Foot Locker Inc (FL) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the third quarter 2004 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 managements' current reviews of future events and financial performance.

These forward-looking statements are based on many assumptions and factors including the effects 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 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.

Mr. Brown, you may begin.

Good morning and welcome to our third quarter conference call.

As you will note from our press release, our third quarter net income per share increased 15% to 47 cents, which is at the midpoint of the guidance that we provided at the beginning of the quarter and also in line with our year-to-date percentage increase.

We remain optimistic for the balance of the year and into 2005 as a result of this solid performance and our improving sales trend that we expect will continue.

We are also pleased with the progress that we continue to make in regards to our strategic objectives including the rapid integration and successful remerchandising of the Foot Action business and the completion of our acquisition of eleven stores in the Republic of Ireland.

As discussed on our August conference call, the costs associated with integrating the Foot Action business were fully absorbed during the second quarter of this year.

As such the Foot Action results have not been segregated and are included in our consolidated results the same as the rest of our ongoing operations.

Following our standard practice Bruce Hartman, our Executive Vice President and CFO, will begin the call with a discussion of our third 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'll answer your questions.

For those of you who do not know, Matt had surgery on his back in late September.

On behalf of the Foot Locker management team we welcome you back and look forward to your continued leadership.

I will now turn the call over to Bruce Hartman.

Good morning.

As Peter mentioned we are encouraged with both our third quarter and year-to-date financial results, and remain very optimistic for the balance of the year and even more so for 2005.

During the third quarter we continued to execute on our strategic objectives that are designed to sustain our earnings growth momentum for the foreseeable future.

The Foot Action business has been fully integrated into the Foot Locker infrastructure and is now adding to the profitability of our overall Company.

We are also pleased to have entered the Irish Republic.

This represents the 14th country in Europe where we operate Foot Locker stores.

In addition, we continue to make good progress with several strategic initiatives designed to improve the productivity of our base business.

Matt will touch on these during his part of our prepared comments.

Total Company comp store sales increased 1.2% in the third quarter, an improving trend as compared to the spring season.

Our comp store sales in the U.S. increased versus earlier this year, while comp store sales from our international stores remain soft but in line with the spring season.

As we enter the fourth quarter we are seeing good signs that our comp store sales will continue to gain momentum in the U.S. and improve in Europe.

Our total sales increased 14.4%, reflecting the benefits of the acquired Foot Action chain, new stores in Europe and the favorable foreign exchange rate.

By division, our third quarter comp store sales gains break out as follows: Our combined U.S.

Foot Locker business, which includes Foot Locker, Kids Foot Locker and Lady Foot Locker, reflected a low single digit increase.

Lady Foot Locker had a strong showing which has us very encouraged that this division has now turned the corner and is headed towards even higher profit margins.

Champs was a bright stop with comp store sales up very strong mid-single digits.

The Foot Locker international business, including our European business, declined mid-single digits.

But on a positive note we believe the worst may be behind us as the comp store sales are back to positive territory in November, and Footlocker.com sales increased low single digits.

Our third quarter results continue to reflect the benefits of our global diversification.

As we have said before, this important attribute enhances our ability to deliver ongoing earnings per share increases and strong cash flow by mitigating the risk associated with certain external factors in any one market or economy.

As expected, our comp store sales in the United States were negatively impacted in August, and subsequently enhanced in September due to the one week calendar shift for the back-to-school season.

More specifically, comp store sales declined low to mid-single digits in August, increased mid-single digits in September, and again increased low singles in October.

To date November our comp store sales are running up low single digits including a slightly positive increase in Europe.

Our gross margin rate for the third quarter declined by 150 basis points versus last year, primarily due to a difficult comparison to last year's extremely favorable rate, but was 50 basis points higher than the rate we achieved during the third quarter of 2002.

Our gross margin rate was also negatively impacted this year by approximately 60 basis points due to the addition of Foot Action who's margin rate for the quarter remained below that of the overall Company.

For the fourth quarter, however, we expect that gross margin rate to be similar or favorable to last year's comparable quarter for the following reasons: We expect Foot Actions margin rate to continue to improve and be much more in line with that of our Foot Locker division.

We plan to maintain a more tempered promotional posture that we expect will result in a mark down rate similar to or lower than last year's fourth quarter.

Our real estate strategy continues to progress on schedule.

With over 450 real estate projects approved during 2004, our divisional profit margin on these stores is tracking towards a rate expected to exceed 10%.

As a result we expect to continue to improve our occupancy rate on our base business, excluding Foot Action by 50 basis points this year, and an additional 50 basis points each year for the next three years.

This benefit will be reflected in both our gross margin and depreciation expense.

Our merchandise inventory at the end of the third quarter was 20% above LY.

This increase exceeded our third quarter sales increase as we purchased additional product to support our newly acquired Foot Action chain.

We also accelerated the receipt of certain merchandise into October that we believe has us better positioned for the fourth quarter.

Inventory remains current and well-positioned to support our fourth quarter sales plan.

We're also pleased that our divisions and corporate staff continue to deliver on their SG&A expense challenges during the third quarter.

As a result, third quarter SG&A expense as a percentage of sales improved by 120 basis points versus the third quarter of last year.

In fact, SG&A was below a critical barrier for us which is the 20% line.

This is the first time this has occurred in '04.

We expect a similar result in Q4.

Total third quarter SG&A expenses, excluding the Foot Action results, new stores in Europe, and the favorable foreign exchange rate, were actually below LY

We're particularly pleased with the progress that our Foot Locker Europe division made in reducing its operating expenses.

As a result Foot Locker Europe's total division profit showed a solid improvement versus the third quarter of last year.

Another bright spot in the quarter was the $1 million reduction in our interest expense.

This decline reflects both higher interest income on our short-term investments and lower interest expense on longer term debt.

Turning to the balance sheet we capitalized on our strong financial position during the third quarter by investing in the growth of our business and reducing our financial obligations.

As previously announced, we purchased 11 stores in the Irish Republic during the month of October.

We also contributed $56 million to our U.S. pension plan in September of this year.

This payment, which we were planning to make in February, 2005, was accelerated to September, 2004.

Including this payment, our overall funding status is almost 85%.

This is up from just 56% at the end of 2002.

So far this year we've invested a total of $265 million to purchase the Foot Action and Ireland acquisitions, which includes working capital to remerchandise the stores with current inventory.

We also utilized $106 million of cash to reduce the obligation to our U.S. and Canadian pension plan.

Excluding the investment in these new businesses, the $106 million infusion into our pension plan, and $150 million debt conversion that we initiated during the second quarter, our cash position, net of debt, would have increased by $142 million from the end of the third quarter last year.

The progress that we are making with the Foot Action business remains on track and we continue to expect that this business will contribute approximately 4 cents per share during our fall, 2004 season, and at least 10 cents plus per share to our annual earnings base in 2005.

We are also very pleased with the initial results from the 11-store chain that we purchased in Ireland.

We have remodeled each of the stores and they are now open for business under the Foot Locker banner.

In summary, we are well on our way to achieving our earnings plan for 2004, and continue to generate strong cash flow that we are redeploying for our shareholders.

We remain optimistic for the fourth quarter and expect to have made meaningful progress towards achieving our near-term 8.5% operating profit margin objective.

We also look forward to continued strong growth in 2005.

Reflecting this confidence earlier this week our Board of Directors approved a 25% increase in our common stock dividend effective with the January, 2005 payment.

I will now turn the program over to Matt Serra.

Thank you, Bruce.

Good morning.

As Bruce mentioned, we remain on schedule to achieve our earnings target for 2004 and remain very encouraged for the next year.

Our re-engagement with Nike in the U.S. is progressing on schedule and is contributing to higher average selling prices.

At the same time we also continued to sell large quantities of classic footwear from several other of our important suppliers.

As a result our improving comp store sales trend was driven by increased volume and higher average selling prices.

We also continued to see an emerging trend towards higher priced technical footwear.

Certain styles performed very well during the quarter which encourages us for the future.

One such style is the Nike Impax that sold well cross each of our divisions.

We believe that the combination of having access to greater amounts of Nike marquee products and the trend towards higher priced technical footwear will result in our average selling prices in the U.S. increasing during the fourth quarter and throughout 2005.

This should be a positive factor for comp store sales growth during the next several quarters.

During our August conference call we stated that while we believed that classic footwear sales had peaked, in no way did we expect this category to go away.

We stressed that we expected this category to continue to be a very healthy piece of our business for the foreseeable future.

This expectation turned out to be correct during the third quarter, and we expect it will continue to be a very important category in 2005.

Some of the better selling classic footwear in our U.S. stores during the third quarter include New Balance 574s, Converse Chuck Taylors, Nike Air Force 1s, pieces of the Nike 20 Pack, adidas Super Stars, as well as various styles of Reebok and K-Swiss Classics.

We also had success during the quarter with several marquee launches particularly as we began to regain access to important Nike high-end product.

These marquee product launches included Jordan and Jordan Retro shoes from Nike as well as the exclusive T-Mac program that we had from adidas.

And also the S. Carter and G Unit shoes performed extremely well from Reebok.

We were very pleased with the sell-throughs of the Nike Shox including the running NZs that are available in our Foot Action stores as well as certain Foot Locker and Lady Foot Locker stores.

We continue to look forward to growing that business as we get into the fourth quarter this year and the spring season of 2005.

We've also mentioned on previous calls that we intended to introduce more color into our assortments.

This strategy has been very successful, with the colors of red, white, and black most recently being prominently displaced in most of our stores.

On the apparel side of the business we generated solid sales gains from our private label and branded offerings.

Our private label apparel offerings, which are imported directly from factories through our internal sourcing company, continues to be an important competitive advantage that allows us to differentiate ourselves both in terms of price and quality.

Sales of licensed goods, which is the smallest segment of our apparel offerings, declined as expected during the quarter, but still remains an important category in our stores.

Our team edition manufacturing division also helps us differentiate our stores from competition by producing high quality team imprinted merchandise.

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

Our total U.S. store business generated a low single digit comp store sales increase during the third quarter.

Champs and Lady Foot Locker posted the strongest results followed by Foot Locker and Kids Foot Locker.

I'm particularly pleased with the sales results of our Lady Foot Locker division which has been lagged for several quarters.

Our significantly improved private label and branded apparel offerings are currently driving strong sales increases.

While the Foot Action results will not be included in our comp store results until next August, we continue to be encouraged by the improving results of these stores.

If you visit one of our Foot Action stores will you note that we are beginning to differentiate our product offerings from that of Foot Locker and Champs.

We have also significantly improved the apparel content which we believe was a major weakness under the prior ownership.

One such program is Champion fleece.

As we move into next year, we will begin to further differentiate the Foot Action product mix from that of Foot Locker and Champs.

We're also very pleased with the third quarter results that our Champs division posted.

This division has done an excellent job of building its marquee footwear business that has more than compensated for its declining licensed apparel sales.

We began to get the top-line sales of FootLocker.com/Eastbay moving again during the third quarter while investing in some additional catalog distributions in clearance of older goods.

Our third quarter comp store sales in our European stores declined mid-single digits.

With the promotional environment particularly in the U.K. continuing to be intense, and economic conditions in Europe remaining soft, we're taking a cautious approach to sales in this market until we get later into the fourth quarter when the comparisons become a lot easier.

But as Bruce mentioned, our European business has generated a positive comp store sales increase so far in November.

We remain confident, however, that we will continue to demonstrate solid profit growth in this division with pretax margins at or near historical levels.

In fact, our European business generated a solid profit increase during the third quarter, and a margin rate in line with that of last year.

Many of the expense savings initiatives that have been implemented in Europe have benefited both the current quarter and should enhance our earnings going forward.

Our other international divisions, Asia Pacific and Canada, each produced another strong quarter in terms of both sales and profits.

Our 2004 capital expenditure program continues to be implemented on schedule.

This program includes the addition of over 450 new stores this year including the acquisition of the 349 Foot Action chain and the 11 stores in Ireland.

During the third quarter 21 new stores were opened, 37 stores were remodeled or relocated, and 24 stores were closed.

We ended the quarter with 3955 stores.

With the addition of the stores in Ireland we now operate in 18 countries.

We also continue to invest in several projects designed to improve customer service through enhanced logistics and information systems.

The roll-out of our new POS system in the U.S. stores is now complete.

This system provides us with several enhancements that we believe will enable us to better serve our customers.

Two such programs are a stock locator system and a loyalty card program.

The stock locator provides our associates the ability to electronically locate a particular shoe at a nearby store or at a distribution center in the event of a stock out position.

A new loyalty card program was rolled out to our stores late in the second quarter.

This program is similar to that of the one that Foot Action had employed for several years.

The initial receptivity to this program has been good and we expect this will be a very effective medium to communicate with our best customers.

We believe that the loyalty program is something that we have been remiss on and some of our competitors are ahead of us, and this is a good opportunity to catch up.

We completed the distribution center expansion in Europe which will allow to us double its former capacity, thus providing the appropriate infrastructure to support our exciting store growth plans in that region.

As Bruce already covered, we utilized some of our cash during the third quarter to both invest in our future and reduce our pension plan liability.

While enhancing our financial position continues to be a high priority for our Company, we will also continue to actively seek out new opportunities to grow our business including future acquisitions.

Capitalizing on these opportunities will be balanced against continuing to return excess cash to our shareholders.

In that regard, we're very pleased to be able to increase our shareholder dividend by 25% beginning with the January, 2005 payment.

In summary, we generated a solid earnings increase for the third quarter at the midpoint of our earnings guidance that we provided going into the quarter.

We believe we remain well-positioned in the marketplace and are maintaining our previous guidance of a 10 to 20% earnings increase for the fourth quarter.

This earnings per share guidance is based on a low single digit comp store sales increase.

We expect that the improving strength of our athletic footwear sales in the U.S. will continue to offset any continued weakness if sales do remain soft in Europe.

Our gross margin rate comparison with the fourth quarter is much easier than it was for the past quarter.

We also expect our gross margin rate to continue to benefit from occupancy cost leverage.

Our plan calls for earnings per share accretion from the Foot Action business of approximately 2 to 3 cents per share for the upcoming fourth quarter.

The Foot Action stores remain on schedule to average approximately 1 million in sales for 2004.

We continue to expect the Foot Action stores will average over 1.4 million in annual per store sales, and contribute at least 10 cents in 2005.

We also feel confident that these stores have the potential to earn an operating profit margin in line with that of Foot Locker in a very short time frame.

And again, we believe that we are very well-positioned for the balance of this year and feel even more optimistic for 2005.

In fact, we are cautiously optimistic that by the end of next year we will be at or close to our operating profit margin objective of 8.5%.

In addition, we remain confident in our ability to also achieve our long-term goal of a 10% operating margin over the next several years.

I will now been happy to answer your questions.

Thank you.

Thank you.

We will now begin the question-and-answer session.

If you have a question, press star then one on your touch-tone phone.

If you wish to be removed from the queue, press the pound sign or the hash key.

If you're using a speaker phone, you may need to pick up the handset first.

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

One moment.

I have Dennis Rosenberg from Credit Suisse First Boston on line with a question.

Please state your question.

Good morning and congratulations on what looks like an improving outlook.

A couple of questions.

Could you discuss what happened in Europe in November, why things turned positive and why you're still cautious given that and given that the comps got easier as you move into December?

Sure.

I think one of our problems in Europe is kind of self imposed in that we were a little cautious when our sales began to decline in terms of merchandise receipts.

We've upped that aggressively and in the first two weeks of this quarter we've really receded a significant amount of important key merchandise on a comp store basis.

We, last year in the month of January is really when the sales really imploded over there and we basically broke even on a comp basis.

Even though we had a very good fourth quarter last year.

We're beginning to see some more traffic in our stores.

Last night we sponsored in Rome the European MTV Awards which really gave us a lot of business in that region.

Italy, as I think I've spoken before has done extremely well this year.

The two regions over there where we've suffered the most are obviously the U.K. and France.

U.K. continues to be extremely promotional and tough.

We've seen a little improvement in France.

I believe that the worst may be behind us.

I'm not prepared to validate that on this call now, but I feel a lot better about our merchandise content and our focus on comp stores.

I think the management over there is clearly on top of their game.

And very importantly, even with the comp store shortfall, our earnings are very rich over there and we're continuing to prove in a tough environment that we can earn historical pretax margins.

So hopefully this may be the beginning of a turnaround over there.

And the second question, in the U.S. you talk women's and Champs are very strong.

What's been happening with the U.S.

Foot Locker stores, what happened in this quarter, and what do you see happening in the current quarter?

Foot Locker U.S. was tough.

The sales were basically flat and the earnings were not a disaster, basically even with last year.

I think it's, part of it's attributable to the Foot Action integration into that division and we're beginning to get our sea legs in there now.

The Foot Locker division operates the Foot Action division as well, and we've just realigned some middle management and they have to strengthen the planning and allocation functions and we've added a few buyers in there as well.

So we're hopeful that in the fourth quarter that the big foot, almost 1500 store operation, will get back on track and be a big contributor.

Thank you.

Thank you.

I have Virginia Genereux from Merrill Lynch on line with a question.

Please state your question.

Thank you.

Bruce, maybe the SG&A spending, the SG&A control was really impressive.

Let me ask you, was the 26 million, I know you don't want to get into breaking that out, but for Foot Action last quarter was the 26 million in SG&A spending there, was that abnormally high or is the sort of reduction this quarter more Europe related?

If you can just --

It was overall, Virginia, but I will tell you that two spots where we had the best traction, one was in Europe.

They did an outstanding job with their expenses.

And we're finding lots of places in Foot Action to reduce our expenses.

But that would be doing a disservice to the rest of the Company because the rest of the Company performed very, very well on expenses.

But the two real highlights were Foot Action and Europe.

Okay.

And Foot Action probably lower relative to last quarter?

Yeah.

Right.

Where maybe you had some charges and stuff.

And then if I may on the sales side, Bruce, I had, if I look at what you guys disclosed for Foot Action last quarter, I was getting to a little bit higher sales number even with the comp, even sort of assuming based on your comp disclosure for this quarter.

So I'm getting to a little lower productivity in newer stores, but maybe I'm getting to the wrong number.

Was it, was Foot Action sort of more integration to come on?

It sounded like that was some of Matt's commentary and that now you have that sort of set for January to sort of deliver the accretion?

Or are new stores less productive than they've been historically which have been very, very productive?

I think the answer to the question, Virginia, is that we assimilated a fairly large Company with annualized sales of 350 stores, $500 million, and easy to say and hard to do.

The first quarter that we operated we had a lot of merchandise issues.

We dealt with them.

We cleaned the place out.

We did have some delivery problems in the last quarter which have since been corrected.

I think it cost us a penny a share in there even though we made a profit in there, and I really believe that it's going to be a home run for us in the long run.

And this quarter we're really, I think very well-positioned with a lot of the key marquee product that was in that operation last year, and also one of the very important things to remember is the 349 stores that we acquired were the best of the chain.

So as we continue to strengthen the product offerings in that division, I think our productivity will be up to previous standards.

That's great.

I think the stores look great.

Thank you, Matt.

Thank you.

The next question comes from Jeff Edelman from UBS.

Please state your question.

Thank you, good morning.

Matt, just one clarification.

For the 8.5% operating margin you said approaching that by year end next year or---

Next year, 2005.

Right.

Okay.

We believe that this year we have a shot at getting halfway there.

Right.

Okay.

Good.

Secondly, Bruce, if the Foot Action stores achieved a profitability close to the Foot Locker average this year, then why should they not at least in the fourth quarter, what's going to hold them back from getting closer to the Foot Locker average in '05?

We believe they will be.

Oh, okay.

We haven't said they wouldn't be.

Okay.

Good.

And then finally, you've done a great job holding down costs in Europe.

If we do start to see sales accelerate, or let's say get back to a growth pattern, will you have to start reinvesting which might hold back some profit growth or can you run with the current low rate of expenses?

No, these expense savings that Bruce and the management in Europe worked very, very intensely on, we believe are permanent expense reductions.

We felt, as one example, that we were fairly over staffed over there and we've taken measures to bring the selling staff in line and it's a big play for us in terms of a permanent reduction in expense.

Okay.

Great.

Thank you.

Thank you.

The next question comes from Lee Backus from Buckingham Associates.

Please state your question.

First, good quarter, guys.

Matt, you've talked about the average selling price up, could you sort of give us a sense over the last couple of years what marquee shoes were strong in the past and then it got to more classic, what kind of a fall off you saw in ASPs and what kind of increase you could see in ASPs going forward?

And also does this, also the increase in marquee as a percentage of your business, does that also apply to Europe?

Well, Europe has always been heavily gated towards marquee.

It's a huge piece of the shoe business there.

You know, it's well over, I don't want to give you the exact number but it's well over 60% of the business.

In terms of the average out the door price, as we continued to intensify the marquee and technical pieces of the business, we have an opportunity to go up ten to 15% higher in average unit price.

And that's where we kind of were three years ago.

With the infusion of a lot of classic merchandise which is I'm sure you know is much lower priced that was a key ingredient in bringing down the average unit price.

So as technical comes back, as our re-engagement with our friends at Nike, really crystalizes in full force in 2005 we think over the next couple of years that there's an opportunity for, I'll be conservative, a 10 to 12% increase but it could go higher.

Also in Europe we've seen you make consolidation moves here in the states, we've seen the move in Ireland, with the weakness that we have seen in Europe can you see other consolidation moves happening in the near future in Europe?

You mean from competitors?

Yes.

Taking them out.

There are opportunities over there in Europe and we are looking at several of them and we've always stated that we will only by a company that's accretive.

And if something surfaces which there could be an opportunity in the next 12 to 18 months, we will look very hard at it.

And we think Europe, absent comps for a second, Europe has tremendous, tremendous growth opportunity for us as does Asia further down the line.

Thank you.

Thanks.

John Shanley from Susquehanna on line with a question.

Please state your question.

Good morning, guys.

Matt, the growth that the Company is achieving in its operating profit margin seems certainly achievable.

Is it realistic to expect that beyond fiscal '05 that the Company will continue to accelerate and possibly get within the goal of a 10% or better operating margin?

Certainly Foot Locker had achieved that in the past and I just wanted to find out if you felt that that type of operating margin was still a realistic expectation somewhere beyond '05?

Yeah, good question, John.

I mean, we believe that we will be at or close to the 8.5% operating margin at the end of '05.

That was our goal four years ago and we are fully on our way to achieving that.

We stated that our long-term goal was to get to 10% double digit operating margin.

We see that happening in the subsequent three to four-year period thereafter.

Anything could happen.

If we were to make some exciting acquisitions that were richly accretive it could happen, it could happen sooner.

But that is clearly our goal and a big play as we've talked about it now for many years is in our real estate expense and it's happening, we're getting the 50 basis points down.

This is I believe the third year and we see it for a couple more years just on the current store base.

And obviously as you continue to cull out the poor performing stores, the nonproductive stores, that there are further opportunities in the current portfolio of divisions to increase your operating profit margin.

From a retail margin point of view, we're pretty high and we're in the mid-forties and you can get it higher but we want to keep our inventories current.

We want to be competitive and fairly priced to the customer.

So, you know, you always want to improve your retail, your selling margin.

But that, I don't see a huge uptick in that area.

I think a lot of it will come from obviously growth and continued real estate efficiencies.

That's very helpful.

Matt, also you mentioned in your presentation that licensed apparel was a little bit weaker than you would have anticipated.

Has any, have you pretty much exited whatever excesses inventory or product lines in the license business pretty much beyond you now and if so, where have you focused the freed up, open to buy dollars in terms of the ongoing business that had been done in licensed goods in the past?

Well, obviously putting a lot of money into our private label programs and as quickly as we can get the market to respond, we're putting a lot into the branded sector.

We still have some problems.

Rick Mina and his team are working extremely hard on getting that excess inventory under control.

And very importantly, with Rick, and Rick has always been very involved in this business, it's still big business and getting the teams right by market is one of the key ingredients in moving that business.

You still have that fan-based business, you know, there's the fashion element of it, and then you've got the fans that by market if you get the right goods in there, it's not going to go away, that business, and I don't think the same thing that happened in '97 and '98 is going, where it practically disappeared, that we believe that we will still have a significant profitable business in that sector.

But doing it by market is key.

And as I mentioned, Rick has put a lot of effort into this and I believe in our fourth quarter, while we're clearly going to experience a significant sales drop in that, that hopefully the clearly the private label and if we can get more of the branded goods in there we can offset most of it.

Are the margins in the private label and branded about equal to or better than the licensed part of your apparel assortment?

Private label is better and the branded is about the same.

Last question I have is on the, you mentioned strong sales of marquee and classic athletic footwear.

I wonder if you can comment in terms of whether you're also generating similar results in terms of the brown shoe sector, particularly fashion boots?

Are they a strong category for you in the current quarter?

They're always a strong category.

It's obviously been very warm the last three, four weeks, and it's affected that sector somewhat.

But there's a lot of exciting new styles in there.

We're introducing the moon boot from Timberland.

We think we have a TV add in December.

We think that's going to be a very exciting product.

We've received some merchandise already and we've got some exciting sell-throughs on it.

But the category is slightly off at this point.

Okay.

Thanks a lot.

Appreciate it, Matt.

Thank you.

The next question comes from Robbie Ohmes from Banc of America.

Please state your question.

Thanks, just two quick questions.

One, as you've looking at 2005, are there any changes in your thinking for the Foot Locker stores in terms of the number of SKUs you carry, would you consider going broader in the stores especial if you're going to be bringing more Nike product in?

The second question is just, on the Foot Action stores with the goal of bringing them up to 1.4 million next year, with them comping that way what impact do you think those stores will have on the Foot Locker and Champs stores?

Thanks.

The 1.4 million basically, don't forget we've stated the million dollars this year and that's only for three quarters, so the additional 400,000 would represent basically the first quarter and a slight increase.

I'm sorry, the first question, Robbie?

Gotcha.

So, I'm sorry, so the Foot Action stores you're not expecting them to comp big next year?

I didn't say that.

The current plan is we're forecasting to do $1 million by door this year average, and the $400,000 represents the first quarter and a conservative comp increase.

As you know, we always plan conservative and hopefully try to over achieve that.

And the first question, I missed.

It was just, as you're looking at bringing more Nike product in next year, is there any change in sort of how you're designing the stores in terms of number of SKUs or breadth versus depth in your assortments?

There will be some more SKUs but I don't believe it will be material.

I mean we try to run current average with around 250 SKUs, active SKUs per division.

That varies by division but that's generally our benchmark.

Terrific.

Thanks a lot.

Thank you.

I have George Lusch from Fulcrum Global Partners.

Please state your question.

Thank you.

Hey, Matt, you'd mentioned that your comparisons get easier in Europe in January.

Is there anything going on in the U.S. with either with respect to comparisons or the calendar that might disrupt the current trend?

If I'm remembering correctly I think August started out strongly and then you gave back a lot toward the end of the month with the shift in back- to-school sales.

One of the important things and we really, I don't think we publicized it, but we operate almost 300 stores in Florida and Puerto Rico.

I don't want to give you a weather report but that cost us, in this quarter, almost a percent in comp and a penny a share.

Those storms down there, I mean we have four very, very intense aggressive storms where we had many of our locations in both those markets close for as long as a week and some ten days to two weeks.

So I think we would have had, clearly on a comp basis, a stronger quarter, not huge but 2% corporately and then in the U.S. operations we would have been, it would have been closer to mid-single digit comps.

I guess---

I think in looking at Christmas, the big six period, that you've got two more days of selling which is always good.

I think it will always be, it's getting, has been for a number of years now very challenging and the business comes later and later and later.

But I don't see anything on the horizon that's going to disturb our trend in the U.S. which is moving more positive by the quarter.

Okay.

Thank you.

Thank you.

Once again, if you have any questions, press star then one on your touch-tone phone.

I have Jim Duffy from Thomas Weisel Partners on line with a question.

Please state your question.

Thank you.

Matt, can you help me understand the dynamics of your real estate transactions here?

After all the efforts you guys have made here I'm surprised that you think you have three years of improvement in the occupancy expense.

Help me kind of get my arms around how those negotiations work.

Well, we continue as we get larger and stronger, we continue to get better arrangements.

But that's not the principal dynamic in the real estate reduction.

Looking back at the Company in the 1997, 1998 period, we made several, a couple hundred very bad deals with large stores, very high occupancy rents, huge build out costs.

I would tell you that in some cases four to as much as eight times the amount we spend on a store today.

That depreciation drops off and a lot of those stores go away.

And that's where the lion's share of that real estate expense reduction is going to come from.

That's helpful.

Thanks.

Now that you have some perspective on the Foot Action stores how do you see yourself differentiating the merchandise going forward in these stores?

Well, first of all, there is a huge opportunity in apparel and we're going to be putting different brands in there than we carry in the Champs and Foot Locker operations.

When you get into the footwear category, clearly 40 to 60% of the footwear will be the same.

A lot of special color ups and some new lines that are going to be going into there that we're not going to be carrying aggressively in Foot Locker and in Champs.

So we believe that we will clearly be able to establish a differentiation and there's a big differentiation in the look of the stores and the visuals.

So we're confident that we're going to be able to work closely with our key suppliers have a lot of different merchandise.

Okay.

Good.

Bruce, question on the tax rate, you guys came in below the 37% again.

Are you sticking with the 37% guidance going forward?

We think we have some modest opportunities going forward, both this year and next year and we still have some planning strategies that we're working on that should help us.

So should we be modeling the 37% or should we expect something below that?

I don't want to help you with your models but 37 is the natural rate and we have some things that we're working on that should help us.

Okay.

Thanks, guys.

Operator, we have time for one more question.

The last question comes from Jeff Edelman from UBS.

Please state your question.

Thank you.

Matt, I just wanted to follow-up on the new product you've got in the store.

Would you give us a sense of where you are today in terms of your wish assortment and where you figure you might be in spring if you're able to get everything you wanted to get?

Sure.

I'd say we're in the 90% range of what we, you're speaking specifically about Nike, I assume?

I assume Nike is probably the only one.

Yeah, so I'd say we're around 90% now and I believe by Easter, mid-spring, we will be 100% of what we want.

And we'll be fully competitive.

Great.

Thank you.

You're welcome.

Okay.

We just want to thank everyone for participating today and we look forward to another good quarter in the fourth quarter.

Thank you.

Thank you.

This concludes the third quarter 2004 earnings release conference call.

You may disconnect at this time.