Foot Locker Inc (FL) 2002 Q4 法說會逐字稿

Good morning and welcome to the Foot Locker Inc.’s fourth quarter 2002 earnings release conference call.

At this time all participants are on 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 effects of currency fluctuations, consumer preferences and economic conditions worldwide and other risks and uncertainties described in the company's press releases and SEC filings.

Any changes in such assumptions or factors could produce significantly different results.

If you haven't received today's release, it is available on the internet at WWW.prnewswire.com or WWW.FootLocker,Inc.com.

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

Mr. Brown, you may begin.

Good morning.

We're pleased to report today two significant financial accomplishments.

First, the fourth quarter of 2002 was our 14th consecutive quarter of earnings per share improvement versus the same quarter of the previous year.

And second, Foot Locker ended 2002 with a zero debt net of cash, accomplishing a key objective that we set at the beginning of 1999.

Bruce Hartman, our executive Vice President and Chief Financial Officer will discuss the financial details of our fourth quarter and full-year results.

Matt Serra, our President and Chief Executive Officer will follow with the business update and provide comments on 2003.

After our prepared remarks, we'll answer your questions.

During the call, we will discuss results from continuing operations, adjusted to exclude the results of non-athletic businesses that were disposed of in prior years.

Several of the key highlights of the fourth quarter are as follows.

Total sales increased 5.1%.

Comp store sales decreased 0.9%.

Our gross margin rate, increased 20 basis points.

And net income for the fourth quarter increased 14% to 33 cents per share from 28 cents per share last year.

For the full year our net income increased 13% to $1.10 per share.

Our return ratios also significantly improved with our lease adjusted ROIC approaching 9% and ROE exceeding 15%.

And as already highlighted, we finished the year with $357m in cash, which equals our balance sheet debt.

I'll now turn the call over to Bruce Hartman and he will review these highlights in greater detail.

Good morning.

As Peter stated, the fourth quarter of 2002 represented the 14th consecutive quarter of earnings improvement versus a comparable quarter of the prior year.

We are particularly proud of this accomplishment given the current soft retail environment and the uncertainties from world events.

Despite these challenges, Foot Locker remains focused on and were successful in continuing to drive forward our company's profitability.

The fourth quarter of 2002 was a continuation of a 10-year trend with many consumers holding off their purchases until very late in the holiday season.

As such, our sales trend improved during the back half of December and into January.

January sales were also somewhat enhanced by the increasing importance of gift cards.

In total, our fourth quarter sales increased by 5.1%.

Total sales growth continues to benefit from many of our real estate initiatives designed to increase sales per square foot and earnings per share.

Total sales growth reflects the significant store growth in Europe and the increased usage of the Internet as a retail channel.

These two highly productive sales channels are greatly contributing to our profit improvement.

In addition, sales and profits were impacted positively by the strengthening of euro currency versus the U.S. dollar.

For the full year of 2002, total sales increased to $316 dollars per square foot from $306 per square foot last year.

We continue to make progress towards our stated goal of $350 per gross square foot.

By division, our fourth quarter comps store sales breaks out as follows.

Foot Locker U.S., Kids Foot Locker and Lady Foot Locker each produced a mid single digit decline.

Champs generated a low to mid single digit increase.

Foot Locker Europe produced another strong comp increase in the high single digit area.

And footlocker.com had a very strong fourth quarter with a strong double digit increase.

Sales in this division were driven by the results from our highly profitability Internet channel.

Our adjusted gross margin rate increased 20 basis points during the fourth quarter, which was in line with our expectations and communicated during our third quarter conference call.

Our inventory levels continue to be in line with planned and well positioned to support our spring 2003 sales expectations.

Fourth quarter SG&A expenses were again favorable to plan, reflecting the continued benefit that we are deriving from our company wide profit improvement process.

SG&A expenses in the quarter were negatively impacted by the following items. $5m primarily related to the stronger euro currency.

We took a $6m impairment of assets against our Kids Foot Locker division as required by FAS 144. $5m of increased expenses related to new stores, and we had $2m of higher pension costs.

Excluding these items, fourth quarter SG&A expenses would actually have been lower than last year.

We were also successful in reducing both our book and cash taxes during the fourth quarter for the full year and our effective tax rate was 34.2% versus 35.5% last year.

While we have recently reduced our planned tax rate to 37% for 2003, we are continually working on strategies to further reduce this expense.

Full year EBIT increased to $270m or 6% of sales versus $244m of 5.6% last year, a double digit increase.

EBITDA reached $419m in 2002, and is quickly approaching a 10% of sales rate. 33 cents per share performance was within our guidance range that we provided at the beginning of the quarter and in line with current analyst estimates.

This compares to last year's 28 cents per share reflecting an increase of 18%.

For the full year, we earned $1.10 per share at 12% increase, compared with our 98 cents per share last year.

At year end, we recorded an $83m non-cash reduction to shareholders equity related to our pension plan.

This reduction was required due to a decline in our pension plan assets and lowering the discount rate that we utilize to value our liabilities.

This was partially offset by a $38m addition to shareholders equity related to the foreign exchange rate, primarily from the strengthening euro.

The pension assets continue to be professionally managed by two of the leading pension asset managers in North America.

While the 2002 asset returns were in line with market bench marks, they were negatively impacted by the poor performance of the U.S. stock market.

Therefore, year round the company's qualified pension plans were under funded by approximately $281m.

As such, the company contributed a payment to our U.S. plan of $50m in February.

This tax deductible payment was factored into our 2003 cash flow plan, and is in line with the payment we discussed on our third quarter conference call.

We continue to closely monitor these plans and expect to contribute a similar amount each year over the next several years.

We expect that all of the Contributions will be fully tax deductible and will be made in the ordinary course of business.

Our significantly strengthened financial position, having reduced our debt net cash to zero, now provides Foot Locker with the flexibility to capitalize on several opportunities to increase shareholder value.

These opportunities may include purchasing some of our bonds, increasing our shareholder dividend.

Repurchasing our stock or reinvesting additional capital into our business.

While acquisitions are unlikely, these may be explored opportunistically in the specialty athletic footwear industry.

We believe all of these strategies offer increased value for our shareholders and may be implemented as market opportunities dictate.

From a financial standpoint, we will continue to monitor our cash flow, maintain a strong liquidity position and strive to become an investment grade company.

Given the world's uncertainties which may further impact consumer confidence and spending, we will pursue all incremental investment opportunities conservatively.

We continue to expect to generate approximately $100m plus of cash flow during 2003 and beyond.

After investing $165m in capital and a $50m contribution to our pension plans.

During the past four years, we have carefully managed our investment base, and conservatively allocated new capital towards those projects that were projected to generate the highest returns.

Well in excess of our cost of capital.

This is particularly true in Europe.

This strategy has resulted in a significantly strengthened financial position, higher credit ratings, and improved overall return rates.

For 2002, as Peter said, our lease adjusted ROIC approached 9% and our ROE was approaching 16%.

I will now turn the program over to Matt Serra.

Good morning, as Bruce mentioned, we're very pleased with our fourth quarter and full-year financial results.

It is also appropriate to pause for a moment and recognize what our organization has accomplished since 1998.

Total athletic sales have grown almost 25% to $4.5b.

Operating profit has grown ten times to $319m.

Earnings per share have grown to $1.10 per share from 7 cents per share in 1998.

And debt net of cash, which we eliminated at end of 2002, stood at $574m at the end of 1998.

These financial results were achieved as a result of the successful and disciplined implementation of several strategic initiatives that were designed to increase shareholder values.

These initiatives included rapidly growing, highly profitable European operation, turning around our champs division.

Launching a highly profitable

Internet channel and significantly improving the productivity of our catalog business, developing a very strong private label program in apparel.

Developing a more cost efficient infrastructure and completing the divestitures of all non-athletic businesses.

During 2002 we generated solid top line sales and profit gains in all four quarters.

This success is achieved despite operating a very challenging retail environment, particularly as customer traffic in U.S. shopping malls declined low to mid-single digits.

Our key suppliers continue to provide us with high quality, new and retro products that were in demand by our customers.

We ended the year with inventories on planned, well positioned for spring 2003.

Our organization led by Bruce’s efforts continues to do a very commendable job with all aspects of expense control, including SG&A, depreciation, interest and taxes.

We're proud of our 2002 accomplishments and expect to continue our string of quarter over quarter and year over year profit improvements.

Before I turn my attention to the future, I would like to provide an overview of the accomplishments of our individual business units.

The U.S.

Foot Locker divisions, including Lady Foot Locker and Kids Foot Locker generated low single digit comp store decline for the year, clearly impacted by weak consumer confidence that has led to declining mall traffic.

Champs continues to build on its impressive turnaround that began in 2000.

During 2002, Champs generated low single digit comp store sales increase and increased operating profit above mid- mid-single digits.

Today Champs by a wide margin is the second most profitable specialty, athletic foot ware and apparel retail in the United States only after Foot Locker.

Our profitable growth in Europe continued very strong during 2002.

We grew our store base, adding 57 new stores, ending the year with 377 stores.

Sales at all of the store increased high single digits.

We benefited from a strengthening euro currency at the exchange rate averaged 96 cents in 2002, versus 89 in 2001.

Most importantly, we generated a very strong double digit increase in operating profits.

Foot Locker Europe's operating profit margin remains significantly above the overall 10% corporate goal.

Footlocker.com including Eastbay also had a very strong year in 2002 and is now a meaning full profit contributor to our company.

Sales in this division increased 7.1% to approximately $350m.

Operating profits increased 67% to $40m.

The operating profit margin of this division reached 11.5% in 2002, up from 7.4% in 2001.

Today Foot Locker remains the world's leading retailer of athletic footwear apparel, operating through multiple channels of distribution and global diversification and meaningful growth opportunities.

Looking forward to 2003, we continue to implement our three profitable growth strategies, which include opening new stores stores, increasing the sales and profits of our existing stores, and growing our direct to customer catalog and Internet business.

Our new store expansion program was initiated in 2001.

During the past two years, we've opened 273 new stores in regions where we already operate.

In total, sales results from these stores are running on plan, with operating profit margins projected above that of our overall company results.

In 2002, our store openings broke down as follows. 63 new Foot Lockers in the U.S., 57 new Foot Lockers in Europe, 26 new Champs stores in the U.S. and Canada, 6 new Foot Locker stores in Canada, 3 new Lockers in Australia and 1 Lady and 1 Kids Foot Locker in the US.

Our current plans call for opening approximately 100 new stores during the first nine months of 2003.

The planned openings break down as follows: 25 Foot Locker stores in the U.S., targeted in urban locations.

Sixty international Foot Locker stores heavily concentrated in Europe, included in this total is our expected entrance into Portugal, Greece and New Zealand.

And 15 Champs stores in the U.S., primarily in shopping mall malls.

Improving the productivity of our existing stores is also a chief priority for Foot Locker.

During 2003, we are trying to step up our efforts and accelerate certain real estate initiatives that we expect to continue to improve sales per gross foot.

These include remodel and relocate over 500 stores.

Projects that historically generate returns well in excess of our costs per capital; this represents a 67% increase or approximately 200 more projects than we completed in 2002.

Our remodeling plans include a particular emphasis on Foot Locker U.S., shooting for approximately 250 this year, versus 120 projects last year.

Big Foot has over 550 stores in need of remodeling.

Therefore over the next two years, we expect Foot Locker U.S. to have 90% of their fleet updated into our new format.

We also plan to invest some additional capital in our Lady Foot Locker division to freshen up their stores, including new fixtures and many enhanced visual presentations.

These projects will also include right sizing certain stores that may be too large or too small.

Or not configure properly with the appropriate selling space.

During 2003, we expect to close approximately 60 stores that are losing money or the expected returns that don't justify the required incremental capital investment.

In many case, sales from these clothes stores may transfer to another one of our stores in existing malls.

We also plan to begin an investment in new points of sale registers in our U.S. stores in 2003.

We expect to implement and complete this program in the Champs division this year, followed by a rollout to Foot Locker in 2004.

This system was implemented in Europe in 2001, and has contributed to that business's continued success.

In total, our cash flow plan includes $165m for capital expansion in 2003.

Another significant opportunity to grow our sales and profits is through our direct to customer catalog and Internet business.

As we highlighted earlier, operating profit margin in this division is now well into double digits.

The incremental margin rate of this division grew very significant last year as profits increased at almost ten times that of the sales growth.

Going forward, we're excited about both internal and external opportunities to possibly grow this business.

During 2002 Eastbay launched a final score catalog and Web site to expand our market penetration, offering more value based products.

Product customization was initiated to further differentiate our products from competition.

New and existing businesses, alliances, with well-known third parties are another significant growth opportunity.

For example, footlocker.com manages the catalog and E-commerce business for the National Football League.

This continues to be an important external partnership.

Late last year, we entered into a strategic alliance with Amazon.com whereby Foot Locker is a featured brand on their apparel and accessories store.

We expect this arrangement to provide nice add-on business as we go forward.

We also believe that we will continue to benefit as the Internet continues to become a more widely used shopping medium.

As mentioned earlier, our direct to customer channels have become

Meaningful profit centers contributed to our companies.

I'm very encouraged by the results of this business and expect its high earnings growth rate to be sustained for several years to come.

We're very pleased with our fourth quarter full-year results and believe we're poised for continued profit improvements in 2003 and beyond.

Our business fundamentals continue to improve and our merchandising plans are well conceived for this year.

Despite the economic uncertainties, we expect continued earnings increases in 2003 with growth accelerating later in the year as we cycle against ease of comparisons and likelihood of world issues becoming resolved.

As Bruce mentioned, we also put some of our excess cash to work.

We will put some of our excess cash to work to further increase shareholder value.

We plan to capitalize on these opportunities and market conditions dictate, being careful to ensure that expected returns well exceed our 13% internal rate return [inaudible].

From a merchandising point of view, we continue to work with our key suppliers for more exclusive products.

We're beginning to see some important success stories.

Most recently, we introduced the nova European collection from new balance, a $90 exclusive program and have experienced strong sell-throughs.

We also have initiated an exciting new polar footwear collection that is doing extremely well.

The retro and classic business continues to be exciting with strong increases from all of our suppliers in this category.

As far as our business relationship with Nike is concerned, they continue to be our largest supplier and I believe we're still their largest customer.

We've had continued dialogue on ways to improve the business and we will continue to do so.

Our apparel and accessory business continues to perform well with product margins approaching footwear levels.

We will put a major effort on Big Foot this year with more focus strategy on exclusive merchandise, higher product margins and more visual excitement.

I'm very pleased with our management teams and the success that they've achieved.

We're fortunate to have a deep organization that allows us the opportunities to promote from within.

Just last month, we elevated Rick Mena(ph), President and CEO of Foot Locker USA, responsible for all store operations in the United States.

Rick has an excellent track record at both Champs, Foot Locker Europe and will continue his efforts on the operations and merchandising activities here in the US You will also note from our press release that beginning March 31st of this year, Foot Locker's ticker symbol will be changed to FL.

Our former symbol Z suited our company for many years.

We believe FL is more symbolic of our company today and will be more recognizable by Foot Locker investors.

In summary, our overall strategy, we've got to get our Big Foot back on track.

It's a $1.8b business.

We slipped a little last year, but it wasn't a disaster and it is still very profitable; focusing on very important big-time issues, retros, exclusives, $80 to $110 running products $65 to $135 basketball products.

We're going to intensify our licensed apparel, intensify brand and private label apparel, and focus on getting 200 renovations completed in '03 and 25 relocations done.

I feel Rick Mena will add a lot to the merchandising thrust to the Foot Locker organization here.

Continuing to expand in Europe, opening 50 new stores this year, and accelerate 2004 openings up to 100 new stores in 2004.

That would bring our total to approximately 525 stores in that time frame.

Moving into Eastern Europe, Budapest, Prague, and Warsaw, possibly Turkey, a lot of cities there and a lot of people.

We'll be making a trip within a month over there to further solidify our strategy.

We have very strong management in Europe.

Simon Ryder (ph), our CEO in Europe has a strong central team and particularly strong stores organization.

We also have an efficient distribution facility that we will begin expansion on in 2004 in order to grow with our needs.

Continue our dominant position of our footlocker.com business and profitably grow this with the able leadership of Tom Slover(ph), our CEO, who runs our business up there.

Very importantly, our new leadership in Lady Foot Locker, Nick Grayston, Chief Executive in there, will begin an exciting merchandising and marketing program on March 16th.

Nick is a well seasoned extremely talented merchant and business man and we're looking for big things from him.

I will now be happy to answer your questions.

Thank you.

Thank you.

We will now begin the question and answer session.

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

Our first question is from Lee Backus from Buckingham, please state your question.

Yeah, Matt.

Could you discuss any recent trends in the first quarter, how things are going in the first quarter?

Yeah, I'll discuss it a little.

We're a little down in February and we're a little up in March.

I think it's too soon to tell.

You know, you've got the major shift in the east of business.

It's extremely cold in the northeast and Midwest and actually up until recent weeks, it was extremely cold in the south.

But, I think the big play is in obviously in April.

Late Easter always bodes well for the retail business.

Could you also maybe expand a little bit more on what's driving sales as far as brands or looks, what you expect to drive sales for the spring and summer season?

Well, you know, as it relates to Foot Locker, you know, we continue to have enormous sell-throughs on retros.

Anything we have exclusive in the mall seems to really give us a differentiation from our competition.

As I mentioned earlier these Novo shoes which are sold in Europe and Asia from New Balance.

We have an exclusive and we're doing extremely well.

We've got a lot of excitement with guys like Puma out there.

Obviously, the Iverson programs are working extremely well from Reebok and Tracy McGrady in basketball, both of those basketball lines, McGrady from Adidas.

You know, pushing our exclusive thrust with SL’s from Adidas.

Running shoes, $90 to $100.

And upcoming launch of the pressure, which is an exclusive shoe and the Ocello(ph) from Reebok, very exciting programs going forward.

We have a very formidable Jordan business.

Thank you.

Our next question comes from Bob Drbul from Lehman Brothers, please state your question.

Good morning.

First of all, you didn't say much about the outlook for '03.

I was wondering if you could comment, as you look at first call consensus, you know, say $1.27, you know, is you comfortable with $1.27?

You know, any thoughts around earnings growth from a quantifiable perspective?

I think for the first time in a long time, I'm not comfortable on giving out guidance at this point in time because of a lot of dynamics.

You've got a 9-year low in our country in consumer confidence, almost 6% unemployment.

You've got a very terse geopolitical environment out there.

We've had a very frigid beginning to the year, as I mentioned earlier with -- from very, very tough business on the east coast and the Midwest.

I think once we get past certain events, world events, I think we'll be in a better position to forecast where we think we're going to come out.

With that said, we're committed to continuing our sales growth and our earnings growth, quarter by quarter.

Okay.

On -- I guess if you look at the Nike relationship, I think in 2001, Nike was about 47% of your cost of goods.

Can you tell us where they ended up 2002 and sort of where you see that shaking out with the numbers that you had mentioned in previous SEC filings from order perspective?

They were approximately -- we don't have the final, final, final numbers, but approximately 44%, 45%.

Okay.

Bruce, in terms of the tax rate for '03, I think it was just a little unclear what you were saying, what we should expect for 2003.

37% and we're committed to try to make it lower.

And the change in the fourth quarter rate, what were mainly the drivers for that?

Well, we had three -- the difference between the 37% and where we ended up was really about $3m.

You know, a million of it was some international tax strategies that we had -- we put in place that hopefully will help us going forward.

We did state tax planning as well, and then we had a $1m settlement with the IRS that helped us as well.

And as you look on gross margin for '03, Bruce.

In terms of like the contribution from improved occupancy costs versus better buying from some of the vendors as you reallocate Nike [inaudible], can you talk about maybe what you expect contribution from both of those segments to be and sort of what do you think '03 ends up from a gross margin perspective?

Up 50 basis points.

In total?

Yeah.

Okay.

Split equally between those two?

What do you think drives it from here?

There'll be more in the margin this year.

We think in years out, that there'll be a lot of opportunity in the occupancy.

Okay.

Great.

Thank you.

Thank you.

Our next question comes from Jeff Edelman from UBS Warburg.

Please state your question.

Good morning.

Matt, if we look at your sales relative to the industry, the delta has narrowed.

You're not gaining market share the way you had been.

As you look at your business, could this be a function of maybe the bogos(ph) getting tired?

Could it be not having as much of some of the hot brands?

Or could it be a function of going a little more for gross margin and not having the excitement in the store?

Something here isn't clicking the way it used to be, although we know that consumers have been a little soft.

I was wondering if you could address some of those issues.

Sure, good question.

First of all, the bogos are getting tired.

It was a type of motion a couple of years ago that while the market was highly promotional, our competitors were doing it and I guess we did it better.

So we got some lift from it.

One very important factor that you have to understand, since 1998, the U.S. footwear market has grown 6.4% and we've grown 13% here in the U.S.

Europe, which is a whole other subject, we've grown 115% with that business over there.

We think that we're well positioned with a lot of exciting merchandise to continue to grow our business.

We have not lost market share.

Our market share is approximately even.

We think that a lot of our initiatives with our large division in particular, you're talking about Big Foot, Foot Locker, that we have a shall, you know know, over a third of the fleet is in need of updating, and that's going to happen and we're going to achieve that over the next couple of years.

So we think that whatever we do that -- we have a lot of these stores that are 2500, 3,000 feet that are one-third selling, two-thirds stock room.

And as we renovate those stores, we get a good lift and pop in those locations.

So we believe that over the next couple of years that will help our comps dramatically.

It always comes down to how much money do you have to spend.

So with that said, we're slowing up a little in the states on new stores, and expanding in Europe very, very aggressively, and as I said, you know, we're going into New Zealand, the strategy there is for 14, 15 new stores over the next couple of years.

I'm sorry; you asked one other question there.

I -- I'm not sure I got it.

It had to do with -- I'm sorry.

It had to do with product uniqueness.

Are you missing something there relative to what you had compared to the rest of your competitors?

Well, you know, we have our ongoing situation with Nike.

I believe we're missing some product there, and I would tell you that we have ongoing dialogue and it is certainly our hope that we can shore up that disparity.

With that said, we have a lot of exciting product from a lot of other very important suppliers.

We believe that a line like Polo, which is really extremely exciting, which has checked out of our stores as fast as anything I've seen since I've been with the company, offers us an enormous potential down the road.

And the other exclusives, I mean, you know, we could spend all day here talking about exclusives, but we've done very well with new balance basketball shoes.

Nobody else has them.

We're launching the 771 exclusive, a $75 basketball shoe.

And we're still getting a substantial quantity of Air Force Ones, and as I mentioned earlier, while we don't have the same pair-age in Jordan in the first half of the year, we have a significant percentage of what we had last year.

Finally, while you said you weren't in a position to provide any guidance, you did say the increase inventories was consistent with what you're looking for, I gather in the first quarter, first half in terms of sales?

Yeah.

Okay.

If you achieve that kind of a sales increase, should you be able to get expense leverage in the first half?

Yes.

Okay.

And the gross margin improvement, should that be fairly evenly spread through the year?

Yeah, with more towards the back half.

Okay.

Great.

Thank you.

Thank you.

Our next question comes from Virginia Jenerouf(ph) from Merrill Lynch.

Please state your question.

Thank you.

Bruce, may I ask, on the $6m impairment for Lady in the quarter, which was included in the SG&A?

Yes, it wasn't Lady’s it was Kids, Virginia.

I'm sorry, so that's 2-1/2 cents of non-cash impairment in your 33 cents, right?

That's correct.

Okay.

And then may I ask, on the, you know, on the Nike front, you guys have obviously seen the finish line numbers.

May I ask, sort of two questions questions?

Is there any greater urgency on your part to sort of mend that relationship and to -- what would keep you -- what would keep you two from reconciling here, so to speak?

Well, we like to think we always have a great sense of urgency in everything we approach.

They've made their decisions, and we've made our decisions and I think over time, we have to wait and see what happens.

With that said, I've always been a big believer on focusing on my business and not focusing on our competitors business.

And we're totally focused on where we're going and we believe that we have enough product to continue to drive our business and profits.

Thank you, Matt.

It sounds like in your answers to other questions, that first call is not unreasonable and to say the last year at this time, you said we were comfortable with at least 10% year over year EPS growth.

Is that -- my inference is that you are still comfortable with that or am I -- is that not right?

I'll go back to my initial comments that with the current economic environment, that we're going to wait to get further through the year before we give firm guidance.

At the geopolitical unrest that's going on right now, I mean, we've got a lot of people out there that are pretty skittish.

Mall traffic is way down.

So, to answer your question, I'm not comfortable or uncomfortable with it.

Okay.

And last one, may I ask Bruce, accrued liabilities, picked up a little bit relative to sort of where you guys were last year and where we were on a day's accrued basis.

Anything going on there?

Yeah, as I stated, we made a $50m payment in pension, and at the end of the year, we take it out of the long-term piece and put it in the current piece.

And this is where it goes, Virginia.

Okay.

Great.

Lastly, Bruce, are we still in ' '02, you had an $8m gain from post retirement amortization of post retirement benefits, and an $8m pension expense that sorted netted one another out.

Is that the -- should we expect sort of the same for '03?

No, I think pension goes up, Virginia, but the $8m gain, that's probably a longer term good news item for us.

Right.

So may I ask, on the pension expense side, if it was $8m in '02, can you give me a sense of what it would be in '03?

Probably more in the $15m range.

Wow.

Okay.

Thank you.

Our next question comes from Richard Baum from Credit Suisse First Boston, please state your question.

This is Paul Lejuez(ph) on behalf of Richard.

First let me say congratulations on a strong year during these tough times.

I was wondering if you might be able to tell us how many Foot Locker stores has Reebok replaced the Nike house of hoops, and if you could comment on how results have been thus far and secondly if you could talk about the sell-throughs of launch product this year versus last.

Thank you.

It's replacement of all of the locations where we have house of hoops, above the rim is is, you know, is our signing package there.

In terms of launch product, we've done extremely well with both Tracy McGrady.

Most of the merchandise we launch, by the way, is in the basketball category.

So we've done well with Mc McGrady, and we've done well with Iverson.

How about initial results on the Reebok wall replacing the Nike wall?

We really -- it's -- I hate to say this.

I don't like to use the words.

It's transparent.

I mean, it's very exciting looking wall, and it connotes basketball.

It's very recognizable term and we're very comfortable with it.

Just one other thing.

What was the sales effect of the euro, if you could talk about it on a constant exchange basis.

Yeah, I think if you go back to the release, when we did sales, it was about 2%.

Paul Lejuez;

Great, thanks, guys.

Thank you.

John Shanely from Wells Fargo Securities is on line with a question.

Please ask your question.

Good morning.

Matt, you gave us definitive guidance in terms of the operating margins on a number of the businesses, Champs, footlocker.com and so on.

Could you give it to us for Foot Locker U.S.?

Where it's now and what's the expectations by the end of the year with all of the modernizations and so on that you talked about.

It's still in the upper single digits, John.

And we, you know, we got nipped a little last year, and eventually we want to get that thing back to double digit.

It's one of the big engines.

It is not one of them, it's the big engine in our company and we're expecting to get that into the high single digits this year year.

High single this year and do you think you could hit double digit by the end of next year?

Probably five, '05.

Okay.

All right.

Also, you gave a pretty good indication of what the Nike position was for the company for full year '02, 44%, 45% of the merchandise mix.

Based on your open and by commitments so far going into '03, what does it look like it could be, in terms of Nike's representation of your company's sales for '03 and can you give us some idea if the moons align properly and everything else works out, do you have open availability or is there a possibility that by either back-to-school or a holiday that you could see an increase in Nike product offerings in your stores?

I believe that possibility does exist, and too it's too soon to put a percentage on it.

It would certainly be less because in our public statements, we clearly, you know know, analyzed and identified what the shortfall would be.

With that said, we continue to have a growing business in Europe and they are a significant piece of that business.

So, I think we'll have a, you know, a much better handle after the quarter, you know, next quarter is completed.

Is there still a substantial difference in the merchandise margins between Nike product sales in your store and that of most of your other major brands like Reebok and Adidas and Puma and so on?

I don't think we've given out our different margin numbers with our key -- I would just, you know, confirm that our margin rates with all of our key suppliers are good.

Okay, Bruce, I notice in the press release that there are 56 fewer Kids Foot Locker stores at the end of fiscal '02 versus where you were at the end of fiscal '01.

Were the asset impairment charges related to kids involved with the total write-off of those stores or were there still some ongoing kids stores that still have -- where the asset values were impaired but the stores are still open?

They are ongoing, John.

Okay.

Going forward, is there a likelihood that we could see further asset impairments, particularly as you look at those triplex and some of the other units that you've previously indicated that you want to vacate?

Could that be done in '03 or is that basically just going to go through the term of the lease?

That's -- that's not our intent, John.

I mean, our intent is to as we do any of these impairment charges, is to get 100% of it at once, and you know, also, as you know, from FAS 144, it depends on how the divisions perform going forward.

And that dictates more than anything else whether or not you take it.

Yeah, is there any game plan that you have to attack those as assets on your balance sheet more vigorously than you had on in the past?

We look at the stores.

We look at the stores, particularly stores that we believe are underperforming and we try to get them to, through various methods, we try to get them to perform stronger than they have.

Right.

And this is the last question.

What's the expectation in terms of the number of those problem stores that you've identified.

I think there was 125 at the end of the third quarter.

Is it still that number?

Where would we likely see it -- the number be by the end of fiscal '03?

We think, John, we think we're probably going to address about 20% of them by the time we get to the end of '03.

As you know, a lot of the leases on those started in '07 and '08.

With a 10-year leasers 5 and 5s or what?

I would say they fall in the 5-10 range.

A lot of 7s.

A lot of 7s, 5s and 10s 10s.

As we model out for '04/'05, 20% per year, is that a good guess?

That's probably as good as any, John.

We're talking roughly 300 basis points in operating margin that you could recover from exiting those properties?

200.

200 basis points.

Good enough.

Thanks a lot, guys.

Once again, if there are any questions, please press the one on your touch-tone phone.

Our next question comes from George Lewis(ph) from Fulcrum Global Partners, please state your question.

I was wand wondering if you could clarify on the gross margin for next year.

I think you had said the gains would be more skewed to the back half of the year.

I guess my feeling was there was a little bit of a product margin opportunity, especially in the first quarter.

And then if you could comment maybe on your SG&A dollar growth plans for next year as well, please.

Yeah, we're -- when you work on -- with your suppliers on developing, you know, new strategies, gross margin objectives, in this industry, it's quite a lengthy process.

It doesn't happen in several months.

So, usually it takes 9 months to see it get achieved.

So, we think a lot of things we put in place, you know, towards the end of last year will, we'll begin to see a lot of the fruits of that labor begin to materialize in the -- the end of the second quarter and then going forward.

In terms of the SG&A the question was --

The SG&A, our intent, as we said a year ago was to get from the fiscal year 2001, to cut 100 basis points off.

So, we fully expect this year to continue to take SG&A away.

It's a little bit difficult to talk about because of the Euro is adding increases and that increases SG&A, but you also get the benefit of it in the sales line.

So we're going to continue to manage that very vigorously, continue to keep all of our employees focused on that.

But again, our goal this year is if we can take two to three tenths out that would be a great job for us.

Okay, thank you.

I think we have time for one more question.

Our last question comes from David Campbell from Davenport & Company.

Place state your question.

Good morning.

Congratulations on a good year and in a difficult environment as well.

I had two questions.

Can you comment on the performance of Champs power source you opened last year and if you plan to roll out any more of those.

And secondly, what are the performance of the remodels and relocated stores and can you maybe discuss some of the returns you're seeing on those locations?

Yeah, the Champs stores are doing well, and in terms of reloads, they continue to, you know, outperform the rest of the company in terms of sales increases and profit increases.

So, we've done well with -- particularly with our time squares store, with Champs an the footlocker store.

Are you interested introducing any more Power Source this year?

We're going to -- as I said, we're going to take a little pause in the states and really direct a lot of money in renovating, particularly the big Foot Locker stores.

So, you know, if one surfaces, we'll certainly, you know, look at it very seriously and, you know, try and get it.

There is not that many locations.

You know, there is not too many time squares, 34th streets.

You know, Beverly centers, what have you, in the country, and you know, we just don't want to have that as a strategy and not be able to achieve it.

I mean, there is some that are still left out there, but we've got to be very careful.

There is a lot more of an opportunity with these power stores in Europe on these major shopping streets.

I'm sure you know, there is malls in Europe, but they are not, you know, there is not that many real malls as we know malls in America.

So a lot of business is still done on the streets, major, major shopping streets over there.

And put a big focus on power stores over there.

How many of those do you have open now?

In Europe?

Yeah.

Half the fleet.

Okay.

Thank you.

All right.

Well, we would like to thank everyone for participating in the call.

And have a good day.

Thank you.

Thank you, ladies and gentlemen.

That does conclude today's teleconference.

Thank you for participating.

You may now disconnect.

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