Good day, everyone, and welcome to the Genesco Third Quarter Fiscal 2018 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 will now turn the call over to Bob Dennis, Genesco's Chairman, President and Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning, and thank you for being with us. I am joined today by our Chief Financial Officer, Mimi Vaughn. The third quarter, as we expected, was a tale of 2 businesses. Journeys built on its momentum following the emergence from its recent fashion shift and posted a solid comp gain. Meanwhile, Lids, after a challenging second quarter, faced a variety of additional challenges that meaningfully pressured its performance. As we have seen throughout the year, the dramatic consumer shift in shopping away from stores to digital continued once again in Q3, although we did see bright spots in both store traffic and store purchases during Back-to-School in more than one of our concepts. In total, consolidated comparable sales increased 1%, with stores down 2% and direct up 24%. EPS of $1.02 was a few cents above our internal estimates, but down year-over-year, due to the pressures at Lids, losses resulting from the onetime conversion of our Little Burgundy Canadian business to the Journeys' platform and challenges in our Licensed Brands wholesale business. In addition, EPS would have been higher by a few cents if not for the impact of Hurricane Maria on our businesses in Puerto Rico. In a few minutes, Mimi will discuss the specifics of Q3 results in more detail, but I'm first going to walk through the high points and then the headwinds of the quarter. And then I'm going to give some color on Black Friday and November trends and talk about how we are thinking about guidance for the remainder of the year before turning it over to her. And then before I get into operating performance, let me briefly address the goodwill impairment that we announced this morning. Mimi will give more color on this, but I wanted to stress that…

Thanks, Bob. Good morning. As usual, we have posted more detailed information in our CFO commentary that you can access online at our website. Even with higher sales and a positive comp, Q3 EPS was down due to gross margin pressure across several businesses, the deleverage from negative store comps and higher expenses from our omnichannel initiative. In addition, I'll describe the factors that caused Lids, Little Burgundy and Licensed Brands to be down in the quarter, while other divisions were flat to up. In Q3, consolidated revenue increased 1% to $717 million. Consolidated comps were up 1%, consolidated store comps were down 2% and consolidated direct comps were up 24%, a large gap that is similar to what we have been seeing thus far this year. However, store comps were stronger in Journeys and Schuh, driven by compelling fashion trend. The strength of these store sales was not as obvious in our consolidated results because of the decline in store sales in our other businesses. Traffic was up almost 15% on our website. Mobile drove a lot of the direct sales increase, but with higher conversion orders on desktop and tablet devices were up too. Direct as a percent of total retail sales was 10%, up almost 200 basis points over last year, demonstrating the substantial progress we have made driving e-commerce sales. Positive overall comps at Journeys and Schuh were offset in part by negative comps at Lids and J&M. Journeys' comps showed significant improvement from positive 1% in Q2 to positive 4% in Q3. The business performed well across the board, highlighted by year-over-year increases in traffic, in conversion and average ticket size, which was driven by higher-priced fashion athletic product. Both footwear units and ASPs increased at Journeys. Fashion athletic products also drove higher conversion in…

Thanks, Mimi. Before we move to Q&A, I want to provide an update on the important strategic initiatives we are executing. They are key to meeting the challenges in this changing retail environment and are aimed at both enhancing our profitability in the short term and strengthening our strategic positioning for the longer term. As a reminder, these initiatives are: first, reducing our real estate risk and rent expense; next, enhancing our in-store experience and driving traffic to our stores; third, building further our omnichannel and digital capabilities; fourth, strengthening the equity of our retail brands; and finally, managing capital spending carefully as we move into the new year. So beginning with reducing real estate risk and managing rent expense, our store portfolio is in very good shape. In the U.S., around 35% of our doors are in A malls, 45% in B malls, 15% in C malls and the balance in street and other locations. So we have the least amount of exposure in the more challenged malls. And so with this backdrop, I want to address the issue of closing stores and the suggestion by many investors is that retailers like us should accelerate their pace of closings. First, we don't believe that by closing stores, we transfer sales to other locations like some big-box retailers that are more destination driven. It is more likely we lose the sale to a competitor. We do believe sales transfer to our other stores in a situation where the whole mall closes. On top of this, the vast majority of our stores are profitable. So closing them wouldn't increase earnings, it would decrease them. I think what the Street sometimes doesn't appreciate or doesn't realize is that our 4-wall contribution in C stores is in the mid-teens, as high on a…

[Operator Instructions] We will go first to Pamela Quintiliano with SunTrust.

So I had -- if I could sneak in 2, because I think one, you're probably not going to answer it. But footwear, the first one, just, how sticky do you think current trends are? So not asking the brands and all that, but just based on what you've seen historically, how many more quarters do you think we could potentially get out of it? And then turning to Lids, there's obviously a lot of moving parts there, a lot beyond your control. It sounds like you're going to be aggressive with the promotions, reflecting what you're seeing from some online competition, you mentioned a lot of the marketing and outreach you're doing. Can you just talk us through what's incrementally new year-over-year for fourth quarter? And if there is anything that you moved around or shifted the timing of reflecting the recent trends that you saw in the marketplace?

So on Journeys, Pam, we're very happy with the assortment, as we said in the prepared remarks. We think that we are very good for holiday season. We think we are very good for spring, which were at this point heavily bought for. And then beyond that, I think we will probably give you more visibility on the next call. But we feel like this is looking like what we have seen in the past with Journeys. And as you know, in the past, when we come through a fashion cycle, we get a 2- to 3-year run. And so we're in the early stages of that. And we'll see if that plays out. But we'll give you more color in another few months. On Lids, the big surprise for Lids is really football. The Cubs were a huge event for us last year. And so we knew about that, and it's something we planned for. It's just been very well documented that the NFL has hit speed bumps, and you can measure it by TV viewership or merchandise sales. Other retailers have reported out on this. And so we faced headwinds in the category. And some of it's team-based, most notably with the challenges faced by the Dallas Cowboys. We're very happy they won last night. And last year, they were strong playoff contender, and they're, obviously, a very, very popular team nationwide. But this is really an overall thing. So beyond teams, overall the NFL trend is broadly hurting our sales across all teams in general. And this is something we did not expect to see. We also lack a fashion driver in our headwear business. And so we are working with our vendors to address that. We've had fashion drivers come and go over the past 16…

No, I think that covers it.

Okay.

We'll take our next question from Erinn Murphy, Piper Jaffray.

I guess, I have a couple as well. I mean, first on the operating margin for Journeys, you reported a solid mid-single digit comp, but it's the eighth consecutive quarter, where you've had op margin declines. I think Mimi, you called out there was a little bit of impact from Little Burgundy, so ex that it would have been flat. But, I guess, bigger picture, curious what you need to see though on a top line to see margin expansion for Journeys going forward. Is that possible just given where we are in the fashion cycle? And then, Bob for you, just -- you mentioned that U.K., you're planning to be more promotional at the Schuh division in the fourth quarter. What's really driving that?

So Erinn, just to begin to talk about Journeys and what happened in the third quarter, I think if you uncover that 4% comp, first of all, exactly what you've called out, the Little Burgundy conversion is what caused the drag on the Journeys Group profitability. This is a onetime thing. We got them onto our system. We're up and running and feel really positive about their business. So that should not be a factor going forward. When you look at the 4% comp, that is split between a little less than a 3% comp within the stores and a very strong double-digit comp online. And in the quarter, we need about a 3% comp to be able to leverage and we anticipate that in the fourth quarter, in particular, that we will have a chance to do that. We have a much bigger opportunity on sales. There is much more opportunity to leverage the fixed expense, both on rent and to manage selling salaries in a way that in the fourth quarter, we anticipate that Journeys' comp not only will be stronger, but the ability -- the store comp will be stronger, but the ability to drive profitability to the bottom line will be higher there. When the rent reductions that we have been achieving begin to kick in, what needs to happen here is really a resetting of the overall cost base within the store cost structure. So that's what we're working hard on is to bring down rent expense, reset the cost structure by things like, we've recently renegotiated our carrier contract. So overall, shipping expense will be going down for us as well. And all of these actions will put us in a position where we are better able to leverage overall comp within the stores.

On Schuh, I don't think I said we were going to have increased promotion in Q4. What we did say is they were year-over-year a little more promotional over Black Friday. We will continue to seek to be a full-priced seller, only taking the markdowns on slow movers until the market forces us to do something different. And so right now, we're in wait-and-see mode. As you know, in the past couple of years, it has gotten more promotional in the U.K., as we reported out. And so we are alert to the fact that if that happens, we need to join the fray. But it is our intent to focus on being a full-price seller until forced to play otherwise. If we play otherwise, we think we learned a great deal about how to promote in order to get maximum gross profit dollars out of a more promotional position. But we're going in as a full-price seller.

We will take our next question from Steve Marotta with CL King and Associates.

Endeavoring to unpack the NFL just a little bit. Could you please discuss the percentage of sales at Lids that was related to the NFL in the second half of last year and then in the first half of this year, which I assume is relatively de minimis, but it would still be a helpful number? And then what you expect it to be in the second half of this year? Again, as a percent of the total Lids sales, what NFL was related to? And because everyone else had 2 questions, my follow-up is what percentage of sales at Lids originated in Canada?

Bad behavior is contagious. Steve, on the -- I'm not sure we're going to disclose -- Mimi is looking for some numbers down to the level of -- by quarter. I'll give you some color on it.

It's our #1 vendor in the fourth quarter.

It's -- no surprises. It's the #1 league for business in the fourth quarter, especially in our Locker Room stores. Over the course of the year, it's in -- NFL sits in the -- somewhere in the 10% to 15% range, but it is heavily weighted to the fourth quarter. And you're right, it's de minimis in the second quarter. And really the only thing that shows up in the first quarter is the Super Bowl. So it really is a third and fourth quarter event. I forgot your other question. Oh, what percentage comes from Canada? Was that in Lids?

In the Lids, yes. In Lids, it's about 15% of overall sales come from Canada.

We'll take our next question from Laurent Vasilescu with Macquarie.

Do you have any high-level thoughts on the number of store openings and closures for next year and by banner? And can you discuss a little bit more in detail any recent traffic patterns you're seeing between A, B, C mall locations?

Yes, at high level, the themes are, we will probably close fewer stores than investors might anticipate. And the reason for that is that in our prepared remarks, we described a dynamic that when we go to close a store that is underperforming, a landlord, especially in a C-level mall, will come up with a rent deal that allows us to make money and so we will roll it over for one more year. But as you can imagine, there is a level at which even free rent doesn't ring the bell. And so a mall can decay to the level where we have no choice but to close. And so that's kind of the rough pattern. So that's on closures. On openings, we still have, we believe, important runway in the Journeys Kidz concept. As you know, the Kidz footwear business has gone through a consolidation as Stride Rite closed a lot of their doors. And we're just finding that, that concept resonates. As you can imagine, with kids going to the store is a little more important because they have a sizing issue. And our service model there is very focused on sizing the kids correctly. So that's more of a reason for having a weighting towards a store-based concept. And then beyond that, we have got really opportunities that have shown up heavily in A centers for us to bring in most notably the Journeys concept into malls where we have really never been getting an opportunity, and that's just another measure of what's going on in the world of store consolidation. So we are finding opportunities to not only go into these malls but to go in with the right kind of rent deal to be very productive and very profitable. And so we're taking advantage of those. So that's sort of at 30,000 feet how we're thinking about it. And then on the call in 3 months, we'll give you specific numbers because we will have finished our budget by then. Last thing I'll highlight, which we also mentioned, is we think capital will -- is going to continue to come down because on most of these short-term renewals, we really do what is necessary to keep the store open for another short while, which is more of a maintenance kind of CapEx than necessarily a full store rebuild. And so that is helpful to the cash flow aspects of the business.

We'll take our next question from...

Well, just on the traffic patterns between the different malls, for a while, we were seeing traffic patterns -- first of all, it's down everywhere, although in Back-to-School with Journeys, we saw a nice pop. But if you take averages over the course of the year, all levels of malls are down, and it is a little more pronounced as you go down into the -- deeper into the mall universe, with the Cs being the worst.

We'll take our next question from Jonathan Komp with Baird.

Just want to follow up more on the Lids outlook. In comparing the fourth quarter comps guidance versus what you gave a couple of months ago, it looks like kind of about a 400 basis point reduction. I was just curious, can you clarify is that entirely related to the NFL? I think that implies the NFL down in order of like 20%-ish. So I just wanted to maybe clarify that is the first question.

Yes, that's -- you've got -- it is heavily weighted towards the NFL. And that is sort of the order of magnitude of the problem.

Yes, I think that's right. There is a little bit in there for hockey, but the preponderance, because the overall NFL product for gift giving and the fact that we are in the season is the strongest part of our business.

We'll go next to Sam Poser with Susquehanna.

I guess, on the Lids group business, last year, Lids had a good year and you bonus-ed -- or maybe it was the year before, when you sold the Team Sports business, you provided an additional incentive comp for the sale of that business. Now...

It was 3 years, right?

Two years ago. With the write-down of this business now, how does that impact -- how is that impacting -- how are you going to handle incentive comp or the bonus comp there with this because...

Sam, you're mixing apples and oranges. The business we sold, none of that goodwill is in this. That goodwill got addressed when we sold the business. So the goodwill we are discussing in the current impairment is all related to Lids retail, not Lids Team Sports.

And just to clarify, Sam, that really is an adjustment on the balance sheet. Basically, we look -- we do a market cap test, and you've seen our stock price, it's at levels that are well below historical levels. And when the carrying value of Lids almost equals the market cap of the entire company, what the accounting standard calls for is an adjustment on the balance sheet to the goodwill, which is an intangible asset. So that's really what ended up happening, and we flowed that through the income statement for GAAP purposes. And so it is a noncash issue. It's an adjustment to just account for the overall carrying value given where we are currently -- our stock price is currently trading.

And it doesn't enter the bonus equation. It's a separate item.

We'll go next to Janine Stichter with Jefferies.

I'm just curious if you could talk a little bit more about boots at Journeys. It sounds like they got off to a slow start in October, but you're seeing some better trends now the weather has turned. Just curious kind of what's embedded in your guidance up against some easy compares last year when I think you cut orders and left some money on the table. And also on the IMU pressure from the fashion athletic, can you just give us a sense of how important the fashion athletic business is in 4Q relative to 3Q as boots become a bigger part of the mix versus 3Q?

Yes. And so on cold-weather products, you've got it about right. At Journeys -- and by the way, throw in all our businesses that have cold-weather products, Johnston & Murphy and Lids. It was warm through like the last week of October then when it got cold, you could just -- it was like throwing a light switch and all of a sudden we started to sell through nicely. And you remember correctly from last year, it didn't get cold early enough and the whole market got promotional and we joined in. And so to play -- we played an appropriate level of defense and liquidated a bunch of our boots, which only in retrospect when you looked at how the rest of the year played out, we recognized that had we not, we would have had some more boots to sell at full price. But 20/20 is -- hindsight is 20/20, so the team did exactly the right thing. So this year, we feel like we're off to a good start, and we think that when we start to anniversary the period where we didn't have an adequate supply last year that we'll be in very good shape. The IMU pressure from fashion athletic product, that's in our guidance. So it's more important in Q3 than it is in Q4, but it's a factor that we have it in the numbers.

Yes, that's right. The fashion athletic product as a percentage of our sales in the fourth quarter is considerably less. Boots are really the big product that sells in the fourth quarter. And typically, our boot IMUs are lower than our athletic in general. And so this year in the fourth quarter, we actually don't anticipate any gross margin pressure. Last year, we were clearing product in order to address the fashion shift. And this year, we've substituted some of that lower IMU for the markdowns we took. So we're actually expecting that we will be in good shape from a gross margin point of view this year in Journeys' 4Q.

We'll go next to Scott Krasik with Buckingham Research.

One for Mimi, one for Bob. So just if you look at the last 10-K rent expense, I think was a little over $270 million, a little over 21% of sales. Is that trending similarly for this year? And then should we just take a 9% reduction to that for next year? Is that the right way to think about it? And then Bob, I know you don't talk about profitability of Lids Locker Room, but just given some of these numbers, specifically the skew to NFL, is proof-of-concept an issue here? And how do you think about that longer term?

So yes, Locker Room does run a higher percentage of NFL than does the headwear stores, you're right on that. We are not drawing a line on this event, where suddenly interest in the NFL plummeted and everybody ended up long inventory and had to discount as an indictment of the concept to be honest. I mean, it is one of the risks in the business, and so it's a consideration. But what we are going to be waiting to see is what happens when people have learned -- first of all, what does the NFL do to try and rejigger their business model to get viewership and interest rebooted? And then we are continuing to operate the business and we will be buying it next year to what we think is the right-sized amount of NFL. So we think -- we are hopeful that it is a onetime event that is related to the fact that everyone is just over-inventoried on NFL.

Yes. So Scott, in terms of our rent expense, I think the way you have to think about it is that we've got renewal cycles on a portion of our leases that come up every year. And so we've got in the neighborhood of 300 to 350 leases expiring each year depending on our opening schedule. And so more or less you could say that somewhere in the neighborhood of 15% of our portfolio would be renewed each year, and then you can apply that 9% or 10% reduction to that part of the portfolio. And then it compounds, right? Because we will get a set of rent reductions in this year, we'll get a set of rent reductions next year and those sets of reductions will begin to compound and really impact our rent expense line.

We'll take a follow-up from Jonathan Komp with Baird.

I got cut off, so I just wanted to follow up on Lids. And more curious kind of beyond the fourth quarter, how you're thinking about the sustainability of some of the pressures versus opportunity to recapture performance again. So it looks like pretty soft results this year. Just kind of broadly how you're thinking about it?

Yes, that requires that we sort of step back and think about what this business is. We know, first of all, that there is a hearty appetite for fans to buy fan gear at stores. And it's driven by a game day. We know that the omnichannel experience for fans is very compelling. When we ramped up the level of buy online, pick up in store that's available to them, they jumped all over it. We know broadly that returns were a pain point and therefore, we fit that need really well. In the headwear space in particular, we still have a very strong position. Just like the Journeys business that has come through a fashion cycle after going through a trough, we are in a fashion trough in Lids headwear. And so we are of the belief that we can recover from that. It's just -- unfortunately, we have no visibility on what that might look like. But just 20 years of the headwear business says that trends show up and people get engaged on a new kind of look. So we're working like crazy with our vendors to figure out what that might be. So we think there is lots of reasons that this business has a reason to exist. And the other thing that's going on, and I'll highlight this for both Journeys and for Lids, there are some pretty clear indications of consolidation continuing to happen in the industry. So yesterday, a regional competitor, who is in a similar space to Journeys, called Shiekh filed for Chapter 11. There is a lot of buzz around the Locker Room space of competitors that are struggling. We think there will be a pretty meaningful rationalization of an over-stored environment, and we will be the beneficiaries of that. So we've invested -- we're the only one in the store world that has a first-class digital presence. And so -- and that's showing up in terms of the huge gains we're seeing in our digital business, which we continue to invest in. So we see a lot of things about Lids' strategic position, its competitive position that are compelling, but we acknowledge that right now, we're in a bit of a hole. So what do you do in that situation? We certainly are not going to invest in a lot of new stores in an environment where we don't have the visibility of fashion on the hat side and competitive dynamics on Locker Room side. So -- but we will be competing to try and take advantage of what we think is a long-term strategic position. To borrow from Wayne Gretzky, we're trying to skate to where the puck is going to be. We don't like where the puck is right now.

I'd like to turn it back to our presenters for closing remarks.

Well, I just appreciate everybody joining the call. Thank you for all the thoughtful questions. Happy holidays to everybody, and we look forward to having a chat early next year.

That concludes today's conference. We thank you for your participation. You may now disconnect.