Foot Locker Inc (FL) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

And welcome to the fourth 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 may contain forward-looking statements that reflect management's current views of future events and financial performance.

These forward-looking statements are based on many assumptions and factors including the effects of currency fluctuation, customer preferences, economic and market conditions worldwide, and other risks and uncertainties described in the company's press 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.PRNewsWire.com or www.FootLocker-Inc..com.

Please note that this conference is being recorded.

I'll 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 fourth quarter conference call.

As you will note from our press release of yesterday afternoon, our fourth quarter results reflected income from continuing operations of $87 million, or $0.56 per share.

Included in this net income was a non-cash impairment charge and expenses associated with closing unproductive stores, totaling $15 million after tax or $0.10 per share.

A $65 million or $0.42 per share income tax benefit was also recorded to reflect unclaimed depreciation and tax loss carry-forwards that the company currently expects to realize over the next several years.

Our fourth quarter income from continuing operations excluding the 144 and closed store charges, as well as the income tax benefit, was $36 million or $0.23 per share.

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

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

After our prepared remarks, we will leave time to answer your questions.

I would remind you that last year's fourth quarter included an additional week in line with the NRS standard that contributed $18 million after tax or $0.11 per share to our 2006 results.

Included in our press release is a reconciliation of our 13 week and 14 week fourth quarter periods of last year.

As we go through our presentation this morning, we will refer to our 2007 financial results as amounts from continuing operations before the FAS 144 charge, store closing charges and income tax benefit.

We will compare these results to our 13 week fourth quarter period of last year, which we believe will assist you in better understanding our operating results and help in your forecasting exercises.

Therefore, our fourth quarter results reflected the following: Comp store sales decreased 7.8%.

Our gross margin rate decreased by 630 basis points, primarily reflecting higher markdowns.

Our SG&A expenses, excluding the impact of more favorable foreign exchange rates, were $9 million below last year.

Interest expense was $1 million, and our cash position at year-end was $493 million, a $23 million improvement versus last year.

I will now turn the call over to Bob McHugh.

Good morning.

Overall our fourth quarter results reflected a very challenging external environment.

In fact, we believe that the holiday season of 2007 was one of the most difficult periods for U.S.

retailers in many years.

While our fourth quarter operating earnings fell short of our expectations, we are pleased with our year end financial position, including our cash position and inventory level and aging.

As a result, we believe that we are well-positioned for 2008, although we are planning quite conservatively for the year and we'll manage our business accordingly until we see more signs of a pick-up in consumer spending.

With that said, we are off to an encouraging start to the year, the reasons for which Matt will address during his prepared remarks.

As Peter mentioned, during my prepared remarks I will review our earnings from continuing operations before the impairment charge, store closing expenses, and the favorable income tax adjustment.

I will provide some details on these amounts separately and update the expected financial impact of each on our future results.

Our financial results fell short of our expectations at the start of the quarter, primarily due to weak sales and higher than planned markdowns to meet our merchandise inventory objectives.

For this most recent quarter, our 7.8% comp store sales decline fell a few points further than our expectation coming into the quarter.

The sales shortfall put additional pressure on our gross margin and SG&A rates due to the fixed expenses embedded in these amounts.

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

Our aggregate U.S.

store operation decreased high single digits with each business' results closely aligned to this range.

Footlocker.com sales decreased mid single digits.

Our international comp store sales declined mid single digits with Europe down mid single digits, Foot Locker Canada down low single digits, while Foot Locker Australia increased high single digits.

By month, comp store sales decreased high single digits in each month.

Our fourth quarter gross margin rate decreased by 630 basis points from last year, reflecting a 470 basis point decline in our merchandise margin rate and a 160 basis point deleveraging of our buying and occupancy rate.

Given the challenging external environment, we increased our markdown activity, particularly in late December and the month of January to clear slower selling goods.

Our objective was to end the year with our inventory levels below last year and our aging on plan to be positioned for the new year.

And I am pleased to say that we met this objective.

While our fourth quarter occupancy rate increased versus last year, on a constant currency basis, these costs were essentially flat versus the fourth quarter of last year.

Fourth quarter SG&A expenses decreased $1 million versus last year.

On a constant currency basis, our fourth quarter SG&A expenses decreased by $9 million or 2.9% versus last year.

This improvement resulted from our profit improvement process at Foot Locker whereby we encourage our associates to identify and implement new processes to enhance sales and reduce expenses.

We were very successful with this expense process again in 2007, particularly in the area of income taxes.

I am encouraged that we will be successful in containing expenses again in 2008.

Net interest expense for the fourth quarter was $1 million.

The non-cash impairment charge and store closing cost recorded during the fourth quarter totaled $15 million after tax or $0.10 per share, included in this charge were the current period costs related to the stores that were closed during the fourth quarter.

Our fourth quarter income tax provision reflects a net credit of $76 million.

$65 million of this credit relates to a Canadian income tax valuation allowance adjustment, whereby we now believe that we will be able to realize unclaimed depreciation deductions and net operating loss carry-forwards against future Canadian profit.

Also included in our fourth quarter income tax provision was a favorable tax benefit of approximately $15 million, versus what the provision would have been had the amount been recorded at a more historic 37% rate.

This favorable benefit was recorded so that our full year tax rate reflected a higher than previously anticipated percentage of our income being earned in lower tax foreign jurisdictions.

For the year, we closed a total of 274 stores versus a maximum number of closures of 300 that we guided to on our last call.

Of the 26 stores that we did not close in 2007, 20 are expected to close in 2008 at an incremental cost of $0.03 per share.

We expect to complete most of these closings during the first quarter.

At the end of the year, our cash position, net of debt, was $272 million.

Our total cash and short term investments totaled $493 million, while our long-term debt stood at $221 million.

This cash position, net of debt, was $36 million favorable to the end of the prior year.

At the same time this improvement was realized, we also repurchased 2.3 shares of our common stock during the year for $50 million and paid out $77 million in shareholder dividends.

Our ending inventory was $22 million, or 1.7% lower than at the end of last year.

On a constant currency basis, our inventory was 4% lower than last year.

We are pleased with our year-end inventory position and believe that a further reduction of our working capital can be a meaningful source of cash in 2008.

At year-end, our shareholders' equity stood at $2.3 billion, or a book value of $14.71 per share, an amount above our current share price.

We will remain very cautious in regard to capital allocation and spending in the near term, until we see further signs that the external environment is improving.

Looking towards 2008, we currently expect our earnings for the year to be in the range of $0.65 to $0.85 per share.

This is a wider range than we have historically provided, but we have done so given the uncertain external environment.

This forecast for the year is based upon the following assumptions.

Comp store sales relatively flat to last year.

Gross margin rate, 2 to 300 basis points favorable with last year, primarily reflecting an improved markdown rate in line with historical standards.

SG&A expenses on a constant currency basis, relatively flat to up slightly with last year.

Depreciation of expense of 135 to $140 million.

Interest expense of approximately $3 million.

Store closing costs of $8 million, and an income tax rate of approximately 35.5%, continuing to benefit from lower tax rates in international countries where we operate.

From a balance sheet perspective, we are targeting a 7 to 10% inventory reduction versus last year, which will contribute to the generation of a total of $200 million or more of positive cash flow in 2008, before dividends and any share repurchases or debt retirement.

These forecasting assumptions for 2008 reflect a conservative outlook, given the recent challenging external environment.

While we have a much brighter, longer term view, we believe it is prudent to remain cautious in the near term until we see more enduring signs of an economic uptick.

We anticipate achieving year-over-year profit gains in 2008 based on an expected favorable comparison versus those items that significantly impacted our 2000 results, namely, costs associated with the FAS 144 charge and store closing expenses totaled $0.52 per share in 2007.

The elimination of the operating losses related to the 274 stores that we closed in 2007 is expected to benefit the year-over-year comparison by $0.06 per share.

The FAS 144 write-down will reduce our depreciation expense in 2008 by approximately $0.12 per share.

We expect our markdown rate in 2008 to be more in line with our historical trend, during 2008 our strategy of clearing slow selling goods resulting in higher than normal markdowns equivalent to $0.50 per share.

At the same time, during 2007, we also benefited from the reduction in the income tax valuation adjustment of $0.42 per share, and a lower than normal income tax rate for the year which enhanced our 2000 EPS by approximately $0.10 per share.

Taken as a whole, these year-over-year comparisons totaled $0.68 per share, and you may rightly say that we are being overly cautious, and there is an opportunity for us to generate about $1 per share of net income in 2008.

We have taken a more cautious approach with our guidance in the event that the current external environment deteriorates further and consumer spending patterns and confidence remains at today's low levels.

Therefore, we believe that the guidance that we are providing is very achievable and realistic.

At the same time, if the retail environment improves later this year, we may have an opportunity to overachieve our plan.

If that happens, we will update you accordingly.

We are encouraged with our first month's results, which included a small same store sales increase and significantly improved gross margin rate.

Longer term, our objective is to improve our profitability back to 2006 levels, before stretching to a higher plateau.

The timetable for getting back to this level depends on both external economic factors, as well as athletic fashion trends.

Today, our financial position is strong and we remain very focused on continuing to generate strong cash flow that we can reinvest at an appropriate rate of return and/or return to our shareholders.

I will now turn the program over to Matt Serra.

Thank you, Bob.

Good morning.

The fourth quarter of 2007 was another challenging period for our company, as it was for most of the retail industry.

Despite our disappointing performance, we believe that we continue to respond to the external challenges and took several strategic steps which will enhance our profitability in the future.

We're encouraged that we finished the year in a strong financial position, providing the flexibility to benefit our shareholders longer term.

While the stretch of the economic climate remains uncertain, we believe we are in a strong position to capitalize when the external environment shows signs of sustainable improvement.

As we turn the page into 2008, our business is showing good signs of improvement, benefiting from fresh flow of new merchandise into our stores.

As for this most recent quarter, we believe that our sales shortfall was primarily precipitated by external factors including disappointing mall traffic.

As Bob already covered, our fourth quarter results also reflected several significant unusual charges and credits.

Also included in these results were the financial impact of merchandising decisions that we took to make sure we ended the year with our merchandise inventory current and at a level below last year.

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

Our U.S.

stores posted a high single digit comp store decline during the fourth quarter, with footwear sales decreasing mid single digits and apparel and accessory sales decreasing double digits.

On the U.S.

footwear side, our men's business decreased mid single digits.

Kids decreased low single digits and women's decreased low double digits.

Both our men's basketball and running sales were positive, with very solid gains in higher priced Marquis styles.

Sales were also very strong at the lower price canvas category, led by various Chuck Taylor assortments.

Similar to the first nine months of the year, men's footwear sales in the classic category continued to trend down, with the exception of premier assortments from Nike.

Sales in the casual category dominated by low profile styles as well as boot sales were also extremely weak.

Our average footwear selling prices in the U.S.

decreased about 1% versus last year, adversely impacted by a higher markdown rate which is more than offset by the positive shift towards selling a greater percentage of higher priced footwear.

U.S.

apparel sales continued to be weak, extending the trend that we've experienced all year.

During the fourth quarter, apparel sales were weak across almost all categories, licensed, branded and private label.

In Europe, both the footwear and apparel side of the business contributed to our comp store sales decline, with both decreasing mid single digits.

Similar to the U.S.

business, we continue to see encouraging signs that the higher priced technical running footwear is coming back into fashion.

We generated strong gains in Europe and the all-important men's high priced Marquis running category.

We also generated solid gains in Europe from sales of men's basketball and tennis footwear.

On the negative side, we continue to be hit by steep decline in the casual category, primarily low profile styles.

Fortunately, we had some visibility on this trend change and adjusted our merchandise purchases for 2008 accordingly.

Our average selling prices in Europe declined low single digits, reflecting higher markdown rates that were required to liquidate some of these slower selling casual footwear styles.

Our Canadian division's profit was in line with last year and continue to run at a very solid double-digit margin rate.

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 market all year.

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

This division posted very solid results all year on top of a strong year in 2006.

The fourth quarter was particularly rewarding in this division as its division profit rate approached double digits.

Footlocker.com, East Bay, sales declined low single digits and its division profit declined approximately $2 million during the fourth quarter.

For the full year, this division posted an 11% division profit margin.

We also have recently announced (inaudible) to the post of President and CEO of FootLocker.com and Craig Gilbert to EVP and Chief Merchandising Officer of FootLocker.com.

Turning to our franchise business, we ended the year with a total of 10 stores, nine of which are operating in the Middle East and one in Korea.

Plans call for our franchising partner to open another 10 stores in the Middle East during 2008.

For the full year, we opened 117 new stores, remodeled or relocated 200 stores and closed 274 stores.

The 274 store closings fell slightly short of our goal of 300 as we reached some favorable deals with our landlords to keep some stores open and other stores will be closed in early 2008.

During 2008 our current plan is to open approximately 60 stores, remodel or relocate approximately 200 stores, and close an additional 140 stores.

As Bob mentioned, we expect our store closing costs in 2008 to be about $0.03 per share for the remaining 20 stores that we identified last year for early closing.

The cost associated with the remaining 120 stores that we expect to close in 2008 are expected to be minimal and absorbed in the normal course of business.

Most of the closings will occur at the natural lease expiration when the store's fixed assets are fully depreciated.

We believe that by taking a more conservative approach to inventory management in 2008 and by closing a total of some 400 stores in 2007 and 2008, we will have better positioned our company for stronger earnings and cash flow in the future.

During 2008, we will be highly focused on pursuing additional initiatives designed to enhance our base business by driving improved comp store sales and sales per square foot.

We are working with our key suppliers to increase our quantities of unique, exclusive and limited distribution goods in our stores.

At the same time, our goal is to rebuild our branded apparel business with our most important suppliers, Nike and Adidas, while also adding some new highly recognized names, such as Under Armor.

Another initiative that we continue to work on is the further differentiation of our store brands from one another by modifying the interior layouts and adding new fixtures to enhance a store's appeal.

We're also planning to increase our capital spending on freshening up our look and feel of our stores through renovations and remodels, concentrating our efforts on improved flooring, lighting and other modifications to provide a more pleasant shopping experience.

Therefore, our near term strategy will be focused on improving the productivity of our existing stores, with an objective of returning profitability back to our peak years.

We will pursue additional store growth in international areas where we've had proven success in new markets that hold the most promise.

Given the certain external environment, we will maintain a conservative posture with capital spending, working capital and expenses, to help ensure that we have another year of strong positive cash flow.

2007 was clearly a very difficult year for Foot Locker and almost every major footwear retailer in the United States.

Despite the challenges that this difficult external environment is currently creating for our entire industry, for Foot Locker this may present a longer term opportunity.

We believe that our strong brand recognition among consumers and our strong financial base will make us an even more competitive force in the industry.

Thus, when the economic climate improves, we will be positioned to achieve higher levels of profitability than others.

This view is based on historical facts.

We have had a very strong track record over the past 10 years and believe that we can get back on the right path in a relatively short period of time.

I'm confident in the abilities of our senior management team and believe that our organization stacks up well against any other in our industry.

We remain very focused and committed to managing our business profitably.

Our balance sheet is strong and as Bob mentioned at year end, our book value was $14.71 per share.

And our cash position of $493 million was in excess of $3 per share.

I would also like to point out that last year even during a very rough period, we generated positive cash flow that we redeployed for our shareholders.

Given our strong cash position, coupled with our improving outlook for the future, our Board of Directors recently increased our shareholder dividend by 20% to an annual rate of $0.60 per share.

For the first five weeks of the year, we are experiencing a positive sales trend change versus the fourth quarter, with our first month's sales and profits exceeding our plan.

As we mentioned earlier, we are planning conservatively for 2008 and have provided a wider than usual profit forecast range, given the uncertain external environment.

Over the longer term, the next two to five years we believe that our business will generate both meaningful profit growth and strong cash flow.

2008 earnings range of $0.65 to $0.85 per share that we have provided is based on the following assumptions.

Sales of approximately $5.4 billion, reflecting comp store sales being relatively flat to last year.

Gross margin rate improvement of 2 to 300 basis points.

SG&A expenses on a constant currency basis excluding $8 million of store closing expenses, relatively flat to up to last year.

Depreciation expense of 135 to $140 million.

Interest expense of approximately $3 million.

And an income tax rate of approximately 35.5%.

While we are not providing any specific earnings guidance, we expect that our business will continue to generate both meaningful profit growth and strong cash flow over the next two to five-year period.

I will now be happy to answer your questions.

Thank you.

(OPERATOR INSTRUCTIONS).

We have our first question from John Shanley from Susquehanna Financial.

Please go ahead.

Thank you and good morning, guys.

Good morning.

Matt, I wonder if you could give us an update on your outlook for growing your international business, international seems to be doing particularly well with what you just reported on the Asian front.

I think Europe has always generated a higher operating profit margin for you.

Can you give us an idea of how many stores you're planning on opening internationally and where you see the future of the international versus the domestic business going over the next couple years?

Yes.

We still are very focused on the European theater.

We operate approximately 515 stores there and we view that market as a potential of around 800.

We're hopeful that over the next several years, we'll open somewhere between a low of 80 and a high of 150 additional doors and obviously reaching the 800 is a four to five-year goal.

We're in Turkey.

We opened our first store there.

We view that as potentially a very, very large market.

We're exploring Russia, and obviously the eastern European countries.

Canada, we've had enormous success over the last four years or so and it's becoming quite a large business.

I don't think there's much room for more than another 10 stores up there, but it's a very profitable market.

The same goes for Asia-Pacific.

Asia-Pacific is approaching 100 doors and there's a potential of a 10 store expansion there.

But it's surfacing as another Canada.

These are markets that eight, nine years ago we were making little or no profit in and we've had -- we've more than doubled the business and are experiencing tremendous profit growth.

And to your point, the margins are much richer there.

Are the operating margins in Europe approaching where they had historically been in the low double-digit range?

Close.

We're close.

Okay.

Question on the store closures.

With the 400 stores that you will have closed between '07 and '08, does that pretty much end the number of lost stores that you have or are there some other stores that down the road you're still going to have to face closing at some point?

There are always stores that we have to face for a myriad of reasons.

A new mall gets built four miles north of your current location and it becomes a powerball and you have to deal with that.

I don't think store closures are going to go away, but we really took, as you know, a very large swipe at dealing with the unproductive stores.

So hopefully this year, as we begin to get back in a fairly decent profit model and into '09 we will have dealt with the lion's share of the lost stores.

And there are reasons, John, from time to time for competitive reasons that we will operate a loss store in a certain location, not to surrender the volume to a competitor.

That's understandable.

Bob, I have two quick questions for you.

Are there any other potential tax benefits pending comparable to the $65 million benefit that you recorded in the fourth quarter?

And secondly, I wonder if you could kind of walk us through a little bit your comment about possibly reaching earnings of north of $1, how would you possibly be able to achieve that, if you could, please?

The first -- answer to the first question John, is no we don't have any plans for a comparable tax benefit like that.

Secondly, to reach the dollar would be more margin recovery and increased sales.

Top line and gross margin or operating margin?

Yes.

As you know, John, we've planned very conservatively for this year and we've really drilled down on the inventories and have arrangements to get more inventory, if we need to, and it's not out of the question.

Okay.

Fair enough.

Thank you very much.

Appreciate it.

Thank you.

We have our next question from Kate McShane from Citigroup.

Please go ahead.

Good morning.

Thank you.

We were a little surprised by the amount of markdowns taken during the quarter, since inventories we thought were more in line than they had been in the past.

Were there certain regions in the U.S.

where you were marking down more.

Were there some issues with what was bought for the holiday season?

I think you hit it, Kate, with the lower than expected traffic.

We had planned down low to mid single digits and we -- they were down high single digits and we made a conscious decision to clear the inventory and turn it into cash and set ourselves up for '08.

And that's the principal reason.

Okay.

Thanks.

And then in terms of your brown shoe strategy at the Foot Locker stores, are the same people who are buying Marquis sneakers buying these brown shoes and if not, are you getting incremental foot traffic as a result of this offering and how many more brands do you expect to include in the mix?

Well, we've always had brown shoes in our mix and quite frankly, have never really promulgated it until I guess last year when we started setting up sections of the category.

Geox has turned out to be a very pleasant surprise.

We have that exclusive in the mall and we don't view the brown shoe piece as a very large piece of our business going down the road.

But it is an ingredient in our business and as you know, you can call Timberland whatever you want, but they have a lot of brown shoes.

And as that business will hopefully come back in the next year or so, we did a lot of business in that category.

So we do carry brown shoes.

There are a few other brown shoe lines that we're looking at.

But we're basically sticking with our long-term strategy of being athletic footwear and apparel store.

Okay.

Thanks.

And my final question is you mentioned the Under Armour apparel coming into some of your stores.

Yes.

How will it be differentiated from what Finish Line is currently selling and what Dick's storing goods is selling?

I'm not so sure that there's going to be that much differentiation in the product.

That's what you're talking about, the product?

The product.

Yes.

I think we were very late to the game with Under Armour and by the end of the year we'll have it in over 1,000 of our stores in the U.S.

and we view it as -- I view it as a big miss on our part by not getting into that business quickly.

I'm hopeful that in the mall that we'll have a much more say in presentation and a better assortment of the product.

The other big thing is the Lady Foot Locker division will have a very important presentation of Under Armor for women and you see that in the competition.

I'm not sure I saw it in the company you mentioned in the mall, but you don't see much of it around.

And we have been getting calls for it, so could be a very important piece of our ladies branded apparel business.

Okay.

Thanks very much.

Thank you.

We have our next question from Jeff Edelman from UBS, please go ahead.

Good morning.

Matt, my first question is on the inventory.

I guess I would have thought it would have come down further.

Did it not because of the tough environment?

Bob said you were happy with the quantity and level but I guess you've always said that in the past and the guidance of 7 to 8% lower inventory for this year, does that imply you're still lugging some stuff you don't want to have or does it have to do with pockets in certain areas?

And then if you could provide a breakdown of U.S.

versus international, please.

Yes.

There's several dynamics relating to that question.

On a 52-week basis versus a 52 versus 53, we're almost 8% lower than a year ago.

But on a GAAP basis, we reported the 4% decline in constant currency basis.

We're planning to operate 2008 with over $100 million less inventory at cost.

It's in the $115 million range.

The other dynamic that is in there is over the past two years, as the Euro has increased in value, our European and now of course Canadian too, by the way, but really the European inventories have -- it's costing us more to carry the inventory there, in plain English.

Are you following me?

Yes.

And I think that's the reason why it was only 4%, but I think you're going to see now through the remainder of the year on the quarterly reports, 7 to 9% or more down on inventory.

Right.

Okay.

And then are we -- is this decline going to reflect still product lines that are no longer selling well or have you gotten rid of most of that?

We have -- our aging of old age inventory is as good as it's ever been in the last 10 years around here, so we're in very good shape.

You always have some problematic merchandise but we have taken the sword, so-to-speak, to the poor performing merchandise and really cleared it out in December and in January.

So we're very comfortable that the quality of the inventory is now in good shape.

Okay.

Good.

And then based on that and your comments about a good start to February, is it unrealistic to assume we start to see positive EPS comparisons, Bob?

Oh, yeah.

I mean, after last year --

It's realistic or unrealistic?

It's realistic, yes.

Okay.

Jeff, on your other question on inventory at year end, our international inventory was pretty flat with last year where in the United States it was down 5 to 6%.

Okay.

And that's on a 50 --

That's on a GAAP basis.

Okay.

So as we go forward, it's going to be apples-to-apples on a quarterly basis as far as inventories are concerned?

Correct.

Okay.

Then you will get the benefit of the absence of the losses of the closed stores right away?

Yes.

And -- okay.

I got it there.

Thank you.

Thank you.

We have our next question from Virginia Genereux from Merrill Lynch.

Please go ahead.

Hi, good morning, it's [Elizabeth Suss] for Virginia.

Why are you assuming flat comps for '08?

I know you mentioned February you've seen positive comps.

Maybe you could tell us what's been driving that.

I think there's a couple things that have been driving it.

A, we have cleaned out a lot of bad inventory and receipted a lot of fresh, new, exciting receipts.

That's part of the reason.

I think last year we took a larger, greater hit in the first quarter than a few of our competitors because of our massive inventory debacle last year and I think, you know, those are the two principal reasons.

The other thing is when you close unproductive stores and funnel the inventory into your more productive stores, you obviously do better.

Okay.

And then my second question is just can you provide the breakdown in terms of merchandise margins for U.S.

and international?

We don't really break that out, Elizabeth.

Okay.

I thought that you had broken it out quarter to date or year-to-date in the past.

No.

I don't think we've ever broken our merchandise margin rates up.

Were they up in Europe?

I have them up year-to-date.

Good try, Elizabeth.

All right.

Thanks.

Thank you.

We have our next question from Robert Drbul from Lehman Brothers.

Please go ahead.

Hi.

Good morning.

I guess the first question I have for you, Matt, is can you give us any updates in terms of on the M&A side where your mind set is with the use of cash and sort of how you would think about it at this point in time?

Well, we always think about M&A and, you know, it's always on one's radar screen, but our strategy is to right the ship this year.

I'm not suggesting that if an opportunity came along we wouldn't look at it.

But we're focused on getting the business back on track, returning cash to our shareholders, and over the next couple years getting back to our metrics of 2006.

With that said, I'll say it for the third time I guess in the answer, that we look at everything.

So it's our job to do that.

All right.

And can you just give us an update -- you talked about apparel trends have been tough.

Where are you in terms of private label on the apparel side of it?

Has that continued to increase or can you just give us maybe some numbers on the penetration a bit?

Private label I think we clearly have stated is around 50% of our apparel business.

We've done okay.

We did not have an increase last year, nor did we have a big decrease.

We have, as an organization, and I think the market bears some -- I don't want to use the word blame, but they need to get more aggressive.

We've embarked on two very aggressive programs with Nike and Adidas.

They're being receipted in the next 30 to 60 days.

And also with the Under Armour receipts coming in, we've got to get the branded apparel business back on track and I think in general, the branded apparel business in the U.S.

has been -- I'm sure you've been reading, is not particularly good.

Right.

And I think we have some unique products coming in.

I don't want to get into too much detail, because a lot of them are merchandise that we worked on very closely with our suppliers and they're exclusive to us and we -- we took a big hit in apparel last year, as I'm sure you know.

And the licensed apparel as well.

So we're really focused on maintaining the private label apparel and really intensely growing the branded piece of the business.

Okay.

Great.

And then can you just give us an update in terms of the full year 2007, how much was Nike as a percentage of your total business?

It was over 50% and it will be in the 10-Q -- K, rather, in a month or so.

Thank you very much.

Good luck.

Thank you.

We have our next question from Brad Cragin from Goldman Sachs.

Please go ahead.

Good morning.

Thank you.

Was wondering if you could give us a little bit more insight into the price point trends that you're seeing.

It seems like you've got different issues in different price ranges.

Specifically, can you give a sense of whether or not you're seeing any weakness at higher price points, given the economic environment?

No, we're seeing actually the opposite.

The high end Marquis product is working well for us.

The big shortfall and it's been almost two years now, is the classic category and the low profile category in footwear.

But our high end Nike Marquis and Adidas product and ASICS in particular are doing very, very well.

Obviously, Brand Jordan continues to be very strong and Shock.

So our average unit price is higher.

And it was higher last year.

In the U.S.

it was slightly lower, but in Europe was higher.

And that's a result of the decline in the low profile product over there.

How much of that is a function of mix versus price points within, say, that $100 and above range?

Well, the mix is determined -- the customers vote.

And they weren't buying it.

So we took a position early on where we started cutting back receipts in that category and I think I said this on my last conference call, that the classic category has really been a significant reason for our performance last year.

We took a major, major hit on that category.

Do you see classics bottoming out at this point?

I don't think they could go any lower.

Okay.

And then in terms of the changes you're making in your store environment with the lighting and the flooring, can you just give us a better sense as to whether this is something you guys have tested in the past and whether it's something you see rolling out throughout the fleet in coming years?

Yes.

We basically have the same capital plan this year as last year.

Now, a lot of that capital in the prior years was used to open new stores.

We need to make sure that, A, we keep our stores up to standard, which quite frankly I'm not pleased with last year particularly in the U.S.

We need to spend more money on maintaining the stores and putting in newer, fresher and more exciting fixturing, lighting and flooring.

We embarked on a differentiation program in October.

We started with Champs and we will hopefully roll out by the end of this year 70% of the program in terms of this differentiation strategy.

And we've got to make our stores look different.

We're working very hard on making the merchandise look different and doing more special make ups by division.

But you're going to -- if you've been in our stores, you're starting to see some presentation differences.

There's different kinds of tables going into a Champs versus a Foot Locker versus a Foot Action.

And there will be different types of flooring and lighting.

So it's something that's very high on our radar and we don't need too many more stores in America under the current brands that we operate.

So we're taking a lot of the capital to more than freshen up the stores, trying to create an exciting, more -- I guess exciting environment.

You know, we're changing over a lot of our music and our televisions going to flat panel screen TVs and trying to contemporized the look of our doors.

You said 70% by the end of the year.

That is total company-wide?

Yes, in the U.S.

Okay.

All right, thank you.

Thank you.

That will conclude our call for today and just like to thank everyone for their participation.

Thank you.

Thank you, ladies and gentlemen.

This now concludes today's conference.

Thank you for participating and you may all disconnect.