Genesco Inc (GCO) 2013 Q1 法說會逐字稿

Good day, everyone, and welcome to the Genesco first-quarter fiscal year 2013 conference call. Just a reminder, today's call is being recorded. Participants on the call expect to make forward-looking statements, they reflect the participants' expectations as of today, but actual results could be different.

Genesco refers you to this morning's earnings release and to the Company's SEC filings, including the most recent 10-K filing (technical difficulty) of the factors that could cause differences from the expectations reflected in the forward-looking statements made during the call today.

Participants also expect to refer to certain adjusted financial measures during the call. All in non-GAAP reflect financial measures referred to in the prepared remarks are reconciled to their GAAP counterparts -- in the attachments to this morning's press release and in schedules available on the Company's homepage under Investor Relations.

I would now like to turn the call over to Mr. Bob Dennis, Chairman, President and Chief Executive Officer. Please go ahead, sir.

Good morning and thank you for being with us for our first-quarter earnings call. With me today is Jim Gulmi, our Chief Financial Officer. As a reminder, Jim's detailed review of the quarterly financials has been posted to our website along with the press release from earlier this morning.

I'll begin this call with a few remarks about the first quarter and how we are thinking about the rest of the year, and then I will turn the call over to Jim for a review of the numbers. Then I'll return to provide some color on our operating segments before we open the call up for your questions.

Our fiscal year is off to a very good start. The strongly positive sales trends that have characterized our business for the past seven quarters beginning with back-to-school in fiscal 2011 continued in the first quarter. Our 9% comp comes on top of a 14% comp a year ago and follows a 12% gain in the fourth quarter. Through last Saturday second-quarter comps were up 7% versus 12% over the same period last year.

We have been able to maintain momentum despite more difficult year-over-year comparisons thanks to our businesses' strong strategic positioning, favorable fashion trends and excellent execution by our operating teams. This top-line strength continues to drive operating expense leverage and profitability above expectations.

The prospects for our various growth initiatives remain positive. First, as we'll discuss in more detail later in the call, Schuh continues to outperform our expectations even as macroeconomic conditions in the UK have weakened and we are moving quickly to take advantage of a weak real estate market by accelerating store openings there.

Second, we remain excited about Canadian expansion opportunities for Lids Sports, Journeys and Johnston & Murphy with 30 new stores planned across all our concepts for this year.

Third, we continue to focus on expanding our eCommerce business across the Company with specific initiatives that vary by division.

And finally, we continue to be excited about the potential for further US expansion in the Lids Locker Room and Clubhouse space.

As you saw from this morning's earnings release, based on our strong first-quarter results we have raised our full-year outlook. Now I know you've heard us say this before, but we continue to believe we should be conservative in our guidance. While second-quarter comps through this past Saturday were up 7%, we are still guiding off low comps, especially given the tougher two-year comparisons that began in the third quarter.

Consumer credit in March rose 10.2%, the biggest jump in more than a decade, which is ultimately not a sustainable growth driver of long-term retail spending. We believe our industry has to be prepared to see demand soften when the availability of credit or the consumers' appetite for additional debt lessens.

However, in the short-term we are relieved to see gas prices moderate, which especially helps the teenager's budget. We also remain cognizant of a challenging economic environment in the UK. As a result of all of these concerns our guidance for the remainder of the year continues to be predicated on low-single-digit comp increases.

However, we don't think this prudence in our planning greatly limits our near-term upside if business conditions do turn out to be better than we anticipate. We have demonstrated the ability to capitalize on better levels of demand in the past helped by our strong vendor relationships and we are confident we'll be in a position once again to chase additional sales should our near-term outlook prove to be conservative. And now let me turn it over to Jim.

Thank you, Bob. Much of the detailed financial information for the quarter has been posted online, so I will only be making a few comments. The first quarter came in better than our forecast. Comp sales were up 9% for the quarter, this compared with 14% comps in the first quarter of last year.

This was led by a 12% comp increase on top of a 14% increase last year for the Journeys Group; a 4% comp increase on top of a 16% increase last year for the Lids Group; and a 4% comp increase on top of a 10% increase last year for Johnston & Murphy in the first quarter. The Journeys Group comps in both periods have been adjusted to reflect assimilation of 135 Underground by Journeys stores.

I remind you that these comp sales do not include our direct business, that is eCommerce and catalog sales. The direct business increased 67% in the quarter due in large part to the addition of Schuh UK's eCommerce sales. Excluding Schuh UK, direct sales increased 8% in the quarter.

Month to date same-door sales -- same-store sales through May 19 increased 7% and direct sales increased 5% on a comparable basis. Consolidated net sales for the quarter were $600 million, an increase of 25% over last year. This includes sales of $70 million from our Schuh UK acquisition in June of last year. Excluding Schuh UK sales, sales increased 10% for the first quarter.

We earned $0.98 in the quarter, adjusted as shown on an attachment to our press release, compared to last year's adjusted earnings per share of $0.67 or an increase of 46%. Gross margin in the quarter was 51.5% compared with last year's gross margin of 51.4%.

Adjusting for all the items broken out in the press release, we were able to leverage expenses by 90 basis points in the quarter. Adjusted expenses as a percent of sales improved to 45% this year compared to 45.9% last year. The strong leveraging of expenses was primarily driven by rent and selling salaries.

Expenses included increased bonus accruals driven by our stronger performance in the quarter and $0.08 per share of additional contingent Schuh UK acquisition bonus accruals related to the better-than-expected operating performance in the first quarter. Just to remind you, this is a onetime payment built in the acquisition agreement that is contingent on Schuh UK's performance during the first four years of our ownership.

For the quarter adjusted operating income increased to $39.1 million or 6.5% of sales compared with $26.8 million or 5.6% of sales last year. This represented a 46% improvement.

We ended the quarter with $55 million in cash compared with $57 million in cash last year and with $36 million in debt. All of this debt represents the remaining amount of UK debt assumed in connection with the Schuh UK acquisition. Since the June 2011 acquisition we have paid down $12 million of the UK debt.

Inventories were up 20% year over year compared with a sales increase in the first quarter of 25%. We continue to feel good about our overall inventory levels. For the quarter capital expenditures were $14.1 million and depreciation was $14.4 million; this compared with $9.6 million and $11.5 million respectively last year.

Now I would like to spend a few minutes on our guidance for FY'13. Based on our strong start to the year and current visibility we are raising our full-year outlook. We now expect diluted EPS to be in the range of $4.70 to $4.82, an increase from our previous range of $4.58 to $4.70. Using the high end of our new range, this represents an 18% increase over last year. This is on top of a 65% increase in EPS last year and a 33% increase the previous year.

The new guidance reflects the full-year upside from the first quarter versus our budget, which was slightly higher than the consensus estimate. It was also adjusted to reflect higher preopening expenses for the remainder of the year than we originally planned as a result of our accelerated store opening plans for Schuh UK.

Finally, it also reflects higher accruals for the balance of the year than we had earlier planned for the contingent bonus built into the Schuh UK acquisition agreement. Because Schuh UK is performing better than originally planned, the accrual is above plan.

Consistent with previous years, this guidance does not include about $1.5 million to $2.5 million pre-tax or $0.04 to $0.06 per share after tax in expected noncash impairments. This amount compares with last year's noncash impairments, other legal matters and work intrusion expenses of $2.7 million pre-tax or about $0.07 per share after tax.

In addition, we will continue to exclude the amortization of the Schuh UK deferred purchase price from our EPS guidance. The deferred purchase price amount in FY'13 is expected to be approximately $12 million or $0.49 per share.

The guidance does include the full-year accrual for the contingent bonus built into the acquisition agreement, which we currently expect to be approximately $13.6 million or $0.42 per share. The following are assumptions we used to develop this guidance.

First, we're assuming a comp increase of about 2% to 3% for the last three quarters. The assumed comp increase for the full year, including a 9% increase in our first quarter, will be in the range of 3% to 4%. As Bob mentioned, we are off to a good start with comps up 7%, but we are obviously not banking on sustaining that level for the second quarter or the full year. In addition, May is the smallest sales month of the year, only makes up about 28% of our overall sales volume in the second quarter.

We are also assuming an overall sales increase of about 12% to 13% for the year. Adjusting for acquisitions by excluding sales of businesses not owned for the entirety of fiscal 2012 Genesco sales are expected to increase about 7% to 8% for the year.

In case this year's addition of Schuh UK sales and the 53rd week in the fourth quarter may cause some confusion about the quarterly distribution of our annual sales, I'm going to give more detail than I normally would about how we see sales in the remaining three quarters of the year.

Our current planning assumes that approximately 20% to 21% of the sales for the year will come in the second quarter, approximately 25% in the third quarter and approximately 31% in the fourth quarter. Our guidance assumes a gross margin decrease of about 10 basis points and positive express leverage of about 50 basis points. This results in an operating income improvement of about 40 basis points to 7.4%.

The tax assumption is about 37% and the share count assumption for the full year is about 24.3 million shares. We are also expecting capital expenditures for the year of about $92 million and depreciation will be about $59 million.

We are forecasting 116 new stores and are planning to close about 51 stores. This increase from our earlier forecast of 100 new stores includes eight additional Schuh UK stores which will be opened late in the fourth quarter. We expect to end the year with approximately 2,452 stores, an increase of about 3% over fiscal 2012. We are also forecasting square footage growth of about 5% for fiscal 2013. Now I'll turn the call back to Bob.

Thanks, Jim. At Journeys a strong fashion trend drop another quarter of robust growth with first-quarter comes for Journeys Group up 12% versus 14% last year. Quarter to date through last Saturday comparable store sales were up 10%. Our spring merchandise assortments are resonating with consumers which gives us confidence about our prospects for summer and our plans for back to school.

ASPs in the Journeys stores were up 9% in the quarter, some of that coming from the stores being less promotional in the quarter than last year. Excluding the promotional offset we estimate that the ASP increase was mid-single-digit. We saw the first significant ASP increase in the fourth quarter last year, so we have two more quarters to go before we anniversary these higher ASPs.

Shi by Journeys and Journeys Kidz posted strong comps during the quarter. These results were encouraging as both chains began to anniversary tougher comparisons in the first quarter. For Shi by Journeys we still need to improve four-wall profitability before we will be ready to resume growing the store count, but we continue to be encouraged by their trend.

We continue to view the Canadian market as a meaningful opportunity for Journeys and we are moving quickly to capitalize on it. During the quarter we opened five stores increasing the Canadian store count to 18 with plans for seven more openings over the balance of the year.

Journeys.com was up 5% in the quarter on top of 29% last year helped by increased traffic. As we discussed in our year-end call, Journeys has plans to further boost eCommerce by significantly broadening the online merchandise offering and is actively working on some infrastructure improvements to support that initiative.

Journeys.com is also enjoying healthy growth in mobile traffic which is more marketing than transactional, but is clearly an important part of our relationship with our customers. Mobile is not roughly 30% of Journeys' overall digital traffic and growing at a very rapid pace and it is a very important part of making Journeys and Journeys.com all part of a dynamic and integrated system for serving our customers.

The plan to convert most of the Underground Station stores into Underground by Journeys remains on schedule. We are going to support from the landlords on rebranding the stores with new signage and other physical store changes. The redeployment of field personnel done in February to manage the entire Journeys Group more effectively seems to be driving improved results in the stores.

We are still operating these Underground stores with the old merchandise mix. The re-merchandising initiatives are underway, but, as we have said before, we don't expect to see the changes to be visible in the stores until back-to-school and we don't expect to see their full effects on operating results until holiday.

The strong top-line performance in Journeys has translated into a solid operating income improvement; operating income increased 45% in the quarter and operating margin increased by 220 basis points to 9.6%.

Turning to Schuh, the businesses continued to perform well above expectations through the first quarter and into May despite the news that the UK recently fell back into a recession. We remain bullish about Schuh's growth prospects and, as I've mentioned, we have accelerated our expansion plans this year to take advantage of the real estate opportunities that have surfaced as a result of the economic slowdown. The plan is now to open 16 stores in the UK doubling the plan we had at the start of the year.

Schuh's operating income, excluding the effects of the GAAP requirement to expense deferred purchase price, but including a $2.5 million accrual of a portion of the one-time contingent bonus that was built into the acquisition as performance-based enhancement to the purchase price was essentially a breakeven for the quarter which was better than planned.

The Lids Sports Group had another solid quarter with comps up 4% versus 16% last year. Quarter to date through last Saturday comparable store sales were 5%. In the Lids hat stores the growth drivers were consistent with the past few quarters, including the expansion of the embroidery business which is now available in 652 stores.

Snapback Hats, which have been a fashion item for the past several quarters, continue to be an important driver of the business. We know there is some buzz in the market that this trend may have peaked, but Snapbacks are still selling nicely at Lids.

As we pointed out on our year-end call, we have been anticipating that this trend will eventually cool and have always positioned our inventory accordingly. We also believe that Snapbacks were not incremental sales, but rather they took demand from fitted hats in Major League Baseball and other categories and we expect those categories to improve when Snapback demand weakens.

One other category of interest is the NFL, which is switching licensees beginning with this upcoming season. The NFL is not a significant part of the business in the first half of the year, but the early reads on the new NFL product from our new vendors are quite favorable.

Developing Lids Locker Room continues to be a major focus. We believe the long-term growth prospects for the Locker Room stores is substantial and with growth comes market leverage. At the same time we are exploring new partnerships with professional and college teams to expand the Clubhouse concept.

We plan to add 11 Locker Rooms and seven Clubhouse stores this year between the US and Canada. We have both a good pipeline of potential regional acquisitions and very strong interest from landlords for brand-new stores.

Sales of the Lids Sports Group's eCommerce business were up 2% in the quarter on top of a 42% increase last year. At Lids Team Sports the integration of the three businesses we acquired over the last few years is moving forward nicely. Performance metrics like fill rates and orders booked are on positive trends.

That said there is to work to be done developing the proper infrastructure, including implementing improved systems and processes to better support future growth and achieve our vision for redefining how this industry operates. Operating income in the Lids Sports Group was up 37% in the quarter and operating margin improved by 220 basis points to 10.5%.

Johnston & Murphy delivered a solid first quarter driven primarily by strong demand for dress shoes that are being purchased by a broad age range of customers for work and after work occasions. Comps were up 4% versus 10% last year.

Second-quarter to date comps, which are flat, are reflecting Johnston & Murphy's usual sensitivity to stock market performance and as such they don't challenge our confidence in the overall direction of the business. Notably the direct business has remained strong in May.

The growing strength of the Johnston & Murphy brand and the broader appeal of their merchandise selection have given us more conviction to expand the store base with an emphasis on Premium Outlets. This year we plan to add 13 stores including six outlets.

Johnston & Murphy is also continuing to pursue new opportunities outside the US. During the first quarter we signed a distribution agreement for Latin America which adds to our growing international presence which also includes Canada, Mexico, Japan and India.

Our non-store Johnston & Murphy business was especially strong in the quarter. Johnston & Murphy wholesale sales increased 14% and Johnston & Murphy direct sales, which include eCommerce, increased 20%. Operating profit for Johnston & Murphy was up 38% and operating margin improved by 180 basis points to 7.8%.

And finally, licensed brands posted a modest sales gain in the quarter. We believe that several key wholesale accounts are beginning to move back towards branded products and men's footwear after favoring Private Label for several seasons. Licensed brands' operating income was essentially flat with last year.

To close, we are very pleased with our start to fiscal 2013. Our businesses each operate from positions of strength as leaders in their respective markets. The actions taken during the recession to further strengthen our market position, especially in real estate, along with favorable fashion trends have our businesses tracking towards another year of solid sales and earnings growth.

We continue to focus on our current growth initiatives, the primary ones being the Schuh business, Canadian expansion across all of our US-based retail divisions, Lids Locker Room and eCommerce. Our continued strong performance puts us well on track to achieve our five-year plan of $3.1 billion in sales and 9% adjusted operating margins by fiscal 2016.

We are particularly pleased with our progress so far in operating margin which has improved from 5.5% two years ago to a projection of roughly 7.4% this year. This progress is a testament to the commitment of each of our operating divisions to pursue profitable growth and their exceptional skill at executing these plans. Congratulations to our entire team. And, operator, we are now ready for questions.

(Operator Instructions). Jeff Klinefelter, Piper Jaffray.

Thank you. Congratulations, everyone, on a terrific start to the year.

Thanks, Jeff.

I wanted just to ask you a couple questions. One, first of all, Jim, you commented on the second quarter, May being the smallest month of the quarter. Could you remind us just at least generally what the cadence of the business was last year?

Do your compares kind of get harder as you go through the second quarter, easier, or are they kind of consistent? And then also wanted to know, Bob, on the embroidery, 650 stores in Lids. What is kind of the average productivity in four-wall for those versus the non-embroidery stores? And I have one follow-up as well.

Let me just talk about -- while Jim gets the numbers. On the comps, we had a very strong year all of last year. Where the second half gets more challenging is if you do a stack comp, because where comps really took off for us were six quarters ago starting with back-to-school two years ago. So it's really when we get to the third quarter we're going against two years of more challenging comps. Jim can give you the numbers.

Yes, last year comparisons for total, the months of May and July were pretty close. July was a little -- little higher than May and June was higher. So actually May was the lowest, it got higher in June and then kind of dropped back in July.

And then, Jeff, on your embroidery question, I'm going to sort of duck it. I don't have the numbers here, but it's actually not going to give you the visibility you want. The bias for us is to put embroidery stores in our higher volume stores. And the ones that frequently don't have embroidery are ones that were lower volume in the first place. So that comparison really isn't going to show you a lot.

What we do know, and we've said this in the past, is when we have embroidery retrofitted into a store that didn't have to displace any other product we got about an 8% pickup. The other good thing about embroidery is it still comps -- if you look at it on a comp basis, we continue to learn how to sell and execute it really well so it's comping strongly so we grow that base of our business very nicely.

One other one. Bob, just generally as we look into the second half of the year. I mean there are a lot of concerns about footwear. There are concerns in particular about broadly defining the boot category and what happened last year in the fourth quarter. You're talking about your comparisons getting tougher, your stacks getting tougher.

Describe how you view the outlook, your opportunities to navigate through that environment, both your own comparisons and also kind of the dynamics of the industry. If you have ASP pressure, what are your opportunities to go after more units?

Yes, now, Jeff, as you know, we don't call out a lot of trends or future commitments for competitive reasons. What we do is we flex our assortment to align with what the teenager wants to wear.

And the beauty of our business right now is that demand is across so many different categories of merchandise -- everything from athletic skate, still an important business for us, the rest of athletic strong, and then that gray area that's athletic shoes that are really truly fashion shoes even from other brands, and then the boat shoe business is strong.

We've got so many things going on that we will be assorting to what we believe is the right mix. Boots will be an important part of our business, they were last year, they will be this year and certain vendors that have been important there are going to continue to be important. But in terms of giving you the skew on our mix, we're going to duck that.

And when you think about ASPs, yes, the strength of the boot business year over year will affect our ASPs. But in years where we've had ASP increases we have demonstrated our ability to make it up on units because we really buy our inventory to a dollar number. And so we'll be looking to sell what we think is in most demand in the store, and I'll have to leave it at that.

Okay. Great, thank you, good luck.

Scott Krasik, BB&T Capital Markets.

Maybe just help us understand exactly what's going on with eCommerce. You talked about the initiative at Journeys, May to date Lids was negative and Journeys was sort of growing low-single-digits. How do view your ability to grow that business and what's the right growth rate?

Our growth rate -- first of all, when you look at the comps make sure you look at the comparisons, because we had a lot of initiatives that were in blast off mode a year ago.

Look, we're being aggressive in all of our businesses given the big opportunity of eCommerce and our approach is shaped by the belief in the long run a retailer that has both stores and a robust eCommerce presence is best positioned to win share, and especially if they're seamlessly integrated and operated in a way to complement each other and so that's where we're headed.

And we believe that the eCommerce -- there's much marketing as -- we called out the growth in mobile at Journeys and we think that's a very important part of it. So, if you just use Journeys as an example, we're driving this convergence between our stores and the digital world as really a total system for serving customers.

So you can buy online, you can return to Journeys, the online store has all of our inventory represented, both the CCs and the stores. The Journeys stores all have screens accessible to our customers, that allows the customers to see what we have. And we've learned recently that our customers will go into our stores and buy something that we don't have on hand, either because we stocked out or because it's a smaller volume store and it didn't get a full allocation of the full assortment.

So we're learning how to fulfill the orders promptly in our stores. When you think about the teenagers, they use mobile all the time, that's what they do. And a lot of what we're seeing is a lot of kids will -- they'll go to the mobile phone, they look at that Journeys.com, they decide what to buy and they come into the store. And we've got to figure out all the ways in which we make that a driver of what we do.

And particularly given that not all of our stores are assorted to the full range of Journeys, that gives us the opportunity to even broaden the range, even to SKUs that may not be in any of our stores or say our top 10 volume stores.

So what we're looking to do is take advantage of the fact that we're both Internet and store. This is a long-term play, Scott, so I'm not going to give you a growth rate on it. But we think at the end of the day we get to win in the space and especially get a big benefit when hopefully at some point the sales tax imbalance gets equalized.

Anything to that negative comp at Lids in May in eCommerce?

Well, there was -- the comp last year was a breakout event, it was 40 something and that was driven by the fact that when Snapbacks got hot people wanted to have them now. And before we even got the shipment to the store we had them on the Web. And so people were running to the Web to get this very hot product. So you really have to look at the stack comp to get the trend.

Yes, it was about 40% last year.

And then just help us now -- because you have the apparel in some of your Lids Locker Room stores, how big is the NFL for you in maybe Q3 and Q4 and what part of that is hats versus jerseys?

Well, if you do -- first of all, the NFL business in the hat stores, which is reflective of the NFL business, it grows steadily through the third quarter and the fourth quarter. And so, it keeps accelerating as you get deeper into the season. So that's the first thing to be mindful of.

And then if you look at our overall Locker Room stores, the percentage overall of hats, it's something like -- and Jim is trying to run for the numbers -- but it's about 20% hats, it's about 30% to 40% apparel and then the rest is the hard goods in the back -- in that ball park. And NFL will mirror that.

And NFL within the Locker Room is the biggest portion or --?

You mean of all the sports?

Yes within the --.

By sport category? No.

It was not in the first quarter.

No, it's nothing in the first -- I don't know what it is for the year, Scott, Jim is digging for it.

All right. I'll follow-up. Thanks, guys.

Sam Poser, Sterne, Agee.

A question about Schuh. When you say it beat your expectations, can you give us some idea of the magnitude of the beat? And also how you think about the relative sales by quarter of Schuh compared to the balance of the business as you gave it to us?

I'm sorry, what's the second half of that, Sam?

Well, you discussed the percent of total sales for the balance of the year, how you thought about second, third and fourth quarter. I wondered how Schuh varies from that so we can use a better planning, because it came in significantly higher than what I expected. I don't know how much higher it did than you; that's why I'm trying to get a gauge on it in how you're looking at the rest of the year there.

Yes. Well, Sam, we're not disclosing a comp on (inaudible) not comp in our business and we're not getting into that. We had bought the business with fairly conservative assumptions with a pro forma built off of low-single-digit kind of comps and they're beating that by a healthy margin. So we're very, very pleased with what the results are coming out of that, especially given the challenges in that economy. So we're happy with that. And, Jim, you do you know the percentages for the second question?

The percentage breakout by quarter is what you're looking for, Sam?

Correct.

Okay. Well, --.

While Jim digs for it, you know Schuh -- the cadence on that is a little different in the first half of the year where Journeys is softest in the second quarter and Schuh is softer in the first quarter. Do I have that right, Jim?

Yes. Okay so, second quarter, Sam, it will be about roughly -- it will be around about the same of total Genesco that we gave earlier, 20% to 21%. And then the third quarter about 24% to 25% and then in the final quarter the balance may be -- hopefully it will work out 30% -- 32% to 34%.

Okay, thank you. And then secondly, Bob, -- thanks, Jim. Bob, what did -- what do you think is making for the strong performance there? I mean what's the driver given the tough environment? Why is it working versus the expectation? Is it product, how much have you guys had a part of it and how much more do you think you guys can do just for the given business, not talking about opening stores or anything?

And you are talking Schuh still?

Correct.

Yes, it's product. Product is a huge chunk of it, but the product comes because we have a terrific merchant team that is executing and figuring out how to position that store properly. They are getting access to all the right brands. Our team here in the US is giving them a little extra access on a couple of brands and helping them get more access to exclusive product that is exclusive to Journeys here and is now exclusive to Schuh in the UK.

They are just great operators as well. You would have to get over there sometime, Sam and see the stores. They are extremely well-run; it's easy to see why a customer is loyal to Schuh. And so -- but it is retail, branded retail and so at the end of the day, if you had to pick any one thing out, it is going to be the assortment that is really driving things.

And the story there is the same as the story here. It's a very broad set of trends and a very broad set of vendors, which are all being very effective. And Sam, as you called out, that helps you get narrow and deep and really drives sell-throughs when you have so many good things going on. So what is happening here is happening there.

And one last thing. Have you learned anything the other way that is happening in Schuh that might be helping you at Journeys?

There are a lot of things that we can bring back here. We are not emphasizing that right now and for the simple reason that, as we accelerate store growth over there beyond what the plan was, and the plan was beyond what they had ever done in one year in the past, so the challenges for that team right now in terms of executing their own business is sort of enough to have on their plate right now. So we think there are probably some opportunities. we are not making that the headline at the moment just because there is just so much to do.

Thank you very much. Continued success.

Thanks, Sam.

Mark Montagna, Avondale Partners.

I have a question on just the EPS guidance for the fiscal year that you raised. It sounds like the big hurdle with raising it is the 15 additional new stores. Is that the only hurdle that was holding you back from raising it higher? And then can you give us an idea as to what that expense is on those 15 stores? Because I assume Schuh is quite a bit bigger of an expense considering the size of those stores.

Well, Mark, it's really two issues. It's, one, the additional stores and then also the additional expense related to the Schuh contingent bonus accrual since they're outperforming -- since they basically outperformed in the first quarter by so much. The accrual was -- most of the accrual was taken in the first quarter but some of it balances out in the back half.

So it's really a combination of both of those, plus the fact is the Street was at about $0.74 and we turned about $0.98, as you know. But our actual internal forecast was a little higher than the Street. So I'm not really going to give you the exact amount of the -- let's say the additional expense in the back half, but it makes up for the most part the difference between what we passed on and what we had as our internal number.

So just looking at the additional store expense in the Schuh bonus, is it 50-50 or do you think it leans more towards those additional stores?

It's close, 50-50. The stores are actually a little bit more, but maybe it's 60-40.

And then I might have missed this. Did you guys give an update on your progress with expanding the product on the website and also the larger stores and in Canada?

Well, we did call out Canada, so go back to the script for that. On the Internet, yes, we are looking at ways to have more Internet only product that would be available to Journeys. Our challenge there is some infrastructure we need to do that, particularly just in the warehouse.

And so, we're examining that and working to figure out how to do it. And that's very closely aligned with what we want to do with the larger stores in terms of increasing the opportunity there. So those two initiatives are pretty closely linked.

Okay. So then with the website and the larger stores, when can we expect to see that new expanded product in both of those places?

Yes, start thinking more like sort of really having an impact on the business, it's a next year event, not a this year event.

Okay. And then, last question just deals with -- on the last call you mentioned there's 191 stores that are 2,400 square feet in Journeys and you're working to make those more productive. What do you do with those 191 stores when a lease comes up? Do you try to exit those stores to go to a smaller store, or you're committed to those 191 stores even if a lease comes up this year?

Well, you know in our world every store is a store. So -- and it's a case-by-case decision. But if we make a decision on one of those stores it is unlikely because of its size, right. Once you built it out -- you really look at the economics of real estate. Once you've invested in the buildout, assuming you're not going to rebuild the store again, the economics argue very heavily to stay in place. Plus we are believers that we can make those stores much more productive.

And by the way, they've come back since -- what we did is we opened a lot of these larger stores into the teeth of the recession and they have bounced back very nicely. So they're productive and we just think that we haven't really taken total advantage of the opportunity and we'll see that out there.

The truth is very few of those, because so many of those were done sort of the middle of the last decade and a lot of them on 10-year leases, we're not seeing them for a while anyway, so we'll actually have a pretty good read on our full potential by the time we start looking at most of those leases.

Okay, thank you.

Steve Marotta, CL King & Associates.

Jim, the trailing 12 months for Journeys on a sale per square foot basis, how does it compare currently to where you guys peaked in the mid early 2000s?

It's obviously grown, but still -- I don't believe it's up to where it was when it peaked. We're approaching it but it's not at the peak yet.

Okay. Is that something that you could define off-line?

We could define?

Yes. The differential between where the TTM is now and where peak was?

Yes, probably -- yes.

All right, I'll get back to you on that later. Bob, as it relates -- and you sort of spoke about this tangentially on a prior question, but as it relates to where you are in (inaudible) and where you thought you'd be from a best practices standpoint between Schuh and between Journeys, what inning are you currently in and how much more is there to do there?

And I know that the Schuh -- as you intimated -- had intimated, the Schuh guys are focused on the accelerating store growth at the moment. But again, from a sharing of best practices, best merchandising, best brands, where do you think you are in that process?

Well, I don't think of it as a nine inning game. We think of it as the game that never ends because the teams on each side of the ocean are continuing to work on stuff that they will share back and forth. So of the stuff that we had identified early on as being the clear and obvious stuff, which is mostly in the world of merchandising, we basically have the processes in place to do that.

Our vendors to a large extent have said, yes, we're all over this, we're recognizing that Schuh is part of Journeys, and so we're going to try and bring the same benefits to Schuh that have accrued to Journeys basically because of their size here. So that's just happening. And most of it is rolling into place.

Then beyond that our teams talk all the time and the topics range very broad, everything from how we operate the stores to how do we operate the websites and what have we learned of what works and what doesn't work. And that's going to be an ongoing process forever.

Great, thank you very much.

Steve, one thing. I went back and I looked -- when I answered you that it was really -- I was answering for the Journeys Group. If you look at the Journeys stores by themselves they are approaching that number. I don't have the exact number but I think they're pretty close.

Great, thank you very much.

Jill Caruthers, Johnson Rice.

A follow-up on the Schuh accelerated unit growth. Could you talk about these real estate opportunities that you've seen additionally for this year? Are they different sites or how to they vary versus the current base you have?

Well, they're just on trend for what we have cited as the growth opportunity. So where Schuh was most under penetrated within their home market was the Southern UK. And so, not all the new stores are there but that's where the concentration of the new stores will be.

It's real estate in a tight real estate market. And so, especially in a place like UK, and this would be true with Canada as well, when a good opportunity shows up you jump on it because -- if you can, because the opportunity to find really great real estate is more challenging.

So the environment in the UK has opened the door for us to be more aggressive. The team at Schuh, who like us here have a bias at being conservative, at the beginning said let's figure out how many stores we are comfortable opening up because we're stretching our infrastructure beyond what we can. But then came back and said when we combine the opportunities with our confidence in our teams' ability to open stores let's get moving, let's jump on these opportunities.

So there's nothing unusual about the stores. They are in mix of mall and high street, which is typical of their mix. And so, they're just trying to take advantage of opportunity, which is great for us, great for everybody.

Okay. And then just last question. I know it's only a few months in, but could you just give us a little bit more color on your understandings of the initial conversion of the Underground Station, do you think you've learned in the past few months or -- and kind of go over the time line again, I'd appreciate it. Thank you.

Sure. What we did is at the very beginning of the year we made the organizational change, that included integrating the fields and that's the one area where we think we're getting immediate impact. So there is no longer a structure that has people who oversee the Underground stores and a separate group that oversee the Journeys stores.

And what you do when you condense those two together is you reduce territory size which gives people -- supervisory people more time in stores, less drive time, more time at home -- it just is a better arrangement. And trust me, a great person in the field can have a lot of impact on a store, especially an underperforming store, if they get to spend time with the people.

And so, we think that's one of the drivers of what's going on in our improved performance. So that's one thing. Then we also at the same time consolidated and reassigned a number of people here in Nashville into various roles to support a number of initiatives, that was all done.

Now, in terms of -- our real estate team was assigned the task of figuring out what to do with each store, we had a plan for each store, but in some cases they were landlord dependent and what we just said today is we're finding, kind of as we expected, a lot of cooperation from the landlords in supporting the conversion of Underground Station to Underground by Journeys.

And so we're in the process over the next six months or so of re-signing the stores and making some tweaks to the interior to better fit with what we want to do. So that's rolling. Then the last big piece obviously is the merchandise and as we rewrite POs we will start landing goods that are part of the new merchandising plan for back to school. And so we'll see that and then we think we'll have all of that complete for holiday.

And so, by holiday we should be pretty much 100% on track for what we do with the one exception is we'll still have the challenge of making some systems conversion so that our systems recognize the Underground stores as part of Journeys. And that will be done by the very beginning of the next fiscal year in our current plan.

Thank you so much.

(Operator Instructions). Robin Murchison, SunTrust.

Not to get gushy, but congratulations on your first quarter.

Feel free to gush.

Three questions. One, I wanted to ask you about -- if, Jim, you could just kind of go over with us the components of reaching that next 150 basis points to get you to 9% operating margin, what has to happen there? I know a key part of it has always been rents, but if you can just go over that.

Secondly, I want to ask you about Johnston & Murphy women's, it looks like almost all the product is on sale on the website. And thirdly, I want to ask you, if you'll just remind us if you said what your AUC increase on a year-over-year basis is likely to look like in the fourth quarter? Thank you.

You want to do the 150 basis points? The 150 basis points in general is leverage. I'll let Jim --.

Nothing has really changed there. The whole 150 for the most part is leverage. The pickup we got last year from 5.5% to 7% is primarily leverage. Going from 7% to 7.4% this year is primarily leverage. And within that leverage category we continue to leverage rent and we've done a good job of tightening up selling expenses and we're leveraging selling expenses also. So the key driver is rent and selling salaries.

On women's, we're very pleased with what's going on with the women's business. And so I can't really respond to your observation that product is on sale, other than to say as we learn as we go, one of the things we learn, no surprise, is the women's business is a little faster. And so you have to make your calls on product that is working and not working in order to clear.

So that's the only -- our business is fine in women's, there's nothing unusual going on this season. But we are learning that we have to run it a little bit faster and that might be weighing on what you see on the Web. And last question?

Average unit cost in fourth quarter.

Within what business?

Just overall -- what you expect the increase or just anything you can say relative to average unit cost.

Okay. Well let's just sort of back up and realize again that 80% of our business is selling branded goods. And so we had a wave of cost increases that had parallel price increases to preserve gross margin, that's what we were expecting in terms of flowing it through and that is what happened. And indeed the customer has to -- because if you look at the ASPs and the comps, obviously the customers were able to absorb the price increases, and so we comped positively both on price ASP but also on units.

So that's really what happened in the third, fourth quarter with those increases that have now flowed through, I'm still talking the branded businesses. And we're expecting in the next third, fourth quarter another round of increases but less severe and less across the board. And so, don't expect to see anything as robust in the next go around in terms of ASP drivers when we anniversary it.

When you get into our -- into Johnston & Murphy and into licensed brands, we are looking at cost increases. And for the case of Johnston & Murphy it's coming both from factories and labor, which is what the driver is for most of the businesses, as well as leather. Leather continues to be something that's a challenge.

And so, what we've been doing there is what we said, we're testing the market to selectively increase price and at Johnston & Murphy we're reasonably successful on having prices pass through. It's probably been the biggest challenge in our licensed brands business which is a more moderate business where the pressures of the prices and the costs show up more prominently because you're already running a pretty tight ship in terms of costs and margins.

And so, that's just the classic give-and-take between a vendor and a retailer trying to find out what works for both of them. And that's a battle we continue to be engaged in.

Thank you.

Chris Svezia, Susquehanna Financial Group.

Congratulations. Just one quick question, just on the Lids headwear, I guess when you guys talk about what worked in the quarter and what you're seeing working and a lot of talk about Snapback, any color or comments about the action sports piece, MLB piece of the business or is Snapback cannibalizing some of that as you sort of referenced?

Yes, well first of all let's be clear, Snapbacks are an important part of the business, but this is a fairly broadly assorted store. And I don't know what the percent on Snapbacks is, I'm not sure we want to hand it out. But it's far from being the majority of the store, it just came out of nowhere and so it created a pop.

And our observation was when that business popped, the kids that bought that are the kids that normally bought MLB fitted both in the authentic and in the fashion part of it and action sports. And so each of those categories backed up a little bit as the kids went over to the cap. And just stand in one of our stores and you can see who the kids are that run over -- it's a classic fashion customer who is onto that right now.

And so, our expectation is when that cools, and it will eventually cool because we're in a fashion business, that they will move back to where they were in action sports and MLB or possibly move on to the next thing that we don't have visibility on yet.

But the important thing from our perspective is we have the inventory under really good control and it's sort of -- it gets done for us, first, because it's so hot that it's had great sell-through. But as a non-fitted hat by definition it is a less inventory intense business. So we can run a fairly higher percentage of sales and a lower percentage of our inventory, which really mitigates a lot of our risk and that's what gives us a lot of comfort on what's going on here.

Okay, that's helpful. And just on a competitive environment, because it seems like everyone else has sort of woken up to what's going on in Snapback and the headwear business in general a little bit more. I mean competitors are talking about strengthening in that business.

I mean as far as you guys see it and how it plays out, by far you have market-leading position in headwear, you're not seeing anything in the business from a share perspective, it's just maybe the fact that other competitors might have woken up to this business a little bit more, that's really all that's probably playing out out there, is that fair to say?

Yes, I think that's sort of fair. But understand that in the headwear business the two things that the customers really care about are the breadth of the assortment, right? Variety wins the day and we win there. And then freshness wins the day. And because of our position in the market we're the ones that see the next -- you're probably not aware of which hat was last quarter and which hat is this quarter, but the customers in this space know that and so newness matters a lot.

And the other thing from a competition standpoint goes back to what I said, it is much easier to manage an adjustable hat than it is a fitted business. And so, we probably lose a notch of competitive advantage in a category that is non-fitted because others can play in that space a little more easily.

When you get into fitted hats, which continues to be the bigger chunk of our business, that's when managing size assortments and having an inventory intensity and having great replenishment capabilities matters. And so, that's still the big chunk of our business and that still gives us a big competitive advantage.

All right, fair enough. Well, all the best, guys. Thank you.

Sam Poser, Sterne, Agee.

I just have a quick follow-up. When you're looking at the plans for the balance of the year and you're thinking about the margins, can you just walk through that one more time and what it's going to take to beat? Because it sounds like you're looking at the external stuff a lot, but if you keep on -- you're expecting things to get worse, not better, is what it sounds like.

Sam, we're being cautious given the macroeconomic environment. We're very confident right now about the relative position of our stores in terms of you walk the mall and you say are Journeys and Lids Sports and Johnston & Murphy -- are the well-positioned in their space? And the answer is absolutely yes.

Our concern, as we said, is the consumer started spending with borrowed money again and that can't go on forever. So we're cautious on that basis. We continue to have good leverage on our business, so to improve operating margins year over year the low-single-digit comps does that for us. We continue to have success on rent and continue to not see upward pressure on wages in the stores. And so, the two biggest cost items are very nicely under control. So reasonably low comps still give us leverage. Jim, would you want to --?

Yes. Sam, when you say margins, I don't know what margins you're talking about. Do you want gross margins or operating margins?

I was talking operating margins (multiple speakers).

You've been talking about operating, so I'm just -- I'm sort of just doing it on the larger picture there.

Okay, well, larger picture. We really don't see much movement in our gross margin. We're saying gross margin will be down 10 basis points at the end of the year, but that's primarily driven by, as much as anything, just mix. We've got Schuh in there for the full 12 months. We've said Schuh's gross margin is a little below Journeys, so that's affecting it to some degree, peanuts, 10 basis points.

And the rest, as you know, we're talking about pretty conservative comps going forward and we're still talking about some leverage, 2% or 3% comps and we're still getting leverage, which is what we said all along. So that's kind of the story, it's still a little bit of leveraging going on, not home runs because we don't have home run comps in there, and basically maintaining our gross margin.

All right. Thanks again and, again, continued success.

Thank you, Sam.

We have no further questions.

Great. Well, thank you, everybody, for joining us and we look forward to catching up with you again in August.

And this does conclude today's conference. We thank you for your participation. You may now disconnect.