Genesco Inc (GCO) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to the Genesco fourth-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.

These statements 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-Q filing, for some 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 non-GAAP 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 will now turn the conference over to Bob Dennis, Genesco's Chairman, President and Chief Executive Officer.

Please go ahead, sir.

Good morning and thank you for being with us.

Joining me today is Jim Gulmi, our Chief Financial Officer.

As usual, Jim's detailed review of the results has been posted to our website along with the press release from earlier this morning.

I will begin today's call with remarks about our full-year and fourth-quarter results, our start to fiscal 2014 and our outlook for the year.

Then I'll turn the call over to Jim for a review of the numbers and guidance.

I will then return to provide some color on our operating segments before we open up the call for your questions.

As you saw from our press release this morning, our fiscal 2013 performance was solid with adjusted earnings per share up 24% to $5.06.

This was achieved by a top-line gain of 14% and meaningful expense leverage.

As a reminder, we are now reporting a combined comparable sales number that includes stores and eCommerce and that is the number we will be citing throughout our remarks today.

For a more detailed breakdown of our comp performance please see Jim's online review.

For fiscal 2013 comps were up 3%.

From a strategic standpoint we are very pleased with where the Company is heading.

During fiscal 2013 we executed well on the growth drivers we identified at this point last year.

First, we accelerated Schuh's store opening schedule to take advantage of the business' momentum over the past year and the attractive real estate opportunities afforded by the weak economic environment in the UK.

Schuh's freestanding store count at year end was 79, up 23% over last year including the third-quarter addition of three Schuh kids' stores.

Schuh's success comes despite challenging market conditions in the UK and gives us confidence that accelerating Schuh's store growth now will position us for additional gains when the economy eventually recovers.

Second, we continued expanding our Lids Locker Room and Clubhouse concepts through acquisitions and organic growth.

We added 12 net new Locker Room stores to a base of 78 in fiscal 2013 and 13 net new Clubhouse stores to a base of 41.

We continue to believe the economics of this business benefit from scale and we see continuing potential to grow these concepts by both acquiring and opening stores.

Third, we continue to grow our portfolio of businesses in Canada.

During fiscal 2013 we increased our total Canadian store count 31%, ending the year with 127 locations.

This included adding 15 net new Lids stores, 11 Journeys stores and four Johnston & Murphy stores.

Fourth, we've been enhancing our eCommerce platform in a way that complements our brick-and-mortar locations and sets the stage for continued growth.

Today Journeys and Johnston & Murphy have an integrated eCommerce platform that allows consumers to search the entire chain's inventory position and purchase product online from within the store so that we never miss a sale just because we happen to be out of stock in a particular store.

We expect Lids, which currently has in-store access to warehouse inventory only, will add the capability to access the other store inventory no later than the fourth quarter of this year.

We've also increased the number of styles available online in Lids and Journeys which also bolstered top-line growth in fiscal 2013 and we have the opportunities to do more of that, especially at Lids.

In aggregate our comparable eCommerce and catalog businesses grew 11% over the past year and 17% in Q4.

Each of these four successful initiatives contributed to the 14% sales increase for the year.

We believe we've entered the new fiscal year in the right position to continue expanding the market-leading positions of each of our major businesses with each of these four drivers playing a continuing role.

Indeed we are planning to add even more square footage this year than last.

Our confidence is boosted by the fact that we opened 104 new stores in the past year and as a group they are nicely ahead of budget.

Reflecting our confidence in our ability to continue to deliver substantial increases to shareholder value, we continued to repurchase stock in the fourth quarter.

Jim will give you the details on that.

Turning to the fourth quarter, we saw an overall fourth-quarter comp decline for the Company of 2% on a 14-week basis compared to an 11% positive comp gain a year ago reflecting a particularly challenging quarter for Lids, a slightly negative one at Journeys and positive comps at Schuh and Johnston & Murphy.

Despite this softness we believe our fundamentals are still intact and many of the challenges reflected in recent comps are short-term.

February comps for the Company also came in behind our expectations, down 9%.

Along with the ongoing headwind at Lids we believe that February results reflect two significant economic factors -- the IRS delay in processing federal tax refunds and the increase in payroll tax withholding as a result of the fiscal cliff resolution at the end of last year.

In recent years we've experienced a sales boost within Lids and Journeys following the first wave of tax refunds in late January and early February, which, due to the IRS delay, have shifted later into the year.

Based on IRS disclosures the delay in tax refunds looks to have significantly but temporarily reduced US disposable income on a comp basis from the last two weeks of January through the first three weeks of February.

While this hurt business beginning in the 53rd week through much of February, we saw improvement through the month as refunds were delivered with the final week of February coming in only slightly negative.

We expect a brief tailwind in March as the IRS catches up to last year's disbursements.

The new payroll tax increase, however, is permanent and provides headwinds to Journeys and Lids beyond just this month.

So it is hard to sort out what our current trend really tells us right now given these tax factors plus the impact of higher gas prices in the sequester.

In addition, we expect continued challenges during the first half of fiscal 2014 for Lids, but we remain confident in our ability to deliver full-year EPS growth of 10% to 12% over 2013 levels on top-line growth of roughly 4% to 5% with gains over last year expected to be weighted to the back half.

Jim will now review financial results for the quarter and guidance for the year.

Thank you, Bob.

As a reminder, detailed information for the quarter has been posted online, so I will try to highlight a few important points in the reported results and focus in more detail on guidance for the new year.

The fourth quarter came in slightly better than we expected when we last updated in January.

Consolidated net sales were up 10% for the quarter to $797 million.

The extra week in the quarter accounted for about half of that increase, but, as I will mention later, it was a hard week for comps.

Comps for Lids were down 10% for the quarter reflecting a number of specific issues in the headwear market that Bob will talk about in detail as well as the general economic climate.

Journeys' quarterly comps were negative due to the very soft 53rd week, coming in at negative 1% for the quarter.

The final week was a difficult one especially for retailers that are sensitive to disposable income or mall traffic because of the tax refund delay that we call out in our January press release which hurt both Journeys and Lids.

Johnston & Murphy posted a 2% comp increase and Schuh led the Company with a 7% comp increase.

The Internet and catalog business in each segment was strong with comp increases ranging from 10% for Johnston & Murphy all the way up to 27% in Lids and each one outperformed its brick-and-mortar counterpart.

Overall our direct businesses were up 17% in the fourth quarter this year compared to a 4% increase last year.

Operating income adjusted as described in the press release rose 10% to $82 million and was flat with last year at 10.3% of sales thanks to 80 basis points of expense leverage.

This improvement was achieved despite $0.11 per share of additional accruals in the fourth quarter related to Schuh's contingent bonus that is payable in fiscal 2016 under the acquisition agreement if they achieve certain performance hurdles.

Because Schuh has continued to outperform expectations the accruals related to this bonus have also exceeded expectations.

At current rates we expect to have the vast majority of the contingent bonus, which is capped at GBP25 million, accrued by the end of fiscal 2014.

Lower bonus accruals than last year in most divisions under our normal annual EVA bonus plan contributed to the expense leverage.

Our bonuses and the quarterly accruals for them are calculated using an established mathematical formula tied to changes in EVA from the previous year.

They are highly leveraged performers providing automatic expense reductions when business softens.

The expense leverage made up for an 80 basis point reduction in gross margin for the quarter, reflecting heavier promotions at Lids and changes in the sales mix in other divisions.

All in all we are earned $2.16 per share for the quarter adjusted as described in the press release compared to $1.97 last year, a 10% increase.

For the fiscal year sales were $2.6 billion, an increase of 14% over fiscal 2012.

Excluding the impact of the 53rd week the sales increase for the year was 12%.

Adjusted operating income was $197.1 million or 7.6% of sales compared with $160.4 million or 7% of sales in fiscal 2012.

This 60 basis point improvement in operating margin for the year was driven by 80 basis points of expense leverage, primarily bonus accruals and selling salaries.

Gross margin was down 20 basis points from the previous year.

This operating margin was achieved despite $0.35 per share of additional contingent bonus accruals payable in fiscal 2016 under the Schuh acquisition agreement.

For the year on an adjusted basis we earned $5.06 per share compared with $4.09 last year, an increase of 24%.

This compares with a 65% increase in fiscal 2012 over fiscal 2011.

At year end inventories were up 16% year over year compared with the sales increase in the fourth quarter of 10%.

Inventories per square foot were up 15% leaving us with a little more inventory than we would like, mostly reflecting the slower than expected sales.

Much of the incremental inventories in Lids -- we are comfortable that this inventory can be carried forward without a lot of risk.

We ended fiscal 2013 with $60 million in cash compared with $54 million last year, and with $51 million in debt compared with $41 million last year.

This debt includes $23 million of the remaining UK debt assuming connection with the Schuh acquisition.

We spent about $8 million in purchasing approximately 155,000 shares of stock at an average price of about $53.15 during the fourth quarter.

Altogether in fiscal 2013 we repurchased approximately 646,000 shares at a cost of about $38 million or $58.29 per share.

We currently have about $58 million available to purchase stock under our Board's most recent authorization.

Fourth-quarter capital expenditures were $18.9 million and appreciation was $16.6 million.

For the full year capital expenditures were $71.8 million and appreciation was $60.3 million.

In addition, we spent about $10 million in the quarter and about $24 million for the full year on small acquisitions related primarily to Lids Locker Room.

Now a few comments on our guidance for FY 2014.

On the last call we gave some directional guidance for fiscal 2014.

Now I would like to spend a few minutes providing more details around our expectations for the coming year.

We continue to expect earnings per share growth in the range of 10% to 12% with low-single-digit positive comps.

This puts our fiscal 2014 earnings per share guidance in the range of $5.57 to $5.67.

This EPS guidance is subject to the same adjustments as in previous years, excluding impairments, which are of course non-cash and other charges which we expect to total about $3 million to $4 million pre-tax or $0.08 to $0.11 per share after tax.

Earnings per share guidance also excludes the ongoing deferred purchase price expense which is expected to be approximately $11.6 million or $0.49 per share in fiscal 2014.

The guidance does include the full-year accrual for the Schuh contingent bonus built in to the acquisition agreement, which we currently expect to be up to approximately $17 million or $0.55 per share in fiscal 2014.

In developing this guidance we used the following expectations.

We are assuming comps, including direct sales, in the low-single-digit positive range for the full year.

We are expecting an overall sales increase of 4% to 5% for fiscal 2014.

This is about 1% higher after adjusting for the 53rd week in fiscal 2013.

Our plan is to open 155 to 165 new stores for the year compared to 104 stores last year.

We are expecting gross margins to be down 20 to 40 basis points.

We are expecting some leverage in expenses for the full year due to the reduction of bonus accruals.

All of this results in an operating margin improvement of 20 to 40 basis points or an operating margin of 7.8% to 8%.

Our tax rate assumption for the full year is expected to be approximately 37%.

We are assuming average shares outstanding of approximately 23.8 million for the year; we have not included any stock buyback in this guidance.

We are also expecting capital expenditures through the year of about $110 million to $120 million and [depreciation] will be about $67 million.

We expect to end fiscal 2014 with approximately 2,591 stores, an increase of about 5% over the year that just ended.

We are also forecasting square footage growth of about 8% in the new year.

In terms of the quarterly breakdown for the year, I remind you that historically we have had about 60% of our sales and 70% of our operating income in the back half of the year.

And we expect fiscal 2014 to continue that pattern and possibly to be even more heavily weighted to the back half of the year given the first half challenges at Lids and the slow start to the first quarter.

Last year our comps in the first quarter were 8%, in the second quarter were 4%, in the third quarter were 5%, and in the fourth quarter were negative 2%.

So comparisons are toughest in the first quarter.

In addition, we do expect some improvement in the Lids comps after February for the rest of the first quarter, but we expect that it might be the second half before it gets back to solid positive comps.

Finally, the second quarter ends a week later this year, so we expect to pick up some back-to-school business from the tax holidays in the second quarter that fell in the third quarter last year.

Thank you, and now I'll turn it back to Bob.

Thanks, Jim.

I'm going to begin my review with the Lids Sports Group, which was the most challenging area of our business in the fourth quarter.

The Group's fourth-quarter comps were down 10% and we see three factors as the main drivers of the decline.

First, NHL sales declined significantly because of the strike and were off more than 40% for the quarter representing about 1.5 of comp.

Since games resumed in January we have seen a nice recovery in the category.

Second, we experienced the negative effects of the anniversary of 2011's St.

Louis Cardinals World Series victory.

We were impacted heavily because we operate seven St.

Louis Cardinals Clubhouse stores.

Cardinals' sales were off a total of 50% in the fourth quarter compared to last year and net of the pickup in San Francisco Giants product, we estimate this reduced Lids' comps by another 50 basis points for the quarter.

The third and largest of Lids' primary challenges, the Snapback hat, remains.

As we have discussed before, the tremendous popularity of these styles, plus the fact that they are much more easily merchandised than the fitted hats in which we specialize, have led to increased headwear competition and effectively cannibalized other parts of our hat business.

Today Snapback sales remain strong for us and for others.

But like all fashion trends, we believe that Snapback demand will moderate in time and with our market leading position and a proactive merchandising approach we feel good about our ability to capitalize on the next trend.

We are using our merchandising strengths and our leadership in the market to showcase compelling new merchandise, especially within the fitted category, and initial reactions have been positive.

Several of these new collections are exclusive to us.

February comps for the Lids Group were down 11% reflecting the income tax impact and the continuing Snapback effect.

However, the Group's comps improved over the course of the month and were roughly flat in the last week.

The Lids Locker Room and Clubhouse stores continue to grow both organically and through the tuck-in acquisitions we have made over the last several quarters.

This quarter we added 12 new Lids Locker Room stores and one new Clubhouse store bringing our store count for these concepts to 90 and 54 respectively.

Each of these formats will be a significant growth driver in 2014 as we plan to open as many as 35 Lids Locker Rooms and 15 Clubhouse stores.

Turning to the Journeys Group, comps were down 1% in the fourth quarter reflecting particular weakness in the 14th week which, again, we attribute primarily to the tax refund delay.

As we anticipated, the rate of increase of ASPs continued to moderate in the fourth quarter as we anniversaried the price increases from our vendors that began in the back half of last year.

February comps for the Group came in at minus 8%, once again reflecting the delay in tax refunds, as well as later than usual introductions of new products.

For a combination of logistical reasons we began showcasing fresh product in our Journeys stores slightly later in February this year than last year, which likely shifted some of our February sales into March.

Our Shi by Journeys and Journeys Kidz businesses, which were up 6% and 7% respectively for the year, continue to be promising.

In particular the recent success of the kids business has made us a bit more ambitious about expanding this concept in fiscal 2014 with current plans calling for as many as 20 new Kidz stores this year.

Including these stores the Journeys Group currently plans to open a total of 55 stores with 12 of them in Canada.

This would give the Group 36 stores in Canada or about 4% of its US store base by year end leaving plenty of opportunity to continue opening Canadian stores.

Schuh had a strong fourth quarter with comps up 7%.

As we have said, we are taking advantage of increased availability of attractive retail locations and lower rents due to the recessionary environment in Schuh's markets.

This helped us to open 14 net new locations, growing square footage by 12% in fiscal 2013.

Our long-range outlook for Schuh remains positive and we are currently forecasting 12 new Schuh and three new Schuh kids store locations representing freestanding unit growth and square footage growth of roughly 16% in fiscal 2014.

February comps for Schuh were minus 11% against a gain of 15% in February one year ago on a pro forma basis.

We believe this weakness comes from a combination of the UK's challenging macro environment and this year's winter weather versus last year's spring-like February.

Now for Johnston & Murphy -- comps increased 2% in the fourth quarter and decreased 1% in February.

This business continues to benefit from the popularity of higher-priced dress shoes contributing to a 6% footwear ASP increase in the J&M shops for the quarter.

The J&M wholesale business was up 39% led by men's dress shoes which drove solid sell-throughs in our customer stores.

This is not your father's Johnston & Murphy is a phrase we've used before, but it has probably never been more appropriate given the positive reception of several new product introductions that are helping take the brand in new directions.

Recognizing the brand's innovative new platform, we are pleased to have recently learned that J&M's design team was awarded the 2012 Footwear Plus Award for excellence in design in men's dress shoes.

We opened one net new Johnston & Murphy retail location in the fourth quarter and plan to open 15 locations including three stores in Canada in the new fiscal year.

Of the shops planned for the year four are our smaller airport concepts, a channel we do well in, but one in which we believe J&M is currently under penetrated with only 15 locations.

Finally, license brands again enjoyed solid sales growth, up 14% in the fourth quarter ending the year with a healthy operating margin of 9.3%.

So in summary, 2013's solid earnings demonstrate our ability to manage temporary challenges effectively while continuing to pursue our plans for longer-term growth.

These plans reflect a wealth of exciting opportunities across all of our businesses and they include expansion opportunities in existing markets for Schuh, Lids Locker Room and Clubhouse stores, Journeys Kidz as well as further penetration into Canada for several of our concepts and continuing improvement in eCommerce across the Company.

Our business fundamentals remain intact and we are confident that our strategy provides the framework to deliver a successful 2014 and to achieve our most recent five-year target for annual sales of $3.5 billion with an operating margin of 9.5% by fiscal 2017.

To close, I would like to congratulate the entire Genesco team on its solid execution and delivery of impressive bottom-line results in fiscal 2013.

Your combined efforts over the past several years have demonstrated the high level of execution this organization is capable of achieving, putting the Company in a great position for continued success over the long term.

And with that, operator, we are now ready for questions.

(Operator Instructions).

Steph Wissink, Piper Jaffray.

Thanks, Bob and Jim, for the detail, it is really helpful.

Just a couple of questions here as we look at the quarter-to-date trend.

If you could just quantify for us -- maybe give us some insight into the sales mix shift that you saw at Journeys and the effect of that on gross margin.

How should we think about that here over the next couple of quarters?

And then the second question -- Jim, I think you had talked about kind of the SG&A component that is related to incentives or bonus expense.

As you are looking at the other core G&A expenses, is there any shifting happening in that line item that we should think about for the next 12 months?

Thank you.

I'll go first.

On Journeys I'm not sure what you mean by mix.

The Journeys business continues to be driven by fashion trends that have been in place for a while.

And so, what we like about that is it's a broad set of vendors that are important to us, it's a number of different styles, the athletic and surf inspired styles and then boat shoes are obviously important.

Boots were important for winter again this year.

As we move into spring, we landed spring goods, as we said, a little later than we did last year.

And to be honest, Steph, with the whether we have had in February it's a little hard to get an early read.

And on the expense side, you mentioned the other items in SG&A.

The two items -- two big items I called out, one was the bonus accrual, which has provided us with a good deal of leverage certainly in the full year and especially in the fourth quarter.

We would expect some of that going forward.

And there is nothing else major going on in the SG&A -- nothing that we haven't talked about before.

We are doing a great job, I think, in managing our selling expenses in our store.

But a lot of the question of whether the leverage is a question of the comp sales and we've said before that 2% to 3% in that range we think that we can leverage.

So if we fall below that level, which we did in the fourth quarter, then it is hard for us to leverage the other categories.

But we made up for it in the fourth quarter because our bonus accrual was down.

And so really on the -- other than the two items I mentioned, the contingent bonus -- the Schuh contingent bonus and the bonus accrual, it's really not much different going on -- nothing much different going on in the rest of the categories.

Bob, if I could just ask a clarification.

I think as I'm reading through Jim's remarks in the online script it is a referencing product mix several times in relation to the gross margin for the Journeys Group.

So maybe you could just provide some insight there.

I think that would be helpful for us to think about products mix margin if that what is being referenced.

Yes, that's what it is.

And it was just the mix of the product that was being sold.

Some of the categories were -- carried a slightly lower gross margin.

It probably will continue for a short while for the next couple quarters.

It is nothing major.

We're talking about very small movements in gross margin, 10 basis points or so.

So yes, it could continue for a while.

But again, it is driven by the demand for individual brands.

And it just so happened in the fourth quarter the mix was -- the mix was such that it did affect our IMO.

Okay, thank you.

Best of luck.

Scott Krasik, BB&T Capital Markets.

Just a couple questions.

First, the $10 million you referenced on small deals in the Lids Group, that sounds like maybe a little bit more than what it typically is.

Is that in fact the case?

And if so, were you accelerating the strategy to roll up independent operators and could it be even more meaningful next year?

Scott, this is Bob.

Hard to say.

Yes, it spiked a little bit in the quarter and I would expect it to continue to be spiky because if we find a regional group where it makes sense for us to get together with them we will do it, we will be opportunistic.

We are not working off of a quarterly plan because we don't want to force ourselves to do deals that we think don't make sense and our other alternative is to just simply open stores.

So we are going to add stores this year and the market will tell us whether the mix is more heavily steered towards acquisitions or to open stores.

And so, we had a couple deals in the fourth quarter that caused it to be a spiky.

But don't read into that that that trend is going to continue.

What would be a situation where it doesn't make sense to acquire versus build organically I guess?

The asking price is too high.

That's fair, okay.

Then -- and usually I guess history showed with the hat business that sellers were probably better off than trying to keep a high price, is that fair?

Yes, I think our ambition, as we have been very clear about, is to really create a national footprint and be the major player in this space.

And so, over time we would expect that savvy -- and it's happening.

Savvy operators recognize that and see that life might be better inside of the Lids brand.

And so the great thing about it is that not only have we picked up some great properties, but we have picked up some great people who are really good operators but we make their ability to succeed easier.

We get them distribution; we give them a Web platform that they otherwise probably couldn't put together at their scale.

We give them buying power in the marketplace.

We give them access to product that is exclusive that they otherwise may not get.

And all those factors add up to an opportunity.

So savvy operators see that and they call, Ken Kocher and they say, we would love to talk about how we might work together.

Some of those of this come together in a deal and some of them don't.

Some of them take time.

Okay.

No, that's helpful.

Jim, you called out Lids inventory in particular being a little bit high.

You did take a hit there because of promotional activity, but you are not really guiding to a significant of a decline in 2013.

So is it going to be lumpy and are you going to have some pretty big gross margin declines in the first half the year as you close out that excess merchandise or what is your thought?

Well, one thing -- this is Bob first and then I will give it to Jim.

In that business one of the things that happens is the demand on Snapback hats narrowed down to very specific SKUs.

And so, we both got clear in the parts of Snapbacks that have actually slowed down, so that was just clearing slow-moving goods.

And then to some extent we had to get competitive with the rest of the market.

So there was a bit of a reset in that category and that's why you start to see some changes.

Jim, do you want to add more color?

No.

I think that as we get in the year obviously the promotions will be less I would expect as sales pick up in the back half of the year.

But I don't see the trend getting worse than it was in the fourth quarter.

Hopefully we will see some improvement going forward, but there will be some pressure on margins early in the year.

Were you on BOGO longer than you wanted to be in Q4?

And is that the strategy then for the first half of the year to clear the inventory?

No we weren't that much more promotional in terms of all store promotions.

We were targeted.

Okay.

Okay, thanks.

(Operator Instructions).

Sam Poser, Sterne, Agee.

Good morning, it's Ben Shamsian for Sam.

I had a question on the inventory.

What was the inventory on the like for like because it was a week later?

What was the inventory up on sort of the week -- on week to week --?

We don't have that number as of the end of the 52nd week.

And that is a consideration and that could be part -- that is probably part of the reason why inventories were up greater than our sales.

However, we still think that more of the increase is due to the reasons I laid out earlier, but we don't have it at the end of the 52nd week.

And the more important thing is we are comfortable with the inventory that we have.

We got a little bit of Lids, which we managed down for most of the store outside the fashion category.

We managed that down with the receipts because, as we always say, the Yankee hat doesn't go out of style, you just right size the inventory.

And across the rest of the chain we are properly valued and we feel good about the inventory position that we are in.

Can you help us understand the revenue on a quarter-by-quarter basis, sort of the ebbs and flows there because of the 53rd week and how you said you are going to have a later Q2 and a bunch of other things?

So how can we kind of be able to streamline the quarter's revenues?

Well, I think that I can tell you as we said, the 53rd week this year was not very strong, but ball park -- we said it added maybe 1% to 1.5% to our sales for the full year.

So that -- obviously you can break that out of the fourth quarter.

I think that is an easy one, you can kind of get your arms around that.

The one that we did call out was, again, that there is a later July close this year so we pick up early August, that first week of August, which is back-to-school sales and potentially some tax holidays.

So I think that there will be a switch between the first and second quarter, some sales switch in first to second --.

Second to third.

No.

No, second and third, excuse me, second and third, excuse me, not first and second.

Second and third; between second and third.

And really what I was getting at was that the relationship between the first and the second -- second is going to be stronger because we are picking up additional sales from the third quarter.

So the second quarter is going to be stronger in relation to the first quarter.

Got it, got it.

And then I'm sorry if I missed your commentary on Schuh.

Why are the February sales there sort of week here?

I mean the tax holidays I'm assuming don't have any effect there.

Yes, that's a good assumption.

The two things that we called out on Schuh is, first, the UK environment -- really three things.

The UK environment has just been very difficult.

And now there are whispers about a triple dip kind of recession.

And so that is challenge number one.

Challenge number two for them is just simply the compares.

They didn't go comp with us in our comp numbers until we owned them for a year, which was in June.

But if you look at their pro forma comp, which is really what they are going against, they were well into double digits throughout most of the first half of last year.

And so, they've got a comp comparison that is very challenging.

And then finally, it's funny, both the US and the UK had a similar weather pattern in February.

We both had winter this year where as last year it was very spring-like.

And so, if you are set for spring goods you really didn't need the storms to clear and the sun to shine and we haven't had that happen yet.

So that is what we would point out.

And also -- just point out also that February is a very small month.

And so, small changes in sales translate into pretty big percentages.

So I would just throw that out as a caution about drawing too much into what is going on.

Got it.

All right, thank you.

Best of luck.

Steve Marotta, CL King & Associates.

Jim, you mentioned -- and if I didn't get this right let me know -- that performance-based comp related to Schuh in fiscal 2014 is roughly $0.55, is that accurate?

Yes.

And is that then --.

Let me just keep on going.

When you say performance based, there are really two bonus programs here.

One is the normal EVA program and then the other is the Schuh contingent bonus and that is really what I am referring to.

What part is the contingent bonus?

Because that then goes away in fiscal 15, correct?

Right, right.

Contingent bonus, just to be clear, that is a payment being made that we regard as purchase price because it is basically an additional payment for upside performance in the set four year period.

And what Jim was saying is that we are paying regular EVA bonuses to the team in England and Scotland and that will continue beyond year four.

But as you are pointing out, this contingent bonus is a onetime thing, we add it all up at the end of four years, pay it and we are in done.

So to answer your question, yes, for the most part it goes away this year.

There is some of it next year.

Part of it -- it will be obviously driven by the performance this year, but we anticipate right now that for the most part it will go away, there will be some payment next year and that will be about it.

What do you anticipate the delta there?

So if we take out EVA and it is just contingent and there will be a little bit next year is that $0.25, $0.30?

This year we said that it is about $17 million or about $0.55.

And if you look at the $17 million it could be well below half of that next year.

Okay.

Maybe $5 million, in that range.

Okay.

I know when purchased Schuh you spoke about being able to read fashion trends a little bit quicker as they tend to travel east to west.

Has that been the case?

Can you give an example or two of that where Journeys was able to jump on a trend a little bit quickly because of the reads from Schuh?

Well, when you say they go east to west, not necessarily -- if you look at the teen fashion business, at least lately it has been more American influenced traveling to Europe and the UK.

Got you.

And so, the examples would be more along those lines.

And it's not as if the Schuh guys have visibility on it, they maybe get a little improved visibility.

But what our guys do probably more importantly in the collaboration that is going on is when we work with a lot of the major vendors we are getting some more favored treatment in the form of special makeups, products that can make us exclusive in this market and that is being carried over to the UK.

And so, the team over there is getting lots of access to product that would only be available in a Schuh store in the UK and that is probably one of the really big advantages.

I understand.

And lastly, boiling everything down, I know you do not guide quarterly, but is there any expectations at all for potential negative EPS comparisons in either the first or second quarter?

Well, you are right, we don't give quarterly guidance.

But let me just give a little flavor here.

We obviously started out February with a negative comp and February could make up anywhere from 29%, 30% of the quarter from a sales standpoint.

So it's -- as I've said before, it's more an important month than it has been in the past.

So starting out with a negative comp in February we are all hopeful as the tax-free funds begin to kick in in March, we will see some pick up there.

We are not sure exactly what the other tax impact might be, the payroll tax.

So we are really in uncharted territory right now.

And so, all we can say is that it is going to be a challenging first quarter and that is about it.

Now the second quarter is really a different story because that one week is incremental sales, the back-to-school business.

So we are hopeful that we -- the second quarter we're going to pick up a little bit there as a result of back-to-school.

But the first quarter definitely will be challenging.

And if you look at the comps from last year, by quarter they were 8, 4, 5 and minus 2. So we are up against an 8. And certainly conditions in the marketplace have changed year over year.

Thank you, that's helpful.

(Operator Instructions).

Mark Montagna, Avondale Partners.

Just a question about debt.

When you can you pay off that UK debt?

And is all the other debt that you have completely paid off except for the UK?

And what level of cash are you comfortable with?

The US debt is in a revolving credit agreement so we can pay that down as -- whenever we want.

And the question is -- your question is why don't you pay it down, maybe because we add that amount of cash.

There's a certain amount of cash in the system and there is a certain amount of cash in the UK.

So it was -- but we are totally flexible in terms of paying down the US debt.

The UK debt is over the next three years -- over the next three years we pay it down.

We have been accelerating some of the payments on that and we will continue to do that.

But right now it's about a three year maturity with amortization along the way.

And, Mark, for tax reasons we don't have any incentive to use anything other than our earnings in the UK for servicing that debt.

Okay.

And then product delay at Journeys -- was that the only division with a delay?

And then was it a particular vendor, was it exclusive product?

And just kind of explain why it was delayed.

Yes, I mean there is some basic logistical stuff first off which relates to the warehouse.

We did our audit of the warehouse in a different period, and then we had to extend that effort because -- you remember last year we consolidated the Underground Station stores with Journeys.

We waited until after Christmas to consolidate the inventories and to bring them all on common SKUs and that required both systems programming and physical movement of product in the warehouse.

And so, to make room for that effort the team pushed things off.

And then the last thing, if you think about it, last year Journeys came through the holiday on -- with very, very strong comps and, as they say, the shelves were bare.

And so, the team had to accelerate just to provide inventory for the stores.

And then they got the benefit of having done that of a spring like February.

So that was sort of the perfect positive storm.

This year we still had a more normal year where you had some clearance to get through in January into early February.

And so, there was less physical space in the stores and there was more of an effort to clear the remaining inventory.

And so, it's not as if we were late delivering, we weren't accelerating deliveries on a year-over-year basis, that is probably the better way to think about it.

And yes, Journeys was the only one in that situation and it was very specific to those reasons.

Okay.

And then Lids being more promotional last quarter, what about in February?

Nothing too unusual.

You know, we are still having to make sure we are competitive in the Snapback category, and we continue to make sure that we are not owners of Snapback styles that are not in demand.

It really has become a much more narrow business mart in terms of the styles, with a huge emphasis on NBA.

And so we had -- in particular, we had an inventory position in college, that is NCAA, that slowed down, and so we have been making sure we are clear of that.

Overall, when you look at Snaps, we are in a very good inventory position overall in the sense that our percent of sales in the stores are much higher than our percent of inventory held.

So it is very fast and we are making sure that we stay lean, because we continue to believe that at some point this will cool and we want to be well-positioned for that.

Okay.

And then just lastly, what is your role operationally for Lids Team Sports this year?

You know, the Lids Team Sports, we haven't talked a lot about it.

We have been in investment mode.

We are building some terrific capabilities for the team.

We had hiccups along the way as we integrated the businesses that we had acquired, some unexpected disruptions, but we have gotten through that.

And we think it is not very nicely positioned for growth, both top line and bottom line.

So it is not a meaningful contributor yet, but we expect this will be the year that it can really start to grow, and grow off of this base into the next five years.

Okay, that sounds great.

Thank you.

Jill Caruthers, Johnson Rice.

Could you talk about you briefly mentioned a new product collection that you are doing to help offset the Snapback weakness.

Could you give a little bit more detail on that and maybe the timing of when we expect that to be in stores?

Correct.

We will give you a little bit of color, but maybe not as much as you want.

As you know, similar to Journey's, we are very sensitive to current trend information competitively.

That said, we have had three programs, they are all fitted, they've all landed in our stores, they are all in as we speak.

They have arrived over the course of the last two or three weeks, so we have very thin information right now on sell-throughs, but what we have right now we like.

Okay.

And then could you talk about -- you briefly mentioned the Underground Station conversions given you're kind of set with the new store look for the first holiday with a fully assorted -- assortment.

Could you give us any initial takes on that performance?

Yes, the Underground -- the former Underground Station now Underground by Journeys stores, they did very nicely.

They continue to deliver what we had hoped for in terms of performance.

We are looking at how we might further their differentiation from Journeys, that is a work in progress.

The one thing that we learned from looking -- because we still look at them as a group separately, we know that they still trade with a demographic of households that are more challenged economically.

And that shines a light on what this income tax return pattern has been.

The Underground Stations within the Journeys world have been the hardest hit and we are expecting them to have the biggest rebound in March.

And so, but we are very pleased with what has happened there.

We continue to monitor the cannibalization, but the general theme there is we think we are net ahead of the game in those malls where we have two stores.

And as I said, the team is continuing to explore what the differentiation -- points of differentiation might be in the assortment.

We know that we want Underground by Journeys to play older and maybe play a little -- still a little more off the street fashion theme.

But that is a work in progress.

Thank you.

Scott Krasik, BB&T Capital Markets.

Jim, I just wanted to clarify.

I had to go back to 2004 when Q2 sales were bigger than Q1 sales.

Was that what you said was going to happen this year?

I didn't say necessarily that.

I said it will be big -- the relationship in terms of the first and second quarter will be with -- will not be as dramatic as it has been in terms of the fall-off in sales between the second and the first.

And it potentially could be up to where it was, up to the first quarter.

But my major point was that the fall-off that you've seen in the last couple years between the first and second quarter, you won't see that much of a fall-off because of the additional week.

Now, the reason that you had to go back that far is that there has been a gradual movement of tax holidays from July to August and that has affected our July business.

And what I am saying now is because of the later week we are going to pick up some of what we lost over the last couple of years.

So again, the major point is the fall-off in absolute dollar sales between the first and second quarter will not be as great because we are picking up more business in July for the second quarter.

Okay, that helps.

And then, Bob, I mean it is a small sample, but your direct sales or eCommerce sales are up 38% at Lids in February, they were up strong in Q4.

Are these are just off of really low bases or is there anything you are doing differently?

No, no.

First of all, it is not off a low base, Lids has a pretty robust online business.

We hired a great group of people to come in and help us do that about six months ago, they have hit the ground running real hard.

We've gotten more aggressive with getting the site marketed around.

The single biggest thing -- factor structurally probably is the addition of inventory.

Again, because Lids does not read the whole store base, a lot of our SKUs which are fully distributed to stores, they are sort of in their run-out, don't show up on the Web.

But we have been working hard to continue to add SKUs.

So if you think about it, Lids was, and still to some extent is, known as the hat site.

But what we are doing with Lids Locker Room and Clubhouse inventory every time that we add teams and add breadth in a team because we now have the retail store or the Clubhouse store, then we add the jerseys, the T-shirts everything else.

And so, you can expect that Lids will just continue to migrate to be an all things licensed sports site and that will be a driver of business I think in several years to come.

But that is a big part of what you see right now.

Is there an advantage to Clubhouse specifically?

I assume if they are not using you they are using some sort of third-party GSI type PFS type service?

Well, you have got to go by sport.

We don't have access to baseball because it is all run by MLB.com.

But we run -- we have a relationship with the Jets, we have a lot of colleges, so we face off a lot of other sites.

And so I don't know the total count of URLs that we represent right now.

But still the biggest driver amongst all of that is Lids.com.

Okay.

Thank you.

Thank you.

And that does conclude today's question-and-answer session.

Mr. Dennis, I would like to turn the conference back to you for any additional or closing remarks.

Just thank you all for joining us and we are looking forward to talking to you again in three months.

And that does conclude today's conference.

Thank you all for your participation.