Foot Locker Inc (FL) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the fourth quarter 2008 earnings release conference call.

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

Later we'll 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 include, are based on many assumption 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 to you 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 assumption or factors could produce significantly different results and actual results may different 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 the conference is recorded.

I'll now turn the call over to Mr.

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

Brown you may begin.

Good morning.

Welcome to the fourth quarter conference call.

As we reported, our fourth quarter GAAP results reflected a net loss from continuing operations of $125 million or $0.82 per share and included non- cash impairment charges and store closing expenses of $1.06.

On an adjusted non-GAAP basis, our income from continuing operation before the impairment charges and store closing expenses was $0.24 per share, a 60% improvement versus our adjusted, non- GAAP earnings from last year.

Our adjusted non-GAAP financial results were above both our expectations for the quarter and the consensus Wall Street estimate of $0.17 per share.

To assist you in your analysis we've included in our Press Release a reconciliation of our fourth quarter full year results on a GAAP basis to an adjusted non-GAAP basis for both 2008 and 2007.

Overall, our fourth quarter adjust the results reflected the following.

Comp store sales decreased 7.3%.

Our gross margin rate increased by 330 basis points.

Our SG&A expenses were $22 million below last year.

Interest expense was $1 million, in line with last year.

And our cash position at year-end was $408 million.

Bob McHugh, our Senior Vice President and Chief Financial Officer will begin the call with a discussion of our fourth quarter financial results and Matt Serra, our Chairman and CEO will follow with an operational review of the fourth quarter and discuss our overall strategic priorities for 2009.

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

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

Good morning.

During my prepared remarks, I will discuss our earnings from continuing operations on an adjusted non-GAAP bases by excluding non-cash impairment charges, store closing expenses and last year's income tax valuation adjustment.

I'll discuss each of these charges separately.

As everyone is well aware the external business climate during the fourth quarter was very challenging.

Fortunately we anticipated that consumer spending would continue to slow and we planned our business strategy accordingly.

The actions we took included reducing our inventory levels and decreasing our operating expenses.

By moving quickly, we were able to protect our operating profits and keep ourselves financially and operationally strong.

Thus, even though the sales environment was difficult, we still achieved our merchandise inventory reduction objective for the year.

By ending the year in a strong cash and liquidity position and with the inventory $164 million lower than last year, we believe that we are positioned correctly for 2009, a year that will likely bring new opportunities and challenges.

Given the uncertain state of the global economy we are again, planning for our business quite conservatively for 2009, and have taken three key measures to help boost profits, promote strong cash flow and protect our balance sheet.

We have lowered our capital spending program, reduced our operating expenses, and we have planned our merchandise inventory purchases cautiously.

These challenging times require that we take these additional steps to support our capital expenditure program and continue to pay our shareholders dividend at its current rate from positive cash flow from operations.

Matt will provide some of the details behind each of these initiatives during his comments.

Our fourth quarter comp store sales decline of 7.3% was within our range of expectation and the guidance that we provided on our third quarter conference call.

It was our belief that the difficult external environment would continue to contribute to a decline in mall traffic and to lower overall consumer spending.

We made a strategic decision not to chase sales with increased store promotions.

In fact, we were far less promotional this year than we were during the fourth quarter of last year.

We, also, did not need to be as promotional this year due to our much improved inventory position.

We believe that this decision to pull back on our promotional stance was the primary contributing factor that led to our increased fourth quarter profits.

Fourth quarter comp store sales of major divisions were as follows.

Our aggregate US stores decreased low double-digits.

Foot Locker.com sales excluding the benefit of CCS sales decreased mid single-digits.

Our international comp store sales increased high single-digits with Europe increasing mid single-digits, Foot Locker Canada up low single-digits and Foot Locker Asia Pacific increasing mid-teens.

By month, comp store sales decreased mid single-digits in November and December, and high single-digits in January.

Sales trends throughout the quarter were challenging in our US stores.

At the same time, sales at our international divisions were encouraging.

Our fourth quarter gross margin rate increased by 330 basis points from last year, reflecting a 400 basis points point increase in our merchandise margin rate and a 70 basis points deleveraging of our buying and occupancy rate.

Our domestic merchandise margin rate increased 490 basis points, while our international merchandise margin rate increased 180 basis points.

Our significantly reduced markdown rate was the primary factor that contributed to our much higher bottom line profit.

Our fourth quarter buying and occupancy costs on a constant currency basis were slightly below the fourth quarter of last year, and slightly favorable to our expectations.

I'm, also, pleased with our fourth quarter operating expense performance.

Fourth quarter SG&A expenses were $22 million lower than last year.

As a percentage of sales, SG&A expenses increased 100 basis points, reflecting the deleveraging caused by our comp store sales decline.

Clearly, our well established profit improvement process at Foot Locker, whereby we encourage our associates to identify and implement cost reduction initiatives, continues to be very rewarding four for our Company.

We were very successful with this process again in 2008, benefiting from initiatives in all areas of our Company, including store operations, logistics, information systems and technology, Risk Management, and finance.

Net interest expense for the fourth quarter was $1 million, in line with last year.

The non-cash impairment charges and store closing costs totaled $1.06 per share during the fourth quarter this year, compared to $0.10 per share recorded during the same period last year.

The details of both this and last year's impairment charges, store closing costs and income valuation allowance adjustment are detailed in a schedule attached to yesterday's Press Release.

Both year's non-cash impairment charges were recorded to write down the performance of underperforming assets at our US store operations in accordance with FAS 144, which [feints] the accounting for impairment of long lived assets.

Also, included in this year's amount, is an impairment charge to write down a portion of our goodwill in accordance with FAS142.

Our 2008 impairment charges primarily reflect the expected negative impact that the deteriorating external retail environment will have on the value of our US businesses.

Our accounting policy as it relates to FAS 144 as well as 142, and the details of these charges will be outlined in our Annual Report, Form 10- K.

In comparing our 2008 and 2007 fourth quarters, please note that the 2007 results reflect an income tax valuation allowance $0.40 per share related to Canadian income taxes.

Our 2007 income tax expense, also, reflect a $9 million adjustment from that previously reported to correct income tax expense calculation errors that we discovered as we were preparing this year's financial statements.

Our fourth quarter effective tax rates on a non-GAAP basis, after adjusting for impairment and store closing costs in both years, and the income tax correction and valuation adjustment last year, was 32% in 2008, versus 27% in 2007.

At the end of the year, our cash position net of debt was $266 million, our total cash and short- term investments totaled $408 million, while our long- term debt stood at $142 million.

We generated, approximately, $200 million of free cash flow for the year, in line with our expectation at the beginning of the year.

We utilized $93 million of the positive cash flow to fund our cash dividend and $103 million to purchase CCS.

Our ending inventory $164 million, or 12.8% lower than at the end of the last year.

Excluding the additional inventory associated with the purchase of CCS, our inventory was approximately 13% lower than last year.

On a constant currency basis and excluding the additional inventory associated with our CCS purchase, our inventory was, approximately, 10% lower than last year.

Therefore, we achieved the year-end merchandise inventory objective that we established for the year.

We believe that we have an opportunity to further optimize our working capital investment for 2009.

The impact of the challenging external environment on overall consumer spending is very unclear at this time.

Therefore, we have decided that we will not be providing earnings guidance for 2009 because the effect of these external factors on our comp store sales results and earnings per share are difficult to predict.

We are far more confident in forecasting the more controllable factors in our earnings plan, such as our gross margin rate and expense structure.

We believe that we have a very good opportunity to maintain or potentially improve margin rate from 2009 from that reported last year.

As mentioned, our inventory levels are down significantly from a year ago and our merchandise aging is in very good shape.

We've already taken several actions to reduce the operating expenses for 2009.

As we go through this year we will flex our variable expenses with the sales and continue to look for additional opportunities to reduce our fixed costs.

We expect that our depreciation expense for the year will be in the range of $112 million to $116 million.

This is a decrease interest from 2008, reflecting the impact of lower Capital Expenditures, the 2008 impairment charges and current foreign exchange rates.

Interest expense is expected to be in the range of $6 million to $8 million dollars higher than 2008 due to lower investment rates.

Our effective tax rate for the year is expected to be 36% to 37% largely dependent on our mix of income in the US versus international.

While we were taking a cautious and conservative stance for the near term we believe that our Company's earnings prospects, long- term, remain positive.

Once the global economy returns to more normal levels we expect that our earnings will begin to rebound to more historic levels.

In the meantime, we will remain focused on maintaining a strong financial position and generating strong cash flow that can provide attractive shareholder returns.

I'll now turn the program over to Matt Serra.

Good morning.

I want to reinforce what Peter and Bob just covered.

I'm make a few comments about our key corporate strategic objectives for 2009.

Overall, we achieved most of the financial objectives that we established for ourselves at the beginning of the year for both the fourth quarter and for the full year.

Fortunately, we began the year planning conservatively and subsequently adjusted our business strategy when we recognized that consumer spending was contracting.

As a result, we effectively minimized the negative impact of the rapidly deteriorating external environment on our financial results and turned in a good operating earnings performance.

While our sales results for the quarter were towards the low end of our guidance we generated a strong gross margin rate improvement versus the prior year.

We managed our expense structure effectively by reducing operating costs aggressively.

We also generated strong, positive cash flow by reducing our working capital requirements.

These actions allowed us to finish the year in a strong financial position, providing the flexibility to benefit our shareholders longer term.

Clearly, we are still operating in a global retail recession.

We are determined, however, to maintain our financial strength so that when the strength of the economic climate improves, we will emerge in a strong competitive position.

In the US, our combined stores posted a low double-digit comp store decline during the fourth quarter, negatively affected by two key external factors.

Declining mall traffic and lower consumer spending.

Footwear sales decreased mid single-digit and apparel sales and accessory sales decreased high teens.

Our men's footwear business declined mid single-digits and both women's and kids' footwear business declined double-digits.

Our men's basketball, premium classic and canvas categories were strong, but we had declines in most other categories, including running.

Our men's footwear business continued to show strength in the higher price point performance categories.

Our average footwear selling prices in the US increased double digits versus last year for two key reasons.

Last year's average selling prices reflected a much higher markdown rater, when we clearing a large amount of slow selling goods.

Additionally, we benefited this year from a positive mix shift toward selling a greater percentage of higher priced foot wear.

US apparel sales continue to be weak extending a poor athletic trend that we've experienced the last two years.

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

We've had success with new branded offerings from new vendors such as TapouT and Under Armour.

But these programs were not large enough to offset the sales declines in licensed and private label products.

In Europe we're very pleased with the sales improvement that took place in the fourth quarter.

Foot Locker Europe generated a solid sales increase in both footwear and a strong increase for apparel for the quarter.

In Europe, we benefited from solid gains in higher priced technical running footwear.

On the negative side, we continued to experience declines in the low profile casual category.

Sales in this category continue to be a smaller percentage of our business; therefore, the sales declines in this category are becoming a less significant issue to our overall business results.

Our average selling prices in Europe increased low to mid single-digits, while our unit sales were fairly flat.

Foot Locker Europe generated a very strong profit increase for the quarter, with a division profit margin rate back in the double-digits.

Our Canadian divisions' profits in line with plan for the quarter and continue to run at a very solid double-digit division margin rate.

For the year, Foot Locker Canada generated a solid profit increase, and improved slightly on its double- digit division profit margin rate.

We generated our highest year- over- year sales and profit percentage increase in our Asia Pacific division for the second year in a row.

I'm pleased to say that this division broke into the double-digit division profit rate for the first time in its history during the fourth quarter.

Under the leadership of Lou Kimball, its Managing Director, division profit for Foot Locker Asia- Pacific has doubled during the past two years and is beginning to make a meaningful contribution to our Company's results.

Sales that are direct to customer business increased 14.5% in the quarter, reflecting a mid single-digit decline in the Foot Locker.com east bay business and the positive impact of adding the CCS business to the portfolio.

We're encouraged the CCS business was accretive to our earnings during the fourth quarter and generated double-digit profit margin rate.

For the full year, direct to customer business generated an 11% division profit margin rate.

Turning to our franchise operation, we ended the year with a total of 17 stores in the Middle East and Korea an increase of eight stores from what we operated at the beginning of the year.

In total, we opened 64 new stores, remodeled or relocated 230 stores and closed 225 stores during the year.

During 2009, we will remain focused on implementing programs designed to maintain a strong financial structure and improve the competitive position in each of our operating divisions.

Our key strategic initiatives in 2009 are as follows.

First, take the steps necessary to help in ensure that we continued to generate strong cash flow and redeploy that cash carefully for the benefit of our shareholders.

Second, maintain a disciplined approach to inventory management, keeping our aging current and improving inventory turns over time.

Third, continue to work aggressively to reduce operating expenses by flexing our cost in line with sales and implementing new initiatives.

Fourth, capitalize on improving sales and profits in Europe, and focus our growth initiatives in international markets where we earn our highest returns.

Fifth, improve the appearance of our store base through a well- targeted, remodeling and renovation program.

Sixth, build our athletic apparel business in both branded and private label segments.

And finally, capitalize on our recent acquisition of CCS and expand our footwear offerings in the rapidly growing skate category.

Given the current state of the external environment, we are taking a conservative approach to our business planning to help ensure that we continue to generate strong cash flow and maintain a strong financial position.

Therefore, we have reduced our Capital Expenditure program for 2009 by approximately 30% from last year, to $100 million this year.

We will continue to manage our merchandise inventory tightly, purchasing conservatively to ensure that there's an appropriate balance between merchandise flow and sales.

We will continue to monitor our merchandise inventory aging closely and take actions in this regard to slow selling goods on a very timely basis.

Given the state of the external environment, we have challenged our organization to be even more aggressive than in the past in identifying new opportunities to cut expenses.

We have already taken several actions to right size our expenses to match our lowest sales base.

I also expect that we will identify many more expense saving opportunities during the course of the year, through our well established profit improvement program.

We continue to focus our capital spending this year on store remodels, store relocations to more favorable locations in the mall, and systems technology projects designed to enhance customer service.

During 2009, our current plan is to open 25 to 40 new stores and to remodel or relocate up 150 stores.

We'll work closely with our landlords to identify opportunities that are mutually beneficial to improve our profitability.

As mentioned earlier, we're very encouraged with the operating results of each of our international divisions.

Long- term we believe that we have an opportunity to benefit from a turn around in Europe and continue to build on progress in Canada and Asia and Pacific.

While we have temporarily reduced our Capital spending program and store openings, we're active in the European marketplace identifying new locations so that we can more aggressively resume our store growth plan in Europe once the external environment improves.

Our apparel sales in the US has been a soft spot for us for a few years.

As we have already done in Europe, our objective is to turn the challenging apparel segment into a significant opportunity in the US.

To accomplish this objective, we're in the process of remerchandising our apparel assortments with the following key objectives.

Work with the most important suppliers Nike and Adidas to provide more exciting brand of products.

Intensify our offerings from Under Armour and introduce apparel from this very important supplier to more of our stores.

Expand our assortments with new and emerging brands such as TapouT.

Additionally, we believe we have a significant opportunity to improve sales by reworking our assortments of our private label offerings.

Finally, we believe that we have a very meaningful opportunity in 2009 to enhance our business by expanding further in the action sports categories.

Our purchase of CCS was a significant step in capitalizing on this opportunity.

Our fourth quarter profit from CCS was in line with our expectation.

This business is now fully integrated with the Foot Locker.com infrastructure, which will allow us to capitalize on many operating synergies.

New CCS website was successfully launched last month.

We'll continue to make enhancements to all of our websites to keep pace with customer service requirements.

CCS has an opportunity to generate double-digit operating profit margins during 2009, in line with those of Foot Locker.com.

Additionally, we will continue to pursue opportunities to expand our skate business in the bricks and mortar segment of our business.

In summary, we are encouraged by our fourth quarter financial results.

During the quarter, we effectively offset our comp store sales decline through significantly lower markdowns and effective expense management.

The current external environment remains uncertain, which makes forecasting our sales extremely difficult.

While we are not providing any specific earnings per share guidance, we believe that we are well positioned for the future.

We have a well known brand, strong balance sheet and operationally, a very clean inventory position.

Thus, despite the challenges that may lie ahead, we have good opportunity to improve our merchandise margins and build market share.

Most importantly, we will remain focused on generating strong cash flow and maintaining a very strong balance sheet.

We believe it is important to the shareholders that we maintain our quarterly dividend payments; therefore, we plan to manage our business with that objective in mind.

I'll now be happy to answer your questions.

Thank you.

Thank you.

We'll now begin the question and answer session.

(Operator Instructions) Our first question is from Robert Drbul Barclays Capital.

Please go ahead.

Hi, good morning.

Good morning.

The -- couple questions for you, Matt.

First, on the European trends, could you just elaborate in terms of what you think is driving this solid performance there?

And sort of how sustainable those trends are for you?

Yes.

We have seen a resurgence in the athletic fashion of footwear trend, particularly running, which is basically the lion's share of the business over there.

Also, with, in concert with that, our apparel business, where we have intensified our key suppliers, both Nike and Adidas have been performing extremely well.

And we continue to do well with it and we believe that a trend is emerging in the athletic, pure athletic functional piece of the business.

Okay.

And when you look at the inventory situation, and the overall business, you talk about opportunity still for working capital improvement.

What areas do you feel like you have the most work to do in the inventory position as it stands today?

Well, we've reduced our inventory significantly.

And we think that there's more opportunity to continue to reduce inventories, certainly not as dramatically as last year.

One of the dynamics you have to take into the equation of inventory per store, is the amount of price increases that we've experienced over the last several years.

I would say, in general, over a three- year period, the cost in retails are essentially up 30 plus percent.

So, we are trying to get more merchandise on replenishment.

A vendor like ASICS which is growing with us rapidly, basically has everything on replenishment.

And it is growing with us worldwide not just the US.

Those are the opportunities.

I don't see like a 10% opportunity in reducing inventory in there.

We've, also, taken steps in our private label where we have the ability in certain items to replenish it now instead of bringing in huge quantities offshore.

We're doing a lot of it in Central America now.

So with is really, it lands, here and then we just replenish it in kind of a lock and stock system.

Where we don't own the inventory until we take it.

Okay.

Just one last question from me.

Can you comment on, either European trends or trends in the US since the fiscal year ended, so February and thus far in March?

Yes.

February we got off to a very good start.

As a corporation, we were up low single-digits.

The US business was up close to mid single-digits.

And Europe it was down low single-digits.

So we're really focusing on inventory control and margin management.

And when you don't have all of this excess inventory laying around it is a much easier task to deliver profits.

Great.

Thank you very much, good luck.

Thank you.

Our next question is from Robert Ohmes from Banc of America, Merrill Lynch Company.

Please go ahead.

Oh, thanks.

Hi, Matt, couple of quick questions for you.

First, I know the running shoe from Under Armour didn't hit until, I guess, I think it was January 31st, so it really wasn't a factor in the fourth quarter, but can you comment on sort of how that launch has gone for you?

And where you see the Under Armour footwear business playing out for you guys as you move through this year?

Then second you spoke about the big ASP jumps that you've seen, your anniversarying that now and you're looking at flat margins.

Can you just speak to the US/ASP outlook for '09?

Then finally -- I didn't hear if you mentioned targeted store closings?

For this year?

I apologize if you did.

If you could reiterate that and sort of just discuss your store performance, A., versus B., versus C.

malls in this current environment?

Thanks.

A lot of questions, Robby.

Sorry about that.

Under Armour, we - - it is meeting our expectations.

It is off to a very good start for us.

Clearly, the market needs some new product and this is a new, important line.

There are a couple of very key styles in there, the Specter which is a $90 shoe did extremely well for us in both Foot Locker and Champs.

Some of the trail shoes, too, there is [Chamarra] which is off to a strong start for us.

So, we would think and hope Under Armour will continue to be an important opportunity for our Company going forward.

With regard to store closings, we're in the -- we've closed a lot of stores the last couple of years.

and we have on the horizon, potentially 100 stores to close.

We may or may not close them.

Due to negotiations with our valued landlord, who are cooperating with us and working very, very closely.

So, we really don't have that figure at this point in time.

I would tell you that our goal is to hopefully save as many as possible and not have a tremendous amount of store closures this year.

A, B versus C malls?

That's a no brainer.

The A malls always do better.

What we're really experiencing is -- don't forget, we have a lot of street locations.

So, the mall traffic is down dramatically, the urban business is good and the street location is good.

I think one of the big expense initiatives we're taking is -- and I really commend the, the mall developers for initiating it, we're beginning to reduce some hours, which is a big play for us when -- when you operate in the US with 3,000 some odd stores.

Just cutting strategically some nonproductive hours, really is a big play for us.

It really helps us on the expense line in millions of dollars.

So, I mean, that's where we stand on the closures.

Our margins are rich.

Our margins are good.

We've cleaned up the inventory, we're in very good shape.

And we expect to keep it that way.

We fell off the reservation for a while.

And we're back to responsible levels.

And we're hopeful that we'll never get into the position we got into in '07.

And - -

Matt, Matt, sorry in, just in terms -- because you've done a great job of inventory.

Just in terms I know you're not giving guidance '09 how we think about -- how you guys are thinking about ASP trends for 2009?

I think they will probably continues to be up.

Because of the price points we're selling.

Terrific.

Thank you very much.

Thank you.

Our next question is from John Zolidis from Buckingham Research Group.

Please go ahead.

Hi, good morning.

Great job on the fourth quarter gross margin.

Thank you.

Question, clarification on your comment on the occupancy costs, being slightly below last year on a constant currency basis.

That is total dollar, right?

Yes.

And, obviously, sales are below last year as well.

Is your -- was your occupancy cost per square foot basis up for the year?

I think the better way to think of it is, that leases are put into place each time they come up for renewal and there's increases in the existing leases that we have.

Which are somewhat offset by some of the more recent experience we have.

So, while we've closed a lot of stores, you still have the impact of the increasing lease -- built into the leases that we have.

So, I guess the point you're trying to make is, that the rate of growth of that increase is beginning to slow.

And that's why we made the comment we did.

Okay.

That's helpful.

Then, that leads into my second question.

You talked about over at some point in the future, getting back to the historical levels of profitability that the Company enjoyed in the past.

And I was wondering if you could give us a little bit more of the path how that could occur in the context of lease expenses being elevated relative to three to four years ago?

You're SG&A expenses still being much higher.

And then, I was also a little bit confused by your comment on product costs being up 30%, over the last three years.

So, given all of these changes in cost structure of your business, what would have to occur to get back to historical levels of profitability?

Thank you.

Well, clearly, somewhere down the road, you have to begin to build the top line.

Sales.

And we're beginning to experience that.

When you look back at the historical results, we had exceptional results in Europe for about a six year period.

And Europe had hit the wall.

That's coming back extremely aggressively.

So, that will be a big component in building not only margin, but sales.

And Don't forgets a the sales go up, your occupancy goes down.

The other key initiative, and it is happening even though I don't think I mentioned it on the call, the big Foot Locker, Foot Action Kids division, which I believe you all know is operated as one division, that is performing extremely well.

That is almost close to half of our business.

As that engine begins to perform -- and last year while their sales weren't great, their margins, their division margins, which we call them division margins, they're operating margins, were extremely strong.

And that division in the month of February came back with strong mid single-digit comp gains and a very, very strong gross margin and bottom line.

And really that's the way, as you get these -- if we get -- if we continue to drive the big Foot Locker, Foot Action Kids business and the Europe divisions, those two divisions represent a tremendous amount of our profit.

Okay.

Thanks, good luck.

Thank you.

Our next question is Katherine McShane from Citi Investments.

Please go ahead.

Hi.

Good morning.

Good morning.

Adidas spoke about the business yesterday when they reported about getting more promotional in 2009, should we expect more in store promotions in '09 or similar levels?

And do you think you need to be more promotional in order to improve comp store sales trends?

Or are your customers taking a look at your product and think there's enough value conveyed in your product without having to discount?

I think when we have been successful, we have always really, principally, selling the high end, exciting merchandise.

That's what has drove our business in the past.

We're seeing a trend that's very similar to that.

With that said, in our divisions in the US, we've setup what' called a Value Zone and that's in the Locker's division and also Champs has a form of it, where there's a fairly good presentation of $49.99 to $69.99 product that is essentially purchased off price to satisfy that value customer.

We don't want that to become the lion's share of our business or more than 10%, 12% of our business.

But, so we want to get away from -- and we have been for over a full year -- store wide promotions.

We've got to focus on profits, liquidity, and continuing to manage that balance sheet.

Then, as the fashion trend continues to, to move forward with the athletic products, we're very hopeful that we'll get back to historical levels.

In several years.

Okay.

Thank you for that.

Then you had mentioned in a previous question, that February started off strong in the US.

Was this more traffic or ticket?

And other than the Under Armour running shoe, were there any new products offerings bringing people into the store?

And do you expect any launches over the next couple of months to be big traffic drivers?

Yes.

Well, as you know, I assume you know we have Kobe Bryant as exclusive in the mall, basically.

And we had exceptional results on a couple of his shoes.

Our basketball business was off the charts in the US.

So it -- we have close to $1 billion business in basketball.

Basically, most of it is in the US.

So, Jordan products continue to do extremely well.

And basically all of the Nike different basketball merchandise.

There are a lot of launches -- quite frankly, there may be too many launches, because that slows down the inventory turn, by the way.

We have, over the last three to four years, there's been many launches added to the system.

And many times, you have to get that inventory in your stores because it comes in on mixed loads on containers.

You have to have the inventory in your stores, two or three weeks before you get to sell it.

So, we're -- in Europe, we don't launch anything.

It comes in, goes out.

So, while launches are important, we have to create a delicate balance of what we're launching and when the merchandise comes in, just put it out and sell it.

Okay.

Thank you so much.

Welcome.

Our next question is from Christopher Svezia from Susquehanna Financial.

Please go ahead.

Good morning, everyone.

I guess as a question possibly for Bob.

Just to focus in on the SG&A reduction you saw in the fourth quarter, and, Matt, you've outlined several initiatives, as you look at the SG&A line and the cost structure for Foot Locker as you go into '09.

Whether it is logistics in and IT and store operations and store payroll, I guess, do you see an environment whereby SG&A dollars, I guess, could actually fall in 2009, relative to what you saw intent 08?

Yes.

Okay.

Could you - -

Yes.

There's key initiatives and Bob will expand on them.

Reducing store wages, to align the staff with the sales trends is a very big play for us.

Strategically reducing store hours to accommodate the customer traffic.

Current customer traffic.

Trends.

Continuing to, to reduce travel.

We put in many, many years ago, a video conferencing system.

And we have cut back dramatically on travel and never had much entertainment.

But we're watching the nickels and the dimes.

And continuing to work with our landlords to improve our occupancy expense.

I mean, those are the big plays.

Bob has a lot of details on that.

Yes.

Other things in terms of product activity and enhancements in the IT area and we continually work the cost of delivering our IT services.

Things like utilities and part of it is a green initiative to consume less energy.

That, obviously, saves money.

Putting some devices in some of the locations that we have to better monitor and control the usage.

We continuously use an online auction process to buy many goods and services and that continues to pay big dividends.

I -- and I really think that's where we see a big opportunity.

We've had some very good auctions lately.

We buy a lot of goods and services and consequently we're getting some pretty good pricing on some of the rebids of things we buy on continuous basis.

Just, again better -- and a lot of it is just productivity enhancements as well.

Logistics, continue to work the logistics and freight cost and how we deliver the logistics in terms of the use of technology in systems.

And then holding on to more of what we have in terms of being very focused on shrink and monitoring store theft and that sort of thing.

We've had a lot of success in the last year in what, we call holding on to more watch we do get.

And so it's a combination of all of those things together, we think we'll have good savings.

Okay.

That's extremely helpful, Bob.

I gel a follow-up to that statement possibly seeing SG&A dollars down.

I know February is a small month here and you're seeing positive trends in US business, but if -- assuming, possibly, trends continue to, maybe, hold to some degree or not as negative as maybe some might initially anticipate, is it still -- in other words, start to have to fund your business for growth, do you still envision an opportunity to see SG&A fall year-over-year in 2009?

Yes.

I think that's a possibility, yes.

Okay.

Alright, that's helpful.

I guess, Matt.

The other thing I would add though.

February is not a small month for us.

It's one of the biggest month of the year because of the basketball activity.

Okay.

So, it is -- it is -- it is one of the top four months in volume.

Okay.

Matt, when you look to Europe, and just for clarification here, the trends that you're seeing there, and the improvement coming through third quarter into fourth quarter, and if you kind of extrapolate a lot of what the brands have been talking about kind of challenges in Europe seeing both in the UK and on the mainland.

Can you maybe just talk about how you continue to be somewhat confident in the improvement you're seeing in Europe, relative to how the brands are talking about, inventory reductions, and the promotional cadence, et cetera.

Maybe talk a little bit about that, what you guys are doing differently relative to what the brands are talking about?

We've seen less promoting in Europe, with the exception of the UK Now, we do not have a big business in the UK and quite frankly, we're going to be very careful with regard to expansion, in the UK.

The Latin countries, Italy, Spain, and France very, very fashionable.

Countries, we're seeing our exclusive tuned Air product come back, which is very high end.

It's 150 to, depending on the style style, 160 Euros.

A lot of the Air product come back dramatically over there.

So, we're feeling -- and pretty good about Europe.

The other important dynamic in Europe is the big ticket apparel business.

Where the track suit is coming back as a fashion item.

And we've had tremendous success on those products over there.

So it is too early in the game to declare victory because I mean, you all know that we have never seen an environment like this.

And I -- one month and Europe's success for five months in '08, does not make a total turn around.

But there's trends.

When the trends go down, they go down.

When the trends move up, they generally continue to move up.

I think another dynamic in Europe in particular is the independents.

We've seen a significant amount of independents go away over there, because they just can't operate.

They don't have the cash flow to sustain sales declines.

If you read the reports recently, the last couple of weeks, you've seen in the UK, J.J.

B., which is in -- has got its challenges.

Right.

And then Go Sport and [Currier] in France, are struggling.

Losing a great deal of money.

So, and -- I haven't been over for a while, but [Ron Halls] who directs our European operation with [Dick Johnson], who's the CEO over there are telling me that they're seeing a lot of old inventory in the stores.

They're having open to buy problems.

Obviously, big sales drops.

So, we're having the opposite results.

We're fresh.

We're clean.

I think the stores look very, very good over there.

And Dick is really, Dick Johnson, the fellow that ran our Internet operations for a long time, has really jumped in there and done a terrific job with the help of Ron Halls, who handles our international and now Champs.

Congratulations, gentlemen, thank you very much.

Thank you.

I think we have time for one last question?

A question from Sam Poser from Sterne Agee please go ahead.

Most of my questions have been answered.

But I wanted to follow up on something Bob said earlier in his prepared remarks, hinting that the -- that despite you're not giving guidance, you implied -- it sort of seemed to imply that 2009 could be a more profitable than 2008?

Did I hear that correctly?

I don't think we said that.

That would certainly be an objective.

We always like to make more money than the previous year.

I think it is a little too early in the game, Sam to, to confirm that.

But perhaps on our next conference call we'll feel more sanguine about what will develop this year.

Okay.

And just to follow up on that, follow up on actually on Chris's question about the SG&A.

You saved $22 million in the quarter, how -- how much of that -- how much of that can repeat in the coming quarters?

I mean, is that -- could we put in $10 million to $15 million a quarter in actual dollar savings, do you think in SG&A?

No.

No.

There are opportunities to save, but not that magnitude.

That is big number.

When you save 22,that's a bigger number.

Yes, but that was one quarter.

And we had some issues from the prior year.

We went up against a disaster.

A lot of the improvement that we experienced in 2008 was up against a horrific 2007.

On a as- adjusted basis, we made $0.67 against $0.35.

I'll remind you for a number of years we're hovering around $1.50 $1.60.

That's our goal over the next several years, considering the external factors that we have to deal with.

The only thing that I feel good about is I'm seeing a very positive trend in athletic footwear.

Which, quite frankly, we haven't seen for several years.

A lot of the -- a lot of the products have shifted toward lifestyle and skate.

And we're seeing this high-end product really come back.

It is representing well over 35%, 36% of our business.

And that's kind of the way it was in the old days.

So, it is very encouraging.

And then you've got a new supplier, like Under Armour coming on.

And we're very pleased with that product.

Working closely with [Kevin] and his team to do some exciting things in there.

And, also, the Under Armour apparel.

We're rolling that out.

Into a lot more doors this spring.

I think we're going from 800, in the US, 830 doors to almost 1,300 doors.

So, we're getting some traction there.

Okay.

Then, just, just to follow-up on that, can - how much doors is the footwear in?

And are you working on special make-ups with them, with Under Armour at this time?

You'll probably get me in trouble if I answer that question.

You answered it.

Okay.

How many doors is the footwear in right now?

The footwear is going to be, in April, it is in 830 stores now it's going to be in 1,250 doors in April.

In the US.

And are you looking for international expansion there as well?

Yes.

Yes.

We are.

And they do not have a big international business.

But they're working very closely with our international team to get the -- not to reinvent the wheel, but to get the right type merchandise for the -- particularly the European markets.

So we're very excited about the prospects for Under Armour.

One last question.

Your -- can you -- can you -- do you think -- to what degree do you think you could bring your average inventory down on year-over-year basis in 2009?

It is hard to tell, Sam.

Our goal is to bring it down.

But I did mention, there were two dynamics in there, one is the average price that's gone way, way up, in footwear, and apparel to a degree.

But in footwear, which is basically the lion's share of our business.

And the amount of launches that kind of inhibit us from having -- we're working on it, by the way -- but inhibit us from having the turns that we had five, six years ago.

Because it seems like now everything seems -- is a launch.

And my personal point of view is, I mean, unless it is really a special retro Jordan or -- just put the inventory out and sell it.

When it hits the stores.

Are you working with the vendors to get launch dates later in the month so you don't have to deal with, like, loading them up at the beginning -- end of the month kind of thing?

Yes.

We're working -- to cut back in general a lot of launches.

Because it does really load up on inventory.

And if you get -- it is a very -- it is easy to say and hard to do.

And, Sam, you were in the business, so you know that you have a lot of mix loads.

I mean coming over from Asia.

So, if you have a launch shoe with a shoe that you -- you are expecting to get in right away, the way the system works is that really don't have the ability to target exactly what is coming over when you need it exactly.

And then we've got all of the these store in the US, and we have the West Coast cross stock system and our big D.C.

and Kansas.

It is -- it is easy to say and hard to do.

I -- but I'm determined to work closely with our key individual and suppliers and reduce the amount of launch products.

We're working very hard on reducing the inventory.

And I think we're going to have success there.

And we're committed to really maintain a very, very powerful balance sheet.

I think that's the order of the day.

Being in a very strong liquid position and, I mean we find ourselves, fortunately, with almost $410 million in cash.

And looking at our, our cash balances through the remainder of the year, planning very conservatively, we feel very good about that piece of the business.

Thank you very much, Matt, good luck, guys.

Thank you.

Okay.

That wraps it up for today.

Like to just thank everybody for your ongoing support.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may all disconnect.