see some substitution into other categories.

In the Lids Locker Room fan shops the NFL is a more significant part of the business, but a stoppage could actually provide us with a long-term benefit by making some of the smaller operators in the space more eager to participate in our industry consolidation.

Journeys' position as the number one specialty footwear retailer for teens has been further solidified by the ongoing fashion shift away from athletic toward more casual footwear combined with another strong boot cycle which played right into the changed strength during the holiday selling season.

These trends, along with the continued strength of Sk8, are further distinguishing Journeys from its mall-based competition.

Based on the history of product cycles in fashion footwear we would expect our current product advantages to positively impact our performance throughout the current year.

Overall we feel good about Genesco's growth opportunities in 2012.

February comps came in at 10% for the Company and our direct business was up 34% on a comp basis in the month.

Now we've seen something of a shift in the pattern of first-quarter sales over the past couple of years with strong sales in February followed by significant slowing in March and April.

So we are not basing our expectations for the quarter or the year on continuation of comp growth at this level.

But it is certainly a nice way to begin the year.

Looking at supply-chain issues, the inventory shortages we experienced in fiscal 2011 are largely behind us and we pushed up inventory at year end to ensure a good position entering fiscal 2012 given the timing and uncertainty caused by the Chinese New Year.

We continue to see cost pressures arising out of the increased demand for materials, higher labor rates and factory capacity issues in China that may possibly impact fiscal 2012.

As we've said before, although it is not entirely clear how it will play out, we believe our vertical and wholesale businesses, Johnston & Murphy and licensed brands, are most exposed.

They are naturally pushing to get corresponding price increases with retail accounts that tie to anticipated cost increases.

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

However, if it becomes necessary we are prepared to raise retail prices to maintain margins.

All in all we think we will be able to offset the majority of the expected cross pressures through a combination of selected price increases and supply-chain efficiency.

This should allow us to drive full-year adjusted earnings per share growth between 12% and 15% on sales growth of approximately 8% to 9% and with help from continued expense leverage.

With regard to expenses, we still see opportunities to further reduce rent as the recent bankruptcy filing of Borders indicates that the consolidation of the retail industry is still ongoing.

Last year we had 279 stores within an event of some sort -- a kick out, renewal or an occupancy covenant violation -- that enabled us to realize approximately 10% annualized reductions in occupancy-based cost savings on these stores.

We have about 377 renewals and kick-outs that are in the money on the calendar for this year and we would expect many of those to provide opportunities for further occupancy cost reductions.

Now I'll ask Jim to discuss some of the financial highlights from the quarter and the past year and to give you some detail on our expectations for the new year before I talk about individual businesses.

Jim?

Thank you, Bob.

Much of the detailed financial information on the quarter has been posted online, so I will only be making a few brief comments.

The fourth quarter came in pretty much in line with our updated guidance from early January.

Comp sales were 9% for the quarter and 7% for the full year.

This compares with flat comps in the fourth quarter last year and a 2% comp decline for the full year.

Consolidated net sales for the quarter were $560 million, an increase of 17% over last year.

This included sales of $30 million from acquisitions completed over the past 12 months.

Excluding acquisitions sales increased 11% for the fourth quarter.

For the fiscal year sales were $1.8 billion, an increase of 14% over fiscal 2010.

Excluding acquisition sales of $53 million, sales increased 10% for the year.

We earned $1.33 per share in the quarter adjusted as shown on the attachment to our press release compared to last year's adjusted earnings per share of $1.16 for an increase of 15%.

This includes about $0.03 of a positive tax variation that we were not anticipating when giving our earlier guidance.

Gross margin was 48.7% compared with last year's gross margin of 49.4%.

Before a one-time acquisition purchase price accounting adjustment, which we referred to in the press release, gross margin was 48.8%.

The 60 basis point drop in gross margin to 48.8% from 49.4% last year was due to the effect of increasing wholesale sales and the sales mix which we have talked about on previous calls.

Wholesale sales, which normally carry a lower gross margin, represented 11% of our overall business in the fourth quarter compared with 8% in the previous year.

Adjusted for all the items broken out in the press release, we were able to leverage expenses by 20 basis points in the quarter.

This included increased bonus accruals relating to our strong performance which added over 100 basis points to our expenses as a percent of sales this quarter offset by some benefit from the increase of wholesale sales and the sales mix change I mentioned earlier.

For the year on an adjusted basis we earned $2.48 per share compared with $1.87 last year, an increase of 33%.

This was driven by a 14% sales increase and essentially flat gross margin at 50.5% versus 50.6% last year and the leveraging of expenses which added 90 basis points to operating margin.

Altogether our operating margin for the full year increased to 5.5% from 4.7% last year.

The strong P&L performance for the year was reflected in the balance sheet and cash flow as well.

We ended the year with $56 million in cash and zero debt.

Free cash flow before acquisition expenditures for the year was $74 million and this combined with the beginning cash of $82 million allowed us to spend about $75 million in acquisitions and $25 million in our stock buyback program and still end the year with no debt.

Inventories were up 24% year over year compared with the sales increase in the fourth quarter of 17%.

We have talked in the past about underlying product flow issues related to the Chinese new year.

To be cautious we felt it best to accelerate receipts in January in order to avoid any possible supply-chain disruptions early in the first quarter of the new year.

Now I would like to spend a few minutes on our guidance for FY 2012.

On our last conference call we gave an early indication of our forecast for the year.

The preliminary EPS guidance was 12% to 15% increase over this past year and we are holding to that range which puts us at $2.78 to $2.85 per share.

Consistent with previous years, this guidance does not include about $4 million to $5 million pre-tax, or $0.10 to $0.13 per share after tax, and expected non-cash impairments and response costs associated with the network intrusion we mentioned earlier in the quarter.

This amount is down from last year's non-cash impairment and network intrusion expenses of $8.5 million, or about $0.22 per share after tax due to fewer expected new store impairments in the new year.

The following are the assumptions we used to develop this guidance -- a comp increase of about 3%, as Bob mentioned, we are off to a good start with February comps up 10%, but we are obviously not banking on sustaining that for the first quarter or the full year; an overall sales increase of about 8% to 9% for the year; a GMM gross margin decrease of about 20 basis points; expense leverage of about 70 basis points; operating OI, operating percent improvement of 50 basis points; a tax rate of about 40%; and a share count for the full year of about 23.6 million shares.

In addition, we have not factored in a prolonged NFL strike in this forecast.

Our worst-case estimate at this time is that an extended strike could impact us on the top line by about $12 million and reduce operating income by about $5.5 million or $0.11 to $0.14 per share after tax.

Most of this impact will be in the back half of the year.

We are expecting capital expenditures for the year of about $56 million and depreciation will be about $46 million.

We are forecasting 84 new stores and are planning to close about 70 to 75 stores.

We expect to end the year with approximately 2,321 stores, an increase of almost 1% over the year that just ended.

We are also forecasting square footage growth of 1.3% in the new year.

Now I'll turn the call back to Bob.

Thanks, Jim.

For fiscal 2011 our two largest businesses, Lids Sports and Journeys, represented 79% of sales and posted sales growth of 16%.

Johnston & Murphy and licensed brands also performed well.

So we believe we have two very strong and differentiated growth businesses that will drive our top and bottom line going forward and a group of complementary businesses that can incrementally to our overall growth and cash flow.

I'll review each business now beginning with Lids Sports.

It was about a year ago that we explained to you the transformation of our Hat World business into the Lids Sports Group.

We outlined our strategy to build on our strong headwear franchise by consolidating two fragmented businesses -- the licensed sports retail business and the team apparel business -- thereby creating market leaders in their respective spaces.

And we also outlined the synergies we see between all of these businesses.

In line with that overall strategy we made several acquisitions during fiscal 2011 and began integrating our Lids hat stores, our larger footprint fan stores and Lids Team Sports in order to take full advantage of the synergies and cross-selling opportunities within the Group.

Total sales growth for the Group was a healthy 30% in fiscal 2011 of which 11% was organic growth.

Overall operating profit for the Group increased 17%.

On the retail side, including the Lid hat stores and the Lids Locker Room and clubhouse fan shops, we ended the year with a total of 985 stores and plan to open 30 net new stores in 2012.

Comp sales for the Group were up 6% for the fourth quarter and 14% in February.

Now let me provide some more detail on each of these businesses.

In the Lids hat stores our team did a great job capitalizing on the new merchandise opportunities that unfolded this past year to offset the strength from the Yankee's World Series win in 2009.

Notably, we saw continued strength in fashion headwear led by Major Leagues Baseball and, while much smaller, growth in NBA fashion as well.

At the same time, the roll out of in-store embroidery to an additional 111 stores, including new stores and retrofits, continued to positively impact the business.

We ended the year with 885 hat stores and plan to open 12 net new stores in fiscal 2012 and two expand embroidery to another 105 locations including new stores and retrofits to reach a total of 656 stores.

Now moving on to our newer retail business -- we ended the year with 99 larger fan shops that carry multiple categories of licensed merchandise.

These include 63 stores with a wide offering of merchandise from multiple teams which are being branded as Lids Locker Room.

The 63 Locker Room stores are made up of the stores we acquired in the Sports Fan-Attic acquisition in 2009, 21 stores from other acquisitions and this past year and five new stores that we have opened under the Lids Locker Room name.

The fan shops also include 36 team specific stores which we refer to as clubhouse stores acquired in the Sports Avenue acquisition that closed in November.

These stores operate under team names and carry the same broad assortment of merchandise as the Lids Locker Room stores but for only a single team.

We currently have license relationships allowing us to operate team specific stores for the New York Yankees, Chicago Cubs, Auburn Tigers and Los Angeles Dodgers among others.

We see the potential to expand these relationships beyond brick and mortar to include more game today and on premise sales events while also exploring new partnerships with additional colleges and pro teams.

In total we expect to open 20 new fan shops in fiscal 2012 including 12 Locker Room stores in the US, three Locker Room stores in Canada and five clubhouse stores.

Now to Lids Team Sports, our team dealer business where our strategy is very straightforward.

We have built a near national footprint in team sports apparel with the acquisition of several regional players over the past few years, including Brand Innovators and Anaconda in 2011.

We are working closely with Nike to go after the more than 30,000 high schools and small colleges whose teams are currently serviced by local dealers while also targeting the fans, relatives and friends who support those teams to sell additional product.

We have quickly become the second largest team dealer in the country and we are investing in systems, inventory, infrastructure and our sales force to position us to capture additional share in this $3 billion to $5 billion market.

And we believe this is the same ultimate customer we serve at retail.

Our aim is to be the brand of choice that consumers think of first both for the teams they root for and the teams they play for.

Lids.com had an outstanding year with sales up 24% before we include any acquired websites.

Initial efforts to expand online merchandise beyond hats have been successful with non-headwear sales doubling off a small base in the fourth quarter.

Going forward we are adding even more inventory covering all licensed merchandise categories to ensure that we can fully harvest this high margin online growth opportunity.

In addition, with the Sports Avenue acquisition at midyear we added 12 new team specific websites, including sites for college teams like the University of Kentucky and for pro teams like the New York Jets.

Including these websites our overall direct-to-consumer Web business for the Lids Sports Group was up 38% for the year.

We see the success of our eCommerce business as an important complement to our bricks and mortar retail.

Within our clubhouse business this capability provides a leg up on the competition for establishing additional professional and college team relationships.

Teams are realizing the need to marry their stores and websites under one licensed operator and we are one of the only providers that can do this for them.

Moving on to Journeys -- the recent trends in footwear have continued to work in our favor and as a result Journeys Group sales for the quarter increased 12% to $253 million fueled by a 12% comp store sales gain and a 29% direct sales increase.

With our trend right merchandise we're well positioned to take advantage of the growing demand for boots and casual footwear while also reinforcing Journeys' position as a core destination for the skate customer.

The fourth-quarter strength has continued into February where the Journeys Group comped up 9% and direct was up 31%.

Journeys Kidz and Shi were important contributors to the Group with comps for the quarter up 14% and 15% respectively.

We expect that merchandise trends that benefited the Group in 2011, particularly in the second half, will continue to drive the business in the new year.

With inventories in great shape we entered 2012 in a position of strength.

And with over 1,000 stores our relationships with vendors are extremely strong giving us access to coveted products and exclusives to further distinguish us from the competition.

We will continue to use available opportunities to further reduce rent and occupancy costs.

In the US we will continue to consolidate Journeys' real estate portfolio to the benefit of operating margin.

But in Canada the Journeys opportunity that surfaced in fiscal 2011 continues to be compelling with sales in the initial Canadian stores still surpassing our expectations.

We plan to open eight more stores in Canada this year to continue to tap the market potential.

Moving to our other businesses, Johnston & Murphy continued to benefit from our ongoing efforts to reposition the brand and merchandise the assortment towards more business casual footwear and apparel.

Johnston & Murphy had the biggest drop during the recession providing the business with the biggest potential for recovery.

Reflecting this, fourth-quarter sales rose 18% to $56 million with comps up 12%.

Even with this strong performance Johnston & Murphy is still not back to pre-recession levels, so we see potential for continuing recovery driven gains.

For the year total sales increased 11% to $185 million, comps rose 8% and catalog and Internet sales were also up 8%.

Operating income increased 57% showing good leverage on the sales growth.

With a strong expanded casual offering coupled with an increased penetration of apparel and accessories Johnston & Murphy is poised to continue its post-recession resurgence in the new year.

February comps of 15% and an increase of 30% in the direct business are good indicators of the ongoing strength we are seeing in the business.

Now for Underground Station.

After a good back-to-school season and a solid November, sales trends at Underground Station have deteriorated since December.

While the concept showed pockets of strength during the year sales have continued to be very inconsistent.

The good news is that last year's operating loss was roughly half the previous year and cash flows continue to be favorable as a result of our steps to work down the store base to a profitable core.

Of the 151 stores we now operate, compared to 170 at the end of last year, 110 of them are profitable on a four wall basis.

With nearly 50 leases up for renewal over the next 12 months, we'll have additional opportunities to further right size this operation in fiscal 2012.

We note that Underground Station now represents only about 5% of Genesco's sales.

Finally, our licensed brands division had another solid year with sales growth of 9% and operating margins of almost 13%, the highest in the Company.

While we are proud of our recent performance our focus is firmly on the future and we are excited about the prospects that lie ahead for each of our businesses.

We recently outlined our five-year strategic plan that targets annual sales growth of 8% and 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 new stores, and continued leverage on rent and depreciation.

Obviously we exceeded this goal in the most recent year, but we remain committed to this pace of growth evidenced by our guidance for fiscal 2012.

We are very confident that we have the right people and strategies in place to organically grow our business at these rates.

At the same time we think the opportunity exists to surpass these targets through a potential acquisition or acquisitions.

The solid operating performances from Lids and Journeys in particular combined with the improved results out of our other businesses helped to significantly strengthen our balance sheet this past year.

We ended fiscal 2011 with $56 million in cash and no debt.

During the past year we spent about $75 million on acquisitions and $25 million on the repurchase of Genesco shares.

With a strong balance sheet and with a positive cash flow expected in this year we have the financial flexibility to fuel additional growth beyond what I have just described.

I want to close today's prepared remarks by thanking all of the employees of Genesco for the hard work that went into making this past year a success.

We hunkered down through the toughest parts of the economic dip and we are now well positioned to take advantage of our strong strategic position, our strong balance sheet and the exceptional group of people who make up our Company.

And thanks also to all our vendors, suppliers and all of our other stakeholders for their continued support.

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

(Operator Instructions).

Jeff Kleinfelter, Piper Jaffray.

Thank you, congratulations, guys, on a great year.

Thank you, Jeff.

I wanted to just get a couple questions started.

First off, since it's the topic on everyone's mind, these price increases, inflation and also labor considerations in Asia, some as specific as will enough of it come back from the new year this year.

But specifically on price increases.

And Bob, I don't know if you mentioned this and I just didn't catch it, but overall what are you expecting for kind of a blended increase in the second half of the year or for the year in total?

And then you talked of supply-chain efficiencies and then some strategic price increases and these supply-chain efficiencies I think are significant.

Can you drill a little bit deeper into which ones that would include?

And then I just have a follow-up as well.

Yes.

Well, we could talk more definitively about cost than we can about price right now, Jeff, because that has to play out.

And the costs that we're looking at are similar to what other people are reporting which is in the back half of this year high single digit to possibly low double digit kind of cost increases.

And of course that varies by product and the higher price of the product a little more protected they are from labor because the labor percent is smaller.

So that's what we're looking at.

Now the question will be how that plays out in terms of absorption ranging from the factories all the way up to the customers.

And it's not clear yet how that plays out.

So our view of it is that when you look at our vertical businesses, obviously when you take Johnston & Murphy all the way vertical in order to preserve margins we have to try and find some price increases.

And then when you have breaks in the supply-chain you'll have the negotiations to see who takes it.

And so typically it gets pushed a little bit further down the supply-chain, so obviously the Journeys and the Lids guys are pushing back on their vendors saying you need to figure out a way to try and find some efficiencies to make this work.

And so it's a little less clear how it all plays out on price, but our longer-term view -- and we've articulated this before -- is ultimately the cost increases have to work their way through to retail prices and if that means slightly fewer units get traded off for ASPs that's the way the world will eventually settle out.

How we get there will be interesting to watch.

In terms of the supply-chain, the cost that we talk about theoretically is going to be a little less transparent to everyone because there aren't that many products that are replicated year over year.

So what we're seeing is a lot of efforts to engineer the products differently.

And so either trying to add value to a product so a higher price increase has a visible way of a customer seeing added value and therefore it's really a different equation, or the other side of it is just engineering cost out.

And our guys, as an example, in Dockers are doing some very interesting things with synthetics, which in the past when you put them on a table and compared them would be a huge difference, and now the gap between a lower quality leather and a synthetic is pretty narrow.

And so you'll see a lot of different things happening in the supply-chain, including product design, that will start to make it a little less clear as to exactly where the price increases are happening and how they're getting passed through.

Thank you.

Yes, that's helpful.

Two other quick things.

Embroidery stores -- I know these have been very -- they've obviously been successful, you continue to roll them out.

Any just quick comparison embroidery store versus non, the productivity and the four wall differences.

I'm guessing obviously they're positive given you're rolling them out, but anything to share with us in terms of how that drives up margin expansion?

And then Journeys Canada exceeding expectations.

Again compare those stores to maybe Journeys' domestic in terms of productivity and what to does that lead to in terms of further international growth?

Well, I'll go backwards.

On Journeys Canada -- Canadian retailing overall is more productive than American retailing, so let's keep that in mind.

The average Canadian store for probably any chain that goes north is going to be higher, and so that's what we're experiencing.

We've got higher productivity -- we're not going to report Canadian numbers, but they are more productive than the average Journeys store here.

And so that gives us a lot of confidence.

And what we've learned with the Lids rollout is the higher productivity in Canada particularly benefits small box retailing which is what we are.

Because our guys come back from Canada and they go to a mall in the Toronto market on a Wednesday and they say, my gosh, a Wednesday looks like a Saturday because the traffic gets concentrated in the fewer number of malls that exist per capita.

For a small box retailer where you have minimum staffing levels which raises your fixed cost, that higher average productivity really does drive the bottom line.

So Canada becomes especially attractive to us.

Embroidery stores, as we've reported in the past, Jeff, when we add embroidery to a store, retrofit it and the store is of a size that we don't have to pull product out from the stock hats in order to fit it in, we get about in 8% increase in sales at a higher gross margin.

We haven't broken out what it does to the bottom line, but when your add 8% more sales at a higher gross margin and you don't have to add much more to the store you can do the math.

So it's very attractive and, as you noted, we're rolling it out as quickly as we think we reasonably can with the gating items on speed being how fast we can train our folks to do it well.

And then a little tied to store size and lease expiration dates, we're not rolling into a store that's very, very late in its leased life, we'll wait until we roll it.

And then with the new store and the right square footage build in embroidery.

So now we're at like 650, at roughly 1,000 stores have embroidery, so we're sort of two-thirds penetrated and continuing to push on it.

Okay.

And about just that Canadian experience for Journeys, does that lead you to look in other markets now beyond (multiple speakers)?

Yes, I mean we've been looking.

We're always looking at other markets and trying to understand what the customer -- first, is the customer similar to the United States?

And no surprise, consistent with all the themes you hear, the world continues to globalize and the brands tend to go with that.

So our brands travel all around the world, the brands that are in Journeys.

The trick for us would be to figure out competitively can we play in other countries.

When we looked at Canada it was our judgment that there was no one in Canada really doing the business the way Journeys does it and that represented an opportunity.

That's not true everywhere.

So with every country, were we to contemplate going beyond Canada, we have to take in mind what's going on and what would be the right way to compete.

Thank you very much.

Good luck.

Sure.

Kelly Halsor, BB&T Capital Markets.

Good morning, guys.

Can you talk a little bit about -- I know you said recently that you were no longer going to announce small acquisitions for Lids Team Sports as you guys roll up the space.

Could you maybe talk about that?

Have you done any small acquisitions since the last call and just provide some color?

Well, let me correct that a little bit.

When we say no longer announcing small acquisitions, we anticipate most of the acquisitions that we're going to make in Lids down the road are too small to announce, which is different.

Anaconda brand, Sports Avenue -- if we do on other acquisition of that size we will likely announce it because it probably gets up to the -- sneaks up to the level where it matters.

But the point we were making more is as we grow this business through acquisition, on the store side with Lids Locker Room we're anticipating a lot of sort of onesies and twosies and small chains.

And in Lids Team Sports, a lot of it is the acquisition of people, of sales people.

And so when we buy a smaller team dealer were we to go that route, it's more or less to get the people.

And so that will probably show up most clearly in terms of how many sales reps we're running through the business.

And it's sort of make buy decision for us -- if we find experienced people who are a good fit with us we can either just hire them or that we could buy their business.

Okay, great.

Now shifting to Journeys -- you guys did a really good job bringing in the new Brown Shoe inventory.

As this trend continues how do you think you will be able to maintain your leadership position as the product becomes better distributed in 2011?

Well, the history of Journeys is that -- the beauty of Journeys is that it is the destination fashion footwear store for the teenager in the mall.

There is really no one with a national footprint that does what we do.

The issue for Journeys in the past has been as fashion stalled out on an athletic cycle many of the athletic vendors also serve as, naturally, the athletic retailers in the mall, so we find a little more head-to-head.

We are delighted with the move to Brown Shoes for the fact that there isn't anyone who as easily directly competes with us, especially in the mall.

A lot of the apparel guys try to move into the footwear space and it's our view that it is very hard to sell footwear in a meaningful way out of an apparel store because of all of the training issues and the logistical issues.

And so we are just delighted with the move to Brown Shoes and we just believe that that trend, as it progresses we will have really no problem remaining distinctive in the mall.

And just let me further add to that one point.

In terms of the increased distribution, that's a recurring theme for Journeys.

I mean when a brand expands the distribution it's time for Journeys to move on to a different brand.

I mean that has been going on for years and so this is nothing new.

And in what Bob said, what we are so excited about right now is this move into Brown where a lot of the brands are not as widely distributed which really plays into our strength.

Right.

So then in terms of athletic, on the other side of things I know you guys don't really play in the running and basketball categories as much as the other athletic specialty retailers do, but is there anything going on in your athletic business at Journeys?

Well, first of all, we don't play at all in the performance athletic space, not a little.

We don't bother there; we are fashion.

And so if you take our athletic business it breaks into two pieces, basically our core skate business and then everything else.

The core skate business continues to be very strong.

We've used the old Mark Twain phrase in the past; the death of skate has been grossly exaggerated in the case of Journeys.

Because it's consolidating down to strong performers like us, like Zumiez, and we're carrying that product line with great success and because most of those brands are very good about not becoming widely distributed.

Then the rest of the sort of lifestyle oriented non-skate product and fashion product in athletic -- we're still doing good business there, it just isn't a growth category for us right now.

And that would be the area where we most overlap with others.

So we're happy for that to not be the growth piece because we're going in the areas where we're most distinctive and that's what really plays to our advantage.

Okay, great.

Thanks.

Mitch Kummetz, Robert Baird.

Jim, on the comp guidance for the year you're saying 3%.

Could you break that out by concept?

And then maybe talk a little bit about how you would expect to flow on the quarter as you got tougher compares in the back half of the year.

And then I don't think you guys gave a February comp on Underground.

Maybe you did; maybe I didn't catch it.

Mitch, I was -- I almost gave you the answer before you asked it because there's a very consistent question you've asked (inaudible).

So let me give you that.

The comps by quarter are roughly 3% each quarter with the exception being the third quarter where we're going against the back half of this year, the comps improved quite a bit.

So if you say 3% to 4% for most of the quarters and then the back half it's 2% to 3%, and that's generally where it is and we end up at about 3%.

For the different concepts just generally, I'd say Johnston & Murphy is 3% to 4%; in Underground Station are flat to down slightly; Journeys anywhere from 2% to 3% and this quarter we're looking for it to be a little higher than that.

And then for Lids anywhere from 2% to 3%.

So it's pretty consistent across the board.

Okay, that's helpful.

And then on the profitability, starting with Underground, Bob, you mentioned that you improved the profitability there by closing stores.

I think you said that there are about 39 or so stores, 41 stores that are still unprofitable on a four wall basis.

It looks like you're going to close about 22 stores this year, I'm guessing you're closing 22 of those 41.

So what do you think happens to the profitability of that business this year?

And then also on Journeys, you picked up a point of operating margin there on a 7 comp and so you're looking for Jim says sort of a 2 to 3 comp.

How much operating margin can you continue to improve on that comp level this year?

All right, Underground -- well, there are two things going on with Underground first of all.

We are closing stores and then also we're getting, on the stores that we don't close that we renew, most of which we're doing on very short leases, we're getting a substantial rent reduction, so those two factors are kicking in.

Every year in the past, Mitch, we've been surprised that we closed slightly fewer stores in Underground because the flexibility of the landlord has been enormous.

So don't hold us tight to the closing number because we might find enormous flexibility tied in there.

And so we expect to continue to improve the profitability of Underground this year.

We think there's a great opportunity for another significant improvement in the level of profitability that we're going to achieve there.

So the team there is really hunkered down and they know what they need to do, so we're really driving it.

Comps for February for Underground were negative, a very, very difficult first start to February, but they've picked up some momentum.

We're doing the right thing with Underground in the way we're approaching it.

With Journeys, at 3% comp we will get leverage because Journeys also is getting help on rent on average.

Obviously the very best malls have less flexibility than the ones down the food chain, but we're going to get an operating margin improvement in Journeys this year, I'm not sure how much -- I'm not sure, Jim --?

I'd say 20 to 30 basis points and that assumes some slight reduction in gross margin and the pickup in leveraging SG&A.

Okay, that's helpful.

And then last question, on the Lids business, first off Bob, you talked about the NFL percentage being higher on the Locker Room stores, could you tell us what that is?

And then what is the footprint on that business now?

I think you said there's what -- 63 Locker Room stores if I'm not mistaken.

How many states are you in?

You're opening 15 of those -- I think it's 15 stores this year, three in Canada.

Are you going into new regions in the US or are you just sort of back-filling existing regions?

Kind of where is that business now and I assume you sold -- I believe it's going to be a national footprint over time, right?

Well, international meaning Canada -- or sorry (multiple speakers).

I meant national, yes.

Oh, yes.

We're looking for a national footprint.

And the team is being pretty opportunistic and strategic with the new store openings.

The decisions ranging from where we first have a good mall opportunity and we're really being very selective.

Only the mall guys that are coming in and cutting a very sweet deal for us are we going to open a store.

We're looking strategically.

To be honest, we're trying to get into some markets where we want to establish ourselves because if there are other players in that space we want them to see us coming.

So we're doing a little bit of that.

And we know which -- from our hat business we know where the spikes in the license market exist for the best opportunity.

So it's a mishmash of all that.

I don't have the mix of states.

I don't think -- we're not trying to do a regional play, we're not saying let's do the southeast first and then we'll move to the northeast.

We're being nationally opportunistic and we're running it off of the backbone of the Lids headwear infrastructure.

So the clustering which would ordinarily be important from an operational standpoint doesn't matter to us because we have full market coverage with the hat stores as it is.

We have embroidery training across the whole country, so that same group of people are working with the broader assorted stores.

So all those are advantages for us, why we think we're the only guys that can really do this well.

Does that help?

That helps.

And then just the NFL percentage on the locker room business?

It's a lot higher, I don't have the number.

In the headwear business, as you know, the guys wear helmets, so they try to get -- Peyton is good about wearing a hat on the sideline, but it's less than 10%.

When you get into the Locker Room business which is driven a lot more by jerseys and T-shirts, that's the sweet spot for the NFL.

So that's the reason when you get to the bigger footprint stores that the business is bigger.

But I don't have the percentage.

But you asked about the footprint -- those stores are larger than our normal --

right.

-- stores.

They're about 2,500 square feet to 3,000 square feet versus hat stores which are about 800 square feet.

Okay.

All right, thanks guys a lot.

Thanks.

Steve Marotta, C.L.

King & Associates.

Good morning.

Congrats on the quarter.

What percent of sales -- of first-quarter sales does February represent?

You got Gulmi -- keep going, we'll come back to that.

Have you got anything else or was that the only thing you wanted to know?

We can go over that off-line if you'd like as well.

When you talk about growth in the Locker Room strategy, are there tuck-in acquisitions still available or do they tend to be one-offs?

Are they going to be 12 to 15 store chains?

Can you talk -- or is really all the growth expected there to be organic?

No, the opportunity exists to do more tuck-ins and, you're correct, they are five, 10, 15 store chains.

They're more than just ones and twosies.

There are guys out there with usually a market concentrated chain.

And so we have interest in doing business with them.

But we're going to be rational about the way we go at it as we were when we rolled up the hat business.

And there's a point at which we would rather roll out stores rather than pay too much money for it.

We're paying a fair price and that's the easiest way for us to do it.

But we'll probably -- we're going to be parallel processing both routes and the availability will be the gating item in terms of acquisitions.

But the 20 stores that you expect to open this year in Lids Locker Room are completely organic and these acquisitions could be additive to that?

Yes.

Okay.

Thank you.

Steve, on the February sales, February is probably around maybe 30%, maybe a little bit more.

And the way it works is 30% is, that's February --March is down and then the month of April is a big month for us since we have five weeks in that months, so it's the biggest month of the quarter.

30 -- 27-36 that kind of thing?

In that range.

Okay.

Thank you very much.

Robin Murchison, SunTrust.

Good morning, guys.

I had a feeling somehow she meant me.

a few questions here.

First, Bob, on the team sports, in the Lids Group division, as team sports matures over time, becomes a bigger piece of the pie, how is the margin structure, what would change, or would it, within the Lids Group division?

Well, yes, it changes.

The components of margin change dramatically because it's a wholesale-ish business and as such it has a lower gross margin and it has lower SG&A percent.

And so you earn a lower gross margin but then you get charged less on the overhead side.

And we think that in the long run the operating margin potential for Lids Team Sports is in a similar range to where the stores are.

So the operating margin should start to go and that should be unchanged in the long-term.

Now, we bought these businesses, we're investing in them, there are expenses related to some of the consolidation that we're doing.

And so the operating margin on Lids Team Sports right now is not at the same level.

So it's been a drag on operating margin.

But it's all in the spirit of an investment for the future.

Sure, and that's exactly what I was wanting to get at.

Thanks for that clarity.

Let me (multiple speakers).

Robin, let me just jump in on that because it's an important point and we keep on talking about mix changes and I'm sure everybody knows this, but let me just give an example of the way this whole thing works.

In a normal retail business, let's just say if the gross margin is about 50% the SG&A would be like 40% and you come out with 10% four wall.

In the wholesale business you start with a lower gross margin at 35%, but your expenses are lower at -- let's take an example, 25%.

So you still end up with 10% operating margin, but you just get there differently.

And as a result of mix changes in Lids where we're picking up more wholesale business, it's having a negative impact on gross margins, it's having a positive impact on SG&A and the net result should be eventually the same place.

That's an important point.

Right, that's clear, that's where we got it.

Okay, so two other questions.

There are some new trends and meaningful new trends in bottoms, especially women's bottoms, in this new year.

My question is what are your thoughts about a potential shift in demand from boots or do you expect demand to stay the same?

And is there an anticipation that it moves to some sort of a Brown Shoe?

Just how would you see that unfolding and with attention to the ASP, what are the implications for ASP?

Robin, we just came off a really great boot cycle.

And I think just about everybody in the industry is betting that there will be another very important boot cycle ahead of us.

And no one knows for sure whether that's true and you can put us in that camp.

We are working on another boot cycle for sure.

In terms of women's bottoms and detailing that to exactly how the assortment plays, we'd have to get you with Mario; I'm not going to try and take that on.

We're assorting, as we have in the past, with an eye to what's going on in fashion.

And as you know, our new position on that is anything that we think we're going to do differently we're not going to disclose for competitive reasons.

Okay.

And then just two others.

Shi, you had some very nice comments to say about Shi.

Wondered if there's any additional detail there?

And then if you would just remind us what sort of leather pricing increases you're looking for in the new year?

Leather pricing increases?

Yes.

I don't have that number handy.

We can get that to you off line.

Okay.

In terms of Shi, the comp run they've got going on right now is very encouraging.

And so for 2011 they were up nine, the fourth quarter was up 14, February up 10.

So a really good trend going on.

Part of that is related to the -- we're starting to get a little more of a promotional cadence going, which is important in pure women's fashion, footwear retailing, and so we're moving a little bit in that direction, that's part of what's helping it.

We also had a great boot cycle, so that helped.

The important thing -- we're still not there and everybody wants to know when are we going to start rolling Shi.

And it isn't yet.

And we're not really planning anything for this year in terms of a robust expansion.

But we're very encouraged by the trend line.

And the other opportunity we have this year -- this is the first year that a lot of the very high rent Shi stores, their accounts arrive.

And we're out of the money on -- or in the money for a renegotiation on a lot of them.

So we're going to get really good perspective on what rents ought to be in Shi based on what the landlords will accept.

You'll remember that we opened a lot of these stores probably right at the peak of the real estate cycle.

So we're going to end up at the end of this year having gotten more visibility by direct experience on how rents might actually work out.

And that will be an important part of our consideration for going forward.

Thanks.

And great execution.

Thank you.

Jill Caruthers, Johnson Rice.

Good morning.

A question on gross margin.

I know you just explained kind of the wholesale impact.

Could you talk about that assumption into your 20 basis points pressure for the year -- kind of that guidance you're giving, what are those components?

Well, a big part of the lower gross margin is related to mix shift because in most of our businesses we're not forecasting a meaningful decline in gross margin within their line of business.

So when you think about Lids, they're going to be holding roughly gross margin at retail and then holding -- Lids Team Sports.

But Lids Team Sports I think gains a bit in terms of percent to total.

So that's the main factor that's bringing the gross margin percent down.

Jim, would you add anything to that?

No, I think the only thing I'd add is that we gave guidance of a 12% to 15% increase in EPS to really on the lower end.

What we've taken down is primarily the gross margin just to be cautious.

So the change would come in at 12% and 15%, is basically lower gross margin.

Okay.

And then just last question.

Clearly the computer intrusion you announced in December did not impact sales.

Could you just talk about kind of where are you at in building out the IT and should we look for additional expenses going forward?

Well, we've incurred -- first of all, the customer response seems to have been a non event fortunately.

Perhaps customers are immune to the nature of this sort of thing in the new digital world.

We've incurred expenses on legal and consultants, that's what Jim has been calling out.

And then right now beyond that we really have nothing to report.

Okay, thank you.

(Operator Instructions).

Chris Svezia, Susquehanna Financial Group.

Good morning, guys.

Nice job.

I guess my first question just on -- I want to talk about rent.

377 renewals come up in fiscal year 2012.

You get a 10% reduction in 2011 on the ones that you did -- fiscal year 2011 on the ones you did.

Any thoughts about how that cadence unfolded throughout 2011?

And any thoughts about what you can get in 2012 in terms of reductions or is it just too premature to make any observations there?

First of all, it's not just renewals.

It's 377 renewals plus kick-outs that are in the money.

Do know what that means, kick-outs that are in the money?

I know what a kick-out is, yes.

In the money means that the sales run rate that we're on right now makes that kick-out qualified for a renegotiation or a departure from the mall.

And so -- and those are the ones where we typically have the most leverage because we have the ability to walk for sure.

A lot of our renewals of course are stores that are making money.

And so that's a tougher negotiation.

Most of the kick-outs, if we're in the money it usually means that we're not making money so we have more leverage there.

Look, we had 10% last year, we think that the status of the mall is similar to what it was.

There are still people reducing the number of stores they have, so at the bottom end of the mall universe there are still malls that are stressed and we think we get the same leverage.

We have not tried to sort the 377 to say how many of those are in stressed malls.

But it's enough that the relationship between last year and this year is probably in the same order of magnitude.

And I'll ask Jim to --.

Yes, the bottom line on that is, as Bob just said, we don't have a number as to on the 377 what kind of reduction we're going to get.

But we do believe that with the comp that we've given and also with the overall growth of the Company we do expect to be able to leverage rent.

So that's one of the key contributors in the total Company leveraging expenses for the full year.

Okay.

All right, helpful.

Just to go back to the fourth quarter for one second.

Nice job on the comp -- I'm just curious in terms of the flow-through and what happened on SG&A, the fact that you only got 20 bps of leverage, is that just because of the changes in incentive comp, some consultancy fees, and just curious why not more leverage unless I'm just missing something?

I'll give you two comments and then I'll just pass it to Jim.

Yes, we had a great year.

And so the bonus percent -- the bonuses are being paid and as you know as a company, in bad years we pay no bonuses and in good years we are generous with bonuses.

So we're in fortunately a generous cycle.

And then the other thing is when you get to the fourth quarter for a business like ours where in the other quarters we are very fixed cost oriented, because we staff up for the additional volumes we have less of a fixed cost structure in the fourth quarter just because we're bringing on additional help.

And so a lot of the expenses get [variableized] in the fourth quarter which changes the leverage structure.

And so with that said I'll pass it to Jim.

A couple things.

First of all, I also, when I talked about the bonus accruals I said that that had a negative effect on leverage of 100 basis points, which is pretty sizable.

In addition to that, we made a bunch of acquisitions, we made one retail acquisition in August, and we made a wholesale acquisition in August, and then we made another acquisition in June.

Two of the three businesses were wholesale businesses, which normally have late fourth quarters.

So that kind of messed up the relationship with gross margin and SG&A in the fourth quarter.

In addition to that, the retail business which we acquired, we were not -- since we had just acquired it, some of the synergies we were expecting we were not able to fully reach our potential obviously within a few months.

And in addition to that, we were doing some integration on the Lids Team Sports which added cost.

So there was a bunch of stuff going on in the fourth quarter that caused us not to leverage as much as we normally would have.

Okay, all right, I got you on that.

Okay, helpful.

And then last two things.

I guess your thoughts about -- for Journeys in terms of your thoughts about I guess units versus ASPs.

The only reason I'm asking this question is just with the inflationary pressure that you're kind of seeing in footwear at the retail level, if you're able in some areas to pass on that pricing increase, how are you thinking about units and does that to some degree give you, I guess for lack of a better description, an artificial comp driver to the business if that were to unfold in that fashion?

Or are you just planning it so cautiously conservatively just to see how it unfolds throughout the year?

No, it's pretty simple.

We planned at dollars.

Units and ASPs are derivative.

So the way our merchants work in the Journeys world is they are looking at what the right mix needs to be between athletic, skate and other athletic and then casual and the different categories of casual and they are buying to a dollar number in support of their business plan.

And within that, because we're so diversified in terms of what we sell, you get mix changes and all sorts of things that will affect ASPs and units.

So we're really playing to that dollar number and that 3% comp.

And people are always surprised.

We don't look beneath that to say, okay, well then what's ASP and what's units?

Because within 2% or 3% either way, it doesn't matter to us.

As long as we're buying to the right dollar number we're in good shape.

Okay, all right.

I got you.

Well, thank you very much and best of luck.

Thanks.

Sam Poser, Sterne, Agee.

I just want to -- good morning.

I just wanted a couple of clarifications on just the store openings and closings.

Can you just walk through it specifically by each group?

Sam, I'd be glad to but I'll tell you -- if you look at what we've posted in my longer notes online, we've got the breakdown of openings and closings -- by individual business unit.

Okay.

And then you talked about -- on the gross margin and on the pricing issues you talked about pushing back.

I mean, you have a mix change in Journeys with casual, which is partially boots, you used to be a -- well, you still do Dr.

Martens business -- those kinds of things which carry a higher -- which carry higher retails sort of by definition than athletic.

Is it not sort of in your favor that average selling prices are going up just sort of by nature of the trend in the Journeys and likely Underground Station as well?

And I'm trying to understand why there are push backs on that.

Well, it just sounds like the mix is going to send that ASPs up anyway.

Okay, well let's do -- there are two different things.

There's average ASP and then there's margin.

If average ASPs and go up, Sam, you are correct, that's very much in our favor even if units are proportionately lower, if they're both up that's obviously the magic solution for us.

But in our world at Journeys, if we -- we've said this in the past -- if you took ASPs up 10% tomorrow and you took our unit sales down by 10% so it was a wash on the revenue line, we would be delighted.

And the reason is operationally in our highest volume stores we're somewhat constrained in our back rooms.

And so we would end up getting relief and the opportunity in a lot of our high-volume stores to grow off of that base.

So that would be terrific.

The gross margin issue is a different one because even if the mix changes in favor of ASPs you do have these pressures on costs coming up the supply chain from China.

And so our position has been first with vendors let's try to find ways to avoid price increases altogether, but in a way that maintains our margin.

If costs have to get passed on it needs to be associated with a price increase to the consumer which needs to be across all of retail, and we will absorb that even if it leads to lower units, because we think in economics 101, 5% to 10% higher prices, 5% to 10% lower units.

And we would live with that because we do want to first and foremost maintain gross margin percent.

Does that make sense?

May I just use an example as a question.

You do a nice Ugg business, and I'm not trying to find out your Ugg business, I'm just using it as an example.

You have an Ugg boot, they're going to raise the price of the classic short from $140 to $150, the margins are going to be the same.

I mean the customer is not going to fight there.

Isn't it really finding what your customer wants?

Because the vendors aren't cutting their margins either, they're trying to make better product so the customer response to the higher price point and wants it.

And since you are such a fashion-based business and, as you talked about the competition, you're the only show in town in a lot of these malls.

Doesn't that, again, work to driving both -- I mean really all three -- units, margins and dollars?

Well, Sam, yes.

Of course.

If you gave me a store and you said I've got 20 vendors that are all as hot as Ugg and they're on allocation, so I can raise price and I don't worry about units because I still can't get enough product, of course I'm going to do well.

Unfortunately that's not quite -- Uggs is actually a pretty bad example, sorry, because it's an allocated product and it's so hot that it does have pricing elasticity that is outside the norm.

For a product that's more mainstream and more or less fighting for share it's a different equation and it wraps back to more what I said.

But if we could pull off what you just said, absolutely, let's have every product in the store that's so important and hot for the teenager that they'll take a price increase and we're done.

That would be great.

Thank you, Mr.

Dennis.

That does conclude today's conference -- excuse me, our question-and-answer portion of the conference.

I'll turn the call to your for closing remarks.

Thank you all for joining us.

And we look forward to catching up again in three months.

And that does conclude the conference.

Thank you all for your participation.