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Genesco Inc.

F3Q09 Earnings Call

November 25, 2008 8:30 am ET

Executives

Bob Dennis – President, CEO

James Gulmi – Chief Financial Officer

Analysts

Jeffrey Klinefelter – Piper Jaffrey

John Shanley – Sussquehanna Financial

Mitch Kummetz – Robert W. Baird

Justin Boisseau – Gates Capital Management

Operator

Welcome to the Genesco third quarter fiscal year 2009 release conference call. (Operator Instructions) At this time for opening remarks and introductions I would like to turn the call over to Mr. Bob Dennis, President and Chief Executive Officer of Genesco.

Bob Dennis

Good morning. Thank you for joining us for our third quarter fiscal 2009 conference call. Participating with me on the call today are Hall Pennington our Chairman and Jim Gulmi, our Chief Financial Officer.

We will make some forward-looking statements in this call. They reflect our expectations as of today but actual results could be materially different. We refer you to our earnings release and to our recent SEC filings including the 10-Q for the second quarter for some of the factors that could cause differences from our expectations. And for those listening to the replay of this call, some of these factors can be read on the opening screen.

As you know, we pre-announced our third quarter results and revised our outlook for the rest of the year. First, let me briefly review our actual third quarter results. Net sales increased approximately 5% to $390 million. Total company same store sales increased 2%.

We reported diluted earnings per share from continuing operations of $0.43 per share for the quarter versus $0.23 last year on a GAAP basis which includes restructuring charges, merger related fees and tax benefits. As noted in the release last year's number without merger and restructuring costs were $0.39 versus $0.43 this year.

We also continue to effectively manage inventories. As quarter end, year over year inventories were down 4%. During the third quarter we experienced significant erosion in our same store sales trends. We had a solid back-to-school, then comps deteriorated and this weakness has continued into November.

Through November 16, same store sales for the month are down 9%. We are not providing a comp update beyond November 16 because Thanksgiving and Black Friday fell in the third week of the month last year versus the fourth week this year, making last weeks and this weeks comparisons meaningless standing on their own.

We have outlined a broader than usual range of guidance for the fourth quarter to reflect the uncertainty in the marketplace. We expect same store sales to range from negative1% to negative 4% and diluted earnings per share subject to the items we outlined in the schedule to the press release to range from $1.06 to $1.20 versus $1.01 last year.

This outlook is not based on any change in the general economic environment which we don't expect in the short term, but on some specific favorable comparisons that we will discuss in the course of the call. In addition, we believe that the move of Thanksgiving back one week relative to last year shifts November's retail sales more to the back half of the month and into December when compared to last year.

We base this on our daily sales index of fiscal 2004, the last year with Thanksgiving falling this late. Thus, we expect significant improvement to our negative 9% comp performance through the rest of the quarter.

In the near term we remain focused on what we can best influence. First, driving sales dollars and margins while effectively managing inventory levels through whatever promotions we find necessary. Second, controlling costs with special attention to our biggest controllable which is store labor, and finally, executing in a way that makes the customer shopping experience the best it can be.

As we head into holiday, we remain confident that we are well positioned from a merchandise standpoint and believe that the product looks great. We recognize how difficult the retail environment is but we also believe we have some favorable comparisons that make our guidance realistic.

Now let me review our individual businesses beginning with Journeys. The overall comp increase for the Journeys group was 5% for the quarter compared to a 3% decrease in the same period last year. Through November 16, comps in the Journeys group for November were negative 9% against positive 2% in last year's comparable period.

We anticipate that fourth quarter comps for Journeys group will range from negative low single digits to positive low single digits versus negative 7% last year. We believe that early November same store sales trends in the Journeys group reflect unfavorable year over year calendar comparisons as we mentioned earlier. We also believe Journey group heads into the holiday with product advantages in several categories, especially skate and women's boots.

Looking at the components of the Journeys group in the third quarter, in the Journeys stores alone, third quarter comps were up 4% compared to a 3% decline last year in the third quarter. Footwear unit comps increased 2% and average selling price increased 4%. The solid comp results were driven by continued strength in the skate business and women's boots. Men's footwear made up about 46% of Journeys footwear sales for the quarter and women's and kids footwear represented about 54%.

We opened five new Journeys stores during the quarter and we remain on track to open sixteen this fiscal to end the year with a total of 819 stores.

In Journeys Kidz, comps rose 8% in the quarter on top of the 7% gain last year. In the third quarter footwear unit comps increased 1% and ASP's rose 8%. We opened nine new Journeys Kidz stores during the quarter and expect to have 141 stores in operation by the end of the fiscal year.

Shi by Journeys comps in the third quarter were positive 6%. We continue to adjust our product offerings during the quarter by increasing our selection of athletic products and adding a larger selection of higher priced merchandise. We were pleased with the positive reaction. As a result, ASP's were up 19%.

We currently have 53 Shi stores in operation and plan to open two additional Shi stores in fiscal 2009 to end the year with 55 stores. At this point, we will need to see meaningful improvement in Shi before we commit to add more stores to the chain.

Journeys Direct, which includes both the internet and catalogue businesses, was especially strong, up 33% although it slowed near the end of the quarter. Overall the Journeys group had a solid back-to-school performance. The same product advantages that drove this performance should be in place for the holiday shopping period, making us optimistic about Journeys prospects.

Turning now to Hat World, comps increased 2% during the quarter versus a 2% increase for the same period last year. Urban stores comped up 4% and non urban stores were up 2%. Hat World's internet sales were a nice point of strength, up 14% during the quarter.

From a product standpoint, major league baseball continues to be Hat World's largest category. Both core and MLB performed well and action brands were once again very strong. We did experience a small positive impact from the Phillies winning the World Series versus the second go round last year by the Red Sox.

So far this season, NFL has been weaker than expected, but a lot of key teams are still in the hunt, in particular the Cowboys, the Steelers, the Colts, the Giants and the Patriots. However, to be safe, we are accelerating mark downs in this category to drive inventory liquidation and we here in Nashville are particularly pleased that the Titans are 10 and 1, but unfortunately that doesn't do much for hat sales.

Overall Hat World's operating margin expanded 190 basis points during the quarter as the comparison benefited from last year's right sizing of the NLB fashion inventory. We opened a total of 14 new Hat stores and closed four in the third quarter. We expect to open an additional 13 stores for the balance of the fiscal year to end with 890 stores in the Hat World group. In addition, we now have embroidery in 350 stores. This category is up 28% and blank hats which are driven primarily by embroidery are up 13%. Both are high gross margin businesses.

Through November 16, Hat World group comps for the month were negative 6% versus negative 4% for the comparable period last year. We anticipate that fourth quarter comps for Hat World will range from low positive single digit to low negative single digit comps with the Thanksgiving shift I mentioned earlier as the primary factor in the expected improvement. Last year, Hat World comps were negative 4% for the fourth quarter as they finished right sizing their fashion inventory.

It is worth mentioning that the headwear retail industry remains extremely fragmented. We believe Hat World's leading position in this space should continue to serve us well as the industry further consolidates and it becomes increasingly difficult for smaller players to stay in business during these tough times.

Turning to the Underground Station group, comps increased 1% during the third quarter versus negative 19% last year and through November 16; November comps were down 15% versus negative 7% last year. Footwear unit comps for the third quarter increased 10% and ASP's declined 4%. However, women's ASP's were up 7% while men's ASP's were down 8%.

We are looking for fourth quarter comps in the range of negative high single digits to negative low double digits versus negative 5% in last years fourth quarter. We believe that Underground Station is being disproportionately impacted by the current macro environment as unemployment and mortgage issues are weighing more heavily on Underground's target consumer.

Yet despite the modest Q3 comp, Underground Station essentially met its profit expectations for the quarter due to better than expected gross margins.

Women's and kid's footwear made up about 46% of Underground Stations footwear unit sales and about 42% of its footwear dollar sales in the third quarter this year. These categories were 43% of units and 47% of dollars in the third quarter last year.

We will not open any more Underground Station stores this year and expect that our store count for the Underground Station group will be down to 174 stores by year end from 192 last year as we continue to close underperforming stores.

Given persistent challenges in the urban market, we continue to look at the long term prospects for this business and we continue to shorten lease terms where we can to give us maximum strategic flexibility. We plan no store openings for next year.

Johnson & Murphy's business continues to be hurt by the tough economic climate. Not surprising, our business is particularly soft in financial service oriented locations like New York City, Boston and Charlotte. The weakness is especially pronounced in the dress shoe category where purchases have a longer life cycle and are easily postponed.

In contrast, businesses performing better in airport stores where there is typically more built in traffic and the merchandise is oriented more toward non footwear products and impulse shopping.

Third quarter sales for the group were approximately $42 million. While wholesale sales were down only 2%, same store sales for Johnson & Murphy shops declined 15% compared to a 2% gain last year. We believe that we continue to gain share in the wholesale channel and believe that Johnson & Murphy's wholesale business is outperforming our retail stores right now because of the much lower average price point in the wholesale channels.

Non footwear sales for Johnson & Murphy shops continue to increase and accounted for 34% of sales during the quarter versus 33% last year. Johnson & Murphy remains on track to open 10 new stores this year and we expect to end the fiscal year with 158 stores in operation.

We launched a limited assortment of Johnson & Murphy women's product this season in 28 stores and we're still in the early stages of creating awareness. Women's sales have been climbing steadily as a percentage of sales in these stores, but it is obviously difficult to attract new customers in the current environment.

As of November 16, Johnson & Murphy's comps for the fourth quarter were down 20% versus a 5% gain last year. We expect to experience some improvement in this comp trend as gifts and accessories become a greater percentage of the mix in the fourth quarter after Thanksgiving.

Dress shoes, our most difficult category right now, has historically been a smaller percentage of the total in the fourth quarter than in the third quarter. We expect that fourth quarter comps will range from negative low double digits to perhaps twice as much as that versus negative 1% last year.

Finally, turning to licensed brands, sales increased 3% to $30 million on top of a 26% increase in the same period last year. In October last year, we introduced a new licensed footwear brand that we are providing exclusively to one major retailer and the initial pipeline loading made for more difficult comparison this year.

Dockers brand sales were up 11% during the quarter driven by solid performance across the moderate to specialty footwear chains and a positive response to their new line. We believe that Dockers quality value proposition continues to resonate well to consumer and may in fact be more important now than ever.

Let me end by talking briefly about real estate and related capital expenditures. Last year we opened 229 new stores and this year we will open about 105. We have not planned our next years openings in detail, but we expect that next years total store openings to be even less than this year.

The good news is that in most malls it is a buyers market and we are already seeing favorable trends on rents for both new stores and renewals. Also, due to the environment, we are able to renew many stores without a full remodel. Thus, we expect our CapEx next year to be below this year.

Now Jim will take you through the financials for the quarter.

James Gulmi

I will now run through the P&L for the quarter starting at the top. Second quarter sales increased 5% to $390 million versus $372 million last year. Total comp store sales increased 2%.

Journeys group sales increased 10% to $201 million and comps were up 5% for the quarter. Hat World group sales rose 6% to $93 million. Comp sales for the quarter increased 2%. The Underground Station group sales were down 9% to $24 million due to fewer stores versus the same period last year. The overall Underground Station group store count dropped 14% to 184 stores. Comps increased 1% for the quarter.

Johnson & Murphy group sales were down 10% to $42 million. Johnson & Murphy wholesale sales decreased 2% for the quarter. Comp sales for the Johnson & Murphy shops declined 16% and factory stores were down 10%. Licensed brand sales increased 3% to $30 million. The Dockers brand itself had a sales increase of 11% in the quarter on top of a 12% increase last year.

Now turning to gross margin, total gross margin for Genesco was up modestly to 50.8% compared to 50.5% last year with margin gains in Journeys, Hat World and Underground Station. Johnson & Murphy's gross margin was off by about one percentage point due in part to higher mark downs. Licensed brands gross margin declined 300 basis points primarily due to mix changes and increased product costs.

Now turning to SG&A, total SG&A as a percentage of sales decreased to 46% in the quarter compared to 46.8% last year. Excluding merger related expenses of approximately $200,000 this year, and $6.1 million last year, SG&A as a percentage of sales was 46% compared to 45.1% last year. This includes about a 60 basis point increase this year in bonus accruals.

We experienced good leverage improvements in both Underground Station and licensed brands. Hat World's SG&A as a percentage of sales were about flat with last year in spite of about 40 basis points of added bonus accruals.

Journeys expenses as a percentage of sales were up about 30 basis points which included about 80 basis points of added bonus accruals. Johnson & Murphy experienced negative leverage due to its negative comps.

We reported operating income of $16.3 million or 4.2% of sales in the quarter compared with $13.8 million or 3.7% of sales last year. Included in this years operating income is about $2.5 million or 65 basis points of restructuring charges and merger related expenses. Last year operating income included about $6.2 million or about 170 basis points of merger related expenses and restructuring charges.

Excluding these restructuring charges and merger related expenses in both years, operating income in the current quarter was $18.8 million or 4.8% of sales compared with $20 million or 5.4% of sales last year.

Journeys operating income increased to $16.9 million from $15.3 million last year. Operating margin was essentially flat at 8.4% overcoming about 80 basis points of increased bonus accruals.

Hat World's operating income was $6.7 million up from $4.6 million last year. Operating margin increased to 7.2% from 5.3%. Underground Station reduced its operating loss to $2.2 million from $2.9 million last year. Johnson & Murphy's operating income was down to $1.5 million from $4.4 million last year and operating margin was 3.6% compared to 9.4% last year.

Licensed brands operating margin was 13.1% compared to 14% last year. Again, this includes a tough comparison with the new product line introduction last year. Otherwise, operating margin would have been up for the quarter.

Interest expense was down to $2.5 million from $3.5 million last year. The lower net interest expense was due to additional cash received in connection with the merger litigation settlement of which a portion was used to pay taxes and in the first quarter to buying $91 million of stock.

Positive timing differences primarily in connection with taxes have continued to reduce our working capital related bank bonds. In addition, our operating cash flow has been very strong which has allowed us to borrow less money than anticipated, further reducing interest expense.

Pre-tax earnings from continuing operations for the current quarter is $13.8 million which includes $2.5 million of restructuring charges and merger related expenses. Last year's pre-tax income for the same quarter was $10.3 million which included $6.2 million of merger related expenses and restructuring charges.

Excluding restructuring and merger related fees from both years, pre-tax earnings would have been $16.3 million this year and $16.5 million for the same period last year. As you know, our guidance for the year excluded merger related expenses, litigation expense, tax effects of the related settlement and restructuring charges.

Earnings from continuing operations was $9.5 million or $0.43 per share compared with $5.6 million or $0.23 per share last year. Included in this quarter's number is $2.5 million of pre-tax restructuring charges and merger related expense offset by a $1.2 million favorable Fin 48 tax adjustment. Last years number included approximately $6.2 million pre-tax of merger related expenses and restructuring charges.

After making these adjustments, diluted EPS this quarter was $0.43 compared with $0.39 last year. Again, we refer you to the schedule in this morning's press release for more detailed reconciliation.

We expect capital expenditures for fiscal 2009 to be in the $55 million range, about $25 million below last years level. Depreciation for the full year is expected to be about $47 million.

Here's a breakdown of our new store outlook for FY 09. By the end of the year we expect to have opened about 16 Journeys stores and to have closed two stores. We expect to have opened about 26 Journeys Kidz stores and about eight Shi by Journey stores. We expect to have opened about 43 Hat World group stores and to have closed 15 stores for the year. We expect to have closed about five Jarman stores and 13 Underground Station stores.

We expect to open about seven Johnson & Murphy shops and close five shops and to open about three Johnson & Murphy factory stores and close one store.

All together we expect open about 103 stores and to close 41 this year. We expect to end FY 09 with 819 stores Journey stores, 141 Journey Kidz stores, 55 Shi by Journey stores, 890 Hat World group stores including 50 stores in Canada, 174 Underground Station group stores, 115 Johnson & Murphy shops and 43 Johnson & Murphy factory stores.

This is a total of 2,237 stores or an increase of 3% for the year. We also expect retail square footage to increase by about 4%.

In addition, we are very pleased with our balance sheet and cash flow in the first nine months of the year. Our bank debt at quarter's end was $50 million which is down considerably from last year at $129 million. Our unused borrowing availability under committed lines of credit at year end was about $139 million. Borrowings are considerably below our plan due to the cash from the merger litigation settlement and a strong operating cash flow.

Inventories are down 4% from last years levels.

Now regarding the outlook, as Bob mentioned we revised our outlook last year for the remainder of the year and we provided a wider range of guidance than we typically do to reflect these uncertain times. Based on a comp range of negative 1% to negative 4% for the fourth quarter, earnings per diluted share calculated on the same basis as the company's previous annual guidance and reconciled to GAAP and schedule C would range between $0.06 to $1.20 for the fourth quarter.

This would result in annual earnings per diluted share in a range of $1.83 to $1.96 for fiscal 2009. As with the earlier guidance, this does not include any of the items broken out in the reconciliation schedule included with the press release. To be clear, this guidance does not reflect any legal settlements, tax effects of the merger related settlement or the Fin 48 tax gain this quarter.

Additionally, as with earlier guidance, this does not include restructuring charges. These charges are primarily store closings and impairments including closings in connection with our previously announced plans to close 57 Underground Station and Hat World stores. The estimate of these restructuring charges remains at $10 million to $12 million for the full year.

We also expect a nice positive cash flow in FY 09 with lower capital expenditure levels and tightly managed inventory levels.

Now I'll turn the call back to Bob for some closing comments.

Bob Dennis

In conclusion, before we take your questions, I'd like to put a bit of perspective around these results and our view of our prospects both short term and long term. This is unquestionably a difficult retail environment. No financial news headline in the third quarter was calculated to encourage consumers to buy things, and not surprisingly we didn't perform quite as well as we had hoped.

But we still performed reasonably well under the circumstances if you consider that we had one, positive sales growth, two, positive overall comp sales gains, three, a positive comp gain in every division except Johnson & Murphy, and most importantly fourth, an earnings per share increase over the third quarter last year after adjustments.

Again, not surprisingly, we have adjusted our outlook for the fourth quarter. We have tried to be realistic in our outlook and have extrapolated from the recent negative sales trends while reflecting the various factors we've called out in our remarks today to arrive at the best estimate of how well we might do for the balance of the year.

We note that our updated fourth quarter earnings guidance this year represents an increase over last year. Longer term, for reasons both financial and strategic, we will come through this market as a force to be reckoned with in the eventual recovery. As Jim has told you, we have a strong financial position with plenty of availability under committed credit lines and we expect cash flows to be strong in the near term as we adjust our store opening pace to the environment and manage inventories and other assets.

Just as importantly, our strategic position remains compelling. Our concepts occupy strong defensible niches in the market and their positions will probably be strengthened by any future retail shakeout.

As I mentioned earlier, one positive effect of current conditions that we're already seeing and that we'll enjoy for years to come is the potential for better deals on retail space for both new stores and renewals. We have a large number of renewals this year and next and are seeing significantly better economics already. So there are long term positives for strong players even in this economy.

Finally, in terms of execution, we have a leadership team made up of people who have come through bad markets more than once in the course of their careers and they know how to navigate through them successfully. Of course markets like these do require navigation and we are managing prudently watching inventories and expenses and managing for strong cash flow while we continue to work hard to offer our customers the merchandise they're looking for in the places they like to shop.

Now I would like to turn the call over for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first call comes from Jeffrey Klinefelter – Piper Jaffrey.

Jeffrey Klinefelter – Piper Jaffrey

A couple of questions for you. The first would be the online business or direct business versus the store business, it sounds like you had a very strong momentum through the year both of Journeys and Hat World and just curious how you think about that relative to stores, store sizes and ultimate number of stores or your footprint domestically. It seems like in some cases, the bigger that your online business, the more of an opportunity you might have to actually contain the size of your store footprint and maybe you can just help us understand how you think about that on a longer term basis.

Bob Dennis

I don't think we view our internet business as a reason to not open more stores. There's very different kinds of customers out there. There's the mall shopper and then there's the internet customer, and obviously the internet is gaining a bit of share. And so you could argue with a margin that might say that marginal store might have opened looks different because more sales flow over to the internet.

We actually see the internet as a nicely integrated piece with the stores. In the Journeys stores we're making some technology changes that will allow the customer to actually see our full range of inventory in stores that don't carry it and that might actually enhance sales in the stores.

Hat World is a very special situation because as you know, no store comes even close to carrying the skew count of Hat World. So we always say if you're down in Florida, that you're unlikely to find a Purdue hat in a hat store anywhere. So the internet fills that very special need. And once again, we run that integrated with the store so you could buy your Purdue hat at our store and have it shipped there for free.

I'm not sure it's going to impinge too much on the footprint. It's more an integrated activity and we'll still look at every store on it's own merits.

Jeffrey Klinefelter – Piper Jaffrey

So you look at it more as a way ultimately to control or contain the size of the store and still represent the full assortment of products.

Bob Dennis

That's probably a better way of looking at it.

Jeffrey Klinefelter – Piper Jaffrey

In terms of this real estate, it sounds like number one the most important consideration facing retailers today, is this shift in leverage in the market place between landlords and retailers. Could you just give a little bit more color maybe directionally help quantify what you think the rate improvement are looking for rents or do you see store closings in certain markets, either department stores or specialty stores being a primary driver of when you'll consider looking at additional store locations, just the balance between cheaper rents and actually seeing an opportunity for more share opening up in the market.

Bob Dennis

I think it's both. The landlords have really turned around on us and have become much more flexible. We see that as we've changed our plans on the fly, decided to do somewhat fewer stores even this year, but of course we're obviously looking at stores for next year. As we reject deals, they just keep coming back better.

So it's a little hard to quantify right now, because I think it's pretty much on the fly. There's no doubt that it's getting better. And we see it more or less anecdotally. We are tracking it. We have a way of measuring what our re-news and our renew increases. We see that coming back out of the percent increase that we're having to pay and on new stores we're seeing when we reject deals, they get re-cut and put back in front of us very quickly.

In terms of store closing driving opportunities, we're really not hooked to store closings all that much because in most of the malls where they're leased up, we're in most of those. And so there's been availability and most of the other malls where we might want to be there's simply more availability which is putting increased pressure on the landlord to find tenants, and that works in our favor.

Jeffrey Klinefelter – Piper Jaffrey

On inflation, any updates there and what you're hearing out of your suppliers in the footwear space in particular?

Bob Dennis

Some dramatic changes. It's gone from the suppliers are now saying we need more business and obviously when they're coming to you asking for more business, you pick up a lot more flexibility on negotiation. There's still currency swings out there which are still going to leave some uncertainty in it, but certainly in terms of negotiating with factories in those situations where we deal directly, we're seeing a lot more flexibility and we presume our vendors in our branded businesses are experiencing the same thing.

Operator

Your next question comes from John Shanley – Sussquehanna Financial.

John Shanley – Sussquehanna Financial

Skate has been a major product category for the Journeys business for some time. Are there other new fashion products that the merchandising team at Journeys have identified that may supplement skate as we enter both fourth quarter and fiscal '10?

Bob Dennis

You've probably seen our stores. We're set up for holidays so obviously for holiday there's not a whole lot that has changed. Within the skate space, there's been nice product development and so there is some freshness in the category but I wouldn't say that we are calling out another category that comes on top of that which reflects something big and new.

As you know, our guys are always testing new ideas. In terms of looking at spring, we don't see anything big in terms of changing the product assortment. We see a lot of things that we're testing that could become exciting and for those, you just pretty much have to stay tuned.

John Shanley – Sussquehanna Financial

So skate will continue and spring to be a major component of the merchandise mix?

Bob Dennis

Yes, absolutely.

John Shanley – Sussquehanna Financial

Turning to Hat World for a second, is the merchandise mix at the urban stores and the suburban units and the margins for those two components of the division essential different from one another?

Bob Dennis

The merchandise difference between an urban store and a suburban store in Hat World is gigantic. As you know we have big differences as you go from market to market because of teams. But even if you're in one market, and I'll use Indianapolis, the home city of Hat World as an example, they're in Lafayette Square which is pretty urban and they're in Capstan which is a very suburban.

Last time we looked at it, the skew overlap between those two stores was only in the 20% to 30% range. The fashion store, as we call them in the urban mall is very heavily concentrated in more hip hop inspired, major league baseball to some extent, NBA. New Era which is our main vendor plays an even bigger role in the urban stores because that's the most important brand essentially. That's sort of the Nike if you will of that customer base and so the mix is very different.

In terms of margins, the margin structure is pretty similar. I don't have a number off hand to give you but the margins in the two stores are going to be pretty similar because we don't differ that much across ranges. If anything, urban margins might be a little lower because we don't do as much college business. We do very little college there, and college is our highest margin business, so if I had to guess at it, I would guess that we're probably a little lower in urban stores, but we probably hit a higher average price. So that's a trade off.

John Shanley – Sussquehanna Financial

Underground Station is still clearly struggling. Is there a time line in place whereby the company will make a decision on the ongoing prospects at Underground? Do you have a cut off date that you've given the division in terms of reaching the goals that you set for them in terms of operating profit margins?

Bob Dennis

On Underground Station first of all, they had a very strong first half, up 9%. They had a strong back-to-school, and they have just now seen some recent weakness, and we know that their core customer is challenged. We're resisting the temptation to have any kind of knee jerk reaction to their performance.

We have a strategy that we think for seven months of this year was proving itself out and we just continue to gauge its performance, and at the same time, we're doing a bunch of things to maintain flexibility with that. We're closing stores and we're shortening up the lease terms that were we to take a different direction with it, we're in a much stronger position.

What we have said in the past is we are looking for Underground Station to become profitable next year and that is still the target that we have for the business. I'll tell you that the best financial outcome regardless of which route you would choose to take with Underground Station is the route that we're on right now, which is again closing stores and shortening up lease terms.

So we're going to keep watching. We're alert to the fact that it has had a setback in the last couple of months. We'll watch it carefully, but we still have this goal of having it profitable next year. That's the way we're thinking about it.

Operator

Your next question comes from Mitch Kummetz – Robert W. Baird.

Mitch Kummetz – Robert W. Baird

Let me start with Journeys. You had mentioned that you have comps through November 16. I think the guidance for the fourth quarter if you take the mid point of the range is basically flat. Some of that improvement is a function of the calendar but I think some of that is also has to do with what you talked about in the pre-release, timing of vendor shipments. Could you just elaborate on that second point a little bit?

Bob Dennis

We looked very closely at some key vendors and we noticed that last year we landed some product in early November and we got a huge spike, and if you look at what we gave today, I think we said that for that comparable period in early November last year, we were up two. This year we were down nine.

A large chunk of that can be accounted for by the landing of that very fresh product. This year we had brought it in early so we got a little help from it in October, and then the balance of our shipments on those product lines are arriving in late November. So there's just a bit of a delta in terms of timing of shipments that we called out.

But we looked at Journeys. Journeys overall for the quarter last year was minus seven and so that plus two of the first two weeks is a little bit of a head fake in terms of how well Journeys is doing and we were going against that plus two when we reported minus nine. When in fact, we're really going against minus seven over the balance of the quarter and we think that's probably the better indicator of what the comparison looks like.

Then in addition to that, we've got the Pack Sun comparisons, so we're still going against a period where last year Pack Sun was fully assorted in the skate category and this year we get to hopefully pick up some of that business.

Mitch Kummetz – Robert W. Baird

When you talk about the later delivery on the balance of these vendor shipments, can you say specifically what it is?

Bob Dennis

We prefer not to call out a hot product for competitive reasons.

Mitch Kummetz – Robert W. Baird

Healy's, that has been a head wind for your business through the second quarter. Now I'm guessing that it's in terms of having replaced it with other products, it's a bit of a tail wind here in Q3 and then going forward, can you talk a little bit about the impact that that's having on your comp and your margins in the third quarter from you're having replaced that business a year ago or some of that business?

Bob Dennis

In the third quarter, that's when we took some substantial mark downs last year on Healy's and we also went into the quarter with a fairly sizable inventory commitment which essentially was an opportunity cost. So when we went through the third quarter we obviously had the positive of having other inventory.

There's no one thing where you can say this is what we replaced Healy's was. We split the dollars over the assortment and honestly we didn't have to face up to the margin pressures that we had last year. As we go into the fourth quarter, that effect starts to get diminished because we started to wind down our Healy's position in the fourth quarter.

It's still in effect, but it's not as pronounced, and our margins since we took most of our hits in the third quarter, our margins actually got a little less severe. That said, we'll still have margin improvement year over year in that category. And at this point, Healy's is another one of those little vendor businesses that we have that goes forward, and we own all the stuff that allows us to make our typical margin.

Mitch Kummetz – Robert W. Baird

On Johnson & Murphy, either I missed it or you didn't give it. What is your Q4 comp expectation for that business?

Bob Dennis

It's from low teens to possibly twice that negative.

Mitch Kummetz – Robert W. Baird

You talked a little bit about store labor being a key cost of yours and it sounds like you're going to flex that a little bit in order to try to take some of the expense out of the business. How are you thinking about that in the fourth quarter? And maybe you could comment on your views of SG&A in Q4. Are you looking for that to be sort of flattish to last year on a dollar basis, or how are you thinking about those expenses?

Bob Dennis

It's natural that as we look at our sales trends, we will manage ours in a way that is appropriate to what sales volumes we're doing, and that's on a dollar basis the biggest controllable that we have. It will be a little bit of manage as you go kind of thing, but it is a point of negative leverage. We can't get away from that.

We can't cut selling costs as quickly as sales. If sales came down dramatically we can't cut selling costs to make up for that so there would still probably be a negative impact in terms of SG&A leverage.

James Gulmi

There will be negative leverage just like negative leverage in the quarter on the high side of the guidance that we gave. The absolute dollars will be up a little bit, and I don't have all the details in front of me but we do have more stores so rent expense will be up resulting in an additional selling expense. So there will be some negative leverage on the high side, not a lot but some, and absolute dollars will be up a little.

Operator

Your next question comes from Justin Boisseau – Gates Capital Management

Justin Boisseau – Gates Capital Management

A few questions on caps during the period, number one, what was you CapEx in the quarter, and then number two, I think you still had $30 to $40 million of cash taxes due as a result of the settlement this year. I wondered if you'd paid any of those in Q3 or if you're expecting to pay all those in Q4. And then finally, I think there was a payment expected this year related to an environmental settlement. I wondered if you that was paid in the third quarter or if you're still expecting it in the fourth quarter.

James Gulmi

In terms of capital expenditures for the quarter, the quarter was $10.8 million and depreciation was $11.7 million. And in terms of the taxes in connection with the settlement, the final tax payment, we paid everything except for around $20 million or so which we'll pay in the month of January. But other than that, we have paid everything up through the third quarter.

In the environmental, we still have to pay some of that. We've extended that so we will not be making, we may make a small payment in the fourth quarter, but we will not be making a full payment in the fourth quarter. We've extended that payment stream.

Operator

There are no further questions so I'll turn the call back over to Mr. Bob Dennis.

Bob Dennis

Thank you everyone for joining us this morning. We appreciate your interest in Genesco and have a great Thanksgiving.

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Source: Genesco Inc. F3Q09 (Qtr End 10/31/08) Earnings Call Transcript
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