Genesco Inc (GCO) 2015 Q2 法說會逐字稿

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

Just a reminder, today's call is being recorded.

Participants on the call expect to make forward-looking statements.

These statements reflect the participants' expectations as of today, but actual results could be different.

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

Participants also expect to refer to certain adjusted financial measures during the call.

All non-GAAP financial measures referred to in the prepared remarks are reconciled to their GAAP counterparts in the attachments to this morning's press release and in schedules available on the Company's home page under Investor Relations.

I will now turn the call over to Bob Dennis, Genesco's Chairman, President, and Chief Executive Officer.

Good morning and thank you for being with us.

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

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.

Also joining us today is Mimi Vaughn, our Senior Vice President of Strategy and Shared Services, who will provide a brief update on our ongoing omnichannel and digital initiatives.

I will begin today's call with remarks about the second quarter and our start to back-to-school.

Then I will turn the call over to Mimi for her update and Jim will follow with his usual review of the numbers and guidance, and after that I will return to give a little color on our operating segments before opening up the call for your questions.

We were disappointed with our second-quarter earnings per share of $0.34.

Broadly speaking, solid comp performances from Journeys and Schuh helped us achieve our top-line projections.

Our consolidated comp sales were up 2%, with stores up 1% and direct comparable sales up 13%.

We are particularly pleased with the strength of our direct business, which is benefiting from the ongoing investments in our digital platform and omnichannel capabilities.

Unfortunately, all of this wasn't enough to offset a shortfall in sales and gross profit in the Lids Sports Group against our expectations.

With respect to year-over-year comparisons, about half of the lower second-quarter profitability was driven by a swing in compensation expense related to bonus accruals.

Our EVA bonus program resulted in large reversals of prior-year bonus accruals in the second quarter last year than this year.

Additionally, the accrual related to the contingent bonus arrangement in the Schuh acquisition increased in the second quarter this year.

We have a solid trend going on this month.

Through last Saturday quarter-to-date comps were plus 4% with stores up 4% and direct sales up 10%.

Results this month continued to be strongest in our Journeys division.

The business is getting a boost from some new fashion developments that first emerged in spring and continue to gain pace.

Similar trends are playing out at Schuh, where comps were positive in the second quarter and have accelerated month to date.

It is important to note that the second quarter is our lowest volume quarter of the year and as such it is exposed to high fixed costs and a shortfall in sales or gross profit can produce large percentage swings in earnings, as we just experienced.

We are essentially a second-half company.

Our guidance presumes 75% to 80% of our profits come in the third and fourth quarters.

So while we are disappointed with our second-quarter profitability, we still have a long way to go in the year.

And for reasons we will outline for you during this call, we still expect a solid back half performance, although with slightly lower expectations primarily related to Lids.

So to reflect the Q2 miss and these more modest expectations, we are lowering our guidance for the year and now expect adjusted EPS in the range of $5.10 to $5.20.

We continue to feel our longer-term future is compelling given the strong strategic positioning of our brands.

This strong position is being enhanced by the numerous digital and omnichannel initiatives that we have outlined in our last few earnings calls, which Mimi will now update.

Thank you, Bob.

As Bob indicated, we are delighted with the stellar performance of our direct business.

The double-digit increase this quarter follows three consecutive years of double-digit growth.

In particular, mobile traffic has increased considerably to our mobile optimized sites and we have been converting customers at a rate that has exceeded our expectations.

Last year direct accounted for 7% of overall retail sales and we anticipate it will grow by double digits again this year.

Notably, we run our direct business to deliver strong profit.

We have not sacrificed profit just to chase market share.

Importantly, our digital capabilities also allows us to better serve the customers in our stores.

Strategically, we have been committed for several years to serving our customers in whichever channel they choose to shop.

And when they choose to interact across channels, we are working hard to make that a seamless experience.

We were fortunate to have a legacy catalog business within our footwear company.

This gave us a big head start versus retailers who chose to build web stores with independent systems and then had to merge them.

While our initiatives are wide-ranging and numerous, we will highlight today three critical areas to omnichannel's success: a single view of inventory, a single view of the customer, and our efforts to get product distributed quickly once an order has been placed.

To begin with a single view of inventory, Schuh is farthest along with the most extensive omnichannel capabilities in our company and has reached a new level by having visibility of its inventory everywhere in real time.

This enables advanced offerings such as click and collect, where customers purchase shoes on the website and, if the shoes are in stock, can come pick them up in the store within the hour, and check and reserve, where they can reserve shoes on the website, get a confirmation email, and come in and try them on before making the purchase.

These capabilities are in demand by customers and, importantly, drive traffic to the store.

As such, we are working to implement them in the rest of our footwear concepts.

Journeys and Johnson & Murphy stores have for a long time been able to access the entire inventory of their respective concepts.

Journeys has taken this one step further and provided access to product held in one of its vendors' warehouses and will be expanding this capability to include more of its vendors.

In addition, in Journeys, Schuh, and J & M today, customers can go online and check store availability for product and sizes before making the trip to the store to purchase.

Lids plans to roll out on a select basis the ability to access inventory in the top 200 stores in the back half of the year.

This will be valuable for the Lids in-store shopper.

For example, 5% of Journeys in-store sales last year were made by accessing inventory and other stores or in the DC.

This ultimately will be a tremendous improvement for the Lids online shopper as well, since as much a 70% to 80% of Lids' inventory is in its store and its localized SKU count is so high.

Now, moving to a single view of the customer.

Customers want to be able to purchase online and then, if necessary, return or exchange items to a store.

They can currently do this in all of our concepts.

Nonetheless, we took steps to improve this interaction, implementing a new order management system which went live in J&M in the first quarter and in Journeys in the second.

This new system gives enhanced order status, tracking, and history, and provides robust updates to the customer and will make returns in the store easier.

This system populates a database that is the repository for digital and physical purchases.

We have visibility into actions that originate in one channel that drive traffic to another.

For example, we know direct customers receiving a Journeys catalog in a recent drop subsequently made purchases 60% of the time in stores and 40% online, capturing activity across channels.

J&M is our front-runner here and has been exceptional at gathering customer data.

It currently captures in its store information for more than two-thirds of its customers.

J&M leverages this data to deliver personalized messages, suggesting items to customers they would be interested in and, thus, driving sales.

Journeys is catching up and expects together close to 1 million customer email addresses in stores this year.

Now, on distribution capabilities, Lids is our innovator here and is in the midst of installing robotics in its new DC.

Robotics enable faster, more efficient pickings, particularly for single order picks.

We are also testing faster delivery options and Schuh sets the standard.

We have discussed Schuh's mini warehouse in southern England that extends the cutoff time for next-day delivery from 6 p.m.

to 10 p.m.

Today this warehouse shipped almost 10% of Schuh's e-commerce orders.

Schuh will be piloting next-day delivery on Saturday for Sunday and Sunday for Monday and currently allows customers to receive deliveries via couriers, in collection depots, in local convenience stores, and even on the day of their choosing.

Digital has unlocked for us exciting possibilities that were never before available in our stores or online and will differentiate the experience we are able to offer our customers.

We were experimenting with responsive web designs, in-store Wi-Fi, tablets and kiosks for interactive ordering in stores, and mobile payments made in the store away from the cash wrap, among others.

Our digital teams have been busy and their efforts have paid off in the strong results we have realized.

All of this underscores what we know is a key strategic advantage, having both bricks-and-mortar and a dynamic digital presence.

We continue this work and are investing for sizable gains in our e-commerce business in the years to come.

I will now turn the call back over to Bob.

Thanks, Mimi.

We make a big deal about omnichannel, not only because purchases directly off our websites are growing so nicely, but also because we believe our brick-and-mortar stores will become better, more compelling destinations for our customers as a result of this work.

Now Jim Gulmi, over to you.

Thank you, Bob.

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

Earnings per share, adjusted as we breakout in the press release, came in at $0.34, which is below our internal projections for the quarter and below last year when adjusted EPS was $0.56.

As Bob said, about half of the year-over-year difference was driven by a swing in compensation expense related to bonus accrual.

Most of the miss versus our expectations came from a failure to realize a planned gross margin improvement at Lids.

I will discuss the factors that impacted our bottom-line performance in more detail during my remarks.

Total comp sales increased 2% for the quarter with stores up 1% and the direct business up 13%.

Journeys, Johnson & Murphy, and Schuh all had positive comps in the quarter and each delivered improved trends compared with the first quarter.

The Lids business struggled with total comps down 2%.

Consolidated net sales for the quarter were $615 million, an increase of 7%.

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

Month-to-date total comparable sales through August 23 increased 4%, which includes a direct comp sales increase of 10% and a store comp increase of 4%.

As I mentioned, the bottom line shortfall versus our expectations for the quarter was mostly a gross margin issue.

Gross margin in the quarter was 49% compared with 49.2% last year.

While gross margin was essentially flat with the year-ago levels, we had budgeted an improvement driven primarily by a pickup in Lids gross margin.

This did not materialize through a combination of lower-than-expected sales, higher promotional activity, and higher shipping and warehouse costs than we had expected.

Adjusting for all the items broken out in the press release, expenses as a percent of sales increased to 46.8% and 45.4% last year.

Almost 50% of the increase in expense as a percent of sales was driven by lower EVA bonus accrual reversal compared to last year and a higher contingent bonus expense related to the Schuh acquisition.

The remaining amount was driven in part by negative rent leverage as we were not able to leverage rent with a 1% comp increase in our stores.

This should improve in the back half when we are expecting store comps of about 2%.

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

For the quarter, a contingent bonus accrual of $3.2 million reduced EPS by $0.11 compared to $2.3 million, or $0.07 per share, last year.

We expect to fully expense the remainder of this contingent bonus in the amount of $12 million, or $0.40 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 $2.2 million, or $0.09 per share.

Last year the amount expensed for the quarter was $2.8 million, or $0.12 per share.

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

Also consistent with past practice, we have excluded asset impairments, gains from the sale of leasehold interest, and other legal items from our non-GAAP guidance and results.

The amount expensed this quarter was approximately $1.4 million pretax, $0.05 per share, due to other legal matters and asset impairments.

The amount last year was a net gain of about $2.2 million, due in part to the net gain on the sale of a leasehold interest offset by other legal matters and asset impairments.

We ended the quarter with $59 million in cash compared with $46 million last year and with $76 million in debt compared with $73 million last year.

We did not buy any stock during the quarter; therefore, we have about $66 million remaining on the Board's most recent repurchase authorization of $75 million.

Inventories increased 7% year-over-year in the second quarter, in line with the 7% sales increase.

Inventories were under our plan for total Genesco.

Capital expenditures were $32.9 million and depreciation and amortization was $18.4 million for the quarter.

This compares with $19.4 million and $16.5 million, respectively, last year.

Year-to-date we have opened 123 stores, including 69 Macy's locations, acquired 19 Locker Room stores, and closed 36 stores.

During the first six months last year we opened 73 stores, acquired seven Locker Room stores, and closed 51 stores.

Our store count is up 7.5% this year and excluding Macy's increases 3.7%.

Square footage is up 8% and, excluding Macy's, increases 3.7%.

Square footage is up 8% and, excluding Macy's, it is up 6%.

Last year the store count at the end of the second quarter was up 3.5% and square footage was up 8% compared to the prior year.

Now turning to our guidance for FY 2015, as Bob said we are lowering our EPS guidance for the full year to $5.10 to $5.20.

This reflects a shortfall in the second quarter and the lower projections for the Lids group in the back half, particularly the third quarter, which we now expect to come in essentially -- where we now expect to come in essentially flat with last year from an EPS perspective.

This guidance is subject to the same adjustments as in previous years.

Excluding impairments and other legal matters, partially offset by a lease termination gain in the first quarter, which we expect will total about $3.2 million to $3.7 million, or $0.08 to $0.10 per share after-tax.

EPS guidance also excludes the ongoing Schuh deferred purchase price expense, which is expected to be approximately $7.4 million, or $0.31 per share, in fiscal 2015.

Final amount will be expensed in fiscal 2016 and is expected to be $1.6 million, or about $0.07 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 $12 million, or $0.40 per share, in fiscal 2015.

As I mentioned earlier, this should be the final year expensing the contingent bonus accrual and we expect the full amount of the accrual, GBP28 million, to be paid in fiscal 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 we discussed in the first-quarter conference call.

Let me briefly review the assumptions behind the updated guidance and point out the more significant changes to our May guidance assumptions.

We are assuming a comp increase in the 2% range for the full year.

For the first half, total comps were up 1% and we are expecting comps in the 3% range in the back half.

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

We are expecting an overall sales increase of 7% to 8% for the fiscal year and 8% to 9% in the back half.

Our plan is to open or acquire 165 stores in fiscal 2015.

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

Our current plan is to close 45 stores during the year.

We plan to end fiscal 2015 with 2,662 stores, again excluding the Macy's locations.

This will be a 5% net increase in stores.

Square footage, excluding the Macy's locations, is expected to be up 7% for the year.

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

We are now expecting gross margin as a percent of sales to be flat with last year for the full year.

We have taken gross margin down about 50 basis points for the full year from our last guidance update in May.

This is driven primarily by Lids, where we are now anticipating increased promotional activity and higher shipping and warehouse costs than we had originally planned.

Expenses as a percent of sales are essentially flat with our earlier guidance.

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

This results in operating margin of approximately 7.1% for the year.

Our May guidance expected operating margin was flat with last year at 7.5%.

Our tax rate assumption for the full year is approximately 37.3%.

We are assuming average shares outstanding of approximately 23.7 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 $147 million and depreciation and amortization will be about $75 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 down 2% for the second quarter on top of a 3% decline a year ago.

Third-quarter comps for the group were plus 3% through last Saturday.

Second-quarter sales trends in the hat stores were choppier than expected and gross margins were down slightly from last year while we had expected to see some gross margin improvement.

We had anticipated better full-price selling than a year ago when Lids was forced to get more promotional to clean up their snapback inventory.

In reaction to softness in sales in the quarter this year, the team reverted to a similar promotional cadence.

A factor in the second-quarter performance were unfavorable NBA and NHL championship comparisons.

San Antonio Spurs and the Los Angeles Kings drove far fewer sales this year than the Miami Heat and the Chicago Blackhawks last year.

As in recent quarters, the broader issue for Lids continues to be a lack of meaningful fashion driver in the hat category.

Despite the tough quarter, we are cautiously optimistic about the hat stores delivering improved results in the back half of the year, but have hedged that optimism in our revise guidance.

Turning to Locker Room and Clubhouse stores, comparable sales were down mid-single digits in the second quarter after a strong first quarter that benefited from the Seattle Seahawks Super Bowl win.

The Spurs and the Kings championships had an even more pronounced effect on the Locker Room stores than on the hat stores, partly due to our concentration of Locker Room stores in the Chicago market.

Looking ahead, we feel good about our NFL offering in the second half.

However, we want to point out that the Red Sox Cardinals World Series matchup was helpful last year and, therefore, should two less well-followed teams make it to the series this year, we could have some exposure.

We continue to be excited about the growth prospects we see for our Locker Room and Clubhouse concepts and remain on target at 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.

During the second quarter we acquired a 19-store chain in the Ohio and Kentucky markets, which represents good timing given Manziel and the Browns and LeBron's return to Cleveland.

We opened 62 more Locker Room by Lids departments at Macy's during the quarter, bringing us to a total of 95 departments in operation at quarter end.

We continue to view this as a good opportunity to reach consumers that wouldn't typically shop our standalone Locker Room stores.

We are on track to hit our target of opening 175 departments by year-end.

In addition, we are seeing nice early growth of our business at Macys.com as we load their site with our SKUs.

At Lids.com, comparable sales increased 10% on top of the 25% increase a year ago.

The direct business quickly bounced back into double-digit growth territory, albeit slightly more promotionally driven.

The work we have done positioning the website as a one-stop shop for licensed merchandise combined with our ongoing omnichannel initiatives continues to yield improvements in sales.

We expect further improvements from a new e-commerce platform which we currently expect to launch in the second half.

Now turning to the Journeys Group, total comparable sales were up 5% for the quarter with store sales up 5% and Journeys direct up a strong 31% on top of the 21% gain a year ago.

We are very pleased with Journeys overall performance in the second quarter as positive fashion developments we called out on our Q1 call in late May gained further momentum in June and July.

As we head into the back half of the year we expect that the positive trends in non-athletic footwear, which has been a clear point of differentiation for us during the past several back-to-school and holiday periods will fuel improved results of Journeys over the same period a year ago.

But we also expect that the recent newness on the athletic side will be a meaningful complement to growth, which we haven't experienced during the holidays in some time.

Quarter-to-date comps for the group were up 5%.

With respect to the digital business, traffic trends remain very strong, up well into the double digits again this past quarter, driven in part by increased mobile and tablet access.

Our higher conversion rate also contributed to the sales growth.

Journeys recently completed a multiyear study of the US teen consumer and we think spending a few minutes on this work is worthwhile.

Much of the feedback confirmed the strength of the Journeys brand and our understanding about our target audience, and yet there were important new insights that will help shape the future direction of this business.

First, we reaffirmed that Journeys has incredible brand awareness among teens.

In fact, 75% of 13- to 22-year-olds have heard of or have shopped in a Journeys store.

Shoppers considered Journeys their favorite store for fashion-related reasons.

They like the wide selection and variety of styles.

They come to shop because they know Journeys is a house of brands and they will find the brands they like and want.

They believe that Journeys will always be on-trend and carry shoes that represent the latest in fashion.

Notably, they did not emphasize prices, nor promotions, as being important reasons why they shop in Journeys stores.

Second, these consumers told us they really like the store environment including the music, the vibrancy, and the inviting feeling they get when they walk into a Journeys store.

Many feel like it stands out from other stores in the mall.

And while they like the store environment, with overwhelming agreement, customers love the Journeys employees.

Store salespeople are seen as approachable and our teen customers say they can relate to them easily, affirming the benefit of our peer-to-peer selling approach.

These teens feel like our employees are true experts who provide good information and advice about footwear and they value their recommendations.

This work validated that even after almost three decades of being in the mall, given the perennial freshness of the product offering and the extraordinary strength of its culture, Journey remains the go-to store for teens who want to buy fashion footwear.

This research also led to a segmentation across all teenage customers and to the recommendation that Journeys focus its efforts on a subset of teens, representing roughly half of the population, who purchase a disproportionate amount of teen footwear and heavily influence their peers.

The teens in these segments visit the mall on average more frequently, typically two to three times a month, but many even more often than that.

And when the mall they make the rounds of their favorite stores, checking out the latest products before deciding what to buy.

Understanding these customers and their shopping behaviors has led us to numerous initiatives aimed at attracting more of these customers and expanding Journeys' share of their wallets.

Here are a few examples.

First, is an initiative to increase the rotation of new products on the lease line and in the windows at the front of the store and to use our signs and displays to more consistently highlight new products.

The storefront is Journeys' greatest source of discovery and awareness for teens.

Since these teens are in the mall frequently and are looking for new and distinctive product, we believe this will capture their attention and draw them into the store more often.

Because these teens are seeking out shoes with unique details and styling, a second initiative is to significantly call out greater attention to the products carried in the store that is exclusive to Journeys.

We have not effectively enough called out for them the extensive range of exclusive product.

We will seek better ways to spotlight these products with signage, Journeys TV in the store, digital product presentations, and in the Journeys catalog to reinforce the message.

In spite of much positive feedback about the store environment, these consumers told us this is another area of opportunity.

Teens in these target segments like the Journey story environment in general, but would prefer a larger, better lit, more organized store.

So we are taking action to give them what they want while keeping the core essence of the store intact.

Finally, a more thorough understanding of these segments has allowed us to have greater insight into Journeys marketing and social media efforts and spend.

For example, Journeys sponsored the Vans Warped Tour, which made stops in 42 cities this summer.

While the primary Journeys target segments represent 50% of the teen population in general, they represented over 90% of the attendees at the Warped Tour, further validating our position as a presenting sponsor of the tour and our other targeted efforts to reach our desired customer.

The Journeys team is extremely excited about the insights generated from this work and is confident these insights will help them drive customer traffic and sales.

Now turning to Schuh, comps turned positive after five quarters of negative comps, up 1% for the second quarter.

Stores were down 1%, while the direct business was up 14%.

It is especially encouraging to see the direct business resume healthy comp trend, which has continued into August.

The performance of Schuh's direct business marked a strong recovery from the 6% decline in the first quarter as traffic improved.

This bodes well for the back half of the year.

Importantly, the recent growth at Schuh has been broad-based, with several newer brands computing to its performance, providing a more balanced and diverse merchandise assortment heading into the holidays.

Similar to Journeys, the emergence of new fashion trends helped boost Schuh's recent sales, and we are cautiously optimistic this will contribute to positive comps during the third and fourth quarters.

Third-quarter comps for the group were up 5% through last Saturday.

We will soon open a new state-of-the-art distribution center to serve the Schuh business.

We expect this to drive expense reductions from consolidation of the existing infrastructure and to increase the speed and efficiency of Schuh's supply chain, giving the team improved capabilities to further enhance their superior service model.

The new DC will also support Schuh's store expansion.

Schuh has opened four stores year-to-date and currently operates 99 locations with plans to add a total of 14 stores this fiscal year.

Johnston & Murphy total sales increased 3%, which included a 2% comp increase on top of a 7% increase a year ago.

Third-quarter comps through this past Saturday were down 2%.

Following several high single-digit quarterly comp performances, comps have moderated this year as it appears we have entered into a bit of a lull in the replenishment cycle for dress shoes.

That said, our expanded offering of casual footwear is growing nicely including in the wholesale channel and we are seeing success with J&M's growing apparel and women's offerings.

Finally, the licensed brands group posted solid top-line results for the first half of the year while maintaining nearly a double-digit operating margin.

So that wraps up our individual businesses.

In summary, although we are unhappy with our bottom-line performance in the second quarter and we are appropriately cautious about our near-term outlook, our long-term confidence is undiminished.

We continue our focus on enhancing the position of each of our businesses as a leader in its niche by pursuing initiatives to make them even more difficult for others to replicate.

We will benefit from the expertise and dedication of our outstanding employees who execute day in and day out, delivering the right product to our customers and service levels in our stores that distinguish each of our retail brands.

All of our businesses benefit from leadership teams with deep industry knowledge and a long history of managing through both favorable and challenging sales environments, and we thank them all.

Finally, our balance sheet is strong and gives us the flexibility to pursue initiatives to generate value for our shareholders.

Thank you for listening in and, operator, we are now ready to take questions.

(Operator Instructions) Scott Krasik, Buckingham Research.

Couple questions.

First, you alluded to athletic or fashion athletic helping your comps in Journey at the holiday.

What is the contribution that you are seeing right now between athletic and casual?

Well, both are contributing.

So the point on that comment, Scott, was that we have the belief that the benefit we are getting in casual and athletic will go throughout the rest of the year.

Okay.

And then your view on the comp progression in casual, just because it has been so strong for a couple of years.

You don't see that falling off?

No, there are things on that side of the house that are very on trend and we think that will persist through holiday.

Okay.

Then, Bob, maybe just talk about -- you talked a lot about sports teams impacting things.

I'm just wondering sort of the core hat business -- we are past the snapback issue -- is there pricing pressure on just core hats and can that business comp on an ongoing basis without fashion?

Let me first talk about the one-off factors.

We are going to live with championship teams all the time and so in this case they took a little bit of a hit from that.

And the bigger hit, as we said, was in Locker Room.

Most of the decline in the comp in Locker Room was actually related to the championships.

So when you sort of tuck that aside and say let me look at the rest of the business, how it's doing, it's not as much price pressure like other people doing a lot of discounting on hats.

It's more just the reality that you have to at some point keep your inventory right-sized and so you have to move a little bit of product.

And so on a year-over-year basis gross margin in the hat business was similar, but we had expected they would pick up.

If you go back a year ago, so go back two years, the snapback clearance we did last year gave up about 200 basis points in gross margin, so we thought we were going to get part of that back.

It ends up we decided to just make sure that inventory was right-sized and clean and so margins didn't get to where we had hoped.

What we need is a little more fashion.

We are in a fairly uninspiring fashion cycle on headwear.

With that said, we see a couple of things that will be helpful on the fashion and in the back half.

Now they are not such big items that they change the game completely, hence we are being cautious on our guidance, but we see some glimmers of items that will come in that we think will be new and special.

And new and special means a lot of full-price selling.

And your expedition for comps then for Lids for 3Q, 4Q?

Is in the -- on average for the two quarters is about the same at around 2%.

Okay, so it still needs to -- well, I guess let's run the amount in August.

Okay, good luck, guys.

Taposh Bari, Goldman Sachs.

Good morning.

Just a question on the guidance, the composition of the next two quarters.

Your $5.15 at the midpoint of the year.

You're saying, Jim, flat earnings in the third quarter, so my math points to about 19% growth, EPS growth in the fourth quarter after a tough first half.

So I'm just trying to understand what it's going to take to get there.

And help me understand the bonus noise.

Does that continue into the fourth quarter?

Yes, it continues for each of the next two quarters.

And we've talked about that a lot.

It actually -- the amount is up a couple million dollars, the adjustment in the third and fourth quarters versus the first quarter.

It's going to be fairly similar to what it was in the first quarter, so, yes, that's going to happen.

Now, the pickup in the fourth quarter, that's where the opportunity has always been for us.

The third quarter is, as we've said before, is primarily back-to-school.

Started off very good; hopefully we are being conservative in our guidance, but nevertheless in the fourth quarter we've got a lot of good things going on.

We've talked about the Locker Room business, which is very, very heavily weighted to the fourth quarter.

It is more weighted to the fourth quarter than any of our other businesses.

A large amount of the sales in the fourth quarter and basically all the profits.

So with the additions we are making at Locker Room area we expect that to really contribute.

Then each of the other businesses; there's some opportunity in Journeys in the fourth quarter and also Schuh.

So, yes, we expect the fourth-quarter pickup, but that's where we have the best opportunity to leverage and so we feel comfortable with it.

Also when you talk about stores, realize that in this year we will have opened more stores than we have really since pre-recession and the weighting of those stores is heavily into locker room and Schuh and, to some extent, Journeys Kids.

These are all businesses that are more fourth-quarter weighted for us.

And so you've got a maturity cycle kicking in with new stores and then you've got fourth-quarter weighted stores.

So when you model it up you end up tilting a lot more of the income into the fourth quarter.

That's why it has that shape.

I understand.

So you actually expecting -- I know you said SG&A deleverage for the year.

Are you expecting SG&A to delever in the fourth quarter or actually get leverage?

Just a second.

In the fourth quarter we expect to -- we expect to get a little leverage in the fourth quarter.

On SG&A?

Yes.

The other question I have is just back on Lids.

What are you seeing there on the gross margin line quarter-to-date for the Lids hats business?

I think you said it was flat in the second quarter.

Are you seeing the same kind of trend quarter-to-date?

Quarter-to-date we are not even through with the first month, so we don't have a final number and there's a lot of adjustments to be made, but it is running down so far this month.

But let me just tell you we have it down from -- the big switch in the back half, the biggest switch in the back half is in the Lids gross margin.

We've taken that down quite a bit.

And so far this month we are running behind last year, so we feel comfortable (multiple speakers).

Year-on-year guidance.

But we are in line with guidance because we expected it to be down.

You are referring to the Lids hats business, correct?

Actually, I am referring to the whole Lids business in total.

Okay.

All right, guys.

Thank you and good luck in the back half.

Pam Quintiliano, SunTrust Robinson Humphrey.

This is Nick Hiatt.

I am on for Pam.

Thanks for taking our question.

First, I just have a question around new apparel trends.

There's a lot of buzz surrounding some of the new apparel trends out there, particularly on the bottoms side.

Can you remind us what, if any, impact new apparel typically has on footwear purchases?

The general thesis is always that new apparel, particularly on the bottoms, can prompt changes to fashion footwear needs.

And I think a couple of you guys; some of the analysts have called that out.

We are very willing to run with that.

It's very hard to prove when that happens and when that doesn't happen.

Right now, it seems like there's changes going on in both, so is there a link?

Maybe.

We know what our trends are right now and so we are chasing those hard.

Thanks, and one other question.

There seems to be a little bit of conflicting macro data out there and most of our team retailers have indicated back-to-school has started better than anticipated.

I know you mentioned that the key thing you need is some of the fashion to pick up, but I'm just wondering how do you think about the health of your core customer this year versus last and their propensity to spend.

That's a tricky question.

It's probably better answered by a more broad-based retailer, because when you look at our business at, let's take Journeys, we know that we have some good fashion drivers that are contributing to our success.

So underneath that what is the core propensity to spend?

It's hard for us to judge.

If we look back over the last several years, it has been a very choppy consumer environment in the mall and seemingly at odds with some of the upbeat economic forecasts the people have given.

Our businesses are so more affected it seems by ups and downs in fashion and in sports, a little bit by teams in fashion, that it's hard for us to sort out, too.

So right now what we are happy about is that August month-to-date we are up 4 and that's a nice number for us, so we are happy that fashion at least is working in our favor.

Sounds great.

Thanks a lot.

Good luck on the quarter.

Sam Poser, Sterne Agee & Leach.

Good morning, thanks for taking my question.

I have a few.

Let's start with this.

In the Lids business, we have looked at some data that told us that there's a difference between what's going on with licensed hats and non-licensed hats.

Can you talk about what percentage of your business -- how that's set up?

You do a lot of licensed business, teams even growing business at the Lids stores.

Can you talk about any move towards more fashion and less team logoed hats or anything like that?

First of all, Sam, let's be clear -- we're talking about the hats stores.

They are primarily a licensed business.

And the non-licensed business is -- it has been 10 to 20 depending upon the trend.

So we do see some things happening that will probably help the non-licensed business a little bit in the next half of the year, but we need the licensed business to perform in order to be a good performing company.

So we can point to a few things in the non-licensed area, and we think that that has some reasons to be up-trending, but when it's such a small percentage of the store, it isn't what you can really hang your hat on -- if I can throw a pun out there.

Okay.

Then we also saw that there was -- did you take advantage of any of the World Cup situations within the Locker Room stores?

Yes, we did.

And so when we -- in fact, when we talk about what's going on in hot markets, so we try to separate out the one-off events in sports from the baseline trend in our stores, we had the World Cup, which helped us this year.

That was offset in our overall business by the year earlier we had the World Baseball Classic, which, because that is so hat-oriented, was actually a big event for us as well.

So, yes, we were in the World Cup.

We sold a lot of US.

I think the order went this year US, Brazil, and then Mexico in terms of jerseys.

And we did very nicely with it.

It's hard to get very aggressive because in the United States, you are in that business for three weeks and then you are out of that business.

So like a lot of other hot market things, you play it to make sure that you are well liquidated at the end.

Thank you.

And then a couple more.

Jim, will the compensation expenses that are going to carry through this year and so on, will those revert to being most likely a -- will that result in easier comparison next year or does that just depend on business?

Well, it will -- there are two pieces to the compensation expense.

One is the Lids earnout.

Excluding the Lids earnout.

I said Lids, but I meant Schuh, the Schuh earnout.

Excluding that.

But the other one is the bonus accrual, okay, and will it reverse itself?

Well, the question is what is the bonus next year?

If we are having a good year it will probably be buried and you won't even see it.

But in terms of the clawback issue that we are facing this year versus last year, for the most part that will be eliminated because we are expecting to pay -- we are expecting a small bonus this year, whereas last year basically we had a clawback.

So from that standpoint, we won't have the clawback issue but then it depends on how well we do.

But again, if we are doing well, it's probably not going to be a callout because they don't get buried in the numbers.

Does that answer your question?

Yes, thank you, and then a couple of things.

A couple more things.

I will just go through it -- Macy's revenue versus your expectation or give us some details there.

Journeys Kids' comps versus the whole thing.

And then I know you don't like talking about brands, but given sort of how things are going in the back half, can we assume that when we look around holiday and everything, it's going to be Timberland, Doc Marten, and UGGs really being the driver outside of what's going on in that casual athletic business?

Well, I will take your questions on reverse order.

You're right, we don't like to talk about brands and we are expecting on the casual side of our business, including boots, we expect the business to perform very nicely.

Journeys Kids continues to do well.

Its comps have generally been running at or above Journeys' comps for several, several, several years, which is why we have been so much more aggressive on opening more stores.

As you well know, Sam, Stride Rite is closing stores, so some of that specialty business spills to us.

Of course they skew a lot younger than Journeys Kids, but we get some help from that.

So we just think that the Journeys Kids concept is just really resonating.

Part of the thesis on that is we've been around long enough that the new mom is a mom who shopped Journeys and so she knows the store, she knows the brands, and we think that adds to the theory.

We actually were meeting with one of our top vendors yesterday who said in their brand that has been around for a while they believe they are seeing the same thing in their kids business.

So those are those two things.

Macy's revenue, it's kind of early still, Sam.

We are rolling out these stores very quickly and it's really hard to comment on revenues because it's so team-driven and so -- the answer is when we hit markets with teams doing well the stores do better than in markets where the teams aren't doing well.

And the mix right now is really a mix so I would rather not get out in front of the Macy's revenue until we have more of a stable store base.

Last question, what is included in your guidance for Macy's?

So built into the guidance for the full year, what are you expecting out of that business?

It's breakeven and make a few dollars, not very much.

From a revenue perspective?

From a revenue perspective, we are expecting about -- it's going to be a small amount, Sam.

It's really not going to move the needle.

It's going to be below our earlier expectations, because certainly in the first quarter it was slower than we had anticipated.

We are catching up now, but it's a real small amount.

It's basically a rounding difference right now.

Thank you, good luck.

Mark Montagna, Avondale Partners.

Question about Lids.

Wondering if the sales weakness is centered more around NCAA than professional.

NCAA has been very weak for us for years because it's not on-trend for fashion.

It's never played a big role in snaps and before that it wasn't big -- when I first got involved with Lids it was the go-to fashion item and it was particularly in those days North Carolina.

So it's a very, very small -- much smaller part of our business than it used to be.

Jim, I don't know if you have any numbers as to whether it's up or down, but -- but whatever it is, if it's down, it's not material.

It's not a driver.

Okay, all right.

And then just looking at Schuh, can you just talk about the promotional environment that you saw out in the UK during Q2, what your expectations might be for the second half?

And then how does their promotional environment compared to the US when it comes to footwear?

Just in general how do they operate in the UK in terms of how they try to -- not they, but the overall market.

Again, let's also not talk about footwear in general, because the footwear -- let's start with the US.

The footwear market in the US is more promotional than what Journeys is because we operate in a segment where the brands are not as widely distributed and they are brands that are very cautious about putting themselves in a situation where promotions rule the day.

Journeys is not a promotional house.

They drive liquidation on end-of-run, end-of-season goods obviously with sales, but they are not using sales to drive traffic.

And that is exactly the same pattern at Schuh.

The environment over there did go through a stretch when sales were very soft, when in reaction to competitors they had to get a little more promotional to drive liquidation.

But the general pattern at Schuh is very similar to Journeys.

It's a slightly different promotional cadence in terms of when they go on sale as an industry to drive their liquidation and they are consistent with that pattern.

But they really are a full-priced seller who then liquidates at end of season.

I would say in general the UK promotional environment looks to have improved along with the economic environment on the main street.

Okay.

So out in the UK does Schuh -- are they ever looking at -- do they ever have to really compete against a direct competitor, whereas obvious in the US Journeys doesn't really have that issue?

Yes, I'd say there's competitors.

There's competitors that are a little more like Schuh with a national footprint than Journeys.

Journeys has no one really like them with a national footprint and so that's -- obviously that advantages Journeys a bit on a relative basis.

But when you look at Journeys there are players in the mall who have pieces of the Journeys business, so obviously the skate business is also served by the state guys, as an example.

So Schuh does have one competitor in particular that probably looks more like them than we experience here in the US.

Then just lastly regarding Journeys, is the trend, the comp trend, are you seeing greater strength towards men or women?

It's strong on both sides.

Thank you.

Steve Marotta, C.L. King & Associates.

Good morning, everybody.

Thank you for taking my question.

Bob, can you speak to the primary difference in Lids comp quarter-to-date versus the entire second quarter?

What is the primary delta there?

What are you doing differently?

What changed between the negative 2% and the up 3%, in your opinion?

Again, one of the factors that was in the second quarter was those championship teams, so we didn't have that offset in August.

It's a good question.

There isn't an item -- it isn't -- you can't say here's the category either in terms of the sports league or the silhouette that all of a sudden has popped and is driving it.

Traffic is a factor I think.

The mall or back-to-school, at least based on our Journeys numbers, seems to have been reasonably strong.

Jim is having a gaze at the numbers.

Jim, do you see anything in there that would be really distinctive?

Yes, the month of June -- first of all, the trend is better, was a lot better in July than it was in May and June.

So from a trending standpoint it was improving during the month.

And June, by the way, that's the championships.

Both championships were in the month of June, which is where we got clobbered.

We got clobbered in June.

May was not very good and we saw improvement in July.

So the trend line was improving as we got into the month of August and so obviously that had a large impact on it.

Then based on the above and beyond downward change in EPS guidance for the balance of the year, much of that above and beyond what was missed in Q2 is predicated on lower gross margins at Lids.

And I'm assuming that's because inventories are slightly higher than you would have previously expected there and that's on increased promotions, because that would be --.

If comps are trending better this quarter, why take Lids margin down for the balance of the year?

I will just talk about comps and then I will let Jim talk about margins.

We are cautiously optimistic on comps for the back half at Lids.

We love the NFL headwear assortment, but it's pretty early still to get a read.

We will get a great read in two weeks.

And as I mentioned, we see a couple of new silhouettes that have tested out nicely where we've been in the business before, but now we are bringing them in greater quantities.

So we have some reasons to be optimistic.

But beyond those two items, the core business has still been a little bit challenged, so, Jim, you want to talk about the decision on margins?

First of all, I want to make the point that we don't want to miss again, so we've been very cautious in our numbers, at least we hope we are.

The issue with Lids in the second quarter was not against last year dramatically.

The issue was against our expectations.

That was the big issue.

And we were overly optimistic on the margin pickup, as Bob said.

We were looking where we are -- where we were two years ago before we really got into the snapback and the gross margins and we were saying, okay, we are heading in that direction.

We didn't get there.

So what we've done going forward from a gross margin standpoint is we have taken the expectations down on the gross margin a lot compared to those earlier expectations.

And we hope that that will do two things: that will help drive traffic and, as we've said, 2% comp in the back half, which is a little above where we were in our earlier expectations, but not a lot.

And then as Bob also said, we hope or we expect to be a little more promotional to bring our inventory levels down by year-end.

Begin to bring it down and hopefully be down some by year-end.

So it's a combination of both of those things.

Again, against earlier expectations we have taken gross margin down a lot and we really haven't raised the comps that much.

So that's an opportunity.

Then the other thing that's going on here that I think is important in the back half from a comp and sales standpoint is what Mimi mentioned, and that is the ability to, in the 200 stores to begin to access inventory throughout the chain.

We think, again as Mimi said, by having that ability in Journeys they are picking up around 5% of their business as a result of that.

Now we are not going to have it fully implemented in the back half.

We think that is an opportunity to help drive sales in the back half for Lids.

Okay, last question.

And just to be clear, would you say the last three weeks then August-to-date have been more promotional than last year?

And can you quantify that at all?

Is it days off of BOGO or is it -- maybe you can quantify it?

Again, it's really hard to say in the middle of the month.

There are just so many adjustments going.

Yes, we think we have been a little more promotional and how much that has driven the comp I really can't tell you.

We will have to get through the numbers and all of the adjustments, yes, but based on the gross margin we are looking at we have been a little more aggressive than last year.

Okay, thank you.

Mitch Kummetz, Robert Baird.

Thank you, couple questions.

So on the championship teams, Bob, how much of an impact did that actually have on comp?

You've referenced it several times; it sounds like it was pretty significant.

Is there any way you can give us an idea what the actual comp impact was?

For Locker Room --.

For Locker Room, it was most of the mid-single-digit loss.

So if you do the hats it was less than -- a little lesson 1 point of comp.

And all-in -- Jim, do you have all-in?

Yes.

It was a little --.

About 2 points of comp.

So if Lids ran minus 2 without the championship offset, it might have been running -- the trend line was probably more close to flat.

So how should we think about that going forward?

Right now you guys are guiding to a 1 to 2 comp for Lids for each of the next two quarters.

If we end up with, I don't know, A's Giants World Series, is October going to be lousy and you might miss a 1 to 2 comp?

Or how should we thinking about the impact of teams relative to your plan?

How do you plan that?

And that's a great question and the answer is, while we are building out the Locker Room business, our exposure to teams goes up because markets where we have a concentration of stores or where we have a clubhouse relationship can swing it more than if we are just completely fully built out.

We always have the Yankees versus Oakland offset, even fully distributed across the US because the Yankees is a national team.

This gets more pronounced.

When Seattle won that was a gift to us because we have Seattle team shops, a business we had bought.

We have -- we bought a group of stores that were centered on Chicago, hence the Blackhawks in particular were a big event.

The Heat were a national team.

So, yes, right now we are going against St.

Louis and we run their clubhouse stores.

And Boston is a national team.

We also are -- we have a relationship with the Dodgers, so the Dodgers will be great.

But if it's Oakland and, say, the Washington Nationals, I hate to offend somebody here, but that's not as good a deal.

So I will give you -- to size it for you a little bit, we went back and looked at the Cardinals and Boston was a plus for us.

The year before was the Giants and the Tigers.

Tigers are -- you know it's a legacy team at least and that cost us about 1 point of comp.

In the back half.

The back half.

Of last year.

So it moves the needle.

What we will do for you guys -- I think it's an important question -- is when it moves it up or down we will do our best to try and give you visibility on it, because the baseline to me is what matters to really assess the health of the business.

Okay.

And should we assume in terms of the plan of a 1 to 2 comp in Q3 that you are not assuming Dodgers and some national team, that it's more of just kind of an average of who might be out there?

Yes, think of average.

And then lastly, on Johnston & Murphy, just looking at the operating profit, it looks like the operating profit was down a couple million dollars year-on-year.

I know the comp wasn't great; the trend line there isn't that fabulous either.

How much of that is impacting just kind of your outlook?

You really haven't talked about it.

The whole discussion has been on Lids, but just something that I noticed.

And what was J&M wholesale in the quarter, just in terms of the year-over-year?

Jim will look for that.

One thing that is in all of J&M is remember we are launching a brand right now, the Trask brand, and so we are still in launch mode.

And being in launch mode with Trask creates a drag on profits because that is still an investment mode, so that is a piece of it.

Jim?

Yes, wholesale was down for the quarter, but that was partly driven by -- we are putting in a new system, warehouse management, and we backed up on some inventory and I'm not sure we are fully caught up.

Then as a result of [the back half we] lost some orders, so that affected it.

How much was it down?

It was down -- I'll do the percent, but let me keep on going.

The other thing that entered into the numbers for Johnston & Murphy was increased advertising and so that hurt the bottom line quite a bit.

So it was a combination of those two things.

Then on top of that they just didn't comp enough to get any meaningful leverage, so those are the two big issues.

Now in terms of how much were they down, they were down maybe 10%.

All right.

Thanks, guys.

Good luck.

Jill Nelson, Johnson Rice.

Good morning.

I have a quick question.

You called out for second quarter higher shipping costs and warehouse expense at both Lids and Johnston & Murphy.

If you could touch upon kind of your thoughts on that line item for the back half.

Yes, expect it to continue and so no relief from that standpoint.

Hopefully, next year we will get a little relief because it's really driven by two factors.

One is e-comm and free shipping, that's probably -- we're probably not going to get relief on that in the future.

But the other thing that is happening is that we are in the process of transitioning two business units' warehouses and so we are in effect duplicating costs as we transition out of Lids.

Lids is moving from one warehouse to another.

Then as Bob called out already in the Schuh situation, they are moving from one warehouse to another.

So we are duplicating costs; we hope to be through most of that by the end of the year.

Then in addition to that we have put in a new -- as we talked about earlier, we put in a new warehouse management system in Johnson & Murphy and that has added to the cost in the second quarter.

That should begin to wind down certainly by the fourth quarter, maybe a little bit earlier in the third quarter.

But the other thing is the duplicating of costs in the warehouse transition.

Certainly we will have that in the third quarter, probably some in the fourth quarter but hopefully next year we will not.

Okay.

Then just kind of just a longer-term, bigger picture question, kind of on your venture with Lids at Macy's.

I know you're going there to attract kind of a non-traditional Lids customer.

Any thought process of learnings there and how can we attract that customer potentially to the core Lids store?

Kind of looking at ways to help drive that top line.

Yes, the premise is not that we are necessarily going to drive that customer to the Lids store.

Obviously, in a market where we have a Locker Room there will be a bigger assortment in the Locker Room store and that opportunity exists, but that's not really part of the thesis.

The thesis is that the customer at Macy's is very loyal to Macy's and they go to Macy's to shop.

We know that the sports business has an impulse component and so we are set up in Macy's to try and really do business there.

A very important part of being in Macy's is that by being -- having the presence in the Macy's stores we also have a presence on Macys.com and the dot-com numbers are an important part of the formula for us.

Okay, thank you.

Stephanie Wissink, Piper Jaffray.

Great, thanks for taking our question.

It's actually Maria Vizuete on for Stephanie.

Just a couple quick questions for you guys.

Just wondering as a follow-up to an earlier question, can you provide some more color on the kids business and how that's trending in the back-to-school period specifically?

On Journeys Kids?

Yes.

We haven't called out -- we are not taking three-week comps down to business units.

As we said before, the kids business has always been tracking at or above Journeys and we are just pleased with what it's doing.

I don't know what else to say.

It has been a great business over many years and we are committed to it.

Got it, thank you.

Then just a quick question; are you guys seeing any variances in traffic by region?

You know, I don't have the data in front of me, so maybe we can get back to you on that?

Sure.

And last question.

On the Johnson & Murphy business, what percentage of the business is dressy versus casual?

Thank you.

Tell you what, Jim is -- it's sort of late in the call.

Let's get back to you on that as well.

Sure, sounds good.

Thanks so much.

Chris Svezia, Susquehanna Financial Group.

Good morning, everyone, and thanks for taking the questions here.

I do have a couple.

I will try and go through them quickly here.

Just first just clarification.

Jim, did you mentioned that you expect third-quarter EPS to be flat?

Did I catch that correctly?

Essentially flat we are saying.

Okay.

Second tier gross margin pressure is that only -- relative to your expectations previously, was that only at Lids or is that in other areas of the business?

Well, there's pluses and minuses, but nevertheless the big change is in Lids.

Okay.

Percentage of the business that is back-to-school based on your estimate at this point.

I don't know what you mean, percentage of the business?

Percentage of the business (technical difficulty) not in August?

I guess historically, as you have seen it, how much of the business that's done thus far do you think is done specifically for back-to-school?

Like how much of your back-to-school -- how many of your markets have gone back-to-school at this point where you think you've done business I guess is what I'm trying to say.

You know, it's very hard to track.

We've got essentially one week to go, which is heavily concentrated in the Northeast.

The Journeys team does their best to try and estimate where it is.

We are on a positive trend through the weekend.

We haven't seen any disruption to that trend with one week to go, so we think that BTS essentially was spread out this year, not too far off of last year.

Does that help?

That does, thanks.

Journeys you were up 5. You are guiding 3 to 4 for the back half of the year and you anticipate, based on what you are seeing in more of those athletic styles, to obviously comp.

Is it just luck; you're being conservative, don't know how holiday plays out, etc.?

Or is there something else?

It just seems (multiple speakers).

Well, something else that would call for caution is -- as you probably know, Chris, in recent years the customer has come out for events and then gone to sleep (multiple speakers) so I think we are being cautious as to whether back-to-school is necessarily the trend line because it is so event driven.

Okay, fair enough.

Last three things; I will just throw them out there.

In Lids, the improvement up 3. Any difference between Locker room and the headwear business in terms of what you are seeing?

Any color on Shi, if you care to share, in terms of what's playing out in Journeys and how that might be helping or not for Shi?

And last, the contingent bonus the goes away this year.

I know you are not giving guidance for next year, but what happens to it?

Do think you will spend it?

Do think you will let it flow through?

Just any color about that, thanks.

Well, the Lids, I'm not going to -- three weeks in the sports business is not worth splitting up between Locker Room and hat stores so let's not go there.

Color on Shi; Shi is continuing to be a project for us.

It is not a positive contributor right now to the business, but it's also with 50-some-odd stores pretty much too small to matter.

The contingent bonus as an accrual goes away.

On a cash basis, yes, we are going to spend it.

We owe the money to the ladies and gentlemen who earned it, so we will be paying it out, so I don't know what you mean by flow.

I guess on a reported basis how we look at it, does it --?

The accrual ends and goes away, so we have already always throughout our ownership of Schuh been paying a regular performance bonus for the year.

We have always regarded the contingent bonus as part of the purchase price paid to a group of people who essentially had an interest in the Company.

And so, as such, that part goes away, goes to zero, doesn't appear again.

We will continue to be paying the regular bonus, as we have every year, based on performance of the business.

Got it, that's all I needed.

Perfect, thank you.

I want to follow-up on Stephanie's question.

Stephanie, you were asking about accessories in the second quarter.

It was pretty consistent with last year.

We've always talked it was in the 30% to 40% range, 35% to 40% range normally and it is around 35%.

Okay, operator?

That does conclude today's Q&A session.

I will now turn the conference back to Mr. Dennis for any additional or closing remarks.

Thank you, everybody, for joining us.

Appreciate the questions.

We will talk to you in three months.

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

We thank you for your participation.