Foot Locker Inc (FL) 2006 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the fourth 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.

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 Inc. most recently Form 10K or Form 10Q for a complete description of these factors.

As any changes in some assumptions or factors could produce significantly different results and actual results may differ materially from those contained in the forward looking statements.

If you have not received yesterday'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 would now like to turn the call over to Mr. Peter Brown, Senior Vice President, Chief Investment Officer and Investor relations.

Mr. Brown, you may begin sir.

Good morning and welcome to our fourth quarter conference call.

As we reported last evening our fourth quarter net income were $0.72 per share.

Our fourth quarter earnings from continuing operations was $0.70 per share exceeding the high end of our expectations going into the quarter.

As Bob will cover, one reason for the stronger than anticipated sales and earnings in the quarter came from the benefit of the 14th week in the fourth quarter this fiscal year.

Bob McHugh, our Senior Vice President and Chief Financial Officer, will begin the call with a discussion of our fourth quarter financial results, and also provide our financial guidance for 2007 and the financial metrics upon which that guidance is based.

Matt Serra, our Chairman and CEO, will follow with an operational review and provide some comments regarding our long term opportunities.

After our prepared remarks we will answer your questions.

In summary, our fourth quarter earnings were very encouraging despite the challenging sales environment.

Our decision to take our foot off the promotional pedal during much of the month of December in the U.S. and for most of the entire fourth quarter in Europe provided a boost to our gross margin and bottom line profit.

The following is a recap of our fourth quarter results based on a 13 week comparison with the fourth quarter of last year.

We included in our earnings release a reconciliation of our 13 week and 14 week fourth quarter periods to assist you in your analysis of our financial results.

As a reminder this press release is posted to our website at www.footlocker-inc.com.

Total sales decreased 0.4%.

Comparable store sales decreased 3.4%.

Our growth margin rate increased by 80 basis points.

Our SG&A expenses stated in constant currency dollars increased less than 2%.

But our income was $7 million, interest expense declined to zero, our income tax rate for the 14 week quarter was 36.8% versus 31.9% last year.

And EPS from continuing operations including the 14th week increased by 15%.

Before I turn the call over to Bob I want to briefly discuss one modification to our standard communication process that we are implementing this year.

In line with trends that we see in the investor relations field we have decided to discontinue the publication of quarterly sales information in a separate press release.

This process is becoming more common among our peers and we believe a better practice.

Thus beginning with the first quarter of 2007 we will issue one press release on May 24th to report both sales and earnings for that period.

I will now turn the call over to Bob McHugh.

Good morning.

As Peter mentioned we are encouraged by the double-digit percentage increase in our fourth quarter earnings per share.

During our third quarter conference call we provided EPS guidance for the full year.

This guidance provided that we expected our fourth quarter earnings from continuing operations to be in a range of $0.62 to $0.69 per share.

Therefore we exceeded the high end of this EPS guidance even though our comp store sales fell below-- short of our expectations.

This was accomplished by identifying and implementing several opportunities that enhanced our bottom line as well as our cash flow.

As happens most quarters capitalizing on new opportunities helps offset challenges that develop in the course of running a large scale global based Company.

My discussion of the P&L components of our fourth quarter results and the comparison with last year will be based on a comparable 13 week basis for each year.

We believe that this is a more meaningful comparison and will assist in understanding the basis for our guidance and for the development of your own 2007 financial models for our Company.

Fourth quarter comparable store sales of our major divisions are as follows.

Our U.S.

Foot Locker business comprising Foot Locker, Kids Foot Locker and Lady Foot Locker decreased low single-digits.

FootAction was essentially flat.

Champs declined low single-digits.

Footlocker.com sales decreased [six] single-digits.

As a reminder last year's results reflect the cancellation of the NFL shops business in early 2006.

Foot Locker Europe's comp store sales declined high single-digits.

Total sales in Europe declined mid-single-digits reflecting a larger store base and a favorable foreign exchange rate comparison.

Comp store sales at Foot Locker Canada and Asia Pacific were the two bright spots, each increasing very solid mid-single-digits.

By month comp store sales decreased low-to-mid single-digits each month of the quarter in line with the quarterly average.

Our fourth quarter gross margin rate increased by 80 basis points from last year reflecting a solid improvement in our merchandise margin rate partially offset by higher occupancy expense rate.

The improvement in our merchandise margin rate reflected a decrease in our mark downs at both our U.S. and international stores.

In Europe we employed a strategy of reducing our promotional levels with the goal of selling additional quantities of full price merchandise.

Our merchandise inventory receipts in Europe were better aligned with the current low profile fashion trend which also reduced our need for clearance mark down activity.

In the U.S. our total mark downs and mark down rate were also lower than the fourth quarter of last year.

After the initial highly promotional Thanksgiving weekend we strategically reduced our promotional posture versus the same period of last year during the first few weeks of December.

We believe this decision contributed to a better bottom line profit.

Our total fourth quarter tendency cost was favorable to our plan, but increased by 50 basis points as a percentage of sales due to our comp store sales decline.

Our tendency rate increased 40 basis points in the U.S. and 90 basis points in our international stores.

Increased utility costs also continued t negatively impact our gross margin rate.

Our fourth quarter SG&A expenses increased $11 million or 3.7% versus last year.

On a constant currency basis our fourth quarter SG&A expenses increased less than 2% versus last year.

Therefore we continue to maintain a firm focus on expense control, identifying new ways to cut costs without negatively impacting sales enhancing strategies.

Our net interest expense during the fourth quarter was zero, which I'm pleased to say is a first for our Company in a long, long time.

For the full year our interest expense declined by $7 million or the equivalent of $0.03 per share to $3 million.

This decrease in interest expense reflects our decision to replay long term debt as well as the benefits of a higher average interest rate on invested cash.

Other income of $7 million for the quarter was $4 million greater than last year.

Collections from our insurance companies related to the 2005 hurricanes were $5 million in 2006 and $3 million in 2005.

This completes our insurance settlements as it relates to these stores.

Our income tax rate for the full quarter was 36.8%, slightly favorable to our guidance, but higher than last year's rate of 31.9%.

As a reminder during the fourth quarter of last year we recorded a reduction in our evaluation allowance against foreign income tax assets that improved our earnings by $0.04 per share.

The 53rd week of 2006 contributed to our financial results as follows. $95 million of sales, $40 million of gross margin, $20 million -- $29 million of pretax profit, and $0.11 of earnings per share.

And finally, our fourth quarter results included an after tax gain related to discontinued operations of $3 million or $0.02 per share.

This gain related to property sales and revaluing our reserves for discontinued operations.

Turning to our balance sheet, our financial position remains strong with cash and short term investments totaling $470 million.

Our cash position net of debt at year end was $236 million, this was $25 million lower than at this time last year, and reflected the payment of approximately $50 million of February lease payments, that were paid before year end because we ended the fourth quarter in the month of February.

Additionally, our accounts payable at year end was $105 million lower than at this time last year.

Our accounts payable to inventory ratio at year end was 20%, significantly lower than last year's more normalized rate of 29%.

The decrease in the accounts payable does not reflect a change in our payment terms of our suppliers which have not changed over the past several years.

This decrease primarily reflects a timing shift as we concentrated our inventory receipts earlier in the quarter as compared with last year.

Our cash flow also reflects the utilization of funds in 2006 that were designed to enhance shareholder value.

These opportunities included $38 million of our 8.5% bonds due in 2022, were purchased at a $2 million discount to face value, $50 million of our bank term loan was repaid, $68 million was contributed to our pension funds, $8 million of common stock was repurchased, and we also increased our shareholder dividend by 39% during the fourth quarter with a total of $61 million paid in 2006.

As we move into 2007, I am pleased to report that on a GAAP basis our qualified pension plans were fully funded at year end.

Therefore going forward we expect to opportunistically redeploy our excess cash in other ways for the benefit of our shareholders.

Our merchandise inventory at the end of the year was 3.9% higher than at this time last year and in line with our internal aging standard.

On a constant currency basis our merchandise inventory was about 3% greater than at the end of last year.

We believe that we have a meaningful opportunity in 2007 to enhance our already strong cash flow through improved working capital management.

As we enter the year our current inventory position is strong, which affords us an opportunity to reduce our receipt of certain nonMarquee launch products during the spring season.

I want to emphasize however that this working capital strategy will not in any way impact the amount of hot selling Marquee goods that we expect to purchase from our key suppliers.

For the full year 2007 we currently expect our earnings per share from continuing operations to be in the range of $1.55 to $1.65 per share.

This forecast is based upon the following assumptions.

Flat-to-mid single-digit comp store sales increases in each of our domestic and international divisions.

Gross margin and SG&A rates relatively flat with last year.

Depreciation expense relatively flat with last year.

Interest expense of $1 to $3 million, income tax rate of 37.5%.

This estimated EPS range compares with income from continuing operations in 2006 of $1.58 per share.

If we back out of last year EPS the impact of the additional week, the noncash impairment charge and other income, the adjusted EPS for 2006 is $1.49 per share.

Therefore our estimated 2007 EPS range of $1.55 to $1.65 equates to a 4% to 11% increase versus the $1.59 per share-- $1.49 per share amount that we earned last year after adjusting for the noncomparable items.

For the first quarter of 2007 we currently expect our EPS to be in a range of $0.34 to $0.37.

Included in this guidance is the negative impact of a one week calendar shift versus last year.

A shift that is in accordance with the interest standard followed by most retailers.

As a result this year's first quarter will include the first week of May and exclude the first week of February.

Historically we generate approximately $20 million more in sales during the first week of February than in the first week of May.

Therefore we expect this calendar shift to negatively impact our first quarter earnings by approximately $0.03 per share.

For the full year however we do not expect the calendar shift to have a material impact on our financial results.

We expect the negative impact of the shift on the first and third quarter sales to be offset by a benefit to sales in the second and fourth quarter.

Given the significance of these shifts on sales, which we have built into our plan, we want to provide the following detail by quarter.

This is the impact on sales.

First quarter negative $20 million.

Second quarter benefit of $40 million.

Third quarter, negative $40 million.

And fourth quarter, benefit of $20 million.

And let me just repeat that for clarity sake since this is very important.

First quarter, negative $20 million.

Second quarter, benefit of $40 million.

Third quarter, negative $40 million.

And fourth quarter, benefit of $20 million.

Our first quarter guidance also considers that sales in the U.S. are off to a slow start in February.

However, we have seen a pickup in our sales trend in Europe with a continuing improvement in our merchandise margin rate at this division.

Our capital expenditures plan calls for spending $170 million in 2007.

Approximately 1/3 of the spending will be spent on new stores. 40% is targeted for remodels and relocations. 12% is allocated to store maintenance.

And the remaining 15% will be spent on corporate infrastructure projects in areas such as logistics and information technology.

In addition to these capital projects we expect to renegotiate and/or extend the terms on several hundred additional stores due to normal lease expirations.

During 2006 we completed approximately 800 real estate projects in total.

We expect to complete a similar number of projects in 2007.

In summary, we are encouraged by our results for the final quarter of 2006 and look forward to our new opportunities over the coming year.

I will now turn the program over to Matt Serra.

Thank you, Bob.

Good morning.

Even though 2006 was a year in which we were faced with several challenges that develop in the highly competitive marketplace in which we operate, we still posted respectable results.

The year was particularly challenging at our European operation, although I believe we have made some meaningful progress during the fall season.

In fact, we were successful in stabilizing the bottom line at this very profitable business in the back half of the year and I'm encouraged that Foot Locker Europe is poised to increase its profits in 2007.

As a reminder, during the second quarter of 2006 we recorded a noncash impairment charge to write down store [inaudible] assets at our European operations pursuant to FAS 144.

Excluding this charge our total Company pretax earnings for the full year would have increased by $4 million compared with last year.

While our earnings per share for the full year fell short of our plan, we did outperform many of our peers in this highly competitive specialty athletic footwear industry.

From a strategic standpoint 2006 was an important year for our Company, we identified new areas for growth.

As for the fourth quarter, which Bob already recapped, sales fell short of our expectations, but we exceeded our profit goal.

Strategically, we elected to take our foot off the promotional pedal for a good part of the fourth quarter in both the U.S. and international markets.

We believe that this strategy worked and resulted in a stronger bottom line profit than we would have produced had we not taken the pedal down on the promotional activity.

As the numbers demonstrate we had a nice pickup in our gross margin rate despite being impacted by some deleveraging of our occupancy.

From a merchandise standpoint, like all quarters, certain parts of our business were better than others.

Starting with our store business in the United States the following were some key strengths during the quarter.

Men's Marquee basketball sneakers, styles that sold included brand Jordan shoes with continuing extraordinary strength in retros.

Men's running shoes were another strength led by Nike Air products, ASICS, certain New Balance and Adidas Bounce styles and Nike Shocks.

Kids footwear was strong in a number of categories, and strength in each of our U.S. divisions.

Classic footwear sales were relatively flat for the quarter, representing an improving trend versus declines in the category over the past couple of years.

Demand for the various styles in this category ebbs and flows over time, however with the exception of Air Force ones which remains a very highly sought after shoe.

Sales of the Superstar shoe also remain an important stable for our business as Adidas continues to do a great job in maintaining momentum by introducing new color waves for this shoe.

Two other strengths in our fourth quarter business were sales of low profile shoes from Puma, Adidas and Nike, and skate shoes from Heelys, Adidas and Nike.

As always some other segments of our U.S. store business did not work very well during the fourth quarter.

We believe that some of this weakness was due to the warmer than normal weather conditions, or other soft spots related to fashion shifts to other categories.

[Power] sales were weak in each of our U.S. divisions, being negatively impacted by the slow start to winter.

Not surprising our boot businesses during the fourth quarter was weak, impacted by the lack of snow in the northeast and lack of cold weather.

Sales of men's cross training shoes also reflect a comp decline.

In total, our U.S. footwear comp store sales were slightly positive while our U.S. apparel sales declined mid-single-digits.

Excluding boots our athletic footwear comp store sales increased very low single-digits.

Our average selling prices in the U.S. were up low single-digits.

Moving on to Foot Locker Europe, the strength of the sales at this business was in the Fusion category where we produced a very strong gain during the fourth quarter.

As we mentioned on our last conference call we've been delivering to our stores significantly higher quantities of footwear in this Fusion category, the strategy was very successful during the fourth quarter.

Puma, Adidas, Nike and ASICS each delivered some key styles in this category such as Puma and Adidas Racing shoes, ASICS's Whizzer, Nike Sprint brothers and sisters, and Nike Shox Rivals.

The sale of court shoes was another bright spot led by Nike, Adidas, K Swiss and Le Coq.

The weakness in Europe was precipitated by the continued decline in sales of high priced technical running shoes, which is beginning to change.

Therefore the consumer in Europe continues to trade down in price from technical footwear to low priced Fusion footwear which as I just mentioned is beginning to change.

This trend continued to depress our average selling price, although we successfully offset most of this decline by selling a lot of our merchandise in a less promotional environment.

For the fourth quarter our average selling price in Europe declined low single-digits caused by the shift to lower profile Fusion categories.

As we look forward to this year we expect that our European business will benefit from a rebound in demand for high priced technical footwear.

We believe that we will have the appropriate quantities in stock with the right styles that we can rapidly turn and sell through at full price.

At the same time, our plan receipt of fashionable low profile styles will be up significantly from last year, which is also a very strong strategy for us.

We began to turn the corner at our European business from a profit standpoint during the fall season of 2006 and believe that we will begin to also improve the top line in 2007.

Our Canadian and Asia Pacific divisions were our strongest producers for the quarter, generating mid-single-digit comp store sales increases and strong profit gains.

Footlocker.com Eastbay generated a mid-single-digit sales decrease, while maintaining it's strong double-digit profit margin during the fourth quarter.

As we mentioned at the onset of the quarter, the Footlocker.com results reflect a reduction in our third party business given the mutually agreed upon termination of a contract earlier this year whereby we formally serviced the NFL shop business.

Footlocker.com fourth quarter sales excluding its third party business increased low double-digits.

From profit standpoint this division continued to generate a double-digit margin rate for both the fourth quarter and full year.

In looking at the Middle East, the Alshaya Group, our well established franchisee opened its third Foot Locker franchise store during the fourth quarter in Dubai.

We continue to be encouraged by the initial results and expect that an additional 10 to 15 stores will be opened in 2007, with the total goal of 75 stores to be opened in this market over the next several years.

Summary our fourth quarter earnings per share exceeded our expectations reflecting weaker than expected comp store sales.

But a strong gross margin rate and very diligent expense management really spear headed by Bob McHugh and his team.

Looking ahead to 2007 and beyond, we believe that we have several significant opportunities to increase our earnings per share and shareholder value.

These opportunities include proving the profitability of our base business, open additional athletic footwear stores both owned and franchised in the global market place, roll out our new specialty store formats in complimentary segments of the footwear industry where we already have extensive expertise, opportunistically seek acquisition opportunities in both the athletic and nonathletic footwear specialty retail industry and utilize our expected strong cash flow and optimize our balance sheet to create additional shareholder value.

Starting with a discussion of our base business our strategy's designed to improve the profitability of our existing store base including the following initiatives.

Annually over the next three years close up to 150 unproductive stores with an additional 250 to 350 stores being remodeled or relocated.

Improve working capital management and inventory turnover.

Continue to identify expense reduction opportunities through the utilization of our online bidding process.

Stabilize and then enhance the profits of Foot Locker Europe by being deeper in stock with current fashion trends.

Having a more appropriate amount of technical footwear and being less promotional in most markets.

And finally, utilize the excess capacity at our Eastbay operation to expand into additional categories or businesses in the direct-to-customer business.

Second opportunity for growth is through opening new athletic footwear stores in existing countries where we operate as well as testing new markets.

In 2007 we expect to open approximately 100 new athletic footwear stores.

This number includes 10 to 15 franchise stores that we expect our franchisee partner to open.

The 70 Footquarter stores that we plan to open are in addition to this total. 75 of these athletic stores are planned for the U.S. with a high concentration in Champs Foot Locker.

While we have temporarily slowed our store growth in Europe to allow local management to concentrate on the base business we do plan to test two new stores in Turkey and are opening approximately seven to eight stores in existing markets.

A new opportunity for growth and one that we're very excited about is Footquarters.

A new concept that we introduced to you in our November conference call.

Since that time we made great progress in transitioning from the development of Footquarters to the rollout of our first stores to be opened.

We are positioning Footquarters as a specialty family footwear chain that appeals to the value consumer.

A somewhat different customer base than the one that we target at our existing formats.

The stores will be located in strip centers, open large style malls and other value locations where landlords are currently concentrating their growth.

50% to 60% of the merchandise mix will be Brown shoes with 40% to 50% being athletic.

The products will be bought specifically for Footquarters and will include both special buys and closeouts from our suppliers.

Much of the product will be in the $34.99 to $49.99 price range.

Much more moderately priced than our other formats.

Majority of the athletic footwear will be sourced from our existing suppliers.

The Brown shoe mix will be a combination of well known brands and private label.

We held our initial vendor summit at our New York headquarters in late January and had many follow up meetings at the shoe show in Las Vegas in early February.

I must say the reception from the supply community including our existing as well as our new vendors has been overwhelming.

Orders for new products have been placed and our distribution center has already begun to receive and process much of the merchandise.

The Footquarters organization is comprised of a general manager, Graig Gilbert, a long term company associate, and a four person merchandising team and a small field operation.

The average tenure of these associates is over 20 years each.

They have extensive experience in both the athletic and Brown shoe business at Foot Locker and at on other specialty retail companies.

This business reports to Rick Mina who also has extensive experience in the Brown shoe business through our former Kinney shoe company and from his many years living in the Far East heading up our sourcing business for over six years.

Assisting Footquarters will be various corporate and division Management teams including logistics, IT, finance, human resources and real estate.

Therefore the incremental overhead for this division will be minimal and allow for strong flow through of sales to the bottom line.

Over time we expect that this business will be able to deliver a divisional margin rate in line with our corporate average.

Just to be clear, Footquarters is not an outlet or clearance strategy for Foot Locker.

A fourth quarter opportunity for growth is through pursuing the acquisition of compatible specialty retail companies.

As you know our last significant acquisition was in 2004 when we purchased the FootAction stores.

During the past 12 months we were very active in evaluating several important opportunities.

While we can not get into any specific details I will say that the opportunities that we have looked at were aimed at acquiring businesses that will be complimentary to our existing business and where we believe we could add significant value.

And finally we plan to continue to utilize our strong cash flow and balance sheet to enhance shareholder value.

We recognize that our current capital structure is somewhat conservative.

But this is by design, protecting our Company for the long term, positioning our Company to more quickly respond to acquisition opportunities.

At the same time we have been redeploying a significant amount of our cash each year, making contributions to our pension plans, repaying long term debt, increasing our common stock dividend, and in a small amount to date repurchasing stock.

With our pension fund currently in a fully funded position we expect that we will have additional cash available in the next few years to redeploy to either more rapidly grow our business or return money to our shareholders.

As a result our Board of Directors just approved a $300 million repurchase program effectively doubling the size of the former program.

In summary, we believe that we have made meaningful progress in implementing our strategic plan in 2006, but also successfully identifying some new and exciting areas for growth.

We're very excited about our new Footquarter's opportunity which we plan to aggressively pursue over the next few years.

We are optimistic, but at the same time remain cautious about 2007.

We believe that we are better positioned in the marketplace with trend right products than we were at this time last year.

Like every year however we will need to be on top of our game to deliver a winning year.

I believe our organization is well up to the challenge.

Overall, we will continue to be confident about our business and our ability to generate meaningful shareholder value over the longer term.

I will now be happy it to answer your questions.

Thank you very much.

Thank you.

We will now conduct-- we will now begin the question and answer session.[OPERATOR INSTRUCTIONS] The first question is from John Shanley from Susquehanna Financial, please go ahead.

Thank you, good morning guys.

Good morning.

Matt, the moving back to technical products in Europe that you indicated may be a possibility in fiscal '07, is that being precipitated by the brands tightening up the distribution of their product in certain key markets or is there something else that's going on, is it a fashion movement that's making you more optimistic about the likelihood of technical footwear being a --?

I think it's more of a fashion movement, John.

Most recently in the last 30 days or so we've had some very exciting sell throughs on high end footwear in the key markets, Italy and France, which for the last two to three years have been very, very difficulty-- we've had a lot of difficulty with them.

I also believe that to a certain degree I think some of the key suppliers have made strategic decisions on where they're going to be placing their product.

Are the product margins on these new technical products, Matt, comparable to or greater than the Fusion product they may replace?

About the same.

Okay and no real change there?

Yes.

And Bob mentioned that the Company is not likely to reduce Marquee footwear products in a domestic stores, but clearly other components of the mall based athletic specialty environment have-- we're going into the third year weakness in areas like mid-priced basketball, men's boots, women's athletic footwear, could we see a marked change in terms of your vendor commitments overall in fiscal '07?

Is that part of this readjustment that Bob outlined to us that may take place in the various quarters?

Yes, I would respond to that this way, that the high end key Marquee product is continuing to do well, particularly in our U.S. business.

It's high end basketball, brand Jordan, retros, and the Air products.

And as you know Shoxs is obviously, if it's not the best running shoe in the world, I don't know which one is.

So that product is doing extremely well.

When you get into, as you described the basically the $70 to $80 range, there is difficulty.

The major dynamic that's beginning to occur in the U.S. is there seems to be renewed interest in the classic footwear category.

And we had done a lot of business in that category over the last four or five years.

The technical product in the mid-priced range was always, and has always been a challenging business for us.

For the young kid really wants that new exciting highly marketed product by the key suppliers.

And you also have obviously the phenomena of Skate, I don't know how big it's going to be, so far its doing extremely well.

So I think you're going to continue to have a little wrestling with that, that mid-priced technical product.

But if classics come back with great velocity, I think they're going to make up a lot of that volume in there.

This would be all second half Matt?

First half --

First half '07.

Yes, we're positioned now to go after the, to go after the classics very, very aggressively.

That sounds great.

Last question I have is your announcement yesterday about the $300 million share repurchase initiative

Yes.

Over the next three years, that's a pretty aggressive program to say the least, it's about 10% of the current market cap.

Do you see the possibility of the Board may do this more aggressively, in other words do it at the front end of that three year time span rather than the back end to enhance shareholder value.

And is there also a possibility that the Board may consider even more aggressive using your strong cash position to buy back even additional quantities above that $300 million range?

At this point I don't see us increasing it, that doesn't mean that won't happen.

In looking at how we're going to buy it back and when we're going to buy it back,I think that's very dependent on acquisitions, which we are definitely in the throws of looking at some key acquisitions.

Obviously our use of cash will be dependent on what and when we acquire when.

But the current plan calls for a kind of achieving that $300 million buyback over a three year period.

Could you be looking at an acquisition in the range of something $300 million or north of $300 million?

We-- we'll-- we're-- we could be looking at acquisitions of slightly under $300 million and much much greater that $300 million.

Okay sounds great.

Thank you very much, appreciate it.

Thank you, John.

The next question is from Robert Ohmes from Banc of America, please go ahead.

Thank you very much.

Two quick follow ups on John's questions.

The first, Matt, can you give a little more detail on the confidence level you have in the U.S. in being-- continuing this sort of less promotional stance you talked about given how tough it is out there?

And then also related to some of your plans for '07, could we see inventory per square foot start to go down as we move through 2007 as you work harder on working capital, thanks?

Yes, I think, Rick, Rick Mina, head of our U.S. business is committed to driving down the inventory levels.

As I'm sure you all know Rick is a very strong operator, even last year with the tough market here we picked up 1% comp, we increased our earnings.

The year before we picked up 5% comp and the year before that it was I believe 2.5%.

So we're going to be aggressive, but we don't believe that we need to promote as aggressively as we've had to in the past.

Especially since we're gaining market share in the U.S. mall-based business.

So-- and we also have the great strength of the Champs division, which sells basically based in the suburban markets and sells a lot of regular price, high priced footwear.

And FootAction too, FootAction is not one of our biggest divisions, but it's over $500 million and very heavily gated in the urban markets and we do sell a lot of Marquee product in there.

It's a huge percentage of the business.

Did I answer your question?

Yes and just the-- just a little more detail, the-- but would the inventory per square foot be expected to come down in '07 versus this year?

I would say that, yes, that's our intent.

Okay, terrific, thanks a lot Matt.

Thank you.

The next question is from Jeffrey Edelman from U BS, please go ahead.

Thank you, good morning.

Matt, just a couple questions.

You talk about your competition in the mall-based arena, but if we look at some of the industry statistics it would appear as if you're losing market share to other sellers of athletic footwear.

I guess, one do you think that is true, secondly how much longer can you go with cutting back on promotional activity to drive the margin, because ultimately you will need to get sales increases to drive profits?

Yes, that's a very good question.

I think that's the purpose of us opening the Footquarters division.

We're very confident that we're going to be successful in there.

It's quite possible that we make an acquisition in the family footwear sector and fold Footquarters into that.

That's not, that's not a farfetched scenario.

The mall business has been down for two years in a row, mall traffic business is down and mall volume business is down, and particularly in athletic sector.

I don't believe that in the U.S. that we can have too many more stores in the malls.

So the focus in the malls will be continuing to gain market share in the malls and profitability and then getting into the family footwear business and then very importantly the $25 billion Brown shoe business that's in the malls and outside the malls.

I see, okay, then just as a follow up, Nike recently talked about some of their initiatives to help drive excitement in the mall-based retailers, which obviously you come to mind.

Could you share with us any programs you see developing or how far away we are from seeing some of these initiatives begin to take hold?

Talking about our initiatives?

Well, your initiatives with Nike.

I mean, they made a very big commentary about looking to find ways to generate more excitement for the mall-based athletic retailers.

Yes, we're working very closely with them on initiative, which we're going to make a joint announcement hopefully in the very near future.

Where we think that we would have a very special looking kind of a format in the malls that would differentiate us from our competitors.

But I don't think we'll be making that announcement for a couple months.

Okay.

And then I guess just final question, apparel has been doing very badly in Europe, not your best [inaudible] in the U.S., is this really a business that belongs in Foot Locker today, would you need other vendors to drive that business?

It's down, but it's not down like in a disastrous mode, like not down double-digit.

Europe we-- Europe, it was our fault, we didn't buy the right merchandise, we cut back too many receipts.

We have in the last several months corrected that, our apparel business is beginning to move very nicely in Europe.

We've also put in Europe a very strong private label program and it's doing very, very well.

In the U.S., the apparel business is very profitable for us, it's a piece of the business and in my almost nine years here now I've seen a couple of cycles where it just shifts out of athletic and then comes back.

But we're going to be in the apparel business, we're doing 60% to 70% of our apparel business in private label and it's extremely profitable.

Okay, thank you.

Thank you.

Your next question is from Bob Drbul from Lehman Brothers, please go ahead.

Hi, good morning.

Morning.

A couple questions, first on the -- can you give us an idea on the private label penetration, the percentages in the U.S. business and where it is in Europe?

And I guess another question is just the footwear apparel mix, can you just put some numbers around that in U.S. versus Europe just to elaborate a little bit?

Are you talking about private label apparel to --

Yes.

It's 60% to 70%.

Okay.

Of the apparel business.

Got it.

And can you talk a little bit about the basketball category, and any of the trends that you're seeing currently here in the U.S.?

Our basketball business is flat to up, low single-digits.

So we are not experiencing the same declines that a lot of our competition is talking about in basketball.

We're very heavily gated in the urban markets, basketball is a big business, and we have a huge business in basketball.

And I think spring season will be-- continue to be challenging.

It's a fashion trend too, by the way, it's not just performance related.

So we think it's very strong business and it's a very big piece of our business.

It's not big in Europe at all, I don't know if you know that, but it's less than 2%, 3% of the business.

It never has been a big business over there.

But in the U.S. its a very meaningful business and we're focusing on it.

So, and it's very profitable business for us.

Okay, thank you very much.

Thank you.

The next question is from Omar Saad from Credit Suisse, please go ahead.

Thank you.

A couple questions.

One I wanted to get a better understanding of the CapEx shift in the CapEx allocation.

I think Bob kind of laid it out, what's going to the Brown quarters concept and new store remodels, and how that's changed with the addition of, with the addition of the Footquarters rollout, where that-- from a CapEx allocation perspective, where those dollars are coming from?

And --

Well basically as I said I feel we're pretty well fully saturated in the U.S. in athletics.

So the CapEx numbers this year versus last year and basically the year before, basically the same for our corporation and in the U.S. as well.

So we'll be funding the 70 new Footquarter stores from our own original plan, just opening or remodeling, relocating 70 less Foot Locker, Kids Foot Locker, Lady Foot Locker, or Champs stores.

So there's no addition into the capital budget.

Okay.

So it's coming out of any, kind of-- it's coming out of kind of remodel/new store opening.

Well we've got 86% of our fleet remodeled, so that's a very good percentage.

And our goal is to get to about 90%, 92% this year.

And so we just, we're taking the funds out of the original capital plans.

So there's no incremental capital being applied to that operation.

Got it it, got it.

And then, Matt, could you also-- could you talk about the Super Bowl ad and the activities you did around that?

It was a little bit of a surprise for me, and just kind of want to hear what your thoughts are and take aways from that process?

That's something Rick has been pushing for a long time.

I think that gives us national presence and you don't get measurable return on it right away, but I think over the longer run it really gets your name out there front and forward, and it helps the entire branding concept.

And we thought it was a great ad, we got a lot of press buzz from it it, so the world obviously noticed it.

Is it true there was a hidden message in there?

Yes.

One last question for Bob, the extra week impact, the $0.11, you kind of laid out the 29-- looks, sounds like there was 29 positive impact on pretax.

It seems like such a high margin, $29 million on $95 million of sales, is there something I'm missing there, why that extra week was so profitable?

Well it's essentially just variable cost during that extra week so that's what drive the [profitability].

Okay so the fixed costs are over the 13 week period as opposed to a 14 week?

Correct.

Got it, thank you.

Thank you.

[OPERATOR INSTRUCTIONS]

Think we have, operator, I think we have time for one more question.

Okay, thank you.

The last question is from Kate Mcshane from Citigroup, please go ahead.

Hi, good morning.

There's been some discussion that the price war in the U.K. is waning, have you seen any evidence of this and have you seen any improvement in the U.K. market?

And are there any different-- anything different in terms of your expectation of this market going forward?

And then my second question, which is unrelated, you had mentioned that you're going to be opening more Champ stores in the U.S. during 2007.

Are these regular Champ stores or are these the new concept Champ stores the Just Hats?

Well, first with the U,K., I think the promotions have subsided somewhat.

It's still pretty aggressive, but there's no question on a scale of one to 10, if they were 10 they're probably down to seven or eight.

So they have come down on the promoting.

And it's actually helped us a little over there.

In terms of the Champs Hat concept, I believe we have six or seven new locations that will be opening in the spring.

I would be misleading you if I told you that we, we're having difficulty finding the right locations.

There's plenty of locations, but must have highly traffic locations.

And we're going to pursue it.

But it'll probably be a longer rollout than we initially thought was feasible.

Thank you.

Thank you.

Okay, with that I thank everyone for participating and just as a reminder our next scheduled release will be on May 24th, when we'll be reporting both sales and earnings for the first quarter.

Thank you.

Thank you ladies and gentlemen this concludes today's conference.

Thank you for participating, you may all disconnect.