Foot Locker Inc (FL) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the second quarter 2008 earnings release conference call.

At this time all participants 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 filing.

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.prneswire.com or www.footlockerinc.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 conference call to discuss our second-quarter financial results.

Last evening we released our second-quarter results which included the sales increase of 1.5% and net income of $0.11 per share.

In keeping with our standard practice, Bob McHugh, our Senior Vice President and Chief Financial officer, will begin the call with a discussion of our 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.

Overall, our total sales for the period were in line with our expectations going into the quarter.

This is very encouraging considering that our sales results were generated at a promotional level that was lower than planned.

Consequently, our gross margin rate and earnings per share reached the high end of our expectations.

More specifically, our second-quarter financial results reflected the following.

Total sales increased 1.5%.

Our gross margin rate increased by 420 basis points, reflecting lower markdowns and a 20 basis point increase in our tenancy rate.

Our SG&A expenses, on a constant currency basis, were up slightly versus last year.

Store closing expenses were $1 million, depreciation expense declined by $11 million, and our total cash position net of debt was $173 million favorable to the same time last year.

I will now turn the call over to Bob McHugh.

Good morning.

As Peter mentioned, our financial results for our second fiscal quarter were at the high end of our expectations going into the quarter.

We are encouraged that we are essentially achieved or exceeded the key financial metrics that we set out to accomplish at the beginning of the quarter.

As we have discussed on previous conference calls, a key objective for our company is to get back to our peak earnings that we achieved in 2005 and 2006, recognizing that it may take us some time to get there.

On a GAAP basis our 2008 second-quarter earnings of $0.11 per share exceeded both the $0.12 loss of 2007 and the $0.09 profit of 2006.

Our 2006 results on a non-GAAP basis, excluding the $0.07 non-cash impairment charge recorded in 2006 were $0.16 per share.

Therefore, while we are encouraged that we are on the right track, we still have some work to do to get back to our core earnings of 2006.

Our earnings are also encouraging given the challenging external environment in which we operated, particularly as it relates to consumer confidence and spending.

Another positive development was the strengthening of our financial position during the quarter.

As previously reported, we completed a new three-year $175 million revolving credit facility with our bank group during the second quarter.

This agreement includes a provision that would allow us to increase the size of the facility by $100 million for a total of $275 million under certain circumstances.

Concurrently with the signing of this new agreement, we have repaid the remaining $88 million balance of our term loan during the quarter.

We ended the quarter with $431 million of cash and cash equivalents and $125 million of balance sheet debt.

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

Our combined US store operation increased low single digits.

Foot Locker.com sales increased high single digits.

On the international front, Europe declined mid-single digits, Foot Locker Canada increased mid-single digits, and Foot Locker Asia-Pacific increased high single digits.

By month, comp store sales increased very low single digits in May and June and decreased low to mid single digits in July.

By week, our sales comparisons versus last year were very uneven, fluctuating in line with the level of last year's promotional activity when we were aggressively liquidating slow selling goods.

In particular, our comp store sales slowed in late June and most of July, when we were the most aggressive in clearing slow selling goods last year.

Our second-quarter gross margin rate increased by 420 basis points from last year, primarily reflecting the improvement in our merchandise margin rate.

Our tenancy rate, which is the other major component of our gross margin, increased 20 basis points versus last year.

The improved merchandise margin rate comparison primarily reflected a significantly improved markdown rate versus last year.

I am encouraged to say that we also operated our business at a significantly lower markdown rate than we did in 2006.

Our tenancy cost for the second quarter, stated in constant currency dollars, were slightly lower than last year.

Second-quarter SG&A expenses increased $13 million versus last year.

On a constant currency basis our second-quarter SG&A expenses were up approximately 1% versus last year.

We achieved this good performance despite some additional expense dollars that we spent in our stores to improve our customer shopping experience.

More specifically, in line with a near-term strategic priority of putting more focus on our existing stores, we incurred additional expenses versus last year on visual merchandising and store maintenance.

Depreciation expense for the second quarter declined by $11 million versus the same period last year.

We expect our depreciation expense to run at approximately $34 million to $35 million for each of the next two quarters.

This will result in a similar favorable comparison during the third quarter of this year and be relatively flat to last year during the fourth quarter.

The year-to-date and expected third-quarter decrease in depreciation expense reflects the asset impairment write-downs recorded last year in accordance with FAS 144.

Net interest expense for the second-quarter was $2 million.

Lower rates on our short-term investments were somewhat offset by the elimination of the interest expense on the $88 million debt that was repaid during the quarter.

The $1 million of store closing expenses recorded during the second quarter were in line with a program that we initiated last year, primarily to accelerate the closing of cash flow negative stores.

Four store settlements were included in our second-quarter financial results.

The closing expenses related to three additional stores are expected for the fall season under this program at an estimated pretax cost of $1 million, or less than $0.01 per share.

Our second-quarter income tax rate was 36.8%, a little higher than we expected for the fall season when our percentage of profits and lower tax jurisdictions will be more meaningful.

At the end of the second quarter, our cash position net of debt was $306 million, a $173 million improvement versus the end of the same period last year.

Our cash totaled $431 million, while our long-term debt stood at $125 million.

Both amounts reflect the repayment of the $88 million term loan and purchase of one -- $5 million over 8.5% debentures during the second quarter.

Our merchandise inventory position of $1.4 billion at the end of the second quarter was $51 million, or 3.5% lower than at the same time last year.

On a constant currency basis, our inventory was 5.4% lower than last year and almost 10% lower than we were at the end of the second quarter two years ago.

This inventory reduction is in line with a strategic initiative designed to reduce our inventory per store and increase our inventory turnover over time.

With the end of the second quarter coinciding with the being of the back-to-school period, we did not decrease our inventory position as much as we planned for at the end of our third and fourth fiscal quarters.

By year end we continue to expect that our year-over-year inventory position, on a constant currency basis, will decrease by approximately 7% to 10%, or by approximately $100 million.

At quarter end our shareholders equity stood at $2.3 billion, a book value of $14.59 per share.

As stated in our press release, we currently expect our 2008 earnings, excluding the impairment charge that was recorded during the first quarter, to be in a range of $0.70 to $0.85 per share.

This lower end range is $0.05 per share higher than our initial guidance for the year, reflecting the fact that we overachieved our earnings expectations for the first half of the year.

Given the uncertain external environment, we believe that it is prudent to remain cautious in how we plan and operate our business for the second half of the year.

Our earnings guidance reflects this cautious outlook and thus we have not increased the higher end of our guidance.

The underlying key assumptions that this forecast is based also remain consistent with our previous guidance.

Comp stores relatively flat to down low single digits.

Gross margin rate 200 to 300 basis points favorable with last year.

SG&A expenses on a constant currency basis relatively flat with last year.

Depreciation expense of about $135 million.

Interest expense of approximately $4 million.

Pretax store closing cost of $7 million and an income tax rate, excluding the impact of the first quarter impairment charge, of approximately 35.5%.

We also continue to expect to generate a total of $200 million or more of positive cash flow in 2008 before dividends, debt retirements, and any share repurchases.

In summary, we believe we are currently on track to deliver and potentially exceed our financial plan for the year representing a meaningful profit improvement versus last year, and to generate positive cash flow to enhance shareholder value.

I will not turn the program over to Matt Serra.

Thank you, Bob.

Good morning.

In a quick snapshot, our second-quarter sales and expenses were essentially in line with our expectation going into the quarter, while we overachieved our earnings plan through a stronger-than-expected gross margin rate.

This gross margin rate benefit reflected primarily lower than planned markdown activity as our inventory was better positioned than at the same time last year.

Our second-quarter financial results are very encouraging, especially considering the challenging external environment that has been particularly difficult for mall-based specialty retailers.

Higher food and oil prices, declining real estate values, volatile financial markets, and the higher unemployment all continue to pressure the consumer during the second quarter of this year leading to lower spending at the retail level.

A positive external factor is that inventory levels in the athletic industry appear to be lower and cleaner than last year, as many of our competitors have also focused more effort on inventory management given the current external environment.

We are also encouraged by the strength of our marquee footwear business in both the categories of basketball and running.

We believe that this trend in the marketplace bodes well for our company over the next several quarters as these categories are the core and strength of our business.

Again, our second-quarter earnings were favorable to our expectation as our gross margin rates bounced back to more historical levels.

Looking towards the fall season, we believe that our company has an opportunity to achieve a meaningful profit improvement over last year.

To reach our forecasted full-year earnings of $0.70 to $0.85, which excludes the first quarter impairment charge, would require that we earn $0.47 to $0.62 per share for the fall season.

During fall season last year our income from continuing operations was $0.29 on a GAAP basis.

Excluding the impairment in store closing expenses, as well as income from valuation adjustments, we earned $0.40 per share during the fall season last year.

Therefore, for comparison purposes on an adjusted basis we are looking for a $0.07 to $0.22 per share improvement during the second quarter of this year.

Second half of this year, I'm sorry.

This view is supported by several factors that we believe will enhance our profitability including the following.

A weakly flow of new basketball and running shoes, particularly in higher-priced marquee styles, a category that the consumer often looks to buy in our stores first.

New assortments of branded apparel from existing vendors, such as Nike and Adidas, as well as new suppliers such as Under Armour and TapouT.

The closing over the past year of under productive stores reduces the drag on our remaining store fleet.

Additionally, our depreciation expense is expected to be approximately $10 million favorable to last year for the third quarter and flat with last year in the fourth quarter.

The second-quarter turnaround of our US store division is very encouraging.

Collectively, they generated a small comp store sales increase during the second quarter, and a very meaningful profit increase.

These results reflect the solid sales trend improvement versus the first quarter of this year at a similar merchandise margin rate.

We believe that our US business will continue to benefit from the recent trend resurgence back towards higher-price technical footwear.

Our total US stores generated a sales trend improvement versus the first quarter of this year in both footwear and apparel.

Sales of men's footwear showed the biggest improvement.

Versus the second quarter of last year, footwear increased mid-single digits while our apparel sales continue to be negative.

Sales in both our men's and kid's footwear businesses increased mid-single digits, while our women's sales decreased mid-single digits.

Men's basketball and running shoes sales in the higher-priced marquee styles remain the highlight, continuing a trend that we saw developing during the second half of last year.

Sales in the lower-priced canvas category led by various Converse Chuck Taylor assortments, as well as various assortments of sandals also remained very strong.

We believe it is more relevant to compare our average footwear selling prices and units sold in the US this year to our results from two years ago when our business was more normalized and not reflective of the high markdown rates of 2007.

Thus our second-quarter average selling price in the US were approximately 10% higher than two years ago, while our units sold in comp stores were relatively flat.

These results are reflective of the mix shift towards selling a greater percentage of higher-priced footwear.

US apparel sales continue to be weak across most categories.

We have seen some encouraging signs in our Champs division with solid sell-throughs of new styles and new supplies in the mixed martial arts category.

We have also recently added Under Armour to the mix, which we plan to expand to 800 stores by the end of the year.

Our international business was mixed with strong results at our Asia-Pacific and Canadian divisions, with business in Europe remaining challenging.

Our Asia-Pacific division had a very solid quarter with the high single-digit comps store sales increase and division profit above plan.

Our Canadian division also produced a mid-single digit comp store sales gain and a double-digit division profit increase for the quarter.

In Europe, our footwear sales were mixed.

Similar to the US, we generated solid gains in higher-priced technical running footwear in the men's segment, but were impacted negatively by weak sales in the men's and women's fashion categories.

Our apparel and accessories business in Europe has shown signs of improvement with second-quarter sales nearly flat with last year, as we generated solid gains in men's branded outerwear, hats, and bags.

While sales comparisons continue to be very challenging in Europe, this division remains one of our highest performing businesses in terms of overall profit and division margin rates benefiting from higher sales per square foot and lower markdown rates.

Our near-term operating strategy in Europe remains unchanged.

We plan to carefully manage our inventories and use markdowns selectively to keep our aging in line with Company standards.

Sales at FootLocker.com East Bay increased 10%, while division profit increased 33%.

FootLocker.com East Bay continues to be one of the best run and most efficient businesses in the direct-to-customer retail segment and contribute meaningfully to our company's profitability.

For the first six months of the year, we have opened 40 new stores and remodeled or relocated 162 stores.

We enhanced the look and feel of an additional 200 stores in the US this year with the flooring and lighting program, while adding new fixtures and other modifications to 1,500 stores.

An import by-product of these interior layout modifications and new merchandising initiatives is a further differentiation of our store brands from one another.

We closed 97 stores during the first half of the year, of which 17 stores were part of a program initiated last year to accelerate the closing of unproductive stores.

We have outlined on our recent conference calls, given the uncertain external environment, our strategic focus for 2008 is on improving the productivity of our base business.

In this regard, we continue to implement several strategies which we believe will contribute to our improving financial results.

We are carefully reducing our inventory levels and increasing our inventory turnover over time, and in a disciplined approach to ensure that our stores continue to receive a fresh flow of marquee goods.

Our goal for year end remains unchanged.

Our objective is to reduce our year end cost inventory stated in local currency by approximately $100 million versus last year.

Achieving this goal would translate into a cost inventory per store reduction stated in constant currency dollars of approximately 5% and a like reduction in inventory per square foot.

Our purchases for the fall season are highly focused on unique, exclusive, and limited distribution marquee footwear with planned reductions in styles in other categories that are currently out to fashion.

We also believe we have a meaningful opportunity to rebuild our branded apparel business with both existing suppliers, Nike and Adidas, while expanding recently tested apparel from Under Armour, TapouT, and other emerging brands in more of our stores.

We believe these near-term strategies are important first steps in returning our business back to profitability of our peak years.

In closing, we plan to remain conservative in how we manage our business.

While we are encouraged with our own results, the consumer remains very cautious which makes us pause and plan very conservatively.

The recent fashion trend back towards higher-priced technical footwear is encouraging and plays well into our sweet spot of the market.

Our apparel business has been especially tough over the past several quarters, but on the bright side, we believe this represents an opportunity to post improved results going forward as we add new assortments from both well-known and emerging vendors.

We are off to a good start for the year with our first half pretax profit, excluding the impairment charge related to be the disposed business and store closing charges, having increased by $40 million, or $0.26 per share, versus the same period last year.

Our balance sheet is strong and our cash position net of debt is $173 million favorable to this time last year.

I will now be happy to answer your questions.

Thank you.

Thank you (Operator Instructions) John Shanley, Susquehanna.

Thank you and good morning, everybody.

Matt, since you are placing such great emphasis on the growth of the marquee business within Foot Locker, particularly in the domestic component of the Company's operation, can you give us an idea of what percentage of the domestic footwear sales are now generated by marquee product?

And are the margins for the marquee line comparable to or better than the rest of the footwear selections?

Yes.

John, it's well over 33% of the footwear sales and the margins are very rich.

It's a regular-price business and we have had tremendous success with it in the past.

It looks like it's coming back to the same type of metrics that we enjoyed in previous years.

You mentioned it's comparable to what you were doing in 2006.

Should we model off of 2006 in terms of the results to get an idea of what the Company is likely to produce in fiscal '08?

I think that in the current environment to use that model, which was a pretty good year for us, might be a little ambitious.

We made a $1.60 a share in 2006.

Our intent is to, as I said at the beginning of the year, is to right the ship this year, get it back on track.

Our goal is, obviously, to get back to 2006 and hopefully beyond.

And I think that will take some time.

How much time that is -- I don't think I have a crystal ball.

But we are coming back in a, I think, a responsible and measured fashion.

Okay, that sounds great.

You did a nice job in terms of reducing the inventory levels.

Were the inventory reductions pretty much across the board in terms of most of the Company's retail concepts?

Or were they heavily focused on certain operations?

I am particularly interested in were the inventory levels in Europe reduced meaningfully during the quarter.

The inventory levels were reduced aggressively in the US, John.

We never really had an inventory issue in Europe in the past.

When you get into Europe, it's really marquee product is the lion's share of the business over there.

So, again, our -- for the use of no other word, our big problem last year in inventory was principally here in the US.

We have not had an inventory issue in Europe.

It's down actually this year on a per store basis, but we have never really had an issue over there.

It was here in the US and that is where we took the very heavy markdowns last year.

Again, were the reductions pretty much across most of the US operations Foot Locker, Footaction, and so on?

Principally, in the big Foot Locker division, Footaction, Champs to a degree.

Kids, our business is very strong and we had a little bit of an inventory problem last year, but not as big as in some of the other divisions.

Lady was fairly well-controlled last year.

Great.

Turning to Europe again, you mentioned business is still very profitable there.

Are the operating margins that were in the second quarter comparable to what was generated in the second quarter of last year?

Or have they trailed off a bit?

Trailed off a bit.

Trailed off a bit.

Do you think there is going to be any improvement in the back half of the year in Europe?

We are approaching Europe very conservatively.

I think it continues to be pretty tough over there.

All the public releases we see and what we hear the market is very tough.

The good news is that the way our Internet, FootLocker.com division, is performing any profit shortfall that we have in Europe in absolute dollars, a lot of it will be offset by the tremendous improvement at .com.

I see.

We are not getting, John, we are not getting into the promotional fray over there.

We are going to run the business the way we have been running it.

We have taken a pause on the expansion until things come back and trying to operate it as profitably as possible.

Really with a tremendous focus on introducing a marquee product we just introduced [Tundare 10], which is doing extremely well.

We have exclusive over there and it's reminiscent of when we originally introduced Tundare, not with the same velocity, but it's creating a lot of interest and buzz.

We have got a big TV campaign beginning next week in Europe's back-to-school, so we are expecting that shoe to really be a barn burner over there.

That is great to hear.

Last question I have is, how is the Company likely to utilize the strong cash position that you just reported?

Are we likely to see dividend increases or share buybacks, or other ways of putting that cash to use?

Well, we are always looking for ways to reward and enrich our shareholders.

We recently increased our dividend by 20% and we will continue to focus on dividends as appropriate.

I think during this environment we are paying a lot of attention, I'm not suggesting we haven't in the past, but we really want to be in a very strong financial position with a strong focus on balance sheet management.

Bob and his team have done a very strong job in making that happen, as well as the merchants and controlling the inventories.

I think until we get through the current business environment and into the future, I think we learned our lesson the hard way.

But there is a lot of inventory that we don't need around here.

So, we are editing very, very aggressively our purchases.

And really putting a very heavy focus on managing that balance sheet and making sure that we have a liquidity position that is failsafe.

That sounds super.

Congratulations on a good quarter and keep up the good work.

Thank you, John.

Bob Drbul, Lehman Brothers.

Thanks, good morning.

Two questions that I have.

The first one is, Matt, on the apparel business overall, can you just give us an idea in terms of the newness, what is going to change in the apparel business besides -- from the branded apparel guys what you think will change the market there?

On the average prices of what you have sold a year ago or two years ago in apparel, what sort of increases do you expect on the branded apparel with both existing vendors and some of the new vendors?

Yes.

Firstly, this mixed martial arts apparel is a very hot category.

We have exclusively in the mall TapouT, which is a very fast growing business.

It started at Champs almost a year ago.

They are doing a terrific job with it.

It is now in Foot Locker and it's being rolled out I believe to all the Foot Locker doors, so that is a big play.

And that could be a very, very big branded business.

There is also some tertiary brands getting into that mixed martial arts that we are carrying.

When you look at Nike and Adidas, in the past couple of years I think it's a tale of the chicken or the egg.

Business was a little soft and we backed off too much.

We have increased our purchases with both those key suppliers for the fall season.

If you go to our stores today, you will see a lot of the product.

Track suits are coming back and that is good news because that is a high ticket item.

The originals package from Adidas is also very, very strong.

We are rolling that out into a lot of doors, and also in Europe, it's doing very well in Europe.

But that is a very high ticket item and doing well.

As far as average price, our average prices are up in apparel.

We are trying and successfully implementing a program by which we are selling less of the promotional T-shirts that worked extremely well for about six or seven years.

I think the customers are tired of it, we are tired of it and we are getting into more higher price points in the T-shirt category.

T-shirts are very big business, obviously, in a company like ours.

So, our average unit retail is up significantly in apparel this year versus last year.

Great, then just my last --

It's double digit up.

Thanks, Matt.

Then my last question is just can you talk about August in terms of the trends that you have seen in August thus far?

August is off to a good start.

The US is about even, as of today.

We expect it to be ahead by Sunday, after this weekend's launch.

There is a big Jordan package and a Pippin package, and some strong Air Force One programs this weekend.

So US is off to a good start.

Europe is basically in the same mode.

Our Internet business is strong.

The other two divisions, Canada and Asia Pacific, are performing okay.

In terms of merchandise trends, for us it remains on the high end with marquee product, unusual product, but it is different by market.

If you get up into Canada we are still selling a lot of European merchandise, particularly in the Québec market.

Still selling a lot of low profile product up there from Adidas and Puma, where in the US it is not doing well at all.

I mean those are the big headlines in trends.

Great, thank you very much.

You are welcome.

Robert Ohmes, Merrill Lynch.

Thanks.

Just actually a few follow-up questions.

First one, just a follow-up on Bob's question.

Matt, can you -- as you look into August, September, and October can you actually give us maybe a little more detail on the product launch schedule?

So I think the Hyper Dunk program related to the Olympics was an August program for you guys.

Can you comment on how well that went and if there is any carry-through into September and October related to that?

Then as you look at the Jordan launch schedule, is August going to be the biggest month or is it September or October?

And then maybe even carry us through how does the backlog coming out of Nike on marquee look to you guys right through December of this year?

Then related to that on the apparel side, I haven't heard any comment in a while on the licensed apparel business.

I was just curious if that is still an absolutely dead business or you are seeing any sort of signs of life there?

Thanks.

License continues to be challenging.

It has been tough now for a couple three years.

The Kobe Hyperdunk, which we have exclusive, has done extremely well.

That is a $110 shoe.

It has been a barn burner for us, we have done extremely well.

As you know, he is becoming a superstar at the Olympics, which is really helping that product.

We have considerably more marquee high-end product and launch product from Nike for the fall season, particularly in basketball.

Our basketball business, while if you look at the data that is around is not particularly good, our basketball business is on the moon.

We are in many divisions running double-digit increases in our basketball, particularly obviously here in the US where we have a huge basketball business.

So we are pretty well set for the fall season with the high-end marquee product and launch product.

There is a shift where we -- from September into August on a Jordan launch, so one came out of September and went into this weekend.

So I think as you look around, particularly I know a lot of you do go out and shop the stores this weekend.

You will see a lot of product being sold.

I don't remember, I think it's the second or third weekend of September where there is not a comparable Jordan launch this year.

But apples-to-apples we have got a lot more product.

Did I get them all, Robbie?

There might have -- I think there was something else.

You got it all but one last follow-up question, anything going on on the women's side that could get women's footwear comps to turn positive this fall?

We are having a tough time in women's product.

It's universal.

It's not in any particular division, it's worldwide, it is tough.

Clearly, it's a fashion trend and it has been troubling for around a year now where our women's business has been really challenging.

It's not a disaster, but it's not good.

Great.

Thank you very much, Matt.

Thank you, Rob.

David Turner, BB&T Capital Markets.

Was most curious about pricing, particularly as it relates to a lot of inflationary anecdotes circulating.

You had mentioned 10% versus two years ago.

Your gross margin performance this quarter would suggest that you are not really getting hurt by any inflationary pressures.

So I guess if you are not getting hurt, what are you seeing or what are you doing differently?

And if you are, or are you just passing it through?

I guess if you could just -- is that an issue or have you been able to avoid it thus far?

The same question came up on the last conference call last quarter.

We have not experienced any resistance to the price increases.

Our markups remain the same on that product.

If our supplier increases their prices, we have had no difficulty in selling the product at the higher price.

I don't think the increases are egregious, I think they are reasonable.

Their costs, obviously, are going up over at there where the product is being manufactured.

But, if you -- if you hit them with the right product, the kids respond.

They are responding to a lot of exciting merchandise.

And quite frankly, in a long time I don't think I have seen this much exciting marquee product in the market.

In my judgment, it has probably been four to six years since I have seen this much hype and excitement around new and innovative merchandise.

So that bodes well for us, because that is where we trade and do a lot of business.

I think I have stated publicly several times we have almost a $1 billion basketball business worldwide, most of it here in the United States.

That is all products including apparel and accessories, but the lion's share of it is footwear.

That business is doing extremely well.

I anticipate the remainder of the year that basketball, as well as running, but basketball in particular will be a key driver.

Our House of Hoops store is performing extremely well.

We have three to four additional ones opening this fall.

As you know, House of Hoops exists in all Foot Locker stores, all 1,250.

We have a segmented section on the wall and it's doing very well.

I guess just to drill down a little bit more.

This was -- the pricing was independent of the stimulus checks?

You didn't see a big spike in May and June and then the pricing has come back down since?

It has been relatively constant throughout the month, I guess, the pricing?

Essentially, yes.

July was a little softer than the previous two months, but there is no stimulus checks now and business is okay.

Then to close out, for me anyway, I think Bob had mentioned inventory cuts in the 7% to 10% range for the back half of the year.

I was wondering if that is going to eat into your ability to comp?

My guess is that you are going to sacrifice some units given that.

But given how strong the marquee is you are still going to be able to get to a guided level without much heavy lifting.

Is that a fair scenario?

We over a two-year period, 2006 in particular, built up our inventories in the US too much.

We didn't need a lot of that inventory.

We, as I said, we have learned our lesson.

We are on-plan for the end of this current quarter, and we are expecting our inventory levels at the end of the third quarter to be down 10% to 11% from last year.

The reason being is we wanted to set ourselves up for very strong back-to-school and I don't think the inventory levels will be an issue.

We may, at the end of the fiscal year, add some inventory into that in that now we are going to be a very big part of the Under Armour running shoe launch.

They are launching that on January 31.

So we are going to have to bring those receipts in at the end of January, and it's a lot of inventory.

So it may have an effect of a couple of percent on our ending inventory, but it's is all new, fresh product.

We are in the throes of finalizing the orders, the purchase orders on that.

But I guess that you are not -- it's not cutting into your ability to drive sales?

This is not cutting into muscle, I guess?

No.

Thank you.

You are welcome.

(Operator Instructions) Omar Saad, Credit Suisse.

Thanks, good morning.

Congratulations on the nice quarter, especially the impressive gross margin improvement.

It has to be very satisfying, I imagine.

Thank you.

Matt, just wanted to get a update on the store closures.

Where you stand in terms of your store base?

I know it sounds like you are kind of standing still a little bit in Europe and waiting to see how things shake out.

How do you feel about the locations here in the US?

Are you where you want to be?

Are you going to continue to trim and prune over the coming quarters?

Last year we closed over 300 stores worldwide.

This year the plan is to close 140.

We are going to exceed that because we made a decision to get out of some more unproductive stores.

This is not a situation where we are going to have to buy out the leases or anything, but we are going to probably close 30 to 40 more than we had originally planned.

We are looking at the store base in that we really are -- want to be headed towards -- you will never have a total fleet this size where every single store is totally productive.

It just doesn't work that way.

But we expect to end the year with about 70, 80 stores less than last year.

The store closing program is on track and we are very comfortable with it.

We feel real good about what we did last year and what we are doing this year.

We are spending a lot of money on renovation, particularly in the mothership of Foot Locker.

We have renovated our flagship here at 34th Street.

We now have, worldwide, close to 300 stores that have the look and feel of the store here.

Our strategy is to implement another 500, hopefully, 600 renovations of the same caliber next year to really get us update and current and really looking exciting again.

Great, thank you.

Then a quick question on the Olympics, are you seeing an impact?

Do you expect an impact in the market here or in the Europe?

What are your thoughts on China as a market opportunity?

We have always had a little bit of a lift from the Olympics.

But I don't think it's going to change our lives, so to speak.

So we have gotten -- I have been here now for several Olympics.

We get a slight lift, but it's not material.

What was the question on China?

Yes, I mean, obviously, there is a lot of passion for sports and basketball in particular in China.

Just curious what your thoughts are on that as a market opportunity?

Obviously, it's a big market and it's something that -- I made a trip a couple years ago over there and hadn't been there in a long time.

There is a lot going on and it is clearly on our radar.

Great, thank you.

I think we have time for one last question.

John Zolidis, Buckingham Research.

This is it [Jody Yen] on behalf of John.

Just had two quick questions, what was the impact of currency on the sales?

Got that on the top line?

30?

It's about 2%, I believe.

OK.

The second question is about the rent, are you seeing any more favorable terms for landlords for lease renewal?

The answer is yes.

I never thought that I would be able to say that.

But their obviously with the current economic conditions out there we are beginning to get some more favorable arrangements.

Okay.

Second question is how do you think that rent per square foot will be going up in 2008 and 2009?

It won't.

Okay.

So you think that it will be flat?

Expecting it to be flat, yes.

Okay, thank you very much.

Jody, just to clarify the impact of FX on sales, it was closer to 3%.

Closer to 3%, okay.

Sounds great, thank you.

All right.

Well thank everyone for participating today.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may all disconnect.