Foot Locker Inc (FL) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

And welcome to the fourth quarter 2004 earnings release conference call. (OPERATOR INSTRUCTIONS).

At the request of Foot Locker this conference is being recorded.

If there are any objections please disconnect at this time.

This conference may contain forward-looking statements that reflect management's current views of future events and financial performance.

These forward-looking statements are based on many assumptions and factors, including the effects of currency fluctuations, customer preferences, and economic conditions worldwide, and other risks and uncertainties described in the Company's press releases and their 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 fourth quarter conference call.

We are pleased to report today that our fourth quarter earnings per share increased 21 percent to 57 cents per share.

This increase was above the high end of the EPS guidance that we provided going into the quarter, as well as the update that we provided in February.

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 2005.

After our prepared remarks we will answer your questions.

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

Key highlights for the quarter are as follows.

Total Company sales increased 15.1 percent, comp story sales increased 2.5 percent, net income from continuing operations increased 25 percent to 89 million.

And we ended the year in a strong financial position with almost $500 million of cash and short-term investments.

We're particularly encouraged by our significantly improving sales trends that began in late December and has carried through February.

Therefore as Matt and Bruce discuss, we believe that we're very well positioned for 2005.

I will now turn the call over to Bruce Hartman.

Good morning.

As Peter mentioned, we're very pleased with both our fourth quarter and full year financial results.

Our fourth quarter sales performance was really a two-part story.

Sales during the first half of the quarter were soft as it is becoming more obvious that the consumer is waiting later and later to shop during the holiday season.

As a result, sales accelerated significantly through the final 2 weeks of December and into January.

I'm also pleased to note that the momentum has carried over into the new fiscal year as well.

During our third quarter conference call we mentioned that we were seeing good signs that our comparable store sales will continue to gain momentum in the U.S.

We're pleased that this forecast was realized and the improving sales trend is continuing into the present year.

Contributing to this optimism is the trend towards higher average selling prices, our somewhat lower promotional posture, and improving external environment, and regaining access to important marquee product in our U.S. stores.

By division our fourth quarter comparable store sales gain broke out as follows.

Our U.S.

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

While all 3 divisions posted positive results, Lady Foot Locker clearly produced the strongest sales performance.

Champs was another bright spot, with comp store sales increasing very high single digits.

While Foot Locker Europe recorded a low single digit decline, results in this region improved from earlier this year and turned positive in January.

Our most challenging market in 2004, the UK, is also showing signs of improvement.

Footlocker.com had a very low single digit decrease, having been negatively impacted by the current fashion shift away from licensed apparel.

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

Therefore while comp store sales were very healthy for the quarter in total, the strength of the holiday period shifted into late December and throughout January.

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

Geographically we are most encouraged by the improving sales trends in our stores located in the U.S. and Canada.

While the sales trend in Europe has improved, we remain cautious with regard to our planning for this region until we're more convinced that the sales improvement is more enduring.

In any event, we will continue to work hard on many expense initiatives in Europe to ensure that we maintain our strong, double-digit margin rates.

Earlier this decade we established 2 key financial objectives.

Our annual sales per square foot to $350, and achieving an operating profit margin of 8.5 percent.

We continued to make meaningful strides in 2004 towards achieving these objectives, and currently believe that they are both within our grasp.

In 2004 our sales per square foot reached $345.

And our operating profit margin reach 17.3 percent.

Excluding the Footaction results, however, our operating profit margin was 7.8 percent and is tracking well towards our 8.5 percent objectives.

Our fourth quarter gross margin rate improved by 10 basis points versus the same period last year.

On a comparative basis, however excluding Footaction, our gross margin rate improved by 50 basis points.

This improvement reflected both a higher merchandise margin rate and a lower rate on our occupancy expense.

As we have outlined in recent conference calls, reducing our occupancy costs as a percent of sales provides a significant opportunity for our Company.

For the full year of 2004 we completed almost 600 real estate negotiations related to new or existing stores, or approximately 15 percent of our store fleet.

Our annualized tenancy expense rate for these stores is expected to average approximately 200 basis points favorable to that of our Company average.

This improvement is in line with our objective of reducing our total Company occupancy rate by 200 basis points.

4 key initiatives are driving this improvement, opening stores in our most productive markets, lowering our store build out costs to reduce depreciation expense, closing or reducing the size of certain larger stores, and working with our landlords to optimize our tenancy cost structure.

The initial 50 basis points of this opportunity was realized during 2004.

Excluding the results of our recently acquired Footaction business, the occupancy costs related to our base business were approximately 50 basis points lower in 2004 than the prior period.

We expect to benefit from a similar decline in our base business occupancy rate each year for the next 3 years, assuming we generate a low single digit comparable store sales increase.

Our fourth quarter SG&A expense rate was essentially flat versus last year's comparable period.

I would like to point out, however, that we are up again against a very strong 19.7 percent rate in the same period last year.

This was the second quarter in a row that our SG&A rate was below 20 percent.

As a long-term objective, being below 20 percent is strategically important to Foot Locker.

For the full year our SG&A rate improved by 40 basis points to 20.3 percent from 20.7 percent last year.

As such, we continue to be very pleased with our expense efforts, and believe that we will continue to reduce our SG&A expense rate in the years ahead.

In 2004 we generate significant cost savings from our new competitive bidding process that we utilized for supplies and services.

For the full year this process benefited the Company by about 4 to 5 cents per share.

Largely as a result of these efforts, our incremental margin rate for the full year, excluding the impact of Footaction, was 25 percent.

Meaning for every additional dollar of sales generated, 25 cents fell to the pretax line.

As we move into 2005 we will continue to aggressively implement this bidding process, while also exploring a new initiative that we expect will significantly reduce our overall maintenance costs.

We will also put even more focus on reducing other nonsales generating expenses.

This reduction -- the reduction in our effective income tax rate to 32 percent this year versus 35 last year was another highlight of the fourth quarter.

This quarter over quarter decrease, which is the equivalent of 3 cents per share, resulted in part due to a larger percentage of our annual earnings being derived from stores located in jurisdictions with lower than the Company's average effective income tax rate.

We also continued to receive the benefit of the very timely completion of our income tax audits.

Turning to our balance sheet, you'll note our financial continue continued to strengthen during 2004.

We ended the year with almost $500 million in cash and short-term investments, and a cash and short-term investment position net of debt of $131 million.

We undertook several initiatives during 2004 that contributed to our strengthening balance sheet. 1, $150 million of 5.5 percent convertible notes were converted to equity.

Income tax liabilities were reduced by $47 million as we closed several years of income tax examinations.

Our underfunded pension liability was reduced by $71 million.

Our $200 million revolving credit facility was amended and restated with its term extended to 2009.

A new 5 year $175 million term loan was negotiated with our existing bank group.

We believe that our capital structure efficiently supports our existing business and provides sufficient financial flexibility should appropriate, additional investment opportunities arise.

Our total assets at the end of 2004 increased by $500 million, while our liabilities increased by just 68 million.

Our merchandise inventory at the end of the fourth quarter is current and well positioned to support first quarter sales.

The 25 percent increase in inventory reflects stronger foreign exchange rates in Europe, Canada and Australia, and the inventory to support our new Footaction business.

Excluding the impact of foreign exchange and Footaction, inventory would have increased 11 percent.

Given our strengthening financial position last month we opted to prepay 17.5 million through our banks, which would have otherwise been due in May 2005.

In addition, we contributed $19 million to our pension fund in February 2005.

In regards to future cash investment plans, our first priority will be to seek growth opportunities to expand our business.

Reducing the Company's financial net liabilities is another key priority as we strive to obtain an investment grade credit rating.

A third priority is to continue to increase shareholder value by providing our investors with a total return based upon capital appreciation and cash dividends.

During the fourth quarter we increased our quarterly shareholder dividend by 25 percent to an annualized rate of 30 cents per share.

Given the recent changes enacted to the tax code, we believe that returning cash to our shareholders through an ongoing dividend program it is appropriate and efficient.

I will now turn the program over to Matt Serra.

Good morning.

During our last year's fourth quarter conference call we commented on our financial progress over the past 5 years.

I'm very pleased to say that 2004 was another very solid year for our Company, and we once again took steps to continue our impressive financial performance in the future reporting periods.

Let me update that 5 year review, and put 2004 into an historical perspective.

Total sales increased to 5.4 billion in 2004, up from 4.2 billion in 1998.

Income from continuing operations reached 255 million in 2004, up from just 14 million in 1998.

Return on equity reached 15.9 percent last year versus 1.2 percent in 1998.

We ended 2004 with a cash and short-term investment position net of debt of $131 million, representing over a $700 million improvement versus 1998.

Our working capital stood at 1.2 billion at year end versus 366 million at the end of 1989.

Again, these are just some of financial ratios that demonstrate how far we have come over the past 6 years.

While we have made substantial progress, I can assure you that we're committed to working as hard as we can to insure that this progress is sustainable in the years ahead.

2004 was a milestone year for our Company as we celebrated the 30th anniversary of the opening of our first Foot Locker store, expanded into the Republic of Ireland, and purchased and then smoothly integrated the Footaction chain into our Company.

By year's end we operated nearly 4,000 stores in 18 countries throughout the world.

Let me now turn to our fourth quarter and provide some additional insights into the key factors that helped drive our increased profits.

From a footwear standpoint, as we began to offer more higher priced marquee footwear to our U.S. customers, our average selling prices continue to trend higher than the fourth -- prior quarter.

Also contributing to our higher average selling price is the continuing fashion trend towards higher priced technical footwear.

We expect this trend to accelerate through the 2005.

Some specific marquee and technical footwear styles that sold well during the fourth quarter include Shox, Jordan, Jordan Retro, and Impax shoes from Nike, and RTA shoes Reebok.

At the same time while the growth of classic category has leveled off, it continues to be a major contributor to our sales.

The better selling classic footwear styles in our U.S. stores included New Balance 574s, Converse Chuck Taylor's, Nike Air Force 1’s and exclusive 20 pack (ph), Adidas Superstars and various styles from Reebok and K-Swiss.

In total we had a very strong comp store sales increase on the footwear side of the business driven by increased volume and higher average selling prices.

While our apparel business was more difficult, we continue to generate solid sales gains from our private label and branded offerings.

As expected, sales of licensed goods, which is the smallest segment of our apparel business, continued to decline during the quarter due to the change in customer demand.

Now for a review of our individual business units.

Our total U.S. store business generated a mid-single-digit comp store sales increase during the fourth quarter.

Champs and Lady Foot Locker posted very strong results, followed by Foot Locker and Kids Foot Locker, who each posted low single-digit gains.

The financial results in our Champs business, a chain comprising of almost 600 stores in North America that rivals our largest competitor in the U.S., continues to improve significantly.

We believe that this business is very well positioned in 2005 and to post a significant increase in both comp store sales and division profit.

We also plan to step up our efforts during 2005 in opening new Champs stores in United States.

As we mentioned on our November call, we will begin including Footaction in our comp store sales calculation next August.

Sales and profits in this division continued to gain traction during the fourth quarter.

In fact, in line with our expectations, Footaction added approximately 3 cents per share of accretion during the fourth quarter.

The target customer who shops in a Footaction store is a 15 to 30-year-old male, who is influenced by the street and hip-hop culture and resides in urban areas.

As a result, we are even more encouraged that the Footaction will meet or even exceed our sales and profit plan in 2005.

Our fourth quarter comp store sales increase in our European stores declined low single digits, an improvement versus the second and third quarters of last year.

As we moved into January, comp store sales in the European stores turned positive for the first time in a year.

For the full year, Foot Locker Europe sales passed the $1 billion mark, and its division profit increased nicely from last year.

While the improving sales trend has as us somewhat encouraged, we're not yet convinced that the retail environment in Europe is totally back on track.

As such, we have take a more cautious approach with store growth in 2005.

While intensifying our efforts to reduce operating expenses in this division aggressively, we will also add additional marquee footwear and apparel products into the large performing stores in the European theater.

Our Canadian division produced another strong quarter in terms of both sales and profits.

In fact Foot Locker Canada achieved nearly a double digit division operating margin.

In total, our Direct-to-Customers sales declined low single digits.

Sales from our highly profitable Internet channel continue to show solid growth as online shopping continues to become more accepted by the U.S. consumer as a safe but convenient means of shopping.

Our catalog sales, however, continue to decline as customers are browsing our catalogs and subsequently placing their orders through the websites.

In total, sales in this division were negatively impacted by the current fashion shift away from licensed apparel, a very large business in that division.

Earlier this decade we established 2 key financial objectives, increasing our annual sales per square foot to $350, and achieving an operating profit margin of 8.5 percent.

As Bruce mentioned, we made meaningful progress toward achieving these objectives in 2004, and now believe that both are within our grasp in the very, very near term.

As a result, we are now targeting our goal of a 10 percent operating profit margin, a goal that we believe is obtainable within the next several years.

Our businesses continue to generate strong cash flow.

And they are carefully redeploying to deliver increased value for our shareholders by investing in worldwide growth, enhancing the productivity of existing businesses, strengthening our balance sheet, and providing a meaningful cash dividend to our shareholders.

During 2004 we stepped up our investment in our world wide growth by completing the acquisition of 2 important businesses, the 354 Footaction chain in the United States and the 11 Athletic Stores in the Republic of Ireland.

We expect the financial returns from these acquisitions to exceed our cost of capital by a meaningful margin, and profits to be accretive to earnings per share in 2005 and beyond.

The Footaction brand, which is well known across the United States, is anticipated to be complementary to our existing businesses and important in generating topline growth.

Footaction's value to our Company has been enhanced through the successful integration of its operation built through the Foot Locker infrastructure.

We're also very excited about our expansion into the Republic of Ireland, the 14th European country in which we operate retail stores.

We will also begin testing the central European market in 2000 -- we did in 2004 in Budapest, Hungary, and we will continue that in the next year.

We believe Europe continues to offer the most exciting opportunities for sales and profit growth over the next several years.

And as a result, we plan to continue opening new Foot Locker stores in strategic locations across this region.

At the same time, we continue to look towards the Asia-Pacific region as a significant longer-term opportunity for growth.

In fact, we think there is a good chance that we may begin to test 1 or 2 new markets in this region within the next 12 to 18 months.

We also continue to focus on improving customer service in our existing businesses, including the following recent initiatives, our new Loyalty Card program, enhanced gift card presentations, and an automated stock locator system.

Each of these programs, which were integrated within our new point-of-sale system that we finished installing in our stores this year, are expected to enhance comp store sales beginning in 2005.

Meeting the needs of our customers also depends on providing an attractive store environment at convenient locations.

During 2004 we completed over 750 real estate projects.

These projects included acquiring 360 stores, opening 97 new stores in strong consumer markets, closing 100 underperforming stores, and relocating and remodeling over 200 stores to right size and enhance their appearance.

As we look towards our future, substantial growth opportunities have been identified and are being carefully pursued as we expand in the global marketplace.

Capital expenditures of 170 million are planned for 2005, primarily targeted towards opening up to 100 new stores, remodeling and relocating approximately 275 existing stores, and maintaining an efficient infrastructure.

At the same time we remain firmly committed to providing our shareholders with meaningful cash returns in addition to capital appreciation on their investment.

We believe that we can continue to grow our earnings per share between 10 and 20 percent each year.

This is our expectation for 2005, which is consistent with the annual guidance that we have provided in prior years.

Included in this guidance is our expectation that we will incur approximately 3 cents per share of additional expense in 2005 when we adopt the new stock-based compensation accounting rules later this year.

The earnings per share guidance is also based on generating a low single digit comp store sales increase, and continuing to improve our operating profit margin rate through our occupancy and expense reduction efforts.

We expect our first quarter earnings to increase towards the high end of this 10 to 20 percent range, with an opportunity to exceed this guidance if current sales trends continue.

This equates to 34 to 37 cents per share, or potentially higher, versus the 31 cents per share that we earned during the first quarter of last year.

In summary, we're very pleased our fourth quarter and full year financial results.

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

Our businesses are off to a fast start in 2005.

And we're very encouraged for the current year based on our improving comp store sales trend and the flow of new, exciting products into our stores.

I would like to take this opportunity to congratulate Nick Grayston who was recently promoted to CEO of Foot Locker U.S., which includes the oversight of our Foot Locker, Kids Foot Locker, and Footaction stores in the U.S..

Additionally I would like to welcome Keith Daly to the Foot Locker organization to replace Nick as CEO of Lady Foot Locker.

Finally, before I turn to your questions, I would like to emphasize that our success over the past several years is attributable to the hard work of the entire Foot Locker organization.

I would now be happy to answer your questions.

(OPERATOR INSTRUCTIONS).

George Lusch with Fulcrum Global Partners.

I was just wondering if I could clarify your commentary regarding current trends.

Is it fair to say that strength in January has continued into February?

And also, was Europe positive in February?

No, Europe was not positive, experiencing the prior trends in 2004.

In the U.S., which is obviously the lion's share of our business, we had a high single digit comp increase in the month of February.

And that is similar to what we achieved in January.

Excellent.

And then I noticed in some of the stores in New York and New Jersey the House of Hoops basketball presentation with Nike has reappeared over the last few weeks.

Could you maybe comment on how many stores that is in?

And maybe if we can expect some product specifically for that presentation in the coming quarters?

Yes, as you may recall, we introduced that program in late 1999.

And it was a very important piece of our basketball business.

And when we had our little spat with Nike we got off track with that.

We have now reintroduced it.

I think it went up, I believe, in 30, 40 stores in the last couple of weeks.

And we will roll that out to as many as 800 stores in the very near future -- the first quarter.

We expect it to be a very, very important driver of our business.

There are some unique products in there that are exclusive to us.

Virginia Genereux from Merrill Lynch.

This is Michele Groop-Graham for Virginia.

The first question we had was on the net openings you have planned for next year.

I know you talked about 100 store openings.

What are you planning for closures?

And with respect to the openings, how does that play out between U.S. and Europe, and I guess now Asia?

We're planning approximately 100 stores next year, closing approximately 95 in total.

The breakout will be in Europe at this point approximately 20.

With some deals we're very close to entering Greece with 1 or 2 stores, and Switzerland with 1 or 2 stores.

So that would take it up to 24, 25.

And as opportunities arise, we will certainly look at them.

The net effect is we began the year with 3,967 stores.

And we will probably end the year somewhere near close to 4,000 stores.

So it will be an increase of around 30 stores.

As far as Asia-Pacific goes, what we have recently executed was the merger of our 4 Guam stores into the Asia-Pacific division to give that company an opportunity to operate offshore and see how they do in their process.

As I stated before, as we enter the Asia-Pacific market, i.e., Singapore, Hong Kong, eventually China, Taiwan, etc., we will operate it off out of Australia and not incur the past central expense that we had when we ran those divisions over there and then closed them in '97 and '98.

So your question was in Asia, how many new stores?

Right.

About 6, 6 new stores this year.

And that is net (multiple speakers)?

That doesn't include the Guam stores.

And then there was no mention of a lease accounting impact.

Did you have, similar to some other retailers, did you to have to take -- make any accounting changes?

I noticed that D&A was a bit up this quarter?

It was very minor.

Yes, that was a balance sheet reclass.

As we looked at it from an income statement standpoint there was an immaterial impact on earnings, but there was a reclass.

And like most retailers we included construction allowances as a reduction against furniture and fixtures.

There is no profit impact.

Right, no profit --.

Just reclassified into -- what do (indiscernible) equity?

No, to our liabilities.

And last question on the tax rate, is that -- should we expect this level going forward or --?

We are planned at 36.5 percent.

There is always opportunity for tax strategies to materialize.

We have been extremely successful over the last number of years in beating our planned tax rate.

And it could happen again, but at this point it is not baked into our forecast.

Lee Backus from Buckingham Research.

First congratulations, Matt, on a good year -- and your team.

You talked on the last conference call that you expected by spring that the Nike products would be pretty much up to where you wanted them as far as getting them marquee products.

Is that still pretty much on plan?

Yes, yes.

And quite frankly, I think we're a little ahead of the curve in that regard.

We -- in the fourth quarter, the last week of December and the month of January, receipted an additional $200 million in the U.S. of marquee product as part of our little stock increase that we had inventory increase at the end of year.

But I'm very encouraged by the allocations we are receiving and cooperation from the entire Nike organization.

And that is certainly true in Europe also?

Europe had never had an issue with allocations or quantities of Nike marguee product, as did Australia and Canada and our Internet operation.

So it was clearly an issue in the U.S. stores.

I believe it is repaired, and it is -- we're back on track.

Now on the strength that you're seeing on the market out there over the last couple of months, is this because the whole market is strong do you think, or is this because you're doing a better job than your competitors?

Or the fact that some of your competitors have disappeared ala Athlete's Foot?

Just give us a sense of what you think is going on in the general competitive environment of there?

You know I don't believe the business -- you know, if you take the $16 billion footwear business in the U.S., I don't think it has grown that much in quite a long time.

You go back to 1998, it was in the 15, $15.5 billion range.

So I think when you have over a long period of time -- when you have over long period of time companies like Just For Feet going away that did I believe $800 million.

Our acquisition of Footaction I think was a pivotal strategy in executing that in 2004.

And it took our market share in the U.S. from 19 to close to 20 percent.

So I think -- I don't think you could say business is great, and I don't think you can say business is bad.

I think there is a redeployment of store base, and the inventories, as I said, being redeployed in different companies.

The Athlete's Foot operation which we picked up -- was it 11 stores, Bruce?

10.

10 stores.

They were never a huge each competitor in the U.S.

Although they did carry a lot of marquee products.

So we I think have a beneficiary of a lot of that key merchandise.

But there is definitely a shift towards technical footwear.

There's a lot of exciting product out there.

The apparel business in aggregate has not been great.

In the last quarter we did okay.

Our private-label business continues to grow very, very aggressively with impressive margins.

And our branded apparel business is coming on strong.

So I think we and some of our key competitors had very strong comps and total increases in footwear, and didn't do as well in apparel.

If we can get both of those things working at the same time, it could be a very exciting year in the industry.

Jeff Edelman from UBS.

Nice job.

Just one clarification, Bruce, on the tax rate.

If you benefited this year from a mix to more lower rate areas, is that going to reverse itself in '05?

At this point, Jeff, we feel most comfortable giving guidance at 36.5.

And obviously if you look back over the last 3 or 4 years, we have certainly beaten that trend.

But that is what we want to stick with at the time being.

Number 2, Matt, with the -- your comp store sales domestically I guess if we X out apparel, footwear was mid to high single digit?

Yes.

Okay good.

Third then if I could ask, in terms of the Nike flow when will you continue to start getting the big -- or when will the big delta start to subside in terms of incremental flow?

I think the increase in flow is going to continue throughout the entire year.

Nike has developed a lot of new, exciting product.

And if you look at just the Shox category that now in my opinion is almost like a brand within a brand.

There are so many styles, exciting uppers, and different SKUs both in basketball and in running.

The other thing that we are getting back on track on is our Tuned Air business, which was a very big business that we had in the late '90s and 2000, 2001, which essentially fell off the charts for the last couple of 3 years.

Our European operation has continued to have a very exciting Tuned Air business, as well as our Canadian and Australia operations.

We're talking like well in excess of 1 million pairs of -- you know 1 shoe in different styles.

So we have introduced during Christmas time and in the last month or so several styles of Tuned Air and have done extremely well.

We know one of our competitors has not done well with that product.

This would lead me to believe that the customer recognizes that very important Air shoe in our store.

And I think it's going to be a catalyst for the coming years again.

It may not be as big as it used to be, but it used to be 4 million pairs of shoes as a corporation in all different genders.

Donald Trott from Jefferies & Co.

You mentioned that you had very lofty operating margins in Canada.

Do you regard that as aberrational or sustainable?

And if so, what is causing that?

I think we have -- we've done in a lot of things in Canada.

We clearly have strength in the management up.

Larry Present (ph) has done an outstanding job of up there.

The fellow has been with our Company for over 20 years.

Ran our Australian operation, got that thing profitable.

And he has been up there now for a little over 2 years.

We had a huge facility that used to service all of our companies up in Canada in the old days.

I'm talking about the Woolco's and all the different divisions.

So we now have a nice new, exciting office environment and have attracted some key merchandising executives.

Also we renovated -- that division is almost 90 plus percent either new or renovated.

So we really look very crisp and very exciting up there.

The other thing that you have in the Canadian market, and you look at the greater Toronto area and Montreal, it is a very fast market.

A lot of European merchandise that doesn't necessarily sell in the U.S. as well -- we sell it, but it doesn't sell as well -- we do extremely well with up there.

So we were just a few basis basis points away from a double-digit division profit there.

And a much more aggressive organization up there then we have had.

We made the most profit we have ever made by a long shot there, and I think it will continue.

In the UK, as I recall there were 2 competitors that had been fairly aggressive on price promotion.

And also they were -- their financial condition was alleged to be somewhat weak.

What is the status of that whole situation in the UK currently?

You've got firstly, J.D.

Sport, a very fine company, very similar to Foot Locker, particularly Foot Locker Europe, excellent locations, a good product mix.

They went through an acquisition of First Sport a couple of years ago.

And it could be that they over-stored their operation, because they have been really wrestling.

Their earnings are thin.

They do approximately $800 million.

Then you've got JJD, which is kind of an offshoot of Sports Authority, not with as many products that you would find in a Sports Authority, i.e., you wouldn't see a lot of exercise equipment in there or hard goods, fishing gear and whatever they -- guns, what have you.

But you know a lot of football, soccer merchandise.

They have a new -- they do about 1 billion 3.

They have a new competitor over there called Sports Soccer, which is growing very, very aggressively.

I believe they have 170 to 180 locations, and they appear to be taking market share from them.

So it is a very aggressive promotional environment in the UK.

As promotional as the U.S. was several years ago.

So a lot of banging heads over there.

We're not doing as well as we would like to do in the UK.

We are extremely profitable.

We operate approximately 70 doors ever there.

And we will expand it at the appropriate times.

We have some very, very exciting stores over there.

One of our largest stores is on Oxford Street.

We are in Covent Gardens.

We're very big in the principal cities, Birmingham, Manchester, Leeds where there is a lot of athletic footwear.

But it could be that the UK, I would tell you that in the athletic zone is a little over-stored.

There's a lot of competition.

I think the strategy -- many of them is just price, price, price and instead of product.

I just have 2 very brief questions to follow up on that.

Number 1, on the new openings to what degree will you be utilizing the Footaction banner?

And number 2, you said your market share in the U.S. is now about 20 percent.

Can you just refresh us on at this point who is number 2 and 3, and what their respective shares are roughly?

We will be opening between 5 and 10 additional Footaction locations this year.

It could be more down the road.

I quite frankly -- I know I mentioned it on the last conference call.

I am very, very pleased with this acquisition.

It is succeeding my expectations.

And I think it is a business that has tremendous urban growth potential.

The second question was who is our second player in market share?

Who is the second and third in the United States, yes.

I think you've got Finish Line in there which is around 4 percent, something like that.

And it is hard to find the third.

I think you've got to look inside some of the big-box guys.

It could be Sports Authority.

How about any of the general merchandise stores?

The second one actually is Wal-Mart.

Yes, but that is not --.

That is not really a competitor of us in that they are such low price points.

I think Don is referring to our zone.

Bob Drbul from Lehman Brothers.

A couple of questions.

First on the inventory levels, I think Bruce said inventories were up 11 percent X Footaction and X currency.

When you look at your square footage growth plans and the comp plans that you have, that seems a little high.

I just wondered if you could just elaborate a little bit more on your comfort level and sort of why you are running it at these high levels?

I think I kind of explained it when I mentioned that we chose to intensify, because we are able to get it, an additional $200 million of Nike marquee product in the U.S. operations.

So I think that really added a lot to our inventory base.

Footaction, we're not calling it a start up, it is an acquisition.

But we're still finding our sea legs on quantities by store and our distribution method of operation in there.

But I'm very, very comfortable with the inventories.

They are clean.

They are fresh.

Currency in line with our standards.

We will be adding a significant amount of inventory into Europe in the next 2 quarters.

The mission over there is to intensify our comps.

And that is why we are generally -- we're going -- we have been opening 50 to 60 stores for the last 4 or 5 years, and we went to take it down to 20, 25.

It is not because we don't have confidence, but we want to really invest in inventory and be sure that we're not missing any sales, and beef up the apparel presentations as well.

And so if you look at the full year for 2005 in your Europe, what is your comp plan?

What do you expect that business to do on a comp basis throughout this year?

The corporation?

Yes, In Europe specifically.

In Europe?

Yes.

It is too soon to tell.

It is very early in the year.

There's no question things continue to be very cranky over there.

But we could be looking hopefully at a low single digit decline.

I think if we got to a break even toplines over double-digit, and I think thereafter I think you'll see some stronger improvement.

But our earnings over there continue to be very, very, very exciting.

We're running a clean, regular price fashion forward business.

And I would rather position the business to have low mid-single-digit declines and keep the earnings very high and deposition them to jump off very aggressively in '06, 7 and 8, continue our strategy of 50 to 60 stores per year.

And then just one final question is on the average selling price trends here in the U.S. has there been any big disparity amongst the Foot Locker business, the women's -- the Lady Foot Locker business and Champs on the footwear side, or have they all been pretty consistent question?

In general in the month of January most of them were up around 4 to 5 percent.

So they're pretty close.

John Shanley from Susquehanna Financial.

Matt, I wonder if you can just clarify 1 quick comment that you made?

Are you expecting comp increases in fiscal '04 of low single digit or as the press release had it low to mid-single-digit?

Low to mid single.

And then in terms of the increase of 200 million in Nike wholesale purchases --.

Those were retail.

At retail, so it is 100 million --.

Those were receipts that we receipted the last week of December and the month of January.

Can you give us a rough idea then what your expectation is for Nike as part of your vendor mix?

When you file your 10-K how much of the '04's business was Nike and how much will it likely be in '05 with this recent increase?

It will be in the low 40 range for '04 and will pop up to the mid to high 40s depending on how things go.

So it will not get back to where you were prior to the dispute, which I think was --.

I don't know about that.

It is too soon to tell.

Fair enough.

And on the Footaction merchandise marketing opportunities, as we get into the '05 selling season in earnest, are we likely to see a (technical difficulty) in terms of the merchandise and marketing efforts between Foot Locker and Footaction?

And what about possibly represent in terms of maybe giving the big Foot Locker chain a little bit better pop in terms of opportunities so they're not competing head-to-head with Foot Locker -- Footaction as they did in '04?

A lot of the merchandise is the same and a lot of the merchandise is different.

So there's a lot of special make ups in footwear.

We articulated the apparel strategy in that Foot Locker will remain heavily gated in the private-label sector, and that we will take Footaction and really intensify the brands in there in apparel.

We see a very, very exciting opportunity in Footaction for athletic apparel.

As you know, and most of the people who have been following the industry for a long time know, Footaction never had a meaningful apparel business.

So you will clearly see differentiation.

And by nature of store location with the Footaction operation there will be more urban type of merchandise in those locations.

That's great.

Bruce, I had a question.

I don't want to beat this tax thing to death, but there was quite a difference in terms of the tax rate.

We show a 5 cent contribution from the lower 31 percent tax rate versus the earlier guidance you gave us of a 37 percent tax rate.

Can you give us an idea of how much of that may have been contributed by more business being done outside the U.S. in lower tax rate jurisdictions, and how much of it was a result of the overpayment of taxes in '03?

I think you have a few of your facts wrong, John.

Peter can work with you later on the numbers, but versus LY we are up 3 cents per share.

And the overpayment does not relate to the '03.

And I'm not sure where you get that information from.

We embarked on a pilot program, and I think we're the only corporation in America to do this, with the IRS to get our tax exams caught up to the year that we're in.

And we were successful in doing that.

And one of the things that that did was it reduced the amount of uncertainty on specific items that we have been negotiating with the IRS for a number of years.

So we are extremely current, and I would say maybe the most current corporation in America in terms of its tax rolls.

And I think the biggest reason is because of this pilot program that we --.

We were the pilot.

We were the pilot, John.

Okay.

So did you get a tax credit been then?

I'm not sure I understand?

We get tax credits.

Then you get tax charges.

That stuff happens all the time.

But it has nothing to do with '03.

But in '04 you did get a tax credit, is that correct?

We get tax credits every year, John.

We're always working on them and we have a wonderful tax department.

Super.

Then looking forward with this issue in terms of the lower tax jurisdictions can you give us an idea of how much of the Company's topline numbers were produced outside the U.S. in '04?

And what it may be in '05, so we can maybe quantify our tax issues going forward?

About 22 percent.

22 percent in '04?

Yes.

How about '05?

About the same.

So there is not that much of a change?

Okay.

And then lastly, on the store closings, Matt, that you mentioned 100 store closings.

Are some of those going to be the triplex and other units that you have been trying to get out of?

And will it have a material effect on operating profit margins?

Yes.

There will be some triplexes, and there will obviously be a lot of the larger 8 to (technical difficulty).

What is the current inventory of those larger stores, and when will you probably be out of all of them?

We've got about 48 of the triplexes.

We're not going to be totally out of triplexes, but I would hope in 3 years that the lion's share of them would be gone.

The current inventory is approximately 160, including the triplexes.

160 large format stores?

160.

Okay, Alright, great.

These are very big stores though and very unproductive.

Right.

Right.

And what would that do if you get out of all 160?

What does that mean in terms of operating margins?

If you got out of all 160 and did everything else right, you are looking at probably another 150, 200 basis points.

Thanks a lot.

I appreciate it.

Operator, we have time for 1 more question.

Meo Gordano (ph) from our IRG Research.

I just have a quick follow-up on the average selling prices.

Is there a point where you see average selling prices peaking?

Do you think it will increase throughout the year?

And have you see any resistance at some of the higher priced run products that is out there today?

We have not seen resistance.

We feel that the average selling price is coming back.

And we have not met with any resistance.

I just don't see it happening.

I think what has really happened is a lot of the key suppliers have really just for the first time in a long time have come out with a lot of new and exciting product.

And that is how you get those kinds of selling -- the Jordan 20 that was launched last weekend, a $175 shoe, but it is a very, very exciting shoe.

And look at Adidas with Kevin Garnett.

Those are very, very exciting shoes.

The Pump.

You know it is not the traditional Pump that Reebok had tried to put into the system 2 or 3 years ago.

This is a very exciting shoe.

It has done very, very well.

I think it is $110.

And the other thing the Shox line again it is not just an item or 2 anymore.

I couldn't even tell you how many different styles they have, but there is a lot of different SKUs in there.

And you have got running Shox, you've got basketball Shox, you've got cross training Shox, a big women's running program in Shox.

And that in my mind is a line within a line of the Nike Corporation.

And I think they have done a very, very clever initiative of the way they have positioned that and grown that business.

Okay, we would like to thank everyone for participating today.

And we look forward to a very successful 2005.

Ladies and gentlemen, this includes today's teleconference.

Thank you for participating.

You may now (technical difficulty).