Foot Locker Inc (FL) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the third quarter 2005 earnings release conference call.

At this time all participants are in a listen-only mode.

Later we'll conduct a question-and-answer session.

Please note that this conference is being recorded.

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

Mr. Brown, you may begin.

Good morning and welcome to our third quarter conference call.

As reported yesterday afternoon our earnings per share from continuing operations for the third quarter of 2005 was $0.41 per share.

This result was below our 2 to 12% earnings increase guidance that we had provided at the beginning of the third quarter but at the high end of our updated estimate that we provided when we reported sales on November 3rd.

The decline in our net income from last year was primarily due to certain unanticipated charges that Bruce will highlight in his presentation, and a lower gross margin rate in Europe due to the more promotional posture in that region to lower inventory levels.

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

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

After our prepared remarks, we will answer your questions.

Key components of the third quarter are as follows: Total Company sales increased 3.1%, comparable store sales increased 2.7%.

Our gross margin was 70 basis points below last year while our SG&A rate increased by 10 basis points.

Our pretax profit decreased by 11 million, primarily due to the decline in profits at our European division, as well as expenses totaling $6 million attributable to the hurricanes and other unanticipated charges.

Had our European business achieved last year's profit results and we had not incurred the unanticipated charges, our pretax profit would have increased low double digits.

It is also noteworthy that our financial position continued to strengthen with our total cash and short-term investment position, net of debt, improving by 160 million from the same period of last year.

I'll now turn the call over to Bruce Hartman.

Thank you, Peter.

Good morning.

As Peter mentioned, the decrease in our third quarter EPS from last year was largely attributable to profit declines at our European business and certain unanticipated charges.

I will provide details on each as I go through my prepared comments.

In the U.S., the strongest third quarter financial performances were generated by Champs and FootAction, each of which gaining market share and posting both strong sales and profit improvements.

Our Canadian business generated the strongest sales and profit results of our international units, producing a divisional profit margin in the double digits.

Our 2% comp store sales gain for the quarter was in line with the guidance that we've provided at the beginning of the quarter and broke out as follows.

Our U.S.

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

FootAction, which is included in our comp store sales calculation for the first time in the third quarter, generated a double-digit increase.

Champs generated a high single-digit increase, nearly double digits.

Foot Locker Europe recorded a very low single-digit comp store decline but represents a significant improvement from the second quarter.

More encouraging, Foot Locker Europe produced a comp store increase for the month of October.

Footlocker.com sales trends also improved with a low to mid single-digit increase.

By month, comp store sales in August increased low single digits, followed by low to mid single digit increases in both September and October.

The 70 basis point decline in our gross margin rate was due to our promotional strategy in Europe which led to a decline in the merchandise margin rate at that division.

This promotional strategy was designed to both reduce our inventory growth in Europe and allow to us better compete in certain local markets.

As we enter the fourth quarter, we believe our inventory level in Europe is appropriately positioned to support our fourth quarter sales plan.

Moving to U.S., our initial markup from our vendors, overall markdown rate and resulting merchandise rate for the third quarter, were all very much in line with the third quarter of last year.

Additionally, our third quarter gross margin rate was impacted by a 50 basis point improvement in our tenancy rate, keeping us on track to deliver on our commitment of producing a 200 basis point improvement over time.

As a reminder, the first 50 basis points was achieved last year.

As we reiterate every quarter, our real estate strategy includes 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 size stores, and working with our landlords to optimize our tenancy cost structure.

We've completed almost 500 real estate negotiations related to new stores or existing stores so far this year, with an annualized tenancy expense rate expected to average approximately 200 basis points favorable to the Company's current average rate.

Therefore, the major components of our third quarter gross margin decline can be summarized as follows: A 50 basis point improvement in tenancy costs, a consistent merchandise margin in the U.S., a lower merchandise margin rate in Europe due to our inventory reduction and targeted promotional strategy.

Our third quarter SG&A expense rate increased by 10 basis points versus last year's comparable period.

Included in SG&A expenses is $6 million in charges related to the hurricanes, expected insolvency of one of our third-party insurance administrators and litigation settlements.

Excluding these unanticipated charges, our SG&A rate would have improved by 30 basis points to a 19.5% rate.

Therefore, we are encouraged that our expense efforts continue to pay dividends as we continue to find ways to make our business more efficient.

Depreciation expense increased by $7 million reflecting adjustments to depreciable lives of certain fixed assets, and the increased costs due to our new POS system in which we have invested.

Going forward, we expect our depreciation expense to average approximately $42 million over the next few quarters.

Our interest expense declined by $2 million while our tax rate increased to 36% from 35% last year.

Turning to our balance sheet, you will note our financial position remains strong with cash and short-term investments totaling $390 million.

Our cash and short-term investment position, net of debt, improved by $160 million from the same period last year.

As a reminder, we initiated the execution of our share repurchase program in June, spending approximately $3 million to purchase 120,000 shares.

During the third quarter, we purchased an additional 790,200 shares for $17 million.

Therefore, our capital structure and cash flow remains strong, efficiently supporting our existing businesses, providing sufficient financial flexibility should appropriate additional investment opportunities arise, and allow us the opportunity to return additional cash to our shareholders.

During our August conference call, we stated that a key objective over the next several months was to continue to slow our inventory growth so that by year-end, inventory would be more in line with our sales increases.

We believe that this objective was largely accomplished during the third quarter as year-over-year inventory levels at the end of the quarter were up 8.4%.

As we begin the fourth quarter, our inventories are current and well positioned to support sales.

We expect our fourth quarter markdown activity to be highly focused on driving sales, whereas in the third quarter we needed additional markdown activity in Europe to bring inventory growth more in line with sales increases.

Our current forecast for the fourth quarter is to generate an EPS in the range of $0.53 to $0.61.

For the full-year this guidance would translate into EPS of $1.59 to $1.67.

This forecast is based on the following assumptions.

Low to mid single-digit comp store sales increase, gross margin and SG&A rates at or favorable to last year; depreciation expense of $42 million and interest expense in line with the fourth quarter of last year; and an effective tax rate of 37%.

As a reminder, last year's fourth quarter results included some one-time income tax credits that contributed to our consolidated tax rate being 31.5%, or a $0.05 improvement.

We believe that Foot Locker continues to be very well positioned in the global athletic industry with exciting long-term opportunities.

Before I turn the program over to Matt, let me give you an update on our stores that were impacted by the hurricanes Katrina, Rita, and Wilma, during the third quarter.

In total, 420 of our stores were closed at some point during the third quarter as a result of these storms. 388 of the stores were reopened during the third quarter, with an additional 11 stores planned to reopen during the fourth quarter.

We continue to work with our landlords to get the remaining 21 stores reopened in 2006, although they may be delayed beyond '06 and potentially a few stores that won't open.

I will now turn the program over to Matt.

Thank you, Bruce.

Good morning.

As Bruce mentioned, our consolidated third quarter financial results fell short of last year, primarily because of the unanticipated hurricane expenses, charges due to the pending insolvency of an insurance administrator and other litigation settlements, as well as steps that we took in Europe to clear excess inventory to drive sales.

While Foot Locker Europe's profit fell significantly short of last year this division continues to track toward generating a low double-digit divisional profit rate for the year.

We are encouraged that we were able to work through our excess inventory situation in Europe during the third quarter and believe that this business is much better positioned for the fourth quarter.

The retail environment in Europe remains challenging, but we continue to believe that it will improve over time.

Additionally, the retail landscape in Europe in both more competitive and evolving markets, there are players expanding and contracting at the same time.

In the U.K., for example, a competitor, Allsports, recently went into administration, which is similar to the process of Chapter 11 in the United States.

Through this process, 92 of their stores were closed with the remaining stores being purchased by JD Sport.

In Germany, our key competitor, Karstadt is in the midst of a major restructuring and recently sold their Runners Point chain to a financial buyer.

Additionally, recent financial results posted by other athletic retailers, such as JJB in the U.K., indicate that there continue to be difficulties in that marketplace.

During our second quarter conference call, we discussed several steps that our new management team under the leadership of Keith Daly are taking to improve our comp store sales and maintain double-digit profit margin rates.

These strategies include the following.

Continue to manage our European business centrally from the Netherlands but with a much stronger focus on tailoring marketing strategies to individual markets and strengthening our planning process.

For example, we plan to utilize market-specific marketing programs designed to drive sales and profits.

We want to ensure that Foot Locker maintains its image as the cool place to shop for the newest and hottest full-priced marquee footwear.

We also plan to focus on allocating product to our individual markets.

For example, what sells in the U.K. is different than what sells in Italy.

This is an opportunity that we have successfully employed in the U.S.

Expanding our apparel sales through a profitable private label program is a third opportunity.

Private label apparel offerings will be concentrated in value-based basic categories such as T-shirts, shorts, polo shirts and fleece.

As we now believe that our European sales are stabilizing, renewed acceleration of store growth in this region is being planned for next year.

In addition, we plan to continue to explore expansion into new countries.

As previously announced, we opened our first store in Switzerland during the second quarter and recently opened our first store in Greece last month.

This represents the 20th country in which Foot Locker operates in Europe.

We'll open one more store in Athens this month and another new store in Switzerland, in Basil, Switzerland, next month.

Next year we will ramp up our new store program in Europe from 22 stores this year to 30 stores next year, and we'll enter Turkey, with one or two stores in Istanbul, in Prague in the Czech Republic, and we'll open a second store in Budapest, Hungary.

Moving on to other international divisions, Foot Locker Canada produced another solid improvement during the third quarter.

This improvement was led by our 128-store Canadian division which produced another strong quarter in terms of both comp store sales and profit increase.

In fact, Foot Locker Canada produced our highest divisional profit margin rate in the third quarter and it's in the double-digit range.

This division continues to gain market share at a profit rate well in excess of its competition.

Our 96-store Asia Pacific region produced a solid low double-digit total sales increase which reflects its increased store base.

Our U.S. stores business generated a mid single-digit comp store sales increase with gains in both footwear and apparel.

Rick Meaner and his team are producing a strong year in terms of sales and profits achieving higher retail margins by reducing our promotional posture.

Rick is focused on the high-end of driving up the average unit retail in the big, very important, U.S. business which is approaching close to $4 billion.

From a product standpoint, we continue to have available and sell significantly higher quantities of high-priced marquee footwear.

Additionally, we are also seeing our customers trading out from classic categories into the low profile look.

These trends have led to higher average retail selling prices across most of the divisions.

In the apparel side of the business, we now have effectively anniversaried the declines in the licensed category, while we continue to sell higher quantities of private label products.

The most exciting sales and profit increases in the U.S. were generated by Champs and FootAction.

These divisions compliment one another as Champs caters to the suburban sector while FootAction focuses on the urban teen.

The strong, nearly double-digit comp store sales gain and exciting profit results at our 557-store Champs division were driven by significantly higher sales of marquee footwear and gains in each of the men's, women's and children's categories.

Champs also generated a nearly double-digit gain in apparel, including gains in certain licensed categories, particularly NFL product.

The double-digit comp store gains at our 355-store FootAction chain were also driven by both strong increases of footwear and apparel.

We believe our merchandise offerings and presentations in FootAction stores are now far better than at the same time last year.

In addition, over the past 12 months, improving store execution and providing better customer service at FootAction has been a high priority for our management.

The key initiative that led to this success was transferring a significant number of store management associates from Foot Locker into FootAction.

We look forward to strong sales gains continuing at FootAction for the balance of 2005 and into next year.

For the full-year we continue to expect FootAction sales to exceed $500 million and to generate approximately $0.12 per share of earnings accretion.

Our U.S.

Foot Locker divisions consisting of Foot Locker, Lady Foot Locker, and Kids Foot Locker posted a low single-digit comp store sales increase for third quarter.

Sales increases were led by high-end marquee footwear and private label apparel categories.

Footlocker.com Eastbay, our domestic direct to customer business generated a low to mid single-digit sales increase and continued its double-digit division profit margin rate.

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

For the year approximately 60% of our sales in this division are processed through our Web sites and 40% from our catalogs.

In summary, our business is healthy.

Our balance sheet is strong.

We are encouraged that our comp store sales can continue to increase during the fourth quarter at or above the 2.7% rate that we've posted for the third quarter.

Our third quarter profit results were disappointing as we hit some unexpected charges in addition to absorbing higher than expected markdowns in Europe to reduce our inventories to the appropriate levels.

We are off to a very solid start in the fourth quarter and see both challenges and opportunities.

One of the biggest fourth quarter challenges is anniversarying against last year's most advantageous tax rate which added $0.05 per share to our results.

At the same time, we are encouraged that we have many opportunities to offset any challenges.

These opportunities include having significantly greater quantities, higher priced marquee shoes available to both in our stores and our direct to customer channels.

And, very importantly, the big Foot Locker division in the U.S. has a much greater allocation from our partners at Nike during the fourth quarter.

Additionally, our inventory issues in Europe have been resolved, and we do not expect to have the same markdown issue as we did during the third quarter.

Our other international businesses are expected to each generate solid sales and earnings gains for the upcoming quarter.

In total, we are currently expecting consolidated comp store sales to increase low to mid single digits for the fourth quarter, and earnings per share to be in the 53 to $0.61 range.

Our inventories are properly aligned to support our business plan.

We expect to end the year in a strong financial position which may allow to us redeploy additional cash to our shareholders with the following priorities.

Invest in worldwide growth, enhance the productivity of existing businesses, strengthen our balance sheet, pay a meaningful cash dividend and seriously consider purchasing more of our stock.

As mentioned yesterday, our Board of Directors just approved a 20% increase in our shareholder dividend which validates their confidence in our business going forward.

Our planned $170 million capital expenditure program for this year remains on track, primarily targeted toward opening over 100 new stores, remodeling and relocating over 300 existing stores and maintaining an efficient infrastructure.

Our Company remains strong with exciting growth opportunities in the near and long-term.

And as always, we're highly focused on driving an increasing shareholder value.

Before I take your questions, we omitted the Safe Harbor statement.

Peter, you want to take that?

Yes.

We'd just like to highlight that our prepared presentation and answers to your questions 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 those facts of currency fluctuations, consumer preferences and economic conditions worldwide, and other risks and uncertainties described in the Company's press release and SEC filings.

Any changes in such assumptions or factors could produce significantly different results, and if you haven't received today's release, it is available on the Internet at www.prnewswire.com, or www.footlocker-inc.com.

Now we'll be happy to answer your questions.

[OPERATOR INSTRUCTIONS] Our first question comes from John Shanley with Susquehanna.

Please state your question.

Good morning, guys.

Matt, can you give us some further insights into which of the five major markets in Europe were the strongest performers for you in the third quarter and which may have been the weakest?

And also, in follow-up to Bruce's comments about the comps in October being positive, was that across all five of the major markets?

Sure.

You know, our strongest markets were Italy, France, Spain and the Netherlands.

The toughest markets were France and the U.K.

You mean Germany, or you said France is the stronger.

No, I said Italy -- the strongest were Italy, Germany, Spain and the Netherlands.

Okay.

Thanks.

The toughest were, you know, were France and the U.K.

Those two markets continue to struggle more than the others and we anticipate in the, you know, in the near-term, that, particularly the U.K. will be highly promotional and France is beginning to promote quite aggressively as well.

And have those trends continued, Matt, into October, in those five markets?

They've improved a little in those two tough markets, and the other markets are doing well.

Great.

And then also, wonder if you could give us your thoughts on why Champs seems to be consistently outperforming its sister U.S.

Foot Locker operation and is there a significant differentiation between the two formats in terms of operating profits?

Is Champs growing its operating profits at a faster clip, perhaps, than Foot Locker U.S. is?

Yeah.

I think the Champs division butts heads with our most significant competitor in the U.S., Finish Line, in the suburban-based business, where I don't believe they have a large urban business.

So with the increased allocation of marquee product, and all the renovations we've done in that division, you know, we're really, we're seeing exciting sales and earnings improvements, and, you know, I know you, John, in particular, get out to the stores.

You've seen a completely new look over the last couple of years in Champs.

We also have a very strong apparel business in Champs and in particular private label, and the stores are bigger, and we're able to, you know, show a lot more of that product in there.

As it relates to Foot Locker, we think, you know, Foot Locker has been doing okay.

As you know, it's our biggest division in sales and does make a very healthy profit.

We think that it's taken our partners at Nike awhile to ramp up for the necessary quantities that are required to supply the Foot Locker, the big foot chain.

We've seen a lot of that coming into our operation in the fourth quarter and going forward, so we think we're going to see continued improvement.

In terms of the profitability gap, we believe that Champs is clearly headed for a double-digit operating profit, perhaps not this year, but certainly next year.

And Foot Locker is making, you know, a very, very respectable, you know, upper mid single-digit operating profit.

That's super.

And, Bruce, I have one quick question for you.

What was the settlement of the litigation proceedings which impacted earnings in the third quarter, and are there any other pending litigation which may impact earnings in the fourth quarter?

We don't, at this point, John, we don't know of any pending litigation that's going to impact the fourth quarter.

And I think based on advice of counsel, I think on the litigation, we prefer to not answer that question, John.

But one helped us and one hurt us.

So there was more than one settlement, legal settlements?

Yes.

All right.

Thanks a lot.

Appreciate it.

Our next question comes from Jeff Edelman from UBS Warburg.

Please state your question.

Thank you, good morning.

First I'd like to compliment you on the increased disclosure in the last two press release.

I think it made life easier for everybody.

But on the Foot Locker Champs, Matt, just wanted to follow-up John's question.

Did Champs have a higher allocation of the marquee product in the third quarter than Foot Locker did?

Did they and FootAction tend to overshadow what Foot Locker was doing in terms of some of those categories?

No.

When you look at Champs it's, you know, Foot Locker is a 1400-store operation, and Champs is, you know, a 500 and -- what are we, 77?

Approximately 550 stores.

So they got a lot more than they had last year, as Foot Locker did, but Foot Locker didn't get enough ammunition, so to speak, to, you know, to get that marquee business ramped up in enough doors.

And the same thing happened with us, it's much easier in a smaller division, you know, if you go from, as an example, from 50,000 pair to 100,000 pair, if you're in a big division, and you've got 50,000 pair, and you go to 200,000 pair but you have three times as many stores, and in the case of FootAction versus -- it's four times as many stores it takes you awhile, you know, to ramp up.

But we think that Foot Locker is now poised to really kick in with the marquee product.

We've increased the amount of doors, too, that will be carrying it.

Great.

And secondly, in terms of the better targeted merchandise allocation in Europe, obviously that's been long needed, is that occurring today, or is that something that's going to take place in the spring?

No, that's happening now.

It's been happening, you know, for the last month or so.

We've strengthened the management team over there.

We assigned a guy by the name of Phil Lang who is our number one planner over here at Foot Locker.

He is now the head planner at Foot Locker Europe.

A very, very requiring, thoughtful guy and knows the business cold.

Is really extremely analytical and working very closely with Keith, being very market specific, because really what sells in the U.K., there's a big difference from what goes on in the southern, so to speak, countries, France and Italy and Spain.

So we've strengthened that planning function over there.

Great.

Thank you.

You're welcome.

Our next question comes from Lee Backus from Buckingham Research.

Please state your question.

Matt, I'd like you to talk a little bit more about the environment that you see out there going into this holiday season and maybe early next year.

You're getting more Nike allocation product.

Are there others, many new marquee launches among your entire branded portfolio this year as last year?

And just sort of give us a sense of what you expect this season.

We have significantly many more launches, very importantly, one of the biggest plays is Nike's launching the 360 shoe in mid-January, and between, you know, the U.S. and Europe, we have a very significant percentage of what they're putting in the marketplace.

So we do have a lot more of the marquee product in the 100 plus dollar range.

What is this doing to your average unit retail?

Could you give us a sense of how much it's up this year?

It's up in the U.S. mid single digits.

Europe, it's obviously down.

There's two reasons it's down.

One is we had to clean out, and we got, you know, we now have the inventories back in line, and also the low profile shoes which are very, very important, not only in Europe, but here, in Europe the prices are a lot lower than the high-end marquee.

Marquee continues to, you know, drive our business over there, as you know we still have Tuned Air exclusive, it's a 150 euro shoe.

We sell in excess of one million pair a year in our European operation.

In Europe it looks like, when do you think the margins, are you talking about in Europe the margins stabilizing in Q4, or we still have a ways to go?

I think I said the markdowns would be stabilizing.

Yeah.

But what about the margins?

The margins will improve slightly, but, you know, our focus is to continue to drive the business, to continue to achieve double-digit operating profits and to get more sales, and we can't sit back and let our competitors sell many of the same products we have at a lower price.

So we have to compete.

With that said, the lion's share of the business is still regular priced marquee merchandise, first fashion forward, very exciting looking stores, as I know many of you all have been there over the years, and we expect to continue that posture.

We will, you know, continue to introduce exciting and new important initiatives and market, you know, to that objective.

And we see Europe stabilizing, you know, we had a not a great October, but we had a low single-digit comp increase, we beat last year's operating earnings by a nice percentage and we see the sales in that region stabilizing.

I don't see them flying in the near-term.

I would be very content over the next three to 12 months to have low single-digit comps, stabilize the margin and get things back on track.

And I do believe that in Europe 50% of our problem was external and 50% was internal in that we weren't really recognizing the opportunities that were available to us to really be more market specific.

Great.

Thank you.

Thank you.

Our next question comes from Omar Sahd with Credit Suisse First Boston.

Please state your question.

Wanted to kind of follow-up on the international discussion in Europe.

Could you kind of give us an update on the real estate strategy, what the market is like over there?

You talked about some of the restructurings and bankruptcy, I don't know if there was or is an opportunity to add real estate from those activities.

Just kind of give us a general, it sounds like your new store plans over there has accelerated a little bit for next year.

Yeah.

There's no question that Europe has now become a mature market in the athletic sector.

You know, it's really intensified over the last six, seven years, so you know, there's many more competitors, there's more independents, a lot of change, have expanded significantly.

With that said, there are a lot of people that have expanded and have these two-300-store chains that are not doing well, making very low, 1, 2% pretax profits, and in many cases a lot of companies making no profit.

We have a lot of opportunity, we believe, to continue to expand and to go into new countries and in the current countries we operate in, to expand probably by approximately another 10% over the next two or three years our store base.

But there's a lot of countries that we're not in yet, we're delighted with our entry into Switzerland.

It took us a long time to get there.

We're in Lucerne, we're going into Basil, we're looking for a location in Geneva.

And, as I said, we entered Greece a month or two ago, Thessaloniki, the second largest city in Greece.

We're opening Athens this month.

They're beginning to build more malls in these countries.

So we view Greece, in particular, as a potential 12 to 15-store market.

Central and eastern Europe will emerge over time.

We're going to be very cautious.

The economies are not exactly booming, but we opened a store in Budapest, we're doing okay.

We're going to open another one in a brand-new mall next year, the Czech Republic could probably handle, we're opening one store in Prague, but there's a couple of cities we could probably have four stores there in a few years.

Scandinavia at this point, we're very light in.

It's not an easy place to do business, and that's one of the reasons we haven't, you know, entered it.

But we probably, over the next five years, we have one store in Sweden, five in Denmark, and, you know, we think we could probably add another five or six there.

Great, that's helpful.

One kind of switching gears a little bit.

On the guidance for the fourth quarter, the range, it looks, I think it's roughly plus or minus 7% from the midpoint.

Can you talk a little bit about what, give us some insight on what the assumptions are kind of at both ends of the spectrum?

Is it mostly predicated on where the sales are going to fall?

What are you looking at as the key drivers in the holiday season?

Oh, the sales.

You've got to get the sales.

Very importantly, I think one of the most significant actions we took in this past quarter was getting the inventories back in line, and we're planning to end the year between 6 and 7% more inventory than a year ago.

So we've got our inventory cleaned up, but I've learned a long time ago, if there's nothing on the top line, there's nothing on the bottom line.

So with our arrangements and our close working partnerships with our key suppliers, we believe we'll come out in the margin category.

Great.

Thanks.

Thank you.

Our next question comes from Jim Duffy from Thomas Weisel Partners.

Please state your question.

Thanks.

Good morning.

Good morning.

Can you comment on the average selling prices during the quarter in the U.S. business?

Yeah, they were up mid single digits.

So increase in average selling prices has been fairly consistent trend over a number of quarters now.

How much more running room do you think there is with this?

Do you expect comp improvement will continue to be driven by higher average ticket?

Yeah.

I believe that we will continue probably way into next year as we continue to, you know, receive more of the very important allocated product from Nike that our average unit retails will go up, and, you know, they'll stabilize probably next year in the third or fourth quarter.

Now, the other issue you have is the influx of the low profile shoes, which are obviously a lot lower priced.

But they still are higher priced than the classic shoes.

Where a lot of the classic shoes out the door are basically $50 or so, $55, the whole low profile category from particularly Puma, adidas, and, you know, Nike has some higher priced ones, but they're generally in the $65 to $75 range.

So they'll eat a little bit into the marquee business, but Nike's got a very exciting program in low profile coming into the system next spring.

Does the low profile trend continue to be strong in Europe or is it waning some there?

Yeah, it's very strong.

I was thinking about the free cash flow potential and inventory.

Can you comp positively without growing your inventory balances as we look into next year?

Zero growth?

Well --

We expect to grow.

Our strategy's always been to grow our inventories in concert with our sales growth.

In other words, if we're running a 6% total company sales increase, we expect our inventories to be within the range 1% one way or the other.

Generally we've done that over a long period of time.

That's the way we operate the business.

We flex up and down working closely with our very important suppliers to achieve that.

But as you open more stores, you know, you need a lot more inventory.

Okay.

Final question.

Thinking about the World Cup coming to Europe next year, historically has it been a catalyst for your business, and should we expect it to be so?

Yes, it's a big deal over there, particularly in Germany, and, of course, this year it's being held there.

And it's not like a kind of World Series thing where you get a jolt for, you know, a few days or a week.

Usually our records show us that it lasts about a month to six weeks, and there's a lot, you know, you sell a lot of football or soccer jerseys, and it's a very, very big event over there, very big.

Very good.

Thank you.

Thank you.

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

Our next question comes from Donald Trott with Jefferies & Company.

Please state your question.

Thanks.

This is actually Tim Allen for Donald Trott.

It seems like business has been pretty good, but the shoe vendors seem to be more up beat recently.

I was wondering if there's anything that they're seeing that might be different, or if you could even just make any general comments on that?

You're saying they're up beat?

It just seems like at least adidas, Puma, a lot of these companies on the vendor side have been more up beat in their commentary.

I'm just not sure if there's anything they're seeing that you are not.

Well a lot of their increases, I mean, they're doing okay in the U.S., but a lot of their increases are coming in international markets.

There's a lot of business now being done in Russia, China, they're entering, you know, a lot of markets with a lot of business, and they're getting a lot of their increases out of those markets.

The U.S. markets, many of them have done well, but not to the same level as their international business.

And that's what we need to do.

We need to obviously, you know, get our U.S. business back on track.

Under the leadership of Rick Meaner over the last couple of years we feel we're on our way to achieving that, and now we've got the hiccup in Europe.

It's more than a hiccup.

I think we've got something stuck in our throat, and we're clearing it out.

Our goal is to expand Europe as it has always been our stated goal for the past five years, slow down the growth a little, but we still view Europe as potentially a very huge market for us.

Another question I had regarding promotions.

Were there any changes, I guess, that you're willing to share in the third quarter year-over-year with the promotions run in the stores outside of Europe that is speaking domestically, and if there's anything in the fourth quarter that you'd be willing to share?

Well, during the third quarter as we got more allocation of the higher end marquee product, we didn't need to promote.

We saw a softening of the promotional market in the U.S. where some of our competitors have, you know, needed to promote to maintain or try to maintain their sales.

I don't know if they are or not.

So we cut back on our promotions, our retail margins were higher than the prior year in the U.S.

In terms of the fourth quarter, I mean, I think it's going to always be a challenging quarter.

Business is not bad out there.

You know, it's not flying, but you're seeing mixed reports, you know.

If some company's reporting, you know, strong results, and you see other companies issuing warnings and reporting poor results.

But the economy in the U.S. is not too bad.

It's not that bad, and it should be, you know, a decent holiday season.

You've got this whole new category which is explosive, the whole gift card business is kind of new to our industry in a meaningful way, and we did extremely well the last number of years, and we believe that this Christmas that we'll, holiday season will be very, very important.

But I still think if it's going to be a late Christmas, and it's been that way for a long time now, and I'm not suggesting it will be a struggle, but it seems to always come down to a few days before Christmas, then the week after Christmas there's a lot of use of cash and these gift cards, and our business has, for long time now we've had huge, huge increases.

Plus, I think from Foot Locker, Inc.'s standpoint that we have a lot of the right product, a lot of the right marquee product, very importantly, well positioned with Jordan, we launched Lebron James shoe yesterday.

Did great.

It's a very good sign.

I think it's been the best launch so far.

So it looks, it appears as though the marquee business is going to be fairly strong for the holiday season.

Okay.

Thanks.

And the last question I had, regarding any new store concepts.

Are there any plans or any test concepts open now that may be a different type of a store?

We have currently three Kinney stores open in a test mode around the country.

We own that brand.

We are examining the potential of a new concept which when we, you know, develop it we will certainly let the street know about it.

Okay.

But that won't happen in the first or second quarter.

When we do it, we will do it right and we will do it big.

So we may hear more about it later next year?

Yes.

Okay.

Great.

I appreciate it.

Thank you.

We have time for one more question.

Our next question comes from Robert Drbul from Lehman Brothers.

Please state your question.

Good morning.

The question that I have is on the European inventory side.

Can you just give us an idea in terms of where you are in that region on a comp store basis now?

On inventory?

Yes.

We were running almost the entire year with 30% more inventory.

Obviously because the sales slowed up, and I think we overbought a little, too.

Now we're back in the single-digit range.

Great.

And, Matt, can you talk a little bit about just the branded apparel trends that you're seeing, ex-licensing, ex-private label?

Yeah.

As the licensing business has slowed up, branded is really beginning to accelerate.

So we're very pleased with our branded business, particularly the last six weeks or so.

We've seen an acceleration in the last six, seven weeks in the branded apparel and it's very exciting.

It's not only here, it's in Europe as well.

Great.

Nice work on the inventories.

Best of luck.

Thank you.

Thank you.

Ladies and gentlemen, this concludes today's third quarter 2005 earnings release conference call.

Thank you for participating.

You may all disconnect.