Foot Locker Inc (FL) 2007 Q1 法說會逐字稿

Welcome to the first quarter 2007 earnings results 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 and events and financial performance.

These forward-looking statements are based on many assumptions and factors, including the affects of currency fluctuations, customer preferences and economic and market conditions worldwide and other risks and uncertainties described in the Company's press release 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 have not received yesterday's release, it is available on the Internet at www.prnnewswire.com or www.footlockerinc.com.

Please note that this conference is being recorded.

And I would now like to turn this call over the Mr.

Peter Brown.

Mr.

Brown, you may begin.

Our first quarter net income was $0.11 per share.

This result was in line with the updated guidance that we've provided on May 10.

Bob McHugh, our Senior Vice President and Chief Financial Officer, will begin the call with a discussion of our first quarter financial results and update our financial guidance for 2007.

Matt Serra, our Chairman and CEO will follow with an operational review and provide some comments regarding our strategic priorities.

After our prepared remarks, we will answer your questions.

While our first quarter earnings were very disappointing, our cash flow and financial position remain strong.

The following is a recap of our first quarter results.

Total sales decreased 3.6%.

Comparable store sales decreased 5.1%.

Our gross margin rate decreased by 330 basis points.

Our SG&A expenses, stated in constant currency dollars, increased by $1 million.

Interest expense was $0 and our net income was $17 million.

Finally, our cash position, net of debt, increased by $85 million from the same time last year.

I'll now turn the call over to Bob McHugh.

Good morning.

We are clearly disappointed with our first quarter financial performance, as our results fell well short of our expectations at the start of the quarter.

The earnings per share shortfall was primarily precipitated by a weak performance and additional markdowns at our U.S.

stores.

First quarter profit at each of our U.S.

store businesses fell short of our plan and last year's results.

Profits at each of our international businesses as well as at Footlocker.com, however, were pretty much in line with our plan.

We continue to be encouraged with the improvements at Foot Locker Europe, which generated a healthy profit improvement versus the first quarter of last year.

Matt will provide some details regarding the reasons for our underperformance and the steps that we are taking to improve our results for the balance of this year.

As Peter mentioned, we ended the quarter in a strong financial position with $418 million of cash and investments.

Our ending inventory was 6% greater than at the end of the first quarter last year, reflecting our sales miss versus plan and the one week calendar shift versus last year.

Favorable foreign exchange rate contributed about 1.5% to this increase.

Our ending inventory was higher than we had planned.

As a result, we have since taken several steps to get our inventory position in the U.S.

back on plan by the end of the second quarter, so that we are more properly positioned for the fall.

First quarter comparable store sales of our major divisions were as follows.

Our U.S.

Foot Locker business, comprising Foot Locker, Kids Foot Locker and Lady Foot Locker, decreased mid to high single digits.

Footaction also declined mid to high single digits.

Champs declined mid single digits.

Footlocker.com sales were essentially flat.

Last year's results included sales from the NFL Shops business, an arrangement that we subsequently terminated late in the first quarter of last year.

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

Total sales in Europe increased approximately 10%, reflecting a larger store base and favorable foreign exchange rate comparison.

Comp store sales at Foot Locker Canada and Asia Pacific each increased low single digits.

By month, comp store sales decreased mid single digits in February, increased low single digits in March, and decreased slightly over 10% in April.

Due to the Easter and school holiday shift versus the same period of last year, we believe it is more relevant to analyze the combined March and April time period, which declined mid single digits.

Our first quarter gross margin rate decreased by 330 basis points from last year, reflecting a 200 basis point decline on a merchandise margin rate and a 130 basis point increase in our occupancy expense rate.

The decline in our merchandise margin rate included a 370 basis point decrease at our domestic stores, reflecting higher markdowns taken to reduce inventories and clear older goods.

Our merchandise margin rate out our international stores improved by 220 basis points, primarily reflecting lower markdown levels at Foot Locker Europe, as our inventory is on plan and better positioned with current trends.

Our total first tenancy quarter costs were in line with our plan but increased by 130 basis points as a percentage of sales due to our comp store sales decline.

Our tenancy rate increased 150 basis points in the U.S.

and 50 basis points in our international stores.

Our first quarter SG&A expenses increased $7 million or 2.5% versus last year.

On a constant currency basis, our first quarter SG&A expenses increased by just $1 million versus last year.

We continue to be very diligent with expense control, finding new ways to cut costs without negatively impacting sales enhancing strategies or our strong infrastructure.

Our net interest expense during the first quarter was $0, a $1 million improvement from last year.

This improvement primarily reflects a $37 million reduction in our long-term debt.

At the end of the first quarter, our cash position net of debt was $183 million.

Our total cash and short-term investments totaled $418 million, while our long-term debt stood at $235 million.

This cash position, net of debt, was $85 million favorable to this time last year.

As we stated on our fourth quarter conference call, with our pension plan currently fully funded on a GAAP basis, we would opportunistically redeploy our excess cash in other ways for the benefit of our shareholders.

In line with this objective, we repurchased 1.2 million shares of our common stock in the open market during the first quarter for $26 million.

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

Our inventory in the U.S.

was higher than we had planned due to the first quarter sales shortfall, even though we increased our promotional posture during the first quarter.

The additional markdowns included in those targeted towards moving older goods as we strove to end the period with our merchandise inventory in line with our internal aging standard.

We continue to work with our suppliers to get our inventory levels better aligned with our business requirements.

We also expect to take higher than originally planned markdowns in our U.S.

stores during the second quarter to deal with slower moving goods.

While we plan to intensify our focus on inventory management during the second quarter, we do not plan to slow down the receipt of hot-selling marquee goods that we have already purchased from our key suppliers.

Our goal is to end the second quarter with our inventory levels back on plan and be appropriately positioned for the all important back to school period.

Due to the one week calendar shift versus last year, we are planning to receive approximately $40 to $50 million of additional inventory this year towards the end of the second quarter.

These planned receipts will contribute to an expected mid single digit total inventory increase versus what we reported at the end of the second quarter last year.

For the second quarter of 2007, we currently expect our earnings per share to be in a range of $0.15 to $0.20 per share.

Included in this forecast are additional markdowns that we believe will be necessary to position our inventory for the fall season.

This compares with $0.09 per share that we earned in the second quarter of last year.

We also reforecasted our earnings for the full year of 2007.

This forecast assumes that the external environment improves somewhat from what we experienced during the first three months of the year.

We currently expect our earnings per share from continuing operations for the full year to be in the range of $1.15 to $1.25.

Our earnings forecast for the balance of 2007 is based upon the following assumptions.

A flat comp store sales increase in the second quarter, increasing to low single digits for the fall season.

Gross margin and SG&A rates relatively flat to slightly unfavorable with last year for their second quarter and the fall season.

Depreciation expense relatively flat with last year for the balance of the year.

Interest expense of $0 to $1 million per quarter.

And an income tax rate of 37.5%.

In summary, while we are disappointed with our financial results for the first quarter of 2007, we believe our business will be better positioned for the start of this year's fall season.

We are planning our business very conservatively for the balance of this year given the weak retail environment during the first quarter, particularly in the footwear sector.

While planning conservatively, we will be positioned to capitalize when the retail business environment improves.

In the meantime, our financial structure is solid, and we remain very focused on maintaining strong cash flow.

I will now turn the program over to Matt Serra.

Thank you, Bob.

And good morning.

Clearly, the first quarter of 2007 was the most challenging period that we've faced in many years.

Financial results were disappointing, falling far short of our expectations.

While the first quarter also shaped up to be very challenging for many other retailers, our results did not measure up to the standards that we have come to expect from our Company.

There are a number of internal and external factors that contributed to our underperforming results.

In the past, we successfully made the necessary internal adjustments in our business to offset the external challenges.

Clearly, we were not able to make the adjustments in the most recent quarter.

Bob mentioned earlier, the profit performance of each of our international units as well as Footlocker.com was in line with our plan.

The sales and profit challenges that we faced resulted from the underperformance of each of our U.S.

store divisions.

Our domestic footwear sales decreased approximately 4%, while apparel and accessory comps declined approximately 15%.

The decline in our domestic footwear comps was primarily precipitated by a decrease in average selling price due to the higher markdown rate over last year.

The number of footwear pairs that we sold in our U.S.

stores was very similar to the first quarter of last year.

The external factors that we believe negatively contributed to our results were as follows.

A slowdown in overall consumer spending; continuing fashion shift towards brown shoes; a very slow start to a warmer spring season; the Easter and school holiday calendar shift to earlier than last year.

Again, I'm disappointed that we did not do a better job in adjusting our merchandising strategies to react to these sales challenges.

Quite simply, we bought too much of the wrong merchandise during the first quarter, which led to higher than planned markdowns and pressured our gross margin rate.

Merchandising strengths and weaknesses in our U.S.

store business during the quarter were as follows.

Our men's basketball business continued to be our dominant footwear category, led by strong sales in the marquee category.

We generated strong sales from brand Jordan, Jordan Retros, Nike Lebron shoes, and Dwyane Wade shoes from Converse.

Men's running shoes were weak, although we did do well with certain shoes such as Nike Shox, ASICS, certain New Balance styles and Adidas Bounce styles.

The premium classic footwear category was mixed with Air Force 1's, Nike Prestige, Adidas Superstars, and Converse Chuck Taylor's generating strong sell-throughs.

Skate shoes from Heelys, Adidas and Nike were another strength during the quarter.

Apparel and accessory sales, as well as the boot and cross training footwear categories continue to be extremely weak.

The international side of our business, however, was far more encouraging, particularly at Foot Locker Europe where we generated a very healthy profit increase versus the first quarter of last year.

Our comp store sales in Europe declined very low single digits, we experienced a fairly significant trend change versus the fall season of last year.

Sales in the fusion category continue to be strong, with these styles being Nike Shox Rival, Sprint [Brothas and Sistas] as well as Adidas low profile footwear.

The sale of court shoes was another bright spot, led by Nike and [Lacoss].

Sales of certain high priced technical running shoes are beginning to come back.

We are seeing encouraging signs that Nike Tuned Air and Shox running shoes will sell-through on plan for the rest of the year.

Overall, we sold higher quantities of fashionable low profile styles, while benefiting from a rebound in demand for high priced technical footwear that turned out more rapidly and sold through at full price.

Therefore, the solid profit gain at our European business resulted from a stabilization of sales that was coupled with improving gross margin rates.

Our Canadian and Asia Pacific divisions posted very solid financial results for the quarter, generating low single digit comp store sales increases and solid profit gains.

These gains come on top of very solid increases that we generated for the full year in 2006.

Footlocker.com eSpace sales were about flat with last year.

From a profit standpoint, Footlocker.com continues to generate strong double digit profit margins.

In the Middle East, the Alshaya Group, a well-established franchisee, opened three additional Foot Locker franchise stores during the first quarter and currently operates six stores.

The initial results continue to be very encouraging and we expect that an additional four stores will be opened this year.

As I've mentioned before, we have a target of 75 stores to be opened in this market over the next several years.

Given that our first quarter earnings per share fell short of our expectations, reflecting weaker than expected comp store sales and a lower gross margin rate, we have reworked our financial forecast for the balance of 2007.

We're also making some short-term refinements to our strategic priorities.

Since Bob has already discussed our revised financial forecast, I will provide an update on our strategic priorities.

Our key priorities for the balance of 2007 include the following.

Work closely with our suppliers to improve working capital management and inventory turnover in our U.S.

stores.

Increase the receipt of hot selling marquee goods.

For example, during the all important back to school season, we expect to have Nike Shox in approximately 1,000 of our Foot Locker stores, twice as many of the Foot Locker division as we had last year.

Continue to enhance the profits of Foot Locker Europe by being deeper in stock with current right fashion merchandise, having a more appropriate amount of technical footwear and being less promotional in certain markets.

Identify additional expense reduction opportunities without sacrificing initiatives designed to drive our business.

Close additional underperforming stores, primarily as leases expire.

Currently, we expect to close approximately 130 stores this year.

Given the soft retail environment in the U.S.

and uncertainty regarding overall consumer spending in the near term, we are also taking a more conservative approach in regards to capital spending for the balance of the year or until we see a more positive trend in our U.S.

business.

Planned store openings for the year have been reduced by 45 stores from 170 to 125.

The majority of this reduction is the additional 35 Foot Quarters stores that we had anticipated opening in the fall season.

As planned, we launched our new Foot Quarters business during the quarter, opening 31 stores during the month of April.

The initial results are mixed, with some stores performing better than others.

Our sales continue to increase each week, as customers are finding our stores.

The initial 31 store launch was targeted to several markets in different states to enable us to better determine where we would have the most success.

Our future store openings will be targeted to those markets where we have the most success.

By increasing our store concentration in certain markets, our ability to communicate effectively with our target customer will be enhanced.

From a merchandising perspective, we are currently doing better with brown shoes in there than the athletic category.

We've also been extremely surprised with the very strong receptance to the women's business.

It is a very large percentage of the business so far.

Overall, we are learning a lot about what the customer is looking for.

And we will take this opportunity to understand how to build a value-base footwear chain and remain encouraged that this can be a meaningful opportunity over time.

We also are considering plans designed to more rapidly expand our European operation in 2008, given the improved profitability of this business over the past few quarters.

In summary, while we are disappointed with our first quarter performance, we remain confident about our business prospects and our ability to generate meaningful shareholder value over the long-term.

Our Company is in a strong financial position and we remain focused on generating strong cash flow that we can redeploy for the benefit of our shareholders.

Given the softness of the U.S., however, we are taking a cautious approach in managing the business for the balance of 2007.

Our financial forecast for the balance of this year is realistic but we believe provides upside opportunity if the external environment improves.

Included in our second quarter guidance is the assumption of higher markdowns in our U.S.

stores versus last year to sell through some of the slow moving goods and to reduce inventory levels.

While we are conservatively planning 2007, from an earnings standpoint, we expect that our business will generate strong cash flow that we will redeploy to benefit our shareholders.

Before we answer your questions, I will make a few comments regarding our interest in purchasing Genesco.

As you're aware, last month, we issued a press release and attached it to two letters that we sent to Hal Pennington expressing our interest in purchasing all the common stock of Genesco.

We stated in those letters that we believe the price that we indicated is fair and represents significant value for Genesco shareholders.

The proposed purchase price of $46 in cash represented a total consideration of approximately $1.2 billion, which was a 26% premium to the average selling price during the one year period preceding our indication of interest.

It is also important to note that we also indicated in our letter of April 19 that we might be prepared to offer a higher price if increased value could be demonstrated through a due diligence process.

We believe that the purchase of Genesco at the right price will provide an adequate return to our shareholders and be accretive to our earnings in the first full year of operations.

We remain highly interested in this acquisition opportunity.

I appreciate your understanding that we are not in a position to provide any additional details on the subject at this time.

I will now be happy to answer your questions.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Jeffrey Edelman from UBS in online with a question.

Please state your question.

Thank you, good morning.

Matt, you -- talking about the soft athletic environment and strength in brown shoes, I assume you're talking about the casual sector.

Yes.

But, as we look at some of the NPD data year-to-date, it looks as if athletic footwear sales are up about 3% or so and average selling prices are up about 1.5%.

So clearly, you are losing market share.

You've had the wrong products.

Where are you really missing the mark?

Are you changing people?

Are you changing merchants?

Are you changing vendors?

Or are we just hoping things get better against an easy comparison later in the year?

No, we're not -- we haven't changed any executives or key executives.

I think that our customer is looking for more unique marquee merchandise.

And we have addressed that very aggressively beginning in the third quarter, with some emphasis on the back half of the second quarter.

We are doing extremely well in the $100 plus category.

Where we're not doing well is in the classic category in the moderate price range that was once a very large business.

I'm not sure that that customer is really going to the malls with the velocity that they once were.

And our higher-end marquee product, talking about the U.S.

here now, is performing extremely well and at the same time, coming back in Europe.

But that's probably on the domestic side maybe 30% of your business, the high end marquee?

No, it's actually gotten much higher.

It's between 36% to 39%.

Okay.

Then, what do you do with the other 65%, 60%?

How do you create interest there?

Or is it a business you just have to downsize?

I don't quite understand.

I think what we have to do, Jeff, is we have to look at -- they're not coming to a Foot Locker or Champs for the same kind of product that they can find in other stores.

And I think what we have to do is increase our marquee offerings, do more exclusives and be, to your point, probably a little more trend right.

Okay.

Because you were talking about initiatives with Nike in your last call.

And we see so far 50 stores over the next three years that are really in more urban markets than mall stores.

They'll be in malls and street locations.

Okay.

Are these programs going to go any further than this?

You talking about the House of Hoops, specifically?

The House of Hoops or increased product, further initiatives to enhance your differentiation?

Yes.

We're working very, very closely with the Nike organization to continue to develop more unique and special product.

And the House of Hoops, we think is going to be a very, very, very successful operation where some of these stores will do telephone numbers in volume.

But we'll have exclusive products in there.

And we have a $900 million basketball business in the U.S.

out of a $4 billion business.

It's kind of the base of our footwear business.

Our basketball business has not suffered that much as it has in other venues.

And we believe that this initiative is a very important one.

It's possible to take a store that's doing $1.5 million and convert it into a $5 million to $10 million door with the right product.

Okay.

Thank you.

Bobby Ohmes with Bank of America Securities is online with a question.

Please go ahead.

Thanks.

Good morning.

A couple of quick questions.

First, Matt, I was hoping you could just give a little more on Foot Quarters.

Is this a change in sort of your view on a broader opportunity there or is this just fits and starts because you've just rolled out 31 of these?

The second question is follow-up to Jeff's question.

Could you go into more detail on the apparel initiatives going forward to get that business to stop comping so negatively?

And then, the last one would be, on the markdowns you're taking in footwear and your sort of drive to get the inventory levels down, is this -- when we think about the timing of seeing this in your stores, are you setting up to be sort of very promotional at back to school this year?

Thanks.

We opened the 31 stores in April.

As I said, some are doing better than others.

We're learning a lot about the business and, as I said, we're surprised at the amount of women's business we're doing there.

We're not going to open anymore this year.

Not because we don't believe in the concept.

We're obviously conserving the cash in the event of our Genesco acquisition as it gets completed -- if it gets completed.

We will roll it out slower than we initially had planned and study it much closer but we think it is viable.

As you have seen some of the numbers that have been released, that business is doing pretty good out there in the world.

We're neophytes in this business right now and we think we have a lot to learn about it.

And we're going to study it very, very carefully.

In terms of the promotional activity, I think there will be a little more promotional activity in the second quarter, not the third quarter.

I think we'll be more set up in the all important back to school season to really capitalize on a lot of exciting product.

The apparel initiative is essentially down.

That business is essentially down because of branded apparel and it's down in a lot of locations other than the Foot Locker Corporation.

We are working very closely with our supplies to re-energize that.

We have a very heavy penetration in private label, it is extremely profitable.

I'm not going to deprecate it but apparel is not our problem.

It's an important piece of our business.

And I believe with the right brand initiatives, ie.

Nike Pro, which is rolling out to probably 1,200 of our stores by back to school between Foot Locker and Champs, will be a very, very strong initiative.

But we've got to get the footwear thing business going right.

Great.

Thanks a lot, Matt.

Virginia Genereux from Merrill Lynch is online with a question.

Please go ahead.

Thank you.

It's good to talk to you Matt Serra, I miss you.

Well, I always miss you, Virginia.

Let me ask first about Europe, if I could.

Maybe for Bob McHugh, as well.

When did Europe start falling off from a margin perspective?

I want to say it was really the second quarter of '04.

About 2.5 years ago.

Okay.

So that was sort of the second quarter of '05, I I want to say, actually.

Yes, on or about that time.

And when did it bottom for you guys, Matt, from a margin perspective, Europe?

Kind of the middle of '06 and kind of the first quarter.

And now, we're bringing it back strong.

We've made a decision, Virginia, that we're not going to become a promotional Company over there.

We tried to compete with the people who were promoting and we just figured out how to give a lot of great looking shoes away at lower prices.

And we've got a great team over there, a team I have a lot of confidence in.

We slow down the expansion and focused on the comp stores intensely by country, by major markets.

And we think that the way for us to proceed there is fashion first, high end, exclusive product and it's beginning to bear fruit.

This is about the third quarter now where we've had some nice earnings increases.

That's great.

Now, let me just clarify.

We did not have a comp sales increase there.

It was a very low single digits, I believe it was 1.7% decline.

But the point is, we're not going to buy the business over there.

That's not going to get us to heaven.

I would rather have a 1% to 2% comp in Europe where operating margins are double digit.

And then as I said in my prepared remarks in 2008, roll that out, which is a very profitable division and get back to doing between 30 and 60 new stores a year.

Okay.

And Bob, I think you guys said that -- you said internationally merchandise margins were up 220 and that you lost 50 bips of occupancy leverage.

So international margins were up 170 bips, is that right?

Yes.

Okay.

So that's great even on the negative comp in Europe.

And the inventories are very much in line.

Actually, they're below last year.

Okay.

That's great too.

And let me ask on the quarter again and sort of the other side of Jeff Edelman's question.

The margin pressure that you saw in the quarter, Matt in -- and it was more than all in the U.S.

business it sounds.

It wasn't so much about apparel.

I thought maybe if apparel is 60% to 70% private label that you guys were having to eat all the margin pressure on that.

But it was, it sounds like, more located in footwear.

And it wasn't, Matt, about sort of clearing aged inventory that had built up over the last couple of quarters?

No, that's always part of it.

But the major issue is just over buying.

And we missed our U.S.

plan by over $75 million in sales.

And I come from the old school when you get overstocked, you miss the sales, you turn the inventory into cash.

And take your markdowns, take them quickly, take them hard and get back in shape.

We have not done a good job the last few years in managing our inventories in the U.S.

and we are going to get this straightened out.

It is probably going to take another quarter or two but we're going to get it under control.

Okay.

Great.

And so following on Edelman's question about -- you didn't -- did you see disproportionately greater weakness in the more urban stores, Matt?

And do you -- there's been all of this urban weakness out there, as you guys sort of ramp marquee a little bit here, do you worry about that at all, kind of the urban factor?

No, the urban stores are coming back.

We did have difficulty there for a period of time but the urban locations are coming back.

And in the last year, 1.5 year, we have really spent a lot of capital in updating those stores.

And we have a big urban business.

I think over the past four years or so, five years, the landscape has changed in who out in the urban markets had marquee and what kinds of quantities.

I think that it's beginning to get back to the days of the Foot Locker being clearly the most dominant player in the urban locations.

That's great.

Good luck with your Genesco bid.

Thanks for taking the question.

We have John Shanley from Susquehanna Financial online with a question.

Please go ahead.

Thanks, good morning.

Matt, drilling down a little bit more on the European division, what would happen if you did post positive comps in Europe?

What would that do to the bottom line results?

And is that conceivable that you could achieve positive comp in the European market in fiscal '07?

It could add a minimum $0.05 to as much as $0.12 a share.

And is it conceivable that you could hit it this year?

That's the objective.

It's not the plan, John.

It's the objective.

Okay.

We've got it planned, not aggressively, but it's very close to a double digit margin.

It's like 20 basis points off.

And we think we'll achieve a double digit margin.

And if we get the comps moving over there, we think we get back on the growth category again.

Is your current operating profit margins running about where it was in 2004 and early part of 2005?

In Europe?

In Europe, yes.

Yes and it's ratcheting up.

And is it feasible that you're going to open those 30 to 60 stores in Europe this year?

No.

The first order of business is to continue to get the stores correctly merchandised.

And our big success, anywhere but particularly in Europe in such a fashion forward market, is to have exclusive product and to have it in the right markets.

And we got a little off path there for a couple of years.

And what sells in Germany doesn't necessarily sell in Italy or France.

And it's a very complicated business.

We are the only pan-European operator over there.

And as you know back from the glory days when we had the enormous increases in expansion there, we had one shoe Tuned Air, which was exclusive, it was exciting, new.

And it was a very significant piece of the business, which is beginning to come back, by the way.

So, we've got to really drill down.

Ron Halls is over there spending a lot of time with Keith.

Two very strong executives and a very strong team over there drilling down by market and really differentiating what the products are in each of the different markets.

Just turning to another subject.

In the press release, there was a comment that you're seeing signs of improvements in the U.S.

business.

Was that referencing specific components of the U.S.

business or product categories?

I wonder if you could give us an idea of where you are seeing the improvements?

And obviously, you gave us some pretty good insights in terms of where the problems are.

But what's working for you now, other than marquee footwear?

I think it's just the general trend across the board.

And as you know, it's better than most people in the industry.

There's a big shift in the Jordan launch.

This week we've got the Retro 1 against the Retro 4 that we're up against last week.

If that is successful, which we believe it will be, we could find ourselves in a week or so in the low single digit decline area in the U.S.

Okay.

And are you seeing any signs of improvement in the apparel category, as well?

A little, not material.

Okay.

And then the inventory balance that you have, I'm not sure I understand whether most of that is going to be blown out in the second quarter?

And could you also give us an insight in terms of where most of that inventory is situated?

Is it in Champs because of the apparel?

Is it in Foot Locker because of just the fact that it's such a big part of the U.S.

business?

Maybe some elaboration in terms of just where that stuff is sitting.

It's in -- the strategy is to deal with it in the second quarter.

It could be a 10% spillover of it into the third quarter but we've got to deal with it now.

As I said, turn it into cash, get rid of it.

It's really gated in Foot Locker and Footaction.

Champs is in pretty good shape, Lady inventory is in good shape and Kids is in good shape.

Great, that's very helpful.

Thanks a lot, I appreciate it.

Kate Mcshane from Citigroup is online with a question.

Please state your question.

Hi, thank you, most of my questions have been answered.

But just going back to Europe, if you wouldn't mind giving us a quick update on the UK market.

You had last mentioned that, on the last conference call, that the pricing environment was improving.

Have you seen any further improvement?

Yes.

You have?

Yes, and our business is improving.

Is the UK contributing positively to European profitability?

Yes.

Okay.

And then a second unrelated question back to the House of Hoops, is there any concern that there will be some cannibalization in your basketball business at existing Foot Locker stores?

And what else is really being done right now to better differentiate yourselves from the other athletic footwear retailers in the mall?

I don't believe there will be cannibalization issues.

I think that we will pick and choose our locations very, very carefully, very cautiously.

We're looking at new markets.

There's a lot of new shopping streets in important areas going up.

A perfect example is, there's a whole new area in Las Vegas, which we're looking at building a major store there, which we think would be one of our biggest stores in our chain.

So, we're going to pick and choose very carefully.

We have 4,000 stores, 3,200 in the United States.

And I'm not suggesting it's easy to decide where to put them but we're going to try and rifle them in carefully.

And most importantly, put them in the right locations.

Thank you.

John Zolidis from Buckingham Research is online with a question.

Please state your question.

Hi, good morning.

Two questions.

One, could you give us an idea if you expect inventory per square foot to be down at the end of the second quarter?

And then secondly, could you just comment on whether the current struggles you have in the domestic business in any way impact your ability to integrate an acquisition?

Thank you.

No, I don't anticipate the inventory per square foot to be down materially at the end of the second quarter.

I think that's the question.

Yes, John, if you go back to our prepared comments, based upon timing and bringing some additional inventory in at the end of the second quarter, we said that we expected our inventory at that time to be up mid single digits.

Okay.

And then the second question with regard to the current state of the business, do you think that impacts your ability to successfully integrate a large complicated acquisition?

No at all.

We've been in some tough spots before.

I believe that we have the management to work through them.

We've got a lot of cash on hand, very little debt and I don't believe that it will be a major distraction.

It is well run business and we think it will be a good fit.

Thank you.

Donald Trott from Jefferies & Company is online with a question.

Please go ahead.

Hi, good morning.

Assuming that you're unfortunately unsuccessful on your pursuit of GCO, do you have sort of in the back of your mind a shopping list of other opportunities you would look for or is this a unique one shot situation?

In other words, the degree to which you are desirable of making a meaningful acquisition?

There are other opportunities, Donald.

Okay.

All right.

And I'm sure -- hopefully you're successful with Genesco but if not, we'll see how it unfolds.

Okay.

Thank you.

You're welcome.

Is online with a question.

[Brad Cragen] from Goldman Sachs is online with a question.

Please go ahead.

Yes, thank you, again on the inventory.

Can you talk a little bit about the content on that inventory?

Is it safe to say that where you have the excess is in the categories where you've seen the weakness, I'm thinking specifically of classics, or is it more broad based?

I think it's more broad based.

We had planned the U.S.

business up in the first quarter.

We had planned it up a couple of percent and we dropped close to 8%.

That's almost $80 million in sales.

So, it was a big hit.

We were obviously a little surprised and a little shaken by it.

I will tell you, though that April was a major, major hit to us.

Okay.

And then for back to school, you alluded to the marquee product, of course, and some expectations for exciting product for that period.

Can you just expand on that at all, what you expect to see for that period?

We expect to see significantly greater allocation of key products, obviously from Nike.

And I think the Adidas Corporation has a lot of exciting initiatives, we expect to capitalize on those, as well.

We'll work on some exclusive merchandise -- not will work on, we are working on some exclusive merchandise for that period.

Okay.

And then as you think about store expansion in Europe for next year, are you thinking about any markets in particular?

We're revisiting Scandinavia, we have about six stores up there.

The market could probably handle comfortably another eight to 10.

We have two stores in Greece, I wouldn't mislead you, we are having a difficult time finding the right locations.

They don't have that many malls.

There was a lot of talk of a lot of development in the mall area and we'll probably end up with a couple of stores there.

We're entering Turkey this fall with one store.

That could potentially be a very, very large market for us.

And there are lots of holes in our existing markets throughout western Europe.

And we'd also be -- we'd like to figure out how to get into Russia, St.

Petersburg and Moscow.

Okay.

Thank you.

Well, good luck.

(OPERATOR INSTRUCTIONS)

I think we have time for one more question.

We have Omar Saad from Credit Suisse online with a question.

Please go ahead.

Hi, actually this is [Raghav Kievian] on behalf of Omar Saad.

Thanks for taking my call.

I understand you cannot provide details on the status of the acquisition.

But please can you comment on how Genesco's businesses fit into your strategy?

I think it's a well run Company.

It's a different kind of business than ours in the footwear category.

And they have a very exciting headwear operation and we think they'd be very complementary.

Okay.

Thank you.

I want to thank everyone for participating today.

And look forward to our second quarter call.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may all disconnect.