Foot Locker Inc (FL) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the third quarter 2007 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.'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.prnewswire.com or www.footlocker-inc.com.

Please note that this conference is being recorded.

I will now turn the call over to Mr.

Peter Brown, Senior Vice President, Chief Information Officer, and Investor Relations.

Mr.

Brown, you may begin.

Good morning and welcome to our third quarter conference call.

After the market closed yesterday, we reported a net loss of $33 million, or $0.22 per share for the third quarter.

This net loss included a non-cash impairment charge and expenses associated with closing unproductive stores totaling $66 million after-tax, or $0.43 per share.

Our third quarter net income before these two charges was $33 million, or $0.41 per share.

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

Matt Serra, our Chairman and CEO, will follow with an operational review and provide an update on our strategic priorities.

We will leave the remainder of the call to answer your questions.

Our third quarter results reflected a challenging retail footwear environment in addition to the significant impairment charge and store closing expenses.

As we go through our presentation, we will refer to our financial results as amounts from continuing operations before the 144 charge and store closing expenses.

We believe this will assist you in better understanding our operating results and help in any forecasting exercises.

Our third quarter results reflected the following: comparable store sales decreased 5%, our gross margin rate decreased by 140 basis points due to deleveraging of occupancy costs.

Our retail margins were 10 basis points favorable to last year.

Our SG&A expenses excluding the impact of favorable foreign exchange rates were $4 million below last year.

Interest expense was zero, and our cash position net of debt increased by $70 million from the same time last year.

I will now turn the call over to Bob McHugh.

Good morning.

From a high level analysis, our third quarter results reflected a shortfall in expected sales, a non-cash impairment charge, and costs associated with closing unproductive stores.

Our 5% comp store sales decline fell short of our initial expectation which was to be flat with last year.

As Peter mentioned, my prepared remarks will review our earnings from continuing operations before the impairment and store closing charges.

Afterwards, I will provide some details on the impairment charge and store closing costs as well as the expected financial impact of each on our future results.

As already mentioned, our financial results fell short of expectations at the start of the quarter primarily due to a weak sales performance.

We believe our third quarter sales were impacted by three key factors.

First, a challenging external environment including weakening consumer confidence, second, the warmer weather that continued through the fall season appears to be impacting the timing of consumer shopping habits, and, third, a lack of clear fashion trend in athletic footwear and apparel or excitement created by new must-have assortments.

During our second quarter conference call we highlighted that we would be more cautious in managing our business for the balance of 2007.

We stated that we expected our comp store sales for the fall season to be flat with last year.

We also commented that we expected our gross margin and SG&A rates to be slightly unfavorable with last year reflecting the conservative sales assumptions.

As it turned out, our third quarter sales fell short of this assumption which also put pressure on our gross margin and SG&A rates.

Third quarter comparable store sales of our major divisions were as follows: each of our U.S.

store businesses decreased mid single digits.

Footlocker.com sales increased low single digits.

Our international comp store sales declined mid single digits with the weakest results being in Europe.

Our Canadian sales were flat while Foot Locker Australia increased low double-digits.

By month comp store sales decreased low to mid single digits in August and decreased mid single digits in September and October.

Our third quarter gross margin rate decreased by 140 basis points from last year reflecting a 10 basis point improvement in our merchandise margin rate and a 150 basis point deleveraging of our buying and occupancy rate caused by lower sales.

Our merchandise margin rate included a 30 point basis point decrease at our domestic stores and a 40 basis point improvement at our international operations.

The merchandise margin decline at our U.S.

stores reflected selling a lower percentage of higher margin apparel versus the same time last year.

This was partially offset by a lower overall markdown rate.

In total, our markdown rate markdowns were 12% lower than last year and as a percentage of sales 90 basis points favorable.

While our third quarter buying and occupancy costs increased 140 basis points, the tenancy component on a constant currency basis increased approximately 1% versus the third quarter of last year.

Third quarter SG&A expenses increased $5 million versus last year.

On a constant currency basis our third quarter SG&A expenses decreased by $4 million, or 1.4% versus last year.

Our net interest expense during the third quarter was zero which was $1 million favorable to last year.

Before I turn to our balance sheet, I will provide additional insights in regard to the impairment charge and store closing costs.

Both the potential for an impairment charge and expected store closing costs were discussed during our last conference call in August and were highlighted in our first and second quarter 10-Qs.

The non-cash impairment charge in store closing costs recorded during the third quarter totaled $66 million after-tax, or $0.43 per share.

This impairment charge was recorded to write down the value of certain underperforming assets at our U.S.

stores operations in accordance with FAS 144 which defines the accounting for the impairment of long-term assets.

Our accounting policy as it relates to FAS 144 is outlined in our annual report Form 10-K.

As a result of our lower than expected earnings this year at our 3100-store U.S.

operation, we concluded the need to conduct an impairment review during the third quarter.

Last year during our second fiscal quarter we performed a similar review of our 500-store European operation and recorded a charge equivalent to $0.08 per share.

Included in the impairment and store closing charges this year were costs of $6 million after-tax, or $0.04 per share related to 66 underperforming stores, 13 of which were closed during the third quarter and 53 that we are working with our landlords to close during the fourth quarter.

We currently expect to incur an additional 10 to $15 million in costs during the fourth quarter as these remaining negotiations are completed.

Matt will provide an update on the status of this program during his prepared remarks.

At the end of the third quarter our cash position net of debt was $98 million.

Our total cash and short-term investments totaled $332 million while our long-term debt stood at $234 million.

This cash position net of debt was $70 million favorable to this time last year.

We did not purchase any of our common stock during the third quarter, therefore, year-to-date our share repurchases remain at 2.3 million shares for $50 million.

In total, our ending inventory was $4 million greater than at the end of the third quarter last year.

On a constant currency basis our inventory was approximately 3% lower than last year.

Before I move from our balance sheet, I would like to point out that our shareholders equity currently stands at about $2.2 billion and $91 million greater than at this time last year.

This represents a book value of $14.40 per share, an amount above our current share price.

I would also like to point out that our cash position is currently the equivalent of $2 per share and expect it to be approximately $3 per share at year-end.

Given the current tone of the retail environment, we remain very cautious in planning for the fourth quarter.

As a reminder, last year's fourth quarter included an extra week that added $0.11 per share to our 2006 results.

The details of that extra week were included in last year's fourth quarter press release.

Our fourth quarter forecast versus the 13-week period last year includes the following assumptions: comp store sales down mid single digits, gross margin rate unfavorable with last year reflecting the deleveraging of occupancy costs associated with the conservative sales assumption, the embedded retail margin rate is expected to be relatively flat with last year, SG&A expenses on a constant currency basis relatively flat with last year.

Pretax store closing costs of 10 to $15 million, depreciation expense $8 million below last year, interest expense of approximately $1 million, an income tax rate of approximately 33%, which is lower than last year reflecting expected higher percentage of our income being earned in international countries where we benefit from lower tax rates.

These forecasting assumptions for the fourth quarter reflect a conservative outlook we are taking given the current external environment.

We are more optimistic for year-over-year profit gains in 2008 for the following reasons: the costs associated with the FAS 144 charge and store closing expenses are expected to total $0.48 per share this year.

The operating losses related to the 300 stores we are closing this year totaled approximately $0.10 per share.

We expect to realize approximately $0.03 per share of that benefit in 2007 and an incremental benefit of $0.07 per share next year.

The FAS 144 write-down will reduce next year's depreciation expense by approximately $0.07 per share.

We recorded $0.31 per share of higher than normal markdowns during the spring season to clear slow-selling goods.

Therefore, there is an opportunity for our 2008 EPS to compare favorably to 2007 by $0.93 per share for these items.

In closing, I would like to emphasize that our financial position remains strong and we'll remain very focused on controlling tightly our capital spending, working capital, and operating expenses for the balance of 2007 and throughout next year.

I will now turn the program over to Matt Serra.

Good morning.

Thank you, Bob.

The third quarter of 2007 was more challenging than we expected going into the quarter.

As Bob already covered, the shortfall from our expectations primarily reflected a 5% shortfall from our sales forecast.

Our third quarter results also reflected the FAS 144 charge and the costs associated with the strategic decision to accelerate the closing of unproductive stores.

The other financial factors impacting our third quarter results are merchandise margin rate, markdowns, operating costs, depreciation and interest expense were all within a reasonable range of our initial expectations.

While there is no doubt that our results were disappointing, we did take steps to better position our company for the future and ended the quarter with our inventory levels on plan and below last year on a constant currency basis.

We also made additional progress working with our vendors in adjusting our orders for the fourth quarter which are in line with our sales expectations.

We currently expect to end the year with inventory on plan and properly positioned for the next year.

Thus even as 2007 has proven to be one of the more difficult retail environments we've experienced in some time, we believe that we have positioned ourselves well to emerge in a stronger competitive position.

Looking towards 2008, we have intensified our internal disciplines in regard to inventory management, we've begun placing new orders for fresh spring assortments being more conservative than in the recent past.

Looking at the third quarter of this year, our combined U.S.

stores post a 5.2% comp store decline with footwear sales decreasing 2.8% and apparel and accessory sales decreasing almost 12%.

On the U.S.

footwear side, our men's business decreased low single digits, kid's increase low single digits, and women's decreased mid to high single digits.

In addition to a solid kid's footwear business, our men's basketball sales were slightly positive led by strong sales of Brand Jordan and Jordan Retro assortments.

Men's running was our strongest footwear category with comp store sales up nearly double digits.

Shox running and some Nike Air Max products, ASICS and adidas Bounce were our strongest performers.

We also generated strong sales gains in the skate category led by both adidas and Nike.

Specific styles include the Master ST by adidas, and the Sellwood by Nike.

In total, the classic category continued to trend down with the exception of premier assortments like Nike as well as Converse canvas.

The moderate price classic category is at the heart of our overall shoe decline in the U.S.

business.

Also the weakness in our third quarter results was in the casual category.

This is dominated by the low profile styles.

Boot sales were also extremely weak.

The low profile trend appears to be on the downside in most markets that we operate where as the boot business was most impacted by the warmer weather.

Our average footwear selling prices in the U.S.

increased mid single digits reflecting both a lower markdown rate than last year and a mix of shift towards selling a greater percentage of higher priced footwear.

U.S.

apparel sales continue to be weak in line with the trend that we've experienced for several quarters.

Sales of both license and branded apparel continue to be very soft.

We continue to have better success with our private label apparel, particularly our short and polo programs but it has not been enough to offset the declines in the other two major categories.

The exception is our continuing success of selling Nike Pro apparel.

In Europe we are sticking with the strategy of operating our business with a conservative promotional cadence.

We believe that this is the right long-term strategy to maximize our profits in this region.

In the near-term, however, our comp store sales continue to be pressured.

On the footwear side of the business, the story is somewhat similar to that of the U.S.

business with encouraging signs that the higher priced technical running footwear is coming back into fashion.

In fact, we generated very strong gains in the running category and various assortments from Nike and have had strong customer reaction to the MegaBounce shoes from adidas.

Our canvas business with Converse was also extremely strong.

Another strength of the quarter was the (inaudible) shoe program.

The precipitous slowdown in the fusion category was the primary factor that led to our footwear decline in Europe.

Looking towards the fourth quarter, the number of pairs of fusion footwear that we expect to receive will be down 40% offset by an 80% increase in running shoes.

In our Canadian division profit was very much in line with last year and continued to run at a very solid double-digit division margin rate.

The combination of strong sales per square-foot, consistent markdown rates, effective inventory control, and good expense management provided a well-balanced formula for success in this division.

We generated our highest sales and profit percentage increases at our Asia Pacific division.

Footlocker.com Eastbay sales and profits were essentially flat during the third quarter.

For the full-year we currently expect this division to post a solid profit gain with the division margin rate of approximately 14%.

In the Middle East our franchisee opened its second franchise store in the Kuwait market.

In total, they currently operate nine stores in this market with plans to open an additional 10 stores next year and eventually reaching 75 in several years.

Through the first three quarters of this year we opened 112 new stores, remodeled or relocated 179 stores, and closed 158 stores.

During the fourth quarter we currently expect to close up to an additional 142 stores for a total of approximately 300 closed stores for the year.

234 of the 300 expected closings are stores that we are currently on a month-to-month basis or have natural lease expirations this year.

We expect to exit these stores at a very minimal cost.

The additional 66 stores targeted to close this year will come at a cost as we look to exit these stores before their natural lease expirations.

These are cash flow losing stores.

As a result, their closing is expected to enhance our operating results going forward.

13 of these stores will close during the third quarter with an additional 53 targeted for the fourth quarter.

In total, we expect the expense impact of closing a total of approximately 300 stores this year to be 20 to $25 million.

From a cash flow standpoint, the impact is minimal in that the cash costs of closing these 66 stores are expected to be offset by recapturing the working capital on the 300 closed stores.

The closing of all 300 stores is expected to enhance our division profit by approximately $25 million, or $0.10 per share, $0.03 per share expected to be realized in 2007 with an incremental benefit of $0.07 per share in 2008.

From a strategic standpoint, we are currently focused on three key opportunities.

Programs designed to improve comp store sales and sales per square foot.

Initiatives to generate cash flow and enhance our financial structure, and strategies to provide additional growth for our company.

Continuing a strong focus on exclusive high-priced marquise footwear is our primary merchandising focus.

This is the footwear that our core customer has historically looked to us and is first to buy in our stores.

We are working more closely with all of our suppliers to ensure that our customers have a wider selection of new exciting marquise products.

At the same time, we need to rebuild our branded apparel business with our biggest suppliers, namely Nike and adidas, while also adding Under Armor to our stores this spring.

Another initiative that we think will be a big win for us is to do a better job in differentiating our brands from each other.

This differentiation strategy will include changing the look of selected fixtures in our stores, modifying how we display our product, and merchandising our different store brands with more unique and exclusive product by store brand.

We have completed one of the initial stages of the strategy by updating the look of our Champs stores.

This was completed at Champs last week.

You will be hearing a lot about this from us over the next twelve months as these initiatives begin to rollout.

Given the challenging external environment, we've intensified our focus on cash flow to ensure that we maintain a strong financial position.

We have taken a more conservative posture in regard to merchandise purchasing for the next year.

We are working with our key suppliers to increase the amount of goods on quick response and reducing the lead-time between inventory receipt and sales.

In the near-term we plan to open fewer stores in the U.S.

and spend more capital on our existing stores providing a cleaner look with new flooring, fixtures and lighting.

At the same time, we will continue to pursue new growth initiatives.

One of these sales growth opportunities is the new House of Hoops by Foot Locker that we have developed in partnership with Nike.

The first store was opened earlier this week on 125th Street in Harlem.

House of Hoops by Foot Locker is an innovative retail concept whereby Nike, Jordan and Converse basketball assortments will be offered in high traffic destination locations.

The House of Hoops stores will feature basketball products available nowhere else in the U.S.

including coveted player exclusive footwear.

As mentioned on our earlier conference call, we are also making plans to begin to more aggressively open new stores in Europe.

The returns that we've been generating from the stores that we've opened over the past several years are well in excess of our capital investment hurdle rates and our cost of capital.

We have good visibility where we think we can grow our European chain from slightly over the current 500 stores up to 750 stores in our existing markets.

By expanding into new markets such as Eastern Europe, Turkey and Russia, it is possible to reach up to 1,000 stores without a major investment in our existing infrastructure.

Another growth opportunity is expanding Champs in the U.S.

by another 150 stores to a maximum of approximately 700 stores.

Footlocker.com continues to post high returns and has the excess capacity to support new growth through both product initiatives and comp store gains.

Franchising remains another opportunity, especially in the Middle East where business is very encouraging.

In closing, I'd like to state the obvious that the first nine months of this year have been very challenging for our company.

We recognize that we are not alone and that the results of most athletic and nonathletic footwear companies have been under pressure for the past several quarters.

Nevertheless, we remain committed to managing our business profitably by focusing on our core business so that we will be able to be in a strong position when the current business cycle turns more positive.

Fortunately, our balance sheet is strong and we continue to generate positive cash flow from operations and fund our cash needs through internal generated funds.

As Bob mentioned, our book value is $14.40 per share and is expected to have in excess of $3 per share in cash at year-end.

We are encouraged that there are signs that the fashion trend is shifting back in our favor to its higher-priced marquise running and basketball shoes.

All indications are that the low profile trend has subsided although still an important part of our business.

We have a significant increase in marquise products planned for the fall quarter even though our receipts are planned down.

We believe that we are taking the right steps to improve our results and believe in our future.

I will now be happy to answer your questions.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Jeff Edelman from UBS.

Please go ahead.

Thank you.

Good morning.

Matt, I was wondering if you could look forward a little bit from the comments you made.

What is your vision as to what the Company will look like, let's say, three years from now beyond this valley in terms of what you think each of the divisions will stand for, product mix, mix U.S.

international, things like that?

Our goal is to, obviously, enhance our international presence where we clearly have had a fairly long history of stronger earnings, so we would hope that we would get the two like a 32 to 33% penetration in international operations.

We also believe that each one of our divisions is a viable division or we would've taken action to close it or one of them.

We will look to make strategic acquisitions as they surface and expand the Company domestically with such acquisitions.

We also need to differentiate our brands more carefully.

Kind of what's happened over the last six, seven years, we have over done the big buzz word in the retail business best practices in that we found ourselves at the beginning of this year having many of our formats kind of look the same even though a lot of the merchandise was different in the stores.

The presentation of the merchandise, the fixturing in the stores was very similar, and over the next 12 to 18 months we're going to focus on differentiating the look and the content in each of those operations.

Clearly, in looking at an operation like Champs, we believe that that store, obviously, is mall-based and more sporting goods, and I'm not suggesting we're going into a large hard goods assortment, but more fan-based sporting goods oriented.

So if you've been in any lately, you'll see a tremendous change in the way we display the merchandise in there, the way we feature it and the way we're marketing it.

Foot Locker is -- while we sell a lot of apparel -- is really a big time footwear store, and you know the difference between Foot Locker and Champs where it's well over 40% apparel.

It's a lot less in Foot Locker.

So Foot Locker will become the key shoe destination with many interesting and exciting exclusives to focus on the shoe product categories, in particular, basketball and high-end running.

Foot Action, we believe, needs to, even though it's very urban, needs to reach out and get a much stronger presence in urban apparel and even more, if you can believe it, even more urban oriented footwear.

So we've been down this path before, unfortunately, it was a long time ago, and we recovered from it.

We are in a much stronger position today than we were when this occurred in '97 and '98.

Our balance sheet is pristine.

90% of our stores are renovated even though we need some fixturing work and we still view it as a growth company.

Thank you.

And, Bob, if I can just turn this over to you.

When we get to that point a few years out, what kind of normalized cash flow generation could you envision?

I think we should be able to generate 200 --

250.

Yes, cash a year.

That's net-net cash?

Yes.

Okay.

Thank you very much.

Happy holidays.

You, too, Jeff.

Our next question comes from John Shanley from Susquehanna Financial Group.

Please go ahead.

Thank you and good morning.

Matt, I wonder if you could give us a sense as to whether you feel we're at the bottom of the trough in terms of what seems to be declining urban consumer interest in athletic footwear and, clearly, athletic a apparel based on what you just laid out for us in terms of how apparel sales went in the third quarter?

Do you see any signs of any fashion shift or anything else that's going to help stimulate that particular consumer segment to come back into the stores in a more active fashion than they have in the last couple quarters?

Yes, great question, John.

I don't know if we're at the bottom yet but we are seeing signs of high-end marquise interest, obviously, a House of Hoops stores with tremendous success, a lot of interest there.

When business gets tough and all the buying is done, we get out into the field and looking at very urban locations, i.e.

Fordham Road, 125th Street, Fulton Street in Brooklyn, there's no question that we are seeing on the feet of a lot of kids a lot of high-end footwear, much more so than six months ago and a year ago.

That's a very, very, very good important sign.

Clearly, the field is very, very crowded, and it's my opinion that, and it's only an opinion, that there will be a shakeout.

There's a lot of people that have gone into the zone, but I think we're beginning to bottom out, and I can't sit here and specifically point to any data that I have that we are at the bottom, but I think it's coming back.

Let's just look at it for a second.

The low profile classification has hit the wall big time.

Classic footwear is, since I'm in the business which is a little over nine years going on ten, is at an all-time low.

I'm talking moderate price, John, moderate priced out the door 50 bucks, 45, 55.

And we're seeing a lot of exciting footwear on the consumer, but I think it's going to be challenging for a period of time.

I'm looking at a horizon of -- to come back in full force, six to 18 months.

Six to 18 months?

Yes.

That's a long time.

Certainly is.

Okay.

Thanks for the insight.

I appreciate it.

Just turning to Europe for a second, Matt, can you give us insight into what you think is causing the fairly persistent negative comps in Europe, and doesn't seem to be affecting your operating profits, but why are the comps been negative?

I think we're going into over three years now of consistent negative comps, and what would happen to that operation in Europe if you got positive comps?

You know, some of the comps by country are obviously worse than other countries.

We found ourselves in a position of dealing with new competition three years ago when the low profile fusion category really got into the marketplace.

And the competition now in the European market is a lot greater than it was three, four, five years ago in that a lot of the independents and a lot of the stores that would never receive marquise merchandise have been receiving the low profile products, so the low profile, as you know, became a large part of our business over in Europe, so we had, you know, a plethora of new competition over there.

What we're doing is we're sticking to our guns and we're not getting into the promotional fray.

You and I talked a while ago, and we talked about the U.K.

coming on strong again with the promotions, and actually we're doing, okay, in the U.K., so we want to be fashion forward, and the promoting is still going on over there in Europe, so to define a clear answer is pretty difficult.

As far as why we're making more money, we're selling fewer units at higher margin and controlling the expenses very, very aggressively over there.

So we view Europe as a growth potential.

The last 24 months the metrics on the new stores have been extremely impressive and it gives us, in our minds, a tremendous base in thinking to continue to expand over there.

Do you think you could compositively in fiscal '08 in Europe sometime?

I think it's a real possibility, yes.

Great.

Bob, I had a question for you.

The SG&A expenses were down according to our calculation 1.4% including foreign exchange, but sales declined 5% in the third quarter.

Can you give us a sense as to when you believe selling expenses will be more likely to be leveraged down and be more in balance with the Company sales performance?

I think we've done a pretty good job with expenses, I'm not sure that you can --

We're pretty well fixed in there.

The one thing we don't want to do, John, is get sloppy on customer service because once you go that route, there's some short-term pain and hopefully long-term gain.

We're intensifying our efforts on our training programs and trying to really make our shopping experience better or as good as anybody in the marketplace, so you get to a certain number, and if you go below, you really then start really giving bad customer service.

When you got 40 some odd thousand employees, and we have cut back, John.

You have to make some hard decisions, but we're not taking it off the selling floor.

Are there other places where you could carve out some expenses?

We continue to carve out expenses.

One of the biggest challenges we have is the real estate quotient.

The rents aren't going down, and whenever we seem to have a great expense savings idea, it gets offset by the continuing increase in the real estate expense.

Without being over simplistic, and you've been around a long time, John, if there's nothing on the top line, there's nothing on the bottom line.

We've got to get the sales going in this company.

Right.

Okay.

Agree with that.

Last question I had is of the 142 stores that are going to close in the fourth quarter and the overall 300 stores that the Company has announced they're going to close in fiscal '07, are the majority of those stores, Matt, loss stores?

And can you give us a sense in terms so we can adjust our numbers going forward what the combined or collective sales volume of those stores were and perhaps what their negative impact on the Company's operating performance were or would have been if you kept them open?

First of all, they're all loss stores, and I don't think -- did we put a number on that?

We didn't put the sales.

It's a couple hundred million bucks.

And can you give us a sense of what they were losing?

Yes, that was $0.10 a share, $25 million, which of 3 we expect to realize this year and $0.07 next year.

Okay.

All right.

Fair enough.

And next year we have approximately 120 to 140 stores that we'll be closing.

Some of those are cash flow negative stores, but as we deal with those, it's obviously, we would've closed them this year, but it's obviously more efficient to ride out the lease through parts of next year, but hopefully towards the mid-point of '08 we will have dealt with the total problem in aggregate.

Will you get rid of the majority or all of the triplexes by '08?

No, not really.

The plan is to be down about 32, 33, and believe it or not, now that they're fully depreciated, most of them are making money, so we still have a plan to take approximately 10 to 15% of them and scale them down.

In other words, we just took a triplex in one of our markets which had all three facias in it, and we put a Foot Locker and a kid's in it, and it's doing extremely well because the ladies business was always the toughest in the triplex, but basically now, correct me if I'm wrong, guys, the triplexes are pretty profitable.

That's right.

That's really great to hear.

Thanks a lot, Matt, I really appreciated it.

Thank you.

Happy holiday, John.

Our next question comes from Bob Drbul from Lehman Brothers.

Please go ahead.

Hi.

Good morning.

Here's the first question that I have.

When you talk about the book value of the equity of the Company and the stock price, can you just maybe update us on our philosophy around the share repurchase program and the use of cash that you guys have on the balance sheet and your priorities for that cash a little bit more detail?

I think first of all, this is Bob, given the current sales environment and external environment, we plan on being very conservative with our cash and have been, as you know, since this last quarter.

So I think we do look at the value, constantly look at the value of the stock both on the external market as well as internally, and what other things we want to do with the business.

We also have to balance that with that we have had blackout periods at various times during the past year because of the Lehman strategic review, but again, we constantly look at this but I think given the current sales environment we're going to be very cautious (inaudible) how we spend the cash.

Okay.

And then the other question that I have is essentially for Matt.

When you look at the percentage, the current allocation of high-priced exclusive marquise merchandise, where was that in the third quarter and what do you expect it to trend to over the next several quarters?

Well, we certainly are getting more of it and buying more of it, and our company, since its inception, has always done well when the high-end has been strong, so we've increased it a very significant number.

I'm not at liberty to divulge that number, but we have a lot of, the customers there, we've got the merchandise.

Okay.

Then just the final question that I have is when you do look at the pipeline and product that you've seen over the next several months, are there any new either running shoes or any new basketball shoes that you really do think will and maybe start to lead you out of this?

You know, I think you continue to have Jordan, Brand Jordan and Retro doing extremely well.

Dunks, Air Force 1, you can't get enough of them.

I mean all you can get you can sell.

Very importantly, the adidas Bounce running shoe is becoming a very, very important high-end shoe.

Most of them sell for around $110 and we're doing well universally.

And when you have a shoe that is doing well universally, when I say in every single market we operate in.

And the other big shoe is, obviously, Shox which is, I think, becoming a mini brand by itself.

The kids have bought into it.

It is one of the number one running shoes out there.

Very impressive is the growth that we've experienced with ASICS in the last couple years, but this year I think ASICS is coming into their own as a major force in the business.

Great.

Thank you.

Happy holidays.

Happy holiday to you.

Our next question comes from Robert Ohmes from Banc of America Securities.

Please go ahead.

Thanks.

Hey, everybody.

Just a couple of quick follow-up questions.

I think the first, Matt, is the store closings in the fourth quarter, I would imagine you're going to be doing a lot of liquidations in those stores.

Do you think that will have impact on the promotional environment for the fourth quarter or sort of can you walk us through that process versus what was going on in the third quarter?

The other question was just on Under Armor.

You mentioned it's going to be in your stores for spring.

It is a test or are you rolling out all stores?

Can you give us some sense of the magnitude and also whether you anticipate carrying Under Armor's footwear as well?

And the last question would just be on the marquise you're obviously increasing it year-over-year, and it's out performing everything else in the store.

But if you look at the comps, if you look at the square footage increase in your stores versus the comp in marquise, are you out comping the increase in square footage that you're doing or is it just out performing the other stuff that's doing so poorly?

Thanks.

Yes, it's clearly outperforming all the other product.

I mean that's the bottom line.

In looking at Under Armor, I would say it's an aggressive test.

We certainly wouldn't rollout Under Armor in 1300 Foot Lockers, but there will be a nice presence in Foot Locker.

And we think that Champs, being clearly a very sports oriented operation, there's several hundred stores that will be carrying that, and they will be carrying the footwear, the cleats, and Foot Locker will participate in the cross training shoe when that comes out which, I believe, is July '08.

In terms of promotional stance, I think that the fourth quarter is, and I'm sure you guys are on this, I think it's going to be very, very promotional.

Whether we aggressively go after a little more aggressively in these stores we're closing, I don't think it's going to create havoc in the marketplace.

There's always people discontinuing stores, closing stores and liquidating stores.

So it's not a huge piece of our fleet.

And we are taking a pretty big hit this weekend on that category, so our plans are to get out of them as quickly as possible, and I don't want to be in a lot of these stores on December 26th.

Got you.

Did I miss one?

No, no, that's very helpful.

Thanks a lot, Matt.

Okay.

Thank you.

Our next question comes from Robert Samuels from JPMorgan.

Please go ahead.

Hi.

Good morning.

Just quick question.

Are you seeing any patterns or trends by region or mall versus urban locations?

Yes, business is very good in the Northeast, in particular in New York.

I think it's pretty apparent that the city is flush with tourists and the exchange rates are, they're basically getting, I'm sure you all know that the shoes -- the same shoe that would be $100 in the U.S.

in many cases is 140 euros in Europe.

So particularly in our Times Square operations, our 34th Street operations, and all over the city, up in the 125th Street when we did the grand opening the other day with the House of Hoops, I mean we had just tons and tons of tourists up in that, that has become a very big tourist market, and the Northeast is really doing well, and that's a big piece of it.

We also have a lot of very important flagship stores here.

Geographically, if you look at California and Florida, they're our two toughest markets and Texas is right behind them.

Texas is a new development that's been going on about the last three to four weeks, but this year the California market and Florida have been our roughest parts of the country.

And then finally, any new brands you're planning on bringing into the stores for next year?

Yes, there's a couple of -- I'm not although liberty to discuss.

We're negotiating with them now, but there's a couple new interesting things we're working on.

Great.

Thanks.

Thank you.

Our next question comes from John Zolidis from Buckingham Research.

Please go ahead.

Hi.

Good morning.

I was wondering if you could comment on the strategic review, is that continuing or has it concluded?

And then my second question is on cash flow.

You gave us an idea of what you thought your gross cash would look like at the end of the year.

Can you give us a little bit of help with the assumptions in terms of what you think you can generate in terms of cash flow from operations?

How much of a benefit from working capital do you anticipate there?

And then what's your updated expectation for capital expenditures for the year?

Thank you.

For the current year or next year?

For the current, well, current year and if you've got next year I'll take that, too.

I think around 148 this year, something in that range.

Yes.

Next year we're planning approximately 170, and by and large that is really to execute this differentiation strategy in the U.S.

and cleaning up a lot of the stores that were done in the last six to seven years are in need of new flooring, new lighting, new fixturing, and some other items to make them look fresher.

In looking at the strategic review with Lehman, Lehman continues to advise our company on a range of matters.

We really don't have anything to report further at this time.

I think there was a question on cash flow.

Were you talking about this year or out years?

For the current year what kind of cash flow from operations is built into the statement that you're going to end the year with about $3 a share in cash.

I think that we addressed that in the prepared remarks where we stated that we thought that we would end the year with about $3 per share of cash which kind of puts it in the 400 to $500 million range.

Okay.

And then is the share repurchase suspended while Lehman is doing the strategic review or are those two independent of each other?

No, they're not suspended, but if you read the 8-K after we received our amendment about a month ago from the banks and extended our facility through, I believe, it's May of 2010, that we have a $50 million ceiling on share repurchase.

And until business gets better, quite frankly, we want to really maintain a very strong balance sheet and liquidity level and be sure that we got our working capital needs covered, and I don't believe at this point in time going out and purchasing a lot of stock is a particularly good idea for our company.

Okay.

Thanks a lot, guys.

Good luck for the holidays.

Thank you.

Okay.

Great.

I think we've run out of time for today.

I just want to clarify one statement and maybe fine-tune it a little bit.

The sales related to the 300 stores that we hope to close this year will be about $175 million.

So with that, appreciate everybody joining us, and everybody have a happy holiday.

Thank you all.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may all disconnect.