Genesco Inc (GCO) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to the Genesco first-quarter fiscal year '12 conference call.

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

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

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

Genesco refers you to this morning's Earnings Release, and to the Company's SEC filings including the most recent Form 10-K for some of the factors that could cause differences from 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 first-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 with a brief review of the highlights from the first quarter, and then I will turn it over to Jim for more details on the numbers.

I'm going to return and provide some additional color on our operating segments, and then we can take questions.

As you saw from our release issued this morning, we've had a great start to fiscal 2012.

After a very solid February, sales accelerated in March and April.

Consolidated comps were up 14% in the first quarter on top of last year's 5% gain, led by our 2 largest businesses, Lids Sports Group and Journeys.

At the same time, our Internet and catalog businesses picked up where they left off at the end of 2011, and were up 24% on a comp basis for the quarter.

Total sales for the quarter increased 20% to $482 million, and earnings per share, adjusted as spelled out in the press release, increased 60% to $0.67.

We are also off to a good start in the second quarter with comp sales up 12%, and our catalog and eCommerce businesses up 45% through Saturday, May 21.

We are excited about our longer-term prospects based on our strong strategic position, and the momentum that position has provided us.

You may remember that we are now into the second year of our current 5-year plan.

In that plan, which is built on modest assumptions, our goal for organic growth is to reach sales of at least $2.3 billion, and an operating margin of about 8% by fiscal 2015.

This equates to approximately 18% compound annual operating income growth for the period.

Our progress in fiscal 2011, combined with a strong start to fiscal '12, puts us ahead of where we need to be at this point in the 5-year plan to realize these goals.

Now I'll turn the call over to 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.

We had a very strong first quarter, which exceeded our expectations.

The strong comp increase and relatively stable gross margin, combined with good retail leveraging of expenses, helped drive the approximately 60% increase in adjusted operating income.

Comp sales for Genesco increased 14%.

We earned $0.67 per share in the quarter, adjusted as shown on the attachment to the press release, compared to last year's adjusted earnings per share of $0.42, or an increase of 60%.

Consolidated net sales for the quarter were $482 million, an increase of 20% over last year.

Excluding sales of $25 million from acquisitions completed over the past 12 months, sales increased 14%.

Gross margin was 51.4%, compared with last year's gross margin of 51.9%.

Our retail businesses in aggregate had a small increase in gross margin.

The drop in overall gross margin was caused by increased wholesale sales this year, representing 14% of total Genesco sales, compared with 12% last year, combined with an overall lower wholesale gross margin.

Adjusted for the items broken out in the press release, which were about $1.2 million pretax this year, and $2.4 million pretax last year, we were able to leverage expenses by 180 basis points.

We leveraged rent, depreciation, and compensation, which included increased bonus accruals.

Also, the increase of wholesale sales as a percent of total sales contributed to some of the reduced expenses as a percent of sales.

Operating income, again, adjusted for the items referenced above, was $26.8 million, or 5.6% of sales compared with 4.2% last year.

This approximately 140 basis point increase in operating margin was driven by the 180 basis points of expense leverage, offset by a 50 basis point drop in gross margin, due to the change in sales mix and lower-margin wholesale sales.

Inventories were up 26% year over year, compared with a sales increase of 20%.

Last year at this time, we were low on inventories due to shipping and manufacturing issues in China, so we are comfortable with this increase.

The bottom line is that we had a good first quarter on top of a strong first quarter last year.

To put this in perspective, we earned more this quarter than we did 2 years ago in our third quarter, which is seasonally a strong quarter due primarily to back-to-school sales in August and early September.

Now I'd like to spend a few minutes on our guidance for FY '12.

Based on our strong start to the year and current visibility, we are raising our full-year outlook.

We now expect diluted earnings per share in the range of $2.90 to $2.97, an increase from our previous range of $2.78 to $2.85.

Using the middle of our new range, this represents a 19% increase over last year.

This is on top of a 33% increase in adjusted EPS last year.

Consistent with previous years, this guidance does not include about $4 million to $5 million pretax, or $0.10 to $0.13 per share after tax in expected non-cash impairments, and response costs associated with a network intrusion we announced last December.

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

For the full year, we now expect comps to be approximately 5% to 6%.

The breakdown per quarter is 5% to 6% in the second quarter, and 2% to 3% in the third and fourth quarters.

This translates into total sales of $1.98 billion.

This equates to an overall sales increase for the year of 10% to 11%.

We estimate that the sales contribution from the businesses acquired last year will be about $128 million, split 60/40 between wholesale and retail.

We are expecting an increase in operating margin of about 50 to 60 basis points from leveraging and expenses, while the gross margin will be down due primarily to mix changes.

We expect an overall tax rate for the full year of 40%, and shares outstanding will be approximately 23.5 million.

We are expecting capital expenditures for the full year to be about $55 million, and depreciation to be about $48 million.

We expect to open approximately 83 stores, and close approximately 76.

Our store count will be essentially flat, and square footage will increase approximately 1.2%.

In my commentary, that can be found on our website, we have a complete breakdown of the store openings and closings for the full year.

Now I'll turn it back to Bob.

Thanks, Jim.

Now I want to spend a little time on our individual businesses.

First, Lids Sports Group had a very strong quarter.

Total sales were up 41% to $170 million, and operating profit increased 49% to $14 million.

Our overall comp sales increased 16% in the quarter, and month-to-date through May 21, the Group's comp sales were running up approximately 9%.

ECommerce comp sales were up 42% for the quarter, and 45% month-to-date.

We ended the quarter with 878 headwear stores, 66 Lids Locker Room multi-team fan shops, and 36 single team clubhouse stores, for a total of 980 in the Group, 58 more than 1 year ago.

Much of the earnings growth in the quarter was driven by the Lids headwear stores, where sales were up approximately 19%.

This business is running much stronger than planned for the year, driven primarily by compelling new product introductions.

The Lids Locker Room and Clubhouse businesses are especially seasonal, with relatively small first-quarter volume.

As such, these businesses lost money in the quarter, as planned.

However, they did show some of the gross margin expansion we have anticipated from our increasing scale of operations, and from the buying and merchandising synergies this business enjoys as part of the larger Lids Sports Group.

The team sports business is still in its integration phase, so we are not yet realizing its full potential.

We have built a national presence in this business with 117 reps across the US, up from 30, 2 years ago, and are one of Nike's largest team dealers.

This is a large and highly fragmented market that we believe will benefit from scale economies, and we continue to be excited by the potential we see.

In Lids.com, the 42% quarterly comp sales increase was fueled by a much greater selection of merchandise, as we've transitioned the website to include a full range of licensed merchandise beyond just hats.

We made a big inventory commitment to this business, consistent with our strategy to build an assortment with both breadth and depth of product that are second to none in the marketplace, and it is paying off.

Finally, for the Lids Sports Group, let me touch on our current thinking about the potential NFL strike.

As you recall, when we presented our guidance for fiscal 2012 on our last conference call, we laid out a worst case scenario of a completely lost season with a $5.5 million pretax negative effect on our bottom line for the year, which was not included in the guidance.

As of today, our view of the likelihood of a full-season strike is not much different than when we gave our original guidance.

The upwardly revised guidance we provided this morning still does not reflect the effects of a disruption, and our estimate for a full-season loss remains the same.

Of course, there is a good chance that part but not all of the season may be disrupted.

While the effects of this scenario are difficult to quantify with precision, it is worth noting that our NFL volume is weighted towards the fourth quarter, with November and December being the most significant months.

If there is a partial season, it is likely to include those months.

The key vendors are producing NFL merchandise, which we believe will be available to us if we need it.

So a partial season loss would cost us considerably less than the $5.5 million worst case scenario.

With any meaningful disruption to the NFL season, we see the glass half full for Lids Sports since it may benefit our consolidation strategy in the Locker Room space, as the effects of a strike may make some smaller competitors more eager to be acquired.

With or without a strike, our strategic plan for the total Lids Sports Group continues to focus on becoming the national leader in licensed sports merchandise, with the kind of buying power and economies of scale we now enjoy with our Lids headwear stores.

Next, moving to the Journeys Group.

The Journeys Group had its best first quarter in several years.

Total sales for the Group increased 15% to $209 million, and operating income rose 94%.

The Group's overall comp sales increase in the quarter was 15%.

Journeys stores were up 14%.

Journeys Kidz was up 14%.

Shi by Journeys was up 21%.

And eCommerce in the segment was up 29%.

Through May 21, Journeys Group comp sales were up 13%, and eCommerce within the segment was up 39%.

We believe the limited distribution of our branded product assortment within the mall continues to drive traffic into our stores.

We saw it in men's and women's casuals for the fall/winter season, and that trend continued as we repositioned our stores for the spring/summer selling season with strength in casual, canvas, sandals, and skate brands.

We believe our casual offering and core skate assortment has become even more distinct within the mall, as many of the athletic retailers continue to dedicate more space and resources to capturing share of the lightweight running and basketball categories, which have been performing well for them.

Given the typical life span of teen footwear trends, and the fact that they haven't changed much over the last year, we expect these trends will continue to drive strong performance during back-to-school and the holiday season.

And similar trends are also benefiting the performance of Journeys Kidz and Shi.

We also continue to be very pleased with the strong start of the 3 new Journeys stores in Canada, and we now plan to open an additional 7 to 10 Journeys stores in Canada this year.

Turning to our other divisions, Johnston & Murphy continued recent strong performance with a 10% comp in the first quarter, on top of a 10% comp a year ago, and ongoing improvement in wholesale, which was up 6% in sales.

ECommerce and catalog sales were up 3% during the quarter.

Through May 21, Johnston & Murphy's comp sales were up 19%, and eCommerce and catalog sales were up 54% for the second quarter to date, benefiting from a quarter-to-quarter timing difference in its most recent catalog drop.

Meanwhile, Underground Station's operating income improved more than 70% for the quarter, aided by a 6% comp, and the closing of 18 underperforming locations over the past year.

We currently have 11% fewer stores than at the same time last year, as we have continued to consolidate the business to its profitable core.

Underground Station's comp sales month-to-date through May 21 are up 9%.

Finally, licensed brands had a small increase in sales.

Operating earnings were down, but still strong, with an operating margin of 11.4% for the quarter.

In conclusion, we have had a great start to the year, even better than we expected.

Lids Sports Group and Journeys Group, which made up almost 80% of our sales in fiscal 2011, grew a combined 25% in the first quarter, while together their operating profit grew 70% over the same period last year.

And with Genesco's consolidated May comps up 12% through May 21, the second quarter has started out very well.

While we are certainly encouraged by what we are seeing, we are not quite ready to commit to this pace of growth for the full year.

As a reminder, 55% to 60% of our sales, and more than 75% of our profits, are generated in the second half of the year, and our comp comparisons get much tougher in the back half.

Additionally, with external factors like persistently high unemployment, and high prices for fuel and other necessities, consumer sentiment remains something of a risk.

However, given our strong start and some of the positive dynamics that are driving our current performance, we have reasons to be somewhat optimistic.

Also, in the context of our long-term goals, as we mentioned, we are tracking ahead of our plan thanks to our strong performance over the past 9 months.

Before we move to questions, I want to acknowledge once again the terrific job our team is doing.

After a very successful fiscal 2011, everyone has remained focused and energized, and that is evident in our strong start to the new year.

And now, we are ready to take your questions.

(Operator Instructions).

Jeff Klinefelter with Piper Jaffray.

First of all, one question for Jim and then just a couple for Bob.

Jim, in terms of the flow of earnings for the balance of the year, could you just remind us, are we going to see a typical seasonality?

I know you won't give too specific of guidance yet for earnings but are we going to see a typical flow?

Or how should we incorporate recent acquisitions to think about the quarterly flow of earnings for this year?

And then for Bob, just two quick things.

What are those new products that are driving the meaningful gains in the Lids headwear stores?

And then in Journeys, what pricing dynamics are you seeing now and do you expect for the second half of the year?

Jeff, I really don't see much change in the seasonality in the business.

As you know, in the last couple years, with the back-to-school sales that have moved from the second to the third quarter, second quarter's not as strong as it normally has been.

And I don't think there's any real changes going on there from last year.

Really saw a lot of it last year.

In the third and fourth quarter, not really much change.

Fourth quarter's still the big quarter, the third quarter will be better than the second quarter.

So really not much change in seasonality.

Jeff, there's a broad category of headwear that has really caught on that collectively would be called Snapback.

It's a silhouette that would be similar to an on-field hat but with a snapback construction.

And we are just benefiting from a run on that and we'll ride that as long as it's with us.

Several vendors are participating.

And it's just, again, an example of how the headwear category just reinvents itself over and over with another hot product.

So we're very pleased to see that that's happening.

With respect to Journeys pricing, the story line is pretty much the same as our last call.

Like everyone else who has reported out, there are pricing and cost pressures that are going to flow through the business.

And it's in the high single digit neighborhood and it varies a lot, though, by vendor and category.

But our general position with our vendors is that if there are cost increases that need to take place to us, there are price increases that need to be put in place for the consumer, that's the strategy everyone is pursuing.

We think we're fortunate that many of the brands that we carry have relatively narrow distribution, which will be helpful, we expect, to maintaining the price discipline in the marketplace for what are necessary price increases.

And then we'll just see how that plays out.

So what are you seeing currently?

Or maybe think about the contributions in the first quarter and what are you factoring into those comp gains for the balance of the year in terms of price increases?

We don't plan our business, Jeff, as you know, around ASPs.

So we're planning our business in the back half for Journeys to be up low single digits and we're riding a buy budget accordingly.

To the extent that prices are going up -- cost and prices -- then the buy budget adjusts.

So we'll probably be buying fewer units at a higher average ASP.

But I don't have those numbers for you and we wouldn't actually disclose them.

Okay, so at this point there's no meaningful driver of that low single digit increase, just based on price at this point.

We're not looking for price to be a driver of comps.

What's driving our comps is fashion.

Steve Marotta, CL King and Associates.

Good morning, Bob.

Good morning, Jim.

I wanted to offer my congratulations, as well.

A couple of quick questions.

Jim, what is a typical percentage cadence for the second quarter for May, June, July, the sales breakout?

Yes, second quarter is, May is the slowest month of the quarter and of the year.

And just to give you a rough breakdown from a sales standpoint, it's about 29%, 30% for May and June, and then the balance in July.

Okay.

Also, last year can you talk a little bit about how comps were running in May, June, July?

Again, I know you don't offer specifics but just from a mid single digit, low single digit, high single digit standpoint.

Per month?

Correct.

I don't have that in front of me, but if I remember correctly May was a little low, but it was probably pretty flat.

I don't have the monthly breakdown.

I can talk to you about it later.

Also, inventory I think is up 26%, if I see that correctly.

Can you quantify what's organic and what the drivers are there?

While Jim looks at that, I'll remind you that one of the drivers of that, independent of organic, is that this time last year we were in the midst of the supply chain disruption from China where it was hard to get containers and hard to get product.

And so we were running lean.

So we're not uncomfortable with being up faster than sales right now, even on an organic basis.

Yes, on an organic basis, if you back out the acquired companies, I think it was around 18%, increase in inventories.

And maybe to give you a little more comfort, if you look at our inventory per square foot in our stores it's actually down, it's actually lower than our comp increase.

Okay.

Last question is, as it relates to the Clubhouse stores, now that you've had them for a period of time, can you talk a little bit about, or quantify, the net increase in productivity from the time that you bought them and the time that they were owned previously?

Actually too soon to say.

We've reset stores so we're looking at the productivity of the stores with the reset on a test basis.

We're continuing to work the vendor mix in a way that we think fits our advantage.

But remember, the Clubhouse stores we bought which mostly came in the Sports Avenue acquisition, we did that deal in August.

So give us a little more time to do that.

We like everything we're seeing.

The biggest theme, take-away from us, which was a pleasant surprise, was the degree to which the vendors are hungry for this business and making all the steps that we expected might have occurred after we had even greater scale.

We're seeing that happen now.

So it's turning out to be the opportunity that we had anticipated from that angle.

Mitch Kummetz with Robert Baird.

Thank you.

A few questions.

First, Jim, on the comp guidance, I know you expect this question.

So, you're saying 5% to 6% for Q2, 2% to 3% I think for the back half.

So how would we expect that to break out by the operating groups?

I'll go by business unit.

Johnston & Murphy would be higher pretty much across the board.

Higher in the second quarter and then maybe 3% to 4% in the third and fourth quarters.

Underground Station, be up slightly in the second quarter and then essentially flat to up slightly in the third and fourth quarters.

But Journeys is basically along those lines of what we set out for the total Company.

And essentially the same for Lids also.

Okay, got it.

That's helpful.

And then on your gross margin outlook, I think you'd said down for the year.

I think on the last earnings call, if I recall correctly, you said down 20 basis points.

Are we still thinking about the same slight pressure on gross margin for the year as a whole?

Yes.

And it's essentially around that, in that area, in that ballpark.

And again, it's also an issue of mix, wholesale's going to make up a bigger percentage of the total.

It's a combination, but it's not a lot.

It's only in the range of 20, 30 basis points.

Got it.

Okay.

And then on the Journeys performance in the quarter, I know you talked about ASPs versus units.

Is there any way you could provide a little more color on that business, men's versus women's or casual versus athletic?

I'm curious as to how your sandal business performed in the quarter, just given some unfavorable weather out there.

Mitch, as you know, we're not very forthcoming about those kinds of trends.

So let us just say that both men's and women's has done well.

Casual is the real strength of the business, so the nonathletic side of the house is doing well.

But within athletic, our skate business continues to be strong.

Okay.

How about on the sandal piece?

Sounds like casual was stronger than athletic.

How about within casual, how did sandals perform?

We're going to leave it at that, okay, Mitch?

Okay.

Couple other items.

Bob, on the NFL lockout, I appreciate the color in terms of how it impacts fourth quarter more, but at what point do we need to start thinking that a lockout is having an impact on the business?

Is it July, August when you would start to expect to sell some of that merchandise to where if there's a lock out we start to see some minimal impact then, and then it builds as we go into the fourth quarter?

The key element is going to be getting to a decision.

Because as soon as they pull the trigger on a resolution of this, then the teams and the players can get together, the media will start paying attention to a season and not to discussions.

And we will be able to receive merchandise immediately.

And the merchandise is going to be on hand.

And that's the key theme that we were trying to lay out for you guys.

Our partners, our vendor partners and we are still operating as if there's going to be a season and, therefore, there are going to be goods available, which is a risk that some people are taking on.

And so that's not going to be a deterrent to doing business.

So the trigger will be a resolution of the season and then once the media picks up on it and they start going to camp, we'll see some business and then obviously when they start playing it really takes off.

To give you just a perspective, we basically don't have an NFL business that's meaningful at all until the middle of August, in a normal time.

And that's when they go to camp.

And then where it really takes off is September and as you know, the first game is usually in the second week, or the weekend after Labor Day.

And so it tracks that.

All right.

That's good.

That's helpful.

Last question, Bob, you mentioned on the Locker Room and Lids Team Sports businesses that there was some gross margin improvement there as those businesses build.

How do you think of that in terms of where you are today versus what the gross margin opportunity is there when you've really achieved a national footprint and real scale in that business?

How far are we from that?

We're making good progress.

We have said in the past that when we had a national footprint in headwear, and then we were still buying small regional guys, that we were picking up 300 to 400 basis points in gross margin as the spread between our structure and a small mom-and-pop structure.

And so we think that's the best measure of the opportunity.

And what we're doing already is we're starting to eat into that.

We're not quantifying how much of that we're picking up, but we're only a small part of the way towards realizing that total opportunity.

And so that's what we're pursuing.

And what we like is we're seeing all of the patterns in terms of vendors' willingness to work with us.

We bring their cost down.

We're cheap to serve because we buy once and we hold inventory.

We do a lot of things that make it easier for us to deal with so there's actually a cost reason why a vendor would work with us on margin.

(Operator Instructions).

Jill Caruthers, Johnson Rice & Company.

Good morning.

If you could talk about some of the strength you saw in the first quarter on the Journeys side product-wise.

Typically, if you see such strength in the first quarter, does that bode well for back-to-school, some of the same products working?

It is in this case, Jill.

We are convinced that the typical pattern for teen fashion trends is a multi-year event and so we're roughly a year into this event.

And, therefore, we are very excited about what the prospects are.

And we now have spring/summer in the store against that same assumption on mix and fashion drivers and it's checking really well.

So that all bodes well.

There's no guarantees in this world but we certainly would bet the over in terms of this fashion trend helping us out in back-to-school and into Christmas.

All right.

Could you just clarify on eCommerce, is that growth number actually included in the consolidated comp number?

And then could you talk about some of the strategies you're taking.

The eCommerce growth is very significant, if you could just talk about how you're working that strategy.

Yes, eCommerce is not included in our comp numbers.

And so we call it out separately.

The biggest driver -- and I'll broaden it to all of our businesses -- the single biggest driver is access to inventory and having a great product position.

And in the case of Journeys, some of the systems changes that we invested in, about a year ago, is when we finished the roll-out of the new POS, made it easier for eCommerce to access our total inventory, including what's in the stores.

And facilitated the process of fulfilling an Internet order from the stores.

And so that means that the amount of inventory that is truly available for the eCommerce team exploded.

And that's what's driving business, is the number one thing.

Naturally, we're doing a lot of other things in terms of SEO and paid search and things.

We continue to analyze that and look for opportunities to grow the business so there's a lot of other factors kicking in.

Journeys launched their mobile site, so the mobile access is a new twist on it.

So there's a lot of other pieces but if I was going to highlight any one thing it would surely be inventory.

Chris Svezia, Susquehanna Financial Group.

Good morning, guys.

And really great to see the strength in your business.

Great job.

A question just on Lids with regard to the hat business.

We started to hear some good things about the snapback hats.

I'm just curious how big that is, what's the run rate possibility of that business?

And I'm also curious about embroidering, as you continue to roll that out.

And obviously that's creating a lift to stores.

Just what is that doing to the comp?

In other words, I'm just trying to get an idea, embroidery is obviously helping the comp performance Maybe put them in buckets -- what the core is doing, what some of this new product is doing, maybe what embroidery is actually doing in terms of comp performance for the head gear business.

I've said about what I'm going to say about snapback hats for competitive reasons.

And the team is India is probably already sending me evil e-mails for having even called it out.

In terms of embroidery, we continue to love this business, we continue to add stores.

But the embroidery on a comp basis also continues to be a terrific result for us.

So it is more than just adding stores.

It is comping nicely.

And the single biggest reason for that, I think, is operational.

Our team continues to uncover how to run that business better.

They made a major change a year to two ago where we separated the embroidery from the POS in our larger stores, and so that just increased our ability to focus on it.

A lot of it's training.

And so we've just continued to drive the business nicely and we're very excited about it.

We're not breaking out what that comp is.

But I'll just let you know that it's running a nicely positive comp.

And Bob, just remind me, you were going to do a little over 100 stores this year, going to retrofit in?

Is that still the plan?

We're right now at 567 stores.

We talk about that every quarter, so you can see we've really increased it a lot, 567.

We plan on adding another 62 by year end.

One other point is that we are adding the embroidery to all the Lids Locker Room stores we're opening and they're in, I believe, currently, about 37 of the 47 Lids Locker Room stores already have embroidery.

So we have it in a lot of the hat stores but also we're adding it to the Lids Locker Room stores.

Okay.

All right.

And then to switch gears for one second, you didn't really talk about leases.

So last time we had a conversation about this you had 370 or so stores that were up for some type of conversation.

Just an update in terms of what that dialogue is like, what's going on there in that front, as well?

We continue to have great success, Chris.

The story line is the same.

There's been a lot of discussion amongst landlords about how their leasing situation has improved, but in the malls where we need some changes made, we're still getting a lot of those changes made.

And our 5-year plan was built on the assumption that we would continue to get the kind of help, and we are getting it.

Okay.

And then just on the Journeys division, great improvement in operating margin year-over-year, some of the best we've seen in a long time.

Is that just you're really just starting to leverage that business from a comp perspective?

And is it also any factor that has to do with just getting good negotiations with regard to leases?

That's pretty impressive in terms of the year-over-year improvement.

I'm just curious about sustainability.

Obviously it's driven by comp.

But any particular factors driving that significant operating margin improvement first quarter?

For any small box retailer, if you have a really strong comp in the first or second quarter, you're going to get huge leverage because small box retail is essentially a fixed cost business for the first 6 months of the year.

And so you get great flow-through on that.

That same kind of comp gain probably doesn't translate through as much in third and fourth quarters because you're actually adding labor to keep up with the sales.

But in the first and second quarter for all of our small box businesses, comp gets leveraged tremendously.

And Jim, you want to add to that?

Yes.

We've been talking about this for a while and we've been saying that once we get good comps, a lot of good things are going to be happening.

And that's exactly what's happening now.

And when you look over the last 5 or 6 years in Journeys and the issues they've had with their operating margin, for the most part it has to do with deleveraging.

The gross margin has not moved that much.

And without the comps we have a problem leveraging rent, depreciation, and compensation to some degree.

And we've said all along that the opportunity going forward is that if we get reasonable comps, and what we're seeing from a rent standpoint in terms of renegotiations, that we're going to leverage rent, we're going to leverage depreciation.

That's exactly what's happening.

So with these strong comps, we're controlling expenses and we're leveraging rent and depreciation and those are the main drivers in the operating margin.

Okay.

And I have one last thing, real quick here.

Just from a product perspective, I know you don't talk about trends but an overall just view -- this may be more a Mario question -- but just as you think about boots, in general, and the trends we've seen there, any data point about is it starting to look better as you start to progress through the year about the opportunity there?

Just any incremental thoughts on the boot cycle as we go into the back half, how Journeys plays into that.

Chris, it's May.

I know it's May but at the end of the day you've got to be testing and reacting some product as you start to put product in for the fall.

You've got to at least have some impression about how that may be shaping up relative to fourth quarter and how the first quarter unfolded.

We're going to be in the boot business in third and fourth quarters.

We're committed to it.

We believe that the past year's trends are going to be relevant this year.

The extent to our commitment year-over-year is not something we're going to disclose.

We're going to keep that to ourselves.

I'm sorry I can't be more helpful.

Scott Krasik, BB&T Capital Markets.

Good morning, guys.

The Journeys business, either on the athletic side or the nonathletic side, how have competitors' either bankruptcies or decisions to close stores, has that helped Journeys at all?

We think so.

It's so hard to quantify it.

We've had that experience in both Lids Sports and in, we think, Journeys.

The best feedback we get is from vendors on this.

And we think, particularly in the skate category, skate had a lot of mom-and-pop operations because it was a new category several years ago.

So that probably fueled it.

And that's been a difficult business, particularly on the West Coast.

You know the reports.

Everyone keeps predicting the death of skate, and our skate business keeps on improving.

And so we think the difference is the fact that so much competition has gone away.

And then certainly a lot of mom-and-pops, more in the general family area, also have struggled.

But it's so hard to quantify it.

It's all anecdotal but anecdotally we think that's part of what the story is.

From a timing perspective, have you been having these conversations for a long time or are they still coming u, or is this something we can still count on for a while?

I'm not sure.

It's a little hard to say.

My only speculation on it, and again, we haven't had conversations, is a lot of this was driven by the credit crunch.

And so many in the sports business in particular, we heard many stories of people who had been paying their bills on time and despite that had American Express bought business cut their lines in half.

And if you're not fully inventoried in that business you can't compete.

So that part of the dynamic is probably done.

Small business lending has opened up a little bit again so maybe the worst of that is over.

But it's all anecdotal and, therefore, it's hard to be precise.

Okay.

And then to the extent that the Journeys margin was awesome, it's still going back to '05, '06, so wasn't as good as some of those years, '07.

Is it just more comps?

And given that you're conservatively looking at the comps for the rest of the year, can we actually get back to the operating margins now from those years even though we haven't talked about them?

Not this year, I wouldn't expect to get back to the operating margins that were in the 12%, 13% range, which was the peak.

But we're tracking in that direction and we're loving what we see.

But I wouldn't expect that this year.

Jim, you want to add any color?

We're not going to.

We're going to make good progress this year, no question about it, and we're running ahead of where we thought we would be.

But it's going to take a while to get back to the comps we had in the past.

But we're, again, making good progress.

And it's a question of comps.

We get the comps, you can see the kind of leverage we get.

So we continue to get double digit comps, it's going to happen a lot quicker than we thought.

Yes, it's get you there a lot faster.

And then just last, to what extent has private label at Journeys, your private brands, been helping?

And has the cost environment changed your approach to focusing on private brands?

No, it has not.

We don't believe our customers' thought process is, I'm going to trade down to a private brand because prices went up, say, 5% or 10%.

Our customer is very hooked to brands.

And so our private label strategy is very targeted, mostly on the women's side, mostly on the casual side of women's.

And so that's not going to change.

We're committed to brands.

You know the whole story.

During the recession, our highest selling products, our most demanded product in Journeys was the highest price, it was UGGs.

Which is an anecdotal way of pointing out the thought process of the kids who shop our stores.

They want to have the brands, we're going to deliver the brands.

Sam Poser, Sterne Agee.

Good morning, everybody.

Most of my questions have been answered.

I just wanted to follow up on the gross margin.

For the full year, you said 20 to 30 basis points.

Why would the balance of the year improve from where it was in the first quarter?

Because as you get in the back half of the year, the issue of mix becomes less because we made the big acquisitions in the wholesale business in the second and early third quarter.

So mix becomes less of an issue.

So then we could expect the gross margin in Q2 to be more challenged than it would be in the back half?

(Inaudible), but that's generally right.

That's generally right.

Okay.

And then on the snapback hats, from what I understand there, the ASPs on the snapback hats, and I saw it on your web site, are a few dollars less than the fitted hats.

But I understand from some of my contacts that the margins might be significantly better.

How is that going to evolve going forward or is that the case?

Are the initial markups better?

We're not going to talk about margin structure or specific items, Sam.

I've got to try too.

And then can you talk about the order in which the store openings and closings by quarter, how that's going to flow in a general sense or by concept?

Okay, Sam.

By concept?

Or just in total.

You can give me a net openings, net closings by quarter, either way is fine.

If you look in the second quarter, we'll have net openings of 10 to 15, second quarter, 15 to 20.

You said second quarter twice.

Second quarter, 10 to 15.

Third quarter, 15 to 20.

Excuse me.

And then we'll have a decrease in the fourth quarter.

Robin Murchison, SunTrust.

Good morning, Bob and Jim.

Just a few questions here.

Going back to the embroider stores for just a minute, aren't you getting an 8% lift when embroidery first goes in?

Yes, when you first put embroidery into a store that did not have embroidery and does not require us to take out any inventory to fit it in, those caveats, we get an 8% lift.

Just 3 more questions.

Will you update us on the Underground Station, number of stores up for lease renewal this year?

There's a good chunk, I think it was 21, Jim?

-- that we're addressing.

And of course whether they turn into closures is dependent a little bit on landlords.

Obviously, the comp run we've got going right now is changing the scenario there, so we're very encouraged by what we see as a bounce in Underground right now.

That's helping the situation.

But it's a big year for us in terms of being able to deal with a lot of the leases so that's very helpful.

I think you had about 100 stores that were making money, so I guess it's to be continued.

Yes, we're down to about 150, and we have about 100 that make money.

So 50 to deal with and ballpark 20 of those we can look at this year.

And then also just quickly, any difference in your factory store performance versus your front line store performance in terms of contribution to the comp?

I don't have factory stores handy.

For Johnston & Murphy or for the whole Company?

Let me phrase it this way.

Outlet stores for the whole Company, just wondered if you were seeing any remarkable difference between outlet store performance and mall-based or strips, front line store type performance.

It's funny, in the first quarter we didn't but in the last couple of years we have.

As you probably know, outlet stores have outperformed the mall.

Obviously, the perception of value is a big chunk of that.

But interestingly, and I'm talking Johnston & Murphy now, is the one that we break out explicitly, the actual mall stores came back a little stronger than factory.

Again, part of that is the low base and coming back from where they were.

Lastly on Shi, was that Shi comp, was that a bounce off of easier comparisons versus the rest of the concepts or within the Journeys?

Just any color there and any thought on unit expansion.

I'll deal with that, Jim will get you the comparable.

We're still not committed to unit expansion but we are certainly headed in the right direction.

And so we've got, we think, the right mix of branded goods and own label and the right price points.

We've got a lot of good things going there at the moment.

And so that's very encouraging.

And then, importantly within Shi we're now entering a period where we can deal with a lot of the rents that we took on at the height of the real estate market.

And so part of our decision in terms of doing more units will be tied to what we think the real rent structure is, which we will understand better when we do some of these restructurings and see what the landlords come back with.

So we're in a very important year for Shi.

We're not committed to open any stores this year but by the end of the year I'm expecting we're going to have a lot more visibility.

When you say deal with rents, you mean you're just entering a phase where you can begin to negotiate.

Correct.

We have a lot of kick-outs on Shi stores that are occurring this year.

There are no further questions at this time.

Mr.

Dennis, I'd like to turn it back over to you for any additional or closing remarks.

Thank you all for joining us today and we look forward to talking to you again in 3 months.

Cheers.

Thank you.

That does conclude today's presentation.

Thank you for your participation.