Robert J. Dennis - Chairman, Chief Executive Officer and President James S. Gulmi - Chief Financial Officer and Senior Vice President of Finance.

Scott D. Krasik - BB&T Capital Markets, Research Division Sam Poser - Sterne Agee & Leach Inc., Research Division Mark K. Montagna - Avondale Partners, LLC, Research Division Stephanie S. Wissink - Piper Jaffray Companies, Research Division Steven Louis Marotta - CL King & Associates, Inc., Research Division Mitchel J. Kummetz - Robert W. Baird & Co.

Incorporated, Research Division Jill R. Caruthers - Johnson Rice & Company, L.L.C., Research Division Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division.

Good day, everyone, and welcome to the Genesco First Quarter Fiscal 2014 Conference Call. Just a reminder, today's call is being recorded. Participants on the call expect to make forward-looking statements. These statements reflect the participant’s expectations of today, but actual results could be different.

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

Participants also expect to refer to certain adjusted financial measures during the call. All non-GAAP financial measures referred to in the prepared remarks are reconciled to their GAAP counterparts in the attachments to this morning's press release, and the schedule is available on the company's homepage under Investor Relations.

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

Good morning, and thank you for being with us. Joining me today is Jim Gulmi, our Chief Financial Officer. As a reminder, Jim's detailed review of the quarterly financials has been posted to our website along with the press release from earlier this morning.

I'll begin today's call with some remarks about first quarter results and our strategic outlook. And then I'll turn the call over to Jim for a review of the numbers and guidance and then after that, I will return to give a little color on our operating segments before opening up the call for questions.

As a reminder, we are now reporting a combined comparable sales number that includes stores and our direct business, which includes both e-commerce and catalog sales. However, to be clear, our direct sales do not include digitally assisted transactions run-up within the store but fulfilled from the DC or another store.

For a more detailed breakdown of our comp performance, please see Jim's commentary online. First quarter sales were challenging but improved in March and April after a tough February. For the quarter, comparable sales were down 4%.

February comps were down 8% but for March and April, which we look at on a combined basis to eliminate the Easter shift, comps improved to negative 1%, and May comps through last Saturday were up 1%. For the quarter, adjusted EPS was $0.94 compared to $0.98 last year.

Although comp sales were negative, we benefited from good expense control, especially from the compensation expense leverage that is a feature of our EVA bonus, something we've talked about in the past.

As we discussed on our year-end call, the IRS delay in processing federal tax refunds created a temporary headwind for Lids and Journeys in late January and early February. The impact on our business from the delay was a sizable hurdle right out of the gate that was difficult to fully overcome.

And while we generally avoid blaming weather for performance, we believe an unseasonably wet, cold spring depressed demand for most of the quarter in the U.S. And the weather in the U.K. was even more unfavorable with an extraordinarily cold March.

As warmer weather has finally arrived on both sides of the Atlantic in May, we have seen a slight pickup in business. We had another strong increase in our direct business in the first quarter with comp sales up 16%, led by Lids and Journeys, which increased 33% and 26%, respectively.

We are in a steep period of growth in our digital business, thanks both to the consumers' increasing embrace of this channel and to a number of actions we have taken to drive e-commerce sales. After Jim walks you through some numbers, I will give you more color on our digital initiatives.

During the first quarter, we opened 17 new permanent retail units and closed 17, leaving our total retail unit count at 2,446. Our current expectation is to finish the year with 137 net new permanent retail units, of which 23 are expected to be in Canada and 20 in the U.K. We expect to close at least 34 stores in North America during the year.

In addition, Schuh expects to exit the 13 concessions that they operated in Republic stores in the U.K., but we expect to replace many of these with freestanding Schuh stores. Most of the net new openings in North America will be Lids Locker Room, Lids Clubhouse and Journeys Kidz stores, all of which are still underpenetrated in many markets.

Schuh's openings will continue to be focused on areas of the U.K. where the brand has limited presence. Additionally, the Schuh Group plans to open a handful of Schuh Kids stores this year to continue testing this new concept.

As always, we will be disciplined about our financial parameters for new stores, and will sign leases only when the economics meet our criteria. In this environment, we don't necessarily try to hit our budgeted number of openings. If we can't find the right deals, we will let prudence prevail and come up short.

At the same time, we will continue to close underperforming stores in the U.S., primarily in response to declining performance at the bottom end of the mall universe, a trend we expect to continue.

In the nearer term, we feel confident that we will be able to deliver on our previous EPS guidance for the year, which is built on modest low single-digit comp assumptions. The improvement in May's comps and our merchandise plans and outlook for the second half when comparisons get easier make us optimistic that we will achieve this goal.

Strategically, we continue to be pleased with where our overall business is heading. We are leaning on several different growth levers that we believe will provide sustainable top and bottom line expansion over the longer term. Based on this confidence, we continue to repurchase stock on an opportunistic basis during the first quarter.

And I will now turn the call over to Jim for a review of his -- of the first quarter financial results..

Thank you, Bob. As usual, we have posted more detailed financial information for the quarter online, so I will only be highlighting a few points. Our earnings per share adjusted as we break out in the press release came in a little better than we had anticipated at $0.94.

Total comp sales were negative 4% for the quarter with a 5% comp decline in our stores, partially offset by a comp increase of 16% in the direct business. Last year, we had a strong comp increase in the quarter of 8%, which included a 9% increase in our stores and an increase of 4% from our direct business.

The 2-year total stack comp sales increase is 4%. Direct sales represent 7% of our comp sales in the quarter compared with 6% last year. The Journeys Group comps were down 2% compared with a 12% increase last year or a 2-year stack of about 10%. Schuh's 11% decline this year compared with an increase last year of 20% for a 2-year stack of 9%.

Lids had a 6% comp decrease in the quarter compared with an increase of 3% last year or a 2-year stack of negative 3%. Johnston & Murphy had a nice increase of 7%, on top of an increase last year of 6% or a 2-year stack of 13%. Month-to-date total comparable sales through May 25 increased 1%, which includes a direct sales increase of 13%.

Consolidated net sales for the quarter were $591 million, a decrease of about 1% compared with 25% increase last year. Gross margin in the quarter was 50.5% compared with last year's gross margin of 51.1%. This was due to lower initial mark-ons for Schuh and Lids related in part to changes in product mix.

Adjusting for all the items broken out in the press release, we were able to leverage expenses by about 30 basis points in the quarter. Adjusted expenses as a percent of sales were 44.3% compared with 44.6% last year. The leverage came from significantly lower bonus accrual in the quarter compared to last year.

We had a very strong first quarter last year with adjusted EPS of 46% over the previous year and a large improvement in EVA.

Since our bonus accruals are calculated on a formula based on the amount of EVA improvement over the previous year, we accrued a significant bonus-related expense last year and actually reversed a portion of that accrual this year in accordance with the deferred payment mechanism in our bonus program.

As you may remember, bonus awards above a certain level are at risk for future performance.

In addition, the accrual for the contingent bonus built into the acquisition agreement with Schuh, which is a one-time payment contingent on Schuh's performance during the first 4 years of our ownership also decreased to $0.03 per share in the first quarter this year compared to $0.08 per share last year.

For the quarter, adjusted operating income was $36.4 million or 6.2% of sales compared with $39.1 million or 6.5% of sales last year. Earnings per share in the quarter adjusted as shown on the attachment to the press release were $0.94 per share compared with $0.98 last year.

Last year's 46% EPS increase in the quarter was the strongest increase in the year. We ended the quarter with $40 million in cash compared with $55 million last year, and with $53 million in debt compared with $36 million of debt last year. During the quarter, we spent about $11 million buying 189,300 shares of stock at an average price of $59.26.

Altogether, over the past 10 months, we have bought about 835,000 shares at a cost of $48.9 million or $58.51 per share. We have about $47 million remaining on the board's most recent repurchase authorization of $75 million. Inventories were up 14% year-over-year in the first quarter and up 10% on a square footage basis.

For the most part, inventory levels are on plan with a portion of the increase reflecting a return to more normalized levels in certain business units that were low on inventory last year. In the case of Lids, snapback inventories are actually lower as a percent to total inventory than the total percent of total sales they represent.

It's our other Lids inventory that is a little heavy. This is primarily basic product with little fashion risk so we are comfortable carrying it forward into our busier selling season. Capital expenditures were $17.8 million and depreciation and amortization was $16.4 million for the quarter.

This compares with $14.1 million and $15.3 million, respectively, last year. Now I'd like to spend a few minutes on our guidance for FY '14. We are maintaining our EPS guidance for the full year at $5.57 to $5.67. Using the high-end of our range, this represents a 12% increase over last year.

This is on top of a 24% increase in EPS last year and a 65% increase in the previous year. This guidance reflects our current estimate of the Schuh acquisition contingent bonus accrual of $16 million or $0.52 per share, which is expensed in our guidance.

Consistent with previous years, this guidance does not include about $3.4 million to $4.4 million pre-tax or $0.09 to $0.12 per share after-tax in expected noncash impairments, network intrusion expenses and other legal matters.

This compares with last year's noncash impairments, network intrusion expenses and other legal matters of $17 million pre-tax or about $0.45 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 purchase price amount in FY '14 is expected to be approximately $11.5 million or $0.49 per share. The following are assumptions we used to develop this guidance. First, we're assuming a comp increase in the low single digits for the full year, including the 4% decrease in the first quarter.

As Bob mentioned, we are off to a better start with comps in May compared to the first quarter and comparisons get easier in the second half. We're also assuming an overall sales increase of about 4% to 5% for the full year.

This quarterly sales breakdown -- this year's quarterly sales breakdown is difficult to model due to each quarter ending 1 week later than last year. This is especially difficult in the second quarter because we pick up the first week of August in the second quarter of this year while it was in the third quarter last year.

Since this is the first week of the back-to-school selling season, the switch in the quarters will have an impact on the split of quarterly sales for the second and third quarters. Therefore, I'm going to give more detail than I normally would about how we see sales in the remaining 3 quarters of the year.

Our current planning assumes that approximately 21% to 22% of the sales for the year will come in in the second quarter, approximately 25% to 26% in the third quarter and approximately 30% to 31% in the fourth quarter.

Our guidance assumes a gross margin decrease of about 10 to 20 basis points and positive expense leverage of about 50 to 60 basis points. This results in an operating income improvement of about 40 basis points to 8%. The tax rate assumption is about 37% and the share count assumption for the full year is about 23.7 million shares.

We're also expecting capital expenditure for the year of about $110 million to $120 million, and depreciation and amortization will be about $70 million. We are forecasting 179 new permanent stores and an additional 7 stores acquired since the end of the first quarter. We are planning to close about 49 permanent stores.

We expect to end the year with approximately 2,596 permanent stores, an increase of about 6% over fiscal 2013. Now I'll turn the call back to Bob..

Thanks, Jim. Let me start by walking you through our digital strategy and how it supports our overall omni-channel strategy as well as provide some color on how this all affects our future prospects. We continue to build our omni-channel capabilities across the company.

Our goal in each of our retail brands is for our customers to see our various channels as 1 seamless brand that offers a wide choice of service options, whether it be buying online but picking up in the store, returning online purchases to the store or having our store personnel access real-time systemwide inventory to fill in stockouts.

In addition, our customers want to see peer reviews. They want to share their impressions on our stores and our products with their family and friends. They want us to speak to them as individuals rather than marketing clusters. And they want to be able to interact with us on a wide range of digital devices. And the list goes on but I'll stop there.

In each of our businesses, we are well along this path and yet in each business, we also have more work to do, which means more opportunity. Johnston & Murphy and Schuh are probably furthest along because they acted early and captured some first-mover advantage.

Today, our direct sales, as we have reported them to you, have only partially accounted for the role digital plays in our business. While our pure direct business, defined as sales made outside of our POS system, that is on a digital device, are roughly 7% of total retail sales.

Another 4% of sales occur within our stores with a digital assist to sell inventory that sits somewhere else than that particular store. But because we rang up the sale for those purchases on our store POS, we credit it as a store sale. We expect both of these percentages, pure direct and digitally assisted store sales will continue to grow nicely.

Last year, comp sales for our pure direct business were up 11% and in Q1, they were up 16%. We expect to continue to drive high levels of growth with continued investments in systems, store capabilities and dedicated inventory.

Let me highlight our positions at Lids and Journeys where our upside growth potential is greatest and highlight some of the initiatives underway to help make this happen. At Journeys, pure direct sales were up 8% last year and 26% in Q1.

We are benefiting from a more aggressive shipping policy that essentially allows all full-price payers to ship for free as well as easier to use HTML and mobile sites.

We will anniversary the launch of the new sites and the new shipping policy later in the year, hence the new websites and the new shipping policy will support continued growth through most of this year.

Journeys has also benefited from adding Internet-only SKUs that are accessible to all stores, and the direct business has become more aggressive in paid search and affiliate marketing.

Looking forward, we will be moving to a new order management system, which will provide us with the platform needed to provide even better customer-facing capabilities as well as improved back-end efficiencies.

As examples, we will ultimately be able to support online orders for store pickup, will improve our speed to market with new products, will build an expanded online assortment that more easily includes dropship from vendors and provide significantly improved customer service and communication.

Lids is uniquely positioned to benefit from a robust digital presence due to the displaced fan. A large percentage of our web-based sales go to zip codes not in the home market of the team being shipped.

As such, we believe we have an opportunity to drive significant growth in digital as witnessed by our 9% increase in fiscal '13 and 33% increase in Q1 of this year.

Expanded inventory and SKU count have been big growth drivers and as we expand Lids Locker Room into new markets, the expanded assortment for local teams within those stores becomes available nationwide through the digital store. We believe we have significant expansion potential on that basis alone.

However, Lids is our 1 chain where our store inventory is not yet available on the website, but we expect to have that corrected by either Q4 of this year or Q1 of next year, and that should further drive our growth. As you know, our Lids stores are heavily merchandised to local teams.

This summer, we will test kiosks in our stores that provide web access for our in-store customers to a huge nonstore inventory on a self-service basis, further driving our ability to serve the displaced fan. And Lids is pursuing many of the same customer-facing advantages I mentioned for Journeys.

We are quite excited by all of our omni-channel initiatives, which go well beyond the ones I just walked you through. And all the projects I mentioned that expand our omni-channel capabilities are already baked into our CapEx guidance for this year. Now let's shift back to the business performance and the outlook for our divisions.

I'll begin with the Lids Group where sales comped down 6% this quarter. May comps for the group through last Saturday were down 4%. This all represents a continuation of the merchandise trends that we have reported for essentially the past 3 quarters.

The snapback styles that continued to be an important trend in the headwear business, and we continue to do a substantial amount of business in the category. Doing so has required us to become somewhat more price competitive in the category, hence, the ASPs and the gross margins at Lids have been down slightly.

Plus, snapbacks are a lower-priced item than fitted fashion hats, which is the typical substitute for this fashion customer also adding to the ASP pressure. So all in, about 1/2 of our comp loss in the quarter was ASP-driven with the balance being fewer units.

Over the past several months, we have brought in several new fitted programs and freshness in the category seems to have driven some demand back towards fashion fitted hats. But snapbacks continue to be the dominant trend for now. We are cautiously optimistic about the outlook for the Lids headwear stores for 3 reasons.

First, competition in the mall post holiday has subsided for several nontraditional outlets who backed down on their snapback assortment. Second, the new fitted programs we have introduced have gotten the greatest amount of traction in markets and stores we consider to be fashion leaders.

Our hope, obviously, is that the nationwide fashion works its way back to fitted where our competitive advantage as a pure-play hat retailer is most pronounced. Finally, the comparisons on the Lids headwear stores ease considerably in the back half of the year.

Comps in Q1 last year were 4% in the hat stores and the following 3 quarters were plus 2, minus 5 and minus 12. Our strategy for growing our large-format multicategory stores, which consists of Lids Locker Room, and Clubhouse concepts continues to unfold.

Since the end of the quarter, we've added 7 more of these stores through the acquisition of Fan Outfitters, a small chain with stores in Kentucky and Oklahoma. Over the remainder of fiscal 2014, our plan is to add another 46 Locker Room and Clubhouse stores through a combination of organic growth and acquisitions.

We also expect to open 37 Lids hat stores in the U.S. and Canada this year. We ended the quarter with a total of 1,054 stores in the Lids Group. Turning to the Journeys Group. Comp sales were down 2% in the first quarter beginning with substantial weakness in February.

Sales trends have been steadily improving since with positive comp sales for the combined March, April period and an increase of 4% in May through last Saturday. We expect the improvement to hold as we approach the very important back-to-school selling season.

Our Journeys Kidz business continues to perform well with a first quarter comp up 2% and May comps up 4% through last Saturday. Journeys Kidz has had a positive comp in 14 of the last 15 quarters, and we look to capitalize on this strength, adding as many as 17 net new Kidz stores in fiscal 2014.

Comp sales for Schuh were down 11% this quarter against a very tough comp comparison of plus 20% in the first quarter of last year, which was their strongest comp comparison for this fiscal year.

We believe the decline is primarily the result of unseasonably cold weather in the U.K., including the coldest March in 50 years, combined with the ongoing economic challenges there. May comps through last Saturday were down 5%. Our conversion rate in the stores has stayed fairly steady. Traffic is the culprit in the decline.

Our long-term outlook for this business remains very positive, so we continue to invest in opening stores, particularly in southern England. We are projecting to add 20 net new permanent Schuh stores including those stores that are replacing Republic concessions and 4 Schuh Kids in fiscal 2014.

Johnston & Murphy posted a strong Q1 comp gain of 7% and May comps were up 11% through last week. Sales were again driven by the growing popularity of higher-priced dress and dress casual shoes, which is benefiting the wholesale business as well.

New product introductions from the past several quarters continue to be received positively driving momentum for the brand. We remain on track to open 13 net new locations including 2 stores in Canada and 5 airport stores in fiscal 2014.

And finally, the Licensed Brands group had a drop in sales during the quarter but maintained its strong operating margin of 10%. So to conclude, we enter the second quarter confident in our growth strategies and encouraged by the improvement in sales over the past few weeks.

We are seeing solid returns on the investments we've made over the last year, particularly as they relate to e-commerce. And we are optimistic that our planned investments will continue to contribute to overall growth in the coming years.

We feel good about the track we were on and believe our most recent 5-year targets for annual sales of $3.5 billion with an operating margin of 9.5% by fiscal 2017 are well within our reach.

The most recent 5-year plan forecasts us generating roughly $400 million to $500 million in cash, which obviously brings with it the ability to invest in additional growth if we see opportunities with the potential to meet our ROI expectations or to improve EPS and return cash to shareholders by buying in stock.

Neither of these uses of cash is reflected in the 5-year plan targets we have discussed and so that is obviously a significant source of potential upside. So let me conclude by acknowledging once again the skill and dedication of the whole Genesco team.

We have navigated through some very choppy waters and delivered a solid bottom line for the quarter. This reflects the powerful strategic position of our businesses, but I believe it speaks even more clearly to the value of the many years of experience and the commitment to excellence of our operating teams.

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

[Operator Instructions] And we'll take our first question from Scott Krasik with BB&T Capital Markets..

Bob, good to see the sequential improvement in the Lids comps.

Can you drill down a little bit more on the categories that you're seeing the improvement in? And then secondly, does the fact that you had a little bit of excess inventory in some of these categories mean that you are expecting an even better comp improvement? And if so, why?.

Yes, well -- a lot of the orders get placed further back and -- so our expectations for comps as we went through the fourth quarter obviously came down. But we brought in what we brought in and we can adjust the inventory with future receipts.

And as Jim Gulmi mentioned, the excess inventory sits in -- basically, Yankee hats and Cub hats and product that we think doesn't have markdown risks, so we're not very worried about it. The mix of the business, Scott, hasn't changed that much. So the improvement has come across the board and we are doing a really big business in snapbacks.

We got more price competitive within the fourth quarter, near the end of it, and we've maintained that position. And so that has allowed us to continue to do a lot of business in that category. It's a very fast category and as Jim noted, our percent of sales for snaps are much higher than the percent of inventory.

And so we feel like we're in a very good position there. But there really hasn't been a big move other than the tests we've done with a number of the fitted categories we brought in, the new programs and the freshness, I think, has helped the business a little bit.

But we're anxious to see if we can get more traction on those fitted programs and actually take share from snaps. The customer right now is still all over snaps..

Do you have any -- I was glad to hear you say that the competition maybe has abated a little bit? Is there any belief on your side that, that's permanent? If so, why?.

Not sure, Scott. Our team thinks that a lot of them look for a holiday item. And so it was brought in to those stores as a holiday item. In some instances, and this is not across-the-board, but I think the vendors recognize that overdistribution carries a little bit of risk. So that can be a factor.

And then also we got more aggressive on price, so we made it a little more difficult. The thing that you have to realize in the hat business, and maybe they also woke up to this, is that part of the hat business is fast. And most of those nontraditional guys are not set up for fast fashion. And so we're freshening up that cabinet on a regular basis.

Then if they did one big buy, they probably saw deterioration in their sell-throughs because what was fresh at the beginning wasn't very fresh at the end..

Interesting. Okay. And then just one last one on Journeys, your -- some of the off-mall retailers, the family retailers seem to have reported a little better results than you guys last quarter, and in some of the same categories.

There's a lot of talk about the young adult unemployment rate, the teen unemployment rate, do you have any belief that your customer is just more pressured buying the same thing? And how does that play out for back-to-school in your mind?.

Well, the teen unemployment rate has been a problem for more than a year. So we've been lapping that for a couple of times. So I don't think it becomes new news to the extent that, that impeded purchasing by the kids, that's already -- that trend is already there.

The challenge for Journeys, always, is making sure that for our customer, we've got fresh and new. And in the key -- and that we're in the key brands, and we are. We've seen a very nice improvement in the business in May on top of a positive comp in March and April.

So we still have what the kids are looking for and we're pretty confident that we're in pretty good shape to achieve what we really have out there as modest comps. We're not expecting the big numbers we posted the last 2 years..

And we'll take our next question from Sam Poser with Sterne Agee..

Jim, can you tell us what the value, the incremental value of that week moving from that last week of the second quarter is versus that incremental gain of that week, what -- how big that is relative to the week that you lost at the beginning of the quarter?.

Yes, Sam, it's in the range of probably 3% to 4%..

Can you give us the dollar of what that is? Because it's -- can you give us the dollar variance of that?.

It's somewhere in the range of $15 million to $20 million..

And then, over -- have you -- do you think you've worked through the mix issues, Bob, in at Schuh -- and you had spoken some time ago about potential growth of that business outside of the U.K.

Are you -- how do you -- where do you stand with that right now?.

Well, I'll do the second one. We continue to examine what the possibilities are. We're not in a position to move. These guys, they still have their plates full with all the opportunities that they're pursuing in the U.K., but we continue to both think and look and analyze what options might be for their next step-up in growth.

I mean, that's really all I can say to that right now. On your first question, Sam, when you talk about mix issues at Schuh, I'm not sure exactly what you're referencing..

Well, you mentioned that it was traffic but also some of those -- some margins and there's was -- it mentioned in the press release there were some margin issues having to do with the mix over there, some adjustment in the mix. And I just wanted to understand what that was..

Yes, look, it's simple, Sam. We adhere to our vendors' suggested retail and not all vendors are the same in terms of the margin structure that, that provides. And so when certain brands gain a lot of share, it can shift the gross margin by 10 or 20 basis points. It's not a huge thing..

Okay.

And then Jim, lastly, you -- with this -- I assume that you can get a lot more leverage in the second quarter, even on a lower comp than you can on third in a higher comp because of this shift, am I thinking about that correctly?.

Well, we obviously get added contribution, improved contribution on the incremental sales and as you said -- as I said earlier, incremental sales from the shift is $15 million to $20 million, so it'll be a higher-margin contribution from that..

But the other thing, Sam, keep in mind that the offset to that is the -- in terms of the way our year-over-year bonus accruals affect business, it is likely that the swing in the first quarter will be the biggest one of all, just because we booked a lot of bonus first quarter last year.

And that's a pretty big factor when we look at our SG&A leverage..

Okay. But I mean, taking that out of that scenario, you are going to -- you're basically going to -- I mean, you're going to lose that $15 million to $20 million in the third quarter.

So -- and that would -- and those -- so on a relative to one another, the flow-through on a lower comp, if the comp was flat both quarters, you'd leverage the comp in Q2 and delever it significantly in Q3..

Correct, if you take -- if you just move that money, not a lot of expense moves with the sales. So it is a straight flow-through equation that says the profits off of those sales, pretty much moved from third quarter, second quarter. You're correct about that before you get into the bonus thing..

But as Bob said earlier that there also is in the -- this year, the bonus accrual adjustment was the greatest by far in the first quarter. So that's, in effect, going the other way. To answer your question, where you're getting at this, I think, is that yes, we do expect to get some leverage in the second quarter.

And the third, actually, a little bit in the third..

That's because the comparisons -- that has to do with easier comparisons too..

Correct. Also the comp increases, potentially..

And we'll go next to Mark Montagna with Avondale..

Just following up on a question about the IMU with Lids. In the press release it mentioned mix change, but I'm trying to understand how much of the IMU is mix change versus -- it sounds like you're more price competitive on the snapback hats.

So is it really just mix change? Or is it just flat out lower IMU?.

It's a little bit of both, Mark. At the very beginning when we got into snaps, they had a really good gross margins. And so when we brought them down, we brought them down to a more normalized level. So you're right. That move has impacted gross margins.

The mix, Jim?.

The mix change is what in effect from the mix of snapback because of the lower ASP, lower prices have an effect. And also just in terms of the -- as a result of that, in addition to that, some of the switch going into some of the premium product and the fitted product is contributing to some of that.

Going from -- it's primarily the lower price point on the snapbacks and it's creating the same -- it's the same percentage but the lower-priced one is causing the ASP to be down..

Okay.

And then as far as the inventory at Lids, can you tell us, is the inventory per store up or down versus last year at this point?.

Up..

Up? Okay.

And then when you were talking about the fast fashion with Lids, how quickly do you get that stuff in? If you placed an order today, how quickly does that hit the stores?.

Well, it's -- the fast fashion is a little bit different because what you're thinking about is apparel fast fashion, which means you have a top seller and you reorder it. This is a little different from that, which is about the vendor providing freshness, which by the way in the -- it's a large part of what Forever 21 does, for example.

They do small quantities of stuff that they know the market wants. They blow through it and then it's set up so that the next hot item arrives in the next month. And so the business model is get into the first one, sell it, clear it, and then get into the next one.

And so it's more the next style, which we have a hand in it because we're close with our vendors. But the vendors are also providing a lot of leadership. And then you are moving into the direction that the customer is telling you, and the vendors, they hustle on that.

But look, most of this stuff is made in Asia, so the turnaround time is not really, really fast..

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

Bob and Jim, I'd just like to dig in a little bit more to the direct or omni-channel initiative that you have.

If you could share with us the either currently realized or anticipated margin rates of that business relative to your retail business? And I think you mentioned, Bob, that it was about 7% of total sales, 4% more if you add on the store program.

How big should that be over time? And then lastly, I think you also talked about some free shipping promotions that you're running, is that something that you see as temporary? Or is that really just a standard to play competitively in that channel?.

Yes. Now when I talked about -- I'll go backwards. When I talked about shipping, I was specifically talking about Journeys. And in that instance, they have priced their shipping in a way that most new pairs go for free; in other words, they're over the threshold, I think it's $39.99.

And so just about every new pair, non-discounted pair of shoes is over that threshold. So we effectively provide free shipping for the large majority of our sales.

And we test that over and over, Steph, and we got to the point where we said you know, it has finally broken through where that's the model that makes sense for the profitability of the business. And as long as that continues to be the case, we will probably stick with that.

Obviously, what's going on in the industry, if you look it on a macro basis that is -- that every year, a greater percentage of product from all e-commerce people added up go for free, either from the method I'm describing or truly free shipping. And so that makes it impossible, really, to be any more aggressive on charging for shipping.

You've got to do what competitive environment demands you do. So I think it's likely that we will continue to be at that level or possibly even more aggressive over time. In terms of the margin rate of the direct business -- on an operating margin level, our direct businesses are very, very profitable.

But that's a -- there's a little bit of smoke and mirrors in that because you can't be in the direct business without having merchants and without having a lot of the infrastructure we have here.

And so when we look at the direct business and measure its profitability, the correct way to do it is to look at it as a marginal business because that's how you make your decisions. And as a marginal business, it is extraordinarily profitable. So we love getting more growth out of that and, obviously, are investing in that direction.

In terms of the potential size of the direct business and as I tried to highlight, we have the direct business as reported and then we have the digital assist. In a strange way, if you're a really good retailer, for some reasons you don't want your digital assist business to get too big, it really means you're not managing your out-of-stock position.

And when you ship a customer, it's a less efficient well -- way of filling an in-store sale than actually having that product on hand. And so the first comment on that is we're not ambitious for that part of the business to grow.

We are continuing to be ambitious to satisfy our customers in the store because they came to the store hopeful that we'll be in stock.

But their willingness to take product on, and we call it an SOS basis, to get it shipped to them if we don't have it, has put a huge spotlight on the opportunity to sell stuff that we don't actually carry in the store, which would be what we're calling Internet-only product.

And so the opportunity becomes to build on the base of customers we have and to work with our vendor partners to have an even broader assortment, even though some of that we don't need to have in the back room.

So when you say how big we want to get it, we don't want to start -- we don't want to stop fulfilling our customers in the store with the store assortment and yet, we're ambitious to grow that other part of the business that I just described. So that's a complicated answer to what you just asked. But that's sort of where we're headed.

How big can the overall direct business get? We just want to keep growing it up to its natural limit, and you've read all the industry stuff. I don't know what the natural limit is. Some people say its 15% to 20% of general merchandise sales.

We're at -- depending on whether you measure 7 or 11, we obviously, have a lot of room to grow to improve on that. The other thing that we're doing with our investments to be clear is part of it will drive growth, part of it will drive efficiency. We're already pretty good at fulfilling orders from our stores elsewhere.

We're pretty good from the customer standpoint because we can get it done. We're not very efficient at doing it. And so some of the investments we're making are going to improve our back-end capabilities and our communication capabilities with our customers..

Jim, if I can just throw one for you on some of the things that Bob has talked about.

The implementation around some of this initiative, is that factored into your guidance in the cost line for the balance of the year? How should we think about the P&L effect of any of the implementation costs?.

Yes, that's all built in. Implementation is built in for this year and also the capital expenditures, we've built in to the capital expenditure number..

[Operator Instructions] We'll take our next question from Steve Marotta with CL King & Associates..

Jim, can you just assemble the inventory a little bit between Lids and Journeys, the increase of 10%, an increase on a per square foot basis?.

Sure..

While Jim looks for that -- Steve, this is Bob -- remember, particularly for Journeys, the trend line they were on last year. Their comps were very strong in the first quarter last year. They've finished up 12. And so they were chasing product left and right. They have not bought for that kind of gain.

And so, Jim has referenced earlier that the increase at Journeys is, to some extent, a catch-up for the challenged inventory position they had last year on the too much -- too little product side..

Okay. I tell you what, I've got the Journeys here. The Journeys Group is up 5%, and I have to get back to you on the Lids group in 1 second. We'll keep....

No problem, I could ask one more question to Bob. Can you please remind us some of the specific new programs that are going into Lids that are maybe trending now and are going to be rolling in through say football season? I know there was a batting practice hat. I think there was a throwback hat or an old-timers hat.

Can you talk a little bit about the fashion mix there in the sized hats?.

Yes, we called out 3 programs in particular, Steve, when we spoke to you last. And those are the 3 programs that we're still driving. One was the batting practice hat, also known as the Diamond collection. The second one was Cooperstown collection, which as it sounds, borrows from a lot of older logos.

And then the last thing was recommitting to the franchise, the old franchise hat now with the 47 hat being renamed and that hat is the relaxed, fitted, cotton hat that I guess is best described as the "preppy style" hat. And as we got so much -- so fashion-driven, we had, in retrospect, ceded a lot of that position and we're taking it back.

And we started that with baseball and we'll be landing other sports in that style over the summer. And we're seeing basically nice results across-the-board for all of those programs. For competitive reasons, we don't want to get too much more specific.

And then obviously, we're looking forward to an NFL season and you might remember, we had some challenges with deliveries more on the apparel side than the headwear side when we got the NFL business going.

And then, the other important thing in the back half is we will be fully assorted in NHL, which for a long stretch of the back half last year, was on strike..

Let me get back to you for a minute, Steve, on that -- on the inventory per square foot. Sorry, I -- it took me awhile to get to it. But altogether, as we said, we had an increase of 10%, and for Lids it was up 12%. And for Journeys, I said 5%, but it was up 3%.

So Journeys up 3%, Lids up 12% and then as we said, we have some businesses that their inventory was a little low last year and they're back to a normalized level. And that was the case, specifically, in Schuh's case. So they had an increase, but the Lids was 12% and Journeys was about 3%..

One other comment on Lids, Steve. As you can see from the numbers, we've gotten a lot more aggressive with lids.com. And so we're committing more inventory to both broaden and deepen what we're able to offer on lids.com. And so part of that increase in inventory is to support that initiative and obviously, there's no square footage there..

We'll take our next question from Mitch Kummetz with Robert Baird..

I've got a few questions. Let me start with you, Bob. I just want to drill down a little more on your comment that these -- some of these new fitted program have done better in your more fashion-forward stores.

Is there any way you could speak to maybe the comp performance in those stores versus the balance of the chain, just to provide some evidence of that happening? And I'm also curious as to how predictive those fashion-forward stores have been in the past? I mean, is this something that you feel fairly confident that if you're seeing the trends improve in those stores at some point, hopefully, sooner than later that will spread the cost for the rest of the business? Or....

We were -- we're cautious about the way we speak to that. We used the word hopeful for a reason because I don't think the science on it is all that good. It's a collection of stores that we have labeled as fashion leaders. We know that the mix in those stores is more heavily tilted to the programs that are fashion-oriented, as opposed to fan-oriented.

So we know they're fashion-oriented stores. And so we've seen those customers move a little more aggressively into some of these fitted programs. After that, we used the word hopeful for a reason because as I said, the science isn't all that good about how quickly and how predictive that move is to the rest of the chain..

Okay. Switching gears, I just want to ask about Journeys. I mean, you talked a little bit about the impact of weather on that business. How do you guys -- I know Jim just talked about Journeys inventory up 3%.

How do you guys feel about kind of seasonal inventory levels in those stores? And did you guys -- I mean, did you guys have to cancel orders over the course of the quarter in order to kind of keep things clean? Or has the business just picked up with pent-up demand as the weather's opened up a little bit here more recently?.

Well, look, the business has picked up nicely. The Journeys team, as you'll remember, is very adept at working with the vendors for adjusting what needs to be adjusted in terms of receipts. We do not -- when we look at back-to-school, our philosophy on back-to-school at Journeys is a lot of buy for now.

So even as you -- when back-to-school starts at the end of July, we'll still be expecting a lot of the seasonal goods to be in play. So they'll be working the inventory appropriately with each vendor, but we in no way see it as a slow start as a big event. Remember, those are a couple of very small sales months for us.

And so a couple of good comp weeks in stronger periods -- sales periods during the year can make up a lot of ground..

Got it. And then last question for Jim.

Just in terms of the guidance, I know that you guys are guiding to a mid single-digit comp for the year, can you talk a little bit about that comp outlook, kind of by quarter and concept as we go through the rest of the year?.

See Mitch, you're already trying to raise the numbers..

I guess it wasn't mid single digits..

We didn't say mid single-digits, we said low single-digit..

That's right. I'm sorry..

Okay. Well, I know it was just a slip..

It will be high single digits before I'm done here..

Exactly.

Okay, so your question was, what is the general trend?.

Yes.

How are you thinking about by quarter and concept as we kind of play out the rest of the year?.

First I'll talk about the total company and then I'll get down to more specific business units. Overall, Genesco, as we said, was around negative 4% in the first quarter. We expect to go slightly positive in the second quarter, and then a little more positive in the third and fourth quarter.

So there's an improvement going across from the second, third and fourth. And if you look at the last 9 months, the comp that we're looking at overall is in the range of 2.5% to 3.5%. Okay. Last 9 months. Now by business unit, the Journeys, as we said, was negative 2%.

And we expect them to go positive in the second quarter, a little more in the third and a little more in the fourth quarter and for the last 9 months, in the range of 2% to 3%. In the case of Schuh, they were negative 11%.

Bob talked about some improvement in the second quarter, still expecting Schuh to be negative low single digits in the second quarter, go slightly positive in the third quarter and a little more positive in the fourth quarter. So it'll be slightly -- it'll be low single digits for the last 9 months.

In the case of Lids, we've talked about how the comparisons get so much easier for Lids in the back half. Last year, Lids was positive around 3% in the first quarter and around 2% in the second quarter, and then they went negative 5% and around negative 10%. And actually, the break in their comps began in July, so they went negative in July last year.

A little positive in August and they were negative, so they're going against much easier comparisons in the back half. So for Lids, it was negative 6% and expect it -- hopefully, it will be slightly positive in the second quarter.

And then in the range of low-single to mid-single in the third and fourth quarters, again, because they're going against easier comparisons. And overall, it will be low- to mid-single digits for the last 9 months.

And then finally, Johnston & Murphy was positive about 7% in the first quarter, and we obviously expect it to be positive for all 4 quarters.

And it's -- it'll probably be -- the comparisons get a little harder in the third quarter, so it will be -- maybe a little lower in the third quarter, but in the mid single-digit range for the second and fourth quarter. And overall, mid-single digits for the last 9 months..

And we'll take our next question from Jill Caruthers with Johnson Rice..

Could you talk about -- a bit about your expectations on gross margin? You're expecting it to be up for the year, but you faced a significant 100 basis point decline this quarter. It sounds like....

See, there you go again. You're trying to raise the estimates on us also. On gross margin, no, we said gross margin would be down 10 to 20 basis points..

I'm sorry.

But basically, essential improvement -- I mean, incremental improvement from the first quarter?.

Yes, actually, it's actually the improvement -- we really are counting on continued pressure in terms of our guidance.

Somewhat -- it's really in the second, third quarters, and we expect to see some improvement in gross margin in the fourth quarter, which partly is due to the fact that last year, our gross margin was impacted by the weak fourth quarter. So really not much improvement in the second and third quarter, it will be mostly in the fourth quarter..

Okay.

And then could you talk a bit about the Schuh closing the concessions? Just kind of the thought process around that and the timing and if that should impact numbers significantly in any certain quarter?.

Republic is a retailer in -- an apparel retailer in the U.K. and we had 13 concessions that were basically running the Schuh departments. And that became a very challenged business. Our business was great; Republic was challenged. And they finally filed a Chapter 11, were bought out of Chapter 11 by another retailer in the U.K.

And all that added up to a circumstance where it didn't really makes sense for us to continue within those stores for much longer. And so every store is a different situation, but our general theme is that we want to continue the business. We want to retain our employees and give them an opportunity to continue to service their customers.

And so we have been pursuing a combination of pop-up stores, temporary locations and permanent locations, seeking to try and get permanent in good locations in those markets when the right store is there. So you might notice in the script, we were using the word permanent retail locations.

We were leaving these little temporary locations out of the equation. So the long and short of it is we are making the move. It's a lot of work for the Schuh team. They're doing a fantastic job of dealing with this that came up fairly quickly on them, to retain as much of that business as they can.

And it looks like they'll be successful in retaining most of it. And at the end of the day, as I said, it's only 5% of Schuh anyway. So we'll come out of it in good shape..

One additional point on this is that in the long, more detailed commentary that we filed earlier this morning, we talked some more -- we talk about capital expenditure, new stores going forward and we refer to pop-ups, which Bob just defined. But altogether, we started the year with 13 concessions.

We had planned, actually, on closing 3 during the year, anyways. So really the shortfall is 10, and that shortfall, as Bob said, is going to be dealt with at least initially with some pop-ups, and then we will be opening stores in some of those locations.

So it's going to be dealt with through pop-ups and some new stores that we'll be building during the year..

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

Bob, I don't know if you -- did you comment at all on Shi how it performed in the quarter and maybe some color on how it performed so far in May?.

Yes. It's -- we've had a really nice run with Shi over the last several years. And our comments in the past were that it's getting to the level where we could get excited about possibly expanding it, but we need to see it sustained. And it's been a little more challenged in the last quarter in terms of its performance.

And so we're hopeful -- we're still watching it and we're still -- the team is doing a great job of dealing with the challenges that they ran into again. And we still love the concept. The economy is still not quite supporting an aggressive rollout of a women's fashion chain right now. So we're where we were before, we're in wait-and-see mode still..

Okay.

But I mean, how much of it do you delineate is just really from a weather impact on its business, how much is macro when -- I guess did it improve in May commensurate with the rest of your divisions and operations?.

Yes, a little bit improvement, and weather is hitting pretty much all of the businesses. So Jim is actually trying to dig up the numbers to see what May improvement has been..

It's -- [indiscernible]..

All right. We're not ready to move on it yet, which I think is the important theme..

Okay. So let me ask -- so Jim, I've got a question for you. Just on the bonus contingent.

It was down, seemed like somewhat in the quarter itself, but you're still expecting $0.52, $0.55 or something like that in the number this year, is that fair?.

On the contingent bonus?.

On the contingent bonus, that's right..

Okay, that hasn't changed.

And then, I'm curious just on Lids, the percentage that's being done in snapback either from a unit perspective -- how has that trended now that it's really seems to be focused on a select number of SKUs? Has it -- I assume it has come down even though it's still a pretty significant component to the business, is that fair?.

No, no..

It's been rocking in a narrower set of SKUs, which in a way has made it an even faster business. It's all about a select number of NBA teams right now. And so -- but the -- so the customers are buying just as many snapbacks, they're just buying off of a shorter shelf..

As you go into the back half of the year and you start to feel better about the comp trajectory in this business, are you just going to assume that snapback continues to be a percentage but the fitted business starts to increase? Or comparisons get somewhat -- I'm curious what gives you the confidence that you get better comps outside of just the fact that you've got easier comparisons if snapbacks still seems to be, as you call, rocking in the business?.

Well, look, as we said, we got more aggressive on price with snaps. And with that, we regained our share. And so, we can't predict when snaps are going to become less important to that customer. And our mix will be driven by what our customer is buying. So we'll see how it all shakes out.

But the improvement in comps largely comes from essentially holding serve against increasingly better comparisons.

And so assuming that we can -- if you look at the fourth quarter where we got really beat up and we weren't responsive at the beginning on price with snaps and they were all over the mall, we think we can do -- even if snaps are still popular at that point, we think we can do better..

Okay. I got you.

And lastly just on the comp up 1% in May, can you break out, by any chance, between direct consumer and brick-and-mortar, or talk to that, or no?.

The -- first, let me answer your question earlier on Shi. Sorry it took me so long to get to it. Yes, there is big improvement in Shi in the month of May so far versus where they were for the first -- for the first quarter, and a lot of that has to do with the warmer weather, obviously.

So yes, a nice improvement in Shi, okay? In terms of the overall for the month of May and the breakdown, the direct business was in the range of where it's been running, up nicely and most of the improvement came actually in stores.

So the improvement for the most part has been in the stores versus the direct business, which is creating the improvement in the month of May..

That does conclude our question-and-answer session for today. I'd like to turn the conference back over to Mr. Bob Dennis at this time for any additional or closing remarks..

Just simply thank you for your interest in the company, and we look forward to talking to you again..

Thank you. That does conclude today's conference. We appreciate your participation..