Foot Locker Inc (FL) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Foot Locker, Inc. first quarter 2003 earnings release conference call.

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

Later we will conduct aquestion and answer session.

At the request of Foot Locker, this conference call is being recorded, if there are any objections please disconnect at this time. .

This conference may contain forward-looking statement 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 currency fluctuations, consumer preferences and economic conditions worldwide and other risks and uncertainties described in the company's press release.

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

If you haven't received today's release it is available on the internet at www.trnewswire.com or www.footlocker-inc.com.

I would like to turn the call over to Mr. Peter Brown, Vice President Treasurer and Investor Relations.

Mr. Brown, you may begin.

Good morning and welcome to our first quarter conference call.

We are pleased to report today that we earned 27 cents per share from continuing operations for the first quarter of 2003.

During the call, we will discuss our reported results from continuing operations on a GAAP basis.

Continuing operations for both 2003 and 2002 comprised only our ongoing athletic businesses.

Bruce Hartman, our Executive Vice President and Chief Financial Officer will begin the call with a review of our first quarter financial results.

Matt Serra, our President and Chief Executive Officer will follow with a business review and provide an update on our strategic priorities.

After our prepared remarks, we will answer your questions.

Several of the key highlights in the first quarter which Bruce will expand upon are as follows, total company sales increased 3.5%.

Comparable store sales decreased 2.5%.

Our gross margin rate increased 120 basis points.

Pretax income from continuing operations increased by 9%.

Net income increased to 27 cents per share from 26 cents per share last year.

And debt net and cash declined by $67 million from the first quarter of last year.

Going forward, we are somewhat more confident in our ability to grow earnings per share and now expect to meet or exceed the consensus analyst earnings estimate of 24 cents per share for the second quarter.

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

Good morning.

We are very encouraged that we continued our very consistent track record of growing our quarterly earnings versus comparable period of the prior year.

We are particularly encouraged with our first quarter earnings given the external factors that lead to weak consumer confidence and subdued retail spending.

We believe that the first quarter represents the year's most difficult year over year earnings comparison for our company.

Therefore, we are somewhat confident in our ability to continue to grow our quarterly earnings for the balance of 2003 and at an accelerating growth rate.

In fact, as Peter mentioned, we currently expect to meet or exceed the current analysts estimates for the second quarter of 2003.

In total, our first quarter sales increased 3.5% which continues to reflect the benefits of our multi-faceted real estate strategy that is designed to increase sales per gross square foot and earnings per share.

This real estate strategy includes continuing to aggressively open additional foot locker stores in Europe where we enjoy a higher sales per-square-foot and our best operating profit margins.

Foot Locker's total sales and profits also continue to benefit from the strengthening of foreign currencies as financial results of our international businesses are translated into U.S. dollars at a higher exchange rate.

I would also like to point out that our reported comp store increase is presented in line with the National Retail Federation Standards and therefore, does not include the positive impact of foreign exchange rate changes.

We expect to continue to benefit from currency translation for the balance of 2003 with some additional opportunity in 2004 as these currencies begin to trade more in line with historical averages.

In addition, sales and profits benefited during the first quarter from our rapidly growing internet business.

Our total direct to customer business achieved sales of $87 million in the first quarter.

And the operating profit of $9 million or 10.3% of sales.

As we reported on our fourth quarter conference call, we completed 2002 with sales of $316 per-square-foot, that's up from $306 per-square-foot in 2001.

We expect to continue to make solid progress in 2003 towards our stated sales goal of $350 per gross-square-foot.

By division, our first quarter comparable store sales breaks down as follows, our U.S.

Foot Locker business including Foot Locker, Kids and Ladies produced a mid-single digit decline.

Champs generated a low single digit increase.

Foot Locker Europe produced a strong mid single digit increase and footlocker.com had a low to mid single digit increase, again driven by a highly profitable internet channel.

Our adjusted gross margin rate increased 120 basis points during the first quarter reflecting a higher rate on our product margin.

And with 7 1/2% higher than LY (inaudible).

We continue to aggressively work on several real estate initiatives that we expect would enhance our gross margin in the future.

During the first quarter, we completed 145 real estate transactions resulting in a 7.7% decrease in annualized tenancy costs for those 145 stores.

Our inventory levels are 12% above last year and consistent with our plan.

This inventory increase reflects the stronger foreign exchange rates in Europe, Canada, and Australia.

As well as planned higher inventory levels to support our strategic merchandise repositioning initiatives and new store growth in the second quarter.

We expect our year over year inventory increase to be in line with total sales growth by the end of our second quarter.

Our first quarter SG&A expense rate increased by 110 basis point versus LY.

Total currency adjusted SG&A expenses however, were $13 million below our plan.

Included in our first quarter SG&A expenses were the following, $7 million related to stronger foreign currencies. $8 million related to increased expenses for new stores. $2 million of higher pension costs.

Excluding these items and some other smaller items, first quarter SG&A would have been essentially flat with LY.

Interest expense for this first quarter declined by $2 million from last year.

This decline reflects the retirement of $39 million of long term debt and the benefits of an interest rate swap related to our $100 million of the company's 8 1/2% bond.

These swaps effectively convert the 8 1/2% coupon into a floating rate instrument based on a life (inaudible) index.

Therefore, our profit before taxes increased by 9%.

Our effective income tax rate for the first quarter was 37% compared to 34% last year.

Last year the company benefited from some state and international tax planning strategies.

While we continue to plan our business based on a 37% rate, we are excited and continue to work on many tax initiatives that may reduce our tax rate during certain future quarters.

Our financial position continues to strengthen with our debt net to cash $67 million lower than at the first quarter of last year.

As we have previously discussed our strengths and balance sheet puts us in a position to capitalize on several opportunities.

These opportunities may include purchasing some of our bonds, increasing our share holder dividend, repurchasing our stocks, acquisitions for reinvesting additional capital in our business all of which we believe would add to share holder value.

We did not take any of these opportunities in the public markets during the first quarter primarily due to the ongoing discussions between our company, external auditors and the SCC.

We did however, invest $50 million of cash in the company's U.S. pension fund.

Going forward, we plan to more aggressively seek opportunities to invest our excess cash while continuing to monitor our cash flow, maintain a strong liquidity position and strive to gain a investment grade rating.

Our objective remains to generate approximately $100 million of cash flow during 2003 after capital expenditures and a $50 million contribution to our pension plan.

Before I turn the call over to Matt, I would like to remind everyone that we filed our 2002 Form 10-K this past Monday.

This filing was made within the 15 day extension that we applied for May 2.

The extension was necessary due to ongoing technical discussions between Foot Locker, K P and G and SCC regarding the companies discontinuance accounting for its former northern group operations.

The northern transaction was somewhat complex and the accounting literature quite technical.

These discussions were completed last week and resulted in Foot Locker recording the note due from the purchaser as an asset on our balance sheet at $10 million at the end of 2002.

And booking earnings of 6 cents per share to discontinued operations in the fourth quarter of 2002.

The note has subsequently been reduced by $3 1/2 million to reflect the cash payment that Foot Locker received from the purchaser on May 6, 2003.

Going forward, the value of the note will be adjusted based upon actual and or changes to future expected cash proceeds from the purchaser.

Any future P&L impact related to the note will be recorded in continuing operations.

I will now turn the program over to Matt Serra.

Thank you Bruce.

Good morning.

As Bruce mentioned, we were encouraged by our first quarter financial results given our solid top line sales performance, improving gross margin rate and income from continuing operations increasing by 5%.

This success was achieved despite operating in a very challenging retail environment precipitated by the uncertainties of the geo political events that contributed to weakened consumer confidence and retail spending.

By month our sales decline low single digits in February followed by a mid single digit decline in March and March declined was anticipated due to the Easter holiday shift into April of this year.

Also as expected, sales trends improved in April particularly during the third week of - that coincided with many school holiday schedules.

Geographically we generated very solid sales growth in our international markets led by our European and Australian divisions.

In the United States, teenagers are currently spending more of their money on licensed apparel.

As such our apparel sales remain stong throughout the quarter led by both the licensed and private label categories.

A particular trend were our sales of higher priced NBA and NFL jerseys.

Footwear sales in the U.S. were led by the classic category from several of our key suppliers including Nike, Reebok, Addidas, KSwiss, Converse and Puma.

Overall, our athletic footwear dollar sales declined during the first quarter primarily due to mid single digits decrease on our average price point.

On a parage (inaudible) basis sales declined by 1%.

We ended the quarter with inventories on plan and well positioned for the second quarter.

As Bruce mentioned, we accelerated the receipt of certain product into the first quarter as we strategically repositioned our merchandising offerings.

As such, we expect inventories at the end of the second quarter back in line with expected sales of growth.

Our organization continued to do a commendable job with expense management led by Bruce's efforts developing many new initiatives that makes Foot Locker one of the most efficient businesses in the retail industry.

We are also encouraged with our first quarter results given the number of other retailers that have recently lowered earnings guidance.

I will now provide a review of our individual business units.

United States results were led by our footlocker.com eastbay business which produced another strong quarter and continues to contribute a higher percentage of our companies sales and profits.

Sales in this segment increased 3.6% during the first quarter while operating profits increased 12.5% to $9 million.

Achieving a margin rate of 10.3%.

In addition to organic growth, we continue to develop new business alliances with well-known third parties.

For example, in 2002, we entered into a strategic alliance with Amazon.com whereby Foot Locker became a featured brand on their new apparel and accessory store.

During the first quarter of 2003, Foot Locker entered into an arrangement with the NBA and Amazon.com whereby footlocker.com will provide the fulfillment for NBA apparel sold over the internet.

We remain convinced that our direct to customer channel will continue to become an even more meaningful profit contributor to the company for the next several years.

Champs generated the strongest sales increase of our U.S. retail stores businesses.

Champs larger store size allows for wider offerings of apparel which perform very well during the first quarter.

As a reminder, Champs remains the second most profitable specialty athletic foot wear and apparel retailer in the United States only after Foot Locker.

Our US Foot Locker divisions including Lady Foot Locker, Kids Foot Locker generated mid single digit comps toward declines for the first quarter.

These three formats our kids division produced the strongest performance.

Growth in Europe continued unabated during first quarter.

Comp store sales increased at a very strong upper mid single digit level.

We added an additional three stores during the first quarter ending with 379 stores.

We plan to step up our openings during the second quarter with 24 new stores scheduled.

As mentioned earlier, we also benefited from the strengthening of the Euro currency versus the U.S. dollar and most importantly, Foot Locker Europe's operating profit margin remain well into the double digit level.

A 2003 store expansion program remains on schedule with approximately 100 new stores planned for the first nine months of this year.

A significant percentage of new Foot Locker stores are planned in Europe including our expected entrance into Portugal and possibly Greece.

New Foot Locker stores in the U.S. will be concentrated in urban and street locations.

Our Champs expansion is planned primarily in U.S. shopping malls.

In fact, ten of these new stores will open during the first quarter.

As we discussed during our March conference call, we are investing a higher percentage of our capital dollars this year and next year to enhance the appearance of our U.S. stores based through an extensive remodeling program or relocation program.

These projects will include remodeling approximately 100 Lady Foot Locker stores in addition to updating the entire chain with an enhanced visual package.

We also continue to right size certain stores that may be too large or too small or not configured properly with the appropriate selling space.

During 2003, we expect to close up to 100 stores that are low volume stores and lose money or expected future returns to not justify required incremental capital investment.

In many cases, sales from these clothes stores may transfer to another store that we operate in the same mall.

We completed 77 real estate projects during the first quarter of 2003 opening 17 new stores while remodeling or relocating 60. 42 stores were closed during the quarter.

In total, we expect our total store count to grow very modestly less than 1% in 2003.

However, we expect that our store base will be far more efficient as with continue to open stores in markets that typically generate higher sales per-square-foot and close low volume stores.

Therefore, we expect our total sales increase to adjust to exclude foreign exchange rate changes to continue to outperform our comp store sales growth by 2 1/2 - 3% for the balance of 2003.

Our rollout of our new point of sales system to our Champs division continues on schedule, approximately 150 stores are now operational with the balance of the scheduled between now and back to school period to be completed and we will roll out the Foot Locker division in 2004.

We expect this system to significantly enhance our customer service and our inventory management systems to improve our in stock positions.

As a reminder, the system was implemented in Foot Locker Europe in 2001, and has contributed to that business continuous success.

In summary, we are encouraged with our first quarter performance and believe we are well poised to continue to grow our earnings for the balance of 2003.

Our inventory position is strong, and we believe we have the right products on order for the fall season.

We expect that the current trends of classic footwear and licensed apparel will continue strong throughout the balance of 2003 and into 2004.

We continue to work with all of our key merchandise suppliers on new and innovative product offerings.

As previously disclosed, our business with Nike has declined during the past several months with that said, Nike remains a very important supplier for our company and we continue to discuss ways to expanding our business relationship in a way that is mutually beneficial.

Nike certainly an important resource for us and we will continue to be going forward.

At the same time, we also continue to work with other critical vendors to identify and implement new and innovative merchandising initiatives.

As we said before, we believe our merchandise vendors as a whole are the best that service the retail industry.

Finally, as Bruce mentioned, we have articulated in the past we also have opportunities for some of our excess cash to work to further increase shareholder value.

Plan to capitalize on these opportunities as market conditions dictate being careful to ensure expected returns exceed our 13% internal rate of return benchmark.

Management team continue to develop and produce strong results.

We are fortunate to have a deep organization with a strong succession planning process that allows us the opportunity to promote from within.

During the first quarter, we made several promotions from within our senior management ranks.

Tom Slova (sp), who was previously President and CEO of our footlocker.com business was appointed President and CEO of Foot Locker Europe replacing Simon who resigned.

Dick Johnson was promoted to President of footlocker.com replacing Tom.

Dick was previously chief operating officer of footlocker.com.

Mike, who was CFO of footlocker.com was promoted to chief operating officer of that division.

Jim was promoted to Senior Vice President of Foot Locker sourcing and team edition.

As we recently combined these operations.

Previously Jim was Senior Vice President and managering director or Team Edition.

Mark Cats was promoted from Vice-President to Senior Vice President Chief Information Officer.

I will now be happy to answer your questions.

Thank you.

Thank you.

We will now begin the question and answer session.

If you have a question, you will need to press the one on your touch-tone phone.

You will hear an acknowledgement please thank you.

If your question has been answered and you wish to be removed from the queue, please press the pound sign.

Your questions will be queued in the order they are received.

If you are using a speaker phone please pick up the handset before pressing the numbers.

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

Our first question is Robby Oman from Banc of America securities.

Please state your question.

Thank you, hey guys.

Couple of quick questions, as you look at the inventory composition, can you tell us what you see happening in the average price per pair going forward based on where the inventory position now is and also can you talk about how that composition that sort of buildup we are seeing at the end of this quarter looks from sort of a foot wear versus apparel perspective.

Thanks.

The average price of out of the door is down several dollars versus last year.

The buildup in most cases was intentional preparing for hopefully a strong second quarter.

A lot of the inventory is gated in basketball product and very importantly in the classic zones.

As well as I mentioned earlier, our power business is very, very strong, particularly in the licensed category.

Is there anything you are seeing, Matt, that imply that you think that this sort of trend in average price points may start to revert as you get in to back to school?

We still have a pretty very high average price point out the door.

I think it's basically going to stay in this range for the time being.

Great, thanks a lot.

Thank you.

Our next question is from Jeff Susman from UBS.

Please state your question.

Thank you good morning.

Looking at your gross margin, there was impressive improvement in the quarter here.

If we look back on the seasonality of your gross profit and in expecting to maybe see a little better comparisons, can we expect to see a sequential build in the gross margin quarter to quarter going forward, Bruce?

I think we are pretty confident that we have the processes and negotiations in place to continue that.

And then eventually later on in the year we should start seeing benefit out of our occupancy cost as well helping the margin, so I think you could say we are resonably confident.

Of steady improvement sequentially?

Yeah.

Okay, and then secondly on the expenses, as you get through the store opening program in Q2 then presumably the rate of increase and expense growth slows?

Yeah.

One of the things we try to do this year that we had one of our goals this year was to open more stores earlier in the year as opposed to in the past years where we tend to be evenly disbursed so as you get into the later quarters the new stores expenses should have mitigated themselves.

Great, okay, thank you.

Our next question is from Lee Backus from Buckingham Research.

Please state your question.

First, guys, good performance in a really tough environment.

Matt, could you talk a little bit more about your IMU, that was impressive.

Maybe you can discuss or your margins did it come from mostly from higher IMU discuss the level of mark down activity versus last year, probably was a little negative leverage on occupancy in the quarter.

Sort of discuss some of the component of that increase in gross margin.

Sure, a lot of it came obviously from product margin increases in IMU.

And we are continuing to receive very favorable terms from all of our suppliers.

I think business is not easy out there and many of our suppliers recognize and appreciate the size of the orders we place our timely payments to them and I think we have little bit of a competitive advantage with that IMU.

We are getting as I said very favorable terms.

The mark down activity, we have clearly softened our promotional stance and we expect in the forward months, quarters, to begin to wean ourselves off some of the promoting.

As the shoe prices have come down in the classics have become more and more important, there will be better sell throughs when you are selling a lot of 60 to $80 product, you get a little better sell through up front, a lot better.

Okay, are you seeing that as you soften your promotional stance, are you seeing that -- how does that impact you on a competitive basis?

Are you seeing the same thing happen with other retailers?

I haven't seen it happen with too many other retailers, I think it may hurt us in the short term, but I think in the long term it's probably -- it's the best thing for the business clearly to keep building those margins up.

Now in inventory, inventory is related to sales were high, could you give us a sense of -- you talked a little bit about product that is older than 6 months give a sense of your old inventory as a percentage.

We are very current, we are very very current.

We are actually -- we have always been very current.

We improved over last year.

So we are in pretty good shape.

And a lot of the inventory buildup is in Europe, the Euro affects that.

That makes that increase from a cosmetic view.

We are not unhappy with our inventory levels.

Thank you.

Our next question is from David Turner from BBMP Capital Markets.

Please state your question.

Thanks, good morning.

Just a couple.

I was wondering if you could break down the mid or the high single digit comp or mid to high single digit comp in Champs by category what was footwear versus what was the benefit from the strong license trend.

A lot of it came out of pal.

And is there any thought to given the strength in this business now are your domestic Foot Locker stores flexible and offer or are you going to stay the course with the private label product that's in there now?

Is there any merchandising initiatives to get more license product in the Foot Locker stores?

We will continue our thrust in private label.

Clearly, under the leadership or Rick Ninos (sp), the guy that runs our U.S. operations, who is an expert in the licensed business really has a tremendous understanding building a very strong tracking and infrastructure in there.

It's a very complicated business.

What sells by region, by market actually and by store as to team allegiance.

Very complicated business, but one that can bear a lot of fruit for us.

The answer to your question is our private label business continues to be strong.

Our branded business is okay.

When you get into the licensed category, we are looking for very significant increases there.

And one last one, there has been some noise about Brown shoes possibly picking up steam for back to school.

Given what you said it sounds like classics are still very hot and obviously will be, but are you changing the mix at all towards more like the boot or whether it's branded or private label or anything along those lines that might give more shelf space to Brown shoes versus white, classic athletic shoes.

Yeah, first of all the color brown is becoming very important.

Not only in the brown shoe category, but actually in the athletic zone.

We will have a very meaningful presentation of brown shoes for back to school.

We think it's going to be a fairly big play.

Very good.

Thank you.

Our next question is from George Lusch from Fulcrum, please state your question.

Hi, how are you doing today.

I noticed in your 10-K that the Cap Ex plan looks lower than what you were talking about on the fourth quarter cost.

I was wondering if you could comment on that.

And then also, it sounds like you may be closing a few more units than initially anticipated.

George, in Europe we have key money where we have to pay either the existing tenant to the landlord to acquire the lease.

We include that in the Cap Ex.

That's considered another asset.

So that's primarily the difference.

Okay.

George, I believe that number is also disclosed in the cash so if you add the numbers together I think you will get there.

Okay, and are you going to close more units than you initially anticipated this year?

Yes, it looks like, I believe it's between 20 and 30.

And is that, I guess in the U.S. on the Foot Locker side?

Mostly in the U.S. and principally all the lockers, Foot Locker, Kids Foot Locker and Ladies wear, just some underperforming stores we are taking action on them now.

When we have the opportunity.

Thank you.

Our next question is from John Shanley from Wells Fargo.

Please state your question.

Good morning and let me add my congratulations on a nice quarter despite a tough environment out there guys.

Matt, I wonder if you help us drill down a little bit more on the gross margin.

It was up as noted very impressively in the first quarter.

How much would you say of that is attributable to the change in some of your merchandise mix or was it also due to some promotional environment in your stores during the first quarter versus what you had in the first quarter of last year.

I think it's a combination of both.

But very importantly as I said earlier, the thrust (inaudible) and the classic and retro price points, we get better sell throughs at those lower price points, 60 to $80.

And again, we are taking the modification to our promotional stance.

And the classic and retro-type product commands a higher margin level?

Oh, yeah, yeah.

The promotional environment as it stands right now going into the second quarter, how does it look to you?

Is it about what you expected or a little bit less or little bit more?

It appears to be subsiding somewhat. -- in the mall.

It appears to be, not dramatically, but in our sector, I'm not talking in the general merchandise category out there, but in the athletic foot wear zone, we are seeing less promotion.

I'm not suggesting that the guys that are in that channel are not promoting because they always promoted, but the other more based retailers are I think promoting less this year than last years.

Great, you mentioned apparel is becoming a much bigger part of your sales story, was apparel a larger percentage of your domestic revenue this first quarter than it had been last quarter and can you give us an idea how the margins may have varied quarter to quarter as well, apparel versus foot wear?

It is becoming a bigger piece of our business.

The margins are pretty rich.

A little higher than shoes.

They always been very similar.

Is it driven by those NBA and NFL type stuff that you were talking about?

A lot of it, but we continue to sell you know again, a lot of private label merchandise.

A lot of basketball product that's branded.

I think the biggest thrust is in the licensed category.

There is no question about that.

All you have to do is walk around a mall.

Right.

The last question I had is, I want to understand where you find that you may because of the increase in openings in Foot Locker Europe that you are anticipating the second quarter, will we likely see higher number of store openings in Europe than the previous guidance you gave us of around 60 units.

No, not this year.

Okay.

A lot on our plate.

A lot of stores.

And I don't think we gave 60.

I think we said around 50 to 55.

Okay.

And what is your estimate in terms of the total number of store counts that you may be able to have in Europe now?

You mean eventually?

Eventually, yeah.

650 to 750 easily.

Great.

Okay.

Thanks a lot guys.

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

Our next question is from Virginia Jenerouf from Merrill Lynch.

Please state your question.

Hi, this is Gina Gordon.

Gina?

Go ahead.

Okay, Hi.

I'm calling in for Virginia and I just have a couple of questions although most of them have been answered.

Just wanted to know, SG&A was -- do you think you have any room going in the back half of the year with SG&A?

Any quarters of easy comps you are looking forward to?

Are you saying easy sales comps or easy SG&A comps?

SG&A comps.

I think every quarter is difficult.

Something you have to do every single day.

The company approaches it that way, too.

Okay, because it was up 118 basis points and it was quite a bit more than what we were looking at.

Some of it is because of the Euro.

Some of it is because of the new store expenses we are opening a few more stores in the second quarter as well.

And some pension costs.

So you are looking for that to fall off in the back half the year?

Not significant.

Controlling expenses is a tough job every day.

Okay.

And that's my question.

Thank you very much.

Thank you.

Our next question is from Dennis Rosenberg from Credit Suisse First Boston.

Please state your question.

Good morning, could you give us your comp assumptions for your optimistic second quarter outlook based on format.

We continue to believe that Europe will lead the pack and have strong comps up there in the clearly mid to upper single digit range.

Australia is performing extremely well.

In the states, we think that we will be in the low single digit range at this point.

Up low single digits.

Would that include both Foot Locker and Champs or just Foot Locker or just Champs?

I think in total.

Foot Locker may be down a little more and Champs I think because of the strength of their apparel business I think will probably be positive.

thank you.

We would like to thank everyone for joining the call today.

And we look forward to the second quarter.

Thank you.

Thank you, ladies and gentlemen, that does conclude today's teleconference.

Thank you for participating, you may now disconnect.