Bob Dennis - Chairman, President and CEO Mimi Vaughn - Chief Financial Officer.

Jay Sole - Morgan Stanley Erinn Murphy - Piper Jaffray Jonathan Komp - Robert W. Baird Laurent Vasilescu - Macquarie Capital Scott Krasik - Buckingham Research Jill Nelson - Johnson Rice Sam Poser - Sterne Agee.

Good day, everyone and welcome to the Genesco Second Quarter Fiscal 2016 Conference Call. Just as 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 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..

Good morning and thank you for being with us. I am joined today by our Chief Financial Officer, Mimi Vaughn. Overall, we were pleased with our second performance relative to our expectations.

We had healthy top-line growth despite a later than usual start to back-to-school and the move of sales tax holidays in several states, which shifted some sales into the third quarter versus last year.

Higher than anticipated comps allowed us to improve adjusted earnings per share to $0.36 compared to $0.34 last year, despite the expected drag on gross margin from our ongoing aggressive efforts to right-size inventory in the Lids Sports Group. Profits grew at a rate less than sales due primarily to this gross margin pressure.

Total sales increased 7% and consolidated comps were also up 7%. Performance was boosted by strong trends in our direct businesses but we were especially pleased to see solid comps in our stores as well. Direct comparable sales grew 26% and store comps were up 5%.

The shift in the timing of back-to-school and sales tax holidays due to a later Labor Day had its most dramatic effect at Journeys where comps accelerated in May and June compared to the first quarter trend and then flattened out at the end of July, as a result of these changes.

Despite these headwinds, Journeys delivered a solid comp for the quarter, benefitting from freshness and growth on the fashion athletic side as well as the casual footwear side. In addition, Journeys realized increases in gross margins from strong full price selling.

Once again, the entire Journeys team exhibited tremendous ability for superb execution which resulted in improved profitability year-over-year. At the Lids Sports Group, we continued the efforts that we have detailed previously to turn around performance.

In the quarter, Lids comps benefited from a favorable NHL and NBA playoff line up, and direct sales were especially robust with the 39% gain. This however was not enough to overcome the gross margin pressure from higher promotional activity, work down inventory and year-over-year profitability decline for the Group as we had expected.

Overall for the company, the third quarter got off to a good start. We feel good about our merchandise offerings and believe we’re well-positioned for the fall and holiday selling seasons. We also have a good line up of baseball teams that look to be headed for the playoffs.

Looking ahead however, we have somewhat less visibility on our overall sales in the third quarter than we usually do at this point in the year because of the later Labor Day. In the first three weeks of August, comp sales reaccelerated as anticipated, especially at Journeys but were impacted at the end of the month by the Labor Day weekend offset.

We expect momentum to pick up again with the holiday this coming weekend. For the total company, August comps increased 6%. Not only has a later Labor Day led to a later start to back-to-school and a holiday weekend offset but also to a later start to the NFL and college football seasons and a later World Series.

The start of the key selling season at Lids begins with the college kickoffs this weekend and the NFL regular season kickoff next week. We’ll be navigating through these one week offsets during the quarter. Additionally, last week’s World Series ended with a wind in Game 7 with all the games falling within third quarter.

Given this year’s schedule, some series driven sales, especially sales of championship gear will shift into the fourth quarter.

Lastly, with the Super Bowl scheduled later in the first quarter than it typically is, we expect some sales relating to the run-up to the Super Bowl will shift out of the fourth quarter and into the first quarter of fiscal ‘17. The other significant variable in our second half outlook is Lids inventory initiative.

We are absolutely committed to taking whatever action is necessary to right-size inventories. And in fact, we build more promotional activity into the back half of the year, especially in the third quarter. The level of liquidation we are tackling is a first for us in this business and therefore not entirely predictable.

So, while we believe our guidance reflects appropriately conservative gross margin assumptions at Lids, counting for the additional markdown activity, our primary goal is to hit targeted inventory levels; and Lids gross margin for the balance of the year will reflect that priority as necessary.

Having said all this, the momentum we have had when not experiencing offsets in combination with the positive outlook for the footwear business for the balance of the year, has led us to reiterate our full year EPS guidance of $4.70 to $4.80. And finally, we were active buying our stock in the quarter. And with that, let me turn it over to Mimi..

We still anticipate the strong dollar will remain a headwind and weigh down earnings by $0.08 per share for the year, assuming exchange rates stay where they are. We also expect that increased expense from a legacy pension plan will reduce full year earnings by another $0.03 per share.

Finally, we will continue to benefit in the third and fourth quarters from the end of the Schuh acquisition incentive. As we have pointed out before, the licensed sports merchandise category is predominantly a fourth quarter business, yet we carry store and other expenses throughout the year.

During last year’s heavy growth, we added 73 Locker Room by Lids stores and 165 Locker Room at Macy’s shops to the store base. These stores were negative contributors in the first-half for this year, but should be positive contributors in the back half, especially in the fourth quarter.

The deleverage from the lower Locker Room sales during the first few quarters has reshaped the quarterly breakdown of earnings for the company as a whole, moving a greater percentage of our annual earnings out of the first-half of the year into the second-half.

While we do not give guidance on a quarterly basis, since our last call when we discussed guidance, our second half earnings expectations have become a little more heavily weighted towards the fourth quarter, as a result of the calendar shift and extra Lids liquidation.

We anticipate that total sales for the year will increase 4% to 6% with consolidated comps including direct increasing 4% to 5%. We are also planning on opening 92 new stores in total for the year.

We expect gross margins to be down year-over-year for the total company, somewhat more than the last time we reviewed guidance, due to the additional Lids markdown activity. This gross margin guidance includes a Lids decline and relatively flat margins issue offset somewhat by gross margin improvements in other businesses.

In last quarter’s guidance, we said for at least the first three quarters of the year, total company gross margins would take a hit as we right-size inventory at Lids.

In our current guidance, we have built the Lids additional markdowns into the third quarter and now believe we will be promoting more heavily into the fourth quarter, causing total company gross margins to decline a little then as well.

Next, we anticipate SG&A expense as a percent of sales will be down in the range of 30 basis points compared with last year. We will have difficulty leveraging comps to an even greater extent due to expense pressure. Continuation of the store level wage pressure we have felt is included in our guidance.

This will result in an operating margin that is down somewhat for the year. Finally, our fiscal ‘16 tax rate is expected to be 36.7%. Looking at the balance sheet, we expect inventories at year-end to be flat to up just a little including upto a 15% reduction at Lids. We are planning capital expenditures in the $110 million to $120 million range.

We anticipate spending on e-commerce omnichannel, distribution centers and other non-store capital to be a sizeable portion of these amounts, but in line with last year’s levels. Depreciation and amortization is expected at approximately $80 million.

We’re assuming average shares outstanding of 23.5 million shares for the year; we’ve not included any stock buybacks in this guidance beyond the buying we did already in the second quarter; however, we do have $33 million remaining on our stock repurchase authorization of $75 million. Now, I will turn the call back over to Bob..

Thanks Mimi. I’m going to touch on a few of the major factors in the performance of our individual businesses and our current outlook for them, starting with Journeys.

While we are in the final laps of the successful back-to-school period, we believe the same trends that have fueled the Journeys business plus another solid boot season will contribute to positive holiday selling, in spite of stronger comparisons with the back half of last year.

Journeys continues to benefit from a deep and narrow assortment, leading to more full price selling and strength in both the fashion athletic and casual categories of the business.

In addition, the Journeys initiatives we have been describing such as an increasing catalog circulation, page search investment and investment in music focused grassroots marketing like our sponsorship of Vans Warped Tour and the AP Music Awards are driving traffic to our stores and website and are building the overall brand.

The Journeys ShopperTrak work has been another important sales driver. The initial focus with ShopperTrak was to identify the power hours and improve staffing levels when more customers were in the stores in order to increase conversion.

Now that most stores have anniversaried their implementation days and we have prior year comparisons, the focus has moved to improve conversion year-over-year and we continue to see nice gains as a result. So, congratulations to the Journeys team on their terrific run.

At Schuh, we were pleased to see the acceleration of comps in the second quarter and sustained strength of the e-commerce business which yielded improved profits over last year.

In addition to growth through comps, Schuh continued executing its store opening plan to add substantial square footage in the UK and new stores in the German market this year. Moving to Lids, comps in the headwear stores turned positive in the second quarter even with no strong new trends.

Snap backs remained a healthy part of this business and contributed to growth in the quarter. More favorable year-over-year NHL and NBA playoff line ups and the Blackhawks and Golden State Championships drove comps across all the Lids retail businesses.

Lids Locker Room posted double-digit comp gains, helped to some extent by favorable teams and higher promotional activity. We believe the NFL and college assortments have the business positioned nicely for fall. We are making good progress in the critical initiative to reduce Lids’ inventories.

Although the promotions to accomplish this are hitting gross margins hard, fresh merchandise in our stores is essential to longer-term improvement of the Locker Room business in particular. The better comps in the headwear stores from a fresher assortment and an easier shop -- store to shop are reflected in these benefits already.

We continue the hard work on other initiatives to improve the Lids business. While we have more to do to restore the business to a higher level of profitability, focusing on execution instead of additional growth this year has helped us to make considerable progress.

Turning to Locker Room at Macy’s, we are still in the formative stage of this opportunity, and Macy’s has been a tremendous partner in forging the path to making it a success.

High double-digit comps in the second quarter are a good sign of realizing potential of this business and we’re currently working with Macy’s on some improvements to the business model aimed at improving profitability. Lastly, we continue to be enthusiastic about the positive results of several technology oriented initiatives at Lids.

Locate, the system that tracks total system inventory from online and other stores, has given access to inventory in over 500 stores since February and our plan is to turn it on in an even greater number of stores in the coming months, should yield additional benefit.

We have talked about the advantages for online but Locate is driving comp in our stores too, as stores now are able to access inventory in other stores which is particularly beneficial for serving displaced fans.

Auto store, the robotic system to expedite picking in the warehouse and add efficiency has been operating successfully through its ramp up basis.

In addition, seeing the success of our other retail divisions within Genesco with ShopperTrak and improved customer conversion, Lids has begun rolling it out too and is seeing similar benefits from focusing store labor more on the power hours.

Lids’ rollout Hybris, a new frontend e-commerce system is expected in the first quarter or second quarter next year. Finally, we thank the entire Lids team for their hard work that is behind all of this positive progress. At Johnston & Murphy, strengthened men’s casual and direct casual footwear contributed to the impressive comps in the quarter.

Results in part were due to easier comparisons, given challenges last year from warehouse management system conversion. Comps have moderated somewhat after this as expected but are still positive given the underlying momentum of the business.

One note of caution; comps at Johnston & Murphy in the past have been heavily influenced by significant declines in the stock market and the recent gyrations may have an impact this time once again.

Also, for those of you who shop in the Upper Madison flagship store in New York City, we are sorry to report we are closing the store as the lease has expired and the proposed new rent was exorbitant.

We are committed to finding other locations in the city and we’ll be back to you with updates, but in the meanwhile, remember to shop the Lower Madison location at 43rd Street and then of course, online.

Finally, our licensed brands team has been hard at work with the launch of the Bass Footwear License; we are excited about this opportunity and the chance to leverage this brand with the great legacy and strong American heritage since 1876. The first season of Bass product will be delivered for spring of 2016.

In closing, I would like to thank all of our teams across each of our businesses for the terrific work in delivering solid second quarter results.

There are many moving pieces that need to form place for the balance of the year, but we are unwavering in our confidence about the strategic position of our businesses and most importantly, the talent and commitment of our teams. And operator, we are now ready for questions..

[Operator Instructions] We will hear first from Jay Sole of Morgan Stanley..

Just want to follow-up on Journeys. It sounded like that the trends looking ahead are solid. And you mentioned May and June were good and then July the comps flattened out.

Maybe just give us an idea of like if you look at July and August combined, what the trends in same-store sales looked like; was is it similar to May and June? Just kind of help us understand how the business slowed over the quarter?.

We’re going to be in a better position to answer that question in about two weeks from now because obviously we took a hit on the holiday offset. You’ve got a ton of schools in the Northeast in particular that have shifted their openings to next week and were told a small subset of schools to even the following week because of the Jewish holidays.

And so, it’s just is -- it’s a hard ready because the ups and the downs are still pronounced. We believe we are fine. The team modeled it up as best they can. And based on their model, they think we’re in fine shape for back-to-school. But we don’t want to declare victory until we’re about two weeks out from here..

And maybe just if you can talk about the guidance for a second? Was the plan to liquidate more of the Lids inventory in 3Q because I am guessing a lot of that is baseball on inventory and 3Q is more of a baseball clearance season? Whereas -- really the plan wasn’t to just kind of get all of it -- get rid of it as much as possible, as fast as possible and kind of spread out through the year? Is that the message?.

Yes, the balance that we’re striking on the inventory is speed obviously is helpful in any retail situation when you got excess inventory because it adds to the freshness. But in our world, the best time to clear in terms of getting a good realization is in the sport season.

So, a lot of the promotions we’ve been running, we see the greatest impact of those promotions on the excess inventory that we’re promoting that is in season. So that’s why it is stretching out over the period of the year.

And what we’ve done along the way is because this is sort of a first time event for us at this scale, we’re learning very quickly about the best clearance avenues. One clear learning is that the online site is extremely effective for clearing goods and particularly some of the stress goods. And we’re tracking what we’re doing with Lids right now.

And they are -- we have a plan for where they need to be at the end of every month. And they are roughly on their plan right now. They put forward some new receipts so they are little over their number, so that’s not a bad thing that’s just bringing NFL in a little earlier.

And so, we’re just being cautious as we watch how far we want to drive the clearance to be fresh going into next year. And so that was the messaging that we’re giving with guidance. Mimi, I think you’d add to that..

I think that’s right. And I think just to emphasize, we are committed to hitting these inventory targets and as such, when we have the opportunity within the season, we’re going to take the mark in order to clear the goods.

And so, it is reflective of the fact that we’re clearing in season, but it’s also that we are committed to take the mark even if it’s at a lower level, to be able to get rid of the merchandise..

Yes, what’s interesting about the approach that the team is taking is because the web has turned out to be very effective, we brought a lot of inventory back, so we could be efficient in chipping and brought it back to our DC.

And we think a contributor to the positive comps in the hat stores in this quarter is the fact that we took a lot of the markdown merchandise in headwear, brought it back into the DC and clearing it there.

And so when you walk the stores now, they are cleaner to shop, the presentation has improved and then obviously, you don’t have as much leakage from full price selling to markdown goods.

So, making good progress; congratulations to the team on how much progress they’ve made; and we’re confident that by the end of the year, this business will be right-sized and in good shape..

So, if I can just squeeze in one more. So, when you’re talking about Lids as a group as a whole, Macy’s I think you said it was -- your comps strong double-digits.

Can you talk about what’s changed because that seems like a real acceleration from where it’s been last few quarters? Obviously there is not every store is in the comp base, but can you just talk about changes at Macy’s and why that business seems to be improving?.

Sure. Well, first, let’s keep in mind that it’s a startup and we feel fully expected that we would face a learning curve and indeed we have. And let’s keep in mind that the business is still very young. So, we’re not even at the point where all of the stores have gone comp. Right now, we have 184 total doors. That said the business is in development.

We’re going to lose money on it this year as we expected, but we’re really pleased with where it’s headed. So when you -- remember when we opened a bunch of these stores, we didn’t have the inventory even in the right season because the timing moves. Beyond that we’re learning a lot about what mix it needs to be.

So there’s a lot of merchandise work that’s been done. Macy’s has also been very supportive of us in moving certain stores that were not located and the kinds of places in the store that we have learned are most productive. And so, they’ve been supportive in us making moves and there’re still more moves to be made ahead of it.

When we pose the strong comp, so it is reflective of both doing better but it’s a reflective to be frank of the difficult start that we had last year when so many of the stores had the wrong inventory but we’re zeroing in on the mix that works.

Macy’s has proven to be a terrific partner and they’re working with us on all these initiatives including the one we referenced in the script about tweaking the business model.

This includes moving some of the stores within their box, allowing us to flex our staffing model to focus our sales efforts on higher volume days and higher volume doors, and then just some adjustments to the overall economic model to better fit our early experience.

So, the headline on this though is it’s early days and we’re really pleased with the trend line; it comes from a lot of factors and we’re still optimistic that we’ve got a good business here..

The other thing to note Jay is that first quarter comps were influenced by the Super Bowl. And so, we were facing headwinds really in February from the Super Bowl this year and other than that we’ve seen double-digit comps in every month outside of that..

Now, we’ll move to the next caller, Erinn Murphy with Piper Jaffray..

Bob, I was hoping you could talk a little bit more about the G.H. Bass opportunity. I believe you guys showed the product out at platform in Vegas few weeks ago.

Could you just talk about how that show went for you; what was the response from retailers? And then when you think about that spring 2016 launch, how many doors are you guys targeting initially and what could the ramp look like over time?.

I’m not going to go as far as you want on that Erinn, because the team is still consolidating the results of that show. It got -- the line got a terrific response at the show in terms of the number of doors that we’re going to end up with we’re going to -- that’s a work in progress.

So, probably on the next call, we’ll be better positioned to talk about that. This hits in spring, so right now, they’re in the midst of it and let’s give the team to time to do this work and then we’ll come back and report on where that is headed..

Can you talk maybe just a little bit about the type of distribution that will be within wholesale; is it going to be more of kind of a mid tier or kind of to better department stores or any kind of color on that even; if there’s no specific detail would be helpful?.

Give the team a little more time to figure that out. I don’t want to tip their hands..

You got it, okay perfect. And then I guess on the last call, just moving over to the Schuh business, you talked a lot about kind of the volatility in traffic in the UK market.

Can you just update us on what you’ve been seeing specifically such as how the consumer is reacting in that market? And then looking ahead to Black Friday, will you guys be anniversarying the promotional kind of Black Friday experience in the UK as you have in the last year?.

It’s funny that things at Schuh and in the UK market seem to have leveled out a bit. I chatted with them the other day and it’s a phrase we’ve been using is steady as she goes. So, they ran into some headwinds with a couple of brands. Remember we called out last time that there were some brands that were working here, not working as well there.

So, they’ve managed to make some shifts in the merchandise assortment and there are some other brands that are working there; they’re not working here where they’ve been able to intensify and that has improved their overall assortment and it’s showing up in their comps. So, it’s good.

Unfortunately, yes, we’re going to face another Black Friday anniversary. And we don’t expect it to be -- the approach in the UK to be any less than what it was the last time. It’s just one of those visitor dilemmas that it probably isn’t great to do it because they just moved sales around and that is as expense.

But obviously we need to compete in the way the market gets shaped and compete we will. So, we’ll be out there on Black Friday playing the game as hard as we can..

And then just my last question Mimi for you. Just going back to the commentary around gross margin, so in Q3, obviously it’s going to be a little bit more promotional it sounds like for Lids and some of that continue into Q4.

Can you just help us think about kind of the impact on the overall company? I know Q1 was significantly worse than the Q2 decline.

So, should we look at Q3 as more similar to Q1’s decline for the overall company or for Lids in particular? Just anything you can help us to kind of make sure our models are refined as we get into the last couple of quarters would be helpful..

Sure, absolutely. And I think that it is the cue that you can take is it’s going to be more similar to Q1 than it was to Q2. We were down about 330 basis points in margin for Lids in Q1; we’re down 220 basis points in margin in Q2. We are really going to take advantage prior to the holiday selling season to liquidate inventory.

We want to make sure that when we come off of the back of Black Friday and into December that we are not cannibalizing our full price sales. And so we’re going to intensify the activity in the third quarter. Last year, if you’ll recall, we were down 330 basis points in Lids in gross margin.

And so, we do expect a decline in gross margin for Lids but overall for the company, it will moderate -- gross margin decline will moderate versus the third quarter..

And let’s just be clear. When we call out numbers like 300 points of gross margin, that isn’t all margin reduction, some of that is mixed.

And so the fact that the Locker Room business, the Macy’s business and Lids online are all growing faster than the headwear stores, you get a mix shift in margin; the hat stores run by far the highest margins in the chain, and that will always be the case.

So, don’t expect the recovery to margin levels that existed, say two or three years because our mix of business is substantially different now..

There’s also been a bit of a product mix shift within the Lids headwear business where you can see more branded assortment within the stores and that is sold at a little bit less of a margin than some of the other categories within the headwear stores. So, all those dynamics are at work..

And now, we will hear from Jonathan Komp with Robert W. Baird..

Thank you. Maybe start off just with a question on Journeys first. Obviously, guidance still assumes positive growth in the fourth quarter against a pretty lofty comparison last year. And Bob, your commentary sounded pretty optimistic about the ability to drive comps at Journeys going forward.

And I think you pointed to expected momentum behind the boot category. So, I’m wondering if you could maybe just talk a little bit more about what you see as driving the boot category.

Is that weather product on that boot side or maybe any color there would be helpful? And I guess related to that, I don’t know to the extent, I’m sure you’ve seen some of the reported news out there about a potential El Niño weather set-up in the year end.

And I’m wondering if discrete events like that are something that you actually plan for, from a merchandise perspective?.

Let me start with El Niño. No, a little bit out of our control and a little too prospective for driving our assortment. Let me talk about the comp. So, yes, we had a very strong double-digit comp last year. But then remember, it’s stacked on a comp that was slightly negative. So, part of that gain was reflective of the challenging year before.

And then oddly and this is -- you don’t usually get to say this but even with the strong comp that Journeys had last year, they know that they missed sales on certain brands.

And so, they are confident that the business will have similar strength to last year, adding in the opportunity that they get to fill in some of the blanks that were misses, as you always have misses by the way, you never know for sure what’s going to be a strong and sometimes it’s your subject allocation which was part of the issue last year.

So they can -- they have identified the brands where they think they have upside and that’s across several of the major categories of footwear. Jonathan, you’re newer to the story; we do not talk about specific plans or even trends within the specific category.

So, beyond saying that we think we’re going to have another solid boot season, I think for now we’re going to have to leave it at that..

And Jonathan, I’d just add to that if you actually go back couple of years ago and do a three-year stack, not only with last year, negative but the prior year in the fourth quarter was negative as well.

And actually in fiscal ‘13, the fourth quarter turned negative after positive comps in the first three quarters, after a pretty significantly positive comps. And so when you stack the three-year comparison, it really is not such a bad transition into the fourth quarter..

Got it. That makes sense and makes sense Bob. I thought I would at least try to get some color out of you..

Yes, you can get a try..

Maybe one more kind of broader question, if I could and this could be for you, Bob or Mimi. I know you are very strategic in kind of looking out on a five-year horizon, pretty consistently.

And when I look back over the last, call it four or five years, including this year, you’ve achieved some pretty healthy revenue growth and the earnings growth certainly has lagged or almost been nonexistent over that period.

So, I am wondering as you look beyond fiscal 2016 and kind of the future years, at what point do start to really grow the earnings base again; and any color on kind of what the type of growth rates might be?.

Sure. So, what we have traditionally done is update our five-year plan each summer and we have done that again. We are going to review that with our board in two weeks, after which we’ll be prepared to discuss it with our investors.

The general theme that you’ll see coming out of that addresses exactly what you’re speaking to here which is a reigniting of the earnings growth. We’ll still see revenue growth but we’d really expect the earnings growth to pick up.

If you dissect the earnings growth or the flatness in the earnings growth, it is largely attributable to the challenges that we’ve had at Lids. And obviously the steps that we’re taking that we just outlined in our script are all setting ourselves up. That leads to reignite growth over this next five-year period.

So, the answer to your question is, in general yes, we expect to continue to get back on an earnings growth path and then second, stay tuned for more specifics we expect to be getting that out pretty shortly..

And now, we’ll here from Laurent Vasilescu with Macquarie Capital. Go ahead please..

With regards to the Journeys inventory, I think you guided that the second quarter wrapped up 18% inventory growth due to the anticipation of a strong back-to-school.

Can you talk about your visibility on inventory today; where it stands; and then how do you think it should wrap up for the end of the quarter?.

Let me just make some general comments and I’ll turn it to Mimi. So the Journeys inventory is up. First of all, you’ve got an offset. So, you load up for back-to-school and whereas last year we had a lot of selling underway in July; this year, we’ve really had no kickoff for back-to-school. So, part of that is timing.

And then another part of that is what we have brought in earlier, which is a strategy of just making sure that everything we want to have on hand, we have on hand. That 18% is an extremely clean 18%. We’re really comfortable with where we are in terms of inventories.

When you look at the end of the quarter, what you’ll start to see are the benefits from reducing Lids’ inventory. And I’ll ask Mimi just to talk to that..

I think that’s exactly right. And in fact, it was a very deliberate plan on the part of the Journeys team to pull forward merchandise. And I just want to emphasize that.

They were very clear in their understanding that they missed sales last year because they didn’t have another inventory and their intent was to make sure that didn’t happen again for this year.

When we look through, so by the end of the back-to-school season, Journeys will be right on plan as far as overall inventory and will be back in line with overall increases as it relates to sale.

When you look at the Journeys -- at the Lids inventory levels, what you’ve seen is that inventory was up 5% on square footage, increased to 5% and little higher amount of sales with 11% growth in Lids.

So we have been liquidating as we’ve gone along throughout the entire year and in the back half of the year plan to couple that with managing receipts.

We just didn’t have enough runway to be able to manage receipts in the front half of the year but we’ll be trimming receipts in the back half to couple that with the liquidation, and anticipate it will be down in the 15% range year-over-year at the end of the year in Lids, which means will be flat to up just a freckle for the overall company..

And then I think last quarter it was guided for 115 new stores for the full year than 51 projected closures. It seems like you guys tweaked down the store openings but then tweaked up the store closures.

Maybe you can provide an update on your real estate strategy for this year and then your longer term vision and then the reduction in CapEx guide for the full year; is that the reflection of the reduction in store openings for the year?.

So, what we do when we target our new stores at the beginning of the year is our guide to our operators which they appreciate is tell us what you think you might do sort of best case. But let’s all agree that we don’t want to open the budgeted number of stores just to hit the budgeted number of stores that we will only do good deals.

And so, for several years now, we have come in a little short of what that is and we’re good with that. Because we budget the capital and then if we don’t find the good opportunity to deploy the capital, we don’t do it just to chase a budget opening number. Closures are even more interesting one, because they’re becoming increasingly hard to predict.

We’ll have some stores that aren’t hitting our hurdles in terms of performance. But when they come either to a kick out or to a lease end, often times where we anticipated closing that store, the landlord comes back and makes it attractive to keep it open.

And so, the process of trying to estimate how many stores we’re going to close has become a tricky one. And that’s fine, we just live we that, because there’s not a lot of capital involved. Most of those stores in that category that we keep open, we are not pouring capital in. So, it takes no capital in the decision process.

But when you see our closing number move around, it’s that dynamic at play..

And Laurent, the CapEx decrease is all attributable to the decrease in the number of stores.

We are investing quite a lot in our omnichannel initiatives and we have been for the past several years in terms of we put in new order management systems, we’ve put in new front-end e-commerce systems, we’ve invested in the Locate system in Lids and also in the auto store systems to be able to get e-commerce orders out faster.

And so, our CapEx number is actually reflective of similar level as last year of investments outside of stores. And it is just to help to fuel the growth in e-commerce which with the double-digit increases that we’ve been having, we think that those are investments that are well-made.

And so, we’re just very careful to watch the balance between our bricks and mortar presence and our online presence. And we’re just mindful of where we need to be putting the investments..

And if I can squeeze one more in, can you talk about your border stores in Mexico and Canada? How they’re performing and if there’s any reflection of the comp due to the strong U.S.

dollar?.

We have had great success with our border stores. And to be perfectly honest with you, I’m not that current on them right now. We could find out for you..

The interesting thing that has been happening in Canada is that Canadians have been staying in Canada and shopping more in Canada that we have benefitted from that fact within our Canada market. And to the extent that we are giving up any sales within the U.S. border, we’re making those up in Canada.

And fortunately we don’t have too many stores in Mexico, so, that trade-off wouldn’t be the same..

Our next question will come from Scott Krasik with Buckingham Research..

I guess first, Mimi, just a quick clarification. The comp in August you said was up 6 but I think just reading the commentary, every division except for Journeys was below 6 and Journeys was only a 6, so maybe it’s just a rounding thing. But how….

It’s funny….

It’s a rounding thing….

While she was reading, I went back in double checked for that reason. It is rounding..

Yes, Lids was a fat 5; it almost made it up to 6. And because Lids and Journeys are our two strong divisions, that’s where we ended up with….

I love that term that Journeys was fat 6 and Lids was a fat five..

Those two together are 6. I checked that one as well..

And then, so Bob, just going back to Lids, you said last quarter, I think we still need to prove the concept and we’re talking a lot about the inventory clearance activity longer than expected. So, you are liking this to the hat business but here you actually have a major online pure play competitor.

So again, how much of it is that just you need to rethink what the margins are in this business?.

Scott, I’d tell you, I don’t recall wavering in our commitment to how strategically sound we think this business is. The realignment of the inventory is just adjusting for the difficult growing things that we had as we made a lot of moves in one year with new stores and Macy’s and everything.

We are -- first of all, we consider ourselves a pretty major online pure play competitor or a major online competitor. We’re not as big as the pure play guys. But we also know that online is dominated by displaced fans.

And the universal sport fans is dominated by local fans and local fans prefer to shop stores and we see that with the very sharp spikes that exist as gains arrive. And there’s a need it now aspect to the Licensed Sports business that is pronounced.

And we also believe that for the purposes of efficient inventory liquidation, if you are selling product in both directions that is online of the displaced fan and in your stores of the local fan, you have a very, very privileged position, so, both against smaller mom and pops who are only playing the local game and a pure play online guy that’s only playing the displaced game.

So, we like what this business looks like. We have as we’ve said last time, opening new stores in the way we did. We need to revisit that. And that was the part of the strategy that I think we need to go revisit and say when we resume growth in this business and what way will we do that.

And I acknowledge that we have some questions about where we are going to go there? But we still believe that this is a business that is right for consolidation. And so hopefully that makes it a little more clear..

Maybe then, so what are some of the types of things that you are having success selling at full price and -- or what categories or maybe what changes do you make to get a higher percentage of full price sales? What things just you have to compete on price opposing that? Sorry..

Well, you just have to have your inventory right-sized. That’s the single biggest thing. If you are sitting on a 20% more inventory than you need and your demand at full price isn’t going to allow you to liquidate that, you then need to get promotional in order to clean up.

And that is disruptive to the entire store, right, because you end up with leakage from full price selling to a markdown selling; you end up with a store that is not as attractive to shop as you would like.

And so, what we need to do is get this inventory squared up and then really just start executing on an assortment that is right-sized that allows us to have a much, much higher percentage of full priced selling, which we know is very achievable..

And now, we will hear from Jill Nelson with Johnson Rice..

Just a bit clarification on your stance of holding your annual guidance, despite the second quarter beat.

With the Lids uncertainty on gross margin, is it more weighted to having to take deeper discounts or is it more weighted to having to work through more units than you anticipate today?.

A little bit of both..

And then just talking about some of the payroll headwinds you’re facing, whether it’s internal with adjustments you are doing with the ShopperTrak information or whether it’s macro, higher minimum wage, could you just talk about kind of the timeframe you expect to face those headwinds and maybe when we might start to lap some of those higher expenses?.

Well, there is two different things there. With ShopperTrak, we’ve added a marginal amount of hours perhaps but it is mostly taking hours where it’s been less productive into the power hour days, which -- and those hours are where you would expect them. There was not a major surprise other than how steep the power hours were.

And so, it’s required a little bit of a shift into a little more time in order to accommodate that. That’s a model that Journeys in particular can address because of their demographics. And so we’re really excited about how much more there might still be there as we continue to tweak that. The wage pressure is completely independent of that.

So, if you have X number of hours that you apply to the store but you have increases in minimum wage that is coming both from legislation but really it’s also coming from a number of retail competitors who have committed to paying a higher wage rate, we obviously have to be tuned into what market is. And that has brought our average wage rate up.

It’s heavily weighted to certain states and it’s led by California. And so when we lap, that is a little dependent upon what continues to happen because some of the minimum wage increases are stepwise events as opposed to a clip.

And so, we are expecting that for us and a lot of other retailers, this wage pressure and what kind of comp you are going to need to leverage it is going to be sustained. Our hope is that this puts a little more jingle in the pocket of teenagers who work retail.

And that might give us a little bit of help on the demand side but it is certainly going to be a headwind for the next year and probably a little longer than that.

Mimi, anything you would add to that?.

No, I would just call out that 23 states increased their minimum wages this year. So, when you have almost half the states in the country, you will face the pressure through the course of the year.

And then I think beyond that as Bob pointed out, it has not been because certainly unemployment has improved but there is still plenty of labor out there for retail. Retailers have decided to bring up their wages. And so, we just -- we do expect to continue to see this pressure certainly throughout this year.

Journeys is working hard to look at their commission structure because they are on commission to figure out ways they can, and try to minimize this impact. And so, while they are not able to leverage labor, they are working hard to just keep labor flat..

And now, we’ll hear from Sam Poser with Sterne Agee..

First of all, what same-stores -- how much same-store sales do you need by concept or just in total, to lever the SG&A right now?.

We were able to leverage in about the 3% range in the past. What we are seeing with this wage pressure is that we are not able to -- Journeys had a 4% comp this year and we are just a bit over on in terms of the percentage of selling salaries. And so that came up just a little bit.

And so, I would say that we are probably in the 4% range right now as we move through the wage pressure. And once the wage pressure goes away, that should mitigate somewhat.

We were benefitting at one point during the aftermath of the downturn; we were actually able to leverage at a lower threshold because our rents were going down as we renegotiated, taking advantage of additional vacancies in the mall. But right now, we’re above that 3% threshold that we have experienced in the past..

And just to follow up on that, we’re talking about all-in or are we talking about the stores?.

We’re talking about the stores..

Okay. And then, could you have more variable costs? And what kind of increases could you -- I mean, where is like the tipping point for e-commerce where you can….

Tipping point in regards to what, Sam?.

Well, I guess in regard to -- could you get leverage there or is that kind of end up being more of a gross margin story?.

Much harder to get leverage in e-commerce because it’s a much higher variable cost business, shipping and warehousing expense are the elements of e-commerce that really make it more of a variable business. For every item that you ship out, you have to send somebody go get it and then put it in the box and pay the EPS charge.

And so we aren’t able to see the same type of leverage in our e-commerce business as we are in our store business. However, we unlike some of our pure play competitors who do operate our e-commerce business to be profitable and so they are very nice contributors to our businesses and we are making money in our e-commerce businesses..

I’ve got a couple more.

One, are you seeing any return to the fitted hat business versus snap backs? Number two, Mimi, are you expecting gross margin to be up in total in the fourth quarter? And number three, could you give us for the quarter -- like how the ASPs, traffic and conversions look like at Journeys?.

So, on the fitted hat question, essentially a fitted versus snap backs question, and Sam as we said, snap backs continue to be a significant part of our business. In your note that you put out this week, we would disagree with your statement that we don’t have a competitive advantage in snap backs.

What we’ve always said is we have -- we believe we have a slightly bigger advantage in fitted because the degree of difficulty is higher. So, when we think about our advantages in snap backs, we are still the destination for a person who wants to buy a hat.

We know from our research that the fact that we assort everyone else in the space is the major draw and that is as important to the snap back buyer as it is to the fitted buyer. And then we also have scale in our purchasing and operations which is an advantage that also applies to snap backs.

So whereas we have the additional competitive advantage on the degree of difficulty and the replenishment requirements for fitted, we certainly feel like we have a competitive advantage in competing in the snap back space.

You’re recalling that back in when it got really hot, a number of non-traditional headwear retailers entered the space; they then got out of it, which tells me that they got clobbered because of you’re making money in a category you stick with it.

And so, I think that turned out to be painful but then proof of thesis that we are still the advantage retailer in all styles of hats. So that’s that question.

Gross margin, Mimi?.

Yes, Sam, we are now not expecting gross margins to be up in total for Q4; we’re expecting them to be down just a little bit. And then as far as the Journeys question, ASPs have been up. They were up in the second quarter and also up in the first quarter traffic.

Unfortunately, like all other small retail mall based retailers, has been down, we have been converting at a higher level which translates into our higher comps. So, we really have been making the most of the traffic that comes across our doors.

ShopperTrak has given us incredible insight into it; for every half a point of conversion increased, we’re able to get multiple points of comp increase. And so, the Journeys folks are focused on that, focused on the fact that they their traffic in the doors needs to be converted.

Part of what we have talked about in the past, Sam, is the traffic in the malls we think have a greater intent to buy these days. In the past, you would come and browse and see what you wanted to buy, but much of that browsing and that pre-purchase activity is done online these days.

And so, we think not only is the traffic in malls these days has a higher intent to purchase but that coupled with our activities in the stores to drive conversion have been yielding good results for Journeys..

And ladies and gentlemen, that’s all the time we have for questions today. I will turn the call back to your host, Mr. Bob Dennis. Please go ahead..

Well, thank you all for joining us. And we look forward to having a conversation with you three months from now. Have a great holiday weekend..

And ladies and gentlemen, this does conclude your conference for today. We do thank you for your participation..