Foot Locker Inc (FL) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the first-quarter 2006 earnings release conference call.

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

Later, we will conduct a question-and-answer session.

Please note that this conference is being recorded.

Before we begin, let me remind you that 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 fluctuations, 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 Incorporated'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.

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

Mr. Brown, you may begin.

Good morning and welcome to our first-quarter conference call.

As we reported last evening, our earnings per share for the first quarter of 2006 was $0.01 higher than last year at $0.38 per share.

This result was in line with the earnings guidance range that we provided at the beginning of the first quarter.

Bob McHugh, our Senior Vice President and Chief Financial Officer, will begin the call with a discussion of our first-quarter financial results.

Matt Serra, our Chairman and CEO, will follow with an operational review of each of our businesses.

After our prepared remarks, we will answer your questions.

In summary, our businesses in North America are off to a solid start for the year, while our sales in Europe remain challenging.

Key highlights for the first quarter are as follows.

Comparable store sales increased 0.5%.

Our gross margin rate improved from last year by 30 basis points, while our SG&A rate increased by 10 basis points.

Interest expense was $2 million lower than last year, while our income tax rate was essentially comparable to 2005.

As a result, earnings per share increased to $0.38.

And lastly, our financial position remains strong, with our cash position net of debt having improved by $40 million.

I will now turn the call over to Bob McHugh.

Good morning.

As Peter mentioned, our first-quarter earnings performance was within the guidance range that we provided in March.

In a quick snapshot, our North American businesses exceeded our profit plan, while our business in Europe fell short of our expectations.

Our combined store business in North America produced a strong profit increase of approximately 20% during the first quarter.

In fact, each one of these businesses produced a double-digit profit increase and a higher profit margin rate.

We are encouraged that our North American businesses have a good opportunity to continue to exceed their plans for the balance of this year and help offset any continuing weakness in Europe.

During the first quarter, we were also faced with some year-over-year expense challenges, including the required adoption of two new accounting standards, as well as an unfavorable European foreign exchange rate comparison.

Overall, our 0.5% comp store sales gain was below our guidance that we provided at the beginning of the quarter, but was offset by an improving gross margin rate and good expense control.

First-quarter comparable store sales of our major divisions broke out as follows.

Our U.S.

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

Footaction, our most urban format, produced another strong quarter with a high single digit gain.

We continue to be very pleased with this business and believe that its divisional margin rate will approach high single digits this year.

Champs, which targets a more suburban-based customer, also had another solid quarter with a mid single digit increase.

This is particularly noteworthy in that during the first quarter of last year, Champs comp store sales increased double digits.

Foot Locker.com also generated a mid single digit increase.

On the international front, Foot Locker Europe recorded a high single digit comp store decline.

But as Matt will cover in more detail, our sales in Europe were generated at a lower markdown and higher gross margin rate.

Total sales in Europe were also negatively impacted by an unfavorable foreign exchange rate comparison with the first quarter of last year.

The average rate of the euro declined from approximately EUR1.31 to the U.S. dollar last year to 1.21 this year.

By month, sales in February increased low to mid single digits.

Sales in March, which were negatively impacted by the Easter and school vacation shift into April, declined mid single digits.

And conversely, April sales, which were enhanced by the shift, increased mid single digits.

Our first-quarter gross margin rate increased by 30 basis points from last year, attributable to a 70 basis point improvement in our margin merchandise rate.

This improvement reflected both year-over-year reduction in our total markdowns, as well as a lower markdown rate as a percentage of sales in both U.S. and international businesses.

Going forward, we expect to continue to direct our promotional strategy towards generating additional full-priced sales.

Our merchandise margin rate was also enhanced by a lower shrinkage rate in our U.S. division, reflecting improved store operations.

Our occupancy rates increased by 40 basis points, negatively impacted by the deleveraging of our European businesses, as well as higher utility costs.

Our rent expense, however, was flat with last year.

For the full year, we expect our overall occupancy rate to be flat to slightly higher than last year, with further improvements in our U.S. stores being offset by increased rates in Europe.

During the first quarter, we completed 281 real estate negotiations related to new or existing stores, with an annualized tenancy expense rate expected to average 140 basis points favorable for the Company's current rate.

In summary, we continue to negotiate real estate deals that we expect will enhance our occupancy rates over the long-term.

In the near-term, however, our progress with this longer-term objective has been negated due to the comp store sales declines in our European stores.

Our first-quarter SG&A expenses were flat with last year.

As a percentage of sales, SG&A expenses increased by 10 basis points.

The increased SG&A rate reflects the incremental expense equal to approximately $0.015 per share associated with adopting two new accounting standards, FAS 123(R) related to stock-based compensation and FAS 151 related to inventory costs.

At the same time, we benefited from a onetime gain of $0.01 per share recorded as a cumulative effect of accounting change, also related to FAS 123(R).

Overall, I am very pleased with our ongoing expense efforts, including the continuing benefits that we are deriving from our competitive bidding processes that we utilize for non-merchandise expenses.

These expense savings have allowed us to effectively absorb expense increases such as those incurred as a result of higher energy costs.

Our interest expense declined by $2 million due to lower debt levels and a higher average interest rate on invested cash.

For the full year, we expect our interest expense to total approximately $6 million.

Our income tax rate was essentially flat with the first quarter of last year and in line with our prior guidance.

Going forward, we continue to plan our income tax rate at 37.5%.

We continue to work on new opportunities, however, that may reduce this rate in some future quarters.

In addition, there is proposed legislation in both Canada and the Netherlands that may result in lower income tax rates in those countries.

If enacted, these rate reductions would benefit our company over time, but may have a onetime negative expense implication.

We will continue to closely monitor these developments and assess the impact on our Company.

Turning to our balance sheet, our financial position remains strong, with cash and short-term investments totaling $370 million.

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

At the same time, we recognize our responsibility to continue to redeploy excess cash to enhance shareholder value.

In February, we prepaid $50 million of our bank term loan, leaving an outstanding balance of $90 million.

We also contributed $68 million to our pension funds during the first quarter, which effectively puts our qualified pension funds at a fully-funded position.

As a result, our pension requirements are expected to be significantly reduced going forward.

We also repurchased 334,000 shares of our common stock for $8 million and paid out $14 million in shareholder dividends during the first quarter.

Our merchandise inventory at the end of the first quarter was 6% higher than this time last year.

This is in line with our goal of reducing inventory growth rate as compared to the past years, and this will remain a priority for the rest of 2006.

Additionally, our inventory is current and within our merchandised aging standards.

Our first-quarter EPS guidance was in line with our initial expectations.

Therefore, we have not changed our guidance of $1.75 to $1.85 per share for the full year.

As we discussed in March, we continue to see more opportunities to increase our earnings during the fall season than during the first six months of this year for the following reasons.

First-quarter results were negatively impacted by an unfavorable foreign exchange rate comparison versus last year.

Based on today's rate environment, this may be a favorable comparison for the balance of 2006.

During the fourth quarter, we typically benefit from greater expense leverage during our peak selling season.

Our average selling price comparisons in Europe are more favorable in the fall season, and we believe our stores will be better merchandised to current trends.

Finally, this year's fourth quarter includes an extra week that we expect will favorably impact that period's results.

Our second fiscal quarter, we currently expect earnings per share to be in the range of $0.27 to $0.30.

This guidance includes the impact of incremental expense of approximately $0.01 per share related to the accounting changes.

In summary, we feel very good about the strength of our business in the U.S. and remain committed to meeting our challenge in Europe.

As for our guidance, we continue to believe that both the risk of missing and the opportunity of exceeding our earnings guidance will be based on the strength of our business in Europe, particularly during the fourth quarter.

I will now turn the program over to Matt Serra.

Thank you, Bob.

Good morning.

Once again, the current period was filled with both achievements and challenges.

I think we did a good job capitalizing on our many opportunities in North America and made some meaningful progress in addressing our challenges in Europe.

While sales and profits in Europe were below our initial expectations, we believe this business is now better positioned for improved financial results, given the merchandise changes we have made to enable us to better compete in the current fashion cycle in a more competitive environment.

Therefore, our outlook for the full year has not changed, although I think it is fair to say that we are a little more cautious in our thinking.

The $0.38 per share first-quarter profit was in line with our expectations.

As we have emphasized in the past, we operate a diversified portfolio of businesses that we believe is a competitive strength.

This diversification helps to minimize our risk to external factors, providing the opportunity for more consistent growth.

Clearly, this has been the case over the past several years, with periods of strength and weakness in varying parts of our business.

During the first quarter, our combined North American business generated a mid single digit comp store sales increase.

Profit growth was even more exciting, increasing approximately 20%.

We are encouraged that we generated a solid double-digit profit increase in each one of our U.S. and Canadian store divisions.

In most of these divisions, the strong profit increases came on top of strong gains during the first quarter of last year.

Division margin rates also increased solidly in each one of these divisions.

The combined division profit margin rate of our U.S. store business increased 130 basis points during the first quarter this year.

Comp store gains in our North American stores were driven by increased sales of marquee and low-profile style footwear.

As a result of selling more marquee footwear and customers trading up in price to the low-profile look, our average selling prices in our domestic stores increased mid single digits during the first quarter.

Marquee footwear styles that sold particularly well during the first quarter included Jordan, Jordan Retro, Nike Shox Running, Nike Air Max 360s, Timberland 6-inch boots, Adidas GigaRides, and Asics Kayanos.

Low-profile or the fusion styles that sold well in our U.S. stores included many styles from several of our key suppliers including, Puma, Adidas and Nike.

Looking at our business by division, Champs produced another solid sales increase during the first quarter, and more importantly, generated strong profit increases.

As Bob mentioned, Champs' sales gain came on top of a double-digit gain during the first quarter of last year.

The strength at Champs was led by sales of men's running and children's footwear, and a strong increase in private-label apparel sales.

We believe that Champs continues to gain market share, particularly with the suburban-based consumer.

Sales will likely approach or possibly exceed $1 billion this year, with a profit margin approaching double digits.

Our Footaction chain, which connects more with the urban consumer, also generated strong sales and profit increase during the first quarter.

This division continues to be a more significant profit contributor to our Company.

First-quarter sales gains at Footaction were broad-based across footwear, apparel, and accessories.

On the footwear side, Footaction generated strong gains in both marquee basketball and running categories.

Apparel sales were led by gains in both branded and private-label products.

Earlier in this decade, Lady Foot Locker was our most challenging division, as we struggled to properly merchandise the stores for the most trend-right products.

Lady Foot Locker began its turnaround approximately 18 months ago.

Therefore, we are now in the second year of improving results.

During the first quarter, Lady Foot Locker generated a low single digit comp store sales increase, driven by increased sales of Nike Shox and Air products, as well as through a more in-depth selection of fusion or low-profile styles.

The year-over-year profit growth for the first quarter was even stronger, increasing at a solid double-digit rate.

Our combined U.S.

Foot Locker and Kids Foot Locker division posted a solid low single digit comp store sales increase for the first quarter.

Profit growth was even more encouraging, with a strong double-digit rate increase.

New, exciting products from our suppliers and the fashion shift towards higher average selling has allowed us to be somewhat less promotional in our stores.

At Foot Locker stores, we generated solid sales gains in the men's running, women's casual, and kids’ footwear categories.

We believe that the prospects of earnings improvements at our flagship Foot Locker division for the balance of this year are very encouraging.

We expect our Kids Foot Locker stores to post record earnings for the second consecutive year and to achieve a double-digit division margin rate.

Foot Locker.com Eastbay, our domestic direct-to-customer business, generated a mid single digit sales increase while maintaining its high profit margin.

Sales in this division continued a shift from catalog operation to our more profitable Internet channel.

During the first quarter, 71% of our sales were processed electronically versus 63% last year.

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

The strength outside the U.S. was Foot Locker Canada, while we continue to be challenged in Europe.

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

As mentioned on our fourth quarter conference call, Foot Locker Canada achieved a double-digit division profit margin in 2005, which we believe will improve even further this year.

Total sales at our Asia-Pacific division were essentially flat with last year.

Profits were down slightly, as we elected to clear out some slow-moving apparel, which put some pressure on our margin rate at this division.

We believe most of this inventory situation has been rectified, with recent sales trends being very encouraging.

Our European business continues to be our largest near-term challenge.

While sales comparisons to prior years have been difficult, we have made some meaningful changes within our internal operations that we expect to prove beneficial over time.

These enhancements include strengthening our European management team, improving store operations, and adding more current trend products.

From an external standpoint, we believe that our single biggest issue negatively impacting our business in Europe is the current fashion shift to the fusion category, as well as the continued promotional environment.

Opposite to what is occurring in the U.S., the European consumer is currently trading down in price to this current look from the higher-priced technical shoes.

Due to this changing mix, our average selling prices have been under pressure for several quarters.

We believe that this current fashion trend, fusion shoes, will also intensify in our competition and, in certain markets, many of the casual footwear retailers that we go up against carry these shoes now.

As we begin to further anniversary this issue later this year, we expect that the issue will have less of an impact on our year-over-year comparisons.

Our current plan calls for opening an additional 20 stores in Europe in 2006.

This is a decrease of approximately 10 stores from our original plan and pushes our targeted openings into Turkey and Israel into the year 2007.

The capital savings from the reduction has been redirected towards updating up to 100 of our existing stores in this market to our exciting SOHO look.

While our overall store base in Europe is in pretty good shape from an appearance standpoint, we felt that some of our stores were looking a little tired and would greatly benefit from an exciting facelift.

Our objective is to be the most exciting place to shop in our sector of the business.

Another new opportunity for our Company is through franchising.

During the first quarter, we completed negotiations with a well-established franchisee to open Foot Locker franchise stores in the Middle East.

We are working with them towards opening two stores in the second quarter, one in Kuwait and the second in Saudi Arabia.

Our objective is to open 75 stores in this market over the next several years.

Additional franchising opportunities may be pursued over time into other regions, based on the success of this particular venture.

In summary, we are off to a very solid start to the year in North America, driven by solid sales increases of marquee and low-profile footwear and private-label apparel.

Sales are also benefiting from higher average selling prices.

Each of our operations in North America generated solid increases in profits and higher division profit margin rates for the second quarter.

Higher sales, lower markdowns, and continuing expense control all contributed to this success.

We are confident in the strength of our European business over the longer-term.

While year-over-year sales and earnings comparisons remained challenging during the first quarter, the business remains solidly profitable and we are generating strong returns on our capital investments.

We believe that our merchandise offerings are now better aligned with the current fashion trend and we have an opportunity to improve gross margin rates versus last year when we were clearing excess inventory into the second half of the year.

Therefore, we continue to expect that this business will generate a double-digit division margin rate for the balance of the year and have sales in excess of $1 billion.

As Bob already discussed, we have maintained our earnings guidance for the full year.

This forecast is based on a continuing mid single digit comp store sales increase in North America and a mid single digit sales decline in Europe.

Our earnings per share estimates for the second quarter of $0.27 to $0.30 is based on the following assumptions.

A mid single digit comp store increase in North America and a mid single digit comp store decline in Europe; year-over-year improvement in our gross margin rate of similar magnitude to the first quarter; year-over-year increase in our SG&A rate, also similar to the first quarter, reflecting increased costs of the accounting changes; interest expense of $2 million; and an income tax rate of 37.5% or possibly lower.

Overall, we feel good about our business and confident that we will get our European business back on track.

We will now be happy to address your questions.

Thank you.

(OPERATOR INSTRUCTIONS) Robbie Ohmes, Banc of America Securities.

A couple of quick questions.

First, Matt, you mentioned in your remarks a little more cautious view for the balance of the year, just by keeping your guidance.

Are you more cautious on the U.S. or is it Europe or is it both regions?

That is my first question.

And then the follow-up is on the average unit retails in footwear in the U.S., can you break out men's versus women's AUR trends right now?

Then just finally, the U.S. mid single digit comp momentum, as you look at achieving that hopefully for back-to-school, can you break out on the apparel and footwear side the things that you see driving that comp gain?

Sure.

The concern is Europe.

We feel that we have got the U.S., Canada, our Internet business, and Asia-Pacific, which is not a big business, we feel that we have got that pumping and we will have a good back-to-school.

In terms of what is going to be -- the thing in Europe, by the way, which could really help us dramatically in the second half of the year is Nike has entered the low-profile business very, very aggressively.

They admit, and we all know, that they entered it late, but when Nike makes their mind up to address an issue, they do.

And we have a lot of exciting Nike low-profile shoes hitting stores for back-to-school in Europe -- there's the Rival, the Stun.

I don't know if you're familiar with the Sprint Sister, Sprint Brother; but these are very exciting shoes.

We've got a lot of Puma Big Cats.

And actually, Lacoste over there in the low-profile is a very strong product.

So to answer your question, we feel very good about the U.S. business and most of the other businesses, and Europe is the big question mark.

And that will over time improve.

In looking at the average unit increases, they are basically the same, men's and women's.

Just the for U.S. back-to-school, the sort of incremental drivers that you are seeing to keep the comp momentum in the mid single digits on the apparel and footwear side?

Sure.

There will be continued trust in Jordan.

Trust in Nike Air products.

You have the 360, which we have done nicely with at $160.

Got the introduction of the 180 from Nike at $110.

Air Max 90s at $90, a very important shoe.

A major continued intensification in the U.S. business in Shox.

And obviously, we still think there's a lot of opportunity in the low-profile fusion category.

In terms of apparel, we think private-label for us will continue to be a tremendous growth vehicle.

I think branded will be flat or slightly up and the licensed category will probably be down somewhat.

Terrific.

Thank you very much.

Virginia Genereux, Merrill Lynch.

Bob, I think your detail on the margin drivers in your commentary is really helpful.

It's new sort of this quarter and last.

But Matt, I wanted to ask you a little bit about the U.S. business if I could.

Let me ask you about ASPs first.

I think you said they were up mid single digits in the first quarter.

But I'd say on balance, the comps were little less than that.

So one question is --

We said the comps were up --.

You're talking the overall, Virginia?

Yes.

I'm talking for the whole U.S. business.

Did comps exceed the ASP (multiple speakers)?

In (technical difficulty) business, the comps and the ASPs were both up mid single digits.

So equal.

So one, you were not seeing any -- you mentioned -- you're not seeing any consumer slowdown?

I know your business is a lot less impacted by this, but are you seeing any consumer dynamic?

At this point, we haven't.

Obviously the fuel prices are up.

Interest rates are going up, which obviously is going to have a tremendous effect on mortgage rates and such.

But we have not seen a slowdown in the molds.

When we have our big launches, they have all been successful.

So to answer your question, we have not seen a slowdown yet.

And if you look at some of the other teen retailers, they reported very buoyant sales increases.

I haven't listened to their calls and I don't know what their thoughts were, but clearly Abercrombie and American Eagle, they had very strong quarters.

Thank you.

And then secondly, Matt, can you tell us where are your ASPs maybe relative to prior peaks?

What year was that and how much more do you think you have to go there?

Yes, we are making tremendous progress getting back to the percentage of marquee product that we really were tremendously successful with.

When we were doing well, we were selling approximately 33% of our product in dollars in marquee footwear.

This last quarter in the U.S. was around 30, I think 30.2%.

And for fall, we've got it planned 32, 33%.

We have defined marquee differently than we used to.

It used to be $100 to $150.

We have now lowered it to $90.

But there is not that many shoes in that bucket.

But we are getting back to, in the U.S., to selling a lot of marquee product, which is really driving the business in concert with the low-profile product.

So if I -- my recollection is that your ASPs probably peaked end '01 kind of thing, maybe.

Yes. 2000 and '01.

We were really selling a lot of the high-end footwear.

And then there was a problem for awhile.

They were not accepting the $150 price points.

Cell phones were coming out like crazy and kids were spending a lot of money on that product.

But now I think a lot of them have their cell phones and they are buying (technical difficulty).

Great.

And your trough then probably was kind of first half of '04, ASP-wise, maybe?

Second half of '03 and beginning of '04, yes.

Then we started rebuilding.

Okay, that is helpful.

Then, Bob, I think you said that your European business, you suggested that your easiest compare there was in the fourth quarter, I think.

But as I was looking at your numbers, it looks like you saw the greatest margin pressure in the third quarter.

But maybe I'm -- I'm just looking at your margin disclosure.

Is that right?

You said that fourth quarter is your biggest opportunity in Europe, I think.

Yes, the comps started being less challenging in the third and fourth quarter last year.

Okay.

Just lastly, if I may, the extra week in the January quarter, can you tell us how much that is going to benefit EPS, cents-wise, maybe?

I can follow up with you on that, Peter.

Finish Line quantified that at $0.06 or so.

I think we are a little higher.

Thank you all.

John Shanley, Susquehanna.

Matt, are you likely to obtain greater quantities or a greater number of launch products in the back half of '06 versus what you had attained in the back half of '05, since the productline seems to doing so well for you?

Yes, the launch products are up significantly -- and I would use the word materially.

Can you give us a little further clarification percentagewise or something else that we can get an appreciation of just what the magnitude is?

Materially?

Is that good enough?

Materially.

Okay, we can work with that.

Also, in terms of the Company's European business, can you maybe help us understand a little bit more?

You mentioned that you're still going to attain double-digit operating profit margins.

Are you getting similar margins on some of the low silhouette and some of the lower price point product that you're bringing into your European merchandise mix as you had attained before with some of the higher priced point merchandise?

Yes.

And actually, our margins, our retail margins and our product margins have been good in the first quarter.

The issue over there is obviously the volume.

And we are not going to win in Europe by promoting.

There are certain markets where we can promote and make a little bit of an impact on the sales.

But we have always been a fashion destination store, and that is why I cut 10 new stores out of the 30 store initial program.

Not that -- we look very good.

In fact, I think we look probably the best over there.

But I think we have really got to be cutting-edge, exciting, and really a real fun place, a hip place for the kids to shop.

So we believe that our retail margins, both in the low-profile merchandise and in the technical products, will be higher than last year.

The other thing is technical is not exactly dead over there.

And in the third and fourth quarter, as you know, Nike is launching the 180, which is a very big -- I think is going to be a very, very big shoe.

And we have a very strong quantity of that product in Europe.

The 360s over here, they are $160.

In Europe, they are EUR180, but we have done fairly well with that.

But getting our -- we have reset our stores over there in Europe.

I don't know if you -- have you been lately, John?

I was there last month (multiple speakers) to your stores, yes.

And I think you see a little bit of a difference in presentation, right?

Yes, definitely.

No question about it.

And we have really made a very powerful fusion wall, and the technical products will continue to do well.

We did have a very big program in Tuned Air.

That has slowed up.

But there's other Air products that are coming into the system that Nike is working on very aggressively with us.

But we are looking to this 180 shoe at -- I think over there it is -- it is 110 here; it is EUR140 over there.

But we think that is going to be a very, very big shoe in the third and particularly the fourth quarter.

That sounds super.

Matt, can you give us a little bit of insight in terms of where the main focus of the difficulty that you're encountering in Europe is?

Is it primarily the UK?

Are you seeing light at the end of the tunnel in the French market?

Is Italy, Spain and Germany doing well for you now?

Italy is doing about the same.

They're down a little, but it's a very profitable market.

We're doing very well in the Netherlands.

Now, the Netherlands is not one of our larger markets, but it is material.

We operate about 36 stores there.

The interesting thing, and the trend for the last 10, 15 days in France has been better, which is a very good sign.

Now whether that is going to continue is hard to say.

Needless to say, John, you know we really got hit over there.

The UK is -- and you were there, I know, with I think some of our people took you around -- you know that that is a free-for-all over there.

And we're just going to do what we know how to do and wait it out and continue to spruce up the stores and be a very exciting fashion destination.

And I think that market is going to be troubled for at least one year to 1.5 years, and then I think there is going to be a shakeup.

You've seen the public releases, right, for JD and JJB?

Yes, I have.

So people are not making too much money over there.

So we're going to stay the course there.

Germany has also toughened up the last several months, last three to four months.

It was doing a lot better and seems to be getting a little more promotional.

Then the last question, do you think the World Cup is going to help to any extent in terms of either shopper traffic in your stores or in terms of renewed consumer interest in athletic products?

The World Cup is always a big deal in Europe.

For us, it will be a big deal in apparel.

We hardly sell any of the footwear.

It's not even 0.5% of our business, because it is a very promotional business over there.

A lot of the outdoor prices are EUR29, EUR19, what have you.

But the World Cup, all the history is whenever there is a World Cup over there, there is a little jolt in business.

And in certain countries, there is a big jolt.

Super.

Thanks a lot.

I appreciate it.

Margaret Mager, Goldman Sachs.

This is actually is Brad Kragen for Margaret.

Could you just give us a little bit more background on your franchising plan for the Middle East and just talk us through a little bit what your rationale for that was, how that economic model is going to work?

Is that mainly going to be a licensing fee or how that might work in general.

And then why the Middle East?

I know you guys had, of course, talked about expanding in Europe at various points, and possibly even Asia.

And just where else we might see that type of model grow in the future.

Yes, well, we were approached about a year ago by the Alshaya Group, which is a highly-respected, well-run operation.

I believe they operate some -- close to 700 stores there.

They also own malls in the Middle East.

In terms of the economics, that is a private matter in terms of what our royalties will be, but it will be significant.

There is a lot going on in the Middle East.

Places like Dubai are now destination cities, big tourist attractions.

And obviously, the Emirates.

And there's a lot of people over there.

There's a lot of athletes foots in the Middle East.

So it was -- actually, they were the first people that we had discussions with in terms of franchising, where it made sense for both our companies to go into business together.

We have had discussions over the years with other people and we did not find it interesting.

We also will be looking at some franchising in some of the other countries that you mentioned.

But if the metrics do not work, we are certainly not going to enter into them.

As you think about international growth elsewhere, is franchising a more attractive model for you or are you still interested in pursuing owned stores?

I would say a fair response would be a combination.

If we were going to open 500 stores, 250 could be owned and 250 could be franchised.

There's a lot of countries that are quickly developing -- India, Pakistan, obviously China.

It is hard to make money in China right now as an athletic footwear retailer.

What is going to be happening in the next several years, they are building a lot of malls in these tertiary cities, which would be, by our standards, not that many people, but there's 8, 9, 10 million people in these towns.

But when you get into Beijing, Shanghai, Guangzhou, the rents are as high as Fifth Avenue in New York and it is very risky.

And there is a good chance of losing money.

We were over there.

We operated in Japan.

It's no secret.

I think we closed that in early '99.

We had five stores doing $5 million and we lost $5 million.

We operated in Hong Kong in, I guess, the mid '90s, same scenario.

So we don't want to repeat our mistakes.

Great, thank you.

Jeffrey Edelman, UBS.

Matt, I'd like to talk a little bit about the average selling price in Europe.

As I remember, you were very promotional last year in April to clear inventory.

Right.

So I suspect less promotional activity should have helped things out.

Also, are you getting any benefit yet from new product that has been coming into the stores?

I think the Nike low-profile started coming in in January.

Is that starting to move the needle yet on the average selling price there?

It will.

There's not enough of it yet.

It is beginning to hit aggressively as we speak.

But keep in mind, when you are selling a lot of low-profile shoes at EUR90 to EUR110, and there's a couple at EUR120, and then we were clearing a lot of the high-end technical shoes at EUR150, EUR160, we were selling a lot of those to get the stocks back in line at EUR80, EUR90.

So our average unit retail in the quarter was essentially even in Europe.

Okay.

Can we look for that to stabilize going forward, or is there something else there that might distort that?

No, I think is going to stabilize.

Because in the second half, and late July, particularly August and September, we still had a lot of inventory and we were clearing it out, and trying to obviously compete with everybody else that was trying to clear a lot of this high-priced merchandise.

So I think that will probably continue for a couple of more quarters.

Then I think when you get into the fourth quarter, there is a chance for a little increase.

Okay.

And if you could help me out a little bit on the U.S.

If your average selling price is up about mid single digit, your comp store up about mid single digit, were your footwear units flat or was that up and apparel was down?

I guess more importantly, how do you think you are faring within the segment of the market you have been trying to target?

Yes.

Our units were up nicely.

And basically in footwear, in concert, they were high single digit increases in units and high single digit increases in -- I'm sorry -- I'm looking at -- I apologize.

For the 13 weeks, they were up almost high single digits in units and mid single digits in dollars.

So then apparel has still been down quite a bit.

I guess that was licensed?

Apparel has not been performing -- you'll get the old weather story and all of that.

And then you've got to have the right apparel, right?

I don't think Abercrombie has a problem with apparel.

One last thing.

Any response to the private brand apparel in Europe, or is that still a branded business?

It's doing extremely well.

Extremely well.

We are chasing it.

And we sell it for much higher prices.

It is a little higher quality in many cases than we carry here, but we are chasing it.

We think it could be a huge business for us over there.

And, you know, some of the good operations over there have very strong private label programs.

So we think we can roll it out, not just the basic type merchandise, T-shirts, polo shirts, what have you and track suits; we think we can roll it out into other products.

Okay, great.

Thank you.

Omar Saad, Credit Suisse.

Two quick questions.

Matt, in Europe, you talked about your hesitancy to become more promotional and you were more reserved in that in this quarter.

Have you seen any competitive response or implications of -- are competitors taking notice of that change in your stance?

I can't speak to the competitors, but they are slowing down themselves.

I think they realize that they're not going to get the heaven by giving away a lot of merchandise at ridiculous prices.

Now, when you break out the UK, it is a totally different story.

The UK is still very, very, very aggressive.

And there is promoting going on in the other countries, but it is slowing down a little.

We have slowed down dramatically; slowed down dramatically for two reasons.

One, we had a big inventory problem last year.

And B, we wanted to compete with our competitors.

Okay, great.

And then along those lines, and especially given your decision to be less promotional in Europe, can you give us some insights into the inventory position?

I think it was up 6%, 6% plus in the quarter versus last year, which is a little bit higher than where the sales came in.

How do you feel about that?

Is there any particular exposure by region or format?

No, we feel good. 6% inventory in a company this size doesn't alarm me.

We had a problem last year in the first quarter.

I believe we were 25% higher than the previous year.

So I think the inventories are pretty much in line.

One of the key strategies is we always attempt to keep the inventory within a 2 to 3% variance to the sales.

In other words, if we're running 3% up, 5, 6% inventory doesn't alarm us.

When we go into 5% more inventory than sales, it gets us nervous.

I am not nervous about the fourth quarter because a lot of that high-end stuff came in in April.

A lot of it is launch product.

And when you have a big company like ours and you're launching hundreds and hundreds of thousands of pairs of product every month, and in some cases in one launch several hundred thousand pairs of shoes, you bring those shoes in, in some cases, three weeks early before you put them out to sell.

So that creates some of these very high inventory levels, where you just don't put it out and sell it.

Okay, great.

That's helpful.

One quick clarification, on the franchisee arrangements that you're going to be using in the Middle East, it is a royalty fee situation -- you're not taking the stance of a wholesale division?

That is correct.

Donald Trott, Jefferies & Company.

When you went through the litany before of what was happening in the various European markets, I don't believe you commented on France, which a while back had been one of the markets where there was very intense promotional activity.

I was wondering if you could give us an update on that.

Sure, Don.

France in the first quarter was very, very difficult.

As I think you may have heard, I said it is too soon to make any determinations.

The last 10, 15 days, France has come back nicely.

Why?

I think part of it is we have renovated some of these stores.

I think we look a little better in terms of our merchandise mix.

But France was our worst market last year and was the most troubling, so there is a lot riding on France.

It is a very big market.

Okay.

Well, I guess that will end our call for today, and we thank everyone for participating.

Thank you for participating in the first-quarter 2006 earnings release conference call for Foot Locker.

This concludes the conference for today.

You may all disconnect at this time.