Foot Locker Inc (FL) 2002 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to Foot Locker's, Inc. second quarter 2002 earnings conference call.

At this time all participants are in a listen-only mode.

Later we will conduct a question and answer session.

At the request of Foot Locker, this conference call is being tape-recorded.

If there are any objections, please disconnect at this time.

This conference may contain forward-looking statements that reflect management's current views of future events and financial performance.

These forward-looking statements are based on many assumptions and factors including the [inaudible] Guarantee fluctuation, consumer preferences and economic [inaudible] Worldwide and other risks and uncertainties described in the company's press releases and SEC filings.

Any changes in [inaudible] Or factors could [inaudible] Results.

If you have received today's release, it is available on the Internet at WWW. [Inaudible].com or WWW.

Foot Locker-inc.com.

I'll turn the call over to Mr. Peter Brown, vice president, treasurer, investor relations.

Mr. Brown, you may begin.

Good morning.

We're pleased to report to you that our adjusted net income before taxes increased 25 percent for the second quarter of 2002.

This was our 12th consecutive quarter of sales and profit improvements from our athletic businesses versus the same quarter of the previous year.

Our 22 cents per share result is in line with our guidance that was provided at the beginning of the quarter.

In keeping with prior practice, Bruce Hartman, our executive vice president and chief financial officer will begin with a discussion of our financial results.

Matt Serra, our president and chief executive officer, will follow with a business update and provide earnings guidance for the balance of the year.

After our prepared remarks, we will answer your questions.

I would also like to remind everyone that our results from continuing operations are presented on an adjusted basis, exclude the San Francisco Music Box Company and Burger King franchises that we sold late last year.

The following are highlights of the second quarter.

Total sales increased 5.1 percent, benefitting from our new store opening program and a stronger European currency versus the U.S. dollar.

Comparable store sales increased .9 percent reflecting a low to mid single digit sales increase in May and June followed by weakening sales trend in the United States during the month of July.

Our adjusted gross margin rate decreased by .4 percent.

Our adjusted SG and A expenses as a percentage of sales improved by point 8 percent, which is a continuation of a trend extending over the past several quarters.

Our adjusted net income for the second quarter increased 14 percent, to 32 million, from 28 million last year.

And finally, our financial position continued to strengthen, total debt net of cash decreased by 183 million dollars from last year.

With that, I'll turn the call over to Bruce Hartman.

Good morning.

As Peter mentioned, we've now produced very solid sales and profit improvements and also generated strong cash flow for 12 consecutive quarters.

Additionally, we've continued to significantly strengthen our balance sheet.

During the past three years, we've utilized our positive cash flow to repay debt and build our cash balances.

As a result, we've reduced our cost of capital while improving our credit ratings.

Given our significantly improved positions, we continue to evaluate our capital structure, including shareholder dividends and/or stock repurchase opportunities.

We believe it is prudent to make any decision in this regard only after our peak working capital period in November.

During the second quarter, we worked with our banks and amended our revolving credit facility to provide us with greater flexibility that we consider shareholder redemptions.

Specifically, this amendment allows restricted payments, including share repurchases and dividends of up to 25 percent of prior year's net income from continuing operations.

While we continue to consider shareholder redemption opportunities, our priorities remain the same.

Increase earnings and cash flow, maintain the strong liquidity position, strengthen our balance sheet and achieve improved credit ratings in order to continue to build value for our shareholders.

During the second quarter the retail climate in the United States remained challenging.

While our sales did improve somewhat during May and June from first quarter levels, trends softened during July.

And this has continued into August.

The month of July and August are our most difficult comparison versus [inaudible].

Particularly, partially as a result of the tax refund checks that were mailed in 2001.

The promotional environment also continued during the second quarter.

To profitably compete in this environment and grow earnings required a continued sharp focus on expenses.

Excluding the impact of foreign currency translation.

This was the fourth consecutive quarter that we've reduced our SG and A versus the comparable quarter of the prior year.

By division, our first quarter comp store sales gains break out as follows.

Comparable store sales in our Foot Locker U.S. business was essentially flat.

Lady Foot Locker was down mid single digits.

Champs and Kids Foot Locker were up low single digits.

Foot Locker Europe produced yet another strong quarter with high single digit increases.

And Foot Locker.com had a low to mid single digit increase.

Our adjusted gross margin rate decreased by 40 basis points during the second quarter.

Partially reflecting a somewhat increased promotional environment during July.

Our gross margin rate, however, still remains one of the highest in the industry and we believe our product margin is the highest.

Our inventory levels remain in line with plan.

And continues to be above retail industry standards and we believe we're well positioned to support our third quarter sales expectations, excluding the impact of foreign exchange, inventory at the end of the second quarter was 5.3 percent higher than last year.

Second quarter adjusted SG and A improved by 80 basis points versus last year.

As mentioned on our prior conference calls, our company wide expense process continues to make our company permanently more efficient and allows us to effectively compete and earn more profit dollars in the current retail environment.

In fact, we generated over $10 million in identified annual expense savings during the second quarter.

This was the 14th consecutive quarter that we have generated annualized savings of at least this amount.

One of the key components of this expense process is being proactive with our multi state multi national tax planning strategies to reduce both cash and both taxes.

We continue to have success during the second quarter and as a result we were able to reduce the company's tax rate to 36 percent.

While we continue to plan our effective tax rate in the future to average 37 and a half percent, I would like to point out that we have a number of initiatives under review that we expect will continue this momentum to conserve cash and lower our tax rate going forward in the future.

We also generated another 95 million dollars of adjusted EBITDA during the second quarter and our 22 cents share performance was within guidance range we provided in May and reconfirmed in June.

As mentioned earlier, we've continued to strengthen our financial position.

We ended the second quarter with over 300 million of cash, versus 189 million at the same time last year.

We had 215 million at year-end.

Total debt net of cash is down to 87 million dollars.

And that compares to 270 million versus last year.

We maintained an average short-term investment position in excess of 200 million dollars during the second quarter.

We did not borrow under our 190 million unsecured revolving credit facility.

Further, because of our improving cash position we do not expect to borrow against this facility at any time during 2002, and expect to have a modest cash position during late November, which historically is our lowest seasonal liquidity position.

During the first quarter, S and P recognized the substantial progress we've made and upgraded our credit rating to BB plus.

Shortly thereafter, during the second quarter, moody's also raised our credit rating to BA 2.

Going forward, we remain committed to continuing to grow our earnings per share every quarter and have a 10 to 20 percent annual rate.

We continue to believe we can increase our operating profit margins by three percent from 7.1 percent last year to above 10 percent within the next few years.

As we detailed on last quarter's conference call, our most significant opportunity to increase our operating profit is to reduce our occupancy costs as a percentage of sales.

Our objective is to decrease occupancy expenses and related depreciation as a percentage of sales by 200 basis points over the next several years.

These initiatives include store remodels, relocations, cut down, closing of existing stores and the continued opening of new stores in our more profitable markets.

Since May we have begun to make some real headway with these initiatives and we expect them to begin benefitting our gross margin rate in 2003.

During the second quarter the real estate field deals we signed, signed including store closures were completed at a rate that's 200 basis points better than our existing rate.

Our deals that we completed in August were 300 basis points lower than our existing rate.

This represents, on average, a 17 percent decrease from our previous arrangements.

This is being accomplished through the success of our European and U.S. street store programs and having a more efficient view of square footage domestically.

Additionally, our new stores opened in the last 12 months are running with a fully allocated profit margin range in the double digit range.

As mentioned before, our associates continue to develop and create exciting profit improvement ideas and this shows up in our SG and A rate which was 80 basis points below last year.

This continues to give us confidence that we can stay committed to reducing SG and A by 100 basis points over the next few years.

In summary, our year-to-date earnings are about where we expected them to be when we finalized our plans earlier this year and we're very pleased with the execution of our business and believe our product offerings are well positioned for the fall season.

I would now turn the call over to Matt Serra.

As Bruce mentioned the retail environment remained challenging during the second quarter.

While the pace of sales improved during May and June, business slowed across most of the retail industry during the month of July.

We did have our second quarter plan conservatively and therefore achieved earnings per share within the range communicated to you in May.

We expect sales and earnings to begin to accelerate during September as the comparisons would last year become far easier, than we have experienced within the first seven months of 2002.

In total we expect comp store sales to increase two to four percent with top sales growing above mid single digits.

During the quarter we expect comp store sales to improve during September and October from the soft trends we experienced last year.

From a comparative point of view we had a high single - sorry, high double digit sales performance last August followed by weak sales during September and October.

Additionally, last year's third quarter was very promotional.

This provides a significant quarter over quarter gross margin comparison opportunity this year.

I will now provide you with some second quarter highlights of our individual business units.

In the United States, Foot Locker, Kids Foot Locker and Champs produced flat to low single digit sales increases.

Foot Locker increases were led by the continuing strong trends in classics and endorsed basketball shoes.

We also continue to benefit from our apparel strategy led by our private label and licensed apparel programs.

As most of you know, our first quarter strategy included a much larger allocation of several of our suppliers to high end marquee shoes priced over 120 dollars.

First quarter strategy did not meet our expectations and we worked with our vendors in the second quarter moving the percentage of higher priced offerings back in line with the historical levels.

We believe this issue is behind us and that our higher priced product offerings are back in price zones in greatest demand by our customers.

Therefore, we will continue to emphasize low marquee market to differentiate our stores from our competition.

Lady Foot Locker continued to be the softest part of our business during the second quarter.

Last week we promoted Nick Grayston to be president of this division.

Nick has an excellent merchandising track record at Foot Locker Europe, Champs and most recently as president of Foot Locker Canada.

We believe that fundamentally this business is sound but needs some product reassortments to better meet customer demand.

During this week we announced Ed Schleicher has joined our company to replace Nick at Foot Locker Canada.

He joins us from fed administrated department stores where he was a senior vice president and general merchandise manager with extensive shoe experience.

We also announced last week that we are merging Kids Foot Locker into Foot Locker U.S. under Tim [inaudible] We expect to generate operating synergies for this combination, particularly in the merchandising area.

And for this division particularly to benefit from Tim's leadership.

Foot Locker Europe had another very impressive show during the second quarter, with very high single digit comp store sales increase, almost approaching double digit.

Running shoes continue to be the driving factor through Europe.

Foot Locker.com, including Eastbay continues to grow very profitably.

This division had long single digit sales increase for the quarter with continued strong flow through to operating profit.

Most importantly, profits at Foot Locker.com more than tripled versus last year.

Last week we had a grand reopening of our distribution center in Wassau, Wisconsin, we doubled the capacity of this center to accommodate the exceptional growth of this division from 250,000 square feet to 500,000 square feet.

We continue to make good progress implementing our pregrowth strategies, opening new stores, improving profitability of existing stores and growing our customer catalog and Internet business.

Our capital expenditure program for 2002 is tracking on plan.

With approximately 165 million targeted primarily towards 107 new stores over 200 remodels and relocations and capital maintenance.

In fact, during the second quarter we improved the opening of additional toy stores given our favorable success with our planned openings.

We completed 41 openings, 57 remodels and reloads and closed 23 unproductive stores during the second quarter.

Our real estate department remains on track to complete this year's plan on or ahead of schedule.

In North America, we opened 14 new Foot Locker stores, primarily in urban U.S. locations.

We're now targeting a total of 70 new Foot Locker stores in North America this year.

Western Europe remains our most exciting growth opportunity for Foot Locker and is the region where we generate our highest returns.

We opened 16 stores during the second quarter and continue to be on track to open approximately 65 stores this year.

That will bring our year-end count to 385 stores.

We initiated our new renewed store opening program at Champs during the second quarter with 11 projects completed.

As we've outlined in the past, most of our planned growth Champs is targeted to regional shopping malls.

We did however open a new Champs power store in New York City's 145th location up in Harlem in the second quarter and it's doing very well.

The second location was opened last week at 34th street and fifth avenue across from the empire state building.

Later this year we're planning to open an additional power store in time square.

In total, we plan to grow our store base net of closings by approximately 70 stores this year, representing a two percent growth rate.

Growing our direct to customer catalog and Internet business is another significant opportunity for our company.

The most rapid growth in this division is coming from our Internet business, which produced another very strong double digit sales increase for the quarter.

We continue to initiate new programs in this growing channel distribution.

Our Internet initiative in Europe that we announced earlier this year went live yesterday.

This initiative is expected to be very useful tool in returning new markets for future store expansion, in addition to generating additional sales and profit.

As we already discussed our financial position continues to strengthen, which has allowed us to consider shareholder [inaudible] Programs later this year.

In summary we're off to an encouraging start in the first six months of 2002, having generated a 13 percent growth in net income.

We're cautiously optimistic that our earnings growth will accelerate during the fall season in comparison to last year very much easier.

At the same time we recognize that the economic environment remains difficult and consumer confidence spending is anything but robust.

Our management teams from both the divisional corporate levels once again met their challenges for the second quarter and have our company well positioned for the balance of 2002.

Our relationships with our vendors remains strong and we're very comfortable with our product assortments and products lined up for the fall season.

We currently expect our third quarter earnings to be 28 to 30 cents per share which represents the 13th consecutive quarter earnings growth versus the prior year.

For the total year we remain comfortable we will meet our long-term objective of achieving 10 to 20 percent annual earnings growth at $1.12 to $1.14 per share.

Our full season expectation includes mid to high single digit top line increase reflecting two to four percent comp store sales increase and a two to three percent incremental growth from new stores, plus one to two percent additional growth as a result of favorable foreign currency translation.

Longer term, our continuing objective is to improve our EBIT margin rate by 300 basis points.

As Bruce already outlined, this improvement is expected to result from our multi-faceted real estate strategy we expect to result in 200 basis point improvement in our combined gross margin and depreciation rate.

Our ongoing expense reduction process that is expected to result in at least 100 basis points of savings.

Again, we recognize the challenging economic environment in the United States.

We continue to be excited for the balance of 2002 and confident that we've produced meaningful increased value to our shareholders over the next several years.

We'll now be happy to answer any of your questions.

Thank you.

Thank you.

We will now begin the question and answer session if you have any questions you need to press the 1 on your touchtone telephone.

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Your questions will be queued in the order they're received.

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Once again, if there are any questions, please press the 1 on your touchtone telephone.

Our first question comes from Jeff Edelman from UBS Warburg.

Please state your question.

Thank you and good morning.

Matt, obviously we all saw the announcement by Nike and I'm not going to probe that.

But has there been a change in your buying policies in terms of how far ahead you're committing for inventory or how much of your normal purchases are based on forward orders and has there been an increase in what you're looking to pick up on an [inaudible] Basis.

Not really, we continue to buy six to eight months out and we have reserved this fall season a little money for opportunistic purchases.

But nothing material out of the norm.

As a normal business practice, have you typically cancelled orders this close to a season?

Yeah, we've cancelled, readjusted orders on an ongoing basis.

Okay.

Thank you.

Our next question comes from Lee Bagans [ph] From [inaudible] Birmingham Research.

Please state your question.

Matt, could you give us a sense is has there been any change in your average price points over the last quarter?

Actually, they've gone up.

The average price point is up about two percent in shoes.

How do you - is that from increased marquee or from less promotion, or how do you explain that?

A lot of it is from that bucket in the 60 to 80 price point where we're selling through a lot of those shoes at a much stronger rate than we have in the past.

Obviously the price points of your marquee shoes going forward is going to be decreasing.

Do you think the percentage of your business devoted to marquee shoes will decrease or will that remain about the same?

No, our business has essentially been gated at about 30 percent marquee.

And we plan to continue that.

The only difference would be that we're redefining marquee, the bulk of the marquee used to be over 100 dollars.

Now we're saying it's 90 to 120.

And we still will continue to sell a lot of shoes over 120 dollars, but not the same amount.

Thank you.

Our next question comes from Bob [inaudible] From Lehman Brothers.

Please state your question.

Good morning.

Couple questions, actually.

First can you maybe elaborate a little bit more on your expectations for around September 11th and your confidence about business sort of improving around that period and the second question would be, you guys had previously announced some of the Nike Jordan shops, the concept shops.

Can you give us an update on that how that's progressing, if it's still on track.

And then the third question would be can you talk about like the productivity of some of the urban stores versus some of the mall stores and what you're seeing there?

Sure.

We have very strong double digit increase last August.

And after the unfortunate events of the 11th, like everyone else, our business experienced a very, very steep change in trend.

And we believe that in the months of September and October that we have significant upside opportunity to recoup a lot of that business.

It flattened out.

I mean we've never experienced anything such as September 11th.

And the malls were way, way down in traffic.

And the drop was very, very significant.

And had we not had the huge August, we wouldn't have had a halfway decent third quarter last year.

To answer your question on the Nike shops, at this point Nike has decided they don't believe it's in their best interests to proceed with this program that we had put together with them.

And the productivity of the urban stores is very high.

As Bruce mentioned, we're operating fully allocated at double digit operating profit and that's the first year out of the box.

Those stores will grow dramatically in earnings.

So we're very, very pleased with that.

Two more questions.

First one is sort of retail sales versus Internet sales.

Can you give us an idea how that tracked during the quarter.

And then finally, can you talk about more the market share gains that you seem to be getting in the U.S. and maybe possibly where you are in Europe as well.

The Internet had strong double digit increases.

We're very excited about what's happening there.

In terms of the U.S. stores were basically flat in the quarter, slightly up in a division or two.

When you look at the Internet business, I think there's a couple companies out there that are really growing in this sector, and that because of our name, the Foot Locker brand and the ability of our customers to exchange merchandise in the stores, if it doesn't fit, isn't what they want, our very liberal policy, I think that's a very important enhancement in our Internet program.

In terms of our market share, we think we continue to take market share in the U.S.. there seems to be a lot of people closing stores and we continue to have on that basis openings.

So we're clearly focused on gaining market share in the U.S..

Europe is very, very exciting and our market share over there is about six, six and a half percent.

And we think that over the next number of years that the sky is the limit there.

We're growing at a very aggressive pace.

Very strong management in place and infrastructure located out of am ster dam.

Tremendous distribution center right outside of the am ster dam area that can continue to propel the business.

So we feel very good about our growth prospects for Europe.

Thank you.

Our next question comes from Donald [inaudible] Of Jeffries and Company.

Please state your question.

In Bruce's presentation, you indicated that you're going to reevaluate your stance on stock repurchase and dividends.

After you see the working capital position in November.

And it was also said, I believe, that the peak in November, the cash balance will be relatively small.

So my question is, does that imply relatively smaller amount available for, potentially available for other purposes or in your evaluation are you taking into account the fourth quarter generally is a good generator of cash and again whatever your estimates are for cash generation next year.

Thank you.

I think the answer to your question, your last part, is yes.

When we say modest amount, I mean it's a little bit better than our expectations.

Typically the company has borrowed money earlier in the fourth quarter, specifically right around Thanksgiving.

This year we're doing a little bit better than we expected and we're actually going to have 40 to 60 million dollars of cash on the balance sheet.

But with all that said, I still think we want to get through the fourth quarter before we come up with any firm commitments.

And then also, I don't know if you want to deal with this or not, but there has been buzz out there, a lot of rumors and stuff about some stress on your overall relationship with Nike.

I don't know if you want to go there or if you prefer not to comment.

I'll comment on that.

Our relationship with Nike continues to be strong.

Nike is an important business partner with us and we believe that they feel the same.

As far as any specific arrangements we have with Nike or any of our other suppliers, we consider them private and competitively sensitive.

We continue to do a lot of business with them and they continue to do a lot of business with us.

Thank you very much.

Our next question comes from Richard Boss [ph] From Credit Suisse First Boston.

Please state your question.

Good morning, everybody.

Thank you.

Just a couple of questions.

First, a follow-up to Don's question on Nike.

And I'll kind of get out of here with it.

In their 10-K they actually made some very specific comments about their relationship with you.

And they indicated, among other things, that they felt that you were decreasing your emphasis on higher priced premium footwear.

I think you pretty much put that to rest.

But they also indicated that your future orders in the U.S. for this holiday season had decreased significantly versus the same period the previous year.

So they're out in print on this.

I don't know if you want to comment about that.

I certainly would appreciate it if you would.

And then any other comments along that line in terms of if it's down it's obviously going somewhere else.

And I don't know whether you want to go there Matt or not.

But they're out on this in print and it's created a lot of conversation.

Well, I think we did reduce some of the 140 and 50 dollar programs and clearly while we still have a lot of those shoes in place, we put a lot of emphasis into, you know we talk about higher marquee, in the 110, 120 dollar range.

And we really intensified that zone.

So hopefully that answers your question.

Again, I think that's fine.

We have a lot of shoes from Nike, shoes from all our suppliers, Adidas, Reebok, new balance, technical running shoes, ACICS [ph].

We have a lot of shoes in 110, 120 dollar range.

So sounds like maybe the units aren't changing significantly?

No, we are going to continue to focus on keeping our marquee business at least 30 percent of our purchases and our sales.

And the tweaking - I mean the customers voted last spring.

They didn't buy the high end product.

So we're really going to be gated principally in the 90 to 120 dollar range.

We're going to probably have more shoes to offset the volume in there.

I think we heard you correctly when you are somewhat redefining what you call marquee product by starting it at 90 dollars instead of 100?

That's correct.

We've always sold one-third of all the athletic shoes in America over 100 dollars.

We think it's now time to, because of our careful tracking, to take them down to 90.

We've had tremendous success in the $90 price range.

Okay.

That's good, Matt.

I think that clears the air a lot.

Bruce, this is maybe a small issue, but on your income statement you did report other income, three million dollars.

It was up a couple million versus a year ago and actually worth about a penny or two to the earnings.

You didn't comment on that particular line item.

But what is it?

Essentially it relates to some real estate gains that we will in the quarter, specifically from what we call store one in Chicago.

Typically we have a million to two million a quarter.

This was up a little bit.

Okay.

What's store one?

It's an old store that we had some - it's an old Woolworth's store we had some Foot Locker stores in and so forth.

We will a favorable lease on.

You got out, you closed or sold the lease?

Yes.

Anything in particular that you're seeing in terms of the trend in August by category, Matt? , because the trends - because the trend of the business is the same, that is, it's continued from this weakness that we've seen in July.

But anything specific pop out in terms of categories? , spending well or not trending well.

First of all, I'll comment that I believe that we're trending better than many of our competitors, from the numbers I've seen.

So that's a plus for us.

I believe that - I don't believe.

Our basketball business continues to be extremely strong and our apparel business is strong.

And we had a great quarter and a great spring season in apparel.

Our apparel business is now beginning to grow as a percent to sales, which is exciting.

And we're going to have a very - we're beginning to have a very large apparel business.

I think that's a positive for us in the third and fourth quarter.

I'm not a weatherman.

I'm not going to give anybody a weather report, but last year we did have the warmest fall on record in the northeastern parts of the Midwest.

It could happen again but it doesn't usually happen two years in a row.

So there could be, first of all, our business apparel happens to be strong.

And if we get a little bit of a break from the weatherman, it could really help us out.

I assume, could you just remind us, I think you've indicated what the overall percentage of apparel is to your mix.

And where you think you can -

I don't think we've ever commented on that, have we?

We have not.

We have not.

But -

Want to use this forum as a first-time opportunity.

It's between 25 and 30 percent.

With regard to what's been working I think you indicated both your private label business as well as licensed apparel?

Yes.

And I assume that it's a higher margin business because the private label element; is that fair?

Not necessarily.

It drives a lot of volume at a very respectable margin.

And we use it to drive a lot of traffic in from the stores.

And it's becoming a very big business.

So I mean it's not a large margin but it's a respectable margin.

The licensed apparel margin right now is extremely rich.

And then just a last question.

On Lady Foot Locker, you have a new guy in there.

You've talked about that being impress, the one underperforming business that you do have, and I guess the two areas that you've talked about before was, one, the product mix, the assortment and then secondly the ambiance of the stores.

Could you talk specifically about the changes you hope Nick will be able to make on both of those scores.

And if there's some other big initiative he think he'll be able to accomplish at Lady Foot Locker, if you could comment on that as well.

First of all, we split it out so it's a single division now.

And I use the term around here we're going to put it in intensive care.

And we are making money in there.

It's clearly not where we want to be or need to be.

Nick is a guy with a very, very strong fashion sense.

And I think we're going to start seeing in the next three to six months a lot of exciting shoes in there.

I think we kind of missed the boat on what our customers are looking for in that business.

I think we may have gone in many cases too young and too old and not getting in the middle zone in what the 17 to 30-year-old customer is looking for.

In terms of ambiance, I don't think I've made any comments on the ambiance in there.

We have a lot of stores that need to be renovated and that will follow suit in our normal renovation program over the next several years.

Approximately I believe 150, 160 have been renovated over the last four years.

Have you seen better performance out of the renovated stores, or I guess if not it would indicate you need product changes.

There's been some uplift in renovated stores.

But it's not the ambiance, it's the merchandise.

And the apparel area in there I think has been too item driven instead of fashion driven.

And I think Nick, with his tremendous fashion sense, will bring a lot to that division.

When do you think you'll start to see results?

Timetable.

Hopefully in the late fourth quarter.

Thank you.

Our next question comes from Margaret Major from Goldman Sachs.

Please state your question.

Hi, it's Margaret.

Good job making your numbers.

For your 12th consecutive quarter.

I have a couple questions.

First, I was wondering if you could give us any sort of color on how your urban stores are performing compared to your suburban stores, if there's any sort of differential and if you look at it that way.

And I sort of size your urban exposure at about 40 percent of your business.

Is that a fair statement?

In Foot Locker, that's about the number.

In the big Foot Locker division.

In Champs, it's obviously much more suburban based and the number in there would be about 18 to 20 percent.

The urban business is a little better than the mall business.

Not that much, but a little better.

And on the tweaking of your strategy in the marquee side, I'm just wondering, as far as the cancellations that you're doing that Nike talked about in their 10-K, is that all from you changing your strategy or are they changing their strategy with you?

I would say it's probably a combination.

But I don't really want to - again, from a competitive sensitivity, getting into what they're doing and what we're doing.

We're going to continue to do a lot of business together.

We do a lot of business together and I think we've had years where we've grown and we've had years where we've declined over the last 25 years.

I think you gave us a little bit of insight on the question about the in-store shops, that it sounds like it was their choice not to go forward with the brand Jordan shops.

Does this imply that Foot Locker is going to get much much less of the Jordan product, even at the 120 dollar range?

I think like the retro Jordan don't typically sell for over 140, 150.

They're usually a little bit less than that.

So I'm just wondering, are you, as a result of this changing strategy, going to end up with less of that type of - of that brand Jordan product specifically?

Yes.

I'm not going to comment on that, because I think that again gives out sensitive, competitive information.

But we have a lot of Jordan product coming in the stores this fall.

I talked to a lot of your shareholders and I know that there's a bit of concern about Foot Locker changing its positioning.

And I think you're being very adamant about trying to communicate that you're not changing your positioning.

But it seems a bit nuanced.

And is there a risk from your perspective that somebody else could step in to a space that you clearly have a great franchise and dominate, that this could really change your positioning over the long-term?

We're not changing our positioning and our strategy.

We're tweaking some price points at the high end.

I mean we sell a lot more shoes under 100 dollars than we do over 100 dollars.

So I mean what a merchandiser does is he looks at analysis and he looks at what the customer is buying.

So if there's not a fervor to buy them in our stores, I don't - good luck.

I mean we have the responsibility to supply our customers with what they want.

And they have telegraphed to us very clearly that a lot of these price points, they're not too interested in them these days.

And that could change.

When that changes we'll go back into it hopefully.

If it happens in the next year or so.

Okay.

The question on inventory around the retail channel.

You're obviously very focused on it, and controlling it well.

Do you have any sense of how it is around the channel and is there any concern on your part that it could be, could lead to a lot of promotions in September, October, when you expect things to pick up a little bit?

How are you sort of evaluating that question?

I think there's always some inventory around the channel.

I don't think it's any different this year than it was last year, from my sense.

I think there's always some surplus.

There's always somebody getting into trouble in the business and there's always some goods around.

But a lot of the companies have pretty well cleaned up.

You don't think September October you'll see an acceleration or heating up of promotions beyond what you've already planned for yourself.

No.

Then the last question, as far as cancellations go, I know that's a normal part of every day business.

Peter Brown is very good at pointing that out when we talked to him.

And I'm just wondering, were the cancellations that were cited in the 10-K from Nike concentrated with Nike or is there something going on across brands, across your whole business, in other words?

I don't think I want to get into that.

We clearly have more footwear coming in because of the expansion in the quarter, the amount of new stores that we have.

I think it's [inaudible].

Great on the repurchase.

I know everybody is going to be happy about that.

Thank you.

We have time for one more question

Our last question comes from John Stanley from Wells Fargo.

Please state your question.

Good morning, guys.

Turning to Foot Locker instead of Nike for a minute, I'm wondering if you could give us an update in terms of what's happening with business so far in August.

Is this a typical back to school selling season for Foot Locker and Champs in the U.S. or is this somewhat different than what you've experienced over the last couple of years?

No, it's clearly softer.

And I think we put it in the press release that it's following the July trends.

However, from the numbers we've heard being reported, we think that our declines are a lot less than what our competitors are.

And we see the month coming out, we don't give out [inaudible] Information, but we see it coming out possibly with a, could be a mid single digit decline.

And then in September, October, mid single digit increases, balancing out to about a two percent quarter.

Are you up against negative comps, Matt, for most of the fall selling season continuing into November and December as well as September and October of last year?

September and October were negative.

And the remainder was very tough, tough comps.

I don't know that they were negative, but they were tough

The new store plans for, you commented on gave us good details for 2002.

Can you give us insight of what the current thinking is in terms of new store openings and remodels in the U.S.. and particularly also how many stores you're envisioning at this point in terms of opening in Europe in fiscal 2003?

Yeah.

I think we're going to stay with basically the same plan opening, approximately 170.

Could be higher.

Not much.

But the original plan I believe was 150.

And as we're getting our cost structure down, we [inaudible] It up to 170.

In 2003, I think in Europe we'll continue to be opening 65, 70 stores.

And if the business continues to grow the way it has been growing, it could be an acceleration there.

Where do you stand on the 100 or 150 stores that you had commented on earlier where you were endeavoring to get out of, how many are still left that are in that category and what's the likelihood of closure on those units in the near future.

We've gotten out of a very small amount of them.

And I think it's a several year process and we'll be out of them.

I don't know, Bruce, do you want to comment on that?

Yeah, we keep looking at them, as you know.

We signed the leases on them.

So we're responsible for them.

And we keep looking at whether the cash flow out of them is less than the tenant's cost.

Kind of determines what we'll do about it.

I know it seems like a long, long way but in three years a lot of those things go away.

How many are still left, Matt?

We've got close to 200, about 190.

Okay.

And then last issue I had, maybe to help us all in terms of getting a better read in terms of what's happening with the marquee and the rest of the merchandise mix for the Foot Locker and champ stores in this country, can you give us, in the last quarter you gave us a pretty good indication of what percentage of your merchandise mix is going to fall into each of the pricing categories.

Can you kind of bring us up to speed in terms of the current thinking?

There much of a differentiation from where we were at the end of Q1 in terms of what you're envisioning now through this both the back half of this year and also going into the spring 2003 selling season?

As I said we want to continue to push for 30 percent of our business in the marquee range.

And then a lot of shoes that the market has put together for us in that range.

You've got obviously plenty of Jordans, air first from Nike.

Nike mission, which is exclusive to Champs.

Freakish which is 120 dollar shoe.

Burst, 115 dollar shoe.

We've got the exclusive SL programs from Adidas, at 90 dollars.

We've intensified that.

Key Mack [ph], as you know is going to be a big program, 90 to 110 dollars.

The A Cube [ph] From Adidas, we've done very well with. 130, $135 shoe.

They've developed a very important program for us at 110 dollars.

And we put a lot of money in there.

We think that's going to be an exciting program.

Eye ver son's at Reebok, very, very important program and a lot of shoes, 80, 90 to 100, 110 dollars in there.

So -

If we had to summarize it, the 30 percent marquee, I assume you're using 120 as the marquee definition.

But don't forget we still have a lot of Jordans coming in.

I'm well aware of that. [Inaudible] Than they had been.

But if we wanted to work it in terms of percentage of your merchandise mix, 30 percent above, 120, what percent?

30 percent above 90. 90 and above.

Used to be 30 percent, 100 above.

30 percent 90 and above and the balance would be below 90?

Do you have any idea what that's going to translate into average price this year versus what it may be, may have traditionally been?

Well, for the first half of the year our average price in shoes is up about two, three percent.

So we're hopeful that that continues.

The trick is to sell more, right?

Right.

Exactly.

And if that works, continues, soft economy, I'm not looking for.

I'm not looking for a bouyant comp store sales increase in the second half.

One and a half, two percent and with top line growth for new stores kicking in, five to seven percent range, we'll be in very good shape.

Great.

Last thing, Bruce, the 300 million in cash or cash equivalents as you're now have on your books, if you had to prior ties the applications of the usage you're putting that cash to work, give us a one, two, three in terms of where you see the best opportunities for the company.

We also continue to fund the business going forward, building up for our fourth quarter inventory and the working capital requirements for that.

But as we said in the call, John, is we've got to maintain our liquidity, make sure we have ample liquidity.

Make sure that we keep our credit ratings up, at the same time point in time we have a responsibility to shareholders to redeem some money.

But would that be one, two, three?

I don't think at this time we should really answer that question, John.

Okay.

Fair enough.

Thanks guys.

Appreciate it

We appreciate everybody joining us for the call today.

We are hopeful we'll be back with more positive news in the fourth quarter.

Thank you.

Thank you, ladies and gentlemen.

That does conclude's today's teleconference.

Thank you for participating.

You may now disconnect.