Foot Locker Inc (FL) 2003 Q4 法說會逐字稿

Good morning and welcome to the Foot Locker Inc. fourth-quarter 2003 and full year 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 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 would now like to turn the call over to Mr. Peter Brown, Vice President, Treasurer and Investor Relations.

Good morning and welcome to our fourth quarter conference call.

We're pleased to report today that our income from continuing operations for the fourth quarter of 2003 increased 271 million, or 47 cents per share.

As has been our practice all year, we will be discussing our reported results from continuing operations on a GAAP basis.

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

Matt Serra, our Chairman and CEO, will follow with a business review and provide some guidance for the current year.

After our prepared remarks, we will answer your questions.

In summary, we're very pleased with our financial results for the fourth quarter.

Key highlights are as follows.

Total company sales increased 9.9 percent, comp store sales increased 3.9 percent, gross margin rates increased 50 basis points, SG&A expenses as a percentage of sales improved by 110 basis points, earnings per share increased 42 percent to 47 cents from 33 cents last year and cash, net of debt, improved by 112 million from the same period last year.

We are particularly encouraged that our business has gained momentum throughout 2003.

Therefore, as Matt will cover in his discussion, we believe that we are well positioned for 2004.

I would now like to turn the call over to Bruce Hartman.

Good morning.

I would like to start off by saying that we are very pleased with both our fourth quarter and our full-year financial results.

Our fourth quarter sales were a significant trend improvement from earlier in the year and our earnings clearly exceeded our expectations.

During our third-quarter conference call, we discussed several factors that provided resistance to sales growth in our U.S. stores over the prior several quarters.

We also explained why we believe that our company has reached an inflection point whereby these issues will be less of a factor going forward.

These factors included the 12-18 month trend toward lower average selling prices, our more tempered promotional posture, a challenging external environment and some important Nike product that has been absent from our U.S. stores.

As anticipated, we began to anniversary against these factors during the fourth quarter and our sales trends in our U.S. stores noticeably improved.

As reported on February 5, our fourth quarter total sales increased 9.9 percent, reflecting a favorable foreign exchange rate and a comp store increase of 3.9 percent.

In addition to our very solid sales increases, our earnings were impacted positively by our higher gross margin rate and the benefits of divisional expense reductions that we have put in place in the fourth quarter.

As we move into the first quarter of 2004, I'm going to repeat what I said in November.

We remain very encouraged that we can continue our strong track record of driving meaningful annual earnings increases.

The disciplines that we installed throughout our organization provide the confidence that we will continue to build on our strong track record that we have established over the past five years.

These disciplines are best evidenced by our strong incremental margin rate and factoring 2003, 29 percent of our incremental sales flowed through to increased pretax profits.

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

Our U.S.

Foot Locker business, which includes Foot Locker, Kids Foot Locker and Lady Foot Locker, reflected a solid mid-single digit increase.

Champs' comp store sales increased low-single digits and as with Foot Locker, Champs' fourth quarter sales represents an improving trend versus the first three quarters of 2003.

Foot Locker Europe produced a mid-single digit increase, right in-line with its full year results and footlocker.com had a low-single digit increase, driven by our highly promotional, highly profitable Internet channel.

By month, sales increased very low-single digits in November, strong mid-single digits in December, followed by a solid low-single digit increase in January.

While sales were very healthy during each month of the fourth quarter, the strength of the holiday period was somewhat compressed during late December and early January.

This was a continuation of a trend that has been developing for the past decade.

Our gross margin rate improved by 50 basis points during the fourth quarter, reflecting both a higher merchandise margin rate and a lower rate on our occupancy expenses.

As I mentioned on recent conference calls, we are making meaningful progress in reducing our occupancy costs.

For the full year of 2003, we completed almost 700 real estate deals related to our existing or new stores, nearly 20 percent of our store fleet.

Our annualized tenancy expense rate for these stores is expected to average over 200 basis points better than our company average.

This improvement is in line with our objective of reducing our total company occupancy rate by 200 basis points over the next several years.

Four key initiatives are driving this important effort -- one, opening new stores in our most productive markets, lowering our store buildout costs to reduce depreciation expense, closing and/or reducing the size of certain larger stores.

The positive implications of this process began to be evident during the fourth quarter of 2003 and beginning in 2004 and continuing through 2007, we expect our occupancy rate to decline approximately 50 basis points each year, assuming we generate a low-single digit comp store sales increase.

Our fourth quarter SG&A expense rate declined by 110 basis points versus LOI (ph).

This improvement represents a confluence of factors that blended together favorably in the fourth quarter -- improved comp store sales and the continued success with our expense reduction efforts.

The credit for this expense effort goes to our associates worldwide who through a lot of hard work and creativity, developed and implemented many expense saving ideas that are paying off handsomely.

In 2003, our associates continue to implement millions of dollars in expense savings initiatives that will continue to benefit our company in 2004 and beyond.

One such initiative is our new competitive bidding process for supplies and services that I outlined in November.

This new process has reduced our cost on average by 25 percent for those supplies and services that we have recently bid.

Turning to our balance sheet, you will notice our financial position continued to strengthen during 2003.

We ended the year with a cash position net of debt of $112 million.

From a balance sheet cash and debt standpoint, this is the Company's strongest financial position in its history, including when the Company had an investment-grade credit rating.

Our bills are paid and we are very current with all of our suppliers.

Our merchandise inventory at the end of the fourth quarter was 10.2 percent above LOI (ph).

This is in line with both our actual fourth quarter total sales increase, as well as our expectations for the spring 2004 season.

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

Excluding the impact of foreign exchange, inventory would have increased 7.2 percent.

Sales reached $335 per square foot in 2003, up from $316 per square foot last year and tracking right on schedule to our $350 per square foot goal.

Our operating profit margin increased to 7.2 percent in 2003 versus 6 percent in 2002 and also on schedule to achieve our objective of 8.5 percent.

These are two important ratios that we carefully monitor as we diligently track our progress to obtaining an investment-grade credit rating.

On February 26, Moody's Investors Services upgraded the company's senior implied credit rating to BA-1.

Moody's stated that the upgrade was based on considerable progress in improving profit margins, free cash flow and credit matrix, despite shifts in consumer preferences and a challenging retail environment.

During the fourth quarter, we continued to utilize our strengthened financial position to capitalize on available opportunities.

We repurchased an additional $2 million of our 8.5 percent debentures which are due in 2022. $172 million of these bonds are still outstanding.

We stay in close touch with the market and continue to seek opportunity to repurchase this debt as market prices and other factors dictate.

During the fourth quarter, we also doubled our quarterly shareholder dividend to 6 cents per share.

Increasing our shareholder dividend has become a more attractive alternative for returning excess cash to our shareholders given last year's change in the tax law.

In addition to pursuing additional bond repurchases and shareholder dividend increases, we also continue to consider acquiring compatible retail companies and reinvesting additional capital in our business, all of which we believe would add to shareholder value.

I will now turn over the program to Matt Sera.

Thank you, Bruce.

Good morning.

As we close out our books for 2003, it is important to pause for a moment and reflect on our financial progress over the past five years.

Income from continuing operations was $14 million in 1998.

In 2003, income from continuing operations reached 209 million, 4.4 percent of sales.

Return on equity was 1.2 percent from 1998.

Last year, return on equity reached 16.8 percent.

At the end of 1998, our debt net of cash was 574 million.

We ended 2003 with a net cash position of $112 million, representing a $686 million improvement.

In 1998, our working capital was 366 million.

At the end of 2003, working capital stood at 975 million, a $609 million improvement.

These are just a sample of the financial ratios that demonstrate how far we've come during the past five years.

While we have made substantial progress, we are by no means satisfied.

We clearly believe that the best for our company is yet to come.

As Bruce mentioned, we are very encouraged by our fourth quarter financial results.

Fourth quarter footwear sales in the U.S. were led by the classic category, which is provided by most of our key suppliers.

Specific styles included Light Classics (ph) by Reebok and K-Swiss, Air Force Ones from Nike, Superstars by Adidas, and Chuck Taylors from Converse.

The brown colored sneaker styles that we introduced in our stores for back to school continued to sell well through the Christmas holiday season.

We benefited from the new exclusive 20 pack (ph) line from Nike.

These retro-looking shoes sold well in December and January, which is an encouraging sign for 2004 when we will have a substantial amount more of this product.

Our fourth quarter boot business was strong, led by Timberland and Lugz.

We believe the severe winter weather had a positive impact on our boot business.

Sales of private label and licensed product continue to show very healthy increases.

We believe that our private label program is a key competitive advantage based on our expertise in developing and sourcing these goods directly from our manufacturing partners.

In total, our fourth quarter average selling price increased from the prior three quarters of 2003.

The quarter-over-quarter average price point comparison, however, was still slightly lower than the fourth quarter of 2002.

As we move into 2004, we expect our average selling price to progressively increase versus the same quarter of 2003.

In fact, we have tilted our footwear purchases this year to higher price point shoes to better meet the expectations of the developing trend. (technical difficulty) the fourth quarter with inventories current and our stores appropriately stocked to bode well for 2004.

Looking ahead to the current year without giving away too many of our competitors strategies, we expect the following.

We will have another strong year selling classic footwear, including retro and retro-looking products.

These will be sourced primarily from our largest suppliers that stepped up to the plate with important programs in 2003.

More color will be added to our assortments with some very exciting exclusive programs.

If you were to walk through our stores now, our news story is think pink.

We have put a tremendous amount of inventory and visuals into pink and black, which we think will be our brown story for this spring.

We look forward to benefiting from our re-engagement with Nike and having more Jordan and Marquis (ph) products available in our U.S. stores. (indiscernible) we're very encouraged by the new exclusive 20 Pack (ph) collection that was first introduced last December. 2004 should be another strong year for the boot business.

On the apparel front, we expect to continue to generate strong sales gains from our private-label products.

The demand for the licensed categories is expected to remain very solid.

I'll Now provide a review of our individual business units.

Footlocker.com/Eastbay produced yet another strong quarter of sales and earnings growth.

For the full year, our direct to customer business generated a 4.9 percent increase in sales to $366 million and a 33 percent increase in operating profit to 53 million.

This business model is more productive than our store-based business with an operating profit margin of 14.5 percent.

The significant increase in operating profit is attributable to several factors, including the continued explosive growth of the consumer acceptance to the Internet channel, very diligent expense management and strategic partnerships with third parties.

These partnership arrangements are with well-known third parties, including the NFL, the NBA and Amazon.com.

Most recently, footlocker.com entered into a six-year agreement with the United States Olympic Committee, providing us with the exclusive rights to sell the USOC-licensed products through catalogs and via our new e-commerce site.

Our U.S. store business had a mid-single digit comp store gain during the fourth quarter which was a significant trend improvement versus the first nine months of the year.

The kids segment posted the strongest results, followed by Foot Locker, Champs and our lady's division.

As already mentioned, our U.S. store results began to improve during the fourth quarter, having reached the one-year anniversary of several factors that hindered growth during the first nine months of 2003.

As such, we believe that our U.S. business is very well positioned for substantial profit growth in 2004.

Our sales and profit growth in Europe continued to be strong during the fourth quarter.

Comp store sales increased mid-single digits with operating profit growth exceeding that of our sales growth.

For the full year, this division recorded sales and profits while maintaining a pretax margin rate well in the double digits.

Under our new leadership of Tom Slover (ph), the CEO of Europe, we have built a very strong team over there.

During 2003, we opened 54 stores in Europe, ending with 427 stores in 12 countries.

We plan to continue our expansion in this market with an additional 50-60 new stores scheduled to open in 2004.

This expansion plan includes opening stores in major cities of new markets, such as the Republic of Ireland, Hungary and the Czech Republic.

Therefore, we expect to end 2004 with approximately 480 stores across 15 European countries.

In total, we opened 113 stores during 2003 while closing 128.

As such, we ended the year with 3610 stores in 16 countries.

During the year, we also remodeled and relocated an additional 250 stores.

Our capital expenditure plans for 2004 call for spending $165 million, which includes 110 new store openings.

Store closings will depend on several factors, including landlord negotiations.

In total, however, we do not expect to close as many stores this year as we did in 2003.

We continue to study various markets in the Asia-Pacific Rim, with an eye towards future growth.

We have operated Foot Locker stores in Australia for many years and have recently expanded into New Zealand.

We also operate four high-volume stores in Guam, which will fold into the Australian operation, forming a new Asia-Pacific division.

Our Australian operation had a very strong year in terms of sales and earnings growth in 2003.

Its strong management team and well tested infrastructure provides a base from which we can over time very carefully consider expanding into the Asian markets.

In the United States, we will continue to selectively open new stores while concentrating on updating the appearance and right-sizing our existing fleet.

In total, we completed over 400 real estate projects during 2003 and expect to complete a similar number during 2004.

We also continue to invest in several projects designed to strengthen our sourcing, information systems and merchandise distribution capabilities.

We installed a new point-of-sale system in our Champs stores during 2003 with the rollout Foot Locker already underway in 2004.

We have also made plans to expand our European distribution center in 2004 and recently enhanced the productivity of our direct customer fulfillment center in U.S.

We're expanding our DC in Europe in excess of 50 percent this year to meet our needs.

We continue to strengthen our financial position during 2003, and this will remain a key priority for the current year.

We expect to improve our cash net of debt deposition by another $100 million during 2004.

Obtaining an investment-grade rating and becoming better recognized as one of the better premier retail companies in the world remains a high priority for our company.

As always, our overriding objective is to continue to meaningfully enhance value for our shareholders.

We firmly believe that we can grow earnings-per-share between 10 and 20 percent each year.

This expectation is consistent with the annual guidance that we have provided in prior years.

Over the past five years, we have met, and in most cases exceeded, those expectations.

Looking towards 2004, we are providing the same 10-20 percent earnings-per-share guidance.

This earnings guidance is based on a low to mid single digit comp store sales increase.

For the first fiscal quarter, we also expect earnings to increase 10-20 percent from continuing operations.

In summary, we are very pleased with our fourth quarter and full-year financial results.

We finished the year strong with a very exciting profit improvement over the prior year.

I am extremely proud of our corporate and individual management teams who continue to deliver on challenges.

Rick Mina, along with our division presidents, deserve a lot of credit for the sales turnaround in the U.S. operation.

Our direct to customer division and international businesses posted some very impressive financial results.

And from an expense standpoint, Bruce Hartman's leadership was instrumental in continuing to make our business more efficient.

We remain well on track with our previously stated goals of growing our store sales per square foot to $350 and operating profit margin to 8.5 percent of sales.

Before I turn to your questions, I would like to thank all of our associates for Foot Locker's greatest asset.

It's through their hard work and dedication that we have made so much progress over the past five years.

I will now be happy to answer your questions.

Thank you.

(Operator Instructions).

Ed Kelly (ph), Credit Suisse First Boston.

Good morning, guys.

This is actually Ed Kelly (ph).

Congratulations on a nice quarter.

Matt, just want to ask you a question about today's Footstar bankruptcy filing.

Can you discuss your thoughts on the impact on the industry in both the near and longer term?

First of all, we regret the impact of this decision that it will have on the Footstar associates and the families.

With that said, this is clearly the first stage -- they just filed this morning, and at the appropriate time as things shuffle out, we will look at what is out there.

Clearly, the filing, I did not see the condition of the Company.

As you know, they have not filed financials for some two years, so I did not see the assets and liabilities and what the financial condition of the operations are.

So I don't believe they have yet announced what their strategy is, in terms of exactly how many stores they're going to close, but we will be reviewing it in the coming weeks and months.

Okay.

Can you provide an update on your relationship with Nike, specifically maybe get some detail on the marquis product you will begin selling in May, and also discuss when you expect your business with Nike to return to historical levels?

Sure.

Obviously, after many meetings and a lot of discussion, we feel very comfortable that, beginning in the middle of a second quarter, that we will have somewhat of a full re-engagement.

Both companies are proceeding carefully.

We want to be sure that we just don't buy goods and they don't sell goods for us just to get the numbers back up.

But the relationship is back on track and we think that we will get to historical levels in the latter part of '04 and clearly in '05.

Great.

One last question.

Can you elaborate on your outlook for licensed sports apparel?

Do you see this business slowing at all?

It's been somewhat of a slowdown, but it is still increasing and we think that there is some mileage ahead in the business.

And you have a lot of new, exciting sports stores out there that -- the LeBron program and Carmello Anthony and a lot of other exciting ballplayers will be out there in the fall season and the latter part of the spring season.

So there's been a lot of talk recently about the license sector, but I think if Reebok in particular has the right athletes and the right products, I think it is still a growth business.

Great, thank you.

Rob Drbul, Lehman Brothers.

Good morning.

I have a couple of questions for you.

First, can you give us how much Nike ended, in terms of '03, the cost of goods line for you guys, and then your expectations for that number in '04?

Second question is related to the gross margin.

When you look at -- (indiscernible) you guys had talked about some new point-of-sales (indiscernible) coming on.

How much of the gross margin expansion in '04 do you think will come from that, and when should we start to see that?

As I understand the first question is -- what our penetration was for Nike?

Yes.

We will have that available (multiple speakers)

That will be put in the 10-K.

It is not -- we're just going through the audit process now and it will be firmed up in the next week or so, but it's getting back on track.

Don't forget, now, when you look at Nike, you also add Converse in there too.

It's a division of Nike.

I'm not trying to skirt the answer, I don't have the exact number yet.

On the POS question, Bob, that is more of a sales and customer service game than it would be a margin rate change.

We expect to increase sales out of some of the initiatives, and obviously improve customer service as well.

Okay.

Just a follow-up on the Nike.

Can you give us a range, in terms of where you think it might end up '03, and then your expectation for a range in '04, including Converse?

Yes, I will give you a range.

Low of 38 to a high of 44.

Alright, thank you.

Robbie Olms (ph), Bank of America.

Thanks.

Two quick questions.

First, I was a little surprised that the gross margin actually wasn't even stronger in the fourth quarter, given how strong it was in the third quarter.

If you could comment on that end, and then also how you are thinking about gross margin or how we should think about gross margin in '04 when you add up 50 basis points of occupancy and maybe some commentary you guys had in your release about the promotional environment improvement.

And the other question is -- I have to ask -- what scenario -- when I hear you guys talk about you had -- the comps have started to improve, you're getting more Nike product in, you have the occupancy cost benefit coming in.

What scenario is it where you would hit only 10 percent earnings growth in the next couple of quarters?

Thanks.

This is consistent with the way we have been guiding the street for some five years now, that we are very comfortable with a 10-20 percent range.

One never knows what dynamics could hit the business and we traditionally have been conservative in our forecast.

With that said, I think we have to be responsible.

We have had enormous growth in earnings.

I went through the five-year history and we are not going to deviate from the 10-20 percent guidance, unless business in the athletic footwear industry goes absolutely off the charts.

So clearly, we are comfortable with that and we think it is prudent and we always like to beat our forecast.

I think we have a five-year track record here of generally continuing to outperform what we forecast.

With that said, you could call it conservative.

I think that particularly Bruce and I look at the business and we look at it in aggressive conservative fashion.

And we don't want to disappoint any share owners and we would like to continue to give them good news.

The other question on margin?

Gross margin.

On the gross margin, we had a pretty good performance in the fourth quarter.

One of the things that we really have to be careful with going forward is, first of all, I believe that from all of the analysis that I have that we have the highest gross margin in our sector of any of our principal competitors.

And that doesn't mean that there is not room for improvement.

We have identified the potential 50 basis points a year for the next several years.

You have to be very careful with the product margin.

Don't forget, we have built a huge apparel business here, particularly in private label.

We do not want to overprice the merchandise.

That is a key ingredient in really hurting your sales momentum.

So in terms of gross margin, we are comfortable with 30-80 basis point spread for 2004.

And then sometimes, as you have slow selling products, slow selling periods, we are not bashful.

We take our markdowns and clean it up.

We run a very clean ship here, we are very current on our aging and we want to continue that strategy.

Our focus now, in gross margin, SG&A, are the key components in the measurement of the business.

With that said, we really want to drive some sales this year, and we drive a lot of sales at, you know, last year's margin.

That's stuff will sink down to the bottom line.

Matt, in terms of your promotional approach to '04, will you be doing less promotions in you were in '03?

Yes, clearly less.

We think the business is healthier.

It looks like some people are going to be shaking out and I think the competitive landscape will soften.

That will obviously allow us the opportunity to promote less and we promoted a lot less last year.

The promotional piece of the business is not going away.

It is to what degree you promote.

And we have weaned ourselves off of a lot of the promotional vehicles we had.

And I might add that five or six years ago around here, that we needed to promote because our two principal competitors were promoting very aggressively and we were not and a very injurious (ph) to our results.

As the competitive landscape and the promotional activities subsides with the principal competitors, clearly, we will take the leadership role.

Terrific, thanks a lot.

Jeff Edelman, UBS Warburg.

Thank you, good morning.

Europe has been quite a bright spot for you.

You don't give us too much in the way of numbers on that.

Could you give us some sense where international ended the year, in terms of sales, and roughly what Europe was as a percentage of that?

And maybe Bruce, could you provide a little bit of insight as to how much Europe has been able to move the needle, in terms of the corporate operating margin?

We obviously for competitive reasons don't break at Europe separately, but in my prepared remarks, we had mid-single digit comps.

We opened I believe 54 stores and we're going to continue that strategy over there.

We see Europe continuing to be a very important growth vehicle for us.

And further than that, I don't think we want to comment.

Their operating profits are very rich.

It's essentially a regular priced business in total over there.

They still have regulated markets, i.e., Italy, France, Spain and some of the other countries.

Most recently in Germany this past February, they opened the floodgates and they have taken off the controls, in terms of windows when you can and cannot promote.

With that said, in Germany, and it was one of our stronger markets last year, we took the high road and ran a regular priced business and had a very, very strong year over there.

The UK is highly, highly promotional and is similar to the U.S.

You have your JJV (ph) Sports over there, and the first part (ph), which I was acquired by JD (ph), I think will take somewhat of the promotional edge off of that market. but you have a lot of independents in the UK and it is a highly promotional business.

We feel good about Europe, a very strong team over there.

We run into some bumps in the road because we have had staggering growth.

I probably never have said this on a conference call, but we will clearly this year be in excess of $1 billion in Europe, and that business was around $200 million two years ago.

So we have had some very nice growth in sales and earnings.

So we view it as a continuing growth vehicle.

Comps could soften up over there, but we don't need big comps, as long as we continue to going into these new markets with exciting stores.

And as I said, we're going into the central Europe and we think that that has great potential.

We know some of our key suppliers have had enormous gross in central Europe, so we're really looking forward to that.

Okay, if I could just follow up now.

Bruce, as you indicated, we should be able to pick up about 200 basis points in operating margin over the next let's say 4 years through lower occupancy costs.

You should clearly get some operating leverage domestically now with some higher comps and we raised the percentage of Europe over the next several years.

Shouldn't a 10 percent operating margin be a more realistic goal than 8.5?

Very interesting that you mentioned that.

That's our new goal and we have not said that publicly, but since you put it on the table, yes, we think we will get there in several years.

We had an 8.5 percent goal, and as our business has grown nicely and we continue to achieve exciting operating results and expense efficiencies and really have nailed down all of the components under Bruce's leadership, particularly in the expense owners, we have been -- and you folks have been around a long time, we've had for a number of years very, very strong flowthroughs down to the bottom line on incremental sales.

So to answer your question, yes, that -- we have been working on this for the last couple of months and that is clearly our new goal.

Great.

Since you're in the talkative mood and this is a public forum, have the sales trends from the fourth quarter continued here into the first quarter?

We normally don't give out monthly information.

We have stuck to our guns with quarterly information, but the month of February, we had a low single digit comp increase.

Okay, great.

Thank you.

Virginia Generro (ph), Merrill Lynch & Co.

Thank you.

Two questions, maybe for Bruce and/or Matt.

Bruce, you guys on the gross margin, in October, gross margins were up 200 basis points on flat comps.

And in January, you had comps up 4 and they were up 50 basis points.

And I know Robbie asked this as well, but was there anything aberrant in October, or is there a variability in gross margins quarter to quarter, sort of depending on the mix and the seasonality.

As some of our competitors' business has slowed, we were offered some very exciting branded footwear products at very rich margins.

And quite frankly, we see the opportunity and brought a significant amount of that merchandise and it gave us a real bump.

That was in October then?

Yes.

Thank you.

Secondly, guys, maybe on the cash balance, you have -- I know this is your seasonally sort of high watermark in cash, but you're converted in the money and I think it's sort of convertible or redeemable coming up in June, so that is an additional sort of 150-plus million that's being counted as debt, but will probably be converted to equity, I don't know.

So what else would you, I don't know, buy back stock, or what else could you tell us you would do with the cash, particularly because it is yielding so little?

Well, we could continue to invest in the business, look for strategic accretive acquisitions down the road, continue to increase in the dividend, find, retire some of that tranche of 8.5 percent debentures and keep a very strong cash position while heading towards -- a real very important goal for our organization is to get to investment-grade, and we're hopeful that that is going to happen in the near future.

Thank you.

Lastly, your guidance of 10-20 percent earnings growth, I think, it sounds like Bruce it is predicated on very low-single digit comps because if you take your math of the 29 percent contribution on incremental comp point, that says that every incremental comp point is another 7 cents in '04 or another 5 percent of EPS growth.

If that fair?

Well, a lot of that depends on -- sound wishy-washy here -- but a lot of it depends on lots of moving parts, Virginia.

And I think we could get caught up in our words here if we weren't careful.

I think we should really go back to the 10-20 percent guidance, and that is typical of what this company has produced.

In fact, in few of the years, we've produced in excess of 20 percent and I think that that is probably best where we leave it right now.

The Company expects to earn more than double-digit increases and we're going to continue to expect to do that from both ourselves and our employees, and I think that is how we should all look at our business right now.

And that's based, Bruce, on a 1-2 percent type of comp?

I think Matt said in his prepared remarks, a low to mid single digit comp.

Thanks guys.

John Shanley, Wells Fargo Securities.

Good morning.

Matt, the e-commerce business seems to be really be doing extremely well.

How much more upside could there be in the domestic e-commerce operation?

And also, could you give us an insight in terms of what is happening with bringing that same format into your European market opportunities?

We continue to see strong double-digit growth in the e-commerce sector of the business.

With that said, the catalog business continues to be off.

So in aggregate, when you combine the blended businesses together, we are experiencing very strong sales and operating profits.

In terms of Europe, I thought I announced it on a previous call, but we closed the operation about 6-8 months ago.

We had a lot of difficulty in operating that business.

It was something that, by the way, that I pushed because of our success over here.

Tremendous amount of language barriers.

The other thing that is a key ingredient in our Internet business is a significant amount of the purchases that are made on the Internet are made off of the catalog.

In other words, the kids look at the catalog and they take them, they share them with each other and we don't have that luxury in Europe, we don't have a catalog operation.

Also in the Eastbay operation for like a dot-com, we have 30,000 SKUs and we were operating this out of our DC with far less of an assortment.

So it really hasn't worked.

The language barriers were a very, very key ingredient.

And then unfortunately, what we experienced over there in a short period of time was a significant amount of credit card fraud, which apparently they don't have the firewalls in place at this point to guard against that as we do in the states.

So it never became a big business.

We took the write-up -- in fact, wasn't it in the press release?

I thought it was.

I don't think it was in a press release (multiple speakers).

We took the write-up in October or something.

Small write-off.

Small write-off, not material.

Good enough.

And the top growth potential in the domestic operation then for both the Eastbay as well as the catalog operation -- how big can this business get, do you think, over the next couple of years?

We think we can clearly get to $500 million.

Secondly, you mentioned it is a less promotional environment out there and basically one of your major competitors has clearly stumbling based on the bankruptcy filing this morning of Footstar.

Is there a possibility that you could attain both your goal of growing your topline and still achieve somewhat better gross margins than you attained in '03?

Yes, you got to see how it plays out, John.

Bankruptcy is a very dicey business.

The Company could survive.

The rumors that are floating around, you hear one day they're closing a bunch of stores, one day they're selling the division to financial buyers.

So until we see how that all plays out, I would be reluctant to comment on that.

Fair enough.

Bruce, I had a question for you.

Are there substantial additional low-hanging cost savings that you can still take advantage of, in terms of lowering the SG&A line?

You've done a great job over the last couple of years, but are there more that are readily attainable?

Yes, there are, John.

A lot of the productivity improvements that come out either through increased IS (ph) efforts or new technologies that are developed by our suppliers, whether it be with lights or supplies or phone services or things like that, consistently come out and one of our challenges and one of the toughest challenges for the organization is to stay up with all of the new things that occur and new ways to do things.

And as those occur, John, you can be sure we will be very, very aggressive in pursuing them.

Super.

Thank you very much.

Jim Duffy, Thomas Weisel Partners.

Thank you.

On the tax rate, Matt, in the past, you've mentioned that you think there might the opportunity to get that lower.

You said you were working around some things with that.

And certainly as your international business grows as a percentage, that might be a possibility.

Can you comment on what we should be working with going forward?

I will let Bruce take that.

We generally say that 37 percent is the rate that we plan to each year.

And fortunately as our earnings have grown, our cash position and our financial position certainly have strengthened as well.

One of the downsides in a significant increase in earnings like we've had is that the pressure is put on the tax rate because some of the credits and things you get along the way become dilutive.

So I think for the time being, if we all just stuck with 37 percent, that would probably be the wisest choice.

Matt, you listed off a whole list of things which you expect to be strong going into next year.

Are there any trends that you think may be played out that have kind of run their course?

What are some areas that you think might be weak?

I believe that lower-priced footwear, there will be some pressure on that sector of the business, particularly a lot of our competitors where they're selling a lot of $39.99 and $49.99 product, that as the low-profile footwear, in some cases, the real fashion low-profile footwear is beginning to soften a little in favor of some more performance product.

I think that there could be somewhat of an exposure in that.

With that said, that's a good thing because you're obviously selling more high-priced product.

I would say that's the principal, if you want call it vulnerability.

I would say that is it, but it could be more of a positive than a liability.

That is the area we see slowing down.

Eventually, the white shoes, the classics, will begin to slow down.

The cycle has been almost 3.5 years now.

Right now, they're still doing well, but this is a very cyclical fashion business and as more of the colorful-looking product comes into the system, I think there could be a slowdown there maybe in the fourth quarter into next year.

We've seen a lot of strength from athletic footwear in general.

Do you think this something that is sustainable going forward, or is it part of a cycle that we're in?

The entire fashion business is cyclical, and it's an Olympic year.

Always, if we look back on our historical records and we look back at the industry, the last decade and a half as the business has matured, it always bodes well for an athletic footwear and apparel business.

So I think that is a positive.

But you know, a new fashion trend could emerge and everybody wants brown shoes again.

So we don't see that happening, but there's always something on the horizon.

Such is the nature of the game.

Can you comment on the early traction with the Think Pink initiative?

Yes.

We've just gotten it into our system.

On our last conference call, we said that we would have a new initiative in color, and it's very strong and we believe that Rick Mina and his team really jumped on this opportunity, and that within the next 30 days, we will have a staggering amount of this merchandise in our stores and we hope that it is another competitive differentiator and could be a lot of nice, clean business.

Right now, anything with pink on it is flown (ph) out of the stores.

We have over 1 million T-shirts just in Foot Locker alone that are pink.

It's a pretty big commitment on our part.

Thank you.

Operator, we have time for one more question.

George Lusch, Fulcrum Global Partners.

Thank you.

Hey Matt, I hate to harp on this, but you guys had mentioned that the fiscal year guidance was based on a plus low- to mid-single digit comp (ph).

So I'm assuming the first quarter would be the same?

And then you had mentioned obviously it's an Olympic year this year.

Does that bode well for the branded product on the apparel side?

Yes.

It could give it a good jolt.

I guess the first quarter, guidance is based on a plus low- to mid-single digit?

Yes.

I believe I said that in my prepared remarks, that low- to mid-single digits, yes, consistent with the year.

Okay, thank you.

We thank everyone for their participation today.

Have a good day.

This concludes today's teleconference.

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