Foot Locker Inc (FL) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the first quarter 2009 earnings release conference call.

Later we will conduct a question and answer session.

This conference call may contain forward-looking statements that reflect management's current views of future events and financial performance.

These forward-looking statements are based on many assumptions and factors including the effects of currency fluctuations, customer preferences, economic and market conditions worldwide and other risks and uncertainties described in the company's Press Releases and SEC filings.

We refer you to Foot Locker Inc's most recently filed Form 10-K or Form 10-Q for a complete description of these factors.

Any changes in such assumptions or factors could produce significantly different results and actual results may differ materially from those contained in the forward-looking statements.

If you have not received yesterday's release it is available on the internet at www.PRNewsWire.com, or www.FootLocker-inc.com .

Please note that this conference is being recorded.

I will now turn the call over to Mr.

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

Mr.

Brown, you may

Good morning.

As reported yesterday afternoon, our first quarter earnings were $0.20 per share versus $0.02 per share last year.

As you may recall, last year's results included a non-cash impairment charge and store closing expenses which totaled $0.12 per share.

Thus, for comparison purposes, last year's first quarter net income excluding those items was $0.14 per share.

You'll find a reconciliation of our GAAP results to the non-GAAP adjusted amounts in our press release to assist in your analysis of our results from ongoing operations.

As we go through our prepared remarks, our references to our 2008 first quarter financial results will exclude the impairment charge and store closing expenses.

Following our normal protocol, Bob McHugh, our Executive 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 first quarter earnings per share increased 43% versus our adjusted results last year.

We also produced very strong cash flow during the quarter.

Our first quarter results reflected the following: Comparable store sales decreased 2.4%.

Our gross margin rate increased 130 basis points, primarily reflecting lower markdowns.

Our SG&A expenses were $21 million below last year, depreciation expense declined $4 million, and our total cash position, net of debt was $6 million favorable to last year.

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

Good morning.

Overall we were very pleased with our first quarter financial results, which were better than our expectations going into the quarter.

We were particularly pleased by our performance since the external environment was, and will likely remain, quite challenging at least in the near term.

It is pretty clear from the various economic and industry statistics that consumer spending in the United States remains weak.

While the consumer confidence index increased last month, this has not yet retranslated into increased mall traffic.

During our March conference call, we explained that we were not providing earnings guidance for the year, because the effect of external factors on our comp store sales and earnings per share were difficult to predict.

We did state, however, that we believe that we had a good opportunity to improve our merchandise margin rate for the year, given our much improved inventory position.

This opportunity was clearly demonstrated in our first quarter results.

We also let you know that we had already taken several actions to reduce our operating expenses for the year, while providing guidance on depreciation and interest expense, and our anticipated effective tax rate.

In terms of our overall performance, I can say that our comp store sales were close to our expectations at the beginning of the quarter, while our gross margin and expense rates were better than we expected.

We also said that it was our objective to continue to focus on our already strong balance sheet.

This was another success for the quarter.

At quarter end, our financial position was strong, with $431 million of cash and short-term investments and just $142 million of balance sheet debt.

During the first quarter, we entered a new four year credit agreement with our bank group, providing a $200 million revolving credit facility.

The facility, which replaces an existing $175 million facility includes a provision that would allow us to increase the size of the facility by $100 million for a total of $300 million under certain circumstances.

While the new facility provides for a security interest in certain of the company's inventory assets, no material covenant or payment restrictions exist unless the Company borrows under the facility.

Together with our strong balance sheet, we believe this facility provides adequate financial flexibility to allow us to execute our business strategy effectively and provide us with the financial resources to grow our business opportunistically.

First quarter comparable store sales by region and segment were as follows: Our combined U.S.

store operation decreased low to mid single digits.

Foot Locker.com declined mid single digits.

Foot Locker Europe increased low single digits.

Foot Locker Canada increased low single digits, and Foot Locker Asia Pacific continued its recent trend, being up double digits.

By month, we came out of the box well in February producing a low single digit comp store sales increase.

Comp store sales declined mid single digits in March in line with our expectations, which reflected the Easter shift from March last year into April this year.

Comp store sales in April declined low single digits, which was disappointing given the Easter shift.

Our sales comparison at April was affected negatively by the anemic economic environment, as well as a couple of very strong product releases last year that were stronger than the comparable releases this year.

Our first quarter gross margin rate increased by 130 basis points from last year reflecting improvement of our merchandise margin rate.

Our buying and occupancy rate was flat with last year.

Therefore, while the external environment remained challenging and negatively affected our comp store sales, we successfully offset the impact of the sales loss on profits through a higher margin rate.

The improvement in our merchandise margin rate this year has resulted from two key factors, both of which have contributed to improving our markdown Management.

Our inventory level at the beginning of the year was significantly better positioned than it was at the same time last year, and we made a strategic decision to reduce the amount of product promotion versus the prior years.

Our first quarter buying and occupancy expenses were $15 million below last year, and in some situations, we were benefiting from lower occupancy costs due to more favorable rent negotiations.

We believe that the current environment may provide additional opportunities in other situations where market rents have declined from prior years.

First quarter SG&A expenses decreased $21 million versus last year.

On a constant currency basis, our first quarter SG&A expenses decreased by $7 million.

Our store operations team continued to successfully reduce store expenses by flexing store payroll costs lower and in line with sales by more effectively managing associate hours in our stores.

We expect that we will continue to benefit from lower operating expenses for the balance of the year, due to cost savings initiatives in many different areas, including store payroll, travel and entertainment, freight, supplies, and store closing costs.

Depreciation expense for the first quarter was $28 million or $4 million favorable to last year.

The decrease in depreciation expense primarily reflects the asset impairment writedowns last year in accordance with FAS 144.

We expect that the first quarter depreciation expense is a good proxy for each quarter for the balance of this year.

Net interest expense for the first quarter was $2 million, $1 million higher than last year, primarily reflecting lower rates of interest on our short-term investments.

On a non-operating basis during the first quarter of last year we recorded a non-cash charge associated with a note receivable due from the purchaser of The Northern Group, a business in Canada we sold in 2001.

This impairment charge totaled $15 million or $0.10 per share.

Also during the first quarter of last year, we recorded store closing expenses totaling $4 million pre-tax or $0.02 per share associated with the closing of 15 cash flow negative stores.

Our first quarter income tax rate this year was 37% in line with our expectation and the guidance we provided in March.

Our first quarter income tax rate last year reflected a $15 million impairment charge with no offsetting tax benefit and a $1 million European income tax expense adjustment, therefore, our nominal income tax rate for the first quarter of last year before the impact of these two items was very similar to this year's rate.

Our merchandise inventory position of $1.2 billion at the end of the first quarter was $154 million or 11.1% lower than at the same time last year.

During the first quarter of last year, we decreased our merchandise inventory by $99 million versus the first quarter of 2007.

Therefore, over the past two years, we have reduced our merchandise inventory by $253 million or 17%.

On a constant currency basis, our inventory was 16% lower than two years ago.

In summary, we are off to a good start for the year, having generated a 43% earnings per share increase versus our adjusted results from last year.

While mall traffic and overall sales will likely be challenging for the remainder of this year, we believe that we have an opportunity to offset this potential weakness through a stronger gross margin rate and aggressive expense management.

We are also pleased that we generated positive cash flow during the first quarter which will remain a key focus for the balance of the year and beyond.

I will now turn the program over to Matt Serra.

Good morning.

I will start off my prepared remarks by restating the obvious.

The external environment during the first quarter of 2009 remained very difficult, which presented various challenges for most of us in the retail industry.

I'm pleased to report, however, that during our first quarter, we met those external challenges and produced some very good results.

Low consumer confidence, rising unemployment, unstable financial markets, as well as many other negative factors each contributed to lower mall traffic and declining consumer spending.

The impact of the external environment on current business trends has been highlighted each month, as most retails continue to report declining comp store sales results.

Some of the retailers that have been exceptions to this trend have done so at the expense of declining gross margins.

For the most part, the current winners are the large discount chains and a few select specialty chains whose products are fashion right.

While Foot Locker comp store sales declined during the quarter, on average we outperformed the comp store sales results of many mall-based specialty retailers in the U.S.

who have reported their results.

Three key factors helped cushion our exposure to the external environment during the first quarter of this year.

Our international businesses each produced positive comp store sales increases.

A more favorable athletic cycle continued to emerge in both the US and international Markets and third, the higher priced marquee segment of our business, particularly in technical basketball footwear, where we have the large quantities of exclusive products is performing extremely well.

While some of the more recent economic reports indicate that there is evidence that the global slowdown may be reaching a bottom, there is little that suggests that the consumer is ready to return to a more normalized level of spending.

Therefore, our strategy for the balance of this year remains unchanged.

We plan to continue to operate our business cautiously by managing our inventory levels tightly, while pursuing additional initiatives designed to reduce operating expenses.

As Bob already covered, our comp store sales decline was fairly close to our expectations going into the quarter.

We're very encouraged by the meaningful increase in our gross margin rate, which resulted from improved inventory management.

I'm also pleased that our SG&A expenses were favorable to our plan and below last year for the quarter.

So in summary, our sales decline was effectively offset by improvements in our gross margin rate and SG&A expenses that resulted in a strong earnings per share increase.

By region, our combined US stores posted a low to mid single digit comp store decline.

Our athletic footwear sales in the U.S.

were essentially flat with last year, with strength in our kids business essentially offsetting weakness in the women's footwear sales.

Our US apparel sales for the quarter continued to decline the same period versus last year, although we are encouraged that our branded apparel business was positive.

These branded apparel gains were not enough to offset the declines in our private label and license categories.

By division, our combined Foot Locker, Foot Action, and Kids Foot Locker businesses in the US, which are managed under one organizational structure, produced our strongest profit increase for the quarter.

Combined, these businesses represented approximately 50% of our company's store count and sales during the period.

The first quarter profit increased in our big US Foot Locker division was most significant, reflecting a strong merchandise margin rate increase, lower operating expenses, and better than expected sales.

We also generated a strong profit increase at both our Foot Action and Kids Foot Locker divisions.

The underperforming women's footwear category negatively affected each of our U.S.

divisions, including of course, the Lady Foot Locker division.

Our Champs business was negatively impacted at the most by our weak private label and licensed apparel sales.

The strength of our men's and kids footwear business in the U.S.

continue to be in the higher priced marquee basketball category with strong sell-throughs of weekly Nike and Jordan launches.

We continue to be very encouraged with the sales of Jordan Retros as well as Nike basketball shoes that are endorsed by LeBron and Kobe, much of which are sold exclusively in our stores.

Additionally, we had a lot of success with Nike's Hyperdunk styles which did well, and have been doing extremely well all along.

The lifestyle category, which is dominated by footwear with vulcanized soles, is developing rapidly in the global marketplace.

This vulcanized look comes in a number of brands and styles with Nike, Adidas, Puma, and Converse offering the most exciting products in this category.

To date, the growth of this lifestyle category is offsetting the decline in the fashion category that is dominated by the low profile styles.

In total, our running business in the US trended down, but we did generate some strong gains from Asics, Puma, and some selected Nike Air Max styles, and of course our most successful launch of Under Armour.

Premium classics from Nike also continued to be strong with gains in Prestige, Dunks and Blazes leading the way.

The new Reebok Easy Tone shoe is doing extremely well, that's that new wellness shoe and we have a very strong position that is currently an exclusive in the mall in the US.

Finally, we continue to see no let down in the growth of our Chuck Taylor business from Converse.

Our average footwear selling prices in the US increased mid single digits reflecting both our lower markdown rate and the continuing mix shift towards higher priced footwear.

On the US apparel side of the business we are beginning to make some meaningful progress with branded offerings, as mentioned earlier, generated a comp store sales gain in this category during the quarter.

Sales continue to be weak, however in the license category, as the customer who was previously purchasing the high price pro jerseys is currently seeking a lower price garment.

Our private label apparel sales have also been soft, although this category remains a very important part of our business.

We are working hard to improve our private label apparel assortments in the US and recognize that we need to be a little more fashion forward in this category, without disrupting our important base of programs.

Our international sales were positive in each of the three regions in which we operate, Europe, Canada and Asia Pacific.

More importantly, in constant currency dollars, we generated a double digit profit growth in our international business.

As Bob discussed, our Asia Pacific division, with 93 stores in Australia and New Zealand, produced a double digit comp store sales increase for the quarter.

This business also more than doubled its division profit versus the first quarter of last year.

Our second most profitable international business is our 132 store Canadian chain.

Foot Locker Canada produced a low single digit comp store sales increase for the quarter and nearly a double digit division profit margin rate.

In Europe, we currently operate 512 Foot Locker stores.

This division produced the low single digit comp store sales gain in constant currency dollars, a double digit profit increase for the quarter.

The sales strength in Europe came from strong apparel sales across each of our private label, branded, and licensed categories.

Our largest and most important footwear category, Technical Running, also produced a strong sales gain for the quarter.

By region in Europe, we generated a positive comp store sales gain in most of the important regions, including France and Italy, Germany and the Netherlands.

We are still experiencing weakness, however, in Spain and the UK.

Our direct to customer comp store sales decreased mid single digits for the quarter.

Total sales, however including our newly acquired CCS business, increased high single digits.

The internet piece of the business continues to grow and has reached 84% of this business versus 81% at the same time last year.

Overall, we are somewhat disappointed with the sales results of this division during the First Quarter, even though the core FootLocker.com Eastbay business continued to generate a double digit profit margin rate.

While we do not intend to break out our CCS results separately, I will comment that the first quarter sales was somewhat below our expectations and profits were essentially a breakeven.

We have plans to make additional enhancements to our websites over the next couple of months, and continue to expect that CCS has an opportunity to generate a double digit profit margin rate for the year.

Two additional franchise stores were opened during the quarter, bringing the total to 19 doors.

These stores are operated principally in the Middle East and also in South Korea.

We ended the year with 3,633 stores reflecting 16 new stores, 24 stores closed, we also remodeled and relocated 47 stores during the quarter.

As I outlined in the fourth quarter conference call, given the uncertain external environment, we have taken a more conservative approach this year in the more recent past in planning and managing our business.

For example, we reduced our capital expenditure program by approximately 30% to $100 million for the year.

This program provides the funding to open up to 40 new doors and to remodel or relocate up to 150 existing stores.

With some of the recent signs of stability in the external environment, and our encouraging profit and cash flow for results during the first quarter, we've decided to increase our capital plan by $5 million to $10 million to pursue opening an additional 10 to 15 stores this year.

The primary focus of these additional stores will be in the international markets where we are experiencing our highest returns.

If the external environment continues to improve, we also expect to accelerate our store opening plans in the international markets further during 2010.

Our primary strategic focus in the US for the balance of this year will be to continue to increase profits by increasing the productivity of our base business.

In closing, we believe it is prudent to remain conservative in how we manage our business in the near term, until we see signs of improving in the external environment.

We are encouraged, however, with recent fashion trends shifting back towards higher priced technical footwear.

The developing fashion trend away from low profile or fusion categories to the vulcanized look is expected to be beneficial to our business.

We also believe that we have a meaningful opportunity to improve our apparel business, but understand it will take some time.

We're off to a good start to the year with our first quarter earnings per share excluding impairment charges related to the disposed businesses and store closing charges having increased by 43% from the same period last year.

I would like to remind everyone that during the second quarter of last year, the government provided many consumers with a tax stimulus program that resulted in our business getting a temporary sales lift and as a result, for 2009, we believe our most difficult sales comparisons with last year are expected to occur during the second fiscal quarter.

We expect the impact of last year's tax stimulus program to be less of a factor on sales comparison once we begin the all-important back-to-school season in mid to late July.

I will now be happy to answer your questions.

Thank you.

(Operator Instructions).

Our first question is from Kate McShane from Citigroup.

Please go ahead.

Hi, good morning.

This is [Corinna Chung] for Kate.

Can you provide a little bit more detail about the quality of your inventories this year?

Are you reducing inventory across-the-board or are you focusing more heavily on certain categories or brands and if so what are those that you're focusing on, please?

Sure.

We have not reduced inventories across-the-board.

We've reduced them in obviously the slower selling categories and transferred the receipts into obviously the hot selling items, i.e., basketball and in the case of Europe, high end technical running.

Okay, and then could you also talk about what you're expecting for the basketball business for the rest of the year?

Are there any other major launches coming up in the second quarter or the second half?

There continue to be many many launches in that category, and we have a very very large basketball business.

We view it as a strength and an opportunity to continue to build upon it.

Actually the launches is probably about a 10 to 12% increase in launch product for the remainder of the year.

Great.

Thank you very much.

You're welcome.

Next question is from Robert Ohmes from Banc of America/Merrill Lynch.

Please go ahead.

Oh, thanks, hi, Matt.

Great quarter.

A couple of questions.

The first question was can you speak a little bit more on the second quarter?

I understand the tough stimulus comparisons, but can you also I think the gross margin comparison is a lot tougher than it was in the first quarter as well and can you also walk us through what you think is going to happen with ASP comparisons as you move through the year, because I know the ASPs were up pretty solid again in the first quarter, and then the second question is on Europe, pretty good comps based on what we thought was going on in Europe.

Can you give a little more indication of what was working so well in running technical and do you have any product flow coming in for the second quarter and back half that could keep the momentum going there?

Thanks.

We have a lot going on in Europe.

We're very pleased with the results of the first quarter essentially driven by technical running and a resurgence in the athletic apparel business, in particular, track suits are very very hot over there, it would be wonderful if they found their way back to the US.

With the business beginning to move nicely, we made a decision to open up an additional 10 doors in the Fall of this year.

The markets that are working extremely well as I mentioned are France and Italy and we stated in our K, it's the lion's share of our sales and profit over there, so we're very very pleased, we are initiating a large scale initiative in a significant amount of doors beginning June 5 I believe in Europe, and we view that market over there as right for that category, it's a growing business.

In terms of margin rate, we see continued opportunity to increase our margin nicely this year.

Our average unit retails continue to be higher by sheer virtue of the product that we carry and what we are selling.

We have I won't say abandoned but we're not as heavily gated in the value type business.

We're going after the premium customer, offering new, exciting, exclusive product.

Did I get everything you asked there?

Yeah, just one follow-up on Europe.

On the technical running side, do you have exclusives with Nike?

Can you give us any more detail on what's working well or is it just very broadly everybody is buying running shoes across brands?

We're also doing well with Adidas.

It is high end technical running, quite frankly, there's a huge resurgence towards Air products, Air Max 90s and the higher priced shoes so the air product which had slowed up for probably three or four years maybe has come back very importantly over there and that's what's driving the business.

Keep in mind, we do not have a basketball business in Europe.

It's a totally different business.

The business over there, the drivers have always been the running category.

Great.

Thanks a lot, Matt.

Thank you.

The next question is from Sam Poser from Sterne Agee.

Please go ahead.

Good morning.

Matt, can you discuss the currency effect on the top line in the quarter?

Yeah, I think in the press release, we had total sales declined 7.1%, including the foreign currency fluctuation, sales decreased 2.2, it was about a 5% differential.

Because of the international, obviously.

And what kind of, what kind of SG&A cost savings, great job there on the SG&A and cost controls, what kind of, what should we be looking for in the balance of the year there?

Are we looking for the equivalent in the next two quarters, looking for the equivalent dollar save?

I'll let Bob answer it but I think that there's continued opportunity, Bob and his team have done a real terrific job in honing in on things like store wages, but Bob?

Yeah, I think we expect similar savings and again the same areas as we said before, store wages and travel and supplies and the like.

Another big factor is hours of operation in the malls, 50% of our stores are street stores, we control our destiny there, but I think the landlords, major landlords in the United States are realizing that there are hours of operation that are not necessary in this current environment, and that not only saves wages but it saves utilities, it saves security, and it helps bring that sector down SG&A.

And then I think that the opportunities there's probably more opportunities in the second and third quarter than perhaps the fourth quarter because as you'll recall, it really started to get after the expenses last Fourth Quarter.

Right.

And then again, with the 130 BP margin improvement in the quarter again, could we look for similar type things in Q2 and Q3, again Q4 you had a, Q4 shouldn't give you that same kind of opportunity, but is that the same kind of thing?

We're expecting a margin improvement in the second quarter and the remaining quarters, whether it will be that high is yet to be determined.

The important thing is we have the inventories in line, our aging is as current as its been in the last eight to 10 years, and we look to have a pretty good lift.

I'm not sure it will be 130 basis points, but we're expecting an increase, and in this turbulent market, Sam, we're controlling our appetite to discount and compete with certain of our competition.

We don't have the same exposure I believe that we have in past years by being overstocked and having to reduce inventories sharply which obviously as you know cuts into the margin.

Right.

And then top line, are you looking for top line improvement throughout the year from what you can see right now or is this just going to be flat to down a little bit for the balance of the year, as you see it today?

I think it's hard to predict a top line sales increase in this current environment.

I mean, day by day, what you read in the papers, the reports that come out, you have seen a lot of top line sales drops.

Our focus this year as a major transition year to get through a difficult environment is to focus on profit and that is the key ingredient that we are focusing on.

Everyone enjoys a nice top line sales increase.

The Company will have top line sales increases in the future and I'm not suggesting that we're not trying to go after them but when you have the kind of traffic declines you have, particularly in the U.S.

and the malls, it's a pretty tough assignment.

And are you doing a good job of taking advantage of the traffic you are getting in the stores?

I believe so.

I think our Customer Service is sharpened.

Our field team is doing an exceptional job out there.

I think you probably have been to a bunch of our stores.

I think we look good.

I think we're well presented, we're well stocked, narrow and deep and we're in stock on the key items that drive the business and we're trying to cut back as many promotions as we can and eliminate them.

I think the consumer while there's a value driven consumer, whenever we have been highly successful, it has always been with the high end product and I think our customers look to us for the newness, excitement, and that's what drives our business.

Thank you and good luck.

Thank you.

Next question is from Robert Drbul from Barclays Capital.

Please go ahead.

Hi, good morning.

Good morning.

Matt, I guess the first thing I'd like to ask you is there any update on your contract negotiations?

There was some press reports and just wondering if you could share anything with your outlook or any succession plan that might be unfolding?

Well, the Company has a succession plan.

It has had a succession plan since the day I took over as CEO.

We spend a lot of time on succession, and at the appropriate time, we will address succession.

I know there was an article in one of the publications and as you know it's a longstanding policy of our firm not to comment on speculation or rumors.

All right and in the European business, can you talk a little bit about the soccer category and sort of how that's going versus all the success you're having in running and in the US business, are there any sort of signs of life in the women's business that give you optimism for a return in that business?

We have tried several times in Europe to get into the football or soccer business.

It's a very promotional business.

The price points, believe it or not, I don't know if you've been over there and been in the stores but there's a lot of 30 to 50 year old merchandise and that's the lion's share of the high end of that business.

We've tried it, we do carry some of the high end Nike and Adidas product.

It's not a big piece of our business.

It's not our niche and we're not going after it.

It's a highly promotional business and we want to stay away from it.

With that said, as you know, it's a huge piece of the sports footwear business over there.

With regard to the ladies' footwear product, it is if you see the MPD data, you'll see that that business is struggling, has been struggling, for two, three years, we're managing the inventories extremely tightly.

Hopefully it will come back in the near future but right now, it is a very very tough business.

For us and for many of our competitors.

Okay, and can you comment on your House of Hoops business and how that's going and I guess if you had any preference for Kobe versus LeBron, who are you pulling for?

Nice question.

Going to get me in trouble.

Both are performing extremely well and I think hats off to Nike that they really have now with Kobe and LeBron two additional marquise names that are driving business, and I'm pleased to report that particularly Kobe which is exclusive to us in the mall is doing extremely well and we're very very pleased.

It's a very very profitable venture for both our companies.

With regard to House of Hoops, we're opening three to four additional doors this year and then we'll rollout more doors next year.

We're very pleased, it's doing extremely well.

As you know, we have House of Hoops in all of our Foot Locker stores.

We have an outpost, and we're looking to expand that to further emphasize the basketball thrust of our business, so it's a win.

Nike is very very pleased with what we've done, and I think it's a partnership that will continue to grow.

We're also going to test two House of Hoops stores in the UK, which has somewhat of a pretty good basketball following, and they will open in the Fall of this year.

And Matt, one final question if I could.

I don't know if you talked about it, if I missed it, but how has business been thus far in May?

As we expected, we thought it would be challenging and we're running high to mid single digit declines.

I don't see this May and June period, that we got a pretty good lift last year in the US and we comped pretty positively in May and June, and while we certainly didn't conduct any exit interviews asking customers if they spent their stimulus checks, we saw a very very good lift in our business and we believe that that drove a lot of business.

There was $91 billion of stimulus checks, and most of them were delivered, I think, by the end of May last year, the lion's share.

It was some stimulus checks that were distributed later, I guess into June.

I think they were cut off in July, but the lion's share of them were in May, so we'll get through that and our focus again as I repeated is focusing on the margin, managing the inventories, and I'm not looking for a big quarter.

With that said, we see opportunity in the third quarter and the fourth quarter.

Thank you very much.

Good luck with everything, Matt.

Thank you.

Our next question is from Chris Svezia from Susquehanna Financial.

Good morning everyone.

Congratulations.

A couple questions, Matt, as you see the competitive environment unfold here, just as kind of things have slowed down due to the tax differential here in May that we're seeing, do you believe that just as you look across the competitive set that inventories are much more controlled, that we won't see the level of markdowns converting back to what we've seen in the past?

I'm trying to get an idea of the competitive environment and the level of inventories as you look across the playing field in the US, specifically.

In all my visits and trips, with the exception of California, which is a very tough market for everyone, I think the good companies are managing their inventories and not giving the store away.

I think I see the promotional environment cut dramatically as I travel around.

And you see that being sustainable here, just kind of given everyone's controlling the inventory piece?

In this environment, who knows what will happen from one month or one season to the next, but for the last I want to say four months or so, Christmas obviously and December was highly promotional, people were just trying to get their inventories down and clean up and get ready for the New Year, but I would tell you the last four months or so, I've seen a dramatic decline in promotional activity.

All right, that's helpful, and just on the occupancy side of the business, the $15 million reduction year-over-year I think flat on a percent to sales, down 2.4 comp, how sustainable is that, and maybe if you could talk a little bit about your conversations with landlords in terms of lease negotiations and maybe what's happening there as we look throughout the year?

Well, we continue to get very good arrangements with our valued landlords.

Don't forget we have a very large fleet, particularly here in the US, 3000 doors.

I would say that over the past two years, that we've experienced some very very good reductions in rent.

Our real estate department headed by Jeff Burke and Bob is intimately involved in our real estate negotiations continued to see some opportunity for further rent reductions.

Bob, do you want to make a comment on that?

Yeah, and I think much like the SG&A, there's some opportunities in Q2 and Q3, although the comparison will get tougher in Q4 because we did start on that process at that time last year.

All right, that's helpful.

Thanks, Bob, and the last question I have is just on the inventory reduction, and what you've been able to accomplish there, and I guess my question is, at some point you reach a level where you have the right type of product and I'm just curious as we look into the next couple quarters how we should be looking at that inventory level, relative to the type of product that you now have in your store and right sizing the level of product in your store.

How can we see that unfolding here?

Well, we continue to focus on reducing the inventory.

It won't be to the same levels that we currently achieved but we're looking for continued reductions and quite frankly, we are carrying less product because the prices are way up on the high end product, so it's a dicey formula.

With that said, we see continued opportunities to reduce and manage the inventories more effectively to meet customer demand.

Okay.

Thank you very much.

Appreciate it gentlemen.

Thank you.

Next question is from Bernard Sosnick from Gilford Securities.

Please go ahead.

Yes, good morning.

Matt, you made what I consider to be a very important statement when you said that there are signs that a more favorable athletic cycle is emerging, and I think you made it quite clear that track suits and running shoes give you that basis for the comment in the international markets, particularly Europe.

I don't know that I see the case clearly enough in the US, although you say that marquee shoes are selling well.

The sales trend in the last couple of months hasn't really been as good as you might have wanted and women's is difficult, so could you amplify a little bit with respect to the US and the athletic cycle?

Sure.

We have seen for, it's close to a year now our higher end technical running product, particularly the high end piece of Asics, the high end piece of New Balance, and of course, the high end piece of Nike continue to accelerate and that is what is currently driving our business in the US Up until that acceleration, approximately a year ago, business was tough selling the $100 plus product.

It's always been the foundation of our business not only US, but worldwide.

So we're comfortable in saying that that business is trending and we're in the trend business.

It's also a fashion item as you know, and you seen people wearing more athletic product and there's a lot of innovative exciting product coming out from some of our key suppliers and we could be on the cusp of a major thrust in the athletic zone once again.

We haven't seen one in about five or six years so hopefully it's time.

Are you suggesting that the product for back-to-school is going to be much better than a year ago and what might that suggest for the women's business?

Well, I think we do have a lot of exciting products for back-to-school.

The other thing I failed to mention is that the vulcanized product is taking on a whole new importance in the athletic zone.

Nike in particular, of course you know Converse is basically almost all vulcanized.

That is becoming a hot fashion trend and all the major suppliers are getting into that product.

When you get into the women's zone, we continue to have difficulty in trying to get the right product mix in there.

We've tried just about everything and we're not giving up on the business but we're putting the dollars into the men's and the kids' categories, that's driving the business and that's what merchants are supposed to do.

Thank you very much.

Thank you, sir.

Okay, I think we have time for one more question.

We have a question from John Zolidis from Buckingham Research.

Please go ahead.

Hi, good morning.

Great job with the gross margin in the first quarter.

Two quick questions.

One, interesting that you're looking to open a few more stores.

Do you think that in 2010 there can be net store growth or should we be modeling or expecting at this point probably a slight reduction still, and then second on the CCS business that was breakeven in the first quarter but you expected a double digit profitability for the full year, is that business really seasonal or I guess it has to be but can you give us an idea for the profit for when that business normally occurs?

Thank you.

Yeah, they have a huge fourth quarter business, and sell a lot of goods in there, hard goods and skateboards, etc.

and we view that as a very good acquisition and we're looking for growth as you know, or may not know, we opened our first store in California a couple weeks ago.

We're opening a second test store in Garden State Plaza in New Jersey in early June, so we feel pretty good about CCS, I'm sorry what was the first question?

The first question was on square footage growth for 2010.

Oh, yeah.

We think by the end of this year we will have addressed the lion's share of the unproductive stores and there could be a net closing of up to 80 tol 100 additional doors.

Conversely looking at 2010, we see significant growth in our European business, so we expect hopefully 2010 to be a growth year for us net stores.

Great.

Thanks and good luck.

Thank you.

Okay, thank you, everybody and we look forward to the balance of the year.

Thank you, ladies and gentlemen.

This concludes today's conference call.

You may all disconnect at this time.