Foot Locker Inc (FL) 2005 Q2 法說會逐字稿

Welcome to the second quarter 2005 earnings release conference call. [OPERATOR INSTRUCTIONS] At the request of Foot Locker this conference call is being tape-recorded.

If there are any objections please disconnect at this time.

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

These forward-looking statements are based on many assumptions and factors including the effect of currency fluctuations, consumer preferences and economic conditions worldwide and other risks and uncertainties described in the Company's press releases and SEC filings.

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

If you haven't received today's release it is available on the Internet at www.prnewswire.com, or www.footlocker-inc.com.

I would now like to turn the call over to Mr. Peter Brown, Vice President, Treasurer, and Investor Relations.

Mr. Brown, you may begin, sir.

Good morning, and welcome to our second quarter conference call.

As reported yesterday afternoon our earnings per share from continuing operations for the second quarter of 2005 were slightly below last year at $0.28 per share.

This result was below our 10 to 20% earnings increase guidance that we provided at the beginning of the second quarter but was in line with our updated estimate that we provided when we reported sales two weeks ago.

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

Though we are not pleased with our second quarter results we continue to believe in our longer term profit growth opportunity and remain committed to achieving our financial objectives.

Key components of the second quarter are as follows.

Total company sales increased 2.8%.

Comparable store sales increased 1.3%.

Our gross margin was 20 basis points below last year.

While our SG&A rate improved by 80 basis points.

Our pretax profit increased 25%, and as a percentage of sales improved by 90 basis points.

Last year's pretax profit included a $16 million loss, or $0.07 per share associated with the integration and operation of Footaction.

Also included in last year's income from continuing operations were income tax benefits related to the settlement of income tax exams.

This year's higher tax rates result in an unfavorable comparison to last year of $0.07 per share.

As a result, earnings per share declined $0.01 to $0.28.

I will now turn the call over to Bruce Hartman.

Good morning.

As Peter mentioned, while our second quarter EPS declined slightly from last year we have not lost any of our enthusiasm for the longer term opportunities for our company.

Our second quarter consolidated results were impacted by the decline in sales and profits at our Foot Locker Europe division.

As a result of the current challenges in Europe we are cautiously planning sales and profits for this business for the balance of this year.

However, the combination of our other businesses in the U.S., Canada, and the Asia Pacific region, performed well during the quarter.

Generating improved sales and division profits.

We expect these businesses to continue to post improved results for the balance of the year.

The financial results of Champs were particularly strong during the second quarter, and prospects remain very promising for the balance of this year.

We also remain very optimistic for the improving sales and profits from our Footaction business that we acquired in May of last year.

We continue to expect that this business will generate $0.12 per share to our company this year.

Results from Footaction will be included in our comp store sales calculation beginning in the third quarter which we expect will enhance our overall comp store sales for the fall season of this year.

We also remain optimistic that Lady Foot Locker will continue to post improving results for the balance of this year and that Foot Locker U.S. and Kids Foot Locker will generate a solid year-over-year profit increase.

Our 1.3% comp store sales gain for the quarter was below the guidance that we provided at the beginning of the quarter primarily due to the lower than expected sales at Foot Locker Europe.

Second quarter comparable sales of our major division breaks out as follows.

Our Foot Locker -- our U.S.

Foot Locker business comprising of Foot Locker, Kids Foot Locker, and Lady Foot Locker reflected a low to mid single-digit increase with each of these formats in this range.

Footaction generated a mid single-digit sales increase for the quarter with weak results in June when compared to the clearance activity last year in June.

That was followed by strong gains in July.

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

Champs was our star performer again this quarter was a double-digit increase.

Foot Locker Europe, as I already mentioned, recorded a high single-digit comp-store decline as the retail environment in this region was very soft and promotional.

Lastly, footlocker.com sales declined very low single digits but produced a solid profit increase.

By month, comp store sales in May increased low single digits after posting a mid single-digit increase during the first half of the month.

Comp-store sales in June were flat before increasing low to mid single digits in July.

Our European sales did improve somewhat in July but comps were still down mid single digits.

The 20-basis-point decline in our gross margin rate was primarily due to our results in Europe which experienced the declining merchandise margin rate and higher occupancy rate.

During the quarter, we somewhat increased our promotional posture in Europe which enabled us to maintain our current inventory position.

Additionally, our merchandise margin rate in Europe was historically higher than in the U.S.

Therefore, the sales decline in this market negatively impacted our weighted average consolidated gross margin rate versus last year.

Last year's margin was negatively impacted by the clearance activity required to sell through the initial Footaction inventory.

Our overall tenancy rate for the second quarter was flat versus last year.

However, on a domestic basis, our rate improved by 50 basis points.

Unfortunately the improvements in our U.S. business were offset by the decline at Foot Locker Europe due to the comp-store sales loss.

We do continue to expect that our occupancy rate will improve by an additional 150 basis points over the next few years.

For those of you new to our company our real-estate programs include opening new stores in our more productive markets, lowering our store buildout cost to reduce depreciation expense, closing stores or reducing the square footage of certain larger size stores and working with our landlord to optimize our tenancy cost structure.

Year-to-date we've now completed almost 300 real estate negotiations related to new or existing stores with an annualized tenancy expense rate expected to average approximately 200 basis points favorable to the Company's current average rate.

Our second quarter is SG&A expense rate improved by 80 basis points versus last year's comparable period.

As Peter mentioned, last year's results included costs associated with the integration of our Footaction acquisition.

Excluding the costs associated with Footaction, our SG&A rate would have improved by 50 basis points.

This clearly demonstrates that we have made meaningful progress with our expense initiatives.

Our new competitive bidding process that we utilize for nonmerchandise, nonsales-generating expenses continues to gain momentum.

Year to date we have completed over 100 auctions with an estimated annual savings of almost $10 million.

In fact, last month we completed our most excited auction to date for a banking related expense that we expect will save us approximately $2 million per year.

Our interest expense declined by $1 million while our tax rate increased to 38% from 21% last year.

Other income of $3 million reflect the gains on foreign currency contracts that were executed by our company to offset projected declines in the euro currency versus the U.S. dollar.

Our 38% second quarter tax rate was higher than our 36.5% guidance because we earned a lower percentage of our profits in Europe than we had expected, where tax rates are generally lower than in the U.S.

Additionally, the absolute tax rate was $0.07 per share favorable to this year's tax rate due to benefits related to resolutions of U.S. and foreign income tax examinations.

For the balance of this year we are currently projecting an income tax rate of 37 to 38%.

The actual rate will largely depend on the percentage of our income earned in the U.S. versus international operations.

Turning to our balance sheet, you will note our financial position remains strong with cash and short-term investments totaling $360 million.

In February we've prepaid 17.5 million to our banks and contributed $19 million to our pension fund.

In addition, we began to execute our share repurchase program in June, spending approximately $3 million to purchase 120,000 shares.

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

Our merchandise inventory at the end of the second quarter remains current and well positioned to support third quarter sales.

In fact, our most current inventory position is in our international operations, which includes Foot Locker Europe.

We are actively working with our vendors on several exciting merchandising initiatives, but at the same time we plan to continue to slow our inventory growth over the next several months so that by year end inventory will be more in line with sales increases.

In closing, we remain very committed to continuing the growth of our company and driving increased shareholder value.

We believe that Foot Locker continues to be very well positioned in the global athletic industry.

Foot Locker Europe remains a highly productive performer with double-digit divisional profit margin.

For the fall season we are revising our earnings forecast until we see a consistent change in the retail climate in Europe.

Therefore, we are currently planning our EPS to increase 2 to 12% during the third and fourth quarters.

This would get us to $1.70 to $1.80 for the full year.

The high end of this forecast is in line with the average of current analyst estimates as indicated by First Call.

On a pretax profit basis from continuing operations, our current fall 2005 estimate equates to approximately a 10 to 20% year-over-year increase.

As a reminder last year's effective income tax rate for the third and fourth quarters were approximately 34.5% and 31.5% respectively.

I will now turn the program over to Matt Serra.

Thank you, Bruce.

Good morning.

While our consolidated second quarter financial results did not meet our expectations, primarily due to the shortfall in Europe, we remain encouraged and committed to the long-term growth of our company.

While Foot Locker Europe's profit fell short of last year, this division still generated a double-digit divisional profit margin rate in the second quarter, although not as high of a rate as we have been experiencing.

The high single-digit comp store sales decline in this region was worse than we had expected and that we had guided to last May.

Unfortunately, this sales decline was more than we were able to overcome through the gains from our other businesses.

Last May, we expected that our comp store sales in Europe had bottomed out during the first quarter, and while remaining negative for the second quarter, would begin to improve going forward.

Again, that did not happen and was the primary reason why we missed our earnings guidance for the second quarter.

This was the first time in several quarters that we did not generate a double-digit increase in quarterly earnings per share in line with or above our traditional 10 to 20% guidance.

In most prior quarters, our diversified portfolio of businesses helped to minimize our risk to external factors, thereby providing the opportunity for more consistent growth.

We continue to believe that this is a strength for Foot Locker going forward.

During the second quarter, our international results were mixed with Canada and Asia Pacific performing well and Europe becoming a larger challenge.

As Bruce covered, second quarter comp store sales declined high single digits while total sales in Europe were nearly flat.

The retail environment in Europe remains very difficult.

But we believe we'll improve over time.

Additionally, the competitive landscape is more challenging, although the results that we have seen reported from other athletic retailers in Europe leads us to believe that we are maintaining our market share in this region.

During the second quarter, we named Keith Daly as President and CEO of this division.

Keith began his career at Foot Locker before spending a number of years at Footaction, when it was owned by Foot Star, and subsequently worked at N-1.

We have also made some other changes in the senior management team at this division and believe that this new team is well equipped to lead this division going forward.

I've made several trips to Europe over the past few months, and I believe that our new team can begin to improve the situation in the near term.

We have already begun to make some changes to our merchandise mix, although for competitive reasons, I do not plan to discuss the details.

Our overall business strategy is focused on maintaining our double-digit profit margin rates with the following priorities.

Increase our market share in the high-end marquee footwear arena, continue to emphasize full-price merchandise presentations that include market-specific promotional and selective clearance programs designed to drive sales and preserve our very current inventory position.

And increase our apparel penetration by implementing a similar strategy that has worked so well here in the United States.

For example, we've added T-shirt tables to our stores with strong inventories that are already producing encouraging results.

Until the external environment improves, we will remain very cautious with store growth.

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

We continue to believe, however, that Europe offers store growth opportunities going forward.

Earlier this month, we opened our first store in Lucerne, Switzerland, and expect to open in Greece during the third quarter.

These openings represent the 15th and 16th countries where we will operate now in Europe.

We expect to end the year with over 500 stores in the region.

Moving on to our other international results, Foot Locker Canada and Foot Locker Asia Pacific each achieved very solid results.

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

During the second quarter and year to date, Foot Locker Canada has generated a mid single-digit comp store sales increase and is running at a very strong double-digit profit margin.

They are clearly gaining market share in this region and are currently far more productive than other major retailers in Canada.

We're also very pleased with the continuing progress of our 100-store Asia Pacific division.

This division posted year to date and second quarter mid single-digit comp store increases with higher profits.

Our U.S. businesses generated mid single-digit comp-store sales increase benefiting from higher average selling prices across each of the divisions.

Champs was our star performer generating another solid double-digit comp-store increase and continuing to gain market share in the suburban sector of the high-end athletic footwear and apparel market.

The strong sales and profit result at Champs were driven by significantly higher sales in marquee footwear and gains in each of the men's, women's, and children's categories.

Footaction with its strong urban base, is proving to be an excellent compliment to our suburban-based Champs business.

As we mentioned earlier the sales comparisons of our 350-store Footaction chain were mixed during the second quarter.

We experienced sales declines in June as expected when we were liquidating against last year's clearance of the acquired inventory.

During July we generated double-digit sales increases at Footaction, given our much stronger inventory position this year.

As we move into the third quarter, we expect to benefit further at this division by being in a much stronger inventory position than we were at this time last year.

For the full year, we continue to expect Footaction sales to exceed $500 million and to generate 12% -- I'm sorry, $0.12 per share of earnings accretion.

Lady Foot Locker sales were essentially in line with expectations during the second quarter, generating a low to mid single-digit increase.

We expect this division to post a solid profit increase this year, building on its turnaround that began in 2004.

Foot Locker and Kids Foot Locker in the U.S. also posted solid low to mid single-digit comp-store sales increases for the second quarter.

Sales in each division were driven by increases in the high-end marquee footwear category.

Footlocker.com Eastbay, our domestic direct-to-customer business, generated a low single-digit sales decline while increasing its division profit nicely.

Sales in this division continue to shift from our catalog operations to our more profitable Internet channel as customers are browsing our catalogs and subsequently placing their orders through our websites.

Footwear and equipment sales were solid with a difficult licensed apparel comparison.

For the fall season we continue to expect sales at footlocker.com Eastbay to accelerate for three reasons.

Apparel comps are expected to turn positive as we further anniversary the declines in the licensed category.

New enhanced websites are currently being rolled out by division.

Additional quantities of higher priced marquee footwear will be available for sale.

In summary, the combined increase in profits of eight of our nine business units, Foot Locker U.S., Champs, Footaction, Lady Foot Locker, Kids Foot Locker, Foot Locker Canada, Foot Locker Asia Pacific, and footlocker.com Eastbay essentially offset the profit decline in Foot Locker Europe.

As Bruce covered, we have revised our earnings per share guidance for the fall due to the challenging environment in Europe.

We currently expect consolidated comp store sales to increase low single digits for the third quarter and the fourth quarter and earnings per share to increase from a low to 2 to a high of 12% although we do expect out pretax profit to increase in the 10 to 20% range.

For the full year we expect our business to generate solid cash flow, which we will carefully redeploy to our shareholders with the following priorities.

Continue to invest in worldwide growth, enhance the productivity of existing businesses, strengthen our balance sheet, pay a meaningful cash dividend, potentially repurchase some more of our stock.

Our planned $170 million capital expenditure program remains on track, primarily targeted towards opening and closing approximately 110 stores, remodeling and relocating over 300 existing stores, and maintaining an efficient infrastructure.

We have increased our targeted openings by 10 stores as we have identified some additional locations that we believe are attractive opportunities.

Our company remains strong even though we have had lowered our earnings outlook for the fall season, and longer term we remain optimistic and highly focused on driving increased shareholder value.

I will now be happy to answer your questions.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] The first question is from Robbie Ohmes from Bank of America.

Please go ahead.

Thanks a lot and good morning.

My question is, I was hoping that you could talk more about the inventory levels, up 20% per square foot, and could you give us a little more help on understanding how it's weighted Europe versus U.S., how it's weighted apparel versus footwear in terms of being over what you would want it to be, and then you mentioned slowing the growth of receipts to bring it down, but also should we expect in your guidance that it reflects a lot of gross margin pressure from clearance pressures as you move through the rest of the year?

Finally, any help on Nike versus Adidas, versus Reebok, is there a brand-specific issue in the inventory, or is it just across the board?

Thanks.

Clearly the inventory is -- the overage is centered in a couple of divisions.

Europe is a big piece of the overstock position.

The U.S. in general is in very, very good shape.

So, as you know, we did have gross margin pressure in Europe.

Our gross margin product margin increases in the U.S. were extremely strong in the past quarter.

We are reducing our receipt levels for the third and fourth quarters.

It is not significant.

It is approximately 2%.

So I don't expect any lack of fresh receipts into the stores.

There will continue to be pressure on gross margin.

However, it's a different story.

Now we will be increasing our margin sharply in the U.S., and as we've been through this before, in many, many instances, we will take our medicine, we have taken a lot of mark-towns in Europe during the clearance period, turned that inventory into cash, and get that division back on plan.

Our forecast is to be in the 8% range of inventory versus last year at the end of the third quarter and follow that into the fourth quarter.

I'm sorry, Ron, what was the other--?

Just, the apparel versus footwear inventory levels in Europe.

Yes.

It's kind of -- it's basically -- the percentages over are basically the same.

The good news is that the apparel is a tremendous amount of receipts of our new private label programs where there's not margin exposure.

The big margin exposure would be in footwear, and as I said, we have dealt with a lot of it, and we will continue to deal with a lot of it now.

It's still in clearance periods in some countries.

Then just the last question was, is it sort of broad across brand, or is there one or two brands that's really causing you a problem on the footwear side?

I think in general they're all basically -- they're basically all the same range with Nike being a little better performer than the other major suppliers.

Terrific.

Thank you very much.

Thank you.

The next question is from Bob Drbul from Lehman Brothers.

Matt, can you talk about what you're seeing thus far in back-to-school trends in the U.S. specifically?

Yes.

Basically what's happening, in only two and a half weeks into it, and quite frankly you have to look at the last week and a half of July, because there's a lot of markets around the country that begin back to school at that time.

What we're seeing is we're doing slightly worse than we were in the first half of the year in the U.S.

I would say it's not material, and we're doing significantly better in Europe.

Now, when I say significantly better, our sales are much better, but the margins are obviously lower, and we are now, really have the mind-set where we're not going to make, in Europe, the same kind of operating margins that we have in the past.

There's a tremendous amount more competition over there, there's countries that are highly promotional.

With that said, we still expect to continue to make a nice, strong double-digit profit margin.

But back to school for us so far is okay.

It's -- I saw this morning on some of the -- some of the business channels, that certain retailers said it was significantly off.

We are not significantly off at this point in time.

On the inventory, can you give us comp level inventories by format or by region?

No, we don't really give that out.

I think I did say, though, that Europe was heavy.

We're dealing with it, and we'll get it under control.

The U.S. business, some of the inventory is really gated in the Footaction division where last year we were just loaded with tremendous amount of units, low-priced units, because we were clearing, and we've really built up that inventory to go into the back-to-school period -- so there's a lot more inventory in there than there was last year.

And I would say it's a fair statement to say that a part of our inventory growth was kind of planned.

And when you look at the total inventory number that you guys have, how much of it is clearance inventory, in total, whether it's Europe or the U.S.?

It's always in the 15 to 25% area, because we run very clean inventories.

Our inventory standards, aging standards, are very, very requiring, and we keep our inventories extremely clean.

So we always have around 15, 20% of clearance product that we're offering the customers.

Usually in the back of the store, well presented and managed.

Just one last question for you.

On back to school, can you talk a little bit about, is there any product that you're excited about that you think will be outstanding sellers for you as you look for the rest of August and into September?

Yes, yes.

Particularly here in the U.S., with our increased allocations of Nike marquee product, significantly more than we had last year, helping to drive our U.S. business, Rick Mina, head of our U.S. operations has done a marvelous job in working with Nike and securing very important meaningful quantities.

I think that will help us dramatically.

The other exciting products that you're seeing out there, and quite frankly we missed a little bit in Europe, which really started it, was the low-profile product.

That is increasingly becoming more and more important in the ladies footwear side of the business, with obviously vendors like Puma and Adidas, and you've got Nike now getting into the arena, they have a very exciting new shoe called the Rival, which we launched in Europe this past week.

It's 100-euro.

It's a low profile Shox.

A very, very exciting shoe.

The next question is from Jeff Edelman from UBS.

Two questions.

One centers around Europe, Matt.

You've kind of painted it broad-brush, the whole area.

I assume results are quite divergent by country.

Could you touch on that?

And also, having mentioned new management and some new initiatives, up to this point, you were pretty much talking about the sluggishness in Europe being an economic factor.

Now are we looking at more company-specific initiatives over there?

Yes.

Good question.

I think our problems over in Europe are 50/50.

I think it's 50 our problem and 50/50 external.

We really had had a staggering run in Europe, as you all know, over the last five years, and quite frankly, when you have those kinds of sales and earnings increases, I'm not suggesting we just broad-brush things, but we didn't get into planning and executing more precisely by country and reacting by country.

An example would be in the U.K.

The U.K. has become highly, highly promotional.

While we maintain our posture as being a fashion-forward high-end marquee store, we cannot sit back and not add to our assortment a certain percentage of promotional product.

The entire market is highly promotional, and we have to get into the fray.

Germany is the same thing.

They lifted the price controls in Germany, I believe it's a year ago February.

So that was February '04.

Where quite frankly, you were not permitted to promote outside certain windows.

They lifted that, our competition promoted very, very aggressively, and we kind of sat back and did not compete.

And we're going to compete.

The same thing happened in the Netherlands approximately two years ago.

And -- so essentially in those three markets we're going to kind of operate the business like the U.S.

When it comes to Italy and France, but particularly Italy, we're doing very well in Italy.

We have done well, we have a very, very strong market position there.

It's up to 125 stores.

We see continuing expansion there.

We're dominant over there.

And they do have the price controls in place over there.

With that said, they've extended the clearance periods in both countries, by the way, in Europe and in France, and we have not taken advantage of that.

So we are going to operate our business on a more country-specific method of operation, and I think -- we're beginning to do it, by the way, and it's beginning to bear fruit.

Okay.

Now, part of your longer term margin targets was based on growth of Europe, which is a more profitable business.

Realizing that business is changing, what are your new margin targets, and what are the implications to a new top-line and earnings growth target?

I think our short-term goal was to achieve an 8.5% operating margin this year.

I think we got a little set back.

I think we're going to be in the 8 range.

Our longer term goal was 10%.

We had said on the last several conference calls that that was two to three years away.

It still could be.

It could be another year down the road.

It could be two to four years.

But I believe Europe will get fixed.

It's not going to be easy, but we have very, very strong divisional management in there, and as I mentioned in my prepared remarks, we've also strengthened the senior team in there and we're doing extremely well as we said in the prepared remarks, in all the other divisions, and that we've got to get this Europe situation fixed, and I will be spending a lot more time in Europe than I've been in the last year.

As you know, I had this back operation last year, and I'm back and ready to roll, and I will be over there every six weeks working with Keith and his strong team.

We've got a lot of smart guys and gals over there, and we will get this business back on track.

With that said, again, I want to caution you that the kind of margins we were getting there I don't think we're going to see in the future.

With that said, I think we'll make a lot of that up in the U.S. as we're growing nicely there -- here.

Okay.

Thank you.

Thank you.

The next question is from John Shanley from Susquehanna Financial Group.

Matt, maybe you can clarify the 50% of the problems facing your operation in Europe that are external.

Is that primarily macroeconomic, competitive, or fashion trends?

And also do you see light at the end of the tunnel in terms of possible corrections where those external problems may be resolvable by Foot Locker Europe?

Well, you've got the U.K., John, which is, I mean, as promotional as any market in any sector I've ever seen in my career.

You've got some people that are in trouble there.

All Sports is clearly for sale.

I don't know what's going to happen there, but I think there's going to be some shake-out.

So, as people -- I'm not suggesting they're going to shake out, but as people shake out of the market, it's certainly going to give us more opportunity to gain market share.

You also have some economic situations existing over there.

I mean, France is an example which is also a tough market.

They just reported the highest unemployment rate in ten years.

So I think to take that in concert with the cost of fuel over there, which we think we're spending a lot of money here on fuel.

Over there it's staggering.

Also, again, there's a lot more competition.

This is kind of the situation that we experienced in '97 and, of course, in '98.

I'll just remind you that in 1998, our company went from a operating profit of almost 400 million down to 27 million.

That's not going to happen.

We've learned a lot.

We've got a lot stronger management in place, and we're well diversified.

But you do have some external strife over there.

Germany is, again, high unemployment, always has high unemployment, about 1.5% higher than it was last year at this time, and a lot of people not doing well in our sector and in our marketplace.

Karstadt, I believe they just closed 25 -- I'm sorry, 75 stores over there.

Sold Runners Point.

We'll see what happens there.

And that's one thing, I think that I'm not sure all our investors and people that follow our company know, that a lot of the department stores in Europe have fairly heavy athletic businesses.

They usually take the fifth or sixth, the top floor, and it's a very large operation, so they, too, from what we hear, are really experiencing a lot of difficulty.

Now you have Karstadt closing 75 stores and sold Runners Point, so I think there's going to be some shake-out.

That sounds encouraging.

Turning to U.S., real strong performance in Champs Sports.

Were there other products aside from the marquee footwear that helped Champs, and if so will we likely see the same kind of results happening in Foot Locker U.S. and maybe Footaction in terms of getting up to the same levels of productivity and operating performance that Champs is?

As you know, Champs has almost 50% apparel business, and Ron Hall has done a terrific job.

He's got a very strong apparel background.

In fact he was President of the largest rugby company in the world down in New Zealand, and Ron has really positioned that company with a lot of the fan-based licensed product which is doing extremely well.

We're doing very nicely in apparel there.

So we're trying to take some of those learnings there and move them into some of the other divisions.

Actually, Lady Foot Locker had a very strong apparel season.

So apparel is not all dead.

That's great.

Last question I have is really for Bruce.

Bruce, can you give us the sales and operating profit margin on Eastbay and footlocker.com I know you normally put it in your 2Q, but do you have it handy for us now so we can model it in?

I know the number.

We made 10.3 against 8% in the quarter.

The dollars are in the report.

Okay.

That's great.

Thanks a lot.

Appreciate it.

Next question is from Margaret Mager from Goldman Sachs.

Please go ahead.

Hi.

One of the things I wanted to ask you about, Matt, was the comments on increased quantities of marquee product, and your view of the distribution of marquee product across the U.S. marketplace.

Do you feel that there's still good discipline on the amount of marquee product that's being placed in the market and that we're not running the risk of killing the goose that lays the golden egg?

Yes, I think it's particularly by Nike well managed, well thought out.

They have a very, very strong team there that allocates that merchandise, and I think they went back -- if you go back to '97, where the marketplace got flooded, it was probably the toughest period in the athletic industry.

They certainly don't want that to happen again.

I think they're doing a fine job of managing that process.

But even more closer than '97, back just a few years ago where you found it challenging to sell product above -- dollars, was that -- do you think there was a supply aspect to that that could re-emerge if there's just more distribution of marquee product?

I'm not sure it was the supply.

I think it was more the price of the product.

As you know, as smart merchants, they took a lot of those prices down to -- to what the market would bear.

I mean, Shox, like the MZ was 150, went down to $100.

That will cover us for now.

Thanks and good luck.

Next question is from Robert Samuels from JP Morgan.

Please go ahead.

Hi.

Good morning.

Can you comment at all on the Adidas-Reebok merger and how it may impact your business?

And then do you see any potential catalyst in Europe, such as the World Cup, which may help top jump-start the business?

Sure.

Our current relationships with both companies are very, very strong, and we don't expect with the merger, to impact any of our partnership.

I think the success behind the combined company, how they operate efficiently in the back office, but -- I mean, I don't expect there to be any kind of significant effect on our business with those two companies.

I've had conversations with both principals and been assured that everything is business as usual.

Catalysts for Europe, was the second question.

The catalysts?

Say the question again, please.

Yes, do you think that the World Cup and--?

Sure, sure, that's a big deal over there.

I mean, that is a big deal.

I think that's -- it's -- particularly in Germany, it's going to give a -- it will be temporary, but it could be as long as 30, 60 days.

There's going to be a lot of product marketing, exclusivity around that whole event.

It's a very, very big thing.

It's bigger than the Super Bowl.

It's the biggest sport in the world, and they are really going to go after that.

Great.

Thanks.

Thank you.

[OPERATOR INSTRUCTIONS] The next question is from Virginia Genereux from Merrill Lynch

Matt, maybe, can you talk on the European merchandising efforts, I know you don't want to get too specific, but in connection with your efforts to sort of merchandise more by country, run the business more country specifically, do you need to go to more niche brands, maybe away from the big three, and is there going on there some sort of fashion -- some broader fashion shift maybe away from athletic in your view?

That's one.

Yes.

Basically we'll stay with our principal suppliers.

There's always some niche brands and there's also some brands within brands.

You look at the Ferrari shoe from Puma, that has been the surprise of surprises.

That shoe is doing extremely well.

I also think that in that Europe to your point, there has been a little fashion shift away from athletic to brown shoes.

It was a very hot summer, sandals, which generally are a treacherous business, did extremely well.

I don't think -- I think we over reacted by having a very, very small percentage of our inventory in sandals, particularly in the ladies piece of the business.

But, I -- there's brands over there, but those niche brands, I don't -- that's not going to be part of our strategy.

Okay.

Thank you.

Maybe for Bruce, if I take your -- thinking about your back-half outlook, the July quarter, even adjusting -- even if I sort of adjust for the tax help and the Footaction loss last year, earnings were still down in July, and you're coming out with inventories up pretty substantially on a per door basis.

Why wouldn't you see a little EPS pressure in at least one of these quarters in the back half?

Well, we've looked at both the third quarter and the fourth quarter very carefully, Virginia, and I think that while we were disappointed in the second quarter I think we're reasonably enthusiastic about our ability to rebound and produce numbers for the third and fourth quarter that are within range of the guidance.

And we've got plans in place, working on a lot of things to accomplish that.

Bruce, are the margin compares in Europe a little easier, or is Footaction a bigger contributor?

Can you just -- can you give me any help there?

Definitely Footaction is a big help to us, because we were just starting to get going with them this time last year.

Particularly as we get -- the earlier part should be more helpful than the later part.

We had some very exciting expense initiatives.

I think we all may be discounting a little our ability to perform in the U.S., which is we had a very, very good first half.

We had some really exciting numbers which were masked a little bit about -- by Europe, and I think that's going to perform well for us, and I think that's a good weapon for us in the second half of the year.

Okay.

Just lastly, I'm sorry, Matt, on your last call, you mentioned -- you sort of suggested that you guys were thinking more about acquisitions and that there was maybe an opportunity in Europe specifically.

Can you just update us on your thoughts?

You have a great balance sheet, obviously, and Footaction has been successful, on the acquisition landscape and your progress there?

Sure.

We're looking at several acquisitions.

We continue to look at them.

I don't see anything in the next quarter, but as some of these companies continue to deteriorate over there, if they become attractive, we'll certainly look at them much more aggressively.

But there is -- if you're following the European theater, you will see tremendous deterioration in the sales and earnings of a lot of those businesses over there.

So there could be.

Thank you all and good luck.

We have time for one more question.

The last question is from Joe Yurman from Morgan Stanley.

Hey, guys, a pretty quick one.

A lot of my questions have been answered.

Peter or Bruce, just a few housekeeping, can I have the six-month numbers for cash flow from operations and CapEx, and also -- I'm sorry.

On that you'll have to wait for the Q.

Okay.

Regarding the uptick in the openings from 100 to 110, what's the net number?

I have it.

The store count for the year is relatively flat.

Is relatively flat.

Okay.

And then maybe just one tie-up question about, the M&A landscape, Matt.

It seems perfectly reasonable that if you were in a market that was doing well, it drew competition, return got driven down, and such that the new business model is to grab share on lower margin.

Is it reasonable to assume that you're driving the process of consolidation earlier rather than later, with some of your own actions?

Not really, because we haven't even started over there.

I mean, it's the competition that's driving the margins lower, not us.

Our margins are far superior to theirs.

Right.

But I'm saying it's not so much you guys looking to compete more aggressively.

It is the marketplace in aggregate that has gotten less rational?

I would say that's a fair statement.

Thank you.

Thank you everyone for participating today.

Thank you.

Ladies and gentlemen, this concludes today's teleconference.

Thank you for participating.

You may now disconnect.