Foot Locker Inc (FL) 2004 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Foot Locker first quarter 2004 earnings release conference call. (OPERATOR INSTRUCTIONS) 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 effect of currency fluctuation, consumer preferences, and economic conditions worldwide, and other risks and uncertainties described in the company's press release and SEC filings.

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

If you have not 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 over 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 our income from continuing operations for the first quarter of 2004 increased 15 percent to 31 cents per share.

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

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

As you know, on May 7th we closed on the purchase of the 350 store Footaction chain.

We're very excited about this acquisition and will provide some guidance during today's call regarding its integration into our Foot Locker operation, strategies in running this business, and the synergies that we believe we can bring to this chain.

After our prepared remarks, we will answer your questions.

In summary, we are off to a solid start for the year and remain confident that we can meet or exceed our 10 to 20 percent earnings per share guidance for the year.

Key highlights are as follows.

Total company sales increased 5.1 percent.

SG&A expenses as a percentage of sales improved by 50 basis points.

Our EBIT margin improved by 70 basis points.

Net income from continuing operations increased 21 percent to 47 million.

Earnings per share increased 15 percent to 31 cents from 27 cents last year.

Our cash position net of debt improved by 105 million from the same period last year.

We are particularly encouraged that our US and store business is gaining sales momentum, which makes us more optimistic for the balance of the year.

I will now turn the call over to Bruce Hartman.

Good morning.

We are pleased with our first quarter performance from both a financial and strategic standpoint.

While comp store sales were at the lower end of our expectations, total sales gains were solid and earnings per share increased at the midpoint of our guidance.

This represents another quarter of a lengthening trend of very steady earnings growth and strong cash flow.

We're also encouraged given our improving sales trend in the United States in April versus March and February.

This improving comp store sales trend is continuing.

During the last two quarterly conference calls we discussed several external factors that provided resistance to sales growth in our US stores over the prior several quarters.

We also explained why we believe that our company was reaching an inflection point whereby these issues would be less of a factor going forward.

These factors included a two-year trend towards lower average selling prices, a challenging retail environment, and some important marquee product that was missing in our US stores.

We are very encouraged with the improving sales trend that we're experiencing in our US stores, a trend that we expect will be further enhanced in the second quarter as we begin to receive some important Nike product into our stores that we have been missing for the past 18 months.

By division our first quarter comparable store sales gain breaks out as follows.

Our combined US Foot Locker business including Foot Locker Kids and Ladies reflected a solid low single digit increase.

Champs comp store sales was essentially flat.

Foot Locker International including our European business declined low single digits.

Footlocker.com sales were essentially flat with last year.

By month comp store sales increased very low single digits in February, decreased very low single digits in March, followed by a solid low single digit increase in April.

In summary, our solid US store sales were somewhat offset by a low single digit comp store sales decline in our international business.

This is a reversal of a trend that we had experienced during the first three quarters of 2003.

We believe that these results demonstrate the benefits of our global diversification.

This diversification enhances our ability to consistently increase our earnings each quarter and produce strong cash flow by mitigating the risk associated with certain external factors in any one market or economy.

Our total international sales, however, continue to increase as our new stores are performing very well, and we benefited from a stronger euro currency versus the US dollar.

In fact, our first quarter total European sales in US dollars increased in excess of 20 percent.

Our gross margin rate declined 20 basis points versus the first quarter of last year.

Our merchandise margin declined somewhat as we took additional markdowns in Europe to keep our inventory current and in line with our plan.

Our tenancy rate, however, improved versus last year.

On recent conference calls we discussed four key initiatives that are driving an improvement in our occupancy costs -- opening new stores in more productive markets; lowering our store build-out costs; closing and reducing the size of certain larger stores.

We also communicated to you that we expected our occupancy rate to decline approximately 50 basis points each year over the next four years, assuming we generate a low single digit comp store sales increase.

Our first quarter financial results reflected a 60 basis point improvement in our occupancy costs.

Gross margin was enhanced by 20 basis points and our depreciation rate was enhanced by 40 basis points.

We continued to make nice progress during the first quarter, completing 120 real estate projects.

Our divisional profit margin on these stores is expected to exceed 10 percent.

Our merchandise at the end of the first quarter was 11.7 percent above LY.

As you know, with the addition of Footaction our store base has increased by almost 10 percent.

This strong inventory position will allow us to readily flow fresh goods into our new Footaction business while continuing to service our existing store base and newly planned openings.

Our first quarter SG&A expense rate improved by 50 basis points versus LY.

We continue to benefit from the profit improvement ideas we implemented last year in addition to the new initiatives that were completed during the first quarter.

Our associates are very active in seeking new productivity measurements, including the utilization of the latest technologies to make our business much more efficient.

For example, our new competitive bidding process for supplies and services that I discussed on previous calls continues to gain momentum.

In fact, we currently expect this process to generate savings of five cents per share in 2004.

During the first quarter we began to more actively implement these processes in our European operation, and to the credit of our Foot Locker European associates $20 million in expense opportunities have already been identified that will immediately benefit this operation and help ensure another year of rich, double-digit profit margins and meaningful earnings increases.

These expense initiatives include renegotiating or re-bidding many SG&A expenses, including store supplies, repairs, maintenance, services, packaging materials.

We also plan to aggressively audit our expense invoices through a process that we've been very successful with in the US.

As we've already mentioned, our financial position strengthened during the first quarter with our cash position net of debt having increased by $105 million.

This included making an additional $50 million contribution to our pension plan in February 2004.

Our strong balance sheet also puts us in an advantageous position to opportunistically acquire with cash the 350 Footaction stores earlier this month.

We are very excited about this acquisition and believe the Footaction brand will be very complementary to Foot Locker.

The $225 million investment in 350 stores is very similar on a per store basis with our current costs of opening new stores.

Over time we expect these stores will generate at least adjusted double-digit internal rate of return, well in excess of our estimated eight percent cost of capital.

We are also very pleased that the integration of the Footaction business into the infrastructure of Foot Locker is essentially complete.

This required a significant effort from many parts of our organization.

The experience we developed from this process is important to our company and becomes somewhat of a strategic weapon as we continue to explore other acquisition opportunities.

We are taking a very conservative planning posture for 2004 in regards to the Footaction store integration while we remerchandise and begin to spruce up the stores.

As such, we're planning for this business to be breakeven to mildly accretive in 2004, but to add 10 cents or more per share to our earnings base in 2005.

We are hopeful that we will exceed these estimates, but believe it is prudent to provide conservative estimates at this early stage of integration.

We're also pleased to announce today that we have closed on a new financing arrangement with our existing banking group.

This arrangement includes amendment to our existing $200 million revolving credit facility to extend the maturity for five years to May 2009.

In addition, we raised $175 million through a new term loan that amortizes over five years.

The current floating interest rate is approximately 2.6 percent based on a LIBOR plus a 1.5 percent spread.

Earlier this month we announced the redemption of our $150 million 5.5 percent convertible notes.

Due to our stock price trading significantly higher than the 15.806 conversion price we expect most note holders to convert into shares of common stock on or before June 3, 2004.

As such, we expect to save over $8 million in annual interest payments, while reducing our debt and increasing shareholders' equity as a result of this conversion.

There will be no impact on EPS in that the convertible notes are already included in our fully diluted share base.

Essentially, the new $175 million amortizing term loan replaces the $150 million convertible notes, leaving our total debt at the end of the second quarter just $25 million higher than before the Footaction acquisition.

We also have the flexibility to repay this new debt at any time without penalty.

In total we expect our 2004 interest expense to be at or below last year's $18 million level.

At this time we would like to publicly thank our bank group for their ongoing support and the tremendous responsiveness that they showed in the execution of this transaction.

This refinancing plan puts our company on a stronger financial footing, which allows us to continue to reinvest in our existing businesses, pursue additional bond purchasing, consider future shareholder dividend increases, and be in a strong financial position to actively seek additional strategic acquisitions.

At the same time striving to attain an investment grade credit rating remains a high priority for our company.

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

Good morning.

As Bruce mentioned, we are off to an encouraging start in 2004 with an opportunity for sales and earnings to accelerate later this year.

Sales of the classic footwear category continued to be the key driver during the first quarter.

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

The new exclusive 20 Pack line from Nike, retro looking issues dating back to 1984, also sold through very strong during the first quarter.

We began to introduce more color into our assortments during the first quarter, a trend that will likely continue throughout 2004.

We highlighted the color pink, including our think pink store promotions, which turned out to be a winning strategy.

You should expect to see some similar types of programs throughout 2004 as we continue to differentiate our product offerings from our competition.

The downside to this current classic trend is that our first quarter average selling price declined mid single digits during the first quarter 2004.

As we move into the second quarter of 2004 we expect our average selling price to flatten versus last year before progressively increasing during the fall season.

We expect this trend reversal to develop as we gain greater access to higher price point marquee footwear in the US stores, primarily from Nike, and a return to a more technical based footwear business.

On the apparel front we expect to continue to generate strong sales gains from our private-label products, as was the case during first quarter, and look forward to the trend to improve on the branded side of the business.

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

In line with our expectations, the growth of licensed apparel did subside somewhat during the first quarter.

Our apparel strategy is being modified to more carefully select product to suit our customers' current tastes.

We also have the advantage of being the first to market with products from winning teams due to our team edition manufacturing division located down in Bradenton with our Champs division.

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

Footlocker.com/Eastbay produced essentially a flat quarter in terms of sales, but generated strong increase in earnings.

For the quarter our direct-to-consumer business generated a 22 percent increase and improved its division profit margin to 13 percent versus 10 percent last year.

As we discussed on previous calls, our Internet sales continue to grow at a very healthy pace, but do detract from our catalog business.

We are finding increasing evidence, however, that our catalogs are extremely important to the total sales of this division as customers browse through these catalogs and quarter online.

In fact, we made a misstep early in the first quarter by reducing our catalog distribution to save some expense dollars.

The result was not only a reduction in catalog sales, but also a slowdown in our Internet growth.

As we increased our catalog distribution in April sales in this division rebounded to prior trends, a lesson well learned.

In total the US store business generated a low single digit comp sales increase during the first quarter.

The Foot Locker division posted the strongest results, followed by Kids Foot Locker, Champs, and our Lady Foot Locker business.

Profits from these divisions also improved, with the largest percentage increase in Lady Foot Locker.

We will continue to selectively open new Foot Locker and Champs stores in United States, while also concentrating on updating the appearance and right-sizing our existing fleet.

During the past three years we have remodeled or relocated 544 stores in United States.

We plan to continue this process with approximately 200 remodel projects scheduled in each of the next two years.

As such, by the end of 2005 we expect that over 80 percent of our Foot Locker and Champs fleet will have been renovated or will be new stores.

We plan to operate most of the Footaction stores under its existing name, which we believe will be complementary to our existing brands.

It is really too early to consider any expansion plans for this format, but is a possibility for the future.

While the first quarter comp sales increase in our European stores declined low single digits, our total sales in this market stated in US dollars increased by over 20 percent.

As such, we continue to increase our market share in this region.

The recent sales softness in Europe is somewhat concentrated in our stores in the UK, France and Spain, and even more specifically London, Paris, and Madrid.

Our stores in Italy and Germany, on the other hand, have continued to generate solid comp store sales increases.

We believe the issues in the UK, France, and Spain are driven by several factors.

The promotional environment in the UK intensified due to some overstock positions of key competitors.

The UK has historically been the most competitive market in Europe.

We believe the stronger euro currency has put pressure on tourist spending habits in these cities.

On the other hand, the strengthening euro currency has enhanced the translation of our total sales and profits generated by our consolidated European operation.

Economic conditions in Europe remain soft with high levels of unemployment, low overall growth, and weak consumer spending.

The situation in Europe is similar to that which we experienced in 1997 and into 1998.

The last time it was short-lived and we navigated through it just fine.

We're quite confident that our division profit in Europe will continue to increase in 2004 with pre-tax margins remaining at historical levels.

In fact, the pre-tax margin rate of our European business remained well into the double digits during the first quarter.

Under the leadership of its President and Chief Executive Officer Tom Slover, we are beginning to make some real headway in implementing many of these same cost efficiencies in Europe that we have already benefited from in the US.

As Bruce mentioned, we believe it is a big play.

We're moving steadily ahead with our expansion plans in Europe with 12 stores open it during the first quarter.

At May first we operated 436 stores in 12 European countries.

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

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

Therefore, we expect to end 2004 with approximately 475 stores across 15 European countries.

During the first quarter we formally established our Asia-Pacific division under the direction of its President, Spiro Chrisitomo (ph), formerly Managing Director of Foot Locker Australia.

The headquarters of this expanded division remains in Australia, but the management's responsibility has been expanded to include four Guam stores in addition to our five stores in New Zealand and 81 stores in Australia.

Going forward we will continue to study various new markets in the Asia-Pacific Rim with an eye towards future growth.

We have a lot of confidence that our strong management team and well tested infrastructure in this Asia-Pacific division provides a base from which we can over time very carefully consider expanding into additional Asia-Pacific markets.

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

The roll out of our new POS systems to Foot Locker is well underway and scheduled to be completed during the fall of this year.

By the first week of June we expect to have this new POS system fully installed in our recent acquisition of all the Footaction stores.

We're also making good progress in Europe with the expansion of our distribution center which will double its capacity, providing the appropriate infrastructure to support our existing store growth plans in that region.

The facility will go from approximately 3000,000 feet to 500,000 plus feet.

In total, during the first quarter we opened 21 stores and closed 44 stores.

We ended the quarter with 3,587 stores in 16 countries.

With the acquisition of the Footaction our store count is currently 3,936 stores.

Our 2004 capital expenditure plans have been increased by $15 million to $180 million.

This increase is related to the Footaction purchase, to install new POS registers, and for some basic maintenance and updating of the stores.

We are generally pleased, however, that most of the Footaction stores are in good condition.

As Bruce already covered, we continued to strengthen our financial position for the first quarter with cash net of debt position increasing by $105 million.

The financial position allowed us to negotiate from a position of strength and enabled us to provide an all-cash offer for the 350 Footaction stores.

It is our objective to maintain and further enhance our financial position going forward.

As such, we are very pleased to have completed the extension of our $200 million revolving credit facility and our new $175 million term loan that are coterminous for five years.

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

In summary, we're very pleased with our first quarter financial results.

We had a very solid quarter, achieving our earnings plan, and are well positioned for the balance of the year.

As such, we're reconfirming our 10 to 20 percent earnings guidance for the full-year.

For the second quarter we also expect 10 to 20 percent EPS growth.

Second quarter earnings per share guidance is based on a low single digit comp store sales increase, flat merchandise margin rate, and continued occupancy and SG&A leverage.

Keeping with our conservative planning posture, we have not built any earnings per share accretion from the Footaction business into our 2004 forecast as we concentrate on remerchandising and cleaning up the look of the stores.

We expect that each of the stores average approximately 1 million in sales during the balance of 2004.

During 2005, however, we expect that each of these stores will generate over 1.4 million in sales and produce an operating profit margin in line with that of the average of our US stores.

We have absorbed the Footaction stores into the existing infrastructure of Foot Locker.

Eliminating most of its previous overhead allows us to operate the business with a much lower cost structure than under its previous ownership.

Initially we will remerchandise the Footaction stores, utilizing goods from current inventory and for our existing on order position.

We're actively working with our key suppliers to order new merchandise specifically for these stores to maintain a differentiation from our other formats.

We expect that approximately 25 to 35 percent of the footwear content in the Footaction stores will be different from that of Foot Locker.

Our goal is to return Foot Locker to its previous position of the leading provider of marquee footwear in America.

Improved apparel assortments may be the most significant sales opportunity in the Footaction stores.

Our strategy is to merchandise these stores with less private-label and more branded apparel than we typically stock in the Foot Locker stores.

Before I turn to your questions, I would like to state that we're very pleased with our 350 store acquisition of the Footaction chain.

The cooperation that we received from the Footstar management team was extraordinary, which facilitated the full integration of these stores into our systems in a very efficient manner.

The acquisition adds 350 stores or 12 percent to our 3,000 store US base.

We believe that the purchase price was fair and in line with our typical store opening costs.

A key advantage of this acquisition is that the stores have a very solid sales track record, and we believe with our synergies this chain well earned an operating profit margin in line with that of Foot Locker in a very short time frame.

Keep in mind that these 350 stores are generally the most profitable of the former Footaction 600 plus store athletic division, so we really got the cream of what was left from the chain after the closing the last 2, 2.5 years, and the obvious liquidation of 77 stores.

The infrastructure integration is essentially complete and we expect to have the stores remerchandised during the second quarter.

New visuals will be added to the stores over time as we promote the Footaction brand.

The purchase of Footaction was Foot Locker's first acquisition since 1997 when we acquired our highly profitable Eastbay operation.

I'm very pleased with the way our organization stepped up to the challenge that allowed us to capitalize on this unique situation.

We learned a lot, which better positions our company to consider future opportunities.

I would also like to take this opportunity to publicly welcome the Footaction associates to the Foot Locker organization.

I will now be happy to answer your questions.

Thank you.

(OPERATOR INSTRUCTIONS) Robert Ohmes, Banc of America Securities.

(technical difficulty) or is it actually declining in --?

We didn't hear the first piece of it.

Sorry.

A couple of questions.

The first would be on licensed apparel.

I was hoping you could give us a little detail in terms of is it slowing or is it actually declining.

And was licensed apparel the main difference between the performance of Champs versus Foot Locker?

In the second question would just be in Europe you mentioned some markdowns you took in the first quarter.

Where are you in sort of the process of taking markdowns over in Europe and is there anything on the product side that might get the business going over there maybe sooner than we all expect?

The Europe markdowns were really put in place to really keep that operation extremely clean.

We have had a very long run over there of running a regular priced business, very, very high currency level in our inventory.

So we took the initiative to really be sure that we were positioned because don't forget we had planned for a mid single digit increase.

So we had to deal with that inventor and we thought it was prudent at this point to deal with our problems and further get our inventories lined up for the second and third quarter with a low single digit comp plan.

The first question was the licensed apparel.

It slowed down somewhat.

Keep in mind that we have a very large business in that.

And clearly in the Champs division, as I think we've publicly stated, that half the business is apparel.

So their shoe business was pretty good in the first quarter.

The hit was principally in the licensed category.

But we're not totally discouraged with that business and we do seeing some opportunity.

But there is no question that there's a little bit of a slowing there.

Just on Europe, is there anything on the product side that you see coming out now that you've got inventories in line that could maybe help the business pick back up in the markets you are having problems?

We don't think it's the product.

We think it's markets specific.

When you look at Europe, our business in Germany has been good, our business and Italy has been extremely strong.

You can say Giacomelli went out of business late last year.

That was $0.25 billion operation.

And you've seen a lack of tourism in Paris, London, and to a degree obviously in Madrid, and we think that the traffic is soft.

The hotel occupancies over there in the cities I just mentioned are in the low to mid 60s.

We think it's a traffic pattern that is affecting us.

Also, the UK, some of our competitors appear to be overstocked and have started to promote a little aggressively.

And we're not going to get into that game.

We have built a very, very exciting, fashion-forward, leadership, regular priced business over there.

And as we mentioned, we're currently forecasting a low single digit decline.

With that said, for the first three weeks of May we have seen an improvement in that trend.

And most importantly, our top-line sales will be double-digit.

All our new stores are performing on plan or above plan.

So we expect even if we were to have the low single digit decline, we expect to have strong top-line sales and also a very, very strong double-digit pre-tax earnings performance over there.

Thank you very much.

Dennis Rosenberg, Credit Suisse First Boston.

When you talked about Footaction getting to the same margin as Foot Locker over a short period of time, are you talking about a four wall margin or are you talking about a fully allocated margin?

Fully allocated.

Why wouldn't you get the leverage since you're going through the existing infrastructure?

(multiple speakers) I think on a four wall basis --

You're going to be selling a lot of goods at the same retails and --

And other piece of it is the acquisition costs have to be charged off over -- I think we're going to do it over about a five-year period.

So that also affects it somewhat in terms of the intangibles and the way we had to book the purchase.

But we fully expect this to be accretive and as a percentage it won't be a drain on our overall ROS percent.

In fact, we expect it to be accretive.

And different subject, could you walk through the flow of Nike marquee product month-by-month or quarter-by-quarter and how you see the comps progressing throughout the year versus the low single digits you're projecting for the second quarter?

Clearly, beginning mid-June we will be receiving a lot more Nike marquee product and we think that by the fourth quarter receipt levels will be back to historical quantities and we will have in our inventories the lion's share of the marquee offerings that Nike offers to its other customers.

So as we get more of the marquee product, particularly things like Jordan, retros, and Shox, we think that our business will improve.

There's also a shift to the technical piece of the business, and we view that as good, a good thing, because a lot of the classics, they are much lower-priced.

You're talking about a lot of 80 to as high as $165 shoes in the Jordan category, so that's very healthy for the business.

Finally, the gross margin guidance you've discussed on the prior conference call, you said you were comfortable with a 30 to 80 basis point improvement for the full year.

Given the first quarter gross margin, do you still feel that?

I think that we're going to be looking on an annualized basis now with the Footaction acquisition probably a flat margin.

We've got a lot of cleaning out to do.

They haven't received a lot of goods in a long time and we've got a lot of work to do in getting those inventories in line.

They're completely broken in sizes, particularly in all the belly (ph) sizes -- sizes men's as an example, 9 through 11, they are basically gone.

So they has been very little or no replenishment for three months in there.

The apparel assortments are very broken.

So we're going to clean it out.

It's going to costs, something that we anticipated.

And I think at this stage we're being prudent to say that we're going to increase our margin.

That does not mean that it can't happen as sales accelerate in the other divisions.

Back to Footaction then, on a quarterly basis, do you expect it to be neutral to earnings or do you think in the earlier quarters it might be negative?

Neutral.

SG&A, what are your expectations on operating expenses as a percent for the year?

Slightly lower.

What do you got, four-tenths?

Two-tenths.

Two-tenths.

Thank you.

Jeff Edelman, UBS.

Just as a follow-up to the gross margin question in the second quarter and going forward, I understand the Footaction impact, but do you see the mix of product that you're going to be getting having a tempering impact on the margin or do you see less ability to continue to buy better as you have in recent quarters?

I think a fair statement would be that our initial markup could be slightly lower, but that our sell-through, our finish margins, will probably be the same or a little higher.

Okay.

As you're buying the marquee product that sells through at a very, very brisk rate, no one has ever sold the marquee product like the Foot Locker organization.

When you have a Jordan launch, as an example, particularly a retro, we can liquidate it in two days where we know that our competitors take weeks to liquidate that product.

So the markup may be slightly lower, but it is a very high gross margin.

So that's going to be a key driver in the our margin and obviously in our sales.

Okay, good.

Secondly, is there any indication that JD Sports in the UK has really gotten through its inventory or are they still pretty well loaded with it?

I made several trips over there obviously because of our business last few months and they appear to be pretty loaded.

They're not going to run out of sneakers.

Thirdly, you do not have much in the way of private-label in Europe; it's mostly branded.

I know it did not work several years ago.

Is there any intention of trying to reintroduce the private brand apparel there?

Great question.

We have brought in a new team in there and we're working very aggressively to change that mix somewhat.

We don't expect it to reach the levels that it represents here in America in Foot Locker and Lady, what have you.

But we think that there's an opportunity for a potential additional 10 percent of the mix to go into private-label.

But you got understand Europe is very edgy and it's less basic in private-label.

In other words, going over there with big T-shirts and fleece programs is not the answer.

So the private-label has to be a little more fashionable.

With that said, there's opportunities to sell some of those basics.

And part of our -- I won't say misstep, but our experimenting with the private-label apparel product over there is that we tried to copy a lot of this edgy merchandise and they really want the brand on that.

So we're going to try and develop a program where its basic, but it's got a little more bells and whistles on it.

Thank you.

Virginia Genero (ph), Merrill Lynch.

Two questions, please.

The first, you mentioned that you would be changing, sort of adjusting your apparel strategy in the US a little bit given the slowdown in licensed.

Could you elaborate on that at all?

Is it more branded, more private-label?

More branded in the total US operations and in looking at Footaction to differentiate.

We're going to be putting other brands in there.

One example would be basically an exclusive Champion program which we have worked on in the last several weeks.

Rick Meaner (ph) and his team has aggressively pounced on this opportunity and a lot of the merchandise would be exclusive to us in the Footaction operation and will probably go into some of the Foot Locker stores, but that will be key differentiator in the apparel presentation.

We're not going to have in the Footaction operation the same quantities and presentation of private-label merchandise that you would see in your typical Foot Locker or Champs store.

But the brands are coming on and we're seeing it.

They are beginning to perform sell-throughs are getting to be somewhat exciting.

And we will be doing up a lot of exclusive stuff, merchandise, within the branded sphere of the business.

So we're quite excited to about the opportunity in branded.

Just as a sort of follow on to that, since you mentioned Footaction are you -- you said that you're going to sort of take Foot Locker -- make Foot Locker the more marquee destination.

Does that imply that Footaction -- they were sort of trying to be more marquee, I think, in the last kind of twelve months.

What does that sort of imply for Footaction on the footwear side?

We will continue to have a strong focus on marquee footwear, continue to have a strong focus.

But we've got this big 1,500 store operation at Foot Locker, which particularly when you look in marquee the urban base that we have in Foot Locker, getting back to where we were a couple of years ago with very, very heavy quantities in the urban stores on marquee footwear will clearly be a tremendous benefit in moving the needle on the sales line and the profit line.

Lastly, can you tell me in Europe what percent of your business is UK, France, Spain, sort of these -- I know we can infer from your store count, but what percent of your business there is in those markets and if you can comment on where you're growing?

We really don't break out our sales for competitive reasons by market over there.

We just are a little sensitive on that.

I think I commented earlier on where the deficiencies and the strengths were, and we think that France is a very important market and we will get that back on track as quickly as practicable.

And clearly the UK is a big business for us, but it's really London-based.

We do the lion's share of our business in the UK in the greater London Metropolitan market.

I guess I didn't give you your answer.

That's fine.

Thank you.

Lee Backus, Buckingham Research.

First, good quarter.

Again on Footaction, when do you think you'll have some of the inventory issues settled?

Will that be for back-to-school or holiday as far as getting the inventories more in line?

And also, maybe you can discuss further a differentiated product mix in the Footaction stores where you have a Footaction store in the same mall with all the Foot Locker concepts, and do you anticipate closing any of those stores?

Maybe you can also talk about the Footaction stores in the urban market; will you keep those Footaction, change to Foot Locker, or just sort of give a sense?

Clearly the strategy is to have in footwear 25 to 35 percent of the footwear will be different than Foot Locker.

We'll have a lot of special makeups and some exclusives.

In terms of apparel, I think I've stated that we will really focus on the branded strategy and there's a staggering opportunity in Footaction for the apparel business.

They're virtually -- I don't want to use the term not in it, but they had a very small apparel business.

The other thing I also mentioned is that the 350 stores that we did acquire were the crème de la crème, and these are really great locations, good-sized stores, in good condition, and these are obviously the stores that were the most profitable in the Footaction division of Footstar.

So there will be some clear differentiation in those stores.

Now what we're going be doing in the next 60 days, we're just going to very aggressively clear out that inventory, beginning probably this weekend.

Don't forget, we just took the company over a couple of weeks ago, we got the SKU files merged, and actually up until a week ago we didn't really know what the ownership was by SKU so we couldn't deal with price action and things that we needed to do.

So there will be a two-month aggressive clearance strategy and we expect to be positioned to around July 15th to 20th of back-to-school.

The vendor community, I must tell you, has been very cooperative and I'm very, very pleased with their response and support in getting us what we need to get in business there for back-to-school.

So you'll see a very good, strong presence on or about July 15th and 20th, and then I think August it will be business as usual.

The urban markets, I believe we know the urban business better than anybody.

We will merchandise those stores very aggressively with the very important urban footwear in particular that we really have some velocity on in those locations.

Thank you.

Could you also comment, do you think of the Olympics will give you any boost in the European business?

It always has in the past.

I think I mentioned on the last conference call that usually in an Olympic year the company has always done well.

You go back to those previous Olympic years that I studied, there was a lot less competition out there in the world.

But it should be a positive, it should be a positive.

Thank you.

Bob Drbul, Lehman Brothers.

Just have a couple of questions on the inventory.

First, Bruce, can you give us an idea of how much inventory on a dollar basis came with the Footaction acquisition?

And secondly, we're talking a lot about getting some new product in, but your inventories levels where they are you said would be enough to support the Footaction stores.

I guess I'm just trying to get comfortable with the quality and the quantity of the footwear, the apparel, how much of it is in Europe versus the US.

Can you elaborate a little bit more on the inventory situation?

The answer to your first question --

(multiple speakers) $80 million.

Right, at cost.

At cost.

Okay, thank you.

But the quality of inventory is not good.

As I said, the sizes are all broken and we've got to clear it.

This is not merchandise that you can sell in, most of it.

It's all special styles that were made.

We will have to deal with it, clear it out and get it.

We're comfortable with our inventory levels, and we will, as I said before, initiate a very aggressive clearance strategy in there and get that thing crisp and looking sharp by July 15th, 20th.

On your total inventory position on the balance sheet, with regards to footwear versus apparel, with the slowing in the licensed are your apparel levels good there?

Can you elaborate a little more in terms of the --?

A little heavier in apparel.

Footwear inventories are in good shape, a little heavier in apparel than we'd like to see.

And we will clear it.

Did you end the quarter in terms of your European inventory with the markdowns that you took at an acceptable level or do you still think there's some more to come in terms of markdowns?

We cleaned it out right on the numbers.

When you go back to your comments on branded apparel, when would be your expectation for that business to start to do a little bit better at retail?

Back-to-school.

Thank you.

I think we have time for one more question.

George Lusch, Fulcrum Global Partners.

Can I ask you to just quickly clarify, in terms of the US I guess you were saying that the current trends are similar to April, and then may be Europe in May has picked up a little bit from where you were in the first quarter.

And then I know you guys said that you increased markdowns in Europe.

Can you talk about the level of promotions through the quarter in the US?

In the first quarter?

Yes.

I think the level of promotions somewhat slowed down towards the -- I'm sorry, they slowed down at the beginning of the quarter.

But I've seen somewhat of a more aggressive posture, particularly from our competitor in Indianapolis where they've been running a up to 70 percent off sale now I guess it is 10 days in most of their stores.

Obviously they must have some inventory problems.

And you've seen some of the other competitors with a little more aggressive promoting going on out there.

But I would say the competitor in Indianapolis has gotten very aggressive on the promotional side of the business.

But how about for you guys during the first quarter in the US, was it the same or did you pick up toward the end as well?

We basically were a little less than last year, a little less.

Even through the quarter?

Yes, the US came out nicely.

I guess were my comments correct on the current sales trends, that the US is kind of where it was in April and then maybe picked up a little bit from the first quarter?

Yes, that would be correct.

Thank you.

We thank everyone for their participation today and we look forward to another good second quarter.

Thank you all.

This concludes today's teleconference.

Thank you for participating.

You may all disconnect at this time.