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Genesco Inc. (NYSE:GCO)

Q3 2013 Earnings Call

November 30, 2012 8:30 am ET

Executives

Robert Dennis – President, Chief Executive Officer

James Gulmi – Senior Vice President, Chief Financial Officer

Analysts

Scott Krasik – BB&T Capital Markets

Sam Poser – Sterne Agee

Stephanie Wissink – Piper Jaffray

Mark Montagna – Avondale Partners

Steve Marotta – CL King & Associates

Jill Caruthers – Johnson Rice & Co.

Chris Svezia – Susquehanna Financial Group

Operator

Good day everyone and welcome to the Genesco Third Quarter Fiscal Year 2013 conference call. Just a reminder – today’s call is being recorded. Participants on the call expect to make forward-looking statements. These statements reflect the participants’ expectations as of today but actual results could be different. Genesco refers you to this morning’s earnings release and to the company’s SEC filings, including the most recent 10-Q filing filed on September 6, 2012 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 Mr. Bob Dennis, Chairman, President and Chief Executive Officer. Please go ahead, sir.

Robert Dennis

Good morning and thank you for being with us today. With me is Jim Gulmi, our Chief Financial Officer; and 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’ll begin the call today with a few remarks about the third quarter and our November sales performance, and also provide some color on the start of holiday shopping. Then, I’ll turn the call over to Jim for a review of the numbers and then I will return to provide an overview of our operating segments and our updated five-year plan before we open the call up for questions.

Our third quarter results reflect a solid overall performance with adjusted earnings per share of $1.44, up from $1.21 last year. Third quarter comps were plus-4%, inline with our expectations and come on top of 12% a year ago and 9% the year before that. These comp numbers do not include an 11% increase in e-commerce sales, reflecting the work we’ve done expanding the product offering, integrating e-commerce with our stores, and enhancing the functionality of our various sites.

As noted in the release, we are raising our guidance for the year to a range of $5 to $5.08 per share. We will discuss this guidance in more detail later in the call.

In terms of monthly sales trends, the third quarter played out much the way we thought it would with back-to-school acting as a catalyst. Our brick-and-mortar businesses performed well in August and into early September, and as we expected the consumer was less inclined to shop over the remainder of the quarter. We see this pattern as an indication that consumers continue to respond favorably to buying events with softness persisting between these events. So November got off to a slow start due in part to Hurricane Sandy. While sales improved in the second half of the month, we finished with a negative 4% comp for the month and we estimate that the storm reduced overall comps for the month by about 1 to 2%.

Historically, a solid back-to-school performance has been an indication that our merchandise is well positioned for holiday. That said, our current guidance of essentially flat comps for the fourth quarter reflect several factors: first, a tough comparison with the fourth quarter last year when comps were up 12%; second, the likelihood that we will not recoup all of the sales lost to the hurricane in the fourth quarter; and finally our expectations for only partial improvement in some of the near-term challenges in the Lids businesses, challenges that they were dealing with in the third quarter. I will discuss these challenges when we discuss the Lids business in more detail later in the call.

For the holiday weekend, we delivered a low single-digit comp increase in the U.S. with Journeys up mid-single digits and Lids down low to mid-single digits. Our comp does not include e-commerce, for which orders booked were up 52% for the weekend, inclusive of Cyber Monday.

One important side note on the weekend – the number of our stores required to be open Thanksgiving evening or early Friday morning was up significantly. Our teams were well prepared to meet the considerable challenges of staffing small box stores with extended hours. We want to both congratulate and thank each of the retail management teams and especially all of our store associates whose holidays were disrupted for executing this event so effectively.

During the third quarter, we bought back approximately 145,000 shares for roughly $9 million at an average price of $59.40, leaving about $66 million available under our current authorization for additional repurchases.

And now, I’ll turn the call over to Jim.

James Gulmi

Thank you, Bob. Much of the detailed financial information for the quarter has been posted online, so I will only be making a few comments. As Bob pointed out, third quarter overall performance exceeded our expectations. Comp sales were up 4% for the quarter. This compares to 12% comps in the third quarter of last year and 9% two years ago. The Journeys group had an 8% comp increase on top of a 15% increase last year. Comps in both periods for the Journeys group have been adjusted to reflect the integration of the Underground by Journeys stores.

Comps were 9% for Schuh in the third quarter this year. As you know, comps for Schuh are now included in the total comp sales as of July 2012. The Lids group had a minus 5% comp decrease. This compares with an increase of 8% last year. Johnston & Murphy had a 6% comp increase on top of a 7% increase last year in the third quarter. I remind you that these comp sales do not include our direct businesses – that is, e-commerce and catalog sales. Genesco’s overall direct businesses increased 11% in the quarter. November same store sales for Genesco overall decreased 4% and direct sales increased 10%.

Consolidated net sales for the quarter were $664 million, an increase of 8% over last year. Gross margin in the quarter was 50.3% compared with last year’s gross margin of 50.4%. Adjusting for all the items broken out in the press release, we were able to leverage expenses by 50 basis points in the quarter. Expenses as a percent of sales dropped to 41.9% from 42.4% last year. Expenses included $0.08 per share of additional contingent bonus accruals at Schuh versus last year’s third quarter related to their better than expected operating performance. Just to remind you, this is a one-time payment built into the acquisition agreement payable in FY16 that is contingent on Schuh’s performance during the first four years of our ownership.

For the quarter, adjusted operating income increased 13% to $55.7 million or 8.4% of sales compared with $49.3 million or 8% of sales last year. For the nine months, adjusted operating income was $115 million or 6.4% of sales compared with $86 million or 5.5% of sales last year. This improvement in operating margin of 90 basis points was driven by expense leverage as gross margin as a percent of sales was even with last year.

We earned $1.44 per share in the quarter, adjusted as shown on the attachment to our press release, compared to last year’s adjusted earnings per share of $1.21. This is an increase of 19% on a year-over-year basis. Our adjusted earnings per share for the nine months is $2.92 compared to $2.10 last year, or an increase of 39%.

Inventories were up 10% year-over-year compared with a sales increase in the third quarter of 8%. We feel we are well positioned for the holiday selling season. We ended the quarter with $40 million in cash compared with $36 million last year, and with $92 million in debt compared with $148 million last year. This debt includes $28 million of the remaining U.K. debt assumed in connection with the Schuh acquisition and normal seasonal borrowings to finance working capital requirements.

As we mentioned during our last quarter conference call, our Board adopted a new $75 million repurchase authorization early in the third quarter. During the quarter, we spent about $9 million in purchasing approximately 145,000 shares of our stock at an average price of about $59.40. All together in the second and third quarters, we have purchased 491,000 shares at a cost of about $29 million or $59.91 per share. We currently have about $66 million available under the most recent authorization.

Also one comment on the very low tax provision in the quarter, which we have adjusted out in our non-GAAP adjusted earnings per share. This is primarily due to a net benefit in the quarter of $9.3 million or $0.39 per diluted share recognized in connection with the resolution of various previously uncertain tax positions.

For the quarter, capital expenditures were $20.4 million and depreciation was $14.8 million. This compares with $14.4 million of capital expenditure and $13 million of depreciation last year. In addition, we have spent $2.9 million in the quarter and $13.7 million year-to-date in connection with acquisitions which for the most part were related to Lids Locker Room.

Now I would like to spend a few minutes on our guidance for FY13. Based on our strong third quarter, we are raising our full-year outlook. We now expect adjusted earnings per share to be in the range of $5 to $5.08, an increase from our previous range of $4.88 to $5. Using the high end of our new range, this represents a 24% increase over last year. This is on top of a 65% increase in earnings per share last year and a 33% increase the previous year. This assumes earnings per share for the fourth quarter of $2.09 to $2.17. Consistent with previous years, this guidance does not include about $1.5 million to $2.5 million pretax or $0.04 to $0.07 per share after-tax in expected non-cash retail store impairments for the full year. This amount compares with last year’s expected non-cash store impairments, other legal matters, and network intrusion expenses of $2.7 million or pretax or about $0.07 per share after-tax.

In addition, we will continue to exclude the amortization of the Schuh deferred purchase price from our EPS guidance. The deferred price amount in FY13 is expected to be approximately $12 million or $0.50 per share for the full year. The guidance does include the full-year accrual for the contingent bonus built into the acquisition agreement which we currently expect to be approximately $16 million or $0.50 per share.

The following are assumptions we used to develop this guidance. First, we are assuming an essentially flat comp for the fourth quarter. Our expectation for the quarter by segment is flat to up slightly for all of the retail businesses, except for the Lids group which we expect to be in the low single digits negative. In developing this comp, we assume that the month of December will make up over 50% of the quarter’s sales and the rest will be spread evenly over the balance of the quarter. For the month of November, our comp was negative 4% and we are assuming an approximate positive 1% for the remaining two months of the quarter. This results in a comp increase for the full year in the 4% range.

We are also assuming an overall sales increase of about 13% for the year. Adjusting for the Schuh acquisition by excluding sales for the entirety of both fiscal 2013 and fiscal 2012, Genesco sales are expected to increase about 8% for the year. Our guidance assumes a gross margin percent of sales about flat with last year and a positive expense leverage of about 60 basis points. This results in operating income improvement of about 60 basis points to 7.6%. The tax rate assumption is about 37% and the share count assumption for the full year is about 24 million shares.

We are also expecting capital expenditures for the full year of about $81 million and depreciation will be about $59 million. We are forecasting 112 new stores, 32 acquired stores, and we are planning to close about 53 stores for a net increase of 91 stores. We expect to end the year with approximately 2,478 stores, an increase of about 4% over fiscal 2012. We are also forecasting square footage growth of almost 7% for fiscal 2013.

Lastly, we would like to give you some early directional guidance for next year. We expect earnings per share growth of 10 to 12% next year. Currently, we are looking for low single digit positive comps in fiscal 2014. The EPS guidance is subject to the same adjustments as in previous years, primarily excluding non-cash impairments and the ongoing adjustment for the Schuh deferred purchase price. Also for those beginning to model the quarterly breakdowns for the next year, please remember we had an extremely strong first quarter this year. As all of you know, the back half of our fiscal year is when we make the bulk of our money. Historically, we have had about 60% of our sales and about 70% of our operating income in the back half of the year, and we would expect a similar pattern next year.

Now I’ll turn the call back to Bob.

Robert Dennis

Thanks, Jim. Turning now to a discussion of our individual businesses, at Journeys sales were solid even in the face of tougher comparisons. Comps for the Journeys group increased 8% in the quarter on top of 15% a year ago and 9% the year before that, reflecting a good back to school season and continuing success by our buyers in identifying and capitalizing on current fashion trends. The Journeys stores had a comp increase of 8% with a footwear ASP increase of 6%, driven primarily by the cost increases from our suppliers we’ve discussed over the previous three quarters. Starting in the fourth quarter, we will begin to lap this recent round of ASP hikes. The footwear ASP increase in Journeys last year in the third and fourth quarters were 2% and 7% respectively.

We continue to be pleased with the momentum at Shi by Journeys and Journeys Kids, which comped up 11 and 12% respectively in the third quarter. The growth at both businesses has been promising, moving us closer to a point where we’d be comfortable further expanding these concepts. Finally, Journeys direct sales increased 6% in the quarter.

Overall, footwear trends remain solid across the Journeys group and we feel good about our assortment, including boots for holiday. For November, comps for the Journeys group decreased 2%, including an estimated 1 to 2% reduction attributable to Hurricane Sandy.

Now to Schuh, which posted a strong quarter despite the challenging U.K. economy. Sales were up 18% driven by a 9% increase in comps and 15 new stores in the U.K. and Ireland, or an increase of 25% in the store count compared to last year. The Schuh team continues to take advantage of the increased availability of attractive real estate locations and lower rents that the current U.K. environment is providing. The Schuh e-commerce business was also strong in the quarter with sales up 12%. For the third quarter, e-commerce represented almost 14% of Schuh’s total sales.

In addition to opening four new Schuh locations in the quarter, we are pleased to report that we opened three Schuh Kids stores. We have had great success with Kids Towers in our regular shoe stores and are anxious to see if this translates into successful freestanding Kids stores. The development of this new concept is a great example of the collaboration between our U.S. and U.K. teams and represents a logical extension of Schuh’s position in the marketplace. For the year, we now expect to open a total of 16 new stores, 13 Schuh and 3 Schuh Kids, representing an increase in square footage of roughly 15%.

Turning to the Lids group, comp sales were down 5% in the quarter compared with plus-8% last year and 13% the year before that, with the decline reflecting pressure on our fitted hat business due to the popularity and wider distribution of snapback hats. To a lesser extent, it also reflects the tough comparison in our seven St. Louis Cardinal clubhouse stores from the Cards’ World Series win a year ago and the negative impact of the NHL strike, especially on our Canadian stores. These two factors combined reduced the group’s comps by about 1% in the quarter. For November, actual comps for Lids were down 8%; however, excluding the impact of both the Cardinals and the NHL and taking into account the estimated impact of Hurricane Sandy, we estimate that the Lids November comp would have been down only mid-single digits.

In the third quarter, snapbacks continued to be the best-selling style in our headwear stores, and as a percent of sales were pretty consistent with the past several quarters. This has come partly at the expense of demand in various fitted categories. Most recently, snapbacks have become more widely distributed in the mall than other headwear and so we are dealing with more competition than is usually the case. We consider this a temporary headwind and believe that as the snapback trend eventually diminishes, our breadth of merchandise and buying power will again provide the competitive advantage that we’re accustomed to.

We did experience a significant sales boost in the NFL category across our Lids retail and e-commerce platform with the start of the regular season. Both the New Era NFL headwear and Nike NFL jerseys carry higher price points than the previous licensed product, and this has helped drive gains in the category. The positive effects from the consumer appeal of the new NFL product were partially offset in the third quarter by delayed deliveries of NFL apparel. Delayed deliveries are a typical blip during a license transition and we’ve already seen an improvement as the fourth quarter has gotten underway. We expect the NFL will be an even bigger contributor to the top line in Q4 for this reason.

Pursuing our growth strategy, we opened 23 stores in the Lids Sports group during the third quarter and acquired eight stores. Altogether, we ended the quarter with 82 Lids Locker Room and 55 Lids Clubhouse stores. Subsequent to the end of the third quarter, we acquired Fans Edge, a chain of 12 stores in the locker room space.

Lids e-commerce continued to lap last year’s tough comparisons with strong results. Net sales increased 13% in the third quarter compared to 12% in the third quarter last year, driven by increased conversion as consumers responded favorably to the site’s broader product offering. For November, Lids e-commerce sales were up 40%.

Now to Johnston & Murphy, where J&M retail comps were up 6% over last year driven in part by a continued shift towards higher priced dress shoes. The J&M wholesale business was up 16% and the direct business was up 15% in the quarter. November comps decreased 3% but we estimate that Hurricane Sandy reduced that number by roughly three percentage points. Finally, the licensed brands division saw a nice increase in net sales this quarter, up 7% over the prior year.

As we look ahead to the fourth quarter, our outlook is somewhat mixed and there are lost of moving pieces. First, we believe that November’s business was better than the headline comparable sales number. As we’ve noted, we think the combination of Hurricane Sandy plus the Cardinals World Series and NHL offsets at Lids cost us roughly two to three percentage points of consolidated comp for the month. Second, the uptick in comps for the Thanksgiving weekend reinforces our general sense that consumers are motivated by shopping events and are thus more likely to shop in December than they were in the third quarter and early November, so we expect to see overall comps that are slightly positive for the rest of the holiday season. Third, we’re expecting improvement in some of the challenges Lids faced in the third quarter. Most notably, we look to benefit from the new NFL apparel now that the license transition is behind us. We obviously don’t know when the NHL strike may be resolved and we are expecting little, if any, help in that regard. We expect the effects of wider snapback distribution to continue in the quarter, and finally the Cardinals headwinds will also be a factor, although they diminish through the quarter. So on balance, we continue to believe it is prudent to be somewhat conservative in our near-term outlook, but we feel good about our ability to deliver on our improved EPS guidance of $5 to $5.08 for the year.

Longer term, despite whatever challenges the fourth quarter serves up, we remain confident about Genesco’s prospects. We recently updated our five-year plan to fiscal 2017 and our new sales goal of $3.5 billion for that year reflects the steady upward trajectory we have been on for the past several years. The key assumption is for continued steady comps in our core businesses of low single digits. Beyond that core, our focus remains on the same four key growth levers we’ve outlined in the past. First, we plan to build on the successes at Schuh where we see tremendous long-term potential and further expanding its presence within the U.K. and potentially in continental Europe over time. The introduction of Schuh Kids now gives us what we hope is a second growth vehicle in the U.K.

Second, we continue to open new stores and pursue acquisitions to grow our Lids Locker Room and Clubhouse concepts and drive economies of scale, much as we did with our rollup of the hat business. Third, we plan to capitalize on our strength in the U.S. marketplace by further extending our Lids Sports, Journeys, and Johnston & Murphy businesses into Canada. We have seen promising results from the expansion we’ve done in Canada so far and we believe that with our scale and buying power we have the ability to do more. And finally, we continue to invest in our e-commerce digital and mobile infrastructure across all of our retail brands to ensure that we are able to capture demand, regardless of what channel the consumer chooses to use.

In summary, we are staying the course on our current strategic direction. We see our recent solid results, especially in light of choppy economic conditions, as a testament to the solid fundamentals of our business. Our consistent performance is anchored by our scale and our market-leading position in each of our difficult to replicate businesses, and by our operators’ relentless focus on execution. We remain on track to achieve our long-term growth plans through organic expansion and strategic acquisitions while continuing to improve our bottom line performance.

And with that said, Operator, we are now ready for questions.

Question and Answer Session

Operator

Thank you. [Operator instructions]

We’ll take our first question from Scott Krasik with BB&T Capital Markets.

Scott Krasik – BB&T Capital Markets

Hi, good morning everyone. Bob, can you help us understand what happened in November? Lids – you know, the e-commerce business was ripping and the same store sales were pretty awful. Maybe give us a little bit more color behind that.

Robert Dennis

Sure. When you look at November for Lids, the first thing we called out is snapbacks. We are still doing a lot of business. That category is still strong, but Scott, if you walk the mall you’ll see that a lot of people have gotten opened up on it. It’s an easy category to manage. We like difficult to manage businesses. We like sized hats where lots of different teams matter, and therefore your distribution center plays a central role in succeeding. This is a narrowly assorted, one-size-fits-all business and a lot of other vendors have popped into this space, just being opportunistic, and so there’s more people playing in this than we’re used to and that makes it a little tougher. So that’s the first thing.

The Cardinals win – you know, we only have seven St. Louis Cardinals stores, but when you look at the numbers, what happens when you get the big surge of sales in those stores from them winning the World Series, it’s sort of an October through mid to late December event, and there is no way we can do enough Giants business in our regular Lids stores to make up for what we lost in dedicated stores.

And then the NHL is a big deal for us now that we’re highly penetrated in Canada, and it’s the Canada stores in particular that get rocked by the NHL because the NHL is a very small percentage in most of the U.S. stores, but in Canada it matters, so we’re getting hit there. And the last thing is we had a little bit of a struggle getting our hands on enough NFL product on the apparel side, but we see the ship getting righted on that end.

So there were a bunch of factors, plus generally our view – and I think yesterday’s release by a lot of retailers confirms – that November in general was a challenging month. We view it as being something that’s not driven by events until you get the weekend, and the weekend wasn’t enough to make up for the shortfall earlier in the month. So there’s a variety of things. Some of them persist; some of them go away over time. The snapbacks one is hard to predict when it fades, but we’ll have to fight the good fight while it’s out there.

Scott Krasik – BB&T Capital Markets

And how are the snapback comps trending? I mean, are they down 10, are they down 20? Are they down 50?

Robert Dennis

No, no, they’re not down. Snapbacks is holding share in our stores. It’s a very important trend, but it is taking away from other parts of our business and the snapback business is getting spread out to other retailers who ordinarily would not be in the hat business. So our snapback business is very strong. I don’t have a comp number for you, but as a percent of sales it’s been holding steady, so it’s probably comping somewhere in line with the rest of the business. It just is more competitive at the moment.

Scott Krasik – BB&T Capital Markets

Okay, and why were the e-commerce sales so strong?

Robert Dennis

You know, we’re doing a lot of work on e-commerce. We’ve brought in some resources in terms of people and we’re being much more aggressive with the way we manage that. We’re also extending what is available on the web, and so—remember, it was a headwear site, and so we’re doing a better and better job of taking the core site, Lids.com, and making it a site that is relevant for all categories of licensed sporting goods. So that’s a big chunk of it.

And as you know, when we report our e-commerce business, it also has a lot of teams in there because we’re running websites, and so we’re actually getting hurt – no surprise – right now with the Jets. But it really is just execution and getting better at the way we run that business, and having more product available.

Scott Krasik – BB&T Capital Markets

And is this something that just started for fall, because in the spring your e-commerce sales weren’t that good.

Robert Dennis

Yeah, last year—you have to look at two years of comps. In the first half of this year, we were going against the introduction of snapbacks. We were really the only people aggressively in the space at the very beginning of this trend, and it was so hot people were jumping on the web to try and get what was new. So we had huge double-digit gains in the first half a year ago, and then we were holding sure against that, which was a pretty good performance we thought. And now we’re back to sort of an normalized level of increases.

Scott Krasik – BB&T Capital Markets

Okay. And then Jim, in terms of the guidance you laid out for next year, are share repurchases contemplated in that, and what level of the stock price do you get more aggressive buying back stock?

James Gulmi

To answer the first part of the question, no, there are no further stock repurchases built into that guidance; and secondly, we really haven’t given a number as to when we’re going to jump in. All I can say is for the last two quarters, we’ve jumped in—I mean, we didn’t jump in, the average was about $59 to $60. But we have not set a specific price. Obviously that moves around some, but that’s what we bought—but that was the price for the last two quarters on average.

Scott Krasik – BB&T Capital Markets

Bob, can you envision a scenario where you’re borrowing to buy back stock?

Robert Dennis

I don’t know; it depends. I wouldn’t say that we would consider ourselves constrained by cash on hand. You know, we’re very cyclical, Scott, so were we to buy stock in two weeks, we would be borrowing because we’re at a peak seasonal need in terms of our borrowings. But we think that right now, obviously because we were in the market, that it is a good investment for shareholders, and we’ll just continue to evaluate that down the road. I think the message is we’re not afraid to use cash to buy stock when we thin it’s a good deal for our shareholders. We do not hoard cash, and as I think you know, our EVA system is structured in a way that were we to hold excess cash, we the management team get penalized for that because we can’t earn our cost of capital on cash. So we feel compelled to do something with it, and recently we thought that buying stock was a really good investment.

Scott Krasik – BB&T Capital Markets

Okay, thanks guys.

Operator

We’ll take our next question from Sam Poser with Sterne Agee.

Sam Poser – Sterne Agee

Good morning everybody. Thanks for taking my question. I’ve got a couple. The EBIT at Schuh fell in the quarter. Can you talk about how that plays, or the reason for that?

James Gulmi

Yeah, there are a couple numbers that need to be factored into that. You’re looking at the GAAP numbers there, and there was a drop. Now, we talk about the non-GAAP numbers and we make the adjustment for the deferred purchase price. That adds back about $3 million in both quarters, both this quarter and last quarter; so it’s still down, but the dollar amounts are up and obviously the operating income as a percentage of sales is better.

The other item which is really a big item is the Schuh contingent bonus which is in there, which again is related to the acquisition. When you add that back in absolute dollars, the dollars are actually up from last year. Operating income is up. The operating percentage is down a little bit, but then there’s another adjustment there in that they’re having such a strong year, we also have the annual EVA bonus here at Genesco and we factor that in and make that adjustment. You make the adjustment for all these bonuses, actually not only the dollar is up but the operating margin is up.

So the reason it’s down is really some unusual items, a couple acquisition-related and then a higher bonus due to they are performing so well this year. So in absolute terms, adjusting for all that, their operating margin was up and, as we’ve said before, as Bob said, we are very, very pleased with the performance of that business.

Robert Dennis

And just to be clear, Sam, because I think this is an important point, the last purchase price payment that is contingent on performance – first of all, we book that even into our non-GAAP numbers as an expense, but they are doing so well that year-over-year, that number went up a lot in the third quarter over last third quarter. And important, this is a number, an expense that once we get to the end of the four years – and we’re a year and a half in – that goes away. We are paying regular performance bonuses to the Schuh team, so this payment is outside the normal course of business and so it’s important to think about two and a half years from now, that last expense then becomes income to Genesco.

Sam Poser – Sterne Agee

Thank you. Thanks for all that detail. And then going back to Lids for a second, I have two more question on Lids. One, you have these strapback hats that I see in the stores – I want to know about that. And number two, because these other people have gotten in, does that sort of reduce—have you found your traffic down significantly just because you aren’t necessarily the—you know, when fitted comes back you’ll end up being more of the go-to place, or when the snapbacks fade you’ll become more of the go-to place to find hats in the malls. It’s sort of spread out, your traffic. How has the traffic been impacted, do you think, by the trend?

Robert Dennis

Yeah Sam, you know, we’re a small box store so we don’t have traffic counters, so it’s just the judgment of our team. They’re seeing a lot of people. The difference is that it’s just very visible throughout other parts of the mall that that product is available, and we know that hats are an impulse item and so the impulse could get triggered at any point in the mall.

We believe that in this business, you continue to win in the long run by having the broadest and deepest assortment, and outside of the snapback trend, we’re all over that. And so for that reason, it is our belief that once this trend fades, we return to being the go-to place for hats because most of the retailers who have jumped into this can’t jump into a broadly assorted, deeply assorted, sized business where local teams and national teams and having that assortment right matters. You need a big commitment to the category with a warehouse that replenishes, and that’s not the way these guys are playing the game. So we feel in the long term we’ll be fine; we’re just battling the short-term trend.

Strapbacks are just a variation on snapbacks, so we work with the vendors to say, what else can we do to be new? One of the ways we’re battling the competition is we want to be at least the freshest look in the store, and so we’re making sure we turn it and we’re making sure that we’re being innovative and, where possible, getting exclusives, all the things that we’re good at in the rest of the business. As I said, this is not a business that went away in our stores. We’re doing well with snapbacks; there’s just a lot going on in the mall.

Sam Poser – Sterne Agee

Thanks. I’ll get back in. Thanks.

Operator

And we’ll take our next question from Steph Wissink with Piper Jaffray.

Stephanie Wissink – Piper Jaffray

Good morning everyone. Guys, I have just one follow-up question to one of the earlier questions on snapbacks, on Sam’s question. Do you feel like you’re being forced to be more price competitive with what you’re seeing across the mall? Are you running more promotions on that category specifically to try to maintain some share? And then secondly, Jim, if you can just talk about that long-term guidance of 3.5 billion. That implies essentially an incremental billion dollars of revenues. If I use your low single digit core comp guidance, that accounts for about 300 to 400 million of that, so just walk us through based on those four priorities where you think the bulk of the next 600 to $700 million could come from. Thank you.

Robert Dennis

Yeah. So first—what was the first one?

Stephanie Wissink – Piper Jaffray

Just the promotional cadence around—

Robert Dennis

Yes. The category—what we’ve done and some people have called out, we’re not getting overly promotional on snapbacks. What we did do is we saw a swing, as often happens, in terms of which teams and styles were selling the best, and so we did a little clearing of slow-moving merchandise with price. But for the core part of the category, we are working to maintain suggested retails. We’ll see what happens down the road. As long as the category remains strong and hot, we think we can continue to do that, but time will tell.

In terms of the—another way to look at the five-year plan, Steph, is it’s roughly an 8% top line growth. So think about that, as you would do in your breakdown, somewhere around 2 to 3% comp and 3 to 4% square footage growth, and then 1 to 2% of other, which would be wholesale and e-commerce, which is not in our comp. So if you take the midpoint of those three numbers – 2.3, 3.5 and 1.5 – that’s how you get to 8.

Stephanie Wissink – Piper Jaffray

Okay. And based on what you gave us in terms of Schuh, new stores and acquisitions, and Lids, and then the e-comm and digital, how would prioritize, maybe rank those one, two and three on the contribution?

Robert Dennis

In terms of the growth factor of those various components?

Stephanie Wissink – Piper Jaffray

Yeah, exactly.

Robert Dennis

Jim? They’re all important, that’s why we called them out.

James Gulmi

Yeah. Let’s go back and talk about—you know, Bob was giving you some idea of where it’s coming from, partly from the comp. The biggest areas are square footage growth, some comp, some growth in our wholesale businesses, and then finally some continued growth in our Internet business. So that’s kind of how we get there.

Now in terms of the business pieces, this is a five-year plan, again, that begins in FY12, so we’ve got FY13; and so some of that pickup is kind of annualizing—as I think the point you made, is annualizing the Schuh business because we only had it last year for half the year, so that’s a bigger number. But if you kind of back that out, the other big additions, Lids is probably the largest contributor, and then Journeys—Journeys and Schuh, and that’s basically the breakdown.

Stephanie Wissink – Piper Jaffray

Okay, perfect. And Jim, just one follow up on Schuh in the U.K. – any feedback from your team in terms of sentiment and category performance in the local market there? Thank you.

Robert Dennis

We’ve continued to essentially defy the economic trend in the U.K. and we’ve been doing it with a mix that heavily resembles Journeys. It’s not a perfect overlay. There are some differences, but it’s driven by a number of different key trends, a number of key vendors, which are pretty much the same. As you know, we’re not going to call out categories, so we’re very pleased with where it stands. I don’t know what else to say, because we’re not going to talk about forward trends.

James Gulmi

No, but a lot of the same trends that we’re seeing in the U.S. are really carrying over to the U.K. in terms of—again, we’re not going to talk about brands, but brands and kind of the directional movement in those brands. So really, a lot of the same things that are going on the U.S. are going on in the U.K. from a brand standpoint.

Stephanie Wissink – Piper Jaffray

Okay, thank you. Best of luck, guys.

Operator

Our next question comes from Mark Montagna with Avondale Partners.

Mark Montagna – Avondale Partners

Hi. Bob, I wanted to just make sure I heard you correctly. I think you said you’re confident on your ability to improve on the $5 to $5.08. Does that imply that you think that there is an upside potential or did I maybe hear that incorrectly?

Robert Dennis

I think you heard that incorrectly. I think we expressed confidence in achieving $5 to $5.08.

Mark Montagna – Avondale Partners

Okay. All right, great. Q3, you comped up 4%, so fourth quarter guidance flat. Is that deceleration all due to Lids or are you seeing any—do you feel that the footwear stores are contributing to that?

Robert Dennis

Well, the underperformer in the group we expect will be Lids, and for all the reasons we just laid out. The rest of the businesses, we think don’t have any intrinsic issues, so we’ve had great consumer demand in our Schuh stores, both Journeys and Schuh and Johnston & Murphy, and so any diminishment in expectations to past trends is more or less traffic-driven. And I’ll let Jim sort of talk about the specifics around that.

James Gulmi

Yeah Mark, in my guidance I talked about the quarter, and I said that we thought that with the exception of Lids, that other retail businesses would be flat to up slightly for the quarter. And then if you compare that to really what we did in the third quarter, Journeys was up 8%, Schuh was up 8%, and J&M was up 6%. So yeah, we’re being a little conservative in the fourth quarter and we’re taking the comp guidance down in the fourth quarter on those businesses.

Mark Montagna – Avondale Partners

Okay, that’s right. Looking at your team sports and Locker Room, you didn’t talk that much about them, and I’m wondering is Locker Room factored into the Lids comps? Locker Room now sound like it’s a little over 130 stores. At what point does Locker Room actually start to become a meaningful contributor? I would imagine that the team sports is a little bit further away from Locker Room. I’m trying to understand if we can start to see an offset against some weakness at Lids, hopefully offset by some gains at Locker Room.

Robert Dennis

Yeah, so if you take Locker Room and Clubhouse and talk about them together, they’re in the low $100 million range in terms of annual revenue. So they are becoming meaningful in the context of the overall Lids business, and obviously that is where we expect to get a lot of our square footage growth. A lot of those stores are in the comp base, and as we called out, the St. Louis Cardinals stores are a part of those and they’ve been a significant drag, and then we were weighted heavily towards exposure to Sandy in the Clubhouse business because of the New York Yankees stores.

So there was some temporary headwinds that came out of that, but the longer term run on that is we think that has both good comp potential because of the changes that we can make to run these businesses with more—I wouldn’t say more professional, but the things that you get with scale, so the things that we can do in terms of learning and sharing merchandise and taking buying power and starting to spread that out over all of those stores. And so we think both comp and square footage growth are very promising in that business. In our five-year plan, they are a significant growth. I don’t recall how big we have it by Year 5, but it obviously becomes a bigger percentage of Lids every year.

Mark Montagna – Avondale Partners

So are those stores, these Locker Room, Clubhouse stores, are they comping positive now? And I assume that for this year, it’s not really a meaningful contributor. Do you foresee it being a meaningful contributor next year to profits?

Robert Dennis

Yeah, the Locker Room stores are composing positive; and again, the Clubhouse stores as a group were dragged down by what’s gone on with the hurricane for Yankees and St. Louis Cardinals, and those are our two biggest brands. But with things being normal, we would expect all of those businesses have the potential to comp up and to be meaningful contributors.

Mark Montagna – Avondale Partners

Okay, but could that be as soon as next year that they’re actually meaningful?

Robert Dennis

Yes.

Mark Montagna – Avondale Partners

Okay, great. Thank you.

Operator

We’ll take our next question from Steve Marotta with CL King & Associates.

Steve Marotta – CL King & Associates

Good morning everybody. Bob, you tangentially answered this earlier, but I just want to make sure – the strapbacks are included in your snapbacks commentary. Is that accurate?

Robert Dennis

Yeah, we treat them as sort of all that same single-size, one-fit-all fashion hat. Yes.

Steve Marotta – CL King & Associates

Do you expect positive comps at Lids in fiscal ’14, and if you can to the extent speak with any granularity on potential drivers, considering issues with the snapback category, why they would be positive in ’14?

Robert Dennis

Sure. Some of it is just related to the last question. When we look at the whole Lids business, we’ve got what’s going on in Clubhouse and Locker Rooms, and it depends on who wins the World Series next year but presumably we are not going to have a difficult comparison because it can’t get worse than the Giants – sorry. And then we see the fact that we will eventually—either the snapback trend starts to diminish, or we start to lap it, in which case it becomes less of a challenge. But we continue to look at ways to drive the Lids business around the snapback trend, and it will be a headwind for a certain period. We’ve got the NHL strike, which hopefully they’ll be skating by next year and that will then become a positive comparison. We’ve got the NHL business and we would expect that Nike comes right out of the gate strong with the apparel side, so we’ll have that opportunity when we get to next year.

James Gulmi

You said NHL. You meant NFL.

Robert Dennis

No, I meant NHL. You know, they’re on strike and so—so a lot of the offsets that we just called out as challenges this year are things we go against next year and can all be positive contributors to comp. But there are some unknowns around a bunch of those things, so we’re running with our best estimate when we write up our guidance for next year.

Steve Marotta – CL King & Associates

Does NHL as a percent of sales, I assume that’s bigger in the first quarter than the fourth, or would have been otherwise or has been in prior years?

Robert Dennis

Well, as an absolute amount of sales, it will be bigger in the fourth quarter because of holiday. As a percent of sales, I’m not sure; but total dollar sales matters more to us than percents, and so we’re giving up a big chunk of the NHL business over the next three weeks because even if they settle, they won’t actually be playing games.

Steve Marotta – CL King & Associates

Right. Lastly, given where you exited the quarter from an inventory standpoint and how November has transpired, do you expect accelerated promotions internally during December, or are you turning to pick it up at the other end?

Robert Dennis

You know, that’s the advantage of our size. We have in the past been very good at managing our inventory down without having to get exceptionally promotional in the store because of the arrangements we can make with vendors to either cancel or to push non-seasonal product out. In the Lids business, we have particular opportunities there because a significant amount of the store is carryover product, so you manage your inventory with receipts and we would do that in that business. In Journeys, as I said, we’ve been through this before and so we’ll manage it down appropriately, and I think we have a better opportunity than the average retailer to avoid getting promotional in the stores if sales don’t develop.

Steve Marotta – CL King & Associates

So at this moment, there is no plans to be more aggressively promotional compared to last year?

Robert Dennis

That is correct.

Steve Marotta – CL King & Associates

Or accelerated promotional versus the plan at the beginning of the quarter. Okay, great. Thank you very much.

Operator

We’ll take our next question from Jill Caruthers with Johnson Rice & Company.

Jill Caruthers – Johnson Rice & Co.

Good morning. Just a follow up on the last question – could you talk about maybe your inventories, some cold weather products at Journeys? I know we’re hearing from some other retailers that the weather just hasn’t participated. How are you feeling in that category?

Robert Dennis

Well first of all, we don’t sell big, bulky sweaters so we’re not as exposed. Obviously in Lids we have knit hats and within Journeys we have the boot category. Right now, we’re very satisfied with the velocity we’re getting on our total inventory with no big pockets of weakness.

Jill Caruthers – Johnson Rice & Co.

Okay. And then last question, just a comment on Black Friday – it looked like you ran some similar promotions at the Underground by Journeys as you did at Journeys, and just given it’s kind of the first few months of Underground by Journeys performance, if you could talk about how that compared to the Journeys store over the Black Friday weekend. Did you see some similar type performance out of the new converted concept?

Robert Dennis

Well, you shouldn’t be surprised to see a similar promotion because we are now running Underground off of essentially the same platform. The assortment is not exact, but the approach to marketing the stores is going to be very similar. We’re not really breaking out Underground that much anymore. We’re looking at the performance of Journeys, so I don’t have that number handy. The way we’re thinking about Underground right now is we’ve repositioned it, re-badged the stores. We’re going to continue to work the Underground business both based on the performance of those stores and the impact that they would have on the Journeys stores that are in the same mall, in many cases. And right now, we just haven’t been far enough down the road with the Underground re-assortment to comment on that.

Jill Caruthers – Johnson Rice & Co.

Okay, thank you.

Operator

We’ll take our next question from Chris Svezia with Susquehanna Financial Group.

Chris Svezia – Susquehanna Financial Group

Good morning, guys. Question on Schuh – you guys have been outperforming for a pretty consistent period of time from a comp perspective. I’m just curious – you know, you commented you’re flat in November. It is just more macro trends, or just any color you can provide about—you don’t have any Sandy impact there, so I’m just sort of curious any thoughts on that comp trend.

Robert Dennis

You know, in the U.K. they’ve been outperforming in a very challenging economy, and so they’re going against—we were not reporting comp numbers until they were comp for us. But they were going against some huge gains that they had made at this time a year ago, and so part of it is just the comparison. It’s been a challenging environment over there for quite some time, and they’ve just defied gravity to some extent. I don’t know—Jim, can you recall any specifics? I mean, I hate to start parsing months because a lot of things go on in just 30 days.

Chris Svezia – Susquehanna Financial Group

Okay. What’s your—Jim, what’s your outlook for Schuh? Is it a flattish kind of comp for the quarter?

James Gulmi

Yes.

Chris Svezia – Susquehanna Financial Group

Okay. And then as I think about 2013—well Shi for a second, you’re getting close to this point in terms of what you’re seeing and what you’d like to see. What’s the defining sort of metric where you decide maybe you could start to grow this chain, and when you think about ’13 for next year, any thoughts to growth for that business in ’13?

Robert Dennis

You know, the defining metric on Shi is four-wall profitability and we’re extremely pleased with the improvement. The team has done a great job of translating strong comp into strong four-wall gains, and so what we’re really looking for is—and no surprise after having run some really long—having a good long run, the four-wall is getting up to the level where it’s very pleasing. We just need to see it sustained, make sure that we’ve got a business where we feel we can consistently deliver cost of capital, and at that point I think we would revisit the idea of growing it again. So it needs to get a little bit better and it needs to do it for a little bit longer, but we’re really, really pleased and really, really encouraged by what the team has done.

Chris Svezia – Susquehanna Financial Group

Okay. Two more quick questions – one, the NFL business, I think at Lids, you called out it’s roughly a high single to low double-digit percentage in the fourth quarter. Does that still sort of stand in terms of that logic and thought process?

Robert Dennis

It’s in that ballpark.

Chris Svezia – Susquehanna Financial Group

Okay. And then lastly, I know you don’t like to talk about trends but I’ll just say this – a mall competitor, if you want to call them that, made some reference about softness in the skate business and how basketball and running is doing really well and taking share. I know you guys play in a lot of different categories and you don’t obviously play in those categories, and your business is very broad and diverse, and I know you made some comment you didn’t really see anything unusual in terms of the business. But any thoughts to that, or does that seem to be more another competitor having issues? I’m just curious about your thoughts there.

Robert Dennis

Well, I’m not going to comment on any competitors. Our skate business is fine. It’s not growing the way it was years ago. Other categories in the business are also strong. You know, we don’t think of it as basketball and running. I guess that would imply that a lot of kids are moving over to buy basketball and running as a lifestyle shoe, as opposed to leaning into performance. I guess our comp suggests that that’s not the case. We’ve been running some—unless that’s a trend that started last week, our trend has been very strong. We’ve got a number of very important fashion categories that are driving our business quite nicely.

We view the basketball and running success as a plus for our business in the sense that the athletic guys benefit from having such success in their core that they are less tempted to go and try to operate with a lifestyle assortment. And they’ve done that in the past with very mixed results, but it’s best for us when they don’t actually try that and they stick to their knitting, and certainly the strength in basketball and running gives them an incentive to stay in that space.

Chris Svezia – Susquehanna Financial Group

Right, right. No, I understand. All right, all the best to you guys. Thank you.

Operator

We’ll take our next question from Sam Poser with Sterne Agee.

Sam Poser – Sterne Agee

Thanks for taking my follow up. Just three things – number one, the impact of the potential or the active strike in the Port of Los Angeles; and number two, are you going to be able to get a hold of Lids Clubhouse at Notre Dame, Alabama or Georgia? That could be a pretty good offset, I would think.

Robert Dennis

Yeah, I’m not sure we could get the stores opened in time. All of those schools would be a wonderful relationship, but right now we’re hopeful that we can just make a lot of hay in our Locker Room and regular Lids stores with that. Notre Dame for a long time was a very important school in our college mix, and the volumes we’ve done on that school have gone down over the years, and so hopefully this is a big revival of Notre Dame because I think the people who claim to have gone there is probably ten times the number of people who actually did, and so we’re delighted to see that they’re doing well from a business standpoint.

Sam Poser – Sterne Agee

That’s a national team, for all practical purposes.

Robert Dennis

Yes.

Sam Poser – Sterne Agee

And then the dock strike?

Robert Dennis

You know, we’re hopefully going to get past that, Sam, in the sense that we’ve landed. We’re set for holiday. I guess we’re still flowing goods right now, but it’s not—hopefully not a big deal.

Sam Poser – Sterne Agee

So that’s worked into your guidance, the awareness of whatever that impact is?

Robert Dennis

It is right now.

Sam Poser – Sterne Agee

Okay. And you’re assuming a flat comp or flattish comp with Schuh. Why is there that deceleration from the higher number, given that we’re coming into a more active time period and they’re running—I think you said they’re running flat to date. So why wouldn’t that accelerate like the rest, or is that just because it’s a different animal because it’s overseas in the U.K.?

Robert Dennis

And the compares. You know, they delivered some really big gains, and so their view on their business, looking at how much they gained plus the status of the economy in the U.K., they are most comfortable – and we respect that – not being too aggressive with their plan.

Sam Poser – Sterne Agee

Just a quick on that one and then I’m done – you have brought some efficiencies and, I would assume, some access to some other product to them. How much do you think that being part of the Genesco group with the efficiencies there has helped the performance, not only the overall performance and then as well—you know, up to this point? Like you say, it wouldn’t have helped much last year in the quarter.

Robert Dennis

Yeah, I wouldn’t say that we’ve added any efficiencies. It’s really being run as an independent business and had been very well run before we arrived. The benefits on the product side, there was a little bit with some vendor access and a little bit on terms, but the biggest thing we’re doing there is getting them access to exclusive products – special make ups – which for most of our vendors if we do special make ups in the U.S., they are being accessible to Schuh in the U.K. and that allows them to have a more distinctive presentation in their marketplace.

The single biggest thing we’ve done for them, Sam, is we’ve taken the lid off of constraints they had for square footage growth, and so as a private company, they had always been operating in most of their history with a certain amount of leverage that required conservatism, and with our balance sheet and our support and our encouragement, they’ve been able to go out and grow their store base faster than they were able to do before, and actually growing it faster than either of us had anticipated when we did the transaction. And that’s purely opportunistic in terms of what’s available in the U.K. to them, which they think is sort of an unusual part of the cycle where great real estate is available, and then they’ve done a marvelous job of ramping up their capabilities to open stores at a pace that they’ve never done before. As they would say, they’re doing a brilliant job.

Sam Poser – Sterne Agee

Thank you very much, and good luck.

Operator

And that’s all the time we have for questions. I’ll turn it back over to Mr. Bob Dennis for closing remarks.

Robert Dennis

Well thank you everybody for joining us and we’ll be conversing with you again, I guess, down in Florida in January. See you then.

Operator

And that does conclude today’s conference. We appreciate your participation.

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