Foot Locker Inc (FL) 2003 Q3 法說會逐字稿

Good morning and welcome to the Footlocker Inc. third quarter 2003 earnings release 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 Footlocker, this conference call is being 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 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.FootlockerInc.com.

I would now 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 third-quarter conference call.

We are pleased to report today that our income from continuing operations increased 44 percent for the third quarter of 2003 to $67 million or 41 cents per share.

During today's call we will be discussing our reported results from continuing operations on a GAAP basis.

In keeping with our normal process, Bruce Hartman our Executive Vice President and Chief Financial Officer will begin the call with a discussion of our third-quarter financial results.

Matt Serra, our newly elected Chairman of the Board and continuing 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.

The key highlights of the third quarter are as follows.

Total company sales increased 6.6 percent.

Comp store sales increased 0.4 percent.

Our gross margin rate improved 200 basis points.

SG&A expenses as a percentage of sales improved by 10 basis points.

Earnings per share increased to 41 cents from 29 cents last year, and debt net of cash declined by $68 million from the same period of last year.

In summary, we are very pleased with our third-quarter financial results and believe that we are very well-positioned to continue to grow our earnings during the fourth quarter and into 2004.

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

Good morning.

As Peter stated, we are very pleased with our financial results of the third quarter.

We achieved our sales guidance that we provided in August and significantly exceeded our earnings plan, generating a 44 percent increase in net income.

Our improved earnings versus plan were primarily driven by higher merchandise margins that resulted from our lower promotional posture, better merchandise purchasing, higher sales in our European operations where we enjoy our highest gross margin rates, and strong divisional expense management.

As we move into the fourth quarter we are very encouraged that we can continue our strong track record of meaningful quarter-over-quarter earning increases.

In fact, we believe that our fourth-quarter net income will exceed the current analyst consensus estimate of 37 cents per share.

The disciplines that we installed throughout our organization provide the confidence that we will continue our excellent record of producing consistent and meaningful earnings growth.

We believe that we have reached an inflection point in our business as we begin to anniversary several factors that have provided some resistance to our U.S. store sales growth over the past several quarters.

During the past twelve months the average selling price of our footwear sales has declined versus the same quarter for prior year.

This is a result of the current fashion trend that favors classic footwear in the mid to high price point zone.

Going forward we believe our average selling prices will stabilize with an opportunity to begin to expand again in the future.

A second factor that we are anniversarying is our tempered promotional posture that we have taken over the past several quarters.

While it is important to remain competitive in our stores, we have found that in the current environment we can be more profitable by being more selective with our promotions.

The external environment over the past several quarters has also been very difficult with weak consumer confidence and lower mall traffic (indiscernible) a moderation of that trend.

As reported on November 6, our third-quarter total sales increased 6.6 percent, reflecting the benefits of our more productive store base, strengthening foreign exchange rates and a comp store increase of 0.4 percent.

By division our third-quarter comp store sales gain breaks out as follows.

Our U.S.

Footlocker business, including Footlocker U.S., Kids and Ladies business reflected a very low single digit decline.

Champs comp store sales also declined very low single digits.

Footlocker Europe produced a mid-single digit increase and Footlocker.com also had a mid to high single-digit increase again driven by our highly profitable Internet channel.

Our gross margin rate increased by 200 basis points during the third quarter, primarily reflecting a higher rate on our product margins.

We continue to benefit from running significantly fewer promotion days versus last year.

This year's third-quarter markdowns were more product-specific as opposed to last year's all store promotions.

We are making meaningful progress in reducing our occupancy rate.

Through the first nine months of 2003 we have completed real estate negotiations for over 500 of our existing or new stores or almost 15 percent of our store fleet.

We expect our annualized tenancy expense rate for these stores to average over 200 basis points better than our company average.

In our existing stores our costs have been reduced this year by close to 11 percent on those deals that we have renegotiated.

We have previously mentioned on our conference call our objective is to improve our occupancy rate by 200 basis points over the next several years.

This improvement is expected to result from four key initiatives; opening new stores in our more productive markets, lowering our store buildout cost to reduce depreciation expense, closing and reducing the size of certain larger stores, and ongoing negotiations to reduce rent expense in unproductive locations.

We expect to begin to see some meaningful benefit from this process beginning in 2004, with approximately a 50 basis-point improvement in our occupancy cost rates.

That is assuming a low single digit increase in our comp store sales.

We would also expect to get a similar incremental margin rate benefit in the years 2005 through 2007.

The aggressive opening of our new stores in Europe where we generate our highest sales per square foot, and operating profit margins, also continues on track and is a significant driver of increased profits.

Footlocker Europe's growth continues unabated and is now one of our most meaningful divisions in terms of both sales and profits.

We ended the third quarter with over 400 stores in 12 European countries.

The growth of our direct-to-customer business also continues to be very strong.

Footlocker.com and Eastbay achieved sales of $91 million and an operating profit of 13 million, or 14 percent of sales during the third quarter.

This business continues to lead our domestic sales and profit growth being propelled by the very strong growth of our highly profitable Internet channel.

Our merchandise inventory at the end of third quarter was 10.7 percent above LY.

This increase is a result of several factors reflecting stronger foreign exchange rates in Europe, Canada and Australia, and higher inventory levels primarily in Europe to support our planned fourth-quarter store opening program.

In fact, we plan to open 19 stores in Europe during the month of November.

Inventory excluding the impact of foreign exchange rate changes was 7.8 percent higher than last year at the end of the third quarter.

And as has been the case in past years, we have ramped up our inventory build at the end of October to drive sales for the important big six holiday season.

Our inventory increase also reflected the decision to receive merchandise into our distribution center earlier in the quarter than we have in the past to facilitate a smoother flow of product to our stores.

We believe this has benefited both our stores and our distribution center operations.

A third factor impacting our inventory growth is our very successful ramp-up of our private label apparel program, which requires a much earlier ownership of product as compared with goods purchased from our third party suppliers.

Our third-quarter SG&A rate declined by 10 basis point versus LY.

We continue to structurally transform our company through a lower expense base and more efficient infrastructure.

Our associates continue to enthusiastically embrace this objective and develop many innovative initiatives.

In fact, during the third quarter our associates implemented over $10 million in expense saving initiatives that will benefit our company over the next twelve months.

These initiatives ranged from installing new energy-efficient thermostats in our stores, reducing debit card fees in our European stores, negotiating lower cost on our telecom services and reducing duties on import purchases.

This is a very small sample of our cost savings initiatives, but demonstrates the consistency that these ideas have generated throughout our organization.

We have also recently changed our competitive bid process for all of our expenses and buildout costs.

On average this new process already is reducing those costs associated by 25 percent.

This process in the future will net us at least $8 million in cost savings.

Our financial position continued to strengthen with our debt-net-of-cash $68 million lower than at the end of the third quarter of last year.

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

During the third quarter we repurchased $17 million of our 8.5 percent debentures which were due in 2022.

This is in line with our stated objective of opportunistically repurchasing our debt based on market prices and other factors.

To date, we have now repurchased $26 million of these debentures.

Another opportunity, as we announced yesterday, is to significantly increase our quarterly shareholder dividend to 6 cents per share, paying out a more meaningful cash return has become a more important priority given the recent changes in tax codes that make dividend payments more beneficial to our shareholders.

In addition to continuing to repurchase our bonds and increase our shareholder dividend, we will also consider -- we will also continue to consider acquiring compatible retail companies, reinvesting additional capital in our business and repurchasing our common stock, all of which we believe would add shareholder value.

I would now like to turn the program over to Matt Serra.

Thank you, Bruce.

Good morning.

As Bruce commented, we are very pleased with our third-quarter performance and even more encouraged looking forward, especially given our improved sales trend in the United States.

During the third quarter our consolidated sales growth returned to a more normalized level, while profits significantly expanded from last year's comparable period.

This profit increase reflects solid overall top line sales performance, a significant improving gross margin rate and continued aggressive work on our expense structure.

Much of our hard work over the past several months as we have transformed our company to more efficient cost structure is now paying off nicely for our shareholders.

During each month of the third quarter our total sales increased mid single digits versus last year with profits for the quarter significantly exceeding plan.

The improved sales trend has continued into November, which was very encouraging and all important set up now for the fourth quarter.

Geographically our third-quarter sales growth remains the strongest in the international markets where we operate, particularly in Europe and Australia.

In the United States our Footlocker.com Eastbay operation had another very strong quarter in terms of both sales and profit growth.

The most significant trend improvement, however, was generated by our U.S. stores as comp store sales improved by several hundred basis points versus the second-quarter decline.

Private label and licensed apparel continue to show very healthy increases.

The strong demand continues for high price, authentic and replica MBA and NFL jerseys.

Footwear sales in the U.S. continue to be led by the class classic category, which are provided by most of our key suppliers.

This current fashion cycle to be moderately priced footwear has resulted in lower average price points for the fourth consecutive quarter.

During the third-quarter, however, the quarter- over-quarter average price point decline was significantly less noticeable than the second quarter as we begin to anniversary against this trend.

We are very pleased with our sales with our Brown college sneakers for back-to-school season, even above our previous expectations.

Our merchants should be commended for their early identification of this trend.

We ended the third quarter with inventories current and our stores appropriately stocked for the fourth quarter.

Several exciting product launches from our most important suppliers are lined up for the holiday selling season.

We have planned weekly launches of this new product throughout the holiday season to provide excitement and fresh flow of new goods into our stores.

Our fourth-quarter marquee launches will include T Mac product from Adidas, various music exclusives from Reebok, and exciting new launch of the exclusive 20 Pack program from Nike.

We have also significantly increased our orders of Jordan product; it will be in our stores during the fourth quarter.

Additionally we expect our Timberland and Lugz, the boot business to be strong performers, as well as the continuing strong classic categories from suppliers such as New Balance, K-Swiss, Converse and Puma.

On the apparel front, we expect to continue to generate strong sales of licensed to private label products, including exclusive merchandise that we manufacture in the company's team (ph) vision division.

We are very pleased with the continuing aggressive expense management that allows Footlocker to produce very high rates of profit growth from each incremental dollar of sales.

Bruce continues to lead the charge in this area, and we are constantly getting new ideas from all of our business units and corporate staff.

I will now provide you with a view of our individual business units.

In the United States our Footlocker.com Eastbay business as already mentioned produced another strong quarter lead by the continuing growth of our Internet channel.

This business generated 8.3 percent increase in third-quarter sales with an operating profit increasing 63 percent.

For the first nine months of 2003 this division is now generated an operating profit of $30 million achieving a margin rate of 12 percent.

The significant increase of the operating profits of this division is attributable to several factors including the continued explosive growth in consumer acceptance of the Internet channel, very diligent expense management, and strategic partnerships well-known third parties.

One of these successful partnerships is with the National Football League whereby Footlocker designs, merchandises and fills the NFL catalogs and e-commerce site.

We are very pleased to have just signed a five-year extension with the NFL for this $50 million annual business that is growing rapidly.

Our U.S. store business had a very small single digit decline comp in sales, which is (indiscernible) improvement versus the first six months of this year.

The Kids segment of this business was the strongest footwear category.

A big part of the third-quarter performance was our less promotional stance in our U.S. stores this year compared to the third-quarter of 2002.

Therefore each of our U.S. businesses generated a very healthy profit increase versus last year.

Our sales and profit growth in Europe continued strong through third quarter.

Footlocker Europe's back-to-school business was very solid and we are very pleased with the job being done by our new management team at this division led by Tom Slover which is headed for record-breaking sales and earnings performance this year.

Comp store sales increased mid single digits with operating profit margins remaining well into the double digits.

Year-to-date we have opened 35 stores in Europe, ending with 408 stores at the end of October.

We plan to continue to aggressively expand in this market with an additional 19 stores scheduled to open in November.

Therefore, we expect to end 2003 with almost 430 stores across 12 Western European countries.

In total, our 2003 store expansion program continues on schedule with 85 stores opened during the first nine months, and an additional 28 planned for the fourth quarter with most expected to open this month.

For the full year 54 of our new Footlocker stores are planned to open in Western Europe.

While most of this year's new stores were opened in European markets where we already have a proven presence we are also exploring new countries for future growth.

For example, as we have already announced, we opened three stores in Portugal during 2003 and are planning to enter Europe in 2004, with several new stores in the Czech Republic and Hungary.

We've also recently decided to enter the Irish Republic in 2004 and believe that this market can easily support 10 to 12 stores in its highly populated area.

Asia Pacific Rim is another region that holds promise for future growth.

We've operated Footlocker stores in Australia for many years and have recently expanded into New Zealand.

We also operate five stores in Guam.

Our Australian operation provides a well-tested infrastructure from which we can over time very carefully consider expanding into Asian markets.

In the United States our efforts are more concentrated on updating the appearance and rightsizing our existing fleet.

We also plan to close low-volume, underperforming stores and selectively open new Footlocker and Champs stores in under penetrated markets.

In total we expect to complete over 400 real estate projects during 2003, opening approximately 115 new stores while remodeling or relocating approximately 300.

We also expect to close approximately 130 poor performance stores.

While our total store count remains substantially unchanged from last year, the store base is far more efficient in terms of sales per square foot on an operating profit.

The rollout of our new point-of-sale system at Champs is substantially complete with additional enhancements such as a stock locator program currently being tested with very encouraging initial results.

This new POS system is scheduled for installation in the U.S.

Footlocker division during 2004.

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

We expect that the current trends of classic footwear as well as licensed apparel will continue to drive sales increases throughout the balance of 2003.

Our boot business is expected to be very solid during cold weather months.

In addition, we are looking forward to a rebound in the higher end basketball category during the fourth quarter and into 2004.

As previously disclosed, our business with Nike has declined in the United States during each quarter for the past year.

We believe that our sales of Nike product will stabilize during the fourth quarter (technical difficulty) in fact we have planned a year-over-year increase in merchandise receipts from Nike in the fourth quarter here in the U.S. and internationally.

We are very excited about the new exclusive Nike product line being launched in mid-December.

This new collection is called 20 Pac and includes new retro looks that date back to 1984.

Much of this product is priced in the 80 to $100 range and includes basketball, running and cross-training categories.

Finally, as Bruce mentioned, we continue to explore opportunities to put some of our excess cash to work to further increase shareholder value.

We are very pleased to be in a strong cash position that enables us to double our shareholder dividend.

This decision should be viewed as a sign of confidence by our Board and their recognition of the importance of providing a meaningful cash return to our shareholders.

Our first priority is to maintain strong financial structure and to attain an investment-grade credit rating.

We are very pleased that Moody's two weeks ago announced that Footlocker was under review for potential upgrade.

In summary, we are very pleased with our third-quarter results as everyone of our business units exceeded their profit plan for the three-month period.

The experience and depth of our merchandise led divisional management team is a clear strength in our company.

Rick Mina is doing a terrific job along with the division presence improving the profitability of our U.S. operations.

In addition, we believe we are very well-positioned for exciting earnings growth in the future.

We expect that the progress that we have made on the gross margin expense front is enduring and that we look forward to incremental improvements in our occupancy cost rate.

In addition, as Bruce covered, we believe that we have reached an inflection point whereby we have good opportunity to further improve our comp store sales trends.

As such, we expect our fourth-quarter earnings per share to exceed the current analyst consensus of 37 cents per share, and another year of strong earnings growth in 2004.

We remain on track with our previously stated goal for growing our store sales to $350 per square foot and operating profit margins to 8.5 percent.

Before I turn to your questions I would like to thank Carter Banco (ph) for all of his contributions during the past two years as Chairman of the Board.

He is a very well-respected and distinguished business leader and has been a tremendous asset to me since my appointment as President and CEO, especially in the areas of corporate finance and governance.

We are very fortunate that Carter will remain on our Board in his new capacity as lead directors.

I will now be happy to try and answer your questions.

Thank you.

(OPERATOR INSTRUCTIONS) George Lusch from Fulcrum Global Partners.

I wonder if you could comment on what comp you guys had in mind for the fourth quarter in terms of your thought that you could beat expectations out there now?

And then maybe if you could just comment a little more quickly on a promotional environment, and I think you guys have some exclusives in the stores right now from some other vendors.

I think the G Six (ph) from Reebok and the rise from (indiscernible) that appear to be doing pretty well, if you could maybe give a little color on that.

We really have retooled the assortments for the fourth quarter and obviously there is a lot more Nike receipts coming into the U.S. operation which has been a deficiency.

So at this point in time and I was fairly accurate on the last conference call, we are looking for a comp of 2 to 5 percent for the entire corporation, absent any geopolitical problems.

The promotional environment, you know it continues to be a fairly aggressive.

It has subsided.

We have clearly bitten the bullet on it and it is really contributing to our margin rates.

We see our competitor in Indianapolis ramping up his promotional posture, but we are not going to get into that zone.

We think that it is time now to pull back a little and go after more margin, and I don't want to say less sales, but really focus on the margin.

And we have a tremendous amount of exclusives for the fourth quarter.

We had the 50 cent launch last month; it was a sellout.

We got another one coming in December.

We've got a staggering amount of the 20 Pac that is going to be launched from Nike in mid December, and exclusives throughout the entire apparel divisions.

And lots of special makeups on our footwear.

I guess as we look forward, I guess into next year it does appear that you guys are going to start to get some of the Nike season in launch product maybe that you don't have right now?

Yes, the announce that went out last evening --I don't know if you saw it from Nike.

Did you all see that?

I am not going to discuss the specific marquee shoes that we are going to be carrying from Nike; in fact our people are out there as we speak working on the whole plan, but we will be proceeding aggressively in June for back-to-school, a nice cadre of marquee shoes.

We think they will be meaningful assortments and begin the process of us getting back on track with the Nike organization.

Thank you.

Dennis Rosenberg of Credit Suisse First Boston.

Congratulations on a great quarter.

Could you talk a little bit more about Nike announcement last night?

Is this going to be different than the way you sold the product previously?

They talked about a partnership with you and selling product into specific stores.

Also could you talk about how the retail presentation of the Nike product might look versus the old house of hoops (ph) and what effect that might have on programs if you currently have with some competitive vendors.

We will clearly enter back into a major basketball presentation with Nike.

Whether will be called house of hoops or something else is yet to be determined but we see it as a very important ingredient in building a very strong basketball business.

We have a very strong basketball business but increasing it.

In terms of specifics by stores, we really don't want to tip our hand to our competitors.

We will -- the word "select" is in there for a reason, and I think it is at this point a private matter between both organizations as to what products are going to go where.

So Nike will clearly get a very salient feature in our stores.

With that said, we have a very, very important Reebok business and relationship.

And I expect the Reebok brand to continue to grow aggressively with our company, both domestically and internationally next year.

And there is a lot of key components in their classic footwear, moderate priced basketball shoes, the Iverson product.

The licensed apparel business is very important and will continue to work with Reebok to have enhanced visual presence throughout our stores.

And clearly this whole music trend could evolve into a very big business; the J. Z. shoes as I said were a blowout and the 50 cent product did extremely well.

I believe we almost sold them out at this point.

And the launch was last week, right?

Yes, it was last week.

So we think that Nike, the new relationship or the rekindling of the relationship is very, very important.

And with that, the relationship with Reebok is very valuable to us and also internationally.

One question for Bruce.

On the gross margin, was currency a meaningful factor in the increase or was it relatively minor?

Relatively minor.

Thank you.

Jeffrey Edelman from UBS Warburg.

Nice job.

Two questions.

Matt, we hear from some of our European colleagues about expected consolidation taking place throughout Western Europe in the athletic sector.

I guess one, do you see that occurring and do you think this represents opportunity for you in terms of just your own store expansion or might we start to see some acquisition activity?

We have been presented with several acquisition opportunities in Europe over the last few years.

And quite frankly, as we have reviewed the numbers, locations and the types of stores we have found them to date unattractive.

We think that for us having this very strong operating division over there, and I also mention we have new management there, Tom Slover, Terry Talley (ph), very strong executives that are really knocking the cover off the ball.

So we expect to grow our business in Europe on an internal kind of basis.

That doesn't mean if the right deal came along that we would not entertain it.

But when you look at the consolidations that have been done over there, particularly in the UK with First Sport and J.V.

Sport (ph) they don't appear to be successful at initial glance.

There is a lot of very small operations.

As you know, we are the only pan European operator over there.

Most recently JJB had expanded the last couple years into the Netherlands and they closed their store in Amsterdam and Rotterdam.

So they were obviously unsuccessful in their quest to expand outside of the UK.

We see continued very, very aggressive expansion plans in Europe.

And again, absent any geopolitical problems, we expect to have well over a $1 billion division next year in Europe.

And Bruce, you've had a record gross margin for any quarter going back over the last several years, and it looks as if there really hasn't been any seasonality.

Excluding the improvement we would expect to see from occupancy costs going forward, was there anything unusual in here that says you cannot sustain this gross margin level going over the next several quarters and out?

It was a tremendous job by our merchandising staff from the procurement end of the buying of our inventory, as well as the discipline that was shown in the markdowns for the quarter.

It was almost all product margin.

Very strong vendor partnerships.

My question is this the kind of performance that can be sustained?

Absolutely.

We think the lion's share of it can be sustained.

Okay.

We were able in the third quarter to get some advantageous purchases.

Obviously from the market had some goods laying around from obviously some of our competitors not doing as well as we.

But we believe there is continued opportunity for product margin increase and as Bruce and his team continue to drive down the real estate expense, that we see meaningful growth in the margin area.

Great.

Thank you.

Robbie Ohmes from Bank of America.

Hi, this is actually April (indiscernible) calling in for Robbie Ohmes.

Just to go back to the Nike release quickly, it did mention that the allocations would be based on elevated retail presentations, and I was hoping you could just provide a little bit more detail on what this will entail, how much it will cost, and whether this is already anticipated in your store professional plans.

In terms of the cost, that is a private transaction between two companies, I don't think we've ever publicly stated what we spend with anybody on the presentation.

There will be a lot of point-of-purchase presentations in our stores to enhance the re-entry of particularly the marquee product.

And there will be a series of launches, and Nike has a lot of new and exciting product, and we're going to want to visually display it in a very, very important salient fashion.

So it is nothing out of the norm, but it will be somewhat distorted because as our business continues to get back on track, we will see some very exciting visuals out in the stores.

Thanks, that is very helpful.

On a somewhat unrelated matter you did a great job playing out the Brown sneaker trends and I was wondering if you expect this trend to continue into holiday, and is there any other trends that we should be looking to product wise help drive traffic through holiday.

Yes, it is continuing and we think it will probably slow down after holiday.

We have another big trend that Rick and his team are working on, which I am not going to publicly state because I don't think our competitors have picked it up.

So we will be launching that trend probably in early February.

I look forward to it.

Thanks for your help.

Bob Drbul from Lehman Brothers.

A couple questions.

Matt, first on the strategic standpoint, you've really moved away from a lot of the performance gear over the last several quarters.

Is this a change in your strategy bringing back a lot of the Nike product in?

I would say it is an adjustment to our strategy, not a major change and performance is beginning to come back again.

And this business is very cyclical.

Five, six years ago we had a huge brown shoe trend, and we had a huge running trend, a good basketball trend and running, and there are signs that running and performance footwear are coming back somewhat aggressively.

So we will participate very importantly in that zone.

Seem like one of the things that really is not working right now for you is branded apparel.

Do you see any signs of any encouragement from that specific part of the business that could get better for you going forward?

I think branded will improve in the next couple of years.

As you know, we have a huge private-label business, which is highly profitable.

We expect to continue to maintain that business.

We have very strong license business, which I feel is not maxed out yet and has considerable upside potential.

But there are signs that branded will be returning.

And again, very cyclical branded, very, very hot in the '95, '96, '97 period, like it just dropped and I meant licensed was very hot in that period.

And then branded came on strong, and as you know in the last couple of years the licensed product has been doing extremely well.

Licensed product is doing very well right now, and I see it continuing of that for clearly the near future.

One final question.

As you look into 2004 are there any earnings goals that you could share with us that the Company has that you think we should be thinking about?

We are going to get through 2003 and we've given you guidance now for the fourth quarter that we expect to concede the streets' consensus.

As we end the quarter and report, we will certainly keep you abreast of what our goals are.

As always our goals will be to increase our sales in earnings, particularly the earnings nicely.

And we think that we have some strategies in place for 2004 to achieve that.

Quick question for Bruce on the gross margin line.

Can you quantify how much currency helped this quarter, how much the occupancy helped and how much merchandising margin improved for you within that line that gave you such a strong gross margin?

In terms of how much impact it had on the gross margin rate or the overall profits?

The gross margin rate.

I think it is de minimus (ph).

Within the 200 plus basis points, can you give us an idea like a quantification of the different --?

That's really negligible.

We did benefit from the fact that Europe continues to be a bigger piece of our profits.

But remember, Bob, you are translating the sales back at a higher rate and you are also translating the gross margin and cost of goods back at the higher rate.

Okay.

Thank you.

John Shanley from Wells Fargo.

Good morning and congratulations on a very impressive quarter.

Matt, I wonder if you could help us quantify a little bit in terms of the level of benefits that you are likely to attain going forward, with the return of some of the Nike allocated and high demand statement products in terms of store traffic levels, merchandise margins, potential revenue and so on.

Can you give us some indication of what your internal business plans, expectations are?

We clearly expect our business to improve.

There has been an absence of marquee product.

A lot of key marquee product from our stores in the U.S.

Keep in mind that we have not had any interruption in our international business with Nike as it relates to marquee product.

We think that it will be significant and meaningful.

Again, we are in the throes of working, I mean our people are literally out there now.

We have all our merchants in Portland, they have been there since Monday and will be there all week working on all the products that we're going to be receiving beginning in June for back-to-school.

But I know that will have a very meaningful impact on our sales for earnings life.

Will it be something to likely build Matt as you start getting more of the product in towards the back half of '04?

Obviously you're getting some goods in for fourth quarter of fiscal '03.

But can we anticipate in terms of our model that this will be a building trend, reaching a high point in the back half of next year?

I would say that is a fair statement.

Great.

The other part of it is on your open to buy allocations, you had mentioned some of your previous conference calls that you had thought you would probably keep Nike somewhere between 35 and 40 percent.

Is that likely to be kept, or if you move it north of that, is that likely to be a reallocation in terms of less business than with some of the other brands?

It will go somewhere north of the 40 percent.

And there will clearly be reallocation of open-to-buy dollars.

And it's our job to obviously get the right product, number one, that sells.

And B, the most favorable terms for the products we purchase.

As I mentioned earlier, I don't see any impact in our business with Reebok.

We've had a very strong year with them and we continue to see them as a very important growth supplier.

There are some which I am not going to identify, but there are some lines that are beginning to slow, and we will allocate those dollars to fund the Nike increase.

I know we've beaten this gross margin issue to death, but it is very impressive in terms of the 200 basis point improvement.

I wonder if you could drill down a little bit for us in terms of which business sectors or merchandise categories, particularly in the domestic market, we know your international business is really strong, but where there is some real highlights in terms of products or business sectors that really contributed to that margin improvement.

I think a lot of the classic shoe product that we sell, a lot of that goods in a regular price, I am talking the $50 to $70 range programs, we did extremely well there, very rich margins.

Our private-label apparel continues to increase in product margin.

Our what I call brown shoe, but I do not want to confuse anybody, the boot business, our margins have increased nicely from our suppliers in there.

And obviously the whole area of classic footwear from all our suppliers has been extremely strong.

But we really had with the careful pruning of our promotional posture, I think almost all the major families and businesses have benefited from that.

Clearly our apparel business particularly the licensed Reebok merchandise, the NFL goods, I mean those margins are very rich ones, we sell a lot of that goods at regular price and we backdoor a lot of promotions, although our competitors some of them are still promoting it very aggressively.

We have been promoting a lot less, and getting very, very nice margins there.

Thanks a lot.

Appreciate it.

David Campbell from Davenport & Co.

Congratulations on a good quarter.

Just another question on the gross margin;

I was wondering if you might be able to talk about how you have improved the purchasing cost?

And also what you think the sustainable rate of gross margin is?

And if you could also (indiscernible) the mix of private-label within the apparel now and where you see that going?

In terms of private-label we really haven't given out our penetration, but it is very significant in the apparel sector.

It is in our footwear business it is negligible.

So our private-label business is continuing to grow, and it's with rich margins.

One could say that it is between 40 and 60 percent of our apparel business, which is a very big business.

The other question was --

First question was the purchasing line, what you see as the sustainable rate of gross margin.

You know, we feel that we can continue to grow our gross margin rate, and we think it is sustainable.

We did have a very rich quarter, but we are looking at our fourth quarter and it looks very exciting at this point.

So I mean we are clearly the biggest guy in the business, so it's no secret that we get the best arrangements because we are obviously a very important customer to our suppliers.

And I think we are kind of easy to do business with; we buy huge quantities and I believe they save a lot of money on freight, a lot of full containers.

Not too many people that can go out there and buy 100, 200, 300, 400,000 pair of a shoe, and in many cases get it delivered in a month.

So I believe that we clearly get better buying terms.

Just separately you also mentioned that you're looking at possible acquisitions.

Can you say what areas you might be interested in, if any?

Obviously in our business we are in the athletic footwear and apparel business.

And we have no interest, strategy or desire to go outside that area of business.

But we get from time to time a lot of companies presented to us.

To date there hasn't been anything that has been put on the table that looks attractive.

That doesn't mean that something is not going to come along in the near future.

(OPERATOR INSTRUCTIONS) Virginia Genereux from Merrill Lynch.

Congratulations, Matt, on your election to Chairman.

Just three questions, if I may.

One, maybe Bruce the 50 basis point improvement in occupancy rates.

I take that to be if you guys I think if you comp up low singles you feel comfortable that next year you can drive 50 basis points of gross margin improvement?

That is correct, Virginia.

From occupancy, that is great.

Real estate.

Gross margin number.

And then two, Matt I think you said your comp plan for Q4 was up 2 to 5 percent, that sounds like it's a nice tick up from the October kind of plus a half a percent or so.

Are the U.S. stores doing better in November, may I ask?

Yes.

Yes.

Obviously we are getting back on track in the U.S., and that is where we know the difficulties there, and if we just break even in the U.S. or pick up a half a percent.

When you take the international business and our Internet business, it can go anywhere from two to five.

It's an exciting Christmas.

Who knows, but a lot of tension these days out there in the world.

Is this more ASB driven do you think, or is it unit driven?

Can you give us any thought on that?

There is definitely an improvement in the U.S. sales trend, dramatic improvement.

And I think we will comp positively in the fourth quarter in U.S. operations.

And with Europe continuing its growth and our Internet business, when you add it all up, it comes to a two to five.

And if we come anywhere near five, top line with all the additional stores in Europe, it will be a pretty big number on top.

Bruce, can you tell us anything about the pension expense on the income statement for '04 with the markets doing a little better here?

We see a few pennies of hit if you take the amortization of post retirement gains against your pension expense, if you saw a few pennies of hit in '03, any thoughts on the income statement impact in '04?

We are still going to end the year under funded.

We are estimating in the 230 to 240 range, which is a significant improvement.

And out of that we still think there is a penny or two that we will have to absorb in 2004.

Just one more (indiscernible) talk about this, if you guys are sourcing on the currency (indiscernible) if you're sourcing in euros, you're not getting any margin benefit.

Your getting a translation benefit that is about two cents we think this quarter, but you're not getting any margin benefit, isn't that right?

That's correct.

We have time for one more question.

Donald Trott from Jefferies & Co.

Congratulations on your promotion.

My question is not a gross margin question; actually I got a couple of them here.

First of all if you continue to maintain the pricing discipline and the cost discipline, is there any reason why the fourth quarter earnings, given the effect of seasonal factors, should not be at least equal to the third quarter?

There is the potential for that outcome.

And then this year it looks like the operating margin is going to come in somewhere in the vicinity of 6 8, 6 9, somewhere there.

Bruce alluded to the potential of getting a 200 basis point swing between now and 2007 just on the real estate.

That would get you up to 8 8, 8 9 and yet on the other hand you said you think the peak margin potential is 8 5, could you just reconcile that?

As you know, we are always conservative in our comments.

And generally, particularly in the earnings bucket, we always like to over achieve.

There is upside potential.

There is upside potential, but we like to be realistic and we don't want to over forecast what could happen.

We like to make 10 percent, and that is my eventual goal.

We think the 8 5 is extremely doable and take a couple more years.

And I would tell you that the 50 basis point thing is new news, we haven't said that before.

Bruce and the real estate team has worked very aggressively, and we've accelerated a good number of our negotiations with our real estate partners.

So I did not originally at the beginning of this year expect to get that 50 basis points next year.

We thought that would be further out.

But we are finding that we are able through a lot of negotiations, a lot of trips, a lot of meetings, accelerate this thing a little faster than I had originally thought.

As you know, we've had these a little over 200 stores that are problematic, and we've worked on -- what's the number again?

We are through about a third of these right now.

That does not mean we are getting rid of one-third, but we have negotiated some lower rents, we've exited some of them next year, not a lot but it is adding up to 50 basis points, which I didn't think we were going to be able to achieve.

So we are looking for another 50 basis points in 2005, as well.

Which at this process continues the negotiations with our real estate partners will accelerate what we have said that we really thought it is going to happen in 7, could happen earlier.

Just one final housekeeping detail, either Peter or Bruce, what should we use in the model for the fourth quarter tax rate?

Our existing rate for the rate of the company naturally accrues that is around 37 percent, which is what we've said.

With that said, Don, we are working on some things we really do not want to talk about right now that could lower that.

But we will give you a better update on that as we get firm with that.

Okay, thank you very much.

Appreciate it.

We appreciate everybody's participation in the call, and look forward to a good fourth quarter.

Thank you.

Thank you ladies and gentlemen, this concludes the Footlocker Inc. third-quarter 2003 earnings conference call.

You may all disconnect at this time and thank you for participating.