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Consumer Cyclical - Apparel - Retail - NYSE - US
$ 29.57
-3.81 %
$ 332 M
Market Cap
-33.99
P/E
EARNINGS CALL TRANSCRIPT
EARNINGS CALL TRANSCRIPT 2015 - Q4
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Executives

Robert J. Dennis - Chairman, President, and CEO Mimi E. Vaughn - SVP, Finance and CFO.

Analysts

Erinn Murphy - Piper Jaffray Jay Sole - Morgan Stanley Pamela Quintiliano - SunTrust Robinson Humphrey Mitch Kummetz - Robert W Baird Sam Poser - Sterne Agee & Leach Scott Krasik - Buckingham Research Group Chad Sutherland - Goldman Sachs Jill Nelson - Johnson Rice & Co. Christopher Svezia - Susquehanna Financial Group.

Operator

Good day, everyone and welcome to the Genesco Fourth Quarter Fiscal 2015 Conference Call. Just a reminder, today's call is being recorded. Participants on the call expect to make forward-looking statements. These statements reflect the participants' expectations as of today, but actual results could be different.

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

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

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

Robert J. Dennis

Good morning and thank you for being with us. I am joined today by Mimi Vaughn in her debut earnings call as our new Financial Officer. Fourth quarter EPS came in at $2.30, an increase of 6% over the fourth quarter last year, but well below our expectations. This brought full-year earnings per share to $4.74, which was below our guidance range.

This performance marked a disappointing end to a disappointing year for the Company. Fourth quarter sales exceeded our expectations driven by a consolidated comparable sales increase of 10%.

This compared performance was highlighted by a double-digit increase at Journeys which led to a record sales and record profit for the division and another strong quarter for our direct business overall. And the first quarter is off to a solid start with consolidated comps up 5% through last Saturday.

However, the revenue upside in the quarter did not flow through to the bottom line largely due to three key factors. First, we experienced substantial gross margin pressure in the Lids Sports Group, due to higher promotional activity as we work to right size inventories and to compete in an increasingly promotional competitive environment.

Second, we experienced lower than planned profit contribution from new stores and acquisitions. While total comp was strong, total sales for the Company only slightly exceeded our expectations. The lower non-comp sales were concentrated primarily in Locker Room by Lids and Locker Room by Lids at Macy’s.

And finally, the strengthening of the U.S dollar versus the British pound and the Canadian dollar negatively impacted the reported results of our non-U.S businesses. Looking ahead, we see a number of themes from the fourth quarter both positive and negative, continuing in to the new fiscal year.

However, foremost in our minds is the turnaround and improvement of our Lids business and the pace and timing of that improvement.

Given that this and other external factors, including challenges from the West Coast port situation, upward pressure on operating expenses due to wage increases partly tied to minimum wage and the continued negative effects of the strong dollar for both our U.K.

and Canadian operations, we have adopted a considerably more conservative outlook for earnings growth in fiscal ’16. We expect earnings at $5.09 to $5.19 per share for the current fiscal year. Now I'm going to ask Mimi, to review the financial results for the quarter and to take you through our guidance in more detail.

After which I will come back with more color on the performance and outlook for each of our business segments..

Mimi E. Vaughn Chairman, President & Chief Executive Officer

Thank you, Bob, and good morning, everyone. As a reminder, we have posted more detailed information online in the CFO commentary. So I will highlight a few important points from the results -- reported results. In the fourth quarter, we had strong sales across all of our businesses with total sales up 13% over last year to $893 million.

This was driven by a 10% increase in consolidated comp sales and increase in non-comp sales of approximately $25 million including the opening of 13 new stores and an increase of 4% in the wholesale sales. By division, total comps were up 16% at Journeys, 3% at Schuh, 7% at Lid, and 2% at Johnston & Murphy.

Consolidated store comps were up 9% and direct comps were up 25%, which pushed direct as a percent of total retail sales to 10% for the quarter compared to 9% a year-ago. These solid sales trends have continued into this fiscal year. Consolidated comp sales for the first quarter to date through last Saturday, March 7, are up 5%.

February got off to a strong start that the winter weather that has blanketed much of the U.S in the more recent weeks has negatively affected sales. By division, for the first quarter to date, total comps are up 7% at Journeys, 4% at Schuh, 2% at Lid, and down 1% at Johnston & Murphy.

J&M has been hit particularly hard by the weather given its concentration of stores in the Northeast. Consolidated store comps for the first quarter to date are up 3% and direct comps are up 36% continuing the strong trend in direct.

Direct comps were boosted by Lids turning on in February at systems to access inventory in the stores from online, which enabled visibility to almost 70,000 more SKUs. As a result of this, plus increased promotions, Lids direct comps quarter to date are up 86%. Gross margin for the quarter decreased 120 basis points over last year to 47.5%.

This was caused by increased markdowns and promotional activity primarily at Lids, but also at Schuh and Johnston & Murphy.

Gross margins were down in all of Lids businesses as we work to freshen inventory and retain share in the promotional environment we faced, but particularly down at Locker Room by Lids were strong full price selling for the College Football Playoff and NFL Playoff Team merchandise was more than offset by this promotional activity.

Higher shipping and warehouse expense put pressure on gross margin in the fourth quarter due to more e-commerce shipments in all of our retail businesses. Nonetheless, Journeys gross margin improved in the quarter on the strength of full price selling.

Total adjusted SG&A expense decreased 70 basis points to 37.6% due to better leverage as a result of strong comp and a reduction in the Schuh earnout expense quarter-over-quarter, despite heavier spending in technology and distribution center investments and higher e-commerce marketing spend.

Adjusted operating income for the quarter increased 8% to $89 million. Operating margin decreased by 50 basis points versus last year to 9.9% due to the lower gross margins. Fourth quarter adjusted EPS was $2.30.

The strengthening of the U.S dollar versus the British pound and the Canadian dollar reduced earnings by $0.06 per share in the fourth quarter compared to last year. And a higher tax rate than was reflected in our guidance due to a lower weighting of overseas earnings reduced earnings per share by another $0.03 in the quarter.

Both of these factors contributed to results being lower than guidance. Our fiscal year ’15 adjusted tax rate was 37.3%. Turning now to the balance sheet, inventory at year-end was up 5% year-over-year with retail square footage up 8% for the year and sales up 13% for the quarter.

Journeys inventory was down and Lids retail inventory increased 17% on a square footage increase of 18%. Finally, we ended the year with $113 million in cash with no borrowings under our domestic credit facility and $29 million of U.K. debt. During the quarter, we repurchased $3.7 million of stock.

Now looking ahead to fiscal ’16, as Bob reviewed, we’ve adopted a more conservative outlook than previously discussed. With expectations for adjusted earnings per share in the range of $5.10 to $5.20 which represents growth of 8% to 10% over this year’s EPS.

As a reminder, we will benefit from the conclusion of the Schuh acquisition earnout which we’ve been expensing for the past 3.5 years. We will pay the total earnout in full early this year given Schuh’s outperformance to expectation since the acquisition. But there will be no P&L expense related to it in the current year.

On the other hand, the strong dollar remains a headwind and we anticipate earnings will be weighed down by $0.08 per share this year assuming exchange rate stay where they are. We also expect increased expense from a legacy pension plan to reduce earnings by another $0.05 per share.

We typically earn 70% plus of operating income in the back half of the year and expect it to be even more heavily weighted to the back this year. As earnings are affected by the promotional activity, we will be conducting early in the year and potentially from the West Coast port backlog.

We expect that the impact will be particularly acute in the first quarter. We anticipate total sales for the year will increase 4% to 6% with consolidated comps including direct increasing 3% to 4%. We are planning on opening 116 new stores concentrated in concept other than Lids. Next, we expect gross margins to be down slightly for the year overall.

This includes a gross margin decline at Lids from an already low base offset somewhat by improvements in other businesses, particularly Schuh. For at least the first half, overall margins will take a hit as we promote to right size inventory at Lid, and then we will improve somewhat later in the year.

We anticipate SG&A expense will be down in the range of 20 to 40 basis points compared with last year. We will leverage rent and benefit from the end of the Schuh earnout that will have difficulty leveraging store labor due to minimum wage increases and a co-manager initiative at Journeys that Bob will describe later.

This all results in an operating margin that is flat to slightly up for the year. Our fiscal ’16 tax rate is expected to be 36.4% and is lower than last year because of a higher proportion of overseas earnings. Looking at the balance sheet, we expect inventories for the year to be flat to up just a little including a 10% to 15% reduction at Lid.

We are planning capital expenditures in the $115 million to $130 million range, up from last year’s level since we will be building a few more new stores and renovating a larger number of existing stores.

We anticipate spending on e-commerce omni-channel distribution center and other non-store capital to be a sizable portion of these amounts, but in line with last year’s level. Depreciation and amortization is estimated at approximately $83 million. We are assuming average shares outstanding of 23.8 million for the year.

We have not included any stock buyback in this guidance. However, we have $61 million remaining on our stock repurchase authorization of $75 million. Now I’ll turn the call back over to Bob..

Robert J. Dennis

Thanks, Mimi. Before I start with the color on the businesses, I misstated our guidance by a penny. It is what Mimi said which is $5.10 to $5.20 for this coming year. So let's talk about the key factors in the performance of our individual business units in the fourth quarter and our current outlook for them, starting with Journeys.

The fantastic quarter at Journeys underscores the buying team’s prowess at identifying and committing to key trends and maintaining a fresh and relevant product assortment for a teen customer.

Outstanding comparable sales reflected a favorable fashion cycle with the combination of casual footwear, and in particular boots, plus newness on the fashion athletic side driving performance. The Journeys merchant team was squarely on the trends and we bought a focused selection and sufficient depth to meet the strong demand.

And we also believe lower gas prices at the pump contributed to some of this demand. Journeys has implemented a number of strategic initiatives over the past several months aimed at driving traffic to the brand and increasing conversion.

These also contributed to the outperformance in the quarter and should continue to pay dividends for Journeys in the current fiscal year. These initiatives included adjusting the store staffing model to better capitalize on peak shopping hours, which was particularly beneficial during the busy holiday season.

An increasing investment in catalogs and digital marketing where we continue to see a high ROI from driving traffic both the Web site and the stores. Journeys investment in omni-channel is paying off as well.

It's first holiday season using its new order management system coupled with a significant increase in online marketing and catalog distribution fueled a 40% direct comp on top of a double-digit gain a year-ago.

Looking ahead, we expect that Journeys product advantages as well as improvements in operations, marketing, and omni-channel, will continue to have a positive effect throughout the current year.

One countervailing force at Journeys is the minimum wage pressure that affects all our retail businesses, in addition to which Journeys is rolling out a specific initiative to address turnover with a bump in co-manager pay.

We expect that reduced turnover will eventually increase productivity, but in the near-term the move will make it more difficult for Journeys to leverage SG&A. And one wild card for Journeys strong prospects this year as mentioned by Mimi, is the potential impact of the West Coast port situation.

Journeys for the most part was unaffected in the fourth quarter, but have experienced some disruption of receipts in the first quarter. As a branded retailer, Journeys is relying on its vendors and as such lacks the complete supply chain visibility that we have in our vertical businesses.

Thus, we see the possibility for more potential disruption in the first half that we can’t see as of yet. And of course this same situation could affect Lids as well. Now to Schuh. Fourth quarter comp start off to a strong start driven by the Group's first ever Black Friday promotion joining what has recently become a broad practice amongst U.K.

retailers. As was expected, this changed the pattern of sales for the quarter, boosting November -- at the expense of December, but not clearly producing incremental sales in the quarter. But we feel it also kicked off a more promotional holiday season and then retailers battled over lower traffic in the weeks leading up to Christmas.

And then despite the fact that Journeys and Schuh sell many of the same brands, the U.K. market has experienced a bit of a decoupling from some of the fashion trends that are driving the Journeys business. And this together with the more promotional environment in the U.K. challenged Schuh’s performance.

We are pleased that sales trends reaccelerated in January and have remained solid so far in the first quarter. Schuh’s direct business which has long been a strength of theirs, thanks to early investments in building this channel had a strong performance in the quarter.

Recent results have been buoyed by the roll out of a new e-commerce platform which incorporates responsive design technology and has significantly improved conversion. So despite gross margin pressure from increased promotional activity in the U.K., Schuh was able to achieve planned operating income, once again thanks to solid expense management.

Without the exchange rate headwinds, Schuh would've exceeded our expectations for the quarter. And then finally, we are very pleased to announce that Schuh will be opening a store at a Mall just outside of Düsseldorf, Germany later this month.

As you know we've been eyeing Europe where the brand Schuh carries do not have concentrated distribution in a large chain with a full service model. This store test will help determine if there is an opportunity with the German consumer, and it will shape our next steps for potential Continental expansion. Now turning to the Lids Sports Group.

The quarter's performance reflected all the issues we outlined on last quarter's call producing very disappointing results. Despite strong comps, weakness in non-comp stores held us back.

The Seahawks Patriots Super Bowl match up was a little more favorable than the Seahawks Broncos a year-ago and then Ohio State winning the college football playoffs was a real boost for the business in the fourth quarter. And overall, the more favorable playoff line of this year contributed one of the seven points of comp gain in the quarter.

However, in Q1, we’re facing headwinds from the Patriots winning the Super Bowl versus the Seahawks win a year-ago.

Lids had planned to be promotional over the holidays across all the retail business units and particularly in the Locker Room and e-commerce businesses to begin the process of rightsizing inventory to allow improved merchandise freshness and to respond to a highly promotional environment in the licensed sports category.

We ended up being even more promotional than we anticipated. These actions drove sales higher than our expectations, but lower gross margin significantly and drove operating income below last year’s levels for Lids in total.

Starting with the hat business, comps were ahead of plan, but operating income fell short reflecting lower gross margins as we increased our promotional cadence.

Snapback sales and inventory are steady and they were in good shape, and while a few minor silhouettes have gained interest from customers, there are unfortunately no dominant trends driving the hat business at this time. The Lids direct business posted another strong comp performance, up double-digits on top of the double-digit gain a year-ago.

The gross margins were lower year-over-year as we use this channel to also clear some inventory. Looking at Locker Room by Lids, the theme was again the same.

Comps were better than expected, up high single digits on top of the mid teens gain a year-ago, led by our Ohio State stores, but the business beyond championship driven product was highly promotional as well. And our new store performance in Locker Room also fell short of expectations. Locker Room by Lids is a still a work in progress.

However, our long-term vision for this business has not changed. We continue to view the opportunity to create the first omni-channel retailer of licensed sports apparel and merchandise serving both the local and the displaced fan from the same inventory pool and we see that as very compelling. So next an update on Locker Room by Lids at Macy’s.

The handful of stores that were in the Q4 comp base had strong comparable sales, but the business overall performed below our expectations. We have identified some operational challenges that impeded performance early on and some other opportunities for improvement that we are working with Macy's to address.

Having learned how much location within the Macy's store matters, we are also working with Macy's to get the ideal positioning for our departments within their stores. And then finally we are adjusting the staffing model as we are able in order to improve store labor expense.

So while its -- in its early days, we still believe that Locker Room by Lids at Macy’s represents a valuable growth opportunity for the future, serving our customer who would not otherwise frequent our Locker Room stores.

And then finally, Lids Team Sports sales for the quarter were ahead of expectations with gross margins were below both planned and last year.

And we realize we have to do a better job on the fundamentals on execution including taking a hard look at expenses and as we’ve told you previously, we’ve brought in one of Lids’ founders, who is leading the efforts to improve day to day operations and performance.

So we have in place a full court press to improve the Lids Sports Group’s financial performance and to unlock the strategic potential of these businesses. Let me mention three key parts of this effort and the effect we expect each of them to have on this year's outlook.

First, we will continue the work of the all important effort to right size the inventory to allow more freshness that the customer expects. We also recognize the extra challenge that the promotional environment that is currently prevalent in the category poses.

To this end, we expect to continue the intensified promotion cadence we began in the fourth quarter through the first half of this year and after if necessary and have planned gross margin accordingly. Second, we will continue in the next year to focus on execution rather than growth.

We expect that simply by eliminating some operational issues that affected various parts of the business last year and by gaining efficiencies, we will achieve stability and operating performance.

We also see some opportunities to beef up the leadership team and as a key early step have recently brought in a new Chief financial Officer for Lids Sports Group with a strong, strong operational background. And he has hit the ground running and is playing a key role in our efforts to improve the business.

And finally, we’ve three significant systems initiative in Lids that have been in progress and that should make a difference in the current year. Mimi has already mentioned the new locate system, designed to increase consumer access to total inventory, the vast majority of which is in stores.

We tested the system in the fourth quarter and went live with its capability in February. And we are very pleased with incremental demand it has generated, translating into tens of thousands of incremental orders in driving significant comp gains.

Early results show that locate is driving full price selling in addition to sales from markdown and clearance products. Locate will play an especially important role in Locker Room. We are tremendously excited about the chances to serve the displaced fan with a deep assortment of merchandise from our local stores.

Next, AutoStore is the robotic system, that facilitate single order picking to expedite both store and e-commerce shipments and save significantly on warehouse labor expense.

The system is already been constructed in the warehouse, its undergoing further testing, but we expect AutoStore to become fully operational in the next few months, but have not built labor savings into our plan until the back half. And then finally, we are working on a new front-end system for the e-commerce business.

Implementation of this platform has taken longer than we anticipated due to its complexity, but we expect to go live sometime in the second half of this year.

While we believe there is real upside from higher conversion of Web traffic that this system will enable, we’ve not built this into our plan and we will do so only when we have a date certain for going live. Now turning briefly to Johnston & Murphy.

Comp sales improved just the quarter progressed and finished up on top of a strong comp a year-ago and versus flat performance in the third quarter. J&M’s holiday selling was highlighted by ongoing strength in the brands non-core offering led by dress casual shoes, women's footwear and apparel.

Helping drive these results for recent investments in the brands omni-channel infrastructure including new warehouse and order management systems and a new front-end platform incorporating response of design technology. However, expenses associated with these investments also weighed on results for the quarter versus last year.

Sales in our Licensed Brands Group were down for the quarter, but operating margin was essentially flat on stronger gross margins. So before I close, I’d like to extend special congratulations to the Journeys team for a spectacular and record-breaking quarter.

After almost 30 years of operation, Journeys is at the top of its game as the destination of choice for branded teen footwear. Congratulations to the Journeys team. And I’d also recognize our entire Genesco team for their strong efforts during the important holiday season.

Their contributions reinforce the powerful strategic position of our businesses and even more clearly the value of the many years of experience and commitment to excellence in our operating teams. We are committed to stronger performance in the year ahead and are excited about the longer term potential.

So thank you for joining us on the call today and we are now ready to open it up for questions..

Operator

Thank you. [Operator Instructions] We will take our first question from Erinn Murphy with Piper Jaffray..

Erinn Murphy

Great. Thank you. Good morning. I just have a couple of questions. First, I guess on the West Coast port issue, it sounds like it’s a little bit more challenging for you guys and a number of others.

Can you just maybe provide some context of what you’re seeing now? How the goods are flowing kind of post labor contract resolution? And then how much product is still backed up? And then, you’ve talked about the Q1 impact, but how bad could it be potentially in Q2 if you are just still not seeing all of those goods come to market in a timely fashion?.

Robert J. Dennis

Right. So Erinn, we obviously have much visibility with our vertical businesses. And so when you talk to the Johnston & Murphy and licensed brands team, they are looking at three, four week delays which on wholesale shipments is particularly critical for us.

We think that though the timeline on this is pretty extended, because it not simply involves unloading the ships that are at dock and then sitting out in harbor, but you got products sitting in China that is waiting to be loaded. So all of the capacity is behind and so it's a little unclear on how long it takes for all the catching up to occur.

When you get to the branded businesses, you have to almost go by vendor, and with certain key vendors for a variety of reasons, at Journeys we brought in some product early with other -- some other key vendors we’re already seeing that we’re a little bit tight, and so it varies by vendor.

And then of course with vendors it's a little more challenging to get really good shipment dates. They are trying to figure out their own allocation. So we are kind of on pins and needles and all of our teams are obvious pressing for sort of most favored nation’s status in terms of getting to the head of the line.

The headwear business is a little different because it is the easiest of all the categories to fly goods in. And some of our top vendors are stepping up and flying some goods in, which would alleviate a little bit of the port situation. So it's all over the board.

It is the reason -- one of the reasons that our guidance got taken down and that guidance is taken down weighted heavily to the first half. And so I guess it's a little bit of a stay tuned and we'll keep updating you as we learn more..

Erinn Murphy

Can you quantify of the guide down in terms of kind of some 18% to the 8% to 10% growth.

How much of that was related specifically to the West Coast issue and then kind of air freight or other things related to that particular issue?.

Robert J. Dennis

We got a bunch of things going on in our business that have caused us to bring down the guidance. And I don’t think we’re going to parse it down into pieces. It’s very uncertain. They’re all working off -- all these things are working off of ranges. So again, we will figure out as we go along..

Erinn Murphy

Okay. And then, I guess secondly on the Lids business, I mean, you talked about some of the strategies to help improve there, but can you just help us think about on some of the new store performance its been lagging over the last couple of quarters.

Just talk about what you’re seeing there now and then how is -- how are you thinking about, in particular, I guess Mimi for you, on the gross margin for the first half versus the second half? I know you said it would be worse in the first half, but what’s your level of confidence that it does actually inflect in the second half when we typically head into more kind of retail promotional season in the second half is it -- as it is?.

Robert J. Dennis

Yes. Well, you got to go by business. And Erinn, unfortunately this was across every one of our businesses. The only business that escaped all of this was our business up in Canada. It was actually quite strong. In hats its three things.

It’s the lack of a meaningful trend and as we said, we don't see anything at the moment that is a move the needle kind of event. So that remains a wildcard. The freshness in our inventory is something that we’re working on. We have really too much markdown products as we try to get fresh.

You will remember in the hat business at one point we tried a couple of fully fitted programs to try and drive our customers back into fitted with freshness. And that program didn’t perform up to expectations and so those are some of the corrective measures that we need to make and then when we do that, we think we can be fresher.

And as we said, we think by the back half we’re in a position to start taking advantage of that freshness. And we’ve step up our promotional activity trying and get that done. We’ve given up in the headwear business and the hat business about a 100 basis points over the last year or two as we try to compete a little more aggressively.

In Lids Locker Room, it's also a lack of freshness, but then there we have a bunch of underperforming new stores and we have probably underestimated the maturity cycle. The benchmarking that we did when we opened new stores was against existing stores many of which we acquired and some of those have been through the maturity cycle.

So we're doing a lot of analysis right now to figure out how -- what pattern of maturity to expect and whether things like grand opening activities might accelerate a maturity cycle. And then, finally at Macy's we opened 165 stores mostly in Q3, so it's very, very early days and this is a work in progress. We had some glitches.

I mean, let's call them glitches in terms of working with Macy's to get our product on the POS, it's natural start-up kind of stuff, its been fixed. And so Macy's has been a great partner in getting us to work through that. But once you miss sales, then you’re heavy on inventory and then you’re having to markdown to play catch up.

We have discovered and this was part of the plan that location matters a lot more than we expected and so we have the ability to work with Macy's to figure out how to get out of locations that aren’t ideal to get to the locations where we think we’re ideal that will take a little bit of time, we have -- that’s a store by store thing.

And then we have some flexibility again with Macy's being a great partner on adjusting our staffing model, which we’re doing right now for a select number of stores to see how sales are affected. And so that's another part of the economic model that we’re working on. If you look at it overall, we’ve halted the growth.

We’ve almost no new stores except for lease commitments in some hat stores that are we think slam dunks. Across the board, we really need to be working on reducing the inventories and we think it takes three quarters to get there.

We need to work on the inventory with our vendor partners to reverse some of the promotional creep that we think has occurred in the industry, and that's both in headwear and in the broader Locker Rooms assortment. And these are very important brands.

So we are at little surprised that the level of promotional activity that has appeared lately and we’re hopeful that they will reign it in. And if not, we will have to compete more aggressively. But we know that some brands are revisiting their approach, particularly to online. And so, we’ve some work to do.

The online has become a little bit of the Wild Wild West for a lot of vendors and they have to construct some policies that does that. But in order to be clear, we recognize that we are not going to do anything to improperly influence our competitors pricing.

What we can do is work closely with our vendors to make sure that their pricing to us reflects the reality of the marketplace and that it’s consistent with our gross margin expectations. And so, that's where we have a lot of work to do. So that was a very long winded answer to your question. I hope it helped you understand where we’re..

Erinn Murphy

That’s helpful.

Mimi, yes on the gross margins help us think first half, second half a little bit more granular?.

Mimi E. Vaughn Chairman, President & Chief Executive Officer

Right. You had asked that question and if you think about the upcoming year, it really will be the reverse of what occurred this year. What happened in this year is that we promoted pretty heavily in the fourth quarter.

Next year what our plan is to promote in the first quarter with the intent to be clean in the second quarter and get back to more full priced selling. If you think about we are in the branded business, of selling branded products and we’re not really able to cut back on receipts quickly because we order -- place our orders six months in advance.

We are bringing in product now, we are clearing product that we think the needs to be clear. We’ve been addressing this, so we continue to bring in some products. So we intent to have promotional activity in the first half and then plan to manage receipts down in the back half of the year to be able to get our inventory down 10% to 15%.

So when you think about margins for the overall Lids business, we expect to be slightly down year-over-year being move down in the first half as margins then picking back up in comparison in the second half of the year..

Robert J. Dennis

And then just -- Erinn, just to talk a little bit about upside as oppose to all the problems, we think that locate on lids.com is a big deal for us this year. Year-to-date, lids.com is up 80% -- just a little bit shy of 80%. Some of that is coming from promotion, we’re more promotional year-over-year, but actually our promotional margins are better.

And we know that we got a very, very strong comp on just the full price selling that we’re doing year-over-year.

So our ability to show our customers online, all of the merchandise that we have is really starting to pay off and we’re in the early days of tweaking how we make that work, we’re in the early days of our stores learning how to quickly fulfill and to be reactive to what comes in, because our personnel are still used to people coming in with leased line rather than over the Internet, but we are very, very excited by that.

And the other thing I'll emphasize to you is we are building a business here and we’re the only one that’s doing it that is an omni-channel business that in this category in particular makes great sense, because the local stores are locally merchandised.

And so in Tennessee we’ve got these stores loaded up with Tennessee and if you live in Kansas City and you’re Tennessee Titans fan, I don't know why you'd be, but if you are a Tennessee -- I don’t know finding in Tennessee would be a Tennessee Titans right now. But if you’re a Titan fan, there is nowhere to get it in Kansas City.

We are going to have the best assortment sitting here that is all -- and its good assortment, because we know we can produce a lot of volume for the Nashvillians [ph] on Tennessee and then that is available for everyone else nationwide.

That's a hugely efficient model for most parts of the year; we expect that the picking of the Internet orders will be by store personnel who are there any way and taking lows [ph] in their day in order to fulfill the order.

We will probably need to staff up with dedicated pickers during the busiest times of the year, but the large proportion of what we do will add no picking labor. So it's a pretty good model. We are the only one doing it and we are committed to say that this is going to succeed.

It just isn’t a smooth path and so we’ve had little bit of the rocky run at the moment..

Erinn Murphy

Got it. Well, thank you for your time and I will let someone else asks their question. Best of luck..

Robert J. Dennis

Thanks..

Mimi E. Vaughn Chairman, President & Chief Executive Officer

Thank you..

Operator

We'll take our next question from Jay Sole with Morgan Stanley..

Jay Sole

Hi. Good morning..

Mimi E. Vaughn Chairman, President & Chief Executive Officer

Good morning..

Jay Sole

Bob, can we talk more about the Lids omni-channel strategy.

But can we talk about in terms of what is the lot that you to do in terms of breadth of product offering compared to what you have now? How is it going to help you clear goods? And then, will you be able to take the product that it state [ph] might be Lids Locker Room and sell it through a regular hat store in a mall or allow people to pick up a product they buy online from a Lids store, even if they don’t have that product in the store and that type of thing?.

Robert J. Dennis

Jay, first on the breadth and depth part of the work we're doing looking at the assortment is examining the breadth and depth relationship. The hypothesis is that we might be a little too broad.

When you look at the Internet selling, there have been some that have pushed forward the proposition that you need to have basically have everything and be extraordinarily broad. We don’t believe that’s the case. This is not a category that doesn’t need good merchants who are making good choices on breadth and depth.

And we think that this is just like most of retail when you lean in and you have the opportunity to get narrower and deeper, you have the opportunity for more success. So a lot of analysis going on that might -- and that might be part of the solution. In terms of using the headwear stores for local stores, that's an opportunity for us.

Now obviously we are ambitious to have ultimately a Locker Room store in every market. But in terms of returns we can set it up that way. In terms of pick up, if you wanted to order and have it delivered to the store, we have that capability already. And so, we’d be able to structure our business that way..

Jay Sole

Got it. Thanks so much..

Robert J. Dennis

You bet. Thanks, Jay..

Operator

We'll take our next question from Pam Quintiliano with SunTrust..

Pamela Quintiliano

Great. Thanks so much. So I have a few questions. One, just a point of clarification. I thought that Mimi has said that we should expect promotions in 1Q, trying to be cleaned up, I guess, by the end of 2Q, but I thought you had said that would take three quarters to reduce inventories.

So if you could just help me understand that? And then, the second question surrounding Lids is it sounds like you're working with your vendors on the pricing and buys.

Just where are you in those discussions, how far along? I know it's sensitive, but anything you could divulge to help us understand from a timeline? And should I be thinking about that just in terms of the impact on the full price product or also any changes in types of planned promotions too, potentially attract the customer? And then lastly just on Macy's, when you said not an ideal location, where would you prefer to be in terms of adjacencies with departments? Thanks..

Robert J. Dennis

So on your first question, how about this, well it will take between two and three quarters to clear the inventory. It's a process and what we expect to do is be a little cleaner every quarter and so I'm not sure that will ever consider ourselves to be completely clean, we are retailers. We are always trying to get cleaner.

But we -- that the merchandise plan that -- and let me talk about how we are getting there. We think we need to do more promoting in the first half to reduce the inventories at the pace we want. We think in the back half, we have the opportunity to do it more with receipts.

So when you’re thinking about as a CFO, you're thinking gross margin and the plan is the harder hits are in the first two quarters.

As an operator looking at inventory numbers and looking for freshness, I think we have one more quarter afterwards, on which we're doing that more with receipts and then with markdowns more in the ordinary course of things. So that kind of explains the difference. In terms of working with the vendors, look we’ve ongoing conversations with the vendors.

We have just picked up visibility of what we perceive to be a step up in promotional activity and we’re actually doing analysis to put in front of some of our key vendors that says this is what we see in the marketplace, what do you see in the marketplace? Where are you going with this? And how can we work on a go forward basis to try and make sure that we hit our margin targets? Because as store operators we have certain margin requirements, there is more than one way to skin a cat and we’re going to work with our vendors to do it.

So it’s an ongoing conversation. That conversation will intensify a little bit, because we think the promotional activity has intensified a little bit. And Macy's, the adjacency is obviously, I mean, this is pretty common sense, first of all main floor works better for us.

The adjacency that has been most common has been somewhere in the area of active and, but it varies with every store, because as you may know that my Macy’s initiative has given the store level people a fair degree of discretion.

So the layout of the store is vary and then we’ve to figure out how to work within whatever layout that they have put together and some of the older stores and the non-legacy Macy’s stores have different than three level stores, two-level stores, entrances at different places, so it varies a lot.

So it's really a store-by-store situation where we will look at where we’re, when we look at the results what we’ve got and then we will have some conversations with our partners on what the options are for improving it..

Pamela Quintiliano

And would we expect by the end of this year potentially that you would have most of that figured out or [indiscernible] multiyear process?.

Robert J. Dennis

I think it will be a continuous process. We don’t -- I don't think we put a percentage on how many of those we have the ability to fix. There is a lot going on with Macy's. So we have got to get the assortment right. Some of these stores opened with the wrong assortments, so we got to give them time to see what their real run rate is.

As I said, we’re working with Macy’s with some flexibility on the labor model. So all of these things add up in different ways to, well do we want to live with the store where it is and make it work or do we want to move it and get hopefully to a place with more volume and make it work on that basis.

We can live with in a lot of these situations; we can live with a lower volume if we move to a different labor model. So it’s again -- it's a couple of different ways to skin a cat and it will be a store-by-store thing..

Pamela Quintiliano

Great. Best of luck..

Robert J. Dennis

Thanks..

Operator

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

Mitch Kummetz

Yes, thank you. Couple of questions. Let me -- we start with Journeys. Bob, you talked about -- I mean, obviously great comp in the quarter, pretty strong comp guidance there, you talked about a few initiatives helping drive comp in the quarter and you talked about those continuing to benefit the business into this fiscal year.

Is there anyway you can kind of quantify the impact from those initiatives in the quarter just to kind of give us a sense how much of a tailwind that might provide in fiscal ’16?.

Robert J. Dennis

Let me do it this way by telling you what the initiatives are and the way in which they improve the business and then I will ask if Mimi has any more specifics thought. I’m not sure we get too specific. One huge initiative involves having put counters in the large majority of our stores traffic counters.

And when we did that, we got visibility that the power hours for shopping our stores is spikier than we had expected. And so, on the old days you try to judge your volume based on your sales and the flaw in that is that you don't know what you are walking.

So it came to our attention that the spikes were higher than our sales curve, which suggests that we’re possibly walking customers. And if you think about it, of the categories in the mall, getting that staffing model right is relatively more important in footwear, because you can’t sell a pair of shoes without getting weighted on.

Our hat stores have a large component of self-service. People will just wander the store and find the hat that works for them, there is no big fit issue, people can figure that out. Footwear is a whole different story.

And so with that the power of those counters what Jim Estepa and Mike Sypert and his sales team have done is they’re starting to rewrite the script and what that takes us to is to more part time, because these are extremely spiky. Part time obviously works well for our economics as well at the moment.

And so -- and that kind of kicked in full gear in the fourth quarter. So we have three quarters where we largely have an opportunity to -- we believe, to get better on how we staff that and then there is probably learning on top of that.

Because the other benefit from that in the eyes of the Journeys team is then you start to get absolute conversion rates and that tells you how well a store has been managed.

And traffic rates in stores can vary for a bunch of reasons and we know that’s even cost by the stores, but then you can look at conversion and say this store is doing great and that store it looks like it has a fundamental issue based on its lower conversion, lets go do something about that.

And what we think is going to be really powerful is when we anniversary the conversion because then what you’re trying to drive is increasing conversion, you got your baseline set. We’ve learned a lot from our partners at Schuh. They’ve been big advocates of having a tracking -- customer tracking and they’ve made great use of it.

So we’re able to learn a lot from what they’ve achieved by using it well. So that just becomes big opportunity.

So the second one that was big is catalog, and what has happened over time is that we’ve gotten better at understanding the attribution of the catalog -- in the old days it was thought you drop a catalog and you get direct sales and that’s its purpose, and that’s how you measure it.

But the attribution that we’ve been able to tack points really squarely that catalogs are equally effective at driving traffic to the stores. We’ve actually known that for quite a while at Johnston & Murphy, and we weren’t sure if it applied to the teen customer as much as it does to the older guy, but it does.

And our research confirmed that, when we did our big research piece last year we learned -- I’ll not even call it a catalog that dates me. It’s called -- for anybody who’s young it’s a look book and they dog ear the pages, and they go or they give it to their parents and say this is what I want right here. It is a very effective tool.

As we measure what we’re getting as we drop the catalog, we’re not done yet. We weren’t brave enough to kind of drop 3x or 4x the catalogs we’ve dropped both in less than in frequency. So we’re going on an incremental basis, but every incremental gain that we’ve made, increase we’ve made in the catalog has translated into a nice boost.

And so we don’t think we’re done there yet, and we’re not sure when we’re done. So we’re just going to keep on taking it up until we see it tail off. I’ll ask Mimi, if there’s any more you’d want to add to that..

Mimi E. Vaughn Chairman, President & Chief Executive Officer

Yes, a couple of things. I think just on the store count there is interestingly -- there were 40 stores that went confident. As Bob said, the real magic in this is to figure out whether conversion is increasing.

And in these 40 stores over the holiday period traffic was flat to a little bit down but conversion due to the sales efforts within the Journeys stores was up, and also dollars per transaction were up as well. And so, we think that, that initiative is going to pay good dividends.

Another thing that is in its early stages and we’re in the process of testing this, but we talked on a previous call about the research that Journeys had done, and Journeys heard back from their customer that their customers really love their store environment and that they like the shopping environment.

But they ask that, there be some modifications made to the store just for brighter lighting and for backlit shelving [ph] and shelf lighting. And so, that is another initiative that we are in the process of testing that we think will motivate customers to come in our stores and have a better shopping experience.

So, I think they have a lot of good things in the hopper. We haven’t specifically quantified what comp come from product, and which comp comes from the initiatives. But altogether I think that we continue to see very good trends in Journeys comp for the coming year..

Mitch Kummetz

Okay. And then, maybe just a quick follow-up on Journeys. Bob, I know for a while now the casual side of the Journeys business has been the bigger driver, but I think for the last couple of quarters you talked about improving trends in athletic. I’m guessing kind of the largest contribution in the ‘16 comp was probably boots in Q4.

But kind of how do you think or maybe if you could just say, was athletic good in the quarter, and kind of how do you think about casual versus athletic as we go through this year?.

Robert J. Dennis

It was a huge comp for Journeys, and so almost needless to say everything was working. Boots were working, athletic was working, non-boot casual was working, it was a great run by Journeys. Obviously we had an unbelievable winter in the U.S. and so that helped things. I’ll bridge your questions issue, they had a mild winter in the U.K.

on a relative basis, and so that partly accounts for the differences. But Journeys was strong across the board..

Mitch Kummetz

Okay. Thanks guys. Good luck..

Mimi E. Vaughn Chairman, President & Chief Executive Officer

Thank you..

Operator

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

Sam Poser

Good morning. Thank you for taking my call. I have a couple of -- just a few things here, actually more than a few things. Can you talk about the traffic and ticket at Journeys since you’ve been doing the counting in the fourth quarter I guess first of all..

Robert J. Dennis

We have hardly anniversaried any stores, Sam. So in terms of up or down we’re -- we can't wait until we can tell you whether traffic was up and down. We only have absolute numbers which aren’t very meaningful..

Sam Poser

Okay.

And then, can you just give us some direction in the first -- I mean are you looking at the first quarter gross margin to be down in the range or even more than it was in Q4 just to help us out to try to -- just so we understand where we’re going here?.

Robert J. Dennis

You mean, gross margin for ….

Sam Poser

For the overall -- overall gross margin year-over-year.

I mean, are you looking at down another 100 plus basis points because of the promotional activity that’s going on?.

Mimi E. Vaughn Chairman, President & Chief Executive Officer

So, Sam the gross margin in the first quarter of the year was stronger than it was in the fourth quarter of the year last year, and so we’re expecting it to be down a little bit versus the first quarter last year, but not as far down as the fourth quarter..

Sam Poser

Even with -- even though the volume in Q4 is -- in Q1 is less, and I would think to get as clean as you need to be in legit, you have to get extremely aggressive..

Mimi E. Vaughn Chairman, President & Chief Executive Officer

No, we were pretty aggressive in the fourth quarter. We took a pretty big hit to margin, and the fourth quarter numbers that we ended up with was pretty unprecedented, and so we think we will continue our promotional activity. We’ll spread it out over the course of the quarter.

We’ll continue it into the second quarter, and I don’t expect the intensity that we had in the fourth quarter..

Sam Poser

So down a 100 -- I’m sorry..

Robert J. Dennis

Sam, we also took some reserves in Lids in the fourth quarter, so that also is a factor when you think about relative gross margin..

Sam Poser

So we’re looking at gross margin - I mean just the gross margin down like what 75 to 80 bps in the quarter you think versus almost 120 in Q4, I mean, am I in the ballpark there?.

Robert J. Dennis

Sam, it’s going to be down less than it was in the fourth quarter, but it will be down a little bit because it was strong last year..

Sam Poser

Okay. Thank you.

And then, how long -- can you just give us some details on how long your Macy’s deal is? How long that agreement goes for the Lids -- for the Locker Room stores there?.

Robert J. Dennis

We have a deal, it has -- and first of all we’ve signed a -- we have an NDA, so there’s not a lot of things -- well not a lot to say about Macy’s nor are they -- it runs for seven years and it has lots of, you can do this and you can do that, if it’s working well or not working well.

So even within the seven years there are relief valves, but I’m actually to allowed to get into them with you. We feel comfortable that we have many knobs we can turn to manage the Macy’s situation appropriately..

Sam Poser

And then you continue to talk about how confident you are about Lids Locker Room and so on, and it just seems to be -- its almost like roseanne roseannadanna if it isn’t one thing, its another.

I mean, how long do you stay confident in something that just has given you a lot of agility as of yet, and I mean would this not be better, I mean is -- at what point do you potentially reconsider the strategy?.

Robert J. Dennis

Well, Sam at the moment we’ve halted the growth as you know. So, what we’re trying to do right now is to access a lot of things that we think needs to be accessed to get it right. That includes the assortment. That includes the new store model. We were surprised at how our most recent wave of stores opened.

They were well short of where we thought they need to be, so we got to get back into that model. We know we have prior stores that do really well and so got to get in and say, well what's the difference? And then we just launched Locate five weeks ago, and we think that that is actually a very critical component.

And so, in fact we don’t even think that you look at the performance of Lids Locker Room alone, you look at the performance of Lids Locker Room plus Lids.com which includes all of the business generated by Locate to understand the full economics. So, we are going to continue to do the work.

It takes to figure out how to get this right, at the same time we’re going to be very prudent with the use of capital, hence we’ve slowed things down not to be running foolishly ahead until we feel like we’ve got it right..

Sam Poser

So, does that mean however that, I mean -- could this theoretically be a situation where your store count actually goes down and you build off the strength of the dot com business given that unlike footwear where you -- you got to really try it on, if you want -- if you know you wear an extra large in a jersey you can just buy that extra large online and do it that way.

So you might not need as many stores, and the same might be true with the Lids stores as well given how everything has evolved over the last five years with the internet and so on..

Robert J. Dennis

No, Sam I’m not going to limit at any possibility, but the one thing that we do know is that the local fan has a huge component of need it now.

We know how high sales spike on game day, and so we still believe that a store and a market place positioned correctly functioning for both that need it now local fan, and for the person who’s a display fan who can draw off that strategy is a winning model.

We think that’s how people will buy, and we’re going to continue to explore that when we get Locate really up and roaring we’re going to have more visibility on that?.

Sam Poser

And what is the timing of that, where it roars?.

Robert J. Dennis

Locate is up and running, and we need to get the front end of it which is high risk which is also going to be an important piece of maximizing how our front end works, and we expect to have that up sometime in the second half. But right now, we’re learning a lot as we go right now because Locate is in action..

Sam Poser

Thank you very much. Good luck..

Robert J. Dennis

Yes..

Operator

We’ll take our next question from Scott Krasik with Buckingham Research..

Scott Krasik

Yes. Hi, everyone. Thanks. So, a follow up on that last question and then one on Journeys.

Bob, aren’t you sort of in a Catch-22 because the lesson you learned from the hat business was that 300 store chains might now make money, but a 1000 store chain can do a double digit margin and you have these issues with comparisons and teams aren’t repeating in this and that.

So, you really need to get national, but at the same time you’re shutting down the store growth?.

Robert J. Dennis

No, I don’t think so.

Because the flaw in your Catch-22 argument is that when we had 250 stores back in the day when I just -- when I joined the founders of hat world and put Lids together, we had visibility at that point based on metrics that we had a winning chain at 250, we could predict off of that, that at 800 it was going to be a killer economic model.

And we think the same thing applies here..

Scott Krasik

Right. But you chose not to open stores..

Robert J. Dennis

Well -- no, what I’m saying is -- what we need to do right now is get to proof of concept which is what we did at Lids at 250 stores. Once we knew that the Lids model worked and we were at 250 stores, we did 100 stores a year.

What we haven’t done is, we haven’t nailed the Locker Room Locate Lids.com model to the level where we think we’ve kind of figured out how all the pieces work. How big is that store? How many do we need in a market? And then, once we figure out what that is then we would have visibility to go aggressive in the growth.

I don’t want to go -- I don’t want us to go aggressive on the growth until we have that visibility. In the hat business we get that visibility very quickly. We don’t have that visibility yet, and so that’s what we’re working towards..

Scott Krasik

Okay.

And then, is being at Macys.com will that allow you to become profitable with this whole business or not yet?.

Robert J. Dennis

Well the Macys.com business on its own, we’re in it for it to be profitable and it’s a similar model in the sense that Macy’s.com ties to the Macy’s stores, and so just as I would look the Lids Locker Room stores together with Lids.com, I’ve looked at the performance of the Macy’s stores together with Macys.com..

Scott Krasik

Right, that’s what I meant.

So, will you be profitable this year?.

Robert J. Dennis

Will we be profitable this year? No, not this year..

Scott Krasik

Okay. And then just last on Journey’s, you made a comment that you thought it would be a little bit tricky to leverage SG&A given some of the wage changes and you’re obviously going to comp very strongly at Journey’s this year.

So, how do you think about the leverage point for comps given some of this stuff and are you just posturing that you will leverage SG&A?.

Robert J. Dennis

No, we’re not posturing. So, one of the things that the team has really worked hard is the, the assistant manager position, we’ve had turnover that we think hurts our ability to perform at our max.

And so, Jim and the team have made a decision to make an investment in that group of people, and if we reduce turnover as we expect that will do, then we think it translates into sales.

But it’s going to take -- it’s the ticket -- we’re going to first make the investment in the people, and then we think the sales are following and we haven’t really written the sales into this year..

Mimi E. Vaughn Chairman, President & Chief Executive Officer

Yes, and to be clear we’re going to leverage rent expense in this formula, but the -- between minimum wage and the actions we’re taking to address our manager pay.

We don’t believe initially we’re going to leverage selling expense, and you also have to recall that we are increasing our -- we have increased expense in ecommerce, advertising and marketing and increased shipping expense and increased depreciation from some of the systems investments that we have made in ecommerce.

And so, its roll in that put some pressure on SG&A, but we believe the pay back will be well worth it over time..

Scott Krasik

What would be the comp leverage point in it?.

Mimi E. Vaughn Chairman, President & Chief Executive Officer

The comp leverage point for Journeys is in the 2% to 3% range ….

Robert J. Dennis

Ordinarily..

Mimi E. Vaughn Chairman, President & Chief Executive Officer

Ordinarily, I think that -- that now because of the these extra investments that is a little bit higher than that. Again we are for this year -- again we are leveraging rent expense..

Scott Krasik

Okay. All right. Thanks very much..

Operator

We’ll take our next question from Taposh Bari with Goldman Sachs..

Chad Sutherland

Good morning, it’s Chad on for Taposh. I wanted to ask another question on Lids. I just want to -- you guys provided good color on the promotional environment and the competitive environment. But I was hoping to get your thoughts on the source of that, like what's driving the promotion in the category.

Obviously there are some self inflicted issues that you guys are working on.

But when you look more broadly what do you think is creating such a promotional environment?.

Robert J. Dennis

Yes, it’s a good question. We are just -- at the moment we’re a little puzzled that it’s gotten -- it got so promotional in the way it did. And so, our step one is to sit down with our vendors and think through how to approach it.

There are some competitors obviously, they’re either clearing a lot -- they could be in a situation like us where they’ve got inventory clearance issues. We have visibility on that, so that’s one possible explanation.

We’ll just have to -- what we want to do is just find a timeline and a model to get it a little, a cleaner right now at an extraordinary level..

Chad Sutherland

That’s helpful, thanks..

Operator

We’ll take our next question from Jill Nelson with Johnson Rice..

Jill Nelson

Good morning.

If you take a look at your revised 2015 earnings growth of 8% to 10%, if you strip out that 8% lift you’re getting from the elimination of the shoe benefit, are you looking for kind of flat to 2% on a core basis? Could you maybe just broadly speaking talk about the division that you feel will be a drag versus, I assume Journey’s would be a lift kind of, just in terms of that metrics would be appreciated..

Robert J. Dennis

Yes, this is Bob. I’ll start with it and then ask Mimi if she wants to get more specific. We’re being very cautious on Lids obviously.

We’re going to have a full year of the Macy’s stores that we opened in the third quarter, and we think it’s going to take time to build them to the profitable positions that we think they represent as an opportunity for us, and likewise we’ve got the most recent wave of the Locker Room stores that we opened.

So, we have those as a drag on earnings for this year, and based on that we have assumed that Lids is a little less profitable, and now on the flip side of that, we expect Journey’s momentum that they’ve had this year to continue into the current year.

Again with the big wild card caveat of the impact of the ports and so, without the port situation we would have probably gotten more aggressive on our assumptions on Journeys, and so -- and then we’re expecting a model level of improvement at shoe and those are the big movers.

So, I think of a decent improvement at Journeys, a little improvement at shoe and a little more downside at Lids and that put it all at up to and I’ll just say, we’re -- we have not performed against guidance for three quarters now, and we’re very cognizant of the fact that we need to make sure that we’re guiding to what we believe at the moment is hopefully a conservative number..

Mimi E. Vaughn Chairman, President & Chief Executive Officer

Yes, I think Bob got it there, that shoe is where we get some improvement, and also Journeys is really where the majority of the improvement comes from. And Jill you do have it right, when you talk about the 8% improvement coming from the end of the shoe burnout, and then 2% growth in the rest of the business.

One of the things that has caused us to be cautious is the foreign exchange rates with the strength of the dollar we really have suffered in earnings that we bring back from Canada and from the U.K..

And we said that even if you just look at the rates where they are that we use for our plan versus fiscal ’15 the year before that we gave updates just on the foreign exchange change over the course of last year. And even since we’ve written our plan we have seen the exchange go down from there, the dollar strength is pretty incredible.

The euro is I think a $1.05 on its way to parity with the dollar. So between the amount of business we have in the U.K. and our growing business in Canada that also causes us to be cautious that while those businesses are growing and contributing they’re offset by pressure from foreign exchange..

Jill Nelson

I appreciate it.

And just a quick clarification, the heavy inventory that you needing to promote at Lids, is that at the core division or is that primarily at Locker Room?.

Robert J. Dennis

It’s a little bit of both, probably on a percentage basis it’s weighted more heavily to Locker Room. But obviously we still have more of a headwind of business going in absolute basis. We’ve got some extra inventory across the board..

Jill Nelson

I appreciate it. Thank you..

Operator

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

Christopher Svezia

Hi, good morning. Thanks for taking all the questions.

Just to go back on the some beat this to death, but on the inventory piece for Lids could you just remind us what the growth rate -- where you stood at the end of the year, what you like to see, where do you want to get it down to relative to the comp performance and can you discern between what is the promotional environment overall which is just a question mark, and versus your ability to reposition that inventory so you’re turning in a lot faster relative to how teams are performing?.

Robert J. Dennis

Right. So the inventory reduction that we’re looking for is in the 10% to 15% range for this year. And then we think beyond that even a little more reduction to be faster would matter.

And a big piece of this Chris is what you just touched which we began this year which is a recognition that we’re in -- unlike the headwear business where this was less than that, we are in the fashion business in the sense that teams go out of fashion at different speeds.

And the single -- so for example what we’ve done this year and this is a little bit of promotional margin pressure that you’ve seen on a year-over-year basis is we have learned that its prudent to exit an NFL team pretty aggressively the day they missed the playoffs.

And it is a fact that essentially when they’re out of the playoffs the demand for everything, beer, [indiscernible] hotdogs in the stadium all take a hit. And so, what we’re doing is reacting to that more aggressively. We’re going to have less of a carryover mentality even though a lot of the product is carryover.

If we can close out a bunch of it at a positive margin that’s a better economic model for the business than just relying on carryover because we free up -- [indiscernible] and you free up space in the store for what is in season, and free up room in the buy plan for what is in season.

And so we’re going to be doing that much more aggressively and that is the model. So, when I talk about the fact that we’ll be more promotional in the first half, we need to do that in some of the sports categories better in the first half.

When we get to the second half we already did that this year on football, and so we’ve already started the process of getting cleaner in the season, and so then receipts starts to kick in. But the way you asked the question kind of nailed what we’re trying to do.

Does that make sense?.

Christopher Svezia

Yes, it does. But also your competition trying to do the same exact thing thus the overall industry is just promotional overall.

Are they mutually exclusive what you’re doing versus what the overall industry and just in general which has suddenly taken a step down of being overall which is promotional?.

Robert J. Dennis

I think we’re the ones that are doing this -- we’re doing it less aggressively and are going to -- getting to doing it more aggressively..

Christopher Svezia

Okay.

If I can just switch gears for one second; just on shoe, when you had mentioned certain categories into a brands or resonating as well versus Journeys versus shoe, is that just a function of weather was more mild for shoe and maybe any reference to a particular categories more athletic versus casual or just what that difference is that you’re seeing at shoe?.

Robert J. Dennis

Well, awesome brands Chris, there was a couple of very key brands, and it wasn’t -- it was not just weather. So, there are brands that are not weather dependant that the price does by having strength here and weakness there..

Christopher Svezia

Okay..

Robert J. Dennis

Sorry to leave at such a mystery for you..

Christopher Svezia

Okay. Well, I guess I had to try. All right. Thank you. All the best. Good luck, Mimi..

Mimi E. Vaughn Chairman, President & Chief Executive Officer

Thank you..

Operator

And we have no further questions at this time. End of Q&A.

Robert J. Dennis

Well we thank you all for joining us, and we look forward to talking to you again on how this is all working in three months. Cheers..

ALL TRANSCRIPTS
2024 Q-4 Q-3 Q-2 Q-1
2023 Q-4 Q-3 Q-2 Q-1
2022 Q-4 Q-3 Q-2 Q-1
2021 Q-4 Q-3 Q-2 Q-1
2020 Q-4 Q-3 Q-2 Q-1
2019 Q-4 Q-3 Q-2 Q-1
2018 Q-4 Q-3 Q-2 Q-1
2017 Q-4 Q-3 Q-2 Q-1
2016 Q-4 Q-3 Q-2 Q-1
2015 Q-4 Q-3 Q-2 Q-1
2014 Q-4 Q-3 Q-2 Q-1