Foot Locker Inc (FL) 2008 Q3 法說會逐字稿

Good morning ladies and gentlemen.

Welcome to the third quarter 2008 earnings release conference call.

At this time, all participants are in listen-only mode.

Later we will conduct a question and answer session.

The 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 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.

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.

I will begin the call this morning with some introductory comments.

Afterwards Bob McHugh, our Senior Vice President, Chief Financial Officer, will discuss our third quarter financial results, and provide some guidance for the balance of this year.

Matt Serra, our Chairman and CEO, will follow with some commentary regarding our business operations.

After our prepared remarks, we will be happy to answer your questions.

Our third quarter earnings per share on a GAAP basis were $0.16 per share.

Included in this amount was a $0.02 per share impairment charge related to a short-term investment.

Our net income before this charge was $0.18 per share.

Our earnings fell short of the range that we expected to earn at the beginning of the third quarter, primarily due to our US businesses experiencing a sales slowdown during the months of September and October.

This slowdown was somewhat offset by the strengthening of our business in international markets, including key countries in Europe that continue to generate positive sales gains.

In total, our third quarter financial results reflected the following.

Comp store sales decreased 1.7%.

Our gross margin rate decreased by 100 basis points.

Our SG&A expenses decreased $2 million.

Depreciation expense declined $13 million.

Our merchandise inventories decreased $214 million, or by 14.5%.

And our cash position net of debt was $272 million, a $174 million improvement from the same time last year.

I will now turn the call over to Bob McHugh.

Good morning.

As Peter mentioned, our earnings per share for our third fiscal quarter were below our expectations going into the quarter.

On a GAAP basis, our 2008 third quarter earnings of $0.16 per share, compares to a net loss last year of $0.22 per share.

Our 2008 results included a $3 million impairment charge after tax, or $0.02 per share, while our 2007 results included an impairment charge and store closing expenses totaling $66 million after tax, or $0.43 per share.

Therefore on a non-GAAP basis, we earned $0.18 per share this year, versus $0.21 per share last year.

Our third quarter earnings per share reflected a comp store sales decline in September and October, and a 100 basis point decline in our gross margin rate.

On the positive side, we are very pleased with the strength of our balance sheet at the end of the quarter.

We believe that we are positioned appropriately for the fourth quarter given the challenging external environment in which we operate, and the uncertainty in the marketplace that may continue over the next several months.

At the end of the third quarter, our merchandise inventory was $214 million, or 14.5% below the same period of last year.

On a selling square foot basis, our merchandise inventory is approximately 10% lower than last year.

We ended the quarter with $400 million of cash and short-term investments, and $128 million of balance sheet debt.

This represents a $174 million improvement in our cash position net of debt, versus the same time last year.

Our strengthening financial position allowed to us complete after quarter end the $103 million cash acquisition of CCS, using positive cash flow from our operations.

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

Our combined US store operation decreased low-single digits.

Footlocker.com sales increased low-single digits, Europe declined low-single digits.

Foot Locker Canada increased low-single digits.

And Foot Locker Asia Pacific increased almost double digits.

By month, comp store sales increased low-single digits in August, declined low-single digits in September, and declined mid-single digits in October.

In the US, we had a low single-digit comp store sales gain in August, followed by mid-single digit comp sales declines in both September and October.

Conversely, in Europe we had a high single-digit comp store sales decline in August, followed by a combined low single-digit comp increase in September and October.

As Peter already mentioned, our third quarter gross margin rate decreased by 100 basis points from last year.

50 basis points of this decrease reflected a lower merchandise margin rate, and the remaining 50 basis point decline due to a higher buying and occupancy rate.

Our merchandise margin rate for the third quarter was somewhat below our expectation, but not far off our historical third quarter rate.

Keep in mind that our merchandise margin rate for the third quarter last year was 10 basis points stronger than in 2006.

Our third quarter markdown rate was also in-line with historical results for comparable periods.

Our buying and occupancy costs for the third quarter, stated in constant currency dollars, were relatively flat with last year.

Therefore, the 50 basis point increase in the buying and occupancy rate, reflected deleveraging due to the comp store sales decline.

Our opportunity to improve our full year-over-year gross margin rate was partially realized during the second quarter, with a further improvement expected during the fourth quarter of up to 300 basis points.

Last year's rate in the fourth quarter reflected heavy markdowns that we took to clear slow selling goods.

Third quarter SG&A expenses decreased $2 million versus last year.

On a constant currency basis, our third quarter SG&A expenses were essentially unchanged versus last year, and in-line with our objectives.

We expect to repeat this expense performance again during the fourth quarter, with our total SG&A expenses stated in constant currency dollars to be flat with last year.

Depreciation expense for the third quarter was $32 million, a $13 million decrease versus the same period last year.

We expect our depreciation expense for the fourth quarter to be 32 to $33 million, relatively flat to slightly lower than last year.

During the fourth quarter, we will anniversary against the asset impairment write-downs recorded last year, that create the favorable depreciation expense comparisons that have benefited our results during the first nine months of this year.

Net interest expense for the third quarter is $1 million.

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

The $5 million of Other income includes mark to market gains on foreign currency contracts, that were executed to hedge our divisional earnings and our international operations.

Option contracts remain in place for the fourth quarter, and provide a hedge for a significant portion of our European earnings.

Our guidance for the year is based on a fourth quarter rate of EUR1.29 to the US dollar, which these hedges should enable us to attain despite fluctuations in the euro.

As a point of comparison, the average exchange rate last year was EUR1.47 to the dollar.

While the exchange rate comparison is unfavorable, we believe that our European operation has an opportunity to generate a profit increase for the fourth quarter.

The $3 million impairment charge relates to writing down the value of a $75 million short-term investment in the AAA-rated reserve international liquidity fund, which held Lehman Brothers securities.

During the third quarter, we requested a full redemption from this fund.

When the fund was trading at its stated $1 net asset value per share.

Subsequent to our request, redemptions for the fund were suspended pending a review by a court.

We believe that our redemption request will be honored at the $1 price based on public statements from the management of the reserve fund.

Partial distributions from other reserve funds that have also suspended redemptions, suggest that we may receive a partial distribution before calendar year end, with the remaining cash distributions expected during subsequent months in 2009.

Our third quarter income tax rate was 35.1%, in-line with our expectation going into the quarter.

Our current expectation for the fourth quarter is that our effective income tax rate will be 35.5%.

As already mentioned, our cash position net of debt was $272 million, a $174 million improvement versus the end of the same period last year.

Our cash and short-term investments totaled $400 million, while our long-term debt stood at $128 million.

In early November we spent $103 million of our cash for CCS, an investment that we expect will be very beneficial to our Company, as we look to expand our business in the action sports categories.

Our merchandise inventory position of $1.3 billion at the end of the third quarter was $214 million, or 14.5% lower than at the same time last year.

On a constant currency basis, our inventory was 11.2% lower than last year.

Inventory in our US stores were down approximately 13%, while down approximately 3% internationally.

As we have previously discussed, this planned inventory reduction is in-line with a strategic initiative, designed to reduce our inventory per store, and increase our inventory turnover over time.

This significant inventory decrease improves our position for the fourth quarter, allowing our stores to receive a significant amount of new goods coinciding with the all-important holiday selling season.

At year end, we expect that our year-over-year inventory position will decrease by approximately $100 million.

We are not planning for our inventories to be down as much at year end as we ended the third quarter.

This is by design for the following three key reasons.

First, on January 31st, the last day of our fiscal year, Under Armour will be releasing its new running shoe, that we think will add a lot of excitement to our stores.

Second, February is a very important selling month for our Company, particularly with the NBA All-Star game and Super Bowl early to mid-month.

It is important that we have a fresh flow of goods into our stores to begin this new season.

And third, the inventory associated with owning CCS will be included in our balance sheet this year.

At quarter end, our shareholders equity stood at $2.2 billion, a book value of approximately $14 per share, significantly above our current share price.

As stated in our press release, we currently expect our full year 2008 earnings, excluding all impairment charges, to be in a range of $0.50 to $0.63 per share.

We have lowered our guidance from that provided in August, to reflect the slowdown in our US business during September and October, and to take a more conservative approach to the fourth quarter.

The underlying key assumptions for the full year are as follows.

Comp store sales down low to mid-single digits, gross margin rate 175 to 200 basis points favorable with last year, SG&A expenses on a constant currency basis relatively flat with last year, depreciation expense of about $130 million, interest expense of approximately $5 million, pretax store closing costs of $6 million, and an income tax rate excluding the impact of the first quarter impairment charge of approximately 35.5%.

We believe that the most significant risk to our forecast relates to comp store sales in our US business during the fourth quarter.

Assuming we achieve our gross margin rate objective, the high end of our earnings forecast assumes total company comp store sales decrease in the low-single digit range for the fourth quarter.

The low end of our earnings forecast assumes a further deterioration of the external environment, such that we would experience a high single-digit sales decline during the fourth quarter.

We also expect to generate up to $200 million of positive cash flow in 2008 before dividends, debt retirements, and the acquisition of CCS.

In summary, we recognize that we are in unchartered territory [in] regard to the external environment.

This uncertainty makes providing guidance even more challenging than during more stable environments.

Our intent is to provide guidance that is both realistic in the current environment, and still achievable if consumer spending continues to slow during the fourth quarter.

On a more positive note, we feel that we are positioned correctly for these uncertain times with our financial position strong, and our merchandise inventory lower than the last couple of years.

We continue to expect to generate a meaningful profit improvement in 2008, and to generate a significant amount of positive cash flow from operations.

I will now turn the program over to Matt Serra.

Thank you, Bob.

Good morning.

Overall, our third quarter results were affected by weakening consumer confidence, resulting in overall retail sales in the US, that slowed precipitously during the months of September and October.

Our sales in the US also slowed during the final two months of the quarter, although not to the same extent as many other retailers.

As a result, our third quarter earnings per share fell below our initial expectations.

This was disappointing, especially since our August results were very encouraging, with our sales and earnings results in the US above plan.

As Bob mentioned, the retail industry is currently in unchartered territory, with consumer confidence reaching new lows.

The consumer has been hit hard by the severe stock market decline, which combined with fears of rising unemployment, have dimmed the outlook for all retailers in the near term.

Estimates of mall traffic in the US indicate declines of 10% or higher.

Our earnings guidance takes into consideration this very challenging external environment in the US.

We are hopeful that the nature of our business is such that we can withstand these very challenging times as well as most.

Our diversification in international markets is currently helping to compensate for the consumer slowdown in the US.

As sales slowed in the US in September, we benefited from a significant sales trend improvement in Europe.

Our sales in several key markets in Europe began to comp positively in early September, a trend that has continued into November.

While we are cautious regarding the external outlook in this market, we are very encouraged that our European business may be at a crossroads, with good opportunity to begin to more consistently post improved financial results.

Our businesses in Canada and Asia Pacific were also encouraging, as each performed well throughout the quarter and generated solid sales and profit increases.

In total, our sales fell 2 to 3% below our expectation at the beginning of the quarter, and our merchandise margin rate was about 60 basis points below our plan.

Looking towards the fourth quarter, on a GAAP basis, we believe that our Company has an opportunity to meet or exceed last year's results.

On a non-GAAP basis.

On a non-GAAP basis.

On a GAAP basis, we earned $0.51 per share during the fourth quarter of last year from continuing operations, which included an impairment charge, and store closing expense of 0.10 per share, and income tax valuation adjusted benefit of $0.42 per share.

On a non-GAAP basis, we earned $0.19 per share during the fourth quarter of last year.

To reach our forecast of full-year earnings of $0.50 to $0.63, including impairment charges, would require that we earned $0.09 to $0.22 per share.

Excuse me, that is excluding impairment charges.

We believe that we can achieve the higher end of the guidance in our comp store sales for the fourth quarter, are similar to the trend of the third quarter.

If the retail environment deteriorates during the fourth quarter, and our comp store sales decline high-single digits, our results will be towards the lower end of the range.

Our total US stores generated a low single-digit comp store sales decrease during the third quarter.

Our footwear sales increased very low-single digits, while apparel and accessory sales declined low-single digits.

On average selling prices, they increased mid-single digits in both footwear and apparel during the third quarter.

On the footwear side, we are benefiting from selling a higher percentage of higher priced marquee footwear, a trend that we expect will continue through the fourth quarter.

On the apparel side, our average unit prices are also increasing, and we begin to regrow the branded piece of our business.

Our men's and kids footwear businesses both had solid gains during the quarter, while our women's sales continue to be soft with high single-digit declines.

Sales of our men's basketball shoes were very strong during the quarter, particularly in the higher priced marquee Jordan styles.

Again, this is a trend that we have enjoyed all year, and we see continuing through the fourth quarter.

Sales in the men's running categories increased in the low single-digit area, led by Nike Shox, Adidas Bounce, and ASICS performance shoes.

In the Classic category, we generated strong gains in some specific Nike and Adidas styles, with sales declines in other basic products.

We also generated men's footwear sales increases in the canvas and boot categories.

As mentioned, our US apparel sales continued to be weak during the third quarter.

We generated some strong gains in some of our branded categories, while we continue to experience declines in the men's private label, licensed, and women's categories.

As we have discussed during our prior conference calls, we are in the process of realigning our apparel purchases, by adding some new branded product from vendors, such as Under Armour and TapouT.

We are still in the early innings as we evolve in this process.

Therefore, I would expect that the apparel sales in the US will continue to be soft during the fourth quarter.

Our international business was very encouraging during the quarter, led by our manager of that business, Ron Halls.

Our Asia Pacific division had a very solid quarter with the high single-digit comp store sales increase, and a strong division profit increase.

Our management team in Australia, led by Lou Kimball, are turning in a very strong performance for the year.

Our Canadian division also produced a strong quarter, including a low single-digit comp store sales gain, and a solid division profit increase.

I would like to acknowledge the good work done by our management team in Canada led by Brian [Milburn].

In Europe, as already mentioned, we have seen a significant improvement in our business beginning in the month of September.

This improvement coincided with some new marketing campaigns that were undertaken with both Nike and Adidas.

Our footwear sales trend in Europe improved during the quarter to the point where we are currently experiencing sales gains.

Our average selling prices increased mid-single digits; as similar to the US, we are selling a higher percentage of marquee footwear.

In Europe, marquee running footwear is the big driver of our business.

We also continue to operate this business effectively by minimizing our markdown levels.

The biggest improvement in our European operation came in the apparel and accessory side of the business.

We saw this trend begin to develop during the second quarter, and then really took hold in September.

In total, our apparel business in Europe increased over 20% during the quarter, with almost all categories contributing to the increase.

Sales at our direct to customer business, Foot Locker.com/Eastbay increased low-single digits.

We expect this division to generate a strong double-digit division profit rate during the fourth quarter.

The most exciting news affecting Footlocker.com/Eastbay is our recent acquisition of CCS.

Foot Locker.com is expected to be able to contribute meaningfully to CCS' profitability by integrating most of CCS' operational needs within their well-run and solid infrastructure.

CCS is the leading retailer in the US that sells skateboard footwear, apparel and accessories through the Internet and catalogs.

Through this acquisition, we acquired a strong management team that have strong relationships and proven experience in merchandising the action and extreme sports product categories.

Our plan is for the CCS team to continue to manage the CCS business, and report to Dowe Tillema, our CEO at Footlocker.com/Eastbay, thereby enhancing our ability to gain the full operating efficiencies of our existing direct to customer business.

We expect that this acquisition will be accretive to our Company during 2009.

For the first nine months of the year we have opened 58 new stores, and remodeled or relocated 194 stores.

Additionally, we have enhanced the look and feel of an additional 200 stores in the US this year, with new flooring and lighting while adding new fixtures and other modifications to 2,000 stores.

We closed 129 stores during the first nine months of the year, as we continue to pare down those stores that are a drain on our profits, especially those that are cash flow negative.

These programs are in-line with our current strategic focus to improve the productivity of our base business.

In this regard, we also continue to be very focused on inventory management, reducing absolute levels and increasing our inventory turnover will continue to be a focus in 2009.

Obviously this goal needs to be carefully balanced, against ensuring that our stores continue to receive a fresh flow of new goods.

In closing, we plan to remain very conservative in how we plan our business in the near term, until we see enduring signs of improvement in the external environment.

It is expected that the consumer will remain very cautious during these uncertain times, which will have a greater impact on some retailers than others.

While we expect that our businesses will be impacted negatively by the external environment, we are cautiously optimistic that we will fare better than many others in retail.

I would like to highlight that our financial position is very strong.

The fashion cycle favoring higher priced technical footwear is what we do best.

Our diversification in international markets is currently benefiting our results.

The turnaround in Europe is especially encouraging, and our inventories are in good shape, which enables a strong flow of new goods to our stores during the fourth quarter.

Our financial results for the first nine months of the year are within the range of our expectations going into the year.

While these are all positive factors for our business, we have reduced our expectations for the fourth quarter, given the increasing external challenges that may be ahead.

We will now be happy to answer your questions.

We will now begin the question-and-answer session.

(Operator Instructions).

Our first question is from Robert Drbul with Barclays Capital, please go ahead.

Good morning.

Good morning.

Couple of questions.

First, Matt, on the European trends, can you elaborate a little bit more, why you believe we are at a crossroads in Europe, and sort of how you expect Europe to stay out of the macro headwinds that those areas are facing, versus what we are seeing here in the US?

Yes.

Beginning in September, actually the first week of September, we began to see some very strong sales increases in our larger markets in Europe, and that is a by-product of several things.

A) the apparel business experiencing a much needed turnaround, and in Europe, the apparel business is a much greater percentage to total than it is here in the US.

So we are selling branded apparel extremely well in Europe, I think the other ingredient is we are beginning to see competition drop out in Europe in some of those markets.

There are some competitors that are closing stores, and downscaling their operations, and the promotional environment in Europe has relaxed dramatically.

Our footwear business, while we are not comping positively, we are down to very low-single digits, and lately on many days comping positively.

So the combination of those factors is what is driving that business over there.

Now we also have a trend now, it is close to three full months, and our profits during the third quarter in Europe were very, very good, and they continue to flow good into the month of November.

So with that said, we are very encouraged with the current trend.

Great.

Next question that I have is, you mentioned the upcoming Under Armour launch that you are excited about, I think at the end of January.

Are there any other launches domestically that you are excited about, that you are looking forward to from a business perspective?

There is a tremendous amount of Jordan launches in the fourth quarter.

We have more product than we had last year.

That is a given, that product will continue to sell well.

Our Nike Shox business continues to be very, very, very strong, and one dynamic that came into the system in the last, I want to say month or so, is the 6-inch boot from Timberland has come back very strong, and that is a big ticket out the door sale at $145.

So encouraging signs there.

My last question is, has the overall environment provided any product opportunities from vendors that you hadn't anticipated for or planned on?

In terms of what?

Off-price?

Have you gotten product that you didn't think you were going to get, or have you gotten bigger allocations on product?

Have there been any vendors that have given you better deals, or more than you anticipated?

No, I would say we always get our fair share of what is out there.

I think the market is being very cooperative in this environment, and I believe they know they need to be.

The one vendor that I failed to mention that is doing extremely well is Adidas with their Originals products.

We have shops between Foot Locker and Champs in the US I think we are up to about 850 doors.

So we are getting, I think very good cooperation from our suppliers.

Thank you.

Good luck.

Thank you.

The next question is from Robert Ohmes from Merrill Lynch, please go ahead.

Hi, Matt.

Two quick questions.

The first one, on the branded apparel piece, where you are starting to re-increase that business, I think a lot of people feel like higher price point branded apparel, like increasing that into the tough consumer environment is a little counterintuitive.

Can you sort of speak to that, as to why that business might be healthy enough to start to regrow again, as you move through the fourth quarter and into next year.

And then secondarily, I was hoping you could just speak a little more about what you anticipate the US promotional environment is going to be like in the fourth quarter.

I know you said it is relaxing in Europe, and some people are maybe going away.

What do you envision happening in the fourth quarter and into the first half of next year, in terms of competition in the US?

Thanks.

The apparel increases I was referring to, the branded apparel, was in Europe, we are experiencing very strong gains.

In the US, we have reengaged with a lot of apparel lines, put in Under Armour, TapouT, they are doing very well.

And we have added back in some important programs from Nike and Adidas.

The US is still down in apparel.

In all apparel, not only branded apparel, private label apparel, and the like.

Is that clear?

So the increase is coming internationally, but particularly in Europe on apparel.

Got you.

Okay.

In terms of the promotional environment, to this point in our zone, other than the people that normally promote heavily, we have not seen people stepping on the gas aggressively.

Will that happen?

My sense is it probably will, and it will probably lag into the first half of next year.

Sorry, Matt, in the range of the guidance you are giving, you mentioned the sales variability, but how much of that is gross margin variability on what you think the promo environment is going to be like?

In our Company, I don't think we are going to be impacted dramatically on our gross margin forecast, because last year the fourth quarter was the period where we really cleaned out the excess inventory.

So we are looking for a pretty good increase in the fourth quarter.

Terrific.

Thanks a lot, Matt.

Thank you.

Our next question is from John Zolidis from Buckingham Research, please go ahead.

Hi.

One question on the dividend.

Under what circumstances would you think that it would make sense to cancel or reduce the dividend to improve the firm's financial position?

Thank you.

We currently are in a very strong financial position.

Our cash flows through the fourth quarter, and our planned cash flows for next year, give us great confidence that we will have absolutely no issues with the dividend.

Okay.

That is good to hear.

One additional question if I may.

Looking at the growth in SG&A, the growth in SG&A dollars excluding items year-to-date compared to sales growth, it has been faster, and certainly currency has been a part of that, especially in the first half of the year, but looking forward into 2009, can you talk about what strategies the Company is considering to improve it's profitability in 2009, especially with respect to SG&A?

Thank you.

John, this is Bob.

We consistently and continuously look at our SG&A, and we always have.

I think the one thing we always look for is in productivity improvements.

We continuously flex the wages, for instance, with the level of sales.

But you have to be careful too, because we don't want to impact the quality of customer service in the stores.

So in terms of the corporate areas, we always challenge ourselves to have better pricing.

We do a lot of competitive bidding of services and goods that we buy.

We have continued to rework some of our internal processes.

But that is something we have always done, and we will continue to do that into next year.

But again, we have to balance that with not impacting the quality of the customer service in the stores.

Thank you.

Next question is from Kate McShane from Citi, please go ahead.

Good morning.

Can you just repeat quickly how much markdowns affected your gross margins during the quarter?

I think you said it was 50 basis points.

The 50 basis point decline was the overall decline in our merchandise margin rate.

Okay.

Can you help us better understand what drove this, how much was from markdown activity?

Were there certain store concepts or certain regions where maybe you were more promotional than other regions?

Not really, no.

I think our markdowns were flatter, lower than the previous year.

Regionally, we didn't take any action that would be different than what we did nationally in the US.

So the lower merchandise margins are more from mix?

Yes.

The bottom line is that we receipted a lot less, and our private label business has not been particularly good this year, because that is basically all apparel.

And that is very high margin.

We receipted more higher marquee footwear during the quarter, and I think it is a mix issue.

Okay.

And we don't expect to repeat that in the fourth quarter, the way the current plans lie.

Okay.

So just to clarify, so the marquee product is a higher margin product, a lower margin product?

And you expect to (multiple speakers)?

It is generally a higher margin product, but it affects the mix in the mark-up when you receipt it.

Then you have to sell it.

Okay.

And then in an unrelated question, are you planning any more store closures for 2009?

We will discuss 2009 on the fourth quarter call, but we are always opening and closing stores.

Okay, thank you.

Thank you.

Our next question is from John Shanley from Susquehanna Financial.

Please go ahead.

Good morning, it is actually Christopher Svezia in for John.

Couple of questions.

First just on the real estate front, I guess regarding renewals, can you just kind of remind us how many you typically do in a year, and have landlords, I guess in this environment, become a little more flexible regarding your occupancy rates, and those renewal terms when they come up?

There is a more cooperative spirit out there in the real estate industry.

Okay.

That is good to hear.

And I guess just switching gears for a second, on the marquee business, the marquee business has grown noticeably in the US.

I think in the past you have talked about being roughly 33% or so of the US footwear business, and it seems like based on what you are talking about, you expect that to continue to grow.

Is that in particular, I guess with Nike, and when you look at footwear pricing are the increases in pricing, is it across the board, or is it in strictly just the marquee end of the business?

It is across the board.

And it is not just Nike.

Don't forget you have got Adidas Bounce, which is a very big program, and we sell a lot of high-end ASICs products in our stores.

So the marquee business continues to grow.

I think we have always said it is 33 or more, and it is growing in our Company.

Okay.

Then as you look to spring and your open to buy commitments for product and inventory, could you maybe talk briefly how you are looking at that, based upon your current inventory position, and obviously how you are looking at business going into the fourth quarter, just any thoughts about how you are looking at spring and your open to buy commitments?

We are planning very conservatively.

We believe that spring will continue to be challenging, and our posture is to be very, very careful, and monitor it week by week.

We have it built into our models, to be very conservative, and if we need more product, we know we will be able to get it.

And the last question, if I may, just switching to Europe quickly, I guess nice turnaround in the business there, but you have talked in the past, maybe a little bit more on a regional basis, in terms of what is going on, UK versus Italy and France, etc.

I was wondering maybe if you can add a little color there?

In the past you have talked about that business being close to or [about] a double-digit operating margin business.

Is what you are seeing potentially lay the groundwork to return to those levels in 2009, or is that further out?

Potentially.

We have been doing well, real well for three full months now, so if it were to continue, it would be an opportunity to certainly get to the high-single digits, and scratch the low end of double-digits.

in 2009.

Anything on the geographic differences, Matt, by any chance?

For competitive reasons, I really don't want to go there.

Fair enough.

I appreciate it.

Thank you.

You are welcome.

(Operator Instructions).

Our next question is from Sam Poser from Sterne Agee, please go ahead.

Good morning.

Real quick, a little cleanup question.

There is $5 million of Other income below the line.

Can you just discuss what that was?

That was FX on currency hedges.

Okay.

And then, Matt, are you seeing a change in the demand for fashion athletic marquee product, being offset by the, if it was apples-to-apples on last year's economy, do you think business would be significantly better, because the demand for that type of product has improved, but it is being held back from more of a macro sense right now, in that improvement of overall offerings, and so on and so forth?

I think that is a fair statement.

And when you look into 2009, I know you don't really want to discuss it, with your inventories down well below what you had initially guided to, and it looks like you are on target to hit the number at the end of the year, how much margin help do you think you are going to get next year just being able to be a little more nimble, and being able to turn even with weak sales, potentially weak sales, be able to turn the product much more quickly?

Well, as I believe I said, our vendor partners are cooperating with us.

I think they are having some difficulties, and I think everybody is going to clearly work together in this environment, and this too shall pass.

It is just a question of how long, and how prolonged this economy is going to be like this.

But our vendor partners are working very closely with us.

One very important aspect is that we are getting a lot more product on quick response, which is helping our turnovers, so that is something that is not new to the industry, but we are getting more than we have ever had before.

One last question.

You had mentioned that you are planning very conservatively.

However, if things do improve, you feel like will you be able to get the product that you need.

Is the risk now being assumed more by your vendor partners on those key items, that may not be automatic replenishment products?

I think it is a shared risk, but we are planning very conservatively.

Thank you very much.

I think we have time for one more question this morning.

Question from Omar Saad from Credit Suisse, please go ahead.

Good morning.

One kind of technical question.

Can you help us understand, on the currency side, the impact, I mean, on margins and profitability as opposed to just the top line, how does that work in your international business.

Obviously the dollar is trying to (inaudible), it hurts the top line as you repatriate those revenues, but how should we think about the margin impact on your international business, as the dollar continues to strengthen?

Well, this is Bob.

I think as the dollar continues to strengthen, obviously the conversion of those earnings into US dollars is at lower rate, so it is not going to affect the margin rates over there.

It is a function of the translation, whatever the rates are at that time.

As you can see in this quarter, we do actively engage in hedging our foreign earnings, and the question is how much does it change from where it is today.

Just to add to that, Omar, most of our purchasing in the US is all US dollars.

Most of our purchasing in Europe is based on the euro or the pound sterling.

So most of it is all done in local currency.

So the real exposure we have, is then just translating the entire income statement into US dollars.

And Matt, if you could, can you talk a little bit more about the Under Armour launch in the spring, it has been kind of been well documented what that brand has done for other sporting good channels, and the benefits it has provided.

How do you see the product fitting in with your customer into the store, how do you view the brand generally and the different product offerings they have, and [it] will continue to grow into your store base, and the kind of impact you think it could have?

Sure.

First of all, we have got the apparel now in a significant amount of our doors throughout our divisions, and we are doing well with it.

We believe that the launch of the running product, which is the last day of the fiscal year, we think is going to be a very important launch in the business.

We have had the cross-training shoes in our Internet operation.

We have done very, very well with them.

So clearly the brand is resonating with the consumer.

We have a very large running business, as you know, and we believe that the product is priced extremely well, basically $85 to $100, and that it is styled well, and it is an opportunity for some new news in the footwear piece of our business.

So we are very excited, and we think potentially, it can be a very big business.

And how many doors is it going to start out in, and how do you expect that to unfold over time?

I think for competitive reasons we are not going to give that out, but we will have a significant amount of merchandise from Under Armour for the launch.

Great.

Thanks.

Good luck.

Thank you.

Okay.

That concludes our call for today.

Thanks everyone for participating.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may all disconnect.