Genesco Inc (GCO) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to the Genesco second 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-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 second 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 second quarter and then turn it over to Jim for more details on the numbers.

Then I'll return and provide some additional color on our operating segments, after which we'll be happy to take your questions.

We are pleased to report that the strong second quarter sales trend that we experienced through mid-June when we last updated our performance continued right through July and August.

Second quarter consolidated comp store sales increased 14% on top of the 3% comp that we reported in the second quarter of fiscal 2011.

Consistent with the past several quarters, our second quarter performance was driven by our 2 largest businesses, the Journeys and Lids sport groups, which were up 15% and 12%, respectively.

Our Internet and catalog businesses also continued to show strong gains across all of our divisions with aggregate comp sales up 40%.

Altogether, including Schuh and our newly-acquired sports-related websites, our web sales and catalog business were up 96%.

Total sales for the quarter increased 29% to $471 million, and earnings per share, adjusted as spelled out in the press release, improved to $0.22 from a loss of $0.02 last year.

This improvement in our bottom line was the result of meaningful operating expense leverage driven by our strong comp performance, as well as the addition of Schuh for 6 weeks in the quarter.

Back-to-school has been quite positive for us, despite the apparent headwinds now facing the US consumer.

For August, comp sales were up 12% on top of 8% a year ago, and eCommerce business was up 21% on a comp basis.

This is encouraging because comparisons got tougher in August.

August store comp last year of 8% was stronger than last year's first half comps of 4%.

We continue to be very excited about our recent acquisition of Schuh.

They delivered a solid result for the 6-week period we owned the company in the quarter and their sales momentum also continued into August.

We now anticipate opening 6 Schuh stores in fiscal 2012, and we plan to accelerate store expansion next year.

As we said on our earlier call, we are planning to almost double the number of Schuh stores over the next 5 years.

We also have been very pleased with the strong support we have received from our vendors who see this as an opportunity to partner more broadly with the Journeys Group.

At the same time, employees at Schuh have expressed excitement about being a part of the Genesco family, and we are naturally excited for them to be with us.

The sharing of trend analysis and the pursuit of best practices on both sides of the Atlantic has only just begun and we see great opportunities going forward.

Based on our acquisition of Schuh, along with the strong performance of our existing businesses during the first 6 months of fiscal 2012, we have upwardly revised our full year EPS guidance to $3.35 to $3.42, from $2.90 to $2.97.

Generally we see the strength of our first half results as evidence that our merchandise position is on target and driving good performance, despite the challenging economic climate.

We believe our competitive position will remain strong in the second half.

But because of the more challenging comparisons and the uncertainty surrounding consumer demand for the rest of the year, our increased guidance is based on modest back half comp assumptions.

We have also recently revised our 5-year plan.

Let me detail our new targets and how they differ from our previous long-range projections.

Our new 5-year plan calls for revenues to reach $3 billion, and operating margin to reach approximately 9% by 2016.

This compares to $2.3 billion in revenue and operating margins of 8% by 2015, the final year of our previous 5-year plan.

Of course the Schuh acquisition and several Lids sports acquisitions give us a significantly higher starting point for the new plan.

The organic growth rate in this new plan is roughly the same as in the previous plan.

Finally, we are pleased, as I'm sure many fans are, that the NFL work stoppage was resolved and that there will be a full season of professional football this year.

This obviously means that the worst case scenario we laid out for you last quarter and was not included in our guidance is no longer a risk.

Now, of course, we face a potential work stoppage in the NBA.

However, the amount of fan gear we sell in that category is considerably less than the NFL, and what product we do sell is more related to a fashion-driven rather than a fan-driven customer.

So our exposure is much reduced.

And now I'll turn the call over to Jim.

Thanks, 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 second quarter which exceeded our expectations.

The strong comp increase of 14% and relatively stable gross margin, combined with good leveraging of expenses, drove the improved performance compared to last year.

We earned $0.22 per share in the quarter, adjusted as shown on the attachment to the press release, compared to last year's adjusted loss of $0.02 per share.

Consolidated net sales for the quarter were $471 million, an increase of 29% over last year.

Excluding sales of $55 million from acquisitions completed over the past 12 months, sales increased 14%.

Included in the acquisition sales are approximately 6 weeks of sales from Schuh, which we acquired in late June.

Our consolidated gross margin was 50.4%, compared with last year's adjusted gross margin of 50.7%, reflecting the seasonal factors in Schuh and Lids discussed in my online commentary.

Adjusted for the $7.8 million in expenses related to the Schuh acquisition, and for asset impairments and other restructuring expenses of $400,000 this year, and $2.8 million last year, as broken out in the press release, we were able to leverage expenses by about 250 basis points.

Adjusted expenses were 48.3% of sales this year, and 50.8% last year.

Operating income, again adjusted for the referenced items, was $9.8 million, or 2.1% of sales, compared with essentially breakeven last year.

It might be helpful to reiterate a couple of points I covered on our call following the Schuh acquisition to be sure the terms of the transaction and the GAAP accounting for some of the deferred purchase price are well-understood.

The total purchase price for Schuh was GBP125 million, plus an earn-out bonus worth up to another GBP25 million.

The GBP125 million included GBP25 million in deferred payments for the 2 principal shareholders of Schuh due in 2 installments, with GBP15 million payable in 3 years and GBP10 million the year after that.

Both of these deferred payments are contingent on the shareholders not leaving the Company voluntarily or for cause before the payments are due.

Because this combined GBP25 million payment is tied to continued employment, it has to be treated as compensation expense due to current GAAP accounting rules.

We view this as part of the purchase price, with a retention feature to protect our investment in the business.

However, it will be amortized for GAAP purposes and reported as an expense, which we plan to break out on a quarterly basis and exclude from our earnings guidance and our adjusted results going forward, so that investors can decide how they want to treat it.

This is a non-cash expense until the note requirements are satisfied.

It reduced GAAP earnings by $1.4 million pretax for the quarter, and was included in the acquisition related expenses of $7.8 million I mentioned earlier.

The second GBP25 million, which is the earn-out bonus, is only fully paid out in 4 years if Schuh reaches performance levels above the pro forma we used to calculate the purchase price.

This management bonus will be expensed over the next 4 years based on the probability of the earnings target being satisfied.

We will also call out the amount of this earnout bonus expense in our quarterly results so that investors can understand its effect.

Unlike the GBP25 million deferred purchase price, we will not exclude it from our guidance or from our adjusted earnings.

This quarter the expense related to this item was $300,000.

So to recap this briefly, the first GBP25 million, which we view as part of the purchase price, will be broken out and will be excluded from earnings guidance.

The second GBP25 million, which is the earn-out bonus, will be expensed as earned and included in our guidance.

In the segment analysis, Schuh essentially broke even from a GAAP standpoint.

However, this segment breakdown includes the $1.4 million in compensation expense we called out earlier as an amount we view as part of the purchase price, and we do not include it in the guidance.

Now, back to Genesco's performance for the quarter.

Inventories were up 26% year-over-year, compared with a sales increase of 29%.

Excluding all acquisitions over the last 12 months, the sales increase was 14%, and the inventory increase was 11%.

Altogether, acquisitions during the past 12 months again contributed about $55 million in sales, and the corresponding inventory was approximately $56 million.

In short, we had a good second quarter which exceeded our expectations.

Once again, this was due to strong comp increases driving meaningful expense leverage.

I would like to now spend a few minutes on our updated guidance for FY '12.

Based on our strong start in the first half, and the addition of the Schuh business for the back half, we are raising our full-year outlook.

We now expect diluted earnings per share in the range of $3.35 to $3.42, an increase from our previous range of $2.90 to $2.97.

Using the middle of our new range, this represents a 36% increase in adjusted EPS over last year on top of a 33% increase last year.

Consistent with previous years, this guidance does not include about $3 million to $4 million pretax, or $0.08 per share to $0.10 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 current year.

It also does not include $7.4 million or $0.31 per share in compensation expense related to the deferred purchase price for Schuh I discussed a moment ago.

And $6.4 million pretax or $0.23 per share of Schuh acquisition expenses.

It does, however, reflect $3.5 million pretax or $0.09 per share related to the accrual for the Schuh earnout bonus.

This number could be larger if better-than-projected performance by Schuh accelerates the accrual of that long-term bonus.

In addition, this does include purchase accounting adjustments related to the Schuh acquisition of about $1.7 million pretax for the balance of the year.

For the full year, we now expect comps to be approximately 7% to 9%.

The breakdown is 14% in the first half of the year and the forecast for the back half, which does include the August comps we have talked about today, is 3% to 4%.

We are going against tougher comparisons in the back half of the year as last year comps were up 4% in the first half and 9% in the second half.

We expect by year end to have opened 84 new stores this year and to have added another 79 stores in connection with acquisitions.

We will close a total of about 78 stores for a net increase of about 85 or 4% of store count.

Square footage will be up about 11%.

My online commentary includes a breakdown of store openings and closings by concept.

This translates into total sales of approximately $2.2 billion, an overall increase for the year of approximately 23%.

We estimate the sales contribution from the businesses acquired over the past 12 months will be about $290 million, with a sales split of about 20% wholesale and 80% retail.

We are expecting an increase in operating margin of about 90 to 100 basis points from leveraging of expenses while gross margin will be down slightly for the full year.

We expect an overall tax rate for the year of about 40% and shares outstanding will be approximately 23.8 million for the full year.

We are expecting capital expenditures for the full year to be about $63 million, including capital expenditures for Schuh, and depreciation to be about $51 million.

Thanks.

And now I'll turn it back to Bob.

Thanks, Jim.

Let's talk about our individual businesses.

First, Lids Sports Group had another strong quarter.

Total sales were up 34% to $178 million, and operating profit increased 57% to $18 million.

Comp store sales for the group increased 12% in the quarter and were up 6% in August.

eCommerce comp sales were up 40% for the quarter and 16% in August.

We ended the quarter with 994 stores in the Group, up from 916 in the year-ago period.

The Lids headwear stores had a very good second quarter driven primarily by fashion product.

We also had another strong increase in embroidery sales and now have embroidery in 533 stores, up from 471 last year.

We continue to be excited about the growth opportunities we see for our Lids Locker Room and Clubhouse stores.

As we have said before, these businesses are very much weighted to the back half of the year, with Q3 and Q4 combined representing almost 70% of annual sales.

During the quarter, we made a small acquisition of a regional chain and have made 1 more since the end of the quarter.

We also furthered our penetration of the college Clubhouse business by signing up Texas Tech, Iowa State and Iowa as partners.

We now operate retail stores and/or eCommerce sites for 12 major college programs.

The team sports business remains a work in progress as we continue the consolidation of the businesses acquired over the past few years, including 2 acquisitions in fiscal 2011.

We now have a much larger organization with capacity to grow and to serve additional schools and teams.

While there are still operational improvements to be made in the consolidation of the business, we are well-positioned to grow our share of this extremely fragmented market and realize greater economies of scale in the future.

We anticipate that this business will generate approximately $110 million in sales this year, and will be profitable.

Lids.com reported a 40% increase in comp sales for the quarter, which follows a 42% gain in Q1.

On a year-over-year basis we have more than doubled the number of SKUs on our core Lids website.

We continue to pursue our strategy of having the broadest and deepest offering of licensed sports headwear and apparel on the web.

Journeys had a solid quarter with Group sales up 16% and an operating loss of less than $1 million, an improvement of more than $4 million over last year.

The second quarter seasonally low sales volume make it difficult to be profitable but we are getting closer to breaking even.

The Group's comp store sales increase for the quarter was 15% driven by a 15% comp increase at Journeys stores, a 15% comp increase at Journeys Kidz, and a 31% comp increase at Shi by Journeys.

The Group's eCommerce business was up 53%.

For August, the Journeys Group comp sales ran up 14% compared to 7% last year.

Direct catalog sales were also strongly positive for August, up 36%.

Strength in the casual category has continued to be a key contributor to our strong sales increase.

Recent casual trends remain in our favor, as evidenced by the strong back-to-school results, making us feel good about the prospects for the holiday season.

While we were up against tougher comparisons and economic uncertainty in the back half, we believe our merchandise has us well-positioned within the mall and that we'll continue to serve as the leading footwear destination for the team consumer.

Shi by Journeys comp performance so far this year and especially in the second quarter has us encouraged.

We are now doing a much better job of meeting the expectations of Shi's target consumer from a merchandising perspective which is obviously a key step in our broader effort to validate the strategic potential of this business.

We opened 3 Journeys Kidz stores during the quarter and now operate 152 Kidz locations.

We also doubled our Journeys store count in Canada with the opening of 3 more locations to give us 6 total.

This continues to be a strong market for us and we anticipate there will be 4 to 7 additional Canadian store openings by the end of the year.

Turning to our other divisions, Johnston & Murphy had a very strong 17% comp store sales increase in the quarter.

That business continued to show strength in casual footwear and it had a nice pickup in dress shoe sales for the first time in a long while.

We also saw further growth in non-footwear sales which increased to 37% of the mix for the quarter, from 32% last year for the Johnston & Murphy shops.

Despite the nice improvement in Johnston & Murphy's business over the past 2 years, we know the performance of the brand is sensitive to the volatility of the stock market and so we are operating with a greater degree of caution.

But so far we are holding up pretty well with August comp store sales up 7% and direct sales up 6%.

Underground Station delivered an improved operating performance for the second quarter.

Comp sales were up 10% which helped drive strong leverage on expenses.

We are now operating 141 stores, down from 162 last year.

Of these 141 stores, 113 were profitable on a 4-wall basis for the 12 months ended July 30.

Comp store sales for August were up 18%.

Finally, in licensed brands, sales were down due primarily to lower orders for branded product from a handful of retail partners who are shifting their merchandising emphasis more towards their own private label brands.

Even with the drop in sales, the division posted a 5.4% operating margin in its seasonally slowest quarter of the year.

To summarize, we had a strong quarter driven by our 2 largest businesses, the Lids Sports and Journeys Groups.

Combined, these 2 divisions represented approximately 75% of our sales for the quarter, posted sales growth of 24%, and adjusted operating income growth of almost 150%.

We also added an exciting new growth vehicle and significantly increased our international footprint with our acquisition of Schuh.

Overall, acquisitions contributed 15% to the sales growth in the quarter.

With August comps for Genesco as a whole up 12%, we have a good start on the third quarter.

As you know, the vast majority of our operating profits are generated in the second half of the year, and in the back half of fiscal 2011 we posted strong results.

While our product is trend-right and our merchandise selection is compelling, we are operating in a macro environment both in the US and the UK that is not particularly conducive to positive consumer spending for a host of reasons.

In this environment, even in the face of solid business results and positive momentum, we believe it is prudent to be somewhat restrained in our outlook for the back half of the year.

With that said, we do see areas where we can balance this caution with a slightly more aggressive approach to our growth strategy.

This includes taking advantage of some favorable real estate opportunities in the UK that have recently surfaced in order to extend Schuh's footprint.

And we'll also continue to selectively add stores in Canada and pursue tuck-in acquisitions for our Lids, Locker Room and Clubhouse businesses.

We move forward confident in our updated long-term goals that we shared with you, encouraged by the trends we are currently seeing across our footwear and sports businesses, and hard at work to ensure that we continue to deliver for our customers and our shareholders.

When we are out talking at conferences this fall we will provide more color on the 5-year plan we recently updated.

I want to close by congratulating the entire Genesco organization on another solid operating performance.

And again welcome our newest team members from Schuh.

We are very happy that you are now part of our family, and we look forward to working together to further expand the exciting footwear business you have established.

And now we're ready to take your questions.

Jeff Klinefelter with Piper Jaffray.

Thank you.

Congratulations to everyone at Genesco on a great quarter, and a really encouraging outlook.

Couple questions.

First of all, just clarifying Q2, I don't know if this is in your online commentary, Jim, but the Q2 comps and then the comps into August -- any color on pricing versus units driving those comps?

Primarily Journeys is the 1 most people are concerned about, I think asking for.

The second quarter, Journeys ASPs were essentially flat.

And actually in August they're showing an uptick.

They're up so far in August.

So there's a small amount of pricing that's driving the comp, but otherwise it's transactions.

I'm not sure if it's increased prices as much as it could be mix, probably a combination of both.

But definitely ASPs are up a little bit in the month of August.

In terms of the outlook here for second half of the year and then rolling into next year, the cost of goods inflation, Bob, just remind us again what's incorporated into your gross margin outlook.

I imagine a put would be the Schuh acquisition, in terms of the gross margin contribution, but then a take being COGS inflation.

Could you just give a little color on second half, and how you'd view that going into next year?

Yes, Jeff.

Again, we, primarily as a retailer of branded goods supplied by others, we view ourselves as being more protected on gross margin from other typical retailers who are either vertical or from the wholesalers.

So our thought process, and this continues to seem to be proving out, is that as costs go up for our suppliers, they will be raising prices to us.

But also raising prices at retail in a way that essentially preserves the gross margin for the retailer.

And our position with our wholesalers is that's the right way to execute from the cost pressures coming out of China.

We will feel some pressure in our vertically run businesses, in our wholesale business.

So both Dockers and Johnston & Murphy are anticipating a little bit of pressure on their gross margins.

But, as you know, that's a smaller part of our business; 75% of our sales come from our 2 big branded businesses.

Just to clarify.

So far, really no resistance at all to those price pass-throughs, at least early back-to-school in August.

And then just 1 other one.

Bob, on the Schuh acquisition and the growth plans, remind us again, you're planning the new store openings, I think you said at the acquisition that would go -- focus a little bit more toward the southern part of the UK, maybe going into more of the heavily-populated, densely-populated London area.

Is that still the case, and would you expect the returns on those stores to be comparable to the current base?

Yes, we are -- the emphasis is in the south.

Not all the stores will be there.

And the pro formas that we're running with do anticipate the same kinds of returns.

In terms of price increases, again, we haven't seen a lot yet.

Jim quoted the ASPs.

These are mostly both cost and price increases that we anticipate for the back half, but they're just not quite there yet.

Okay, thank you very much, good luck.

Steve Marotta with CL King.

Good morning, and let me offer my congrats again as it relates to the second quarter, as well as annual.

The 3-quarter comp to date of 12%, Jim, can you talk about that vis-a-vis Irene?

Yes, Irene -- we had stores down for Saturday and Sunday, maybe 10% to 11% of our stores.

But in terms of the impact, in terms of sales loss, we picked it up, and it's really not that big of a deal.

As of right now, I know of no material damages to our stores, and really it's not a big deal for us in terms of sales.

We debate this all the time internally.

Not everyone agrees with Jim and I on this, even in our Company.

But the thesis is, at our typical customer's level, they spend what they have.

And snowstorms and hurricanes generally move around when they spend it.

But since this occurred in the middle of a quarter, we believe we have plenty of time to recover.

So my question is -- is that 12% then through last Saturday or through yesterday?

No, it's through Saturday.

Okay.

The NBA strike, just to refresh, Jim, and I'm working from memory, I think the NFL strike could have impacted you $0.12 to $0.15.

You're saying NBA is materially less?

That's right.

Materially less because the percentage of product that we sell NBA-related is considerably less than it is for the NFL.

It's so minor, we're not going to put a number on it.

I understand, and I wouldn't try to press you for it.

And lastly, as it relates to Lids comps, can you talk a little bit about what's driving those?

You mentioned there's not a lot of inflation within the businesses, in general.

Can you talk about Lids specifically, inflation versus units, fashion?

What gives you confidence that comps will continue to be positive, at least, over such difficult comparisons?

First of all, it's being driven by fashion.

So our headwear business is divided into fan business and fashion business.

And we're doing well on both.

But there's another great run on the fashion side of the shop.

You can stand in 1 of our stores, as we have done, and you can watch where the walls to which the kids gravitate.

Action Sports is still big, and a lot of the professional sports done in these snapback styles are extremely popular, and it's all fashion.

You can see, even in the teams we sell, we have certain teams that are hot, presumably not because they're winning, because they're not.

It's because the colors are right for the look that the kids are trying to achieve.

We're having a great run, for example, with Chicago Bulls because the red hat is a great hook up to other things that are going on in fashion.

So that is really what the driver is.

And the reason that we continue to be confident is -- we know that our performance in Lids has outpaced -- to talk headwear stores first -- has outpaced the industry because we continue to gain share.

I think we're getting a strong enough performance that those who try to compete with us realize that it's pretty challenging, and so I think we continue to gain share.

So that's part of why we feel confident.

We don't think that changes.

If anything, a softer economy might accelerate that again.

And then when you get outside of the hat business into the Clubhouse and Locker Room business, we have taken over a lot of businesses, and we believe that we deliver opportunities to merchandise better because of our resources.

And so some of that is still going to be hitting those stores, and represent upside as we convert them over to our systems.

That's great, thank you very much.

Mark Montagna with Avondale Partners.

Just want to follow up on that last question.

You had mentioned, regarding the Chicago Bulls and the red coordinating well with fashion, can you talk about some of the fashion that is impacting?

What is it in apparel that may be impacting your Lids business?

What is it in apparel that could be impacting the Journeys business?

Mark, I'm not sure.

I'm not going to try and be too much of an expert on the rest of the fashion trends that are driving this.

It's hard for us to plan into that.

With our inventory, we're more reactive to what's working, and then we chase.

So the observation that a major league baseball and NBA, and hopefully NFL, as well, that the high crown, fitted, and snapback hats are working for the customer with the rest of their gear, gets influenced by so many things.

It's what their fashion icons are wearing.

It's what they're hooking up to.

There's too much going on to try to play expert on that.

I wish I could be more helpful to you.

What about cost increases?

We touched on that earlier, but can you give us a projection as to how much you anticipate footwear costs to rise in the second half?

And then, are you seeing any sort of deceleration in that rise into spring of next year?

We do see an increase in footwear prices, and it varies by product and how much labor content, et cetera, is in it.

Everybody's been talking, not just us, about high-single digits over fall, into spring.

But again, we're not that exposed to it because when you look at Journeys, we are basically taking the costs and the price to consumers; we're taking those 2 increases together.

And maybe even with some forward buys getting a little advantage out of it.

But we're not as exposed.

So that's probably the best question posed to the wholesale guys.

We are, again, seeing a little bit of that in our Dockers business and in Johnston & Murphy, of the order of magnitude that I just described.

Jim, do you have anything to add to that?

I was going to say -- we talk about this a lot in terms of the cost increases, to some degree, will be hidden in that.

It isn't that we're selling the same shoes season after season, it's really a new product.

And so it's a different price.

And so to the consumer, it doesn't necessarily look as an increase because we carry over very few products.

So there will be overall increases, no question about it.

But from the consumer standpoint, it's a new shoe and they really don't know the price has been increased 5% or 6%.

Versus a shoe that we carry over, that would be very obvious if we increased it by 5% to 6%.

And then I just have a couple quick questions.

Johnston & Murphy, August comp up 6%.

Has that accelerated since the beginning of August when we had all that market volatility that perhaps might have hurt the business?

We're not going to break out months.

Then Schuh, are there other chains similar to Schuh in Europe?

Or is Schuh really the biggest one?

Schuh, of course, is just in the UK.

Within the UK, we think that Schuh is unique.

We think that the breadth of their assortment is pretty much -- and their brand assortment is unmatched.

We're going to school right now on Europe because that would represent an opportunity for us to do more.

Our priority right now is to build out the UK, and so most of our energy is going into making sure that gets done well.

But we're beginning to go through the thought process about Europe that we went through with the UK that led us to Schuh.

Both in terms of what countries might make most sense, and then within those countries, whether there's an opportunity to do a greenfield entry or to partner with someone, as we've done with Schuh.

And then just last question.

Shi seems to be doing quite well.

What has changed to enable Shi to really see these impressive results this year?

We've gotten a good brand assortment going on there that works for the consumer.

And so I'd say the merchandise mix is the biggest thing that's driving that.

Okay, thank you.

Scott Krasik with BB&T.

Bob, a couple questions on Journeys.

Teen employment or unemployment had been an issue.

Certainly a lot of the negative headlines skewing consumer confidence down.

Does your customer at Journeys just completely ignore that, as long as there's fashion to be had?

They can't completely ignore it because they spend what they have in their pocket, and if it's less, it's less.

What we like is that footwear right now is very important to that customer, because there's new things going on in the space, and that draws their dollars.

And I would compare that to -- if we just go to the bottoms side of apparel, there's a denim war going on, but the denim has been around for a long time.

So I think it's reasonable to say that a kid with maybe a little more limited budget this year versus last year might tilt more into footwear.

Hence, our comps are doing better than the rest of the mall.

That would be my explanation.

But, no, we're very alert to the fact that consumer confidence is an issue.

Unemployment is an issue.

And, hence, our guidance for the rest of the year is a little muted relative to our trend line.

But we do think that on a relative basis we're pretty well positioned.

If we use units as a proxy for traffic, though, it seems like you have some pretty good increases.

Those don't usually just change on a dime.

They sometimes do, and so that's why we're being cautious.

They usually don't.

They sometimes do.

And then just, Jim or Bob, can you just give me once again the rationale for not including the retention component of the payment?

I think as long as they're just there, which they've already expressed an interest of sticking around, it has to get paid out.

So why isn't that included again?

Because we don't expense purchase price.

Remember, there's 2 payments in the out years.

One is an earnout, and the other one is part of the purchase price that is delayed.

It's not performance-based, it's just tied to Mark and Colin still working with us.

And so when you look at it as purchase price, which is the way we look at it, we're inclined not to consider it an expense.

And I think the really important distinction, Scott, is had we made the decision that the payment was not tied to their being there, that they get it whether they stay or go, it would not get expensed.

So we actually improve the arrangement vis-a-vis shareholders.

And by doing so, we convert it to an expense, which, in my mind, is kind of crazy, but I'm not a GAAP specialist and there must be a reason for that.

But our rationale says -- because it's purchase price, it ought not to be expensed.

Now, we're breaking it out, and any analyst can turn around and treat it however they want.

From our view, we think it really is a purchase price item.

Does that make sense?

That's fair, okay, thanks.

Mitch Kummetz with Robert W.

Baird.

First, on the comp outlook for the year, I think you said 3% to 4% for the back half.

Is that right, to begin with?

That's right.

So you're plus 12% in August, and I would imagine August is your biggest month on the third quarter.

So when we're thinking Q3 versus Q4, should we assume that you're going to be above the 3% to 4% in Q3, and maybe a little below it in Q4, just given where you are quarter to date?

Yes.

The answer is yes.

On the last call, you talked about your comp outlook by concept, given the 3% to 4% now for the back half.

Could you maybe just give us some guidance there in terms of how you're thinking about that by concept?

Sure.

For Johnston & Murphy, for the third quarter, 3% to 4%, and for the fourth quarter, 2% to 3%.

Underground Station in a range of 8% to 9% in the third quarter, and the fourth quarter, 2% to 3%.

Journeys, 6% to 7% in the third quarter, 2% to 3% in the fourth quarter.

And Lids, around 5% in the third quarter, and 3% to 4% in the fourth quarter.

Okay, thanks, Jim, that's very helpful.

And then on your op margin guidance for the year, I think you'd said 90 to 100 basis points.

I also think you said gross margin down slightly, and then you're going to get leverage on the SG&A.

I think on the last call you were talking about a 20 to 30 basis point drop in gross margin.

Are we still looking at that range, or has that changed at all?

No, that's about right.

Lastly, Bob, on the Journeys performance in the quarter, could you just maybe give us a little help in terms of men's versus women's, casual versus athletic.

I don't know if you could talk maybe about sandals, if that's meaningful to the second quarter.

And any reads on boots given what you saw at Journeys in August?

Mitch, you know how we handle these questions.

We consider most of the trend data that we've got to be competitive.

So what we said -- our casual business, we've been running this for now 3 or 4 quarters now.

The casual business is leading the way.

We still have a good athletic business, particularly in skate.

So that's all been doing well.

But what's new and exciting for our customers sits strongly in the casual area, which includes athletic style, a lot of slip-ons.

And so, no one's going back to their Sunday dress shoes.

But it is certainly new brands that represent an opportunity for us to be more distinctive than we are in some of the core athletic stuff.

And then in terms of boots, we're just going to keep that to ourselves for now, competitively again.

That's fair, thanks a lot, good luck.

(Operator Instructions).

Robin Murchison with SunTrust Robinson Humphrey Capital Markets.

Wanted to know how we should think about inventory for the balance of the year, particularly coming out of Q3.

I imagine it's going to be a little bit lower.

And secondly, just wanted to ask you how you see your tax rate evolving over time, or is the UK alone not enough to affect it?

Thanks very much.

There are a lot of things going on in the tax rate, and to be honest, to keep it in that 40% is a little conservative.

And I would expect over time for it to come down some.

But we're holding at 40%, but over time it should be coming down a little bit.

And then inventory, we're doing everything we can to bring in as much inventory.

Inventory really came into line this quarter.

And I would expect, again, that the sales increase and inventory increase would be in line in the third and fourth quarters.

Robin, we're having to chase product a little bit, obviously, particularly the hottest stuff.

But we've seen a strong trend ahead of time, and so we're positioned for supporting a pretty good holiday.

As you know, in our businesses, I think partly because of our size, we can buy a little ahead of what we've budgeted, and play into trend.

And we know we can back down if necessary through a variety of mechanisms that we've used in the past.

Right, thanks.

Jill Caruthers with Johnson Rice.

If you could talk about your updated annual guidance, does that still assume Schuh contributing about $0.25 to $0.30 in EPS?

Yes, it does.

And then just a general question on the Journeys strength.

Could you talk about the benefit you believe you're seeing as more of the specialty athletic mall players focus on the new running, technical light-weight type product, how that variance helps out Journeys.

Broad comments there would be appreciated.

You're exactly right.

We have not only a trend that's going on in our favor in terms of casual sales at Journeys.

But we have a trend that works in our favor in the sense that the athletic guys have very strong basketball and light-weight running businesses going right now.

And that basically says to them -- concentrate on what works and what is your most natural home.

And there's less of a need for them to pursue other businesses to drive their sales.

So the casual business is really ours and a few others in the space to have.

And the athletic guys, as you noted, are pretty much leaving this space alone because they've got their own terrific trend lines going on in their world.

I appreciate it, thank you.

(Operator Instructions).

Jessica Bornn with Sterne Agee.

I just wanted to know if you could speak a little bit about the Lids Group, the growth going forward as far as store count, revenue, and operating margins for this year and beyond.

I'll give you the general theme, and then Jim can provide what numbers he has.

We're very excited about Lids growth going forward.

The headwear business alone still has growth potential.

Again, I remind everybody that that is a store concept that plays well outside of the mall.

And so, while we're very well penetrated in the mall universe, we have nice upside.

But the really exciting part on the retail side there is the Lids Locker Room and the Clubhouse businesses.

And in those 2 businesses, in the Locker Room business, which is all teams, all categories, again, that's a bit of a roll-up for us, but we're also opening new stores.

So we're going down both tracks.

We're having very nice results out of that group, and we see the potential of it becoming a 400 or 500 store chain over time.

And the pace at which we get there is a little bit dependent on the availability of real estate, and the willingness of some of the regional guys to partner up with us.

But we're very excited, and we think once we scale it, we will achieve the same scale economies that we got when we created a national footprint in headwear.

A lot of that comes from gross margin.

Some of that comes from the ability to manage inventories better because we're planning 1 inventory into all those channels.

And then what's very exciting for us is all the headway we've made in Clubhouse stores, which is essentially partnering with teams.

We just opened, several months ago, the flagship New York Yankees store in Times Square, and it's doing extremely well.

And so we're very pleased with what we've got going on there.

We're working with colleges to get more relationships built.

A lot of those get done through RFPs.

We have a number of very important RFPs outstanding.

And so we're very excited about what we're going to be able to grow there.

And the theme around all of that is 1 inventory, and by far the biggest inventory of licensed merchandise, sports merchandise in the world, sitting in Indianapolis, fueling all these different channels of distribution, which is really the best way to summarize the scale opportunity.

And then on top of that, we have the team sports business, which we're in pause mode right now because we bought enough businesses to give us a national footprint, and now we are building out the infrastructure to support that.

And we're very pleased with the progress being made, and very excited about the future.

It's extremely fragmented.

And this is another industry where we anticipate scale economies, and we're rapidly chasing after that.

So those are the headlines.

And I'll let Jim talk a little bit about numbers.

You asked 2 questions.

One was concerning operating income and the other was new store growth.

In terms of operating income percent last year, Lids earned 9.5% to 10% range, a little under 10%.

We would expect it to be up possibly 100 basis points this year.

And so it would be over 10% this year.

And we would expect it, over the next 5 years, to get into the range of teens, low teens.

And that will come primarily, some gross margin expansion, I believe, but also through leverage of expenses.

In terms of new store growth, this year right now our plan is around 47 stores.

About 43 stores, and we made 4 stores in acquisitions, so altogether about 47.

We're going to close about 22.

I think going forward, the rate at which we're closing stores will slow in the future.

And the rate at which we open stores, that probably will increase some, primarily on the Locker Room side.

So there will be some increase in store count, I believe, going forward, but the number of closings will probably be coming down.

And we're going to get on the road in September, and lay out our 5-year plan, and in that plan -- I'm not going to do that now -- but in that plan we will be able to lay out for all of you the growth we anticipate in each of our business units, including Lids.

So we'll show you a 5-year horizon on that.

And then turning to Journeys just quickly, the stores are looking a lot cleaner than we've seen in the last few years.

To what degree would you say the assortments have become narrower and deeper?

Not a whole lot.

It's an interesting observation.

I'd have to go back and look at the numbers.

We've looked at trying to get it narrower, so it's consistent with where we're headed.

And I just don't have the numbers handy to walk you through what we've done there.

But we'll try to follow up with you on that.

Okay, and then 1 last question.

Do you see any resistance from your core Journeys and Lids customers, the teens mostly, to what's going on in the macro environment, the debt crisis, that type of thing?

Not through August.

And so we remain cautious.

But as we said, we think we're trend-right, and there's nothing like being trend-right with the teen customer.

So, stay tuned.

Okay, thanks very much, guys.

Steve Marotta with CL King.

Could you very briefly go over what you mentioned the old 5-year plan and the new 5-year plan?

I think I transposed a number or 2.

Hopefully it was positive.

We were -- operating margin, we were saying -- our last 5-year plan, the last year was FY 2015 and operating margin was 8%.

And we're saying now for our fiscal '16, the operating margin will be 9%.

And sales will be in the $3 billion range in 2016.

And then what was the old sales range?

I believe it was $2.3 billion.

$2.3 billion, and that was 2015.

That's exactly -- I got it, thank you very much.

Robin Murchison with SunTrust Robinson Humphrey Capital Markets.

Jim, will you just discuss or update us on the rents, the component of the 8%, now the 9%, as you get the rent and occupancy expense, as it comes more in line from the historic highs that you had during the mid-2005-2006 time period.

I'll just start, Robin.

The theme is that we continue to have success with our program to pursue rent reductions, which is an average, right?

So, in the A malls it's tougher, and down the food stream it gets easier.

And so we do anticipate continuing to carry that out for several years in the planning.

I'll ask Jim if he has any more specifics on it.

It is a significant factor, an important factor, in our ability to raise our operating margins from current levels, which were like 5.5% last year, I believe, to the 9% goal that we're going for.

And it's really coming through rent and depreciation to a large degree, and some compensation.

And the rent -- we do expect rent to continue to leverage going out to 2016.

However, I do not believe -- and maybe this was your question -- I do not believe at that point that we're still back to where we might have been in 2005 and 2006.

So we're making improvements.

We're still not, I don't believe, back to where we started in 2005, 2006.

I don't think it's a big variation, but it's not like we're looking at a crazy number out there.

It's still, I believe, above where we were back in 2005, 2006.

Do you expect to get back to the lower level?

I don't know if we can take it all the way down.

It will be driven by comps.

Right, okay, good, thanks, congratulations, good luck.

It appears there are no further questions in the queue at this time.

I would now like to turn the conference back over to our speakers for any additional or closing remarks.

Just to say, thank you very much for joining us on the call.

And we'll speak to you again.

Again, we'll be out in September at conferences, and then in 3 months we'll give you another update.

Thank you.

Ladies and gentlemen, this does conclude today's conference.

We thank you for your participation.