Foot Locker Inc (FL) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the fourth quarter 2005 earnings release conference call.

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

Later we will conduct a question and answer session.

This conference call 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 fluctuation, customer preferences, economic and market conditions worldwide, and other risks and uncertainties described in the Company's press releases and SEC filings.

We refer you to Foot Locker Inc's most recently filed Form 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.

If you would have not received today's release, it is available on the internet at www.PRnewswire.com or www.footlocker-inc.com.

Please note that this conference is being recorded.

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

Mr. Brown, you may begin.

Good morning.

Welcome to our fourth quarter conference call.

As we reported yesterday afternoon, our fourth quarter EPS increased 7% to $0.61 per share.

Bob McHugh, who was recently promoted to Senior Vice President and CFO, will begin the call with a discussion of our fourth quarter financial results.

For those of you who do not know, Bob joined our Company in 1997 as Vice President of Taxes after spending several years at KPMG.

For the past six years, Bob has held the position of Vice President and Chief Accounting Officer.

Matt Serra, our Chairman and CEO, will follow with a business review and provide some guidance for 2006.

After our prepared remarks we will answer your questions.

Key highlights for the fourth quarter are as follows: Comparable store sales increased 3.9%, pre-tax income increased 8.5% to $141 million, or 9% of sales.

Net income from continuing operations increased 7.9% to $96 million, and we ended the year in a stronger financial position, with almost $600 million of cash and short term investments.

For the full year, we are very pleased with the financial results of our combined North American businesses.

These strong results, however, were partially offset by weakness in certain international markets.

I will now turn the call over to Bob McHugh.

Good morning and thank you for the introduction.

I am pleased to be available to review our financial results with you today.

Our fourth quarter results followed a similar trend to that reported in the prior three quarters, with solid sales and earnings increases at our North American businesses somewhat offset by weakness in certain European markets.

In total, however, we produced a very solid comparable sales increase of 3.9% in-line with our expectations going into the quarter.

It was also a quarter in which we generated a solid comp store increase in each month, at rates similar to the quarterly gain.

The holiday selling season followed a similar pattern to that of the past decade, with the consumer waiting until the last moment to shop.

Additionally, sales of gift cards, both in our stores as well as those sold in malls, were a major story, particularly in the final few days before Christmas.

As a result, the subsequent redemption of gift cards helped drive additional traffic in the malls, and enhanced sales during the last week of December and into January.

By division, our fourth quarter comparable store sales gains broke out as follows: our U.S.

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

While all three divisions posted solid results, Lady Foot Locker produced the strongest sales performance.

FootAction was our strongest performer during the quarter with a low double digit increase.

Champs also continued to be a bright spot, with a comp store increase in the high single digits.

This was particularly encouraging in Champs was going up against a high single digit increase during the fourth quarter of last year.

As already mentioned, Foot Locker Europe continued to be the weak spot of our portfolio businesses recording a mid-single digit decline.

This decline was a little worse than the third quarter results, when we weren't promotional to clear excess inventory.

Therefore, I think it's fair to say that the tone of the business in this market, was no better and no worse than the prior nine months.

Foot Locker.com had a very high single digit increase nearly double digits.

As already mentioned, comp store sales increased mid-single digits each month in-line with the quarterly average.

Earlier this decade we established two key financial objectives, one of was which our annual sales per square foot to exceed $350.

We are pleased to report today that we exceeded this goal in 2005 achieving a rate of $361.

As such, we have raised the bar, and are now targeting a rated of $400.

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

This decline reflected the following: a flat retail margin rate calculated in constant currencies, a 10 basis point improvement in our overall occupancy rate, and a 20 basis point adverse impact, primarily due to the changing mix of our business.

As a percentage of our sales generated from our European business, where we enjoy our strongest margins, declined from the prior year.

Approximately three years ago we developed a real estate strategy designed to reduce our consolidated occupancy by 200 basis points over several years.

In 2005 our occupancy rate improved by 10 basis points.

Our U.S. stores achieved a 40 basis point improvement, while our occupancy rate Europe increased 110 basis points, reflecting the comp store sales decline in that region.

In 2004, we achieved a 30 basis point improvement on a consolidated basis, of which 50 base points was realized in our U.S. stores after adjusting for our FootAction acquisition.

This 40 basis point improvement over the last two years reflect the completion of over 1200 real estate negotiations, related to new, remodeled, and relocated stores representing approximately 30% of our store fleet.

We estimate that our occupancy rate for these stores will average approximately 200 basis points favorable to that of our Company's average rate.

Overall we are encouraged by the progress we have made with our real estate initiatives during the past two years.

However, we did not make as much progress towards the achievement of this objective as we had hoped, due to the unanticipated difficult environment in Europe.

We have reassessed our expense projections and have established a new objective of reducing our occupancy expense rate by another 150 basis points from our 2005 rate over the next several years.

Therefore, while we remain committed to our original 200 basis point reduction goal, we currently expect that the achievement of this objective will take longer to accomplish than we initially planned.

Our fourth quarter SG&A expense rate improved by 50 basis points versus last year's comparable period to 19.2%.

For the full year, our rate improved by 30 basis points to 20%.

The expense reduction processes that we initiated several years ago, continue to provide significant benefits to our Company, as well as established a key component of our corporate culture.

For the second consecutive year, we generated significant cost savings from our competitive bidding process, which we utilized for supplies and services.

We are now realizing significant savings from both new items that we are bidding, and also for expense items that were rebid from the prior year.

The following are a few examples of 2005 cost savings through the competitive bidding process.

Credit/Debit card processing fees, Card protection services in our U.S. stores, the establishment of a DSL network in Foot Locker Europe, freight and customs clearance rates for the domestic distribution.

As we move into 2006 we remain firmly committed to this expense reduction process and expect to lower SG&A rate by another 50 to 100 basis points over the next several years.

Let me briefly discuss two non-recurring items that favorably impacted our reported net income for the quarter.

We received $5 million of insurance proceeds, or $0.02 per share, related to losses at our stores that were impacted by Hurricanes Katrina, Rita, and a, Wilma. 3 million of this benefit is included in other income, and 2 million was booked as reduction of SG&A expenses.

However, these gains effective offset the losses that were required to be booked during the third quarter.

We also recorded a $6 million, or $0.04 per share,, benefit to our income tax expense primarily to reflect a reduction in the evaluation allowance against foreign income tax assets.

Last year's fourth quarter results also included a significant income tax benefit.

As a result, our income tax rate for the fourth quarter was 32%, a rate in-line with the comparable period of last year.

For the current year, our plans call for a 37.5% income tax rate, in-line with our more normalized rate.

This rate is subject to many factors, including the percentage of our income that we earn in the various tax jurisdictions in which we operate.

Turning to our balance sheet our financial positions continue to strengthen during 2005.

We ended the year with almost $600 million in cash and short term investments, and a cash and short term investment position net of debt of $261 million.

A $134 million improvement over last year.

We utilized our strong cash flow last year to reinvest in our business, reduce our financial liabilities, and return cash to our shareholders.

These initiatives during 2005 included $163 million reinvested through the capital expenditure program, 35 million of long-term debt was repaid, 26 million was contributed to our pension funds, $49 million was paid out in shareholder dividends, and $35 million was used to repurchase 1.6 million shares of our common stock.

Given our strong year end financial position last month, and our new fiscal year we repaid an additional $50 million of our long-term bank debt, and contributed an additional $68 million to pension plans.

At the end of February, our long-term debt stood at $276 million, and our qualified pension plans were close to being fully funded.

As a reminder just three years ago our total under funded pension plan position exceeded $300 million.

Going forward, we plan to seek opportunities to expand our business, reduce the Company's financial liabilities, and provide our shareholders with a meaningful return on their investment, both through dividends and share repurchases.

For 2006, we have increased our capital expenditure program from last year to $190 million, to provide for the opening of approximately 175 new stores.

During the fourth quarter, we increased our quarterly shareholder dividend by 20% to an annualized rate of $0.36 per share, and two weeks ago we announced a new share repurchase authorization, totaling $150 million that may be implemented over the next three years.

In summary, I am happy to report that our financial position is strong, and we are well positioned to provide increased returns to our shareholders.

We will prudently invest the Company's capital to generate appropriate terms, carefully balanced against returning additional cash to our shareholders.

I will now turn the program over to Matt Serra.

Good morning.

During the past two years I have taken the opportunity during our fourth quarter conference call to reflect on our progress over the longer term.

While 2005 did not measure up to our earnings per share goals that we had set at the beginning of the year, we did make progress towards meeting our near-term and long-term objectives.

As Bob mentioned, we ended the year in a strong financial position, which enables us to capitalize on future investment opportunities.

The following are some of our financial highlights over the past seven years.

Total sales increased to $5.7 billion in 2005, up from 4.2 billion in 1998.

Our operating profit margin improved to 7.2% from a loss six years ago.

Income from continuing operations reached $263 million in 2005, up from just 14 million in 1998.

Our cash and short term investment position net of debt improved by over $800 million over this time frame.

Our working capital stood at $1.3 billion at year end, versus 366 million at the end of 1998.

These are just some of the key financial ratios that we use to monitor our business.

While we have made substantial progress, we believe our future is bright, and remain committed to generating increased value for our shareholders.

We also continue to successfully implement our strategic priorities.

These priorities include extending our reach in the global athletic footwear marketplace, in-line with this priority we opened our first stores last year in Greece and in Switzerland.

At year end, we were operating nearly 4,000 stores in 20 countries throughout the world.

Let me now turn to our fourth quarter and provide some additional business insights.

We generated solid sales growth in both the Footwear and Apparel categories during the fourth quarter.

Increased sales of higher priced marquee footwear, as well as a deeper penetration in the low profile fashion category, helped drive our increased traffic, and higher average selling prices in our North American stores.

In fact, our average selling prices in these stores increased mid-single digits during both the fourth quarter and the full year.

We expect that this footwear trend towards the higher end marquee and low profile look in North America, will continue to be strong throughout 2006.

Low profile offerings of Puma and Adidas were particularly exciting.

Nike has now also developed many compelling fashion statements this category.

The marquee footwear sales that sold well with the strongest in the fourth quarter included Shocks, Jordan, and Jordan Retro shoes from Nike.

Nike also introduced two high-priced marquee products during the fourth quarter that were very encouraging.

These introductions were the new 360 shoe priced at $160, and the defining moments launch which sold out at $300.

That was the combination of the Retro 6 and 11.

The Adidas 1 shoe priced at $250 is another success story in the high priced category.

We believe that Adidas will continue to do a good job in merging newer more technological-inspired shoes with exciting fashion.

The classic category while not as strong as in recent years, continues to be an important part of our business, particularly Air Force 1's from Nike, Superstars from Adidas, 574s from New Balance, and various styles from K-Swiss and Reebok.

Our Apparel business in North America was also very solid benefiting from a deeper penetration of private-label and branded offerings.

We have now anniversaried against the decline in sales of our licensed apparel category, which had been providing a lot of headwind over the past several quarters.

Now for a preview of our individual business units.

Our total U.S. business generated very solid strong mid-single digit comps store sales increase during the fourth quarter.

FootAction and Champs were the star performers, while businesses at the various Locker divisions were also solid.

Champs, our 550 store suburban business, run by Ron Halls out of Bradington, Florida had another outstanding quarter, finishing the year the way it started.

This was second straight year Champs produced excellent results, and is now approaching double-digit divisional profit margins.

Champs achieved both record sales and record earnings for the full year.

As a result, we are now planning to pursue a more aggressive approach for store growth in this division.

The improving results of FootAction, our 363 store highly-urban chain, was another bright spot for our Company, generating double-digit comp store sales increases all year.

FootAction's profit increase was also strong all year, which provided double digit accretion to our consolidated earnings.

We're pleased with the progress that we made with this division last year.

This is the first full year under the Foot Locker umbrella.

We're also encouraged that FootAction will build on this success, and continue to demonstrate strong sales and earnings growth in 2006.

We're also planning to pursue store growth for this chain.

Our combined Foot Locker business comprising of Foot Locker, Lady Foot Locker, and Kids Foot Locker, generated a solid mid-single digit comp store sales increase in the fourth quarter.

For the full year, Lady Foot Locker posted a very solid comp store sales gain, and a significant percentage increase in profit.

Kids Foot Locker results for the year, were also very impressive, reaching a record high in division profit.

Over the past few years our store count in the U.S. formats decreased as we closed many unproductive units.

While we expect that we will continue to close additional poor performing stores over the next several years, we also plan to open a similar number of stores.

As such, we now expect the number of Foot Locker, Lady Foot Locker, and Kids Foot Locker in the U.S. to stabilize near the current levels.

Our fourth quarter comp store sales in our European stores declined mid-single digits, following a similar pattern we've experienced all year.

Business continues to be the most difficult in the U.K. and in France, due to a combination of weak economic conditions, and a more competitive landscape.

Sales in Europe for both the fourth quarter and the full year were also negatively impacted by mid to high single digit decline in our average selling price.

These declines are the result of a shift in fashion from the higher end technical footwear, to lower-priced low profile styles.

Average selling prices were also negatively impacted by the overall environment in Europe that's become more promotional.

For the full year, Foot Locker Europe's total sales were essentially flat with last year.

This divisional profit margin rate remained in the low double digit area but at a much lower rate than the prior year.

We plan to take a very cautious approach in planning our business in this region, until we see a sustained improvement in the business environment.

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

Foot Locker Canada generated record profits in 2005 and achieved a double digit division profit margin rate for the first time in its history.

Our Direct-to-customer business has strong fourth quarter, with sales increasing nearly double digits.

This business generated strong orders from its websites, but experienced continuing declines from its catalogs.

This was a continuation of a trend that we have experienced for several quarters now.

As we have previously discussed although more customers are processing orders through the internet, our catalogs remain a critical marketing tool, that effectively drives traffic to our witnesses.

In total, our business continues to generate strong cash flow that we are carefully redeploying to deliver increased shareholder value.

Going to do it by investing in worldwide growth, enhancing the productivity of existing businesses, strengthening our balance sheet, and providing a meaningful cash return to our shareholders.

As we look towards 2006, we have increased our capital expenditure plan to 190 million, which will enable us to accelerate our openings of approximately 175 new stores, and to expand our reach by testing at least one new market.

We estimate that approximately 80% of the new stores will be located in the United States, and 20% in International markets.

During 2006, we also plan to close approximately 110 under performing stores.

Therefore we expect our athletic store base to increase approximately 2% in 2006, and at the end of the year, we'll be operating more stores in each of our formats compared to the beginning of the year.

This will be the first time that this has occurred in the last seven years.

Our second strategy is to expand our sales and profits by leveraging our Footlocker.com infrastructure, by developing new internet websites.

Longer term, we continue to believe that the Asia Pacific region will present significant opportunity for growth.

At this point, however, we do not expect to open any new stores in new countries in this region during 2006.

We will also look at acquisition opportunities.

However, we plan to continue to be patient and also very disciplined, in so far as any transaction should be accretive to our earnings per share, and generate a rate of return well in excess of our cost to capital.

In 2006, we currently expect our earnings per share to increase to $1.75 to $1.85 per share.

On a pre-tax basis this translates to an 8 to 15% growth rate.

Included in this guidance is the impact of adopting the new stock based compensation rules, which we expect to cost $0.03 to $0.05 per share for the full year.

We expect the impact of this accounting change to be essentially offset by the benefit of fourth quarter of this year, having a 53rd week, which is in-line with the [NFRF] standards.

This earnings per share guidance is based on many assumptions, including a low to mid single digit comp store sales increase, depreciation expense in-line with 2005, 1 to $2 million reduction in interest expense, and an income tax rate to average 37.5%.

For the first quarter, we currently expect our earnings to be in the range of $0.37 to $0.40 per share.

To date in the first quarter our overall sales are running in-line with our plan, and are similar to the trend of the fourth quarter.

Overall we believe that the most significant risk and opportunity to missing or exceeding our targets, depends on how successful we are in turning around our European business.

This will be a major focus of our attention during the coming year.

In summary, we believe that on the whole Foot Locker is well-positioned for continued earnings increases for enhancing shareholder value.

Finally, before I turn to your questions, I would like to take this opportunity to recognize our associates that are the backbone of our Company.

We believe that our organization is strong, with talent and experience at all levels, and are a hard working, very aggressive and responsible group of people.

I will now be happy to answer your questions.

Thank you.

[OPERATOR INSTRUCTIONS] The first question comes from Robert Ohmes from Banc of America.

Good morning.

A couple of quick questions.

First, Matt, I just wanted to double check.

Did you say comps were running similar first quarter to date as you did in the fourth quarter, meaning that February U.S. business comps are running in that sort of 3 to 4% range?

They're running in the mid-single digit range, and Europe is running similar to the fourth quarter.

Got you.

The other question I had, can you talk a little bit more about in the fourth quarter how your women's comps in the U.S. overall were, with Lady Foot doing so well, and then also how did women's look in your other concepts?

Clearly as I am sure you know, the women's business experienced a lot of difficulty in the last year and a half.

We have seen a turnaround, actually beginning in the third quarter, but pretty aggressively in the fourth quarter, and now it is following into the first quarter of this year which is good news, and actually while Europe is down, their women's business is greatly improved.

And then what's driving that turnaround in women's?

I think a lot of the exciting new low profile fashion that's in there.

I think that's the key catalyst.

And then just my last question, related to that low profile fashion, how are you guys thinking about AURs in your U.S. business in '06, as you see that shift?

Do you worry your AUR's are going to drop like they did in Europe?

No, not at all.

The dynamics of the pricing strategy are such, that you have a tremendous amount more of technical footwear being sold in the U.S.

Our allocations are up significantly with Nike, and obviously Jordan, and all the exciting, you know, Shocks and Nike TL's, and all the technical footwear.

So we're getting increased allocations in that product and doing extremely well.

The low profile shoes generally are in the 65 to $75 out-the-door price range, so those price ranges are about 10 to $15 higher than the classic shoes that we were selling for the last two or three years.

The combination of both is giving you that increased average unit increase.

Terrific.

Thank you very much.

Thank you.

The next question comes from Jeffrey Edelman from UBS Securities.

Thank you.

Good morning.

Matt, a question on Europe.

Nike and I believe Adidas, have both commented that they shifted some of their shipments into Europe, and especially the U.K., because of some aggressive discounting by I guess the #3 retailer there.

Have you seen that sort of ease off in that market a little bit?

Is it less competitive than it had been?

Not yet, Jeff, not yet.

Because they have the carryover from the prior season.

Okay.

It is still cleaning out and obviously they, some of these guys didn't sell the product well, so they've got a lot of inventory.

I foresee another quarter or two of them cleaning out.

Okay.

And then on the U.S. side, if we think through what's happening with your average unit of retail in footwear mid-single digit up, and your comps --

High single digit.

I am sorry.

It is up high single digits.

If AUR is up high single digits, comps are up mid-single digit, what's down in there?

Is there shift in mix?

A little softness in Apparel, you know, if we look at the, speak strictly Footwear, a little shift in the mix, yes.

And does that have margin implications since you've got a lot more private brand apparel, or is it not that significant?

It is not material, no.

Okay.

Thank you.

Next question comes from Omar Saad from Credit Suisse, please go ahead.

Thanks.

Good morning.

Wondering if you could elaborate a little bit on your new store openings plans, and how much for '06, how much you expect to be in newer markets versus existing markets, maybe talk about that for a second?

We are going to open 175 new stores, and closing approximately 110 unproductive stores this years.

This will be the first time in the United States, since I guess 1998, that we will increase our store counted by division.

We have for the last number of years we've cut back, and gotten rid of a lot of the unproductive locations, so now we feel that particularly a store like an operation like Champs, is poised to grow pretty aggressively.

In terms of looking at International, there is continued opportunity up in Canada, where we're doing extremely well.

In Europe, while we struggled as we have entered new markets, we're doing well in Switzerland, and we're doing well in Greece.

We're looking at several additional markets in Europe, including Israel and Turkey.

We expect this year to be entering one to two new markets in Europe.

Okay.

Great.

Switching gears a little bit, could you just talk a little bit with your inventory levels?

I think they're up about 8 or 9%, and how you feel about where you stand on that front?

The inventory is clean, in good shape.

The aging standards are where we want them to be.

We expect the remainder of the year to run in the 4 to 6 range over last year inventory.

We've always had a strategy around here that's worked most of the time, where our inventory levels are around 1 to 2% greater than our sales increase, because there is just so many sizes, and we're chasing so many different classifications and businesses, and trying to be new and fresh with exciting merchandise.

Right, right.

That's helpful.

And then just one quick question on the gross margins when you kind of look at the trends there, I know you gave an update on the occupancy initiatives that you have been working on, and the outlook from that perspective.

Can you talk a little bit about the other key swing factors on the gross margin line as you look out to the future?

The big play continues to be occupancy.

Our retail margin, product margin is pretty high.

It doesn't mean you can't improve it.

We don't want to over price the merchandise.

In looking at the near and long-term, most of our margin expansion will come from real estate.

Okay.

Great.

Thanks.

That's helpful.

Thank you.

The next question comes from Virginia Genereux from Merrill Lynch.

Please go ahead.

Thank you.

Can you give us a little insight into what your '06 outlook presumes for Europe margin wise?

Is looks like total company operating margins will be up, and I assume the U.S. will be up.

What are your gut thought on Europe?

I don't think there is going to be any quick fix in Europe.

I think my view of the marketplace over there, is that there is around another 12 months of challenge.

I think that you're going it see some shake-out over there, in terms of competition, and you're going to see some obviously some, I think Jeff mentioned is some redeployment of what product goes where.

When you look at the European market over there, the western European market, you look at a lot of operations that are making marginal profits, no profits, and losing money.

Sooner or later, as we all know, that kind of has to end.

We have had a lot of changes last year, you know, All Sports filed, and JD picked up some.

I understand they rejected a lot of what they picked up.

I think you're going to see some shake-out over there, and some redistribution of product, which is I think only going to help us, but I think it is going to be a very challenging year.

That doesn't mean that we don't have an opportunity to do better, but I wouldn't want to mislead you, and paint a scenario where it is a quick fix.

With that said, we've got a very strong business there, in my opinion the organization is very strong, good bone structure, still with the problems we have,our productivity per square foot is much higher than it is here in the U.S.

The locations are power locations in many cases, and I am here eight years now almost, and I have seen a lot of ups and downs in the businesses, and I think this is repairable.

It is a question of when I say repairable, it is not exactly dying, but I believe this it is going to take awhile.

Thank you.

I guess that's when you say, as we look at the publicly traded European sporting goods retailers, and there aren't lots of them, but my take is you are still a lot more profitable than they are, those businesses are running sort of mid-single digits or maybe a little better operating profit, and you guys are still doing better.

Is there a chance, Matt, given what you see going on you see additional margin pressure this year, or maybe how far -- ?

I think there could be margin pressure.

The publicly traded companies you can get some information, some of the divisions of these big companies.

Some of these companies are doing 250 million Euros, and losing 30 million Euros, and it is a three-year history.

How long are they going to continue to put up with that?

You look at another publicly traded company, you know, I don't want to get into names, but they have got almost a billion dollar business, but they're not making any money, they're making $5 million, and it has been a trend for a long time.

Right.

How long are they, the shareholders going to tolerate that, and then you have a got a considerable amount of businesses that are making 3%, 4%, and this thing in Germany with the Runners Point, that was part of Kalstadt, and that's in the hands of a financial buyer now, and there have been some rumors that in six, eight months of their ownership, the thing may be up for sale again.

Thank you.

There is not a lot of people making a lot of money over there.

You guys are doing a great job.

I will let someone else get in.

Thank you.

The next question is from Bob Drbul from Lehman Brothers.

A question for Bob on the occupancy costs, in the U.S. did you get everything that you were looking for in the reduction of occupancy costs in '05, and are there still, was the 200 basis point target from '07, are you still on for that into '07 as well?

I think in 2005 we did get what we expected to get.

As I mentioned earlier, I do think we believe it is going to take us longer to achieve the goal we had set earlier as a Company.

We'll continue to receive the improvements we expect in the U.S.

It is going to take a lot longer, because of the international situation.

We achieved in the U.S. about 40.

A 40 point improvement in the U.S.

and because of the sales short fall in Europe our real estate expense went up, for the first time in a decade.

Yes.

That offset the gain.

Okay.

And Matt, can you talk a little bit about the basketball category in the U.S., and how it has performed for you, and sort of your expectations going forward?

We had a great year in basketball, just a fabulous year in basketball.

In all our divisions, except Europe, Europe does not have a big basketball business.

It is such, like 1 to 2% of the business in a good year.

In the U.S. our basketball business is in excess of a billion dollars, and we had a nice increase there last year.

Very importantly in February, we had a great month in basketball, a very strong shoe month, there were a lot of new launches, the All-Star game was a key catalyst in driving the business, and it was one of the best basketball months around in a long time.

We have had for approximately a year and a half, Rick has worked very hard with Nike gets us back on-track with the key marquee products, and we've always been known as a basketball store.

Now in addition of FootAction which is heavily gated in the urban markets, sells a lot of basketball products, so basketball has been very, very strong.

Okay.

And then just one final question.

On the inventory, when you look at your current levels, and you're clean and comfortable with everything, on the reduction, or the sequential reduction that you're talking about, where would you see most of the reductions coming, is it in Europe that you're going to have the cut back more, or is that -- ?

Exactly.

Exactly.

It is in Europe.

It is in the plan.

Last year we bought too much.

We thought we were going to have, things were going to continue, and they didn't.

The turnover plan is similar to two years ago.

We cut back most of the inventory over there.

On a comp level, where are you in inventories in Europe?

Currently down.

I don't want to give any wrong info, but we're currently down versus last year, about 2 or 3%.

Okay.

Great.

That's our plan basically for the rest of the year.

Thank you very much.

You're welcome.

The next question is from John Shanley with Susquehanna Financial.

Good morning, guys.

Can you give us some quantification, in terms of the new Champs and FootAction stores that you're planning on opening this year?

How many are anticipated in each of those two growth vehicles?

Champs will probably have a net of 10 to 15 stores.

We would like to open more.

But we want to be sure we get obviously the right locations.

One of the great successes of Champs, is that there are a suburban strategy, and they go head-to-head with our largest competitor, and I believe that we're gaining tremendous market share.

When you look at FootAction, we're looking at a net of about 30 stores, you know, increase between openings and closings.

We ended the year with 345 stores.

We're looking to end '06 with 380 stores.

Pretty aggressive growth.

That's great.

It is has done well and believe it or not, there is continued opportunity in the urban markets.

How many net new stores are planned for the Foot Locker Europe business?

25, net new stores.

We ended the year at 500, and the plan is 525.

Just staying on real estate for a second, how many remaining triplex stores do you have, and when are we likely to see the final closure of that concept?

We have 47 or 49, believe it or not, now thew they're fully depreciated some of them are started to go make money.

I still don't like the concept, and we're working closely with our real estate department, and our landlords to break them up.

They're big, John, as you know.

We have a lot that are 18,000 to 25,000 feet with all three formats.

We want to better position them as separate entities.

I think it is at least another three-year process, before we get out of most of them.

Okay.

Turning to Europe quickly, you have gone into some good detail, but the consolidation that's going on in the U.K. that was just another one announced yesterday, Hargraves is being taken out by Sports World, and we see further fall off in terms of the JJB and JD store of things.

Do you see something happening by the end of this year where the U.K. market may thought to have reached the point where it could be another lesson in promotional environment, and the same thing in France, we're starting to see people, like Decathalon and Career, not getting access to the kind of products they had before , that may have made the market much more promotional.

Is there light at the end of tunnel in those two countries that you singled out, that are still problematic for Foot Locker?

Yes, I think the U.K. will continue to be promotional no matter what happens, it has always been promotional but when you had everybody get into the promotional arena as they did in the last year and a half, it was really very troubling over there, really giving a lot of most wanted merchandise away.

When you look at the U.K. it is obviously not a small business for us, but it is not doesn't have the same impact that France has.

That's the most concerning business to me at this point.

France is a big market for us.

We do a lot of business over there, and the competitive nature that's existed there the last year, quite frankly, I've never seen they have laws over there, and window periods when you can promote, and people obviously have not adhered to a lot of those rules and regulations.

So I am a little more concerned, a lot more concerned, with what goes on in the French market.

Okay.

I just got off the Adidas call a few minutes ago, and they were indicating they're anticipating significant rejuvenation of the Reebok brand, and further growth in the U.S. market with the Adidas brand, and they signaled that the Foot Locker operation as where most of that growth is coming from.

You also indicated in the call you're getting great cooperation, get growth from Nike.

How have you leverage, or what could you possibly leverage this strong demand that all these major brands, to get greater shelf space in Foot Locker stores.

What is it going to mean, in terms of product margin from these big suppliers?

There is new ownership at Reebok.

We've got a meeting next week with I guess Herbert and everybody else up there, and there should be some opportunity.

You have to understand that the classic business is still very challenging.

It is not a bad business as you know, John.

A lot of people are wearing those $50 classic shoes, but I don't see a huge increase in that product.

Could you leverage or basically allocate shelf space in Foot Locker stores, based on who gives you the best deal?

No.

We dent want the best deals.

We want the best merchandise.

You know the best deals, the best price is not always the best deal.

It is the product that the kids want, the customer wants.

That's what we try and do here all day long, is talk to our customers, and do a lot of market research, and obviously travel a lot and see what's going on.

The bottom line is, you got to give the customers what they want.

Fair enough.

Thanks a lot, Matt.

Appreciate it.

Thank you.

Next question comes from Donald Trott from Jefferies & Co.

Good morning.

Most of the things I was interested in have already been asked, but at this point, giving effect to the planned domestic expansion, roughly what's the ongoing breakdown between mall stores and urban stores?

Actually with the addition of FootAction, Don, it is approximately 65 mall/35 urban.

And then on the last conference call I think it was, there had been mention or acknowledge that the Company was exploring or testing a new concept, and we were told in the future sometime, we would get some kind of update.

Are you prepared to give us a little update at this point?

No.

We're looking at the Brown shoe business.

We are a shoe company.

We have a lot of experience here in the management, and a lot of depth of experience in the Brown shoe business.

It is bigger than the athletic business.

Depending on what study you look at, it is close to twice as big.

We see a lot of exciting operations popping up around the marketplace, so one of the ways of growing our Company overall, is to get into that zone.

We'll always look at a potential acquisition in the athletic zone, as we always do.

I think there could be an opportunity in the Brown shoe area.

Actually, you know, we've got a committee, a team, we're studying it, and as you know, Don, more than anyone else, we're cautious and very careful, and we don't want to get into something.

I am hopefully that by the quarter of '06, or the first half of '07, we will have some test stores.

That's very helpful.

It was noted that the overseas, the European margin was filled double digit which on an absolute basis, forget where you have been in the past, on an absolutely basis is still a pretty good margin.

Yes.

Given that, when things settle down there that there, there is still the opportunity to get back to former margins, or do you think that it is one of these things you can't go home again, that there will be a new reality, even after things settle down?

I think that is a very good way of putting it.

I don't think we'll get back to those real high margins.

The opportunity is, if we stabilize in the markets we're in, and we go into something, like Greece, we are doing extremely well in Greece.

We have two stores in Greece.

The market can handle 12 to 15 doors.

We are going to probably test one in Turkey this year.

Could be a 15 store market.

We're probably going to test Israel this year, potential for 12 to 14 stores in the Israel market.

So want, if we can make double digit, you know, even if it is 10, 11, 12%, that's a big play if you can expand that.

Right.

Okay.

Thank you very much.

That exhausts my questions.

Okay.

Thank you, Don.

We have time for one more question.

I just want to make one clarification before that.

Our average selling prices in the U.S. were up mid-single digits in the fourth quarter, and our comps were actually up about a percentage point higher, than our average selling price went up by.

With that, we'll take one more question.

Thank you.

The last question comes from Jim Duffy with Thomas Weisel Partners.

Please go ahead.

Thank you.

Questions on your longer term objectives.

What type of comp is implied in your occupancy expense objectives?

Low to mid single digits.

Okay.

And then I was intrigued by your objectives for $400 per square foot.

What are some of the initiatives that will help you get there?

Continuing to close the unprotective stores.

We closed many of them, closing I guess 110 this year, and about, you know, for the last six, eight years, we keep closing these larger stores, and opening smaller stores, and your productivity goes up.

Okay.

And then on the European market, do you expect some kind of short term benefit from the World Cup?

Yes.

That will be very big, particularly in the German market, and some of the other European markets.

The last time the World Cup was on, we did very well.

We had a very exciting sales lift, and it is I think I mentioned on the last call, it is not like the Super Bowl, you get something for a week or two.

It lasts for a couple of months.

It is a very big deal over there.

It is the largest sport in the world.

Over here it has never really caught on, but over in Europe they live and breathe it.

We do expect a lift.

Are those benefits implied in your commentary about the outlook for the year?

Kind of.

It is not a material lift.

I think could pick up 5 or $6 million.

It is basically Apparel by the way, all the teams, jerseys.

Okay.

That's helpful.

Thank you.

Okay.

All right.

We just like to thank everyone for participating today.

Thank you.

Thank you for participating in the fourth quarter 2005 earnings release conference call.

This concludes the conference for today.

You may all disconnect at this time.