Genesco Inc (GCO) 2015 Q1 法說會逐字稿

Good day, everyone, and welcome to the Genesco first-quarter fiscal 2015 conference call.

Just a reminder that 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-K 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 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.

I am joined today by Jim Gulmi, our Chief Financial Officer.

And as in prior quarters, 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 remarks about first-quarter results and our start to the second quarter.

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

After that I will return to give a little color on our operating segments as well as an update on our omni-channel initiatives before opening up the call for your questions.

The first quarter played out about as we expected with total sales for the Company up 6% to $629 million.

Our consolidated comp sales were up 1% with stores flat and direct comparable sales up 3%.

Adjusted earnings per share of $0.81 compares to $0.94 a year ago, but this slightly exceeded the basis for our full-year EPS guidance.

We remain comfortable with our full-year EPS guidance of $5.40 to $5.55 per share.

With respect to year-over-year comparisons, the lower first-quarter profitability, which we anticipated, was driven primarily by a swing in compensation expense related to bonus accruals.

Our EVA bonus program resulted in a reversal of prior year bonus accruals in the first quarter last year, while we are accruing positive year-end bonuses with no reversals this year based on our current projections of improved year-over-year operating results.

Through last Saturday, quarter-to-date comps were plus 3% with stores up 2% and direct sales up 7%.

Since the start of April, buoyed in part by the Easter shift and the arrival of warmer weather, our sales trends have been positive.

This trend has continued into May and we expect it will improve as the quarter progresses and we begin to lap easier comparisons.

As we stated on our fourth-quarter call in March, we had modest expectations for the first half of the year.

This was due to the effects of bonus offsets, planned new store openings which are less productive in the first half, and concerns about the lack of a meaningful new fashion driver in the teen footwear space.

We are now seeing some fashion developments in the spring that are giving Journeys' comps a boost.

We continue to expect comps to accelerate in the back half as casual footwear becomes a bigger percentage of Journeys and Schuh's product mix and as these newly identified product trends take hold.

Strategically we are pushing ahead with the numerous digital and omni-channel initiatives we outlined in our last conference call.

We are building a wide range of capabilities to grow our omni-channel business from implementing new front-end e-commerce systems, to installing new order management systems that allow customers to interact seamlessly with us across one channel to another, to building new systems architecture to accelerate cross channel abilities, and to investing in new warehouse systems to enhance direct order shipments.

We are ambitious in our aspirations to serve customers in whichever channel they prefer to shop.

Direct sales growth continued to outpace comp store growth for the quarter, although not as notably as in recent quarters, reflecting the anniversary of the strongest quarter for digital sales growth last year and a couple of specific short-term issues in individual segments that I will address later in the call.

With the digital business in May through last Saturday up 7%, we seem to have turned the corner on these issues.

We believe our investments in omni-channel across digital and stores will position us well for the future.

I will have more to say about omni-channel initiatives when we look at each division, but first I will turn the call over to Jim to review the numbers for the quarter.

Thank you, Bob.

As usual we posted more detailed financial information for the quarter online, so I will only be highlighting a few points.

Earnings per share, adjusted as we break out in the press release, came in at $0.81 which was slightly better than we had planned when we developed our annual guidance of $5.40 to $5.55.

Total comp sales were up 1% for the quarter with store sales flat and a 3% increase in the direct business.

Much like other retailers who have reported, we saw a nice increase in April due in part to the late Easter and warmer weather.

Last year our comp sales were minus 4% for the quarter.

The Journeys and Lids Groups' comps turned positive in the quarter this year after negative comps in the first quarter last year and the Schuh Group's comps improved a minus 1% compare to minus 11% last year.

Johnston & Murphy's negative 1% this year against a positive 7% last year still left them at a solid 6% on a two-year stack basis.

Month to date comps through May 24 increased 3% which includes a direct comp sales increase of 7% and a store comp increase of 2%.

Consolidated net sales for the quarter were $629 million, an increase of 6%.

On a constant dollar basis, after adjusting for the appreciation of the British pound, the increase was 5%.

Adjusted gross margin in the quarter was 50.3% compared with last year's gross margin of 50.5%.

This small decrease reflected higher shipping and warehouse costs.

Adjusting for all the items broken out in the press release, expenses as a percent of sales increased to 45.3% from 44.3% last year.

As Bob noted, we added to our bonus accrual this year while last year we took back some of the bonus accrual which had been previously deferred which accounted for almost all of the 1% swing in adjusted SG&A as a percent of sales.

Overall adjusted SG&A increased 9% over last year due to the increased bonus accrual.

As discussed before, we are expensing the Schuh acquisition related contingent bonus quarterly, which is included in our guidance and in the adjusted numbers we report.

For the quarter the contingent bonus accrual of $1.4 million reduced EPS by $0.05 compared with $1 million or $0.03 per share last year.

We expect to fully expense the remainder of the contingent bonus in the amount of $11.6 million or $0.38 per share this fiscal year.

So this item, which has weighed on earnings each quarter since the Schuh acquisition, should not be a factor after this year.

In addition, the Schuh deferred purchase price expense in the quarter was $3.1 million or $0.13 per share.

Last year the amount expensed for the quarter was $2.9 million or $0.12 per share.

Consistent with past practice, we have excluded this from our guidance and from the adjusted results.

In addition, our GAAP SG&A expense included a one-time $5.7 million or $0.15 per share charge in the quarter in connection with an amendment to our EVA bonus plan.

This relates to the previous accounting change in bank bonus expense in the second quarter last year.

With this amendment the Company charged off the entire bonus bank balance and will no longer amortize bank amounts in future periods.

We will expense them as earned as we did before last year's change in accounting.

A more detailed explanation of this item is in my online commentary.

This amount has been excluded from our non-GAAP guidance and from adjusted earnings.

Also consistent with past practice we have excluded asset impairments and other legal items from our non-GAAP guidance and results.

The net gain in the GAAP asset impairment line item this quarter of $1.1 million was made up of a lease termination gain of $3.1 million [for] Lids store, partially offset by asset impairments and network intrusion expenses amounting to $2 million.

Last year this amount was a charge of $1.3 million for asset impairments and network intrusion expenses.

For the quarter adjusted operating income was $31.4 million or 5% of sales compared with $36.4 million or 6.2% of sales last year.

Adjusted earnings per share in the quarter was $0.81 compared with $0.94 last year.

We ended the quarter with $72 million in cash compared with $40 million last year, and with $33 million in debt compared with $53 million of debt last year.

We did not by any stock during the quarter.

We have about $66 million remaining on the Board's might most recent repurchase authorization.

Inventories increased 15% year over year in the first quarter and were up 8% on a square footage basis.

Even with this increase actual inventories were under our planned inventories for total Genesco.

The inventory increase over last year is mostly in support of our retail business units.

Schuh's inventory is in good shape on a per square foot basis even with the impact of the dollar value from the strengthening of the British pound.

The majority of our retail inventory growth was in Lids and Journeys.

In the case of Journeys the increase represents debt and the product that is driving sales growth was nearly the entire increase concentrated in their top-selling brands.

Finally, in the case of Lids, their square footage is projected to grow about 18% this year including the 175 new Macy's locations.

We are now projecting Lids' retail inventory to be up about 12% to 14% at year end compared to the projected square footage growth of 18%.

We continue to be comfortable with Lids' inventory and are managing down in a way that maximize his gross margin.

Capital expenditures were $19.8 million and depreciation and amortization was $17.4 million for the quarter.

This compares with $17.8 million and $16.4 million respectively last year.

Now turning to our guidance for FY15.

We are maintaining our EPS guidance for the full year at $5.40 to $5.55.

This guidance is subject to the same adjustment as in previous years, excluding impairments, which are of course non-cash and other charges partially offset by lease termination gain in the first quarter, which we expect to total about $2.6 million to $3.1 million pre-tax or $0.07 to $0.08 per share after tax.

EPS guidance also excludes the ongoing Schuh deferred purchase price expense which is expected to be approximately $7.2 million or $0.30 per share in FY 2015.

The final payment amount will be expensed in fiscal 2016 and is expected to be $1.6 million or about $0.06 per share.

Consistent with past practice, this guidance includes the full year accrual for the Schuh contingent bonus built into the acquisition agreement which we currently expect to be approximately $11.6 million or $0.38 per share in FY 2015.

As I mentioned earlier, this should be the final year expensing this contingent bonus accrual and we expect the full amount of the accrual of GBP28 million including payroll taxes to be paid in FY 2016.

Finally, the guidance excludes the one-time charge of $5.7 million or $0.15 per share related to the bonus plan amendment that I mentioned earlier.

In developing this guidance we used the following assumptions: we are assuming a comp increase in the low-single-digits for the full year, including the 1% increase in the first quarter.

As Bob mentioned, we are off to a better start with comps in the second quarter compared to the first quarter.

A more detailed breakdown of the quarterly comp guidance is in my online commentary.

We are expecting an overall sales increase of 7% to 9% for the fiscal year.

Our plan is to open or acquire 168 stores in FY 2015.

This does not include up to 175 new Macy's locations.

Our current plan is to close 51 stores during the year.

We plan to end FY 2015 with 2,656 stores, again, excluding the Macy's locations.

This will be a 5% net increase in stores.

Net square footage including Macy's is expected to be up 8% for the full year.

A detailed summary of our plan for new and acquired stores is included in my financial review on the website.

We are expecting gross margin as a percent of sales to be up slightly for the year.

Expenses will also be up as a percent of sales compared with last year due in large part to added bonus accruals.

This results in a flat operating margin.

Our tax assumption for the full year is 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 for the year of about $149 million and depreciation and amortization will be about $74 million.

Now I will turn the call back to Bob.

Thanks, Jim.

I will begin my review of our operating segments with the LIDS Sports Group where sales comped up 1% for the first quarter driven by the continued strength of our Locker Room and Clubhouse stores and by solid gains at lids.com.

Second-quarter comps for the group were flat through last Saturday.

The Lids Hat Stores are yet to break completely out of their slump.

The appearance of a new fashion driver after the long run with snapbacks is probably what is needed here.

In the quarter Lids continued to see a slight decline in the snapback category, although it remains an important component of the business and overall snapback inventories are in good shape and margins on this business remain healthy.

Turning to Locker Room and Clubhouse stores, comparable sales increased high-single-digits in the quarter as consumers continue to respond very favorably to our broad offering of merchandise for local and top national teams.

And this is especially true on game day when demand for local team gear spikes dramatically.

We have seen this most recently in our major league baseball business in both our Locker Room format locations and team specific Clubhouse stores.

We benefited in the quarter from the Super Bowl given our concentration of stores in the Seattle area, and our New York Yankees stores have gotten a nice lift from the Derek Jeter farewell tour and from the success of Masahiro Tanaka.

We ended the quarter with 129 Locker Room and 32 Clubhouse locations and our plan includes adding a total of 44 new Locker Room and Clubhouse stores through a combination of organic expansion and acquisitions over the remainder of the fiscal year.

We continue to be optimistic about the prospects for our Locker Room by Lids departments at Macy's.

We believe Macy's is providing a great platform to get the Lids brand and the Locker Room concept in front of a new audience that is less likely to visit our standalone stores and therefore that these departments will deliver incremental revenue and profitability.

We ended the quarter with 33 departments, having opened seven this quarter, and will continue to push toward our goal of opening 175 locations this year.

At lids.com comparable sales increased 5% on top of a 29% increase a year ago.

Last year's strong performance was driven in part by demand related to the World Baseball Classic, which is contested every four years among the top baseball nations.

Hence we were up against a small offset.

Excluding sales of country specific merchandise related to the tournament, our core online business was up 9% in the quarter.

We also faced some gaps in our available online inventory in the quarter, which have since been remedied, that impeded sales.

And month to date through last Saturday lids.com sales are up 15%.

We expect long-term growth in the lids.com business to be fueled by the work we have done positioning the website as a one-stop shop for sports licensed merchandise bolstered by our ongoing omni-channel initiatives which we expect to drive improvements in traffic and conversion.

As we've discussed previously, our digital strategy for the LIDS Sports Group is to cater especially to the displaced fan who wants to support his or her favorite teams from out of market.

Our current platform allows us to do this in a number of ways and we are working on additional features to enhance the consumer experience including increased product selection, improved delivery and return options.

So for example, currently our fleet of more than 900 Lids stores and nearly 200 Locker Room and Clubhouse locations make it convenient for customers to do things like return product purchased online in any concept to any local store.

We believe customers will prefer these capabilities delivered through a combination of brick-and-mortar presence and digital offerings which will position us well and offer competitive advantages over pure play retailers.

Right now customer shopping on the various Lids websites via their computers and mobile devices, as well as our in-store kiosks in certain stores, can select from warehouse inventory only.

And we are working on an initiative that will give customers in stores online direct access to the inventory from most of our stores.

We expect to begin roll out of this initiative in phases late in the second quarter.

This ultimately will make available a meaningfully greater number of SKUs to web shoppers since as much as 70% to 80% of Lids inventory is in its stores.

We also expect to launch a new lids.com website and e-commerce platform in late summer or early fall that will feature an updated look and feel as well as enhanced functionality.

The customer will benefit from greater ease-of-use and Lids will be able to offer, among other things, personalization based on the customer's omni-channel history.

These upgrades will also allow the customer to buy online and ship it to the store which will aid Lids in driving traffic to the store.

Now turning to the Journeys Group, total comparable sales were up 1% for the quarter with store sales up 1% and Journeys Direct up a strong 19% on top of a 26% gain a year ago.

Through last Saturday quarter-to-date comps were up 5%.

We are pleased with Journeys' overall performance in the first quarter given the lack of a meaningful new fashion driver in the teen footwear space and we're excited to see what appear to be some positive fashion developments starting to drive a comp improvement in the second quarter.

We are very pleased with the strong digital growth on top of a strong quarter last year.

Traffic was up considerably well into double-digits, primarily through mobile and tablet access, as paid search efforts and additional catalog drops reap benefits for Journeys.

Conversion was also up nicely which contributed to the growth.

The Journeys Group is currently further along than Lids when it comes to its omni-channel capabilities.

Customers have long been able to access the concept's entire inventory position through customer accessible screens in the stores as well as online.

Customers can also check the availability of a specific product before making the trip to a store and of course they can buy online and return to any [store] (technical difficulty).

In addition, Journeys went live on a new order management platform this month which is built on a new systems architecture that facilitates cross channel abilities.

This new system will, among other things, give enhanced order status, tracking and history for better communication with the customer.

During the quarter Journeys opened a new location on 34th St.

in New York City replacing the prior 34th St.

location that we sold back to the landlord last year.

We are pleased to once again have a flagship location in the city and especially one that promises to be as productive and profitable as our previous 34th St.

store.

At Schuh sales trends improved, as we expected, given the easier comparisons.

Comps for the quarter were down 1% compared to an 11% decline a year ago and a 7% decline in the fourth quarter.

Stores were flat while the direct business was down 6%.

The overall improvement in Schuh sales trend is encouraging given the impact of addressing an overstock position in key lines last year, the clearance of which helped direct sales but hurt gross margins.

And we are benefiting from stronger gross margins this year particularly in the direct business.

We are cautiously optimistic that Schuh, like Journeys, may be seeing some early signs of improvement in fashion trends.

Second-quarter comps for the group were up 1% through last Saturday.

Despite the recent lack of a fashion driver Schuh has continued to exceed the pro forma projections that served as the basis for the acquisition and its new stores continue to perform to expectations.

To support further growth Schuh is on track to open a new warehouse in the back half of this year which will give a significantly greater capacity and improved efficiencies.

We are pleased with the way Schuh has built on its leadership position in a down market through its superior product offering and differentiated service model and we look forward to reaping the benefits as the headwinds diminish.

Schuh ended the quarter with 98 permanent locations and they remain on schedule to add a total of 15 stores this fiscal year.

Schuh was a front runner in omni-channel capabilities even before we acquired the business and has for several years been offering customers access to its entire inventory both through kiosks, in stores and through customers' online devices.

Schuh was an early adopter of allowing customers to check online and reserve in-store products so they could reserve product, come to the store and try on these shoes before purchasing them.

Schuh has also taken buy online/collect in store to a new level by guaranteeing pickup within one hour if the merchandise is in stock.

More recently Schuh has been experimenting with extending the cutoff time for next day home delivery customer orders from 6 PM to 10 PM using a strategically placed mini warehouse in England as it seeks to understand customer specific preferences for delivery timing.

As with Lids, Schuh is planning to launch a new website in the early fall.

This will also feature enhanced functionality and, owing to its responsive design, is very much geared to providing the best experience to a highly mobile customer base.

Johnston & Murphy total sales increased 9% which included a 1% comp decline on top of a 7% increase a year ago.

Second-quarter comps through this past Saturday were up 1%.

As we pointed out on our last call, it was a challenging start to the quarter due to J&M's heavy concentration in the Northeast which was hard-hit by winter weather, including major snowstorms in February and March that coincided with the first two catalog drops of the quarter.

Sales trends improved as the first quarter progressed and warmer weather arrived.

One bright spot was wholesale, which was up 10% on top of a 16% increase in Q1 last year.

Another bright spot was non-footwear which increased 14% further validating J&M's position as a lifestyle brand.

And finally, women's was a highlight in the quarter with total retail sales up 40%.

As we renew leases and remodel stores we typically accommodate the women's assortment which is driving the total growth numbers.

J&M is planning to expand its store base by opening 10 stores this year.

As a business J&M has been forward thinking and a leader among retailers in building its digital offerings.

From a position of strength Johnston & Murphy continues to build (technical difficulty) capabilities.

It went live on the same order management system as Journeys in the first quarter and, in addition, implemented a new website platform with an updated look and improved functionality.

Johnston & Murphy has been exceptional at capturing consumer information and purchase data across all of its direct-to-consumer channels for more than a decade.

They have leveraged this data to build long-term relationships with their customers by delivering personalized and relevant messages through direct mail and email and have visibility into activities that originate in one channel but drive traffic to another.

For example emails that drive customers to the stores.

Finally, the licensed brands group posted an 11% sales increase and a double-digit operating margin for the quarter which was also up from last year.

So all in all the year is off to the start we expected and we like the direction in which our businesses are heading and we believe we are on track to deliver improved results in the second half driven by category trends that favor our competitive strengths and the positive impact of our continued focus on enhancing our cross channel initiatives.

We remain confident in our strategic position with each of our major businesses serving a distinct portion of the market with advantages that are difficult to replicate.

And to close, I want to thank our teams, both operators and support functions, for all their hard work and tireless efforts.

It is your commitment to the job, particularly in a challenging operating environment, that is the backbone of this Company and the reason we should all be excited about the bright future that lies ahead.

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

(Operator Instructions).

Steph Wissink, Piper Jaffray.

A couple questions for you.

Bob, if you could just follow up a bit on some of the broader themes that you are seeing in the footwear space.

I don't want to have you (inaudible) your hand but just give us some insights into maybe where those pockets of opportunity are for Journeys here over the next couple of quarters.

And then, Jim, if you could, just for clarification's sake, could you walk us through the Schuh bonus amounts that you're including in your non-GAAP EPS, both last year and this year, just so that we have an idea of what will roll off as we look out into the out year.

And then one more question, if you could just give us some sense on the broader context for Lids, 175 Macy's locations and then some of the Locker Rooms, that roll-up strategy on the acquisition side.

Are you still finding that there are available acquisitions out there or growth to some of the newer areas of the market?

Thank you.

Well, Stephanie, that didn't take long.

As you know, for competitive reasons we don't call out trends or vendors or categories.

So those are the insights I'm going to provide you on Journeys right now.

On Lids, the context for Macy's is that we have the agreement.

We are pleased with the direction it is going and Macy's has been speaking publicly about how pleased they are with it.

So we are excited about where it is headed, we have got seven more locations opened.

It is a little behind the opening schedule that we had laid out for ourselves.

What Macy's does, as you may know, Macy's gives an awful lot of control and discretion down to the store level.

And so, in terms of securing the space for the Lids departments, it is a store-by-store decision process, it doesn't really just come top down.

And we are working to make sure that where we put these locations are in areas where, based on our tests, they demonstrate that they work and we'll be obviously avoiding suggested locations where we know they don't work.

So it is going to take a little time, but we are making a lot of progress, there are a lot of discussions going on at the store level and so we are excited about where that is headed.

In terms of Locker Room and Clubhouse, and primarily Locker Room because we see that as the bigger engine of growth.

Yes, there are still available acquisitions out there and we continue to see opportunities.

We will compare those consistently with the greenfield opportunity, de novo stores.

So expect that we will be doing both in the future.

And so, stay tuned.

And then on the bonus amount, here is Jim.

Yes, on the contingent bonus amount, as you know, there are two acquisition-related items and one we're excluding deferred purchase price and then the one that is included in our guidance is the contingent bonus which you asked about.

So let me give you the answer on that one.

Last year the amount was altogether $13.1 million or $0.43 per share.

In the current year, and we expect this will be the final accrual that we make on this contingent bonus, and this year it is almost $12 million, $11.6 million, and the impact on EPS is $0.38.

So we have got $0.38 of EPS this year from the contingent bonus and we expect there will be zero next year.

Thank you, Bob.

I just want to come back on that first question.

I think you qualified that as casual becomes a bigger percentage of the mix for the balance of the year that helped the Journeys position.

Can you just help us understand what casual is relative to the broader assortments and maybe what types of, not brands necessarily, but types of categories within casual that you are emphasizing?

Yes.

Well, the easy way to sum that is our casual is pretty much everything that is not athletic construction, fashion athletics.

So what happens in the -- and this part we've been calling out for a while, which is the casual portion of the assortment has been comping better than the athletic side of the store for several years now.

So given that there is more excitement around casual, we are excited that in the back half casual becomes a bigger part of the sales mix -- that is driven heavily by boots, so boots are in there.

But there are other vendors and constructions as well that are part of casual.

And in total that has been the higher growth part of the store.

So even as we formed our guidance for this year without any visibility into any other trends we had said we thought we would be stronger in the back half because of that trend.

That is very helpful.

Thanks, guys.

Best of luck.

Sam Poser, Sterne Agee.

I noticed that you trimmed your same-store sales estimates for the full year.

Can you just talk a little bit about the thought process there going from a 2 to 3 comp to a 1 to 2 comp?

It was just being a little more conservative.

I think primarily it was in the area of Lids, which is -- we trimmed that a little bit.

But other than that I don't think there were really any major changes.

There was a slight decrease, maybe a little more conservatism, but it was primarily in the Lids area.

And then you talked about the inventory at Journeys [to support].

Could you sort of talk about the makeup of that inventory that is there, because it is fairly -- it was a little bit higher than what we had anticipated.

Sure.

Sam, we are singing Sam Poser's greatest hits anyway because it represents more depth in some of the key vendors that have been working well historically.

So we have comfort that we are up a little bit in the areas in which we would like to be up.

And part of it is timing, but we are very comfortable with both the size and the mix of the inventory.

And then can you tell us how much you may have then -- and just to continue the song, can you tell us how much you might have over this year to last year maybe narrowed your assortment to be able to do that?

No, I don't think it is as much a narrowing of the assortment as much as where we have provided more depth.

Okay.

And then can you give us some color on your revenue at Macy's right now, sort of more details there?

No, it is too early in the day to do that.

Macy's tests have only gone through one sports season.

And so as we have disclosed before, Sam, the performance of those stores vary widely, and it was primarily driven by how the NFL team did.

So we killed it in Seattle, no surprise.

And it was very tough, for example, in New Jersey, New York market with where the Giants ended up year over year.

So that was one factor.

And the other thing as I mentioned on this call, we learned a lot about what locations work better than other locations.

So you have got a location factor in there, and that is another part of our learning.

But when we have a longer run in this and have more control over sort of the future, then we will give you a little more color on it.

Thanks.

And then I mean just -- I mean you talked about -- you mentioned the category trends, and I know that you don't like to talk about them.

You mentioned boots.

I mean are we seeing a return to -- I mean just in a general sense, are we seeing a return to some of the more [luggy] stuff that was -- which was a big driver of your business back in the 1990s?

Are we seeing a move back that way right now to some degree, and that is sort of what is exciting you, without mentioning any brands specifically?

Sam, as you know, we're not going to -- we are going to keep our competitive advantage as intact as we possibly can.

So thanks for the question, but I will decline.

Thank you.

You are welcome for the question.

Well, good luck, thank you.

Steve Marotta, C.L. King & Associates.

Could you please comment from Lids' standpoint what percent of sales in the first quarter were snapbacks, and what the inventory ended up as a percent of inventory?

And if you could compare and contrast that over last year, that would be helpful as well.

Yes, look, the percent of sales -- and when we do snapback category, it includes snapbacks -- we have this other line called strapback, so it is the same concept with a strap rather than a snap.

So just be clear we will talk about that whole thing.

It runs in the high teens on sales and it is down slightly from where it was last year as a percent to total.

Inventory is a lot less than that.

It is either low single digits or high single digits, depending upon what kind of receipts we just brought in.

But that is kind of the ratio.

So think of it as high teens and low single digits of inventory.

So it is turning fast.

We are keeping it very lean and we think it is very well positioned in terms of having depth and the items that are selling well.

That wasn't true a year ago and we had gone through, right about this time, some clearance on the snap styles that weren't working well despite the fact that the category was hot.

And you will remember we had called out a year ago how it had narrowed down to a few teams and colors.

And so, that is where we are with our inventory now.

So we feel good about where we are and the margins are solid.

The increase that we talked about in Lids inventory is not being driven by snapbacks in any way, it is some of the other stuff.

So it is not an area of concern at all for us.

We think we have got the balance between sales and inventory in line and we continue to do that.

That is great.

One other question as it pertains to Derek Jeter's retirement, do you plan on that being a comp tailwind for the chain through the second and third quarter?

He is a national figure, I mean obviously a local hero, but certainly a national figure.

Do you think that that will reverberate across the chain?

Look, we think it is a very nice gift to us that Derek Jeter decided to retire in style.

But we haven't exclusively weaved it into our numbers.

We have a comp of assumption.

Lots of things happen in sports, some of them good, some of them bad.

Jeter's is obviously one of the good things, but we haven't sort of taken the comp number and moved it exclusively for Jeter.

Okay, that is helpful.

Thank you very much.

Mark Montagna, Avondale Partners.

Just following up on the Journeys assortment.

You said that it is not being narrowed.

But I am wondering what about the vendor count, are the brands being narrowed at all?

You know, on the margin I don't even know the answer to that.

But the number of vendors who make up 80% of the store is at a similar level to where it has been over the last few years, there's not a huge change there.

And that store does operate with sort of an 80/20 rule.

So I can't give you the answer on vendor count down to the tail end of the assortment.

Okay.

I mean at most it is a rounding error then?

Yes.

All right, so then a quick question on inventory.

When you talk about per square foot up 8%, are you including e-commerce inventory given that you are in omni-channel?

No, and that is one of the items that drives the inventory a little higher than on a square foot basis.

Because when we look at the inventory we are not discreetly taking some inventory and saying well, let's move that aside because that is the Web inventory.

Okay.

And then just a last question, Bob, as you probably know, student attendance at a lot of college football games is declining, in some cases pretty dramatically.

Is that altering the way you are approaching some of the school -- or some of the stores that are close to the universities in maybe your stadium approach?

Or how is that impacting the world for you?

You know, the business for us is driven a little more by almost fashion.

I don't mean fashion meaning Vogue, I mean what do kids like to wear, and college hats, when you're in college, is still part of your gear whether you are going to the game or not.

It is a little less of a game day kind of thing for the college student.

The thing about college, which if you have a longer horizon on our business, is college hats were -- they were the snapback of this business in the 1990s.

And one college in particular was driving it, it was North Carolina.

And so we go through these cycles of what is hot in the hat business and that is a bigger factor for us than whether kids are going to the football games or not.

And college is probably as low as a percent of total in the hat stores as it's ever been, it is just not on trend.

So what we have is the baseline of kids who wear those hats to celebrate their school, but as a fashion item it is kind of become a non-event and it has been handed away to major-league baseball and NBA and Action Sports.

Okay, perfect.

Thank you.

Mitch Kummetz, Robert W Baird.

Jim, we appreciate the comp guidance table in your script.

I do still have a couple questions though, one on Lids.

You did mention, I think in response to Sam's question, that you did trim your comp outlook there for the year.

I'm just wondering what prompted you to do that.

Are you just not seeing kind of maybe the pickup in the fitted business that you were hoping for earlier in the year?

If there's anything kind of specific to that change in the comp outlook.

Yes, that is it.

We called it out and said we are still sluggish in the hat stores and at this point we will continue to be in the snapback business and have a continued run on it.

But it is becoming kind of old news.

And so, we think we need a new fashion trend of a meaningful size there to get excitement in the hat stores revved up again.

And we don't have visibility on that at the moment.

And so, that is the basis of the caution.

What impact could some of your omni-channel initiatives at Lids have on kind of a pickup in the direct business in the back half?

Is that -- is there any outlook there?

Well, what we are doing in omni-channel -- the single business thing that is going to be going on with Lids is what we called out.

So they right now rely on warehouse inventory which at this point is becoming old school.

And they are in the midst of the systems project that will get our website showing all of our inventory.

That is going to be a huge change in terms of what you will see on the website, because at the end of a -- particularly at the end of a sports season we will push out a lot of the remaining product to the top stores for those teams.

And as soon as that happens it comes off of the website.

And so, the guys have done the math periodically that said at this point in time how much more SKUs will be added.

And every time they do it it is a huge number in terms of the percentage increase of what will be shown on the website compared to what we show now.

So that project is underway and it's a little trickier to execute than I think the casual observer might think.

And we have a great experience with Journeys and Schuh and Johnston & Murphy all having been through this, is that you have to be able to then execute at the store.

So if someone wants to buy a given Yankees jersey and it is sitting in a Locker Room store, someone from that store needs to be responsible enough to, on that same day, pull that unit, pack it and get it out with the shipper.

And so what Lids is going to do is they are going to bring on a small number of stores at the beginning to make sure operationally they have figured it out.

And then they will start to expand it and their target number of stores.

Not every store will participate.

Their target number is in the 800 -- 700 to 800 range.

But we are going to phase our way into that because the last thing we want to do is not execute at the store and disappoint customers.

So the tricky part we are talking about trying to give you guys a target of how long it will take to have 800 stores up.

And Ken Kocher who runs it discouraged us because he said, look, it is going to depend on how clean our execution is.

So if it is really clean we can probably do it quickly and if we run into operational issues we are going to take our time.

So we are hopeful obviously that it will happen more quickly.

And not every store will participate, unlike Journeys and Johnston & Murphy, because our store footprint in Lids sometimes is -- it goes from small to absolutely tiny with no back room.

And without a back room this is probably not easy to execute.

So that is another factor that they are going to work in which is what is it going to take to get this done.

And then there is a staffing challenge because we are often single staffed and we will have to decide how to get this done in a single staffed hat store in particular.

So lots of issues, there is the color on it.

Okay, one last question on Journeys.

Given weather we've obviously had a slow start to the spring season, some other footwear retailers have commented on weak sandal performance, strong canvas performance.

Given how you guys are inventoried in what you might call weather dependent categories, how do you feel about the second quarter from a margin standpoint?

I mean, do you feel like you are not in a position where you are going to have to liquidate a bunch of inventory or maybe you are not susceptible to a lot of promotional environment as other retailers are liquidating inventory?

How do you think about that?

We think we are in good shape.

The wildcard on that, as you said at the end of your question, is other retailers.

So we would have some exposure to other retailers going hog wild if their inventory position is tough.

But we are feeling like we are okay.

Okay, thanks, good luck.

Jill Nelson, Johnson Rice.

A question on Lids.

I know the operating profit has been under some pressure.

Maybe you could just delve a little bit more into the 100 basis point decline in gross margin there.

And you also called out higher rent being a pressure in the quarter.

Right, well remember what we are doing in Lids first of all is the majority of the growth that is going on at Lids is in Locker Room and Clubhouse on the retail side.

And in that business we have really high expectations for it when we get to scale.

And so -- and we are seeing really nice improvements there.

But as you grow a lower operating margin business, and it is -- it is got a lower four wall than our average hat store.

As you grow that you are going to have a downward pressure on the total operating margin.

And that is just the commitment we have made to try and build out this opportunity that in the short term the operating margin goes down.

Now what we need to make happen is the overall operating income needs to grow and so -- and we've got those challenges in the hat stores that are putting some pressure on that thesis.

But don't expect that while we grow Locker Room that you're going to get big increases in operating margin because of the mix change.

And I will ask Jim to add more color.

Yes.

This is a key point throughout the year for us, really for Lids and really for the total Company in that in the first quarter our square footage is -- I'm not sure we broke it out, but it was up for Lids by itself 10% to 11%.

And so, if the square footage is up 10% to 11%, normally you think that your normal square foot -- your normal rent expense would go up a little above that.

In the case of Lids it did not.

So their rent was up about 10% to 11%, which was about flat with the square footage increase.

Well, what happens with that, you've got a sales increase 10% or 11% or you deleverage.

So we are growing square footage a lot.

The first quarter is not particularly a strong quarter for us.

We've really got to look at the full 12 months.

From a seasonality standpoint it is hard to lever to those kinds of rent increases, but hopefully over a 12-month period you can come pretty close.

But on the other hand, as Bob said, in the Locker Room business particularly, and that is where the growth is coming, you've got about a three-year maturity cycle.

So you are not going to hit the same kind of leverage numbers in the first year, so that hurts you.

So you've got two things going on in the first quarter: one is the maturity cycle; the second is the seasonality.

But on top of that -- but in addition to that we feel really good about the rent increase because it is basically equal to the square footage, but it was, again, 10% to 11% and sales weren't up that amount.

So we deleverage.

Okay, and so the bulk of the gross margin pressure was mainly just the mix with Locker Room and whatnot, is that the best way to think about it?

Yes, it was that on that, but also there was some increase in our shipping costs, which made up some of that -- our shipping warehouse cost is in gross margin, which I talked about earlier, which for the total Company really made up the 20 to 30 basis points drop in gross margin, and that was really caused by increased shipping and warehouse costs.

In the case of Lids, part of that increase was caused by increased warehouse and shipping costs which came about through two things.

The first thing is that there is additional cost in the warehouse right now and staffing for the Macy's and also in Locker Room, it is costing a little bit more for shipping apparel.

In addition to that, we are in the process too of kind of transitioning into a new warehouse.

So there is some duplication of cost in the new warehouse versus the old warehouse, so that is contributing to it.

And so, part of the reduction in gross margin was due to increased shipping and warehouse costs.

And last question, just kind of if you could talk about new store performance going here -- just given the whole online thread or how online is growing as a course of retail, how your new stores are performing and kind of your expectations?

Thank you.

Yes, on balance our new stores are doing well.

The beautiful thing about the dynamic in the marketplace is with traffic pressure on part of the mall universe that also presents rent pressure in our favor.

And so, we are able to find deals that make sense for us.

And over the last four or five years you have really been able to see it on renewals, so that is the best test.

But we are seeing -- and particularly in the concepts where we are growing.

So you look at the Locker Room expansion, you look at what we are doing with Schuh and those are performing to standard very nicely.

Journeys Kidz is another big area where we are growing and we are really picking up the pace at Johnston & Murphy.

So, we review new store performance regularly as we go and make our commitments.

So we wouldn't be opening all these stores if we didn't have good evidence that it is working.

Thank you.

Pamela Quintiliano, SunTrust.

Thanks so much for taking my question, guys, actually a few of them.

So, sorry if I missed this one, but can you just talk about how big a deal weather was for you guys versus obviously lackluster mall traffic, lack of fashion, just how we should think about that and also mall versus off mall performance?

Well, the weather obviously hit the business like everybody else, and the question is do people come back and finally spend the money that they have in their pockets.

So it is very tricky stuff.

Our comp number for the quarter is the comp number.

I mean the one that really I think didn't have a chance to recover was Johnston & Murphy, and because they had some very unfortunate timing.

They drop catalogs and know that it drives a big chunk of their store traffic, it isn't just driving digital.

And they know that the react time on a dropped catalog is a pretty short period.

So when you drop a catalog into a snowstorm it is an unfortunate timing and probably our sales that you don't -- lost sales that you don't completely recapture.

But is kind of hard to hang your hat on weather for the short performance anywhere else.

People have in their pockets what they're going to spend and they generally spend it.

In terms of the mall versus off mall -- looking not just in the quarter but on the longer period, the top malls are the top malls and they are doing well and then the middle malls and then particularly the C malls are more challenged.

And what we're doing is we are seeing rent adjustments coming our way that allow us to keep pace on profitability pretty nicely.

And we spend a lot of time reviewing our position in the mall and reviewing the mall's occupancy and matching it up to our lease covenants and taking advantage of benefits we get out of that.

We don't have a lot of off mall.

We have some street stores and we have airports, but almost not enough to really make a decent comparison.

So we are pretty much exposed to the mall.

And then when I think about the consumer, particularly the teen, with the challenges out there from the macro perspective and mall traffic issues as you were discussing, just -- is there any change the way you approach that Journeys customer in terms of marketing or events a way to reach out to them?

Oh, absolutely.

And that is why in particular the omni-channel strategy at Journeys is so important, because the teen more than anyone is so social media driven.

And so, the kinds of things we are doing is first just building the capability to offer cross channel shopping and very targeted communications.

But we are also out in the marketplace doing collaborations to get the Journeys name positioned in front of these teenagers so we are a sponsor on the bands' warped tour which really put our name out in front of them and we are doing other things in the music space.

And so that is a big part of it.

And another part of what we do is our stores -- if you ever shop our stores, which I hope you do, you will see that we are very hooked to peer-to-peer selling.

Our store employees are peers, and not just peers in terms of age, but the typical Journeys store person is someone who is really out there on the fashion curve, and so represents the brand and communicates with those teens who do come to the mall.

I mean the shopping and the mall is not going away.

Overall traffic numbers are down, but purpose shopping -- purpose shopping is what we are really after and our ability to close.

So we are very service oriented in the way we are approaching the teens.

And just as a follow up to that, because I know you guys have always been -- you do those sponsorships and have been -- always go out there approaching the teen.

But just given currently the environment in what seems to have been a very challenging 1Q for a lot of the mall-based retailers out there, were you able to flex anything?

And I'm not asking what it is.

But internally were you able to kind of quickly respond or react so that for 2Q you have become more aggressive?

Or is it just more of a continuation of your philosophy?

Well, I think we are continuing to evolve as a Company.

But when we talk about the challenges in the mall, let's be clear, the challenges have largely been in the teen apparel space.

And you can probably make the case that that space has become over stored and lack of fashion drivers, so those two items have made it very difficult for all the names in that space.

The footwear space is much less crowded.

We believe that Journeys has a very defensible advantage, it is the only national footprint retailer doing what we do.

And so, we think that is why we have always been confident and excited about having a brand like Journeys because, unlike a lot of the other people in the teen space, we believe we have a clear defensible competitive advantage.

So you think the teen is still engaged?

That is where I was going with (multiple speakers).

Oh, my gosh, yes.

Because it is interesting when I am doing my channel checks I'm just not seeing the teens in the mall that much period, which I know is the omni-channel, why you go that route.

But the question of just teen engagement which brings me up to my last question is -- you mentioned the apparel guys.

There has been a lack of apparel trends out there; supposedly that is improving.

What does that do for you on the footwear side if there is traction on the apparel?

Age-old question.

On the plus side you would say if there is a new look in apparel that it drives footwear demand because it -- people need to match up their footwear to the new apparel.

And the counter argument is that if they are not spending money on apparel that is more money to spend on footwear.

I have never gotten comfortable on which one of those is the answer.

We will take either one, we want both.

Right now, look, we have been -- as a Company we have come off -- we had a number of quarters that were tough for us, we are I think emerging from it.

You see it with the comp in the first quarter and a very nice start to second quarter.

So based on just our numbers and we are very, very teen oriented in Journeys.

So we are seeing at least enough kids coming to the mall to drive a plus 5% in May so far and that is a good thing.

Great, thanks so much.

Best of luck.

Taposh Bari, Goldman Sachs.

Good morning, guys, nice start to the quarter.

Just a question on the guidance.

So you trimmed your comp guidance this quarter again like you did last, yet last quarter you took down your EPS guidance from your prior.

So I am curious as to where you are making up that difference this time around.

Well, we were -- let's say we were maybe being a little conservative the first time plus we picked up a little more leverage than we anticipated.

So a little bit there, a little bit there, but it was a little bit of leverage.

Maybe in our forecast we were a little too aggressive in terms of increases in costs and we think that based on where we are right now, even with -- and again, it was a very minor change if you really look at -- adjust for all the rounding errors on the comp.

But we did adjust the comp down a little bit, we picked up a little bit more in the relationship between comp and total sales.

So it all adjusted out and we ended up about the same place from an operating margin standpoint and from an EPS standpoint, adjusted all out and we ended up with the same kind of guidance.

And again, we got a range of $5.40 to $5.55, but still, even though we trimmed it a little bit with all the adjustments within the P&L it all ended up in the same place.

Okay, that is helpful.

Second question is on Journeys, kind of multi-parter.

So you are assuming acceleration throughout the year on comp.

I guess, A, how confident are you in that recovery especially with what is going on out there at some of your athletic footwear competitors?

And then the second part of that question, is the comp acceleration there strictly kind of a math issue where you are further distorting the mix towards casual?

Or is there something that you are actually seeing on the horizon related to new brand, style, silhouettes, etc.?

Well, to be clear we haven't changed the outlook on Journeys' comp from where we had it in the original guidance.

So, as we mentioned on the call, we are seeing some new fashion drivers we haven't anticipated.

But we don't have enough visibility on that yet to roll it into the guidance.

So I just want to be clear on that.

So the original -- and you are right, there was an acceleration in the comp guidance originally and that was driven by several years of history that says we continue to move into more casual, which is where we are more differentiated.

And with casual comping up and casual being a bigger percent of the back half, that gave us confidence that the back half would be stronger than the front half.

Okay.

And last one for you, Jim, is SG&A.

Can you help us understand -- I mean, just if you could provide some color as to how we should think about the quarterly cadence of SG&A, whether that be in basis points or dollar growth.

Just because of the fact that 1Q did seem like it came in higher than expected, so any guidance there will be helpful.

Thank you.

Yes, I am glad you asked that question because I wanted to get this out.

In the first quarter the Street was higher than our number and I think that when -- we talked about the guidance for the full year in March we emphasized the cost expense issues that we were facing in the first half.

And I think some people got that message, some people didn't.

But I want to be very clear, that the issue on expenses, and if you look at the negative leverage that we got, even though the comps were not extraordinarily highlight, the reason why there was negative leverage was because of the bonus accrual.

And as Bob said and I touched on it, last year we had reversals, this year we are adding to it, okay.

That was the majority of the change in SG&A.

And that kind of basis change in SG&A will continue for the balance of the year up until the fourth quarter.

And the fourth quarter won't be quite as much because sales are so much larger.

But again, from a pressure on SG&A over the next three quarters, the issue from a bonus standpoint will continue.

So when you're looking at SG&A, we will not leverage for the next three quarters, and the reason primarily will be the EVA bonus accrual change this year versus last year.

So just so I am clear, the SG&A was up $22 million year over year, you are saying the majority of that --.

I'm talking about percentage -- I'm talking about percentages --

Percentage.

-- percentage of sale, that is how we are looking at it.

In terms of increase in SG&A, I don't really think of it that way because it is all, to a large degree it is driven by what is happening with sales.

So I am just saying from a leverage standpoint I define that to be SG&A as a percentage of sales and the deterioration we saw this quarter was due to the bonus accrual, that will continue for three quarters and is built into our guidance.

At the same pace?

Or does the pace moderate as you get into the back half of the year?

The same general basis point difference.

Okay.

Thanks, guys, good luck.

That does conclude all the questions that we have for today.

Great.

Well, thank you very much for joining our call and we look forward to talking to you in three months.

That does conclude today's call.

We thank you for your participation.