Genesco Inc (GCO) 2014 Q3 法說會逐字稿

Good day, everyone and welcome to the Genesco third-quarter fiscal 2014 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 SEC filings 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 call 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 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 will begin today's call with a few remarks about our third-quarter results. Then I will turn the call over to Jim for a review of the numbers and guidance. After that, I will return and give a little color on our operating segments before we open it up for questions.

For the third quarter, we reported adjusted EPS of $1.43 versus $1.44 last year. Earnings in the quarter came in essentially in line with our expectations. Looking at guidance for a moment, the fourth quarter this year is unusually tricky to analyze and forecast given the shift of Thanksgiving, the early start to the Black Friday weekend and a retail promotional environment that looked to pull traffic ahead of Thanksgiving.

Thus far, the competitive environment in the US has been reasonable in our market categories. But because of the short holiday selling season, we recognize that the promotional atmosphere could easily change adding to the uncertainty. Given all that and a November that delivered sales somewhat below our projections, we are lowering our adjusted EPS guidance for the year slightly to $5.10 to $5.20.

In the third quarter, total sales for the Company were $666 million, essentially flat with last year. Our consolidated comp sales were minus 1%, which was an improvement from minus 4% in the first quarter and minus 2% in the second quarter. Easier comparisons through the period of hurricane Sandy last year and a favorable lineup of teams in baseball playoffs and World Series accounted for part of the improvement.

Although the differential was not as dramatic as in previous quarters, comps for the quarter were again strongest in the direct channel with e-commerce and catalog sales up 8% on top of a 9% gain in our last third quarter as these businesses continue to benefit from merchandising and service-related omnichannel initiatives.

We were particularly pleased to see a 5% positive comp for the quarter at Lids Sports Group. While some of that is attributable to the combination of the Sandy offset and the favorable post-season lineup in Major League Baseball, we are encouraged that the rest came from more fundamental improvements. A significant comp increase in the larger format Lids Locker Room and Clubhouse stores, some improvement in our Hat stores that we predicted as we anniversaries the challenges in the snapback category and continued strength in the direct business. We will talk about all these factors in more depth after Jim covers the numbers.

Finally, in line with our earlier expectations, which took into account the easier compare from Sandy, comps for the Journeys Group turned positive in October with a strong casual assortment, especially boots, helping fuel sales gains late in the quarter. Adjusting for Sandy, comps at the Journeys Group were roughly flat in October.

The fourth quarter has started slightly below our expectations with quarter-to-date comps flat through this past Tuesday. Our Black Friday promotional position was roughly the same in the US year-over-year. Based in our interpretation of the sales calendar, we believe this puts us on track to a fourth-quarter comp of 1% to 2%. And once again, we owe a successful Thanksgiving weekend to the stellar efforts of our retail management teams and the store associates that executed this critical holiday in even more challenging conditions, which included about 1400 of our stores that opened at 8 PM or earlier on Thanksgiving Day. We remind you that our overall comp comparison for Q4 goes against last year's minus 2%, by far the easiest quarterly comparison of the year. And now I will turn the call over to Jim for a more detailed review of the numbers.

Thank you, Bob. As usual, we have posted more detailed financial information for the quarter online, so I will only be highlighting a few key points. Our adjusted earnings per share, as we break out in the press release, were $1.43 per share this year compared to $1.44 last year. Total comp sales were negative 1% for the quarter with a 1% comp decline in our stores and a comp increase of 8% in the direct business. Last year, we had a comp increase in the quarter of 5%, which included a 4% increase in our stores and an increase of 9% from our direct business. On a two-year stack basis, total comp sales were up 4%.

Direct sales represented 7% of our comp sales in the quarter compared with 6% last year. Consolidated net sales for the quarter were $666 million, which was up 0.3% from last year. This year's third-quarter sales were lower by about $12 million due to the quarter beginning a week later than last year. The first week of August, which is near the start of the back-to-school selling period, was in the second quarter this year while it was in the third quarter last year.

Gross margin in the quarter was 49.8% compared with last year's gross margin of 50.3%. I will spend a few minutes going over a couple of the items we have excluded from our non-GAAP adjusted numbers and from the full year's guidance. We have excluded a quarterly amortization of the Schuh deferred purchase price totaling $3 million, or $0.12 per share, which is consistent with our guidance and with past practice. The amortization last year was $0.12 per share. In addition, as in the past, we have excluded asset impairments and other charges, which include network intrusion-related expenses and other miscellaneous litigation items, which total about $1.5 million, or $0.04 per share in the quarter.

In our last conference call, we discussed an accounting change to our EVA bonus plan, which we implemented when we filed our second-quarter 10-Q in September. My online commentary includes all the background on this change. In the current quarter, our reported GAAP earnings reflected a $4 million impact from the accounting change. Last year's number includes additional income of $1.8 million from the accounting change, which required us to add back income related to the bonus, which was earned last year.

Through the nine months, the impact of the accounting change was an additional bonus expense of about $16.5 million this year while income was increased by $1.7 million for the same period last year. Adjusting for all of these items, we were able to leverage expenses by about 40 basis points in the quarter. Adjusted expenses as a percent of sales were 41.5% compared with 41.9% last year due to a lower bonus accrual under our historical accounting treatment, which is tied to the operating performance this year compared with last year.

Expenses in the quarter included Schuh's contingent bonus accrual of $3.9 million, or $0.13 per share this year, compared to $4.2 million, or $0.13 per share last year, which we do not exclude from any of our adjusted numbers. Just to remind you, this is a one-time payment built into the Schuh acquisition agreement payable in FY16 and is contingent on Schuh's performance during the first four years of ownership.

For the quarter, adjusted operating income was $55.5 million, or 8.3% of sales, compared with $55.7 million, or 8.4% of sales last year. We ended the quarter with $32 million in cash compared with $40 million last year and with $98 million in debt compared with $92 million of debt last year. We spent about $1 million in acquisitions in the quarter and about $12 million for the nine months.

In addition, we spent about $9.5 million repurchasing approximately 148,000 shares of Genesco stock at an average price of $63.75 per share during the quarter. For the nine months, we purchased approximately 338,000 shares of Genesco stock at an aggregate cost of $20.7 million, or $61.23 per share.

Inventories were up 16% year-over-year in the third quarter. Square footage increased 6% year-over-year. Inventory per square foot increased 10%. Some of this increase is due to the 53rd week last year causing us to close out the quarter later this year than last year. Since we were building inventories in anticipation of the holiday selling season, we received more holiday product due to the later quarter cutoff this year versus last year. In some cases, we accelerated receipts as we wanted to be absolutely sure we were well-stocked in anticipation of the holiday season. This was particularly true for Journeys and Lids.

Schuh's inventories were actually down on a square footage basis. The Lids inventory increase did outstrip its square footage increase of 13%. However, we don't believe there is any meaningful fashion risk with this inventory as much of it can be carried over from one season to the next. To that point, we continue to monitor snapback sales compared to our snapback inventory levels. Currently, snapback sales are running at about 17% of Lids hat sales and snapback inventories make up about 11% of Lids hat inventory.

We expect to reduce the Lids inventory increase by year-end to be more in line with the square footage increase. Also, we do expect some reduction in the overall Genesco inventory increase at year-end, but we are still evaluating the amount of inventory we need to pull forward due to the possible delays in shipments from China caused by the timing of the Chinese New Year. Therefore, some of the anticipated reduction in inventory levels could be offset by the pullforward of product coming from China. As we have said before, early February has become a more important selling period due to the timing of tax refunds.

Capital expenditures were $38.5 million and depreciation and amortization was $16.6 million for the quarter. This compares with $20.3 million and $15.7 million respectively last year. Year-to-date capital expenditures were $75.7 million and depreciation and amortization was $49.5 million. This compares with $52.9 million and $46.2 million respectively for the same period last year.

Our store count increased to 2537 stores from 2448 stores or a 4% increase and square footage increased 6% compared to last year's third quarter.

Now I'd like to spend a few minutes on our guidance for FY14. Our third-quarter performance was essentially in line with our expectations. But even though November comps were positive, they were not as strong as we expected. We now expect adjusted earnings per share for the full year to range from $5.10 to $5.20. This equates to a fourth-quarter range of $2.17 to $2.27, which compares with $2.16 last year and is predicated on an approximate comp of 1% to 2% versus our prior expectation of 3% to 4%.

We are making this slight reduction to our previous guidance to reflect the slower-than-anticipated start to the holiday selling season and a higher-than-expected effective tax rate as higher tax US income will represent a larger share of total income than we originally planned. Consistent with previous years, this guidance does not include about $1 million to $2 million in expected non-cash impairments, network intrusion expenses and other legal matters offset in large part by the gain after expenses from the Journeys Herald Square lease buyout. This compares with last year's non-cash impairments, network intrusion expenses and other legal matters of $17 million pre-tax or about $0.45 per share after tax, which as you know was excluded from guidance last year.

In addition, we will continue to exclude the amortization of the Schuh deferred purchase price from our EPS guidance. The deferred purchase price amount in FY14 is expected to be approximately $11.5 million, or $0.49 per share. Finally, it excludes the effects of the accounting change related to our bonus plan by $14.1 million, or $0.37 per share for the year. This guidance does, however, include our current estimate of the Schuh acquisition contingent bonus accrual of $13.7 million, $0.45 per share, which is expensed in our guidance.

The following are assumptions we use to develop this guidance. We have an overall sales increase of about 2% for the year. Remember last year's sales included an additional week, which added about 2% to sales last year. Our guidance on the high end assumes a gross margin decrease of about 30 basis points and positive expense leverage of about 30 basis points. This results in an operating income margin of about 7.6%, which is flat with the previous year.

The tax rate assumption is about 37.6% and the share count assumption for the full year is about 23.6 million shares. We are also expecting capital expenditures for the year of about $110 million to $115 million and depreciation and amortization will be about $68 million. We are forecasting 174 new stores, an additional 14 stores acquired during the year. We are planning to close about 60 stores. We expect to end the year with approximately 2576 stores, an increase of about 5% over fiscal 2013. Square footage is expected to increase by about 7% for the full year.

Lastly, we would like to give you some early directional guidance for next year. We expect EPS growth of 10% to 12% and low single digit positive comps for fiscal 2015. The EPS guidance is subject to the same adjustments as in previous years, primarily excluding non-cash impairments and the ongoing adjustment for the Schuh deferred purchase price. Additionally, this guidance is based on our prior accounting method for our EVA bonus plan.

As all of you know, the back half of our fiscal year is when we make the bulk of our money. Historically, we have had about 60% of our sales and about 70% of our operating income in the back half of the year and we would expect a similar pattern next year. In addition, in FY14, the first-quarter adjusted results reflected a reversal of bank bonus accruals due to underperforming our expectations. We do not anticipate a similar bonus adjustment in the first quarter of FY 2015. Now I will turn the call back to Bob.

Thanks, Jim. Now let's look at each division's recent performance in more detail. We will begin with the Lids Sports Group where, as we mentioned earlier, comp sales increased 5% in the third quarter coming on top of a 5% comp decline a year ago. We remind you that the Lids Sports Group comp was minus 10% in the fourth quarter last year, so comparisons eased substantially in the current quarter. While we anticipated that the group's comps would improve in the second half of the year due to a combination of initiatives and easier comparisons, the 5% comp gain was better than planned. Some of that came from the favorable lineup of baseball teams. For the quarter to date through Tuesday, comps for the group increased 2%.

There were several key components to Lids' recent results. In addition to the favorable baseball outcome, comps at our Locker Room and Clubhouse stores continue to outpace our Hat stores and were up double digits driven in part by increased consumer demand for NFL licensed apparel. As you will recall, the licensed transition from Reebok to Nike hurt last year's third and fourth quarters in these stores due to delivery issues on NFL apparel. These stores now make up about 20% of the group's sales in Q3. The performance of these larger format stores, which represent the primary growth vehicle for the Lids Sports Group over the next several years, are validating our focus on localization of the merchandise selection and on using customization capabilities to differentiate the stores. We believe we have broken the code for operating these stores successfully particularly with regard to the merchandise mix, promotional cadence and an effective staffing model. Since the end of the quarter, we have completed the acquisition of a seven-store Canadian chain called Game On Sports in the locker room space furthering our rollup strategy.

With respect to the Lids Hat stores, third-quarter comps improved versus recent trends due in part to stabilization in the snapback category following the anniversary of price reductions we took in September of fiscal 2013 in order to be more competitive following wider distribution of the category. The initiatives we implemented to focus our selection within the category and to rightsize our inventory have paid off. Snapback gross margins are solid and inventories are in good shape. Generally speaking, the snapback trend is still pronounced and has lasted much longer than we expected.

While it remains an important part of the business, we do see some signs of a gradual shift in demand back toward the core fitted category, which is, of course, the sweet spot of the Lids business. Snapback comps in the Lids stores were minus 6% for the quarter while comps in the rest of the store increased 2%. Snapbacks represented about 17% of our comp sales in the quarter, down from about 19% in last year's third quarter, but only represented 11% of our hat inventory at quarter-end. So we believe our exposure is nicely controlled.

The third quarter marked the debut of our first Locker Room by Lids departments at Macy's. We rolled out the first 26 shops on schedule and on budget, mostly in major NFL markets and while it is too early to draw any conclusions based on performance, we remain excited about the potential of this partnership as it provides access to Macy's large and loyal consumer base both in stores and on Macys.com where we have been up and running for about three weeks. We plan to open at least another 175 departments next year with an average square footage per store expected to be from 500 to 1000 square feet.

Finally, at Lids.com, an improved conversion rate and an increase in the average number of items per transaction drove exceptional growth. We are pushing ahead with our plans to have our entire inventory available online sometime early next year, which should further drive growth.

Now, turning to the Journeys Group, while comp sales were down 2% in the third quarter, they were positive in October with some help from the Sandy comparison and are flat for the fourth quarter to date. We continue to see a general mix shift from athletic to casual in our sales trend. Given the significant seasonal emphasis in casual during Q4, which reflects our buy plan, we feel good about our overall assortment for the remainder of the holiday season.

We are still excited by Journeys Kidz growth potential. Journeys Kidz also benefited from the shift to casual footwear as we got deeper into the season. Kidz comps were flat for the third quarter going against a strong 12% last year and fourth quarter to date comps were plus 2%.

At Schuh, we continue to drive growth by adding stores. In the back half of this year, comp sales for Schuh have remained under pressure from a combination of tough comparisons, a footwear market that currently lacks a must-have fashion trend and a marketplace that descended more deeply than the US into price-based competition. Comps were down 10% in the third quarter on top of a 9% increase a year ago. As was the story in the first half of the year, the comp decline in our Schuh stores continues to be more a function of traffic than conversion. In our Web business at Schuh, the opposite is true with traffic up, but conversions down and this is where we observe price competition to be most intense.

We are confident that our product assortment is where it should be and we look for improved results when consumers come back out for the holiday selling season. Comps for the fourth quarter to date at Schuh were down 7%. Schuh's comparisons remained challenging through the fourth quarter, so our expectation is for comp improvement to occur in Q1 when comparisons ease considerably. Even with Schuh's recent struggles, their full-year results are tracking above the projections we assumed when we acquired the business in fiscal 2012.

Year-to-date, we have added 15 new stores at Schuh. In the aggregate, our new stores are performing above their pro forma projections despite the less than ideal operating conditions in which they have opened. All together, net square footage is up 18% year-over-year. We will end this year with 95 permanent stores, up from 79 a year ago and currently have plans to open another 13 in fiscal 2015. And beyond that, we remain optimistic about Schuh's continued expansion prospects.

To support Schuh's growth, we are investing in a new 245,000 square foot distribution center in Scotland to ensure that we have the infrastructure in place to support our plans. We are also adding a mini warehouse in central England. This will allow us to extend the cutoff time for next-day delivery on Internet and store customer orders from 5 PM to 10 PM and provide the platform from which we can further refine our service model, including in-store pickup options and potentially same day deliveries given its centralized location. This mini DC will have approximately 20 million people within a two-hour drivetime radius. Based on the results of this test, we could expand this mini warehouse concept to another five or six new locations that would extend the same-day service offering to essentially the entire UK population and the learning from this effort should also help us with our US plans.

Johnston & Murphy continues to be a strong performer. Johnston & Murphy posted its thirteenth consecutive quarterly comp increase, up 7% for the quarter, which comes on top of an 8% increase a year ago and the brand remains on track for its best year in recent memory. The strong sales trend hasn't let up in the fourth quarter so far with comps up 14%. Both retail and wholesale continue to be driven by strong consumer reaction to J&M's recent product offering of higher-priced dress and dress casual shoes and new marketing initiatives that speak to a much wider audience of men and women, particularly consumers younger than the brand has traditionally targeted.

Our wholesale business continues to perform very well with a sales increase of 15% both for the quarter and also for the year through the third quarter. Last year, wholesale sales increased 16%. This year, we will add six new Johnston & Murphy stores, including expansion in Canada, as well as airports, a strategy we will continue next year based on J&M's ongoing success. In addition, we expect to open seven outlet stores, which we believe represents another great growth opportunity for Johnston & Murphy.

Reflected in the J&M results for the quarter is the relaunch of the Trask line of footwear and accessories. We acquired the dormant Trask brand a few years ago and relaunched the line this past quarter at wholesale and at Trask.com. Losses related to the startup had a negative impact of a little more than $600,000 on the J&M segment's earnings.

Finally, the Licensed Brands group maintained a healthy operating margin despite some top-line pressure during the quarter.

While business has remained choppy, given the easier compares for the rest of the year, we feel comfortable that we can achieve our revised fiscal 2014 guidance. On a longer-term basis, we continue to be optimistic about the potential of our business and our ability to generate increased value for our shareholders. We updated our five-year plan last summer, which goes out to fiscal 2018. The plan projects annual sales to reach $3.9 billion or a five-year compound annual growth rate of about 8% through modest organic assumptions of 3% to 4% comparable sales growth, 4% to 5% store growth and a small amount of wholesale growth. Under this plan, operating margins in fiscal 2018 hit 9% to 9.5%.

The most recent five-year plan forecasts that we will generate more than $1 billion in free cash flow prior to capital expenditures during this period. We estimate about half of that will be spent on new stores and renovations and on additional IT investments, including significant e-commerce investments. That leaves us about $500 million to be spent on acquisitions and/or stock buybacks based on what the best opportunity is to drive increased shareholder value. This plan assumes an EPS growth rate of 14% before any acquisitions and/or stock buybacks. If, for illustrative purposes, we assume we spend all of the $500 million on stock repurchases at the current multiple and as we generate the cash, our EPS growth rate would be roughly 24%.

In closing, I want to thank all of our employees for persevering through the recent challenges and especially for positioning the Company for this holiday season and a bright future in the coming years. And now, operator, we are ready to take some questions.

(Operator Instructions). Scott Krasik, BB&T Capital Markets.

Hey, guys, thanks for taking my question. What is in the comparison for December and January that should allow you to go from flat to positive 1% to 2%?

Well, it is two things, Scott. It is the comparison and Jim can maybe walk you through the compares, but it is also just the calendar, right? When Christmas is one day further away, you end up with that quirky part at the very end of the month. So you have to -- what we do is we lay out our best estimate of what sales by day is going to be over the period, which is, as we noted, is trickier this year, but based on that estimate, we think a flat comp through last Tuesday tracks us to a plus 1% to 2%.

And then on the comparison, because I think you were up against, what, a minus 4% in November and you did flat. So what does it look like for December and January?

We are not up against minus 4%. The quarter was a minus 2% last year fourth quarter.

Right. And when you reported November, what was -- I thought November was minus 4% last year.

Altogether I believe it was a minus 3%, minus 2.5% to 3%.

It is more the calendar, Scott.

Okay. And then in terms of the long-term plan, it is a minor tweak, but taking the operating margin outlook from 9.5% to 9% to 9.5%, is there any thoughts there on structural changes within any of your businesses?

No, Scott, it's real simple. When we wrote the plan, we were coming off of a stronger base, starting base. So when the team rewrites the plan, revises the plan next summer, obviously, what we have just gone through will be the new baseline. So it is more reflective of anticipating a baseline from which we are going to grow, which is not where we thought it would be this year. So especially this year's miss.

Okay.

Does that make sense to you?

Yes, and then just last, the gross margin pressure at Lids, are we through that because of the price -- anniversarying the price cut?

We are through a lot of it, and certainly on the snapback, all indications are that we have anniversaried it and early indications for November are that, yes, we are beginning to normalize the -- we are normalizing -- we have normalized the gross margin in snapback. The other part of the business, we will just have to wait to see how promotional it might get, but right now we have anniversaried the snapbacks.

Okay, great. Thanks, guys.

Mark Montagna, Avondale Partners.

Hi. Just wanted to make sure I understood the SG&A impact from the accounting -- the bonuses. Did that help or hurt this current third quarter?

On an adjusted basis, Mark -- it is confusing and I am sorry, but it is what it is. On an adjusted basis, it helped. It helped a lot because we added bonus accruals last year under the old accounting method and this year, we did not add. So it did help this quarter. And that is the reason why we were able to leverage even with a negative comp.

So then, can you tell us how much it helped in terms of how many millions of dollars it might have helped?

Well, I'll tell you what, I will give you a range on a percent basis, somewhere between 1% and 2%.

So it helped SG&A dollars by 1% to 2%?

Yes, of overall sales dollars.

Okay. And is there -- is that impacting fourth quarter in any way?

No, see what happened is that, if you remember last year, we were running pretty well through the nine months, so we are adding to our bonus accruals. We then went into the fourth quarter, and the fourth quarter was disappointing as you might remember. So the bonus accruals were lower, running lower in the fourth quarter last year. We believe the reverse is happening this year. We are going to see some pickup in the fourth quarter. So the benefits that we have gotten in the last three quarters from the benefits from the lower bonus accruals, which we all can question whether it's a benefit for our employees, but nevertheless lower bonus accruals will reverse in the fourth quarter and there is a possibility that the bonus accruals will be greater in the fourth quarter than they were last year in the fourth quarter, which will put pressure on SG&A in the fourth quarter.

Okay. So then, let's see, all right, yes, so that helps me understand the SG&A leverage. Then when you look out to next year, are there any key margin levers that we can count on because this year was the lower bonus accruals through the first nine months. And then in prior years, you had the lower real estate, lower CapEx. Is there anything or should -- is next year highly dependent on got to get that 3% comp to leverage the model?

When you say margin, there is two pieces of the operating margin. One is SG&A and one is your gross margin. And from an SG&A standpoint, we would expect to be more normalized and we expect improved performance. So yes, we will be adding to the bonus accruals, which will be a negative from a leverage standpoint. So we are more normalized and we will have to get comps to leverage. On the other hand, hopefully, we will see some improvement in gross margin in a couple cases, so that could offset some of it to some degree. But yes, you are correct on the SG&A.

So next year's SG&A hurdle is really a 2% to 3% comp as usual?

Right, yes.

Okay, all right. And then just real quick, Bob, when did you say the rollout at Macy's will be fully complete for the next 175 stores?

First half.

Okay, perfect. Thanks.

Steph Wissink, Piper Jaffray.

Hi, good morning, everyone. Thanks for taking our questions. Just two really quick ones, Bob. I think you mentioned that the maturity curve of the snapback trend is extending a bit longer than you had anticipated. I just made a quick jotdown. I think you said 17% of sales in Q3. I recall it was 19% in Q2. How should we think about your plans for managing that business down kind of over the next call it 6 to 12 months?

And then on the long-range plan, as you kind of step back and look at that 3% to 4% comp growth on an annual basis, how reasonable do you think that is just given that we have seen some moderation towards maybe a lower end or low single digit type level here over the last couple of years? Thank you.

Well, on the snapbacks, we don't manage it down. We respond to our customers' demand cycle. So what we are doing with a lower percentage of inventory is being cautious, treating it more or less like fast fashion as fast as we can be in a branded category and reacting as we go. So we have got a very well inventoried store, so the rest of the non-snapback store is really there for the customers to work on and we are there to react to further decreases in snapback if appropriate, but we are not going to overreact and try to manage it down because it is a terrific business with a very solid margin for us and we are not going to give that up. So we are going to see how it trends and we will trend our inventory with it reacting to the customer.

Let me jump in on that one for a minute. I think the perception is that the faster we get out of snapbacks, the better it is and the misconception is that snapback gross margins are very good. The price points are good and the problem has been that they were extremely good a year ago and a year and a half ago. So we have brought the gross margins down to more of a normalized base right now. So there is nothing wrong with the price point and the gross margin with a snapback. It is we have been going against unusually high gross margins. So now it is normalized. So there is nothing wrong with that business. As Bob said, we will manage it depending on what the demand is, but again once it is stabilized and once the gross margins stabilize, which we believe it has been, it is not a bad business.

And Steph, on the comp gain, a couple of things to think about. First of all, if you look at our history and our five-year plans back to the beginning when we were doing them, they are never smooth, they are choppy and generally what happens is after you have a tougher period then you have a more robust period. Part of this just related to the comparisons. So we are coming off of a lower -- a dip in our business model and it has to do with a little bit, as you well know, a little bit of staleness in fashion on the footwear side.

And so the one thing we need to do is we are accommodating that cycle. The other part is we obviously -- since the retail world probably won't be growing at 3% to 4%, maybe more 2% to 3%, we need to gain share and that makes the omnichannel initiatives very important. And so we are spending a lot of time and we are putting some dollars, significant dollars behind getting better at omnichannel in each of our businesses.

And then the third thing I would point out is some of the newer concepts as we -- and I will use Locker Room as the example, but you could look at Journeys Kidz, Schuh Kidz -- they are still in that development phase where we get them better and consumers discover them and so it's that -- there is that upside comp performance as you continue to execute well.

As we noted, the Locker Room stores were up double digits. Now some of that came from just the NFL year-over-year, but some of that is also just getting that business model grooved and that also helps to drive comps.

Okay, thanks, guys. Best of luck.

Thanks.

Sam Poser, Sterne Agee.

Good morning, thanks for taking my question. Just quickly, the Lids e-commerce business in the quarter was up 40%; is that correct?

Yes.

And then it deceled to negative 1% in November. Can you walk through what happened there?

Deceled to -- sorry, give me that --.

The Lids e-commerce business in your commentary, Jim, was down 1% quarter to date.

Lids e-commerce?

I don't think that is right, Sam. I am just looking at the -- oh, it is down 1%, Paul is telling me. Sam, I have to go back and look. I don't know what timing issues are going on there. It relates to -- we report it as shipments, so I am not sure if there are some offsets in shipments. I do know that if you look at the Black Friday to Black Friday comparison, so if you take the weekend they were up significant double digits in terms of orders taken. So I'd have to go back and look at that.

Okay. And I'd love to get a follow-up on that, please. The other thing is in the Lids business with the operating margin down as much as it was, I mean was it already getting promotional beyond the situation with the NFL and the snapback hats? Were you getting more promotional than you expected to get going into the quarter there?

Well, the operating margin decrease on Lids came both on SG&A and some gross margin. So we are still seeing a little bit of margin pressure there, and we did do some building up of some SG&A against some of the initiatives that we have in place, including things like Macy's and Locker Room.

Then lastly, how much of the inventory was -- like how much of the inventory is early receipts versus -- you said November sales didn't live up to your expectations (technical difficulty) risky inventory that might be part of (technical difficulty) just because trends didn't go quite as well as you expected (technical difficulty).

Sam, you are cutting in and out. I think I heard what you are saying. Look, long story short, Sam, right now, we feel very comfortable with our inventory. A week makes a big difference. A lot of retailers have had the same kind of report with the week shift. You start bringing in a lot more goods even over the course of one week, so that is a big chunk of it. And beyond that, we look at our inventory position and we feel very good and feel very clean.

But Sam, the miss in November from a sales standpoint, sales were lower than anticipated, but we feel very good about our inventories. We said they were a little high, but in terms of valuation risk and fashion risk, we see no problems and certainly the November issue did not create any problems for us.

Well, if I could just follow up, initially when you gave us guidance for the fourth quarter back at the end of Q2, you said you expected a 3% to 4% comp; now you are expecting a 1% to 2% comp. Wouldn't that mean that that little -- that the inventory was bought to support the 3% to 4%, not the 1% to 2%? So I know you make adjustments all the time, but probably at the front end you didn't make some of those adjustments. So just that is where I am going with it.

Sam, look, first of all, within the Journeys world, we have a great history of working any inventory position without a lot of hazard to gross margin. Our vendors are very helpful in working with us and so we figure out how to deal with that and we have a history of doing that in the past. And in the Lids world, as you well know, a large, large chunk of the inventory is carryover and so we adjust that with receipts. So as I said before, we are very comfortable with the inventory that we have in place. Jim, do you want to --?

Yes, I was going to say, Sam, we talked about this issue at the end of the second quarter in that the Journeys comps were -- we said they were disappointing at the end of the second quarter, but we were able to adjust and the gross margins came in really well and just because of the relationships we have with vendors, etc. So I mean that continues. So again, a one-quarter issue -- I mean one-month issue certainly is not creating issues for us as a result of our flexibility in dealing with our vendors.

Thanks very much and good luck.

Steve Marotta, CL King & Associates.

Good morning, everybody. I know we have been over this a couple of times. I am just trying to understand it a little bit more linearly. As it pertains to the gross margin, Jim, you mentioned in the CFO commentary that the consolidated gross margins were down 50 basis points primarily due to Lids. Can you talk specifically about when the price reductions occurred there a year ago? I was under the impression that it was late in the second quarter, early third quarter. But based on the decline here, maybe it was a little bit more through the third quarter. Can you just talk a little bit about when the bulk of those occurred and if there are other reasons why Lids' gross margin might be down?

There are other reasons, but we didn't say that about the Lids. I think you got your quarters a little off. We said it occurred -- the anniversarying from a pricing standpoint began in late third quarter. I think we have been pretty consistent on that. I don't think we said much about the second quarter. I think we've said the third quarter all along. So it was late in the third quarter and we really didn't see the effect very much because the gross margin stabilized but the pricing came down. But the pricing seems -- we believe will be stabilized in the fourth quarter. So it wasn't the second and third; it was mostly late in the third quarter.

Now that was part of the gross margin issue in Lids, which I talked about in my commentary, but also early on in the quarter they did get a little more promotional. We have been saying all along that their inventory was a little high. And one of the reasons -- one of the ways to get inventory down is to get a little more promotional in addition to cutting back on future receipts. So it is partly the snapback issue, which hopefully will stabilize in the fourth quarter, which we believe will stabilize in the fourth quarter and then we got a little bit more promotional early in the quarter.

And I am assuming the overdistribution issue that you saw a year ago as it pertains to snapbacks is significantly lower this year?

Yes, we believe so, yes.

Also, I want to talk to you a little bit about the Schuh retention bonuses. Can you talk about the aggregate number of Schuh retention bonuses this fiscal year? And I know that is going to be bleeding off shortly and what that number is expected next year? And I am most interested obviously in the delta of those two.

First off, it's a contingent bonus tied to performance not a retention bonus. And just as background for everybody else, this is the bonus that is payable if they hit an upside scenario, which they have been tracking to very nicely over the period. Obviously things have slowed down this year, but they are still tracking to make likely 100% of the upside bonus for where they are at the moment. And so if you look at the timing of that now -- Jim?

For this year, it was in my script, but we said that the contingent bonus accrual, which is what you are talking about, we anticipate it to be this year, the accrual to be $13.7 million, which is about $0.45 per share. And if you go back and look at my commentary over the last few quarters, that number has changed; it has come down because Schuh has not performed as well as expectations. I believe it was close to $16 million at one point, so it has come down to $13.7 million.

Now to answer your next question, what is the amount for next year, and as a result of that, the amount for next year has gone up and it's somewheres in the range of $10 million now pre-tax.

And that will exhaust the 100%, correct?

That's correct.

Okay. Lastly, sort of encapsulating Journeys problems, Bob, I know you are reticent to speak specifically about branded Journeys, but can you talk a little bit about, and again just sort of encapsulated brand turnover there has not been as aggressive as it has been in the past. That may have been a problem as it pertains to comp this year. Can you talk a little bit about brand turnover there and maybe some specific levers without mentioning brands specifically that you are pulling there in order to gain better traction from a comp standpoint?

Yes. First, you are right that we are reluctant to talk about specific brands and we are going to stick to that. The general theme that we have been calling out, which is worth repeating, is that if you look at the general divide of the store between athletic and casual, and casual includes all of the boots, there is a general trend towards casual gaining share at the expense of athletic and that has been a sustained trend for several years now.

When you then look at that trend by quarter, the casual takes a big bump up in the fourth quarter. So what gets us encouraged going forward into the fourth quarter is that what is more compelling and has more newness and more excitement is on that side of the store and that becomes a much more important part of the business in the fourth quarter.

As you can imagine, the Journeys guys are constantly working and testing and looking at new opportunities. We do see brands emerging that are exciting for us, but some of the stuff on the athletic side is stalled a little bit and that had become a pretty big part of the business and so we need a more pronounced shift for an overall result to start to look positive and that is what everybody is working really hard on right now.

That's terrific. Thank you.

Pamela Quintiliano, SunTrust.

Great, thanks so much for taking my questions, guys. So I actually have a few. The first one, you mentioned November trends disappointing and sorry if I missed this, but can you give us some more color on what you attribute that to? We have heard a lot out there about dismal mall traffic levels. Do you think that is a factor or what else is it?

And then any visibility specifically on Black Friday weekend and trends there would be helpful. And then last but not least, there is also a lot of talk about the headwinds for holiday. How do you think your various customer bases are approaching spend and are you doing anything differently throughout your divisions to address that for the holiday season? Thanks.

So let's talk about the trends. When you get into the fourth quarter, historically, and this goes back to Scott Krasik's question at the very beginning, it is harder to look at comps as a measure of where you stand because the amount of offset in the calendar becomes more pronounced. So then you fall back on how am I doing against plan, basically each of the divisions budgets and they spend an awful lot of time trying to figure out what the likely sales by day is.

And so the first point is we feel that there is more imperfection in our forecasting of the fourth quarter than there is for other quarters. And this quarter has gotten even tougher because if you go back, and this gets into the granular part of it, but if you go back to when we last had a Thanksgiving where it is, that was the days when the mall didn't opened up until Friday morning at 6 AM. And so by opening earlier, are you actually capturing more sales or are you just moving it around? It is a little hard to say.

So given all of those things and the promotional environment pre-Thanksgiving, which is also new news, our team did their best job of trying to figure out where sales per day comes out to achieve that comp. And that is what we are benchmarking ourselves against. So on that basis, we were a little bit disappointed.

Now if you look at the four days, the Thursday through Sunday now that represents Black Friday and compare it to the Thursday through Sunday of Black Friday a year ago, we were up high single digits and were glad we were up high single digits. But that was not enough relative to the way we had planned it out. And so that is the basis on which we have sketched out the guidance and reset our expectations a little bit. But I again put the accent on imperfect.

In terms of headwinds for holiday, let's not overstate this. We were targeting about a 3% comp and we have guided down to a 1% to 2% comp in an imperfect world. So that doesn't necessarily scream a lot more headwind than what we had expected. And so I don't have a lot of views -- we don't have a lot of views on how consumer spending has changed. Obviously, digital is playing a bigger role and we think we are well-prepared to address that. Digital had a very, very big gain in terms of the Black Friday result versus Black Friday result. So if you do the same thing just for digital and you do orders, because we book it as we ship it, our overall US digital business was up deep into the double digits. So there are some indications that we are doing well. It is just that when you map it out against our plan, it causes us to get a little more conservative about our predictions.

And if I could just do one follow-up because we were actually very impressed with the traffic levels at the stores throughout Black Friday. -- Thanksgiving, Black Friday weekend -- given how promotional the entire mall was and you guys didn't really participate in the same way. As we -- as I think about your customer base, do you, and you were planning for the holiday season, how big a deal do you think the whole electronics cycle is for your guys or do you think they are really saying it is the pair of shoes, it is the hat or it is the Xbox and PS4? Just is there a way to think about that and then following up with that, so do you structure promotions differently to be more eye-catching reflecting that because it is harder and then you put it in light of this crazy environment that we are operating in with traffic and promotion as well?

Well, with the electronics, you are right. We always are competing for share of dollar in the teen's wallet and we have competed well for that. This is predictably a stronger electronics cycle this year, so that is another one of our challenges. We are not going to move and become a lot more promotional in terms of some of the things that you saw others doing on Black Friday. We are a branded retailer. We have relationships with vendors and our long-term commitments with those vendors is to try and present their brands in the way that works for them and works for us. And because those brands generally get that treatment by most of their distribution, we don't get shoved into that big promotional environment. So we will continue to do what we do, which is to drive growth with great salesmanship. We will be promoting on items that just aren't selling. So it will be more marking down things that obviously for fashion reasons need help, but do not expect us to be driving the storewide kind of promotions. We just don't feel we need to do that and it isn't really on our strategy.

Glad to hear it and best of luck for holiday.

Thanks.

Jill Nelson, Johnson Rice.

Good morning. A quick follow-up on Journeys. You talked about the fourth quarter, the shift goes into casual versus athletic. Given that, coupled with I guess more favorable weather this year for boots, it assumes -- did you assume November comps for the Journeys division to be stronger than they came in?

Yes, as I said, we have -- again, we are working off a sales budget. We pay more attention to the budget than comp and through last Tuesday, we were coming in a little light pretty much in all of our businesses except for Johnston & Murphy, which has been extraordinary.

Okay. And the main factors there you think is more kind of macro versus merchandise issues?

Yes, absolutely. Because it is across the board and we are watching what other people are reporting and we are just looking at traffic patterns and the $1 million question is is the traffic softer across holiday or has the traffic shifted and will the customers come out stronger closer to Christmas. Every year, it seems that more sales get pushed closer to Christmas and then after Christmas as we train the customer to wait us out. So we are very alert to that and so we don't panic when we are down 100, 200 basis points to our plan at this point in the quarter.

Got it. And then last question, the strength of Locker Room for third quarter, if you could talk about going into fourth quarter, assume it makes up a greater percentage of your mix versus the 20% you gave for third quarter, if you could quantify that and talk about some things that could be going on in that division.

I don't know if we are prepared to quantify it. I will give you -- the general theme is that the position we had in NFL apparel improved a little bit last year third quarter and fourth quarter, but we still believe that we will have a stronger position in the fourth quarter than we had last year from an inventory standpoint. So one of the big drivers of the Locker Room business we think persists throughout the fourth quarter. And then the rest of what is going on in Locker Room is just the general merchandising consistency and very, very strong thinking that the merchants have put in place and we think that will simply play out on its own regardless.

Just for everybody, because what you are referring to, maybe not everyone is aware, is that Locker Room as a percent of sales is more concentrated in Q4 than is the hat business. It is even more gift-driven and so the fact that Locker Room is doing well going into fourth quarter is a big plus for us. Jim, do you have anything to add?

No, no. I can just say that there is no reason to think that the NFL business will not continue to be strong, but I can also tell you, in our guidance, we have taken it down to be more conservative just to be careful. So do not assume that our guidance is based on the continuation of the very high comps. We have normalized that and hopefully we are being conservative.

And just a clarification, is it safe to assume that this margin difference between your core hats versus your Locker Room mix, is there a big difference on gross margin?

Yes, the hat gross margin is higher.

Okay. Thanks so much.

Mitch Kummetz, Robert Baird.

Yes, thanks. Jim, I think you know that this one is coming, so on your comp outlook for Q4, you are saying 1% to 2% comp, a little help in terms of how to think about that by concept. And then also even into next year, you guys I think you have said low single digit comp for fiscal 2015. Again, any direction by concept would be helpful. Thanks.

I can help you with part of that question. On the fourth quarter, it is basically Journeys, low single digits and at Schuh, we continue to expect that to be negative, some improvement, but negative as it was in the third quarter because, as Bob said, we really don't anniversary that business until the first quarter of next year.

In Johnston & Murphy, continue to -- high single digits there and then in the Lids business, even though the momentum is great, we have taken that down some and so it's 4% to 5% -- we were at 5% in the third quarter, taking that down to low single digits.

Okay.

And then for next year, we really haven't -- we're very, very early in the process. So I don't -- I really can't break it out for you at this point other than say it is going to be a low single digit comp, but I can't break it out by division yet.

Got it. And then, Bob, on Lids, I think you have mentioned, and correct me if I have this wrong, but I think you said on headwear for the quarter, snaps were down 6% on comp and then the balance of the business was up 2%, is that correct?

That is correct.

So how has that -- how does that compare -- particularly on the non-snap side, how does that plus 2% compare to kind of what the trend has been for the last couple of quarters? Do you have that info?

Not handy.

Do you think it is better or is it comparable, is it worse?

I think it's definitely better.

Definitely better.

Okay. And so that side of the business is trending more positively then?

Yes.

Okay, that is all I have. Thank you.

I would like to turn it back to our speakers for any additional or closing remarks.

Well, thank you all for joining us and I think Jim had one other comment just following up on Sam's e-commerce question.

Sam's question was -- there was a -- based on my commentary, there was a pretty dramatic falloff in the Lids direct business. And that is true and actually our comp for the quarter is based on a lower comp for Lids. And the reason is that last year, between the third and the fourth quarter, the Lids direct business really took off and in the third quarter last year, it was around 3% and then in the fourth quarter, it was about 27%. So what we did is, in our guidance, we are anticipating that the 40% that we were running at the end of the third quarter will fall off quite a bit because we are anniversarying such a big increase last year. So there is some fine-tuning into November and why it was exactly where it was, but the big issue here is that we are anniversarying the big increase last year in the fourth quarter.

Thank you, Jim. And with that, we will speak to you early next year and talk about how holiday really came out. Thank you all.

This concludes today's conference. Thank you for your participation.