Foot Locker Inc (FL) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the first quarter 2005 earnings release conference call. (OPERATOR INSTRUCTIONS).

Please note that 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, economic and market conditions worldwide, and other risks and uncertainties described in the Company's press release and SEC filings.

We refer you to Foot Locker Incorporated's most recently filed Forms 10-K or Form 10-Q for a complete description of these factors.

Any changes in such assumptions or factors could produce significantly different results, and actual results may differ materially from those contained in the forward-looking statements.

Please note that this conference is being recorded.

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 first quarter conference call.

We are pleased report today that our earnings per share from continuing operations for the first quarter of 2005 increased 19% to $0.37 per share.

This increase was at the very high end of the 10 to 20% earnings guidance that we provided at the beginning of the quarter.

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.

After our prepared remarks we will answer your questions.

Included in Bruce and Matt's prepared remarks are some details of our divisional results that demonstrate the benefits of operating a diverse group of athletic businesses.

In summary, we are off to a solid start for the year, and remain confident that we will continue to post exciting results for the balance of the year.

Key highlights for the first quarter are as follows, total Company sales increased 16.1%, comparable store sales increased 2.6%, our gross margin was flat for the last year, while our SG&A rate improved by 30 basis points.

Our pretax profit increased 23%, and as a percentage of sales improved by 40 basis point.

Income from continuing operations increased 23% to $58 million.

And as I already mentioned, earnings per share increased 19% to $0.37.

Included in this year's first quarter results was a charge of $0.01 per share related to our decision as a responsible corporate citizen to contribute athletic footwear to the Save the Children organization that primarily benefited the victims of the tsunami disaster in Asia.

And finally, our financial position remains strong, which allows us to actively pursue opportunities to expand our business.

I will now turn the call over to Bruce Hartman.

Good morning.

We are pleased with our first quarter performance, and are encouraged that we will continue to generate 10 to 20% EPS increases from continuing operations for the balance of this year.

Our U.S. store business produced strong results for the first quarter.

We expect our U.S. businesses will continue to post similar strong results for the balance of the year, and compensate in the event of any continuing weakness in our European business.

Champs' results have been very promising, and for the balance of this year is expected to generate a very exciting profit increase.

Footaction sales and profits are also exceeding our expectations.

As a result, we're raising our earnings guidance for this business by $0.02 per share, and currently expect Footaction to contribute $0.12 plus per share for 2005.

The strong turnaround at Lady Foot Locker continues.

We also remain very optimistic that Foot Locker U.S. and Kids Foot Locker will each have a strong profit gain for the year.

Overall, our 2.6% comp store sales gain for the quarter was in line with the guidance that we provided at the beginning of the quarter, and contributed to a total sales gain of 16.1%.

Additionally, our earnings increased at the very high end of the EPS guidance that we provided in March.

Excluding the contribution expense associated with assisting with the tsunami relief efforts, we would have exceeded the high end of our EPS guidance.

Our Company continues to produce very solid and consistent profit increases, partially as a result of operating a diversified portfolio of businesses.

Our first quarter comparable sales of our major divisions break out as follows.

Our U.S.

Foot Locker business, comprising Foot Locker, Kids Foot Locker and Lady Foot Locker, reflected a low to mid single digit increase, led by the turnaround at Lady Foot Locker, which posted the strongest results.

Footaction, our most urban-based business also generated very solid sales, as well as encouraging profit results.

As a reminder, these stores will be included in our comp store sales results beginning in the third quarter of this year.

Champs, our more suburban-based division, was the star performer of the quarter with a double-digit increase.

Foot Locker Europe recorded a mid single digit comp store decline, as the retail environment in this region continues to be soft.

Total sales, however, did increase mid single digits due to our expanding store base and the favorable foreign exchange rates.

Footlocker.com had a low single digit increase and continues to produce an improving trend.

As mentioned on our conference call, sales in February were above plan, with comps increasing in the mid to high single digit range.

We also discussed on the call that we were seeing continued strength in our European -- our U.S. store business and weakness in the European marketplace.

These trends continued throughout the first quarter.

The strength of the business -- the strength of business in our U.S. stores was largely driven by increased sales of marquee footwear that led to higher average selling prices.

We also benefited from increased store traffic.

The comp store sales decline in Europe was primarily the result of weak external factors.

The pace of our total Company comp store sales gains subsided somewhat during March to a mid single-digit increase.

Sales in March were enhanced, however, by the earlier Easter holiday season.

The month of April was a two-part story with total month comps down mid single digits.

Comp sales during the first two weeks declined low double digits as expected due to the Easter holiday shift versus last year.

Comp store sales for the final two weeks of April increased low to mid single digits, an improving trend that has continued through the first 2.5 weeks of May.

Our first quarter gross margin rate was flat versus the same period last year.

Our merchandise margins, however, improved by 10 basis points, which reflected a lower markdown rate versus last year.

Our tenancy rate increased by 10 basis points, but on a comparative basis excluding Footaction, actually improved by 10 basis points.

We remain committed to achieving our goal of reducing our occupancy costs as a percentage of sales by 200 basis points.

We realized the first basis points of this savings last year and expect to benefit by an additional 40 to 50 basis points in 2005 and be about halfway to our goal.

Our real estate Department has made good progress towards this progress by strategically implementing 14 initiatives.

We have been opening new stores in our most productive markets, lowering our store buildout costs to reduce depreciation expense, closing stores or reducing the square footage of certain larger sized stores, and working with our landlords to optimize our tenancy cost structure.

While we approach store closings carefully, this is one of the key initiatives that we continue to pursue.

In fact, we generally close stores only after all other avenues, such as relocations, downsizing, and rent reductions, have been fully explored with our landlords.

On a practical basis, however, it makes sense to close a certain number of stores each year, typically as leases expire and we determine that we will not achieve an acceptable rate of return going forward.

Recently the stores that we closed include both larger stores that were open in the late 1990s and the low-volume stores that we were losing money in.

In many cases when we close a store we recoup a certain percentage of the sales in another of our nearby stores.

This has been most prevalent when we closed a Kids or Lady Foot Locker store, and subsequently benefit from a comp store sales increase in a nearby Foot Locker and/or Champs store.

In total we have now addressed approximately two-thirds of the 233 larger sized problem stores, including many of the unprofitable triplex formats that were build seven to eight years ago.

Sixty of these stores have been closed, with the remaining amount resolved through downsizing, relocations, or rent reductions.

The remaining larger stores and low-volume smaller stores that are losing money presently an opportunity in which we plan to capitalize during the next few years.

We completed approximately 160 real estate negotiations related to new or existing stores during the first quarter.

Our annualized tenancy expense rate for these stores is expected to average approximately 200 basis points favorable to the Company's average rate incurred last year.

Our first quarter SG&A expense improved by 30 basis points versus last year's comparable period.

Excluding the impact of our contribution to the Save the Children Organization to benefit the tsunami victims, our SG&A rate would have improved by 40 basis points to 20.4%.

This clearly demonstrates that our expense initiatives are effective and enduring.

In particular, our new competitive bidding process that we utilize for non-merchandise expenses is paying handsome dividends for the second year in a row.

For the full year we expect this process to save us over $12 million.

In fact, we completed over 40 auctions during the first quarter, with estimated annual savings of $4.5 million.

Our interest expense declined by $1 million, while our tax rate was essentially flat with the first quarter of last year.

For the balance of this year we expect our tax rate to remain at 36.5%.

Turning to our balance sheet, you will note our financial position remains strong with cash and short-term investments totaling over $400 million.

In February we prepaid $17.5 million to our banks, which would have otherwise been due in May.

And we contributed $19 million to our pension fund.

We believe our capital structure is strong, efficiently supports our existing businesses, and provides efficient financial flexibility should appropriate additional investment opportunities arise.

Our merchandise inventory at the end of the first quarter is more current than at the same time last year, and very well positioned to support second quarter sales.

The 26% increase in inventory reflects stronger foreign exchange rates in Europe, Canada and Australia, incremental inventory to support our new Footaction business, and access to additional marquee products to support Q2 sales.

Excluding the impact of foreign exchange in Footaction, inventory would have increased 11%.

Looking towards the second quarter of 2005, we expect to achieve the high-end of our annual 10 to 20% EPS guidance, while having an opportunity to exceed this guidance.

Last year's second quarter results from continuing operations included two significant items that while unrelated effectively offset one another in our reported results.

A $0.07 per-share loss related to the operation and integration of Footaction.

And a $0.06 per-share benefit related to last year's resolution of U.S. and foreign income tax examinations, as compared with this year's 36.5% estimated income tax rate.

In closing, I would like to emphasize that one of Foot Locker's great strengths is its global diversification.

Our global diversification, including nine significant distinct businesses, has certainly worked to our advantage during the past six years, and has been a contributing factor to our very consistent record of generating annual, and in most cases quarterly, EPS increases.

And with our U.S. businesses off to a strong start in the month of May, we believe that we have an opportunity to exceed the high end of our 10 to 20% EPS guidance for the second quarter of 2005.

I will now turn the program over to Matt Serra.

Good morning.

We're very pleased with our first quarter results and feel that we're well-positioned for the balance of the year.

Like most quarters the current period is filled with both opportunities and challenges.

The opportunities which we are able to capitalize on clearly exceeded the external challenges, the impact of which we were able to minimize.

Our 19% earnings per share increase was at the high end of our guidance that we provided at the beginning of the quarter.

And we have a lot of momentum as we enter the second quarter.

Our diversified portfolio of businesses helps to minimize our risks to external factors, thereby providing the opportunity for more consistent growth.

Clearly this has been the case over the past six years.

Our business is diversified in many respects.

We operate 4,000 stores 18 countries around the world through 9 distinct business units.

We operate through multiple channels of distribution, including stores, catalogs and the Internet.

Our catalogs and Internet business allows us to reach a larger customer base with a much wider breadth of categories, styles and sizes.

We carry a wide breadth of footwear styles from about a dozen well-known suppliers with a high concentration in the basketball, running and cross training categories.

Our apparel offerings included a mix of branded, licensed and private-label merchandise.

During the first quarter, our U.S. store business presented our most significant opportunity, generating a mid single digit comp store sales increase.

Champs and Lady Foot Locker posted very strong results, followed by Foot Locker and Kids Foot Locker, each of which posted solid low to single digit gains.

Champs, our most suburban-based business with almost 600 stores in North America, was our star performer.

As Bruce mentioned, Champs produced a nice double-digit comp store gain for the quarter, which contributed to a very significant profit increase.

The impressive (technical difficulty) Champs is driven by hirer sales in marquee footwear, which led to increased average selling prices.

Champs' strong sales spanned each of the men's, women's and children's categories.

Apparel sales at Champs gained low single digits, driven by increased sales of private-label and branded products.

This increase more than offset the continuing decline in the licensed category.

Champs is clearly gaining market share in the suburban sector of the high-end athletic footwear and apparel market.

This division is quickly headed towards becoming a $1 billion business with a profit margin well into the high single digits, and moving into the double digits next year.

The sales and profits from our 350 store Footaction chain was another significant highlight of the first quarter.

As Bruce mentioned, the development of Footaction as a significant contributor to our overall Company is progressing ahead of schedule.

Footaction, with a strong urban following, is proving to be an excellent complement to our suburban-based Champs business.

Sales at Footaction are heavily skewed to the basketball category, with particular strength in the high-end performance and marquee footwear category.

Apparel and accessories sales in Footaction exceeded our plan during the first quarter, and remains an opportunity as we build this program going into the future.

Over the past few years Lady Foot Locker with 555 stores in the U.S. has been our most challenging division in terms of sales growth and profitability.

We began to turn this business around during the fall season of last year.

The momentum has carried over into the first quarter of 2005, resulting in an upper mid single digit comp store sales increase.

The improving results at Lady Foot Locker during the first quarter were led by increased sales of apparel and accessories, with strong sales of more appealing branded and private-label products.

We believe that the turnaround at Lady Foot Locker is well underway, and we strive to return this division to its historical levels of profitability.

Foot Locker, with approximately 1,400 stores, and Kids Foot Locker with 336 stores in the U.S., each posted very solid low single digit comp store sales increases for the first quarter.

Prospects of earnings improvements at our flagship Foot Locker division for the balance of the year are very encouraging.

Kids Foot Locker, after posting weak results earlier this decade, is also very well-positioned to have a strong year.

We expect Kids Foot Locker to post a strong earnings increase in 2005, with a high single digit division profit margin.

Footlocker.com/Eastbay, our domestic direct-to-customer business generated a single digit sales increase, while maintaining its high division profit margin.

Sales in this division continued to shift from our catalog operation to our more profitable Internet channel, as online shopping has become a widely accepted means of shopping.

The mailing of catalogs remains an important marketing tool as customers are browsing our catalogs and subsequently placing their orders through our our websites.

Fourth quarter footwear and equipment sales were very solid, increasing mid single digit, with sales of licensed apparel weak.

For the balance of 2005 we expect sales of Footlocker.com/Eastbay to accelerate for 3 key reasons.

We expect apparel comps to turn positive later this year as we begin to anniversary the decline in licensed category.

We are in the process of building new, enhanced websites that we would begin rolling out next month.

We will have additional quantities of higher priced marquee footwear available through this business, particularly during the fall season.

While the financial performance of our U.S.-based business was very strong, our international results were mixed.

Foot Locker Canada and Foot Locker Asia-Pacific each achieved very solid results, while business in Europe remained very challenging.

Our 130 store Canadian division produced another strong quarter in terms of both sales and profits.

As mentioned on our fourth quarter conference call, Foot Locker Canada nearly achieved a double-digit division profit margin in 2004.

Our expectations for Foot Locker Canada for the full year of 2005 include generating a mid single digit comp store sales increase, record profits, and a double-digit division profit.

We are also very pleased with the continuing progress of our Asia-Pacific division.

This division currently operates 82 stores in Australia, 11 stores in New Zealand, and 4 stores in Guam.

Our management team and infrastructure has contributed to the improving results.

Similar to Foot Locker Canada, we expect your Asia-Pacific division to post a mid single digit comp store sales increase for the year, record profits, and an improving profit margin.

As a result of this progress, we continue to pursue new markets for growth in this region, and hope to have something more concrete to report within the next six to fifteen months.

We are currently most focused on Hong Kong, mainland China, and Singapore.

Our European business is our largest challenge for this year.

While we have seen short bursts of improvement over the past two quarters, comp store sales for the first quarter declined mid single digits.

Total sales in this division, however, increased mid to high single digits, benefiting from a larger store base and a more favorable foreign exchange rate.

We believe that our challenging sales results in Europe is primarily due to external factors that will correct over time.

Consumer confidence remains low and unemployment levels very high in most European countries.

The competitive landscape remains fragmented, and several of our regional competitors are struggling.

Our business strategy in Europe is designed to maintain our high profit margin rates and includes the following, sustain our leadership position in the industry by focusing on offerings in the high-end marquee footwear arena; maintain our merchandise margins through full price merchandise presentations, utilizing market specific promotional programs, including very selective clearance programs designed to preserve our very current inventory position; increasing our apparel penetration by implementing a similar strategy that has worked so well in the United States; and aggressively working on reducing nonsales generating expenses.

Until the external environment improves, we're taking a more cautious approach with store growth.

This will allow local management to be more focused on driving comp store sales and maintaining its high profit margins.

We continue to believe, however, that Europe offers exciting opportunities for both sales and profit growth.

During 2005 we are on schedule to open an additional 20 stores in this region, including two new stores in each of Switzerland and Greece, the 15th and 16th countries where we will be operating in Europe.

We expect to end the year with approximately 520 stores in Europe, generating approximately 1.2 billion in sales, and a very solid double-digit division profit.

In summary, our nine business units, Foot Locker U.S., Champs, Footaction, Lady Foot Locker, Kids Foot Locker, Foot Locker Europe, Foot Locker Canada, and Foot Locker Asia-Pacific, and Footlocker.com/Eastbay combined to produce a 19% increase in earnings per share for the first quarter.

As a result, we are more optimistic that we will generate a low to mid single digit comp store sales increase, or grow our earnings per share between 10 and 20% for the balance of the year.

This guidance is in line with our historical practice.

We recognize that an opportunity exists to surpass the high end of this range.

We feel that it is more prudent however to continue to plan our business in line with our more conservative practice that has worked so well for us in the past.

For our second quarter we currently expect earnings to increase toward the high end of this 10 to 20% range, with an opportunity to exceed this guidance if current sales trend continues.

This equates to 32 to $0.35 per share, or potentially higher, versus the $0.29 per share that we earned during the second quarter of last year.

We also continue to make headway toward the achievement of our two key financial objectives that we have previously articulated, increasing our annual sales per average gross square foot to $350, and achieving an operating profit margin of 8.5%.

We expect our businesses to generate strong cash flow again in 2005, which we will carefully redeploy for our shareholders of the following priorities, number one, invest in worldwide growth; number two, enhanced the productivity of existing businesses; number three, strengthen our balance sheet; number four, pay a meaningful cash dividend and continue to review additions to that cash dividend and the potential purchase of some stock.

Our planned 170 million capital expenditure program remains on track, primarily targeted towards the opening and closing of up to 100 stores, remodeling and relocating over 300 existing stores, and maintaining an efficient infrastructure.

Our foundation is strong.

Our outlook is bright, both for the near-term and long-term.

And our management is highly focused on driving shareholder value.

We will now be happy to answer your questions.

Thank you.

(OPERATOR INSTRUCTIONS).

Robbie Ohmes from Banc of America Securities.

I was hoping we could get a little more detail just on the inventory levels.

I know you explained why they are up so much, but can you give us more on by region and category?

So, for example, is it really mostly just Nike footwear product that is increasing on a per store basis, or is it also their apparel, and in private-label is it weighted towards Europe versus the U.S.?

Thanks.

Yes.

It is a combination of everything you mentioned.

I made several trips to Europe in the last few months, and we clearly want to get that operation going.

So we really intensified the apparel inventories in there.

We put in place our private-label program.

It is a little different than what we carry here, but basically the same concepts.

And our apparel business is beginning to turn around very nicely over there.

That has been a big intensified in terms of inventory.

We also pull forward a lot of ski products in the European market to really be sure that we're not missing any sales.

The other piece of it relates to our continuing intensification of Nike end bring in a marquee footwear as we can get it.

And it appears to be working very, very well for us.

The inventory is very, very current.

And I think that we're not concerned about it.

And I am sure, as you have noticed over the years, we always run with a little more inventory than some of our competitors.

So, Matt, should we expect the levels to be up like this for the next couple of quarters on a per square foot basis?

I would say it is going to come down a little at the end of the second quarter.

It could come down by 5% are so.

Robert Samuels from JP Morgan.

Can you talk about where you think we are in the current cycle for premium athletic footwear?

Yes.

I think that there clearly is a tremendous amount of interest in marquee once again.

There are a lot of new, exciting products coming to the marketplace.

That marquee category in the early 2000's was kind of stagnant, and now we are seeing a tremendous interest and sales in the high-end products.

A clear example would be, we have got a lot of shoes, but the Adidas 1 shoe was a sellout.

Now that wasn't a highly distributed shoe.

It wasn't all over the place.

But it gives you an indication that there is a very, very clear sanguine interest in high-priced footwear.

You have got a lot of excitement going on with Nike.

They are launching the Free product next weekend, Memorial Day, exciting new merchandise.

And quite frankly, the Jordan product has sold better than it has ever sold.

And in general, as a general comment, it is very high-priced.

We are seeing in our operation a lot of Air product from the Nike organization, i.e., Tuned Air is back with us in the U.S.

It is doing extremely well.

Items like Air Max soleless are doing extremely well.

Jeter’s, Air Jeter under the Jordan brand, we have done extremely well with them.

So there is clearly a trend back towards the high-end marquee category.

Lee Backus from Buckingham Research.

First just to follow-up on the footwear trends, what other trends do you see in the marketplace?

You talked about marquee, could you discuss classics or any other trends that you see going forward?

Classics have clearly hit the wall.

That's no secret.

On a negative basis, I would say that is the key component.

When you look at low profile, you continue to see some excitement with the Toma organization.

Items like their Speed Cat is really beginning to hit the U.S. market.

Right now I would think those are the real principle key trends that are moving the footwear business.

The other area that continues to do well, and you are in the spring season, but the boot category and brown shoe so-called category has done extremely well.

And Bruce, I was intrigued by the comment you made about your tenancy cost, down 200 basis points for the new stores.

Should we assume that that just falls to the bottom line?

And maybe also you can talk about at what point will the store growth, or the store base in the states, stabilize to where -- every year we have seen -- other than the Footaction acquisition -- a decrease in the store growth.

When do you think that stabilizes?

The answer to your first question is that we will get that money over the next few years, and it is all part of our program to get our occupancy costs and depreciation down by 200 basis points, which we should be halfway through.

The U.S. retail market changes slightly every year, so I think that is something we're going to have to always work on.

I would add to that, with our acquisition of Footaction we picked up nearly 4 points of marketshare.

So we have increased our position in our square footage in the U.S. market.

Okay, good quarter, guys.

Jeff Edelman from UBS Securities.

Matt, one clarification on the inventory.

Was this earlier delivery of Nike product that you expected, or was those additional product that you were able to get a hold of?

A combination of both, but more of the latter, where we were able to get more very important marquee merchandise that is going to really drive our business in the second quarter.

And with our very, very strong liquidity position, we decided to pull it in early.

And then secondly, could you sort of breakout on an overall basis, anyway you can, footwear growth in the quarter versus apparel, and where you think the U.S. business starts to turn positive in apparel?

Yes, sure.

On a worldwide basis, footwear comps were up around 4%, and apparel comp store down about 3%, impacted heavily by the licensed category.

I believe that beginning towards the end of the second quarter, in the early July period, which really is the beginning of back to school in many markets, that we're passed a lot of the business -- the increases that we had in the licensed category.

So our private-label business is acting extremely strong.

And branded is coming on as well.

So we think that we're beginning to turn the apparel business.

Also, Champs, which as you all know is approximately 15% apparel, had a very good quarter in apparel.

Now it is a little different business.

The Champs business is more fan-based, and so their license business was fairly strong in the last quarter.

So they will have the same impact in terms of loss of licensed product.

If I could just throw in one short quick one.

Are there any product categories in Europe that seem to be weaker than the average, or is it pretty much overall?

I think it is across -- kind of across the board over there.

There just seems to be a lack of traffic over there right now.

You've got clearly intensified competition.

And we're going to stay the course in our European operation.

As we have stated we're going to do approximately 1 billion 2 in total sales.

We want to maintain our margin.

We are in there for the long pull.

We want to expand that business.

And it is my sense that this too shall pass.

We have seen this happen in other markets over the last 7 to 10 years.

And I think it is a combination of cyclical and external factors, and you've got a lot of competition over there.

And also you've got -- we could buy the business over there and increase the comps.

But we have made a conscious decision not to do that.

We want to maintain a high double-digit profit margin.

And with that diverse portfolio of brands we can make up any deficiencies that we do have in Europe.

We have got a very strong team over there.

And we're committed to running a cutting-edge, high-quality marquee business.

And as I said we are opening 20 stores going into two new markets.

We're looking at other new markets.

We are hopeful it is a temporary situation, which will probably go through the end of the year.

I can't see it changing.

John Shanley from Susquehanna Financial Group.

Matt, I wonder if you can give us your thoughts on the market growth opportunity for marquee and limited availability product as we get into the important back to school selling season?

And also maybe if you can help us understand the strategy of how you're going to treat that product category as a differentiation between Footaction, Foot Locker -- and you just mentioned Champs Sports is doing well in the category as well.

We really, as our renewed partnership with Nike is flourishing, as you know we have been joined at the hip for the last 25, 30 years.

And we had that little I think intermezzo is not the right description.

Something like that.

A little disagreement.

We are fully back on track.

Nike, I see a tremendous increase in our business with the Nike organization.

Both organizations are working extremely hard together to rebuild what we had.

They have redeployed a tremendous amount of human resources back into our Company.

And I think the situation that we had didn't help either company, and everything is back on track.

So we believe that we're going to have a huge increase in that product -- core category.

In terms of differentiation, as you know, the Footaction brand is much more urban-based.

Most of the stores are urban locations.

And it is heavily gated towards a lot of basketball product.

When you look at Champs, while basketball is important, you'll see a lot more of the running product in there, cross training product.

And Foot Locker is -- you've got a 1,400 store division that about 800 stores are what we call urban/suburban and they will focus on the urban customer and the suburban pieces of the business, and we will focus on the suburban styles.

Now within that whole litany that I just gave you, there's a lot of special color ups in each of the divisions.

A significant amount of merchandise is different.

With that said, a significant amount of merchandise is the same.

The key drivers will be in all of those three divisions.

Okay, that's helpful.

And in terms of Europe, is there some markets within Europe that are still doing well, or is it pretty much across all 13 or 14 markets that you are currently serving?

The real big markets, when we look at -- France and the UK are struggling the most.

Italy is doing fine.

And Germany, believe it or not with all the economic problems over there, is doing well, and has done well for the last three years.

The rest of the markets are much smaller.

When you take -- if you take Italy and if you take France and Germany and the UK, you've got the lion's share of our business over there.

Spain is becoming more important, but those four markets represent close to 70% of our sales over there.

So the key emphasis has got to be to get the UK and French market back on track.

That's helpful.

The last question I had for Bruce.

You mention the Company did well in the first quarter in terms of currency gains.

Can you give us an indication of where you've currently hedged, and how far out you're currently hedged -- the dollar against the pound sterling and the euro?

For purchases we're pretty well covered for the balance of the year.

And I don't really feel comfortable talking too much about where we're hedged for the second quarter.

But in terms of our protection against currency fluctuations, we're pretty well covered for the balance of the year.

You're not expecting any potential negative hits on the currency as we get into the back half of the year if there is strengthening of the dollar?

We tend to try to hedge our futures based off of what our plans are, so we don't have a lot of surprises.

So basically we are not expecting any currency hits one way or the other?

No.

Robert Drbul from Lehman Brothers.

On the inventory, I was just wondering if you can give us the comp store inventory levels maybe in the U.S. and in where you are in inventories on a comp store basis in Europe?

I think that might be pretty helpful to us.

The comp stores in the U.S. are in the teens -- the increase.

And how about Europe?

Yes, the comp stores are in the teens, and obviously there's a heavy emphasis in Footaction to get that operation up and running.

How about like within the Foot Locker business?

It is in the high single digits.

How about in Europe specifically?

In the teens.

So you are comp inventories are up in teens and you're tracking down 5, or down mid single?

Mid single, yes.

So when you look at the second quarter and the guidance that you gave, can you just help us understand a little bit in terms of the margin implications, in terms of getting that to where you need it to be?

Well, a lot of the inventory, don't forget we have partnerships with our suppliers.

And we will get some relief from them.

And we will work through it.

So this is nothing -- this is not new business around here.

It has always been a merchandising principal of mine, particularly in shoes, you just don't want to miss sizes.

So we have always consistently tracked with more inventory that our sales increases.

It has been a rare quarter where the sales increases have been higher than the inventory increase.

And particularly with the Footaction acquisition, we really wanted to be sure that we've got that operation well-stocked and up and running.

So far the results are extremely exciting.

Matt, how long would you say until you think you'll get back to inventory levels on a comp basis in line with what your comp sales are trending?

I am not sure -- we will always run in probably 3 to 6% higher inventory levels than the comp sales.

And that always been one of my strategies, to be sure that we are in stock on the things that we can be in stock on.

All right.

Thank you.

When you've got a company with the liquidity that we have, we really -- we don't have a problem being a little overstocked.

Virginia Genereux for Merrill Lynch.

Nice job as always.

Matt, maybe can you help us think about organic square footage growth -- it is sort of a follow-up to Lee's questions.

Even this quarter you closed more U.S. stores than you opened.

And Bruce -- than you opened internationally -- and Bruce said, it sounded like you still had maybe 60 or 70 of those big-box underperformers to deal with.

Not that they would all be closed.

You talked a little bit about Europe store growth.

But as we look out to really probably to '06, you have been very good on the tactical acquisitions, but what do you think organic store growth or square footage growth will look like?

I believe in '06 you will begin, even with the closings, to see approximately 1 to 2% selling square footage growth.

As we continue to remodel and relocate our fleet, we still have a significant amount of stores that, believe it or not, have one-third selling and two-thirds stockroom.

So as we renovate those stores we will convert them the other way around, to about 60, 62% selling and 40% stocking.

So you have a kind of a natural increase in selling square footage.

So I am looking in 2006 for around a 1 to 2% selling square footage increase.

That is helpful.

We will look at that.

And then any thought, Matt, on sort of the acquisition landscape?

You guys have a lot of cash and are building more.

Yes.

We're looking at a couple of situations, and one is potentially exciting.

If you don't know it, there is a lot out there for sale, particularly in the European market.

What that said, we have always been very, very careful and we want to be sure that anything that we acquire is accretive, and the numbers work.

So we do see though there is some opportunity for one to two acquisitions in the next year or two that would fit in nicely to our operation.

When you say exciting, that means relatively material?

Yes.

For Bruce maybe, on Footaction boosting the accretion estimate this year, where would you say that business is in terms of its margin potential, and maybe its margin potential relative to the core Locker U.S. business?

I would say it is improving.

If I was going to give you a percentage maybe 90 to -- around 90%.

Is there anything systemic there, Bruce, that would keep it from getting to say the core Locker businesses, which I think are still -- probably Champs and Locker are both your highest margin U.S. businesses.

It may even have a chance to be better because it has a higher urban content.

Not only that, keep in mind when we made the acquisition we got 349 stores.

The 349 stores that we acquired of the -- which was originally approximately a 640 store operation, these were all the good stores.

They had closed stores for about a 2, 2.5 year period.

And then when they made the decision to sell the division, they closed I believe 75 or 80 stores immediately.

So all the stores we acquired are very productive, most of them highly profitable stores.

So we think with our merchandising strategy and clearly our expense disciplines that the Footaction operation could be as high or higher than our other U.S. operations.

That's great.

And I know it is entering -- coming into the comps which should be good news too.

And then lastly maybe, Bruce, is there any reason the tax rate -- structurally when you say 36.5 target for this year, that is a decent bit higher than it has been for the past few years, right?

I mean you guys haven't had it that high since 2000.

Anything going on there, or you just --?

Well we always have -- there is always cash opportunities that you're looking at.

And unless they have completely come to fruition, we don't feel comfortable baking them into our forecast.

And in the past, the past two or three years, we have benefited from some very nice tax opportunities.

Which isn't to say we're not going to have them going forward in the future, but I think we would all be best served if we stayed at 36.5 for the time being.

Sounds good.

Thank you all.

We have time for one more question.

The final question comes from Jim Duffy from Thomas Weisel Partners.

Most of my questions have been answered.

One quick one for you, Matt.

So consumer in general is weak in Europe.

Stylistically what is working?

Are there any products that are outperforming the others?

There clearly is a little bit of a movement towards more of the low-profile product over there.

What that said, there are a lot of the AIR shoes working over there.

So it is kind of a mixed bag.

And very importantly we operate in all these different markets.

What works in Italy, believe it or not, doesn't necessarily work in the UK or in France.

So it is kind of hard to pinpoint a common thread.

The marquee product is doing okay.

We just -- you have got in the UK tremendous amount of discounting going on.

And I think that is disturbing the whole market place over there.

It is about as aggressive as you can ever imagine.

Are there any specific ASP trends, aside from the discounting?

No.

I don't think so.

Okay.

Thank you.

We would like to thank everyone for participating today, and look forward to speaking to you again at our next conference call.

Thank you for participating in Foot Locker's first quarter 2005 conference call.

Your conference has concluded for today.

You may all disconnect at this time.