Genesco Inc (GCO) 0 Q0 法說會逐字稿

Good day, everyone, and welcome to the Genesco second-quarter fiscal 2014 conference call.

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

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

These statements reflect the participant's 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.

Please go ahead, sir.

Good morning and thank you for being with us.

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

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

I will begin today's call with a few remarks about our second-quarter results and the potential correction to our historical financial information that is detailed in our press release.

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

As a reminder, we are now reporting a combined comparable sales number that includes stores and our direct business, which includes both eCommerce and catalogue sales.

However, to be clear, our direct sales do not include digitally-assisted transactions rung up within the store but fulfilled from the DC or another store.

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

Before we get started on the business, let me address the potential correction to historical financial information related to the treatment of bank bonuses under our EVA bonus plan that we discuss in the earnings release.

The background information and details are in the release so I won't rehash them.

I will stress just three points here.

First, the potential corrections involve only how we account for the portion of bonus awards that get paid out on a deferred basis after the year in which they are earned.

The actual calculation of bonus awards payable under the bonus plans, including these bonus banks, is not in question.

The issue involves a range of possible interpretations for the accounting rules as applied to an unusual feature of our plan, for which we understand there is no directly applicable guidance in the accounting literature.

And importantly, there are no allegations of any intentional misstatement or other misconduct.

Second, the potential accounting changes won't affect cash flow.

The bank bonuses will be paid out in accordance with the terms of the plan, as they always have been.

What is involved in this issue is the appropriate timing for the accounting charge, not the substance of the bonus calculation or the timing of payments.

Third, because our guidance this year has been given on the basis of the accounting methodology that we have historically applied to bank bonuses and because we haven't determine whether any changes are required, our adjusted earnings discussion and our updated guidance for this year will be presented on the basis of our historical methodology on the call today, but possibly subject to future adjustment as we resolve the accounting issue.

Now, turning to results for the quarter.

We are disappointed that sales trended below our expectations during the second quarter and that our bottom-line performance, while up year-over-year, was well off our plan.

Second-quarter comps ended down 2% versus an increase of 4% last year.

In the second quarter, a 1% gain in May was offset by softer trends in June and July.

Adjusted EPS was $0.56, up 12% over last year.

In addition to the weaker than expected performance in June and July, August has also underperformed our expectations, with comps down 3% for the first three weeks of the fiscal month against a 10% increase for the comparable period last year.

As we have said all year, we expect trends to improve in the fourth quarter.

However, based on the second-quarter shortfall and the soft beginning to the third quarter, we are lowering our full-year outlook to an adjusted EPS of $5.20 to $5.30.

Our direct businesses continued to be a bright spot, with total comps for all of our direct businesses up 11% for the quarter.

These businesses continue to benefit from the merchandising, service and technology initiatives we outlined on last quarter's call that support our overall omni-channel strategy.

With regard to our thoughts about how the rest of the year unfolds, our optimism for a pickup in the business in the fourth quarter stems from four main factors.

First, the sales mix at Journeys and Schuh normally shifts significantly from fashion athletic to casual footwear in the fourth quarter, driven especially by boots.

Journeys in particular has recently been a story of two different businesses, a weak fashion athletic business and a strong casual business.

Casual has posted strong year-over-year increases recently, while fashion athletic has underperformed casual in terms of both unit growth and ASP growth.

While fashion athletic sales have recently been relatively stronger at Schuh than at Journeys, they too are anticipating a good boot season.

Thus, we expect a seasonal mix shift to work in our favor.

Second, our inventory is well-positioned to support second-half demand.

While second-quarter sales were below our expectations, our merchants aggressively liquidated seasonal and slow-moving inventory.

Indeed, the second quarter's disappointing bottom line was partly the result of this markdown activity.

We are confident that any remaining carryforward inventory resulting from slower-than-planned sales in back-to-school is salable throughout the rest of the year, and therefore levels can be properly managed by reducing receipts.

Third, snap-back challenges at Lids began in August and September one year ago.

We believe their position in that category is improving, which we will walk you through in more detail later in the call.

Finally, comparisons begin to ease at both Journeys and Lids later in Q3 and especially in Q4.

To give some sense of the magnitude of the shift in comparisons, last year, consolidated comps were up 6% in the first half and 5% in the third quarter, but were down 2% in the fourth quarter.

Journeys comps were up 9% in the first three quarters and down 1% in the fourth quarter.

And Lids was flat for the first three quarters and down 10% in the fourth quarter last year.

Therefore, we are expecting Q4 to give us a nice recovery on comps for no other reason than comparisons begin to move in our favor.

Despite the headwinds that are currently pressuring our top line, our confidence in the strategic strength of each of our businesses is undiminished and we remain on track to achieve solid, long-term growth along the same lines we have recently outlined.

We have successfully navigated through volatile environments before and have emerged with our dominant market positions intact and, in certain instances, stronger than ever.

We believe we are doing all the right things to ensure this will once again be the case by concentrating our investments in the fastest-growing areas of the Company, such as our digital channels and our underpenetrated retail concepts, namely Locker Room by Lids and Journeys Kidz in North America and Schuh in the UK.

Our recently announced agreement with Macy's to operate Locker Room by Lids in their stores and on their website is also adding to our confidence.

I will now turn the call over to Jim for a review of second-quarter results.

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.

Our adjusted earnings per share on the basis presented in the press release were $0.56 per share compared with $0.50 per share last year.

Total comp sales were negative 2% for the quarter with a 3% comp decline in our stores partially offset by a comp increase of 11% in the direct business.

Last year, we had a comp increase in the quarter of 4%, which included a 4% increase in our stores and an increase of 3% from our direct business.

The two-year total stack comp sales increase is 2%.

Direct sales represented 6.3% of our comp sales in the quarter compared with 5.5% last year.

Consolidated net sales for the quarter were $575 million, an increase of 5.7% compared with a 15% increase last year.

Gross margin in the quarter was 49.2% compared with last year's gross margin of 50.2%.

This was due to lower gross margins for Schuh and Lids, while Journeys, Johnston & Murphy and Licensed Brands had some margin expansion.

I would like to spend a few minutes going over a couple of unusual items in our operating numbers for this quarter.

These items have been excluded from non-GAAP adjusted numbers for the quarter and from the full year's guidance.

In the line item titled asset impairments and other, there is a gain of $7.1 million this quarter.

Included in this amount is a gain from the landlord's buyout of our Herald Square Journeys store lease.

This gain is partially offset by asset impairments, legal fees associated with the network intrusion lawsuit and a provision for the settlement of another lawsuit.

GAAP requires that we record any expenses relating to the lease buyout in SG&A.

We have therefore booked the gain from this buyout in asset impairment and other, while the related expenses are in SG&A.

The net gain of $3.3 million from this transaction has been excluded from our non-GAAP second-quarter adjusted operating results and from our full-year guidance.

The operating income lost from this store's contribution for the balance of the year after it was closed, which was about $0.02 to $0.03 last year, is reflected in our updated guidance for the full year.

In addition to excluding this net gain in the asset impairment and other line and the SG&A related to the lease buyout from adjusted operating earnings for the quarter, we also excluded the quarterly amortization of a Schuh deferred purchase price totaling $2.8 million, which is consistent with past practices.

Adjusting for all the items excluded in the press release, we were able to leverage expenses by about 110 basis points in the quarter.

Adjusted expenses as a percent of sales were 45.4% compared with 46.5% last year, largely from the current approach to bonus accruals.

For the quarter, adjusted operating income was $22.1 million, or 3.8% of sales, compared with $20.3 million, or 3.7% of sales last year.

We ended the quarter with $46 million in cash compared with $47 million last year and with $68 million in debt compared with $95 million of debt last year.

During the quarter, we also spent about $11 million on acquisitions.

We did not repurchase any stock during the quarter and have $47 million remaining on the Boards' most recent authorization.

Inventories were up 13% year-over-year in the second quarter.

Square footage was up 6% year-over-year and inventory per square foot was up 6.8%.

Most of our business units had inventory increases per square foot less than 5%.

Lids was up about 11%.

Snap-back inventory makes up less than 9% of Lids' retail inventory.

Some of the increase in Lids' inventory over and above the sales increase in the second quarter is due to our increased commitment to NFL product ahead of the regular season beginning next week and the added commitment we are making to our Lids eCommerce business, which was up 27% in the first half, as well as saving inventory in anticipation of opening more stores in the back half of this year than last year.

Capital expenditures were $19.4 million and depreciation and amortization was $16.5 million for the quarter.

This compares with $18.4 million and $15.3 million, respectively, last year.

Our store count increased to 2488 stores from 2404 stores, or 3.5%, a square footage increase of about 6% compared to last year's second quarter.

Now I would like to spend a few minutes on our guidance for FY '14.

We are reducing our adjusted EPS guidance for the full year to $5.20 to $5.30.

Due to the slow start to this quarter, we are anticipating a negative comp in the third quarter of about 1% to 2% and a positive comp in the fourth quarter of about 3%.

The improvement in the fourth quarter is due to all the reasons Bob has already mentioned.

Consistent with previous years, this guidance does not include about $1 million to $2 million in expected non-cash impairments, network intrusion expenses and other legal matters, offset in large part by the gain after expenses of the Journeys Herald Square store lease buyout.

This compares with last year's non-cash impairments, network intrusion expenses and other legal matters of $17 million pretax, or about $0.45 per share after-tax, which, as you know, was excluded from guidance last year.

In addition, we will continue to exclude the amortization of the Schuh deferred purchase price from our EPS guidance.

The deferred purchase price amount in FY '14 is expected to be approximately $11.5 million, or $0.49 per share.

Finally, it excludes the effects of any potential accounting change related to our bonus plan.

This guidance does, however, include our current estimate of the Schuh acquisition contingent bonus accrual of $15.6 million, or $0.49 per share, which is expensed in our guidance.

The following are assumptions we used to develop this guidance.

We have an overall sales increase of about 2% for the year.

Remember, last year's sales included an additional week, which added about 2% to sales last year.

Our guidance assumes a gross margin decrease of about 40 to 60 basis points and positive expense leverage of about 50 to 70 basis points.

This results in an operating income improvement of about 10 basis points to 7.7% compared to 7.6% last year.

The tax rate assumption is about 37% and the share count assumption for the full year is about 23.6 million shares.

We are also expecting capital expenditures for the year of about $110 million to $120 million, and depreciation and amortization will be about $66 million.

We are forecasting 163 new permanent stores and an additional 7 stores acquired during the second quarter.

We are planning to close about 53 permanent stores.

We expect to end the year with approximately 2563 permanent stores, an increase of about 5% over fiscal 2013.

Square footage is expected to increase by about 7% for the full year.

Now I will turn the call back to Bob.

Thanks, Jim.

Now let's look at each of our divisions' recent performance in more detail, and I will begin with Lids, where sales comped down 3% on top of a 2% gain a year ago and compared to a 6% decline in the first quarter.

And August comps were down 3% through last Saturday against a 3% increase for the comparable period last year.

We note that Lids was more promotional in August last year, which should help year-over-year margins.

Snap-backs are still a very strong piece of the business, representing 19% of our Lids hat stores and Lids.com comp sales for the first half of the year.

This is an area of focus for us.

To recap, in the first half of last year, we had the Snap-back category to ourselves and delivered exceptionally strong pricing and margins as a result.

In the second half last year, we reduced prices to levels consistent with those of new competitors, and at these reduced prices, our margins were solid, but below the levels achieved when we essentially had the market to ourselves.

In this September, we anniversary this price reduction, and we believe this should moderate the comp losses and the tough margin comparison.

Importantly, snap-backs are a lower percent of our inventory than of our sales, and the Lids merchandising team is continuing to narrow the snap-back assortment to the SKUs that are most relevant to consumers, further increasing the efficiency of the inventory and reducing our risk.

So while the margins in the most popular Snaps are solid, we still have some ways to go in clearing the less productive Snap inventory.

So that is the story on Snaps.

In the rest of the headwear assortment, we continue to freshen the fitted categories and we are encouraged by what we see.

And we continue to test new silhouettes, with some early evidence of new potential opportunity.

With respect to Lids' larger multi-category retail concepts, comps at our Locker room and Clubhouse stores continue to outperform our hats stores.

During the quarter, we added 15 new Locker Room and Clubhouse stores through new openings and acquisitions, and our plan calls for opening approximately 36 more Locker Room and Clubhouse stores over the remainder of fiscal '14.

On top of servicing hometown fans in their local markets, we have recently improved our available assortment with the help of new technologies that allow us to better cater to the displaced fan in some of these stores.

This is being done through in-store kiosks, which are essentially supersized touchscreen iPads sitting in docking stations that look a bit like ATMs.

Here, consumers can shop a much broader inventory assortment, schedule their preferred delivery method and swipe a credit card to complete their transaction.

In addition to expanding our geographic footprint via new doors, we believe that our recently signed agreement with Macy's gives us a great new vehicle for reaching an even larger fan base.

The initial plan is to have Locker Room by Lids departments in 200 strong-volume Macy's doors that are strategically located in key professional and college sports markets around the country by next spring, with the first 25 to be rolled out this fall, mostly in major NFL markets.

This partnership will provide us access to Macy's large and loyal customer base.

The merchandise offering will be tailored to fans of a local sports team in each store's area.

Right now, there are only 40 to 45 Locker Room stores sharing a mall with the proposed 200 Macy's locations, and so there will be relatively little overlap with our fan-focused retail network.

While there will be a Lids hat store within the malls at almost all of the 200 Macy's locations, only about 10% of the merchandise in the Macy's licensed department will be hats, and that will be all fan-oriented product, which reduces concerns about cannibalization.

In addition, our arrangement with Macy's gives us the exclusive right to offer licensed merchandise throughout the entire network of Macy's stores, as well as on Macy's.com.

One of our goals is to eventually include an interactive kiosk, similar to the one I described earlier, so customers can shop a broader inventory and place online orders if they support a team in another part of the country.

Finally, all of our Lids retail businesses should get help in the back half of the year from NFL product.

Recall that last year, the new licensees struggled to get their entire assortment developed and shipped.

This year, we are in much, much better shape.

Now turning to the Journeys group.

Comp sales were down 1% in the second quarter as sales trends became more challenging after a positive start in May.

This compares with an increase of 6% last year in the second quarter.

August comps through last Saturday were down 2% against a 13% increase for the comparable period last year.

As we said in our opening comments, weakness in the fashion athletic category was the biggest drag on results, as units and ASPs were both down compared with a year ago.

This weakness has made for a tough start to the third quarter.

However, as we get deeper into the year, casual, driven in large part by boots, historically becomes a much bigger component of the business.

And we believe, based on early reads, that the casual business will continue to be strong.

Consequently, we expect fourth-quarter comps to improve.

While Journeys Kidz wasn't immune from the challenges in the second quarter, with comps falling 2% against a 13% increase last year, it remains on track to deliver a positive comp for the year.

This being only the second quarter out of the past 16 quarters where comps were negative, we are not backing off on our expansion plans, which call for as many as 18 net new Kidz stores in fiscal '14.

Comp sales for Schuh remain the most challenging among our divisions.

Comps in the second quarter were down 7% compared to an 8% increase a year ago, and after an 11% decline in the first quarter of this year.

August comps are down 10% against a 10% increase in the comparable period last year.

It is clear to us that the UK has gone through an even more pronounced footwear cycle than the US during the period in which we have owned Schuh, both on the way up and on the way down.

The very strong comp increases over the last two years are making comparisons difficult now.

But despite Schuh's recent struggles, we are still projecting top-line and bottom-line results for this year that are well in excess of the projections for this year that were the basis of our decision to acquire the business a little over two years ago.

Inventories at Schuh are now in good shape, thanks to an aggressive approach to clearing seasonal merchandise in July.

However, the clearance was reflected in a decrease in ASPs for the quarter and lower year-over-year margins.

Importantly, Schuh's sales trends has reflected lower traffic than lower ASPs, but the conversion rate has held strong, indicating that our assortment is still right for the consumers who are out shopping.

We continue to be confident in Schuh's long-term outlook and its prospects for growth, and therefore we are moving forward with our aggressive store expansion strategy, particularly in and around London, as well as in markets that had previously included a Republic concession.

The new Schuh regular stores as a group are exceeding their pro formas despite the challenging business trends at the moment.

And we are continuing to test Schuh Kids stores.

All in, we will be adding roughly 18 new stores in fiscal '14, an increase of 23% over where we ended last fiscal year, and we currently contemplate another 13 new stores in '15.

Johnston & Murphy posted a comp increase of 7% after a 7% gain in the first quarter of this year and against a comparison of 3% last year.

In August, comps are up 8% through this past Saturday, against 8% for the comparable period last year.

The wholesale business also performed strongly once again in the second quarter.

The J&M team has done an excellent job capitalizing on the growing popularity of higher-priced dress and dress casual shoes with some fantastic product introductions that are resonating strongly with consumers.

Recent product and marketing initiatives have gone a long way towards reshaping Johnston & Murphy as a younger, more modern version of the brand's original positioning, which catered almost entirely to the male business professional.

With a wider audience insight, we have been opening more stores lately, including in Canada as well as in airports, and we remain on track to add 12 net new locations this fiscal year.

Finally, the Licensed Brands group had a nice increase in sales during the quarter.

While the second quarter did not play out as expected and the third quarter has gotten off to a challenging start, we believe our merchandise strategies are sound and our plans to grow our businesses over the longer-term remain intact.

As we detailed on our last call, we are implementing several initiatives across our digital platform that should drive increased sales and margins for years to come.

I won't repeat the entire list, but the key contributors include making Lids in-store inventory available on the website, a function we expect will be live in the first half of next year and will substantially boost sales.

Expanding our recently launched in-store kiosk programs at Lids that provide customers access to our entire inventory assortment.

We currently have these kiosks in 26 stores, and while it is too [easy] for a detailed analysis of the sales gains, we believe these units have the potential to generate significant incremental sales as any one store only carries less than 10% of our total SKU count.

Our digital partnership with Macy's is obviously exciting.

And, finally, moving to a new order management system at Journeys will support in-store pickup for online orders, enhance speed-to-market with new products and provide significantly improved customer service and communication.

Our teams are continuing to operate at a very high level despite some consumer-facing headwinds and we are confident that we can achieve our revised fiscal '14 outlook.

I want to thank the entire Genesco team for their continued efforts.

We have proven before that we have the people and strategies to successfully navigate through a choppy retail environment and emerge an even stronger Company, and we are confident this will once again be the case as we move through the remainder of this year.

Operator, we are now ready for questions.

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

Thanks.

Bob, I know you don't usually like to talk about specifics of your business, but you called out fashion athletic as weak.

And we have heard from other retailers this earnings season, and brands like Converse and Vans are driving significant comp increases.

So are you potentially losing market share competitively for some reason, or are these just mistakes in the types of shoes you are bringing in?

Any thoughts there?

Yes, no evidence that there is mistakes in the assortment, and our assortment is strong.

If that is the case, you've got the offset between the timing of retail and the timing of wholesale.

So it is hard to answer that.

We think our assortments look good and we are just not selling through some of the fashion athletic brands the way we had.

I am not sure what else I can tell you, Scott.

Okay, well, I was specifically referring to some of the off-mall retailers calling out, so maybe it is off-mall versus on-mall.

But then -- okay, and then on Lids, just a couple follow-ups.

So can you just -- the Macy's deal, is there a fixed royalty with that?

If they miss -- if you are below plan, is there any variable cost associated with the royalty?

And then also what was the $11 million acquisition you did with Lids this year?

Sure.

The Macy's deal -- the structure of the deal with Macy's is variablized to an extent.

We do have a portion that we are guaranteeing, but we worked together nicely in designing something that works both -- for both of us, and that included a variable component on sales.

The $11 million acquisition was Fan Outfitters, which is another Locker Room type concept with stores in Kentucky and Oklahoma.

It is just another business that adds on to our Locker Room concept, a regional player with a very strong position in -- particularly in the Kentucky market, which is heavily a college market, as you can imagine, with Kentucky and Louisville being such strong plays in those markets.

So just another add-on.

Are there still more of those to be done?

Oh, there are, yes, lots of ones just like that, which are the regional players.

And we have done several of those in the past, so the past ones have been up in the Pacific Northwest.

The original one had a big concentration in Tampa.

So we keep on looking at picking up markets.

If there is a player in -- dominant player in that market.

And then Buckeye Corner was another version of that, which was an Ohio State play in Columbus, obviously, only Ohio State product.

But I guess if you live in the middle of Ohio, that is pretty much all that matters.

Okay, thanks.

Sam Poser, Sterne, Agee.

Thank you for taking my question.

Jim, the inventory that looks a bit heavy, how much of that is just the timing because of the calendar shift?

If you basically -- you got it in the first week of August, so it shows in the inventory last year, that would have showed up in the first week of Q3.

Yes, Sam, that is a really good question.

It is definitely there, because we, in effect, closed the books a week later, which means we were more into the back-to-school season, so there was more inventory on hand.

I can't tell you how much.

We really can't -- have not been able to really pull that out.

But if you look at our businesses and the businesses that had the higher, let's say, concentration of back-to-school business in terms of back-to-school being important, the primary business is Journeys, okay?

And Journeys' inventory, as I said, on a per-square-foot basis, was still very reasonable even with that one week shift.

So there was some issue -- I am sure that some of the Lids' higher inventory per square foot was attributed to the weaker -- the later week, but it is not as significant as it is in the Journeys case.

Okay.

Will you be able to get a hold of the dollar -- what that variable -- what that weak receipt number is, though?

Do you think?

Well, we probably could go back and do it, but I don't know.

If it is important to you, I could go back and do it.

But again, it doesn't -- it is not a problem.

I am saying the square footage -- inventory per square foot for Journeys is very, very reasonable, less than 5%.

So I don't think there is any questions there.

So there is an amount, but it isn't that significant -- it can't be that significant.

Sam, the important part on inventory as we look at it is that we liquidated seasonal, and so carryforward stuff represents the bulk of it, and we can manage that with receipts going forward into holiday.

Okay.

Thank you.

And then on Lids, one of the trends that we have seen out there is this 5-panel hat trend, which happens to be a snap-back or a strap-back, or whatever; it is not a fitted hat trend.

Your mix there is -- you have some in the stores, not a whole lot.

I wondered where you are there.

We saw out at the recent trade shows a lot of excitement around that.

Yes, Sam, as we said, we are testing several silhouettes in our stores, and right now, we see some nice potential coming out of those tests, but they are tests.

And then lastly -- thank you.

Lastly, we also heard that the fitted business may not be recovering quite as quickly as you might want it to.

And the question I have is are you starting to work with your vendors to do more exclusive product, so if it doesn't come back as you would hope, you would at least have that -- you could offset the ease of going into the non-fitted business for your competitors.

Given your size, I would think you could get a lot of good exclusive product.

And we do -- we have always done a good amount of exclusive product, and we are really one of the few people with the scale to manage that, to get to the minimums required for exclusives.

And so we do a lot of that.

We continue to do a lot of that.

We have brought in several new programs.

We have referenced them in the past.

We continue to see excitement around those.

But in terms of the real fashion kid, they are still on snap-backs as the major run.

One of the things we have done, Sam, I think when we got so committed to fashion, we gave up on some of the relaxed fitted styles, which is really the opposite of fashion, because it is for guys like us.

It is a fitted, cotton, no high crown, just a straight up fan hat.

And we brought back -- we recommitted to that category with a new hat from our vendor in baseball, and it has done really well.

And now, we are in the process of getting more committed to that business in NFL and NCAA.

And so we see ways to offset what is going on in fashion as we recommit to businesses like that.

Another big chunk of the fitted business is not fashion, it is authentic.

The authentic baseball hat, which has also lost a little ground as kids have run off to wear the fashion snap-back hats.

And we stay committed to that.

And it is easy to stay committed to that because that is a carryover product.

And so we continue to be committed to our customers to be fully assorted there.

So part of it is also just the commitment to remain fully assorted.

We still sell a lot of those hats.

We just are down a little bit on our turn because some of the fashion guys aren't wearing that hat.

But we are very much in the fitted business.

Thank you both very much and good luck.

Thanks.

Steph Wissink, Piper Jaffray.

Hi, good morning, everyone.

Bob, if you could just characterize the back-to-school season so far.

Maybe if you could give us some insight into the build kind of week to week.

I know you have given us the month of August, but any color into the week to week would be helpful.

And then second, Jim, the guidance reduction for the back half seemed a bit more severe than what we would have expected on kind of a flattish, rounded flattish second-half comp and the store growth, which also sounds like it is going to be second-half weighted.

Are there costs in the P&L or in the margin assumptions that we should be aware of as we kind of model out the back two quarters?

Thank you.

Steph, back-to-school has been a disappointment for us relative to what we were expecting, and it has been a pretty steady disappointment.

So you see it bounce up and down a little bit, but I wouldn't characterize it as getting stronger or weaker at the moment.

And you want to talk about the margin assumptions?

Yes, Stephanie, let me talk a minute about that, because it's a good question.

We have taken the high end of the guidance down from $5.67 to $5.30.

So it is down about -- I think I can do that math in my head -- about $0.37.

And so -- and we missed the consensus of the Street by about $0.04.

So the question is what is the difference there?

Well, a lot of the difference is that we were projecting to do better in the second quarter by a lot -- it was much higher than the Street.

So a part of the amount that we took down, a big part of the amount that we took down, represented the second-quarter miss.

That is the first part.

The second part is because of the weakness we are seeing in back-to-school, primarily the month of August is also going to be a miss from our prior guidance.

So the bulk of the decrease in our EPS guidance for the full year represents the miss in the second quarter and it represents the miss basically in comp sales in the month of August and early September.

And so if you look at the back fourth quarter, primarily the fourth quarter, it isn't that much different from where we thought we were going to be all along.

So it isn't that there are additional expenses in the third and fourth quarter; it is primarily due to missing the second quarter and the slowness in the month of August.

Okay.

So if I could just characterize then, Jim, what you are saying is effectively, if there is a catch-up in business in back to school as we proceed into September and October, you would then be pacing ahead of what the guided -- the revised guidance --

Exactly.

In effect, we have extrapolated out based on where we were for the first three weeks.

So if it turns to be better, turns -- between now and Labor Day, if it improves, then that would be some upside.

But we have extrapolated where we are now out through the quarter.

Okay.

Thank you for the clarification.

Good luck, guys.

(Operator Instructions) Mark Montagna, Avondale Partners.

Hi, just a quick question on conversion.

I might have missed it, but did you say anything about how Journeys and Lids conversions were?

No, because we don't have the traffic counters that Schuh has.

Schuh actually quantifies their traffic, and so they get a better read on what is driving their business.

And as we said, their traffic is down and their conversion is steady, and so that sort of hints to us that the assortment is where it needs to be.

There just aren't as many people out shopping.

If you look at the mall data, we kind of look at what you look at.

I think it is like -- I just saw something -- 8 of the last 10 weeks have been negative traffic counts to the mall.

So I assume that traffic is part of our issue as well.

But we don't quantify that at the lease line.

Okay.

And then how is clearance domestically this year versus last year?

For us?

Perhaps chainwide?

Yes.

Yes, as we said, we did clear most -- our seasonal goods cleared very good at Journeys.

And so we are in very good shape there.

And in the case of Journeys, it didn't weigh heavily on margins.

Our vendors are always good partners.

In the case of Lids, they have been aggressively clearing in particular the underperforming snap-back styles and made huge progress on concentrating the assortment down to the most productive styles.

They still have a little ways to go, but they made huge progress on that.

And they are keeping it lean and they are going to continue to treat this as sort of a fast fashion.

Because, to be honest, we know what is hot right now, six months from now, that may not be hot.

This is a very fast-moving category, and so we are committed to staying very lean there.

Beyond that, Lids is -- they are a little heavy on a square foot basis from where we want to be, but it is not at-risk inventory.

It is largely made up of carryover inventory.

Let me expand on that a little bit.

In the case of Journeys, first of all, in the clearing of seasonal merchandise, I think the bottom-line impact is -- in my detailed report, which was filed this morning, we indicate that Journeys' gross margin actually was up in the second quarter, by a small amount, which again, indicates the great job they did in clearing seasonal merchandise.

In the question of Lids, their gross margin was down, and it is partially due to the fact, as Bob said, in certain categories of snap-back, we are moving pretty aggressively to bring inventory levels down.

And so the ASPs were down a lot in those categories, which impacted our gross margin.

And it was part of the reason why the gross margin was down in Lids.

But the interesting thing is that even with the reductions and the promoting to bring inventory levels down, the gross margin, though down from last year in those categories, is still very strong.

So it is a question of relativity to where it was last year rather than bargain-basement pricing to rid ourselves of that product.

Okay.

And just last question, dealing with Lids, are you seeing other retailer -- anything that would indicate to you that other retailers have cut back on their snap-back offering because maybe they realized it is not quite as easy as it appears?

Yes, and it's -- the cutbacks have come from the retailers who you would not normally expect to be in the licensed category.

Other guys that participate regularly in the licensed space are still there.

So it is more the interlopers that seem to have exited, and I think the reasoning is probably what you just cited -- they discovered how fast this is.

And so they are in the business for a couple of months, the next thing you know, they are not in the business because they got the wrong stuff.

So do you think it is these interlopers who had the bigger negative impact on the overall marketplace?

Would you rather see the interlopers out of the way?

My gosh, yes.

Because they -- it is such a small percent of what they do, they end up just taking very hard marks and exit the category.

Absolutely would love to see them stay out of the business.

All right, thank you.

Steve Marotta, C.L. King and Associates.

Good morning, everybody.

First question is regarding a potential accounting change.

If that happens, and the change, I assume, will affect then GAAP earnings, will the change also be subsequently pulled out of non-GAAP earnings?

It will certainly this year.

Okay?

We will pull it out, because we have given the guidance on one basis, so we will pull it out this year.

And again, if the change is made going forward, let's just say that is still under consideration.

We certainly will highlight it, no matter what happens going forward.

But going forward, we really need to think about it some more.

But we will highlight it going forward and also for the balance of this year, we will pull it out one way or another.

Okay.

Bob, you gave a lot of detail regarding snap-backs.

If you gave this nugget, please forgive, I didn't get it.

Did snap-backs comp positively for Lids in the second quarter?

No, they are down a bit, but they are still a very important part of the business.

Remember again that the comparisons start to get funny for us because some of the snap-back business that we have been doing is liquidation of stuff that isn't really at good margin.

And so the quality of our snap-back sales is getting better, and that is really the more important thing.

Jim gave the inventory number, it was 9%, and it's 19% of our sales.

So that is a big spread.

And so to some extent, we are managing it down ourselves, but managing it down to those items that are full-priced selling product, and so it is a much healthier business for us.

Okay.

Turning to Journeys, do you think that the strength in technical athletic in other parts of the mall is negatively affecting what happened in the second quarter in back to school to date?

And also, I know you have confidence as it relates to the change in the product mix for the balance of the year.

But assuming that that strength in technical athletic continues, are you concerned that it eats into that product category as well?

You know, our customer in Journeys is largely a teenager, wearing it for the purpose of fashion.

And when technical athletic becomes an important part of fashion, obviously -- for teenagers, obviously it is an issue.

Right now we are not feeling like there is that kind of big swing going on.

And you can't say it won't happen, you can't say it isn't a piece of the puzzle, but we don't see that as being a big driver right now.

Okay.

That's great.

Thank you.

Mitch Kummetz, Robert W. Baird.

Yes, thank you.

A few questions.

So let me start with you, Jim.

You've provided comp outlook for the back half by quarter.

Could you talk a little bit how you see that playing out by concept?

I'm surprised you asked that question.

Journeys -- I will go to the third and fourth quarter.

Journeys -- in the third quarter, Journeys Group will be down slightly, and Schuh will be down low to mid negative.

We are looking for Johnston & Murphy to be in the mid-single-digit range and Lids to be down in low single digits.

And then in the fourth quarter, we expect again -- as we said earlier, the comparisons become a lot easier as we get through the third quarter and certainly in the fourth quarter.

And so what we are looking at in Journeys is an increase in the mid-single-digit range.

And last year in the fourth quarter, they were negative 1.

And then Schuh, we are looking for essentially a breakeven in the fourth quarter from a comp standpoint.

And Johnston & Murphy in the 5% to 6% range.

And then Lids, we are expecting Lids to be slightly positive in the fourth quarter, and that is going against a minus 10% last year.

So we are expecting everybody to be positive in low single digits.

Schuh, slightly positive, and then in the case of Johnston & Murphy, mid 5% to 6% positive.

Got it.

That's helpful.

And then, Bob, on Journeys, again, you've provided a number of reasons for why you expect that business to improve, and the first of which you gave was just the shift in mix.

Could you give us some sense as to how much the business skews toward casual in Q4 versus the balance of the year?

I think that would be helpful.

It is a big move and, obviously, we put boots in casual, so that is the biggest driver.

We're not going to quantify it for you, but it is a pretty substantial mix shift.

And importantly, we track those two -- fashion athletic and casual, we track those two broad categories.

And despite the tough comps within Journeys, the casual category has been doing actually very nicely.

And so when we look at intensifying around a lot of that business in the fourth quarter, that gives us some confidence that that is going to work in our favor.

And obviously, we are ever more distinctive as a retailer when you get onto the casual side for teenagers relative to the athletic site.

When you're talking boots in Q4, actually, I tend to think more female than male.

Has there been much of a difference in the performance at Journeys, let's say, for Q2 or even early Q3 on a gender basis?

I can't quantify it for you sitting here, but I will tell you that we are seeing good early reads on both male and female.

Okay.

And then lastly, Jim, in terms of the calendar shift, could you say what the sales and earnings impact was on Q2 and then how that reverses itself in Q3?

Well, it is obviously hard to pull out the earnings impact.

But again, these are all marginal sales so the contribution is important.

Anyways, in the second quarter, the improvement in sales as a result of the calendar shift was about $20 million.

And the negative swing in the third quarter, based on last year, is probably around 15.

Okay.

All right, great.

Thanks, guys.

Good luck.

Thanks.

Jill Caruthers, Johnson Rice & Company.

Good morning.

Just to follow up on the previous question.

Boots, we have heard from some other footwear retailers that they have had success with the short boot and whatnot in the first half, despite it not being a seasonal peak for boots.

Did you have any success in that product at Journeys?

Just seeing if that bodes well for back half -- or your fourth-quarter outlook.

Now, Jill, you're getting to the point where the Journeys guys would get mad at me.

So we're going to just tell you that we are committed to boots and we are not going to parse it for competitive reasons.

All right.

And then on Lids, could you remind us, NFL, how much of that is your business in the back half?

And just refresh us on the shipment delays, when you actually got that new product in last year, so we know kind of when we should see an uptick in that business for this year?

Jim is hunting for the actual number.

Let me give you the flavor of it.

NFL is interesting in that it builds every month.

So September is good, October gets better, November gets better, December gets better.

Obviously, when baseball goes away in October -- now it is early November, that shifts more attention from the media on to the NFL.

Remember last year, there was the shift to New Era and to Nike.

And in the case of New Era, the deliveries were great, but New Era really focused down heavily on what is known as the sideline hat, which in their case, they basically did a product that mimics the baseball hat, which is, in their parlance, the 5950 silhouette.

And what we like about this year is they have built on that success with a greater variety around that hat, and we think that additional amount of assortment will be helpful to us.

In terms of Nike, of course, New Era already has a pipeline of factories and since they were doing the same silhouette, getting it done was easy, so their deliveries were great.

In the case of Nike, deliveries were challenged.

And this was not just us.

Even the teams were in a struggle early on.

And I think it is fair to say that we never caught up last year to our target level of inventories on some of the important product.

And so I think it is fair to say that we were challenged through most of the year.

Some of it was specific teams.

So year-over-year, we just feel we are in much better shape.

And Jim is hunting for the numbers.

Jill, I have got it here and I will either find it before we get off the call or call you back.

I don't recall it offhand, but I will get it for you.

Appreciate it.

Thank you.

Chris Svezia, Susquehanna Financial Group.

Hey, guys.

Thanks for taking my question.

I just wanted to go back just on the Journeys business.

I am just curious, can you just maybe clarify at what point does really the business start to change from more of a casual athletic business -- or went from a fashion athletic business to a casual business?

Is that really in the fourth quarter?

And secondarily, I know -- I am just curious -- is there any changes or editing in assortment that can be done on the fashion athletic side of the business at this point?

Or is it -- the season is kind of it over, can we kind of block and tackle with what we have?

I am just curious if there is any editing that has been done in that category.

I will work backwards.

The team never stops editing.

So they are working on what our customers are telling us what worked for them, and shifting the assortment as they can.

And there is still some time to work that.

Obviously, in volume -- in terms of big volumes, we are pretty set for the year.

In terms of casual business, in terms of a shipment basis, we start dropping a lot of fall goods in September.

In terms of when it kicks in, I need the Farmer's Almanac, because it does become a little bit weather-related as to when it really takes off.

But obviously, as we get into holiday, which is so important for us, we know that at holiday, casual will be very, very important.

And one other thing, Chris, on this casual thing, it isn't like it is a new story.

We have been talking about casual for a while now, continuing to show increases.

I think the big point is we continue to think we will see nice increases in casual, driven in part by -- we are expecting, as Bob said, a pretty good boot season.

But the issue in the second quarter was -- or the third quarter now is really the fashion athletic being weaker than anticipated.

So the strength in casual has been there for a while.

It isn't like it is happening overnight.

We have been talking about it, about how that has been strong for a number of quarters.

So it just continued strong.

The issue was that fashion athletic was weaker than we had anticipated.

Okay.

Just on Schuh, I know you had mentioned it seemed to be more of a traffic issue.

But are they seeing any issues from a fashion athletic versus casual perspective, or no?

This is really more of what you are seeing here in North America?

They have seen less of a difference in the mix between fashion athletic and casual.

Obviously, they also experience the mix shift in terms of the difference between the two when we get into fourth quarter.

And they, too, are -- I believe in that boots will be very important to their business.

So that is kind of where they are.

Okay.

How important is NHL for the fourth quarter this year versus last year, non-strike?

I am just curious if that is really a needle-mover or no, not really, for you guys.

It's a small needle-mover -- how's that?

It is not insignificant, but again, with the strike last year, the amount of the move up until the point where the strike got settled and then we got fully assorted, the percentage gains in NHL should be pretty big.

It's just that NHL systemwide isn't that big.

Obviously, for our Canadian business, it will be terrific.

Okay, and just lastly on the margins.

Jim, just the third quarter versus fourth quarter, I guess tough to leverage in the third quarter.

Is most of the revision really occurring?

You mentioned the second quarter was sort of below your plan.

But as you think about the third quarter, is that really where -- probably the biggest adjustment relative to what you see out there and consensus needs to take place in the fourth quarter to a lesser degree, because the comp forecast isn't changing that dramatically in the fourth quarter?

Well, think about the comparisons, right?

The comparisons on a quarterly basis swing most heavily going to the fourth quarter.

And if you get -- if you go beneath that, a big mover for Lids is in September, when they reacted on the snap-back pricing.

That happened at the end of September a year ago.

And for Journeys, there is a bit of an inflection point around October for their business becoming more challenging.

So it's sort of the end of the third quarter, and then into the fourth quarter is where we expect to see the improvements, just because of the comparisons.

In terms of, again, the biggest miss from our internal numbers was on the second quarter, and to a large extent, back-to-school.

But in terms of the Street, one of the big variations, I think, and it affected what the Street was anticipating versus what we were anticipating, was that we had a higher second quarter, and the Street was basically higher than we had anticipated in the fourth quarter.

(technical difficulty).

But again, the Street was probably a little heavy.

We think it is a little heavy in the fourth quarter.

Okay.

And just on the earlier question, the NFL in the back half of the year as a percent of our total is in the teens.

NHL in the back half of the year as a percent of total in a non-strike year runs in sort of low to mid-single digits.

All right.

Thank you, guys.

All the best.

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

Okay.

Thank you all for joining us.

Appreciate spending time with you, and we look forward to doing the same thing in roughly three months.

Have a good day.

This concludes today's conference.

Thank you for your participation.