Foot Locker Inc (FL) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the second quarter 2009 earnings release conference call.

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

Later we will conduct a question-and-answer session.

This conference may contain forward-looking statements that reflect management's current views on 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 release and SEC filings.

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

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

If you have not received yesterday's release it is available on the Internet at www.prnewswire.com, or www.footlocker.com.

Please note this conference is being recorded.

I will now turn the call over to Mr.

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

Mr.

Brown, you may begin.

Good morning.

After the market closed yesterday afternoon, we reported a break-even performance the second quarter of 2009, versus a net profit of $0.11 per share last year.

For the first six months of the year our net income is $0.20 per share versus $0.13 per share last year.

Included in our prior year results was a noncash impairment charge and store closing expenses totaling $0.12 per share which was recorded during last year's first quarter.

Thus, last year's net income for the first six months of the year excluding those items was $0.25 per share.

A reconciliation of our GAAP results to the non-GAAP adjusted amount is included in our press release to assist in your analysis of our results from ongoing operations.

Bob McHugh, our Executive Vice President, and Chief Financial Officer, will begin our prepared remarks.

Matt Serra, our Chairman of the Board will follow with an operational review and strategic update.

We also have with us today Ken Hicks who joined our Company just this week as President and CEO, replacing Matt Serra in that capacity.

Ken will also make a few comments this morning.

As always, we will conclude the program with a question-and-answer session.

Overall, we expected the second quarter of this year to be very challenging from a sales standpoint, and it was.

Our second quarter comp store sales decreased 12.1%.

Our gross margin rate decreased 220 basis points, primarily reflecting the impact of the sales decline on our buying and occupancy rate.

Partially offsetting the sales decline was a $47 million reduction in our SG&A expenses, and a $5 million reduction in our depreciation expense.

Our balance sheet remains strong, with a total cash and short-term investment position of $415 million.

I will now turn the call over to Bob McHugh.

Good morning.

Overall our second quarter earnings primarily reflected the underperformance of our top-line sales.

I would characterize the shortfall as more macro in nature rather than any product-specific issues.

The good job we did in managing our markdowns and achieving significant reductions in our occupancy, SG&A and depreciation expenses helped to protect our bottom line results.

We believe that the steps that we are taking today, in terms of cost reductions and strengthening our financial position, will contribute to higher earnings opportunity for our Company in the future when consumer spending returns to more normalized levels.

The overall decline in consumer spending was the primary factor that led to our weak sales performance in the United States.

In addition, during our first quarter conference call, which was held in late May, we highlighted three specific factors that would affect our second quarter sales.

We stated that our sales trend in the US began to slow during April and continued through the first three weeks of our second quarter.

We discussed that our second quarter sales comparison with last year would be impacted negatively by the stimulus checks that the government provided during May, June, and early July of 2008.

And thirdly, we pointed out that our second quarter sales comparisons would be affected by a calendar change enacted by several states in the US that shifted tax-free shopping weeks that occurred in July of last year into August of this year.

Our European, Canadian, and Asia Pacific businesses fared much better during the second quarter than their US counterparts.

In total, our international sales were in line with last year.

Second quarter comparable store sales by region and segment were as follows.

Our combined US store operation decreased in the mid to high teens.

Footlocker.com declined low double digits.

Europe decreased low single digits.

Foot Locker Canada decreased low single digits.

And Foot Locker Asia Pacific continued its strong performance, up high single digits.

By month, comp store sales declined low double digits in May, and mid teens in June and July.

As we look towards the third quarter of this year, our current sales trend in the US remains negative, reflecting both the benefit from the tax-free holiday shifts into August and the negative impact of the later back-to-school season taking place in many states.

I would also note that our comparisons to last year become somewhat easier as we go through the quarter.

Last year we had a low single-digit comp store sales gain in August, followed by a low single-digit sales decline in September, and a mid-single-digit sales decline in October.

Our second quarter gross margin rate decreased by 220 basis points from last year, reflecting a 30-basis-point decline in our margin rate, a 190 basis point decline in our buying and occupancy rate.

During the quarter, we continued to make a concerted effort to reduce the promotional cadence in our US stores.

At the same time, we remain focused on reducing our merchandise inventory levels and maintaining the quality of our assortments within our internal aging standards.

We were successful in reducing our total markdowns below both our planned levels and that of last year but not quite enough to result in improvement in merchandise margin rate.

We were successful, however, in reducing our merchandise inventory level by 8.4% from the same time last year, and we ended the quarter with our aging favorable to our internal standards.

Our second quarter buying and occupancy expenses were $13 million below last year, reflecting the accomplishments of our real-estate department in negotiating some new favorable occupancy deals.

We believe that the current challenging economic environment will likely provide additional opportunities for us to reduce our occupancy expense in certain markets in the US.

Second quarter SG&A expenses decreased $47 million versus last year.

On a constant currency basis our second quarter SG&A expenses decreased by $37 million.

Flexing associate hours in our stores to be in line with sales trends continues to be the most significant variable expense opportunity in this environment.

We're also working very hard on implementing many other cost savings initiatives across all expense areas that we believe will lower our cost structure for the balance of this year and beyond.

We continue to gain a lot of traction by being aggressive in negotiating prices for all of our expense categories, using online bidding techniques to secure the best deals available.

We are finding that many of our incumbent suppliers are being much more aggressive in their pricing structures to ensure that they retain our business.

Examples where we're finding cost reduction opportunities include travel and entertainment, freight, marketing, supplies, and technology.

Depreciation expense for the second quarter was $28 million, or $5 million favorable to last year.

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

Net interest expense for the second quarter was $3 million, $1 million higher than last year, primarily reflecting lower interest rates on our short-term investments.

In regard to income taxes, please note as you refine your models for the third quarter of this year we expect to record a one-time noncash income tax expense of approximately $4 million to 5 million.

This charge is expected to be recorded to reflect the impact of a reduction in Canadian provincial income tax rates beginning in 2012 on our deferred income tax benefits related to Canadian tax depreciation and operating loss carryforwards.

While the change in Canadian tax rates results in additional income tax expense in 2009, we expect this change will have a favorable effect in 2012 and beyond.

Moving to our balance sheet, our merchandise inventory position at the end of the second quarter was $117 million, or 8.4% lower than at the same time last year.

Over the past two years, we have reduced our merchandise inventory by $168 million, or 11.6%.

On a constant currency basis, our inventory was 11.2% lower than two years ago.

Our financial position remains strong with $415 million of cash and short-term investments and just $138 million of long-term debt.

Again, the second quarter of 2009 was very challenging from a sales standpoint, even more so than we had anticipated going into the quarter.

Consumer spending in the United States remains down, and we expect that the consumer will continue to be very cautious with discretionary spending.

To offset thos external pressures requires that we be even more aggressive with our expense management and continue to control our merchandise inventory tightly to minimize markdown activities.

We believe that the many steps that we are taking this year will improve our competitive situation and position our Company for stronger earnings growth when the economic environment improves.

In summary, the key components of our near term strategy are as follows.

Reduce our expense base aggressively.

Manage our inventory levels lower in line with sales.

Generate positive cash flow.

And strengthen our financial position.

Before I conclude my portion of today's program, I would like to acknowledge the contributions of Matt Serra who is participating in his 35th consecutive quarterly conference call.

Under Matt's leadership, Foot Locker has accomplished a great deal over the past 11 years.

The Foot Locker that Matt passes along to our new President and CEO, Ken Hicks, is a company that is financially strong and well positioned in the marketplace.

As you know, Matt will continue to serve as the Company's Chairman of the Board through January 2010, coinciding with his retirement.

Matt, on behalf of the senior management team at Foot Locker, we would like to thank you for your help, leadership, and many accomplishments during your time at Foot Locker.

I will now turn the program over to Matt Serra.

Good morning.

And thank you, Bob.

As my first item of business this morning, I would like to formally introduce Ken Hicks as Foot Locker's new President and Chief Executive Officer, replacing me in that capacity as of this past Monday.

I have known Ken for many years, having worked with him at May Company in the late '80s.

His background from both an academic and business experience standpoint is an excellent fit for our Company, and I couldn't be more pleased that he is joining our Company.

As Bob mentioned, my future plans include remaining with the Company through the end of January as Chairman of the Board, and I look forward to working with Ken and the management team to ensure a smooth transition.

Ken's hands-on experience in strategic planning, operations, and merchandising, as well as his strong appreciation of finance will serve Foot Locker well.

Before I get into the operational details of this latest quarter, I will turn the call over to Ken for a few brief comments.

Ken.

Good morning, and thank you, Matt, for the nice introduction.

I'm happy to have the opportunity to lead Foot Locker.

While the near-term economic situation continues to present challenges for all retailers, I believe the longer term opportunities for Foot Locker are very exciting.

As most of you know Foot Locker has many strengths that distinguish the Company in the athletic retail industry, including strong brand recognition, leadership position in the global marketplace, success in multiple channels of distribution, a well established supply chain and systems, an experienced deep management team, and a strong financial position.

These strengths are due in large measure to the leadership that Matt has provided over the past decade.

From this solid base of support, I believe we can build increased shareholder value over the coming years.

During the ensuing weeks and months of this year, I plan to spend most of my time helping to guide the Company through the fall season, while at the same time, working with the team in developing the Company's longer term strategic plan.

Once I've had an opportunity to settle in, I look forward to meeting with you to ensure that we maintain the appropriate level of communication with the investor community.

I will now turn the program back over to Matt.

Thank you, Ken.

As expected, the difficult external environment, as well as some specific comparisons with the prior year, presented many sales challenges for us during the second quarter of 2009.

While we certainly did not produce the profit result during the quarter that we would have liked, we are encouraged that we emerged from the quarter positioned properly for the fall season.

Following up on some of Bob's commentary during the quarter, we accomplished the following.

We reduced our merchandise inventory by 8.4% from the prior year.

We ended the quarter with our merchandise aging favorable to our internal aging standards.

We reduced our SG&A expense by $47 million from the prior year.

And, very importantly, our cash position was strong, ending the quarter with $415 million of cash and short-term investments.

Business trends continued to be most difficult in the United States.

In fact, we experienced double-digit comp store sales declines in both athletic footwear and athletic apparel.

The sales weakness in the US was fairly consistent across most areas of the country, in urban and suburban areas as well as inside and outside the mall.

Sales of higher priced marquee basketball shoes continued to be the dominant category in our men's and kids' footwear business.

We continue to generate strong sales of Jordan retros, Nike basketball shoes endorsed by LeBron and Kobe Bryant, as well as new Nike hot dunk styles.

In the technical running category, Nike Air Max, 90s, ASICs, Puma were the highlights.

We also continue to have success in the lifestyle category, which is dominated by footwear with vulcanized soles.

This 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.

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

Our average footwear selling prices in the US increased low to mid single-digits reflecting our continued mix shift towards higher priced footwear.

Our apparel business in the US continued to be tough even as we continue to gain some traction from the introduction of some new branded assortments.

Clearly we believe that improving our apparel business over time will prove out to be significantly important to the profitability of our Company.

I believe that Ken's prior experience and success in this area will be very instrumental to Foot Locker in capitalizing on this opportunity.

As already mentioned, our international sales outperformed our domestic results by a good margin.

Our sales and profit in each of the three regions in which we operate, Canada, Europe, and Asia Pacific, were closer in line with our expectations.

Our Asia Pacific division, which operates 93 stores in Australia and New Zealand, once again this quarter produced our strongest quarter over quarter results.

For the quarter, this division produced a high single-digit comp store sales increase, and a high single-digit profit margin.

Based on the recent sales trend, Foot Locker Asia Pacific division margin for the full year could approach double digits.

Foot Locker Canada also produced a strong profit margin for the second quarter.

While sales slipped somewhat during the quarter, this 130-store chain continued its record during second quarter, producing a double-digit profit margin.

Foot Locker Europe was our most profitable division during the second quarter in terms of the total division income.

We ended the quarter with 514 Foot Locker stores in Europe, and plan to continue to proceed with the store expansion program in this region.

In Europe, we generated very solid apparel sales gains during the second quarter, with increases across each of our private label, branded and licensed categories.

While footwear sales in total were down a little, we generated sales gains in women's footwear as well as some key men's departments, including basketball and court shoes.

Our direct to customers comp store sales gains decreased low double digits for the quarter.

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

The Internet piece of this business continues to grow and has reached 85% of this business versus 82% last year.

Division profit of this division decreased from the prior year reflecting the sales decline.

The division profit margin rate of the core footlocker.com Eastbay business remains very healthy in the high digital margin area.

Second quarter sales of CCS continue to run behind our initial expectations similar to that of other direct to customer businesses.

Therefore we believe this under-performance is due primarily to lower customer traffic and a contraction in consumer spending that is widespread across most of retail.

On a positive note, we continue to be very encouraged with the sales results of our two test CCS stores that we opened this year.

These test stores are located strategically in Santa Monica, California, and Garden state Plaza in New Jersey.

Based on the initial success of these two stores, we are planning to expand this test in 2010.

Additionally, during the first week of August, we launched a new much improved website for CCS.

The look of the site is much improved and includes improved features such as skateboard builder, wish list, wide mode, and additional product detail.

We ended the quarter with 3,615 owned stores reflecting 26 new stores, 52 closed stores for this year.

We have also remodeled and relocated 89 stores so far this year.

Given the uncertain and very challenging external environment, we will continue to take a very conservative approach in managing our business for the balance of the year.

Our capital expenditure program remains targeted to a range of $100 million to $110 million for the year, providing the funds to open up to 40 new stores and to remodel or relocate up to 150 existing stores.

We are closely monitoring our merchandise inventory purchases as we continue to work with our inventory levels to lower them over time.

Just as important, we plan to continue to be even more aggressive with our expense management.

Always looking to get better pricing and finding more efficient ways to conduct business.

While sales comparisons were challenging during the second quarter, I believe that we maintained our competitive position.

At the same time, the strategic actions that we undertook during the quarter positions us better for the future, when consumer spending returns to more normalized levels.

Our financial position is sound.

Our fixed and variable costs are being reduced.

Our merchandise inventory is current, and our infrastructure is strong.

We lost some ground from an earnings standpoint during the second quarter, after over-performing during the first quarter.

We hope to get back on track during the third quarter to finish the year strong in the fourth quarter when our sales comparisons become much easier.

With the change in command at Foot Locker, this will be the last conference call in which I plan to participate.

The past 11 years at Foot Locker have presented many challenges and opportunities.

I believe that we have met most of the challenges and capitalized on many of the opportunities due to the strength, experience, and dedication of our people throughout the organization.

Clearly these are unprecedented times for retailers.

I am confident, however, that the best days of Foot Locker lie ahead.

We will now be happy to answer your questions.

Thank you.

We will now begin the question and answer session.

(Operator Instructions) Our first question comes from Chris Svezia of Susquehanna Financial.

Good morning, everyone.

Matt, congratulations to you.

Ken, congratulations to you, as well.

Best of luck.

A couple questions.

First, Matt, can you maybe add a little bit of color, in terms of the early trends that you are seeing on back-to-school, you mentioned that they are current trending negative.

I was wondering if you could talk about is there any specific geographic differences, whether those markets that have turned and have gone back to school already, what you are seeing versus those markets that have not?

Any color in and around that would be helpful.

Yes.

This is going to be a tricky back-to-school season, because there are more changes, quite frankly, than I've ever seen.

The markets that have gone back, are done with the back-to-school cycle, are running down mid to low single digits, and in some cases are running increases.

There's a huge shift with Florida.

They started this week and our divisions are beginning to do well down there.

There was a shift in Texas with the tax holiday which begins today.

It's, I believe, a week back-shift from last year, and we started comping without the tax shift positively the last day or two.

We do 25% of the big Foot Locker business in the Northeast market.

And basically in the low 20s in the rest of the US divisions.

That is also pushed back one week because of the Labor Day shift.

So it's going to be pretty difficult to get a succinct read on how we're really doing until next week at this time.

I think we're going to perform better than we have been performing in the last quarter.

That's what the indications appear to be pointing towards.

Okay.

That's helpful.

Thanks.

And then just on the inventory, you continue to see nice reductions there.

Could you just talk about, are you continuing to cut your receipts and your buys working on what's working and what's not?

And you made the observation about managing inventory relative to sales.

Is there a possibility that could you be -- are you looking to maybe get a little more promotional, drive traffic, or are you still looking to hold the line as you go into third quarter, and maybe any color between US inventory versus Europe, what's going on in terms of the inventory position.

We've always had a very large business in marquee footwear being $100 and above.

It continues to drive our business.

Makes us different from a lot of our competition.

With that said, the environment is changing.

And I think we have to walk and chew gum at the same time.

I think Ken, who is very conversant in popular priced footwear, as we are here, will lead the team to make some decisions, where I think we have to compete a little more in that popular priced zone.

Quite honestly, the last year and a half, we avoided that zone.

And I think we need to step up to the plate a little more aggressively.

But hopefully buying it off-price, not taking it out of our hide.

That was the next question I was going to ask.

When you talk to vendors is there the availability of product at attractive margins where you can offset the hit on your end, getting maybe more promotional, as you're saying, kind of walk and chew gum with everyone else?

Is that fair?

There's merchandise around.

I think we've got to make a conscious decision to go after it.

The customers have voted.

You see what's going on in the high end market.

It is very, very tough out there.

And the high end market in athletic footwear is not much different.

Certainly a different customer, but it's very pricey, and you've got really high unemployment right now, and I think people are looking for value.

We have to play, and to what degree we're going to play, Ken will make that decision.

But I think we need to play in that arena.

Matt, just to follow up, the inventory between the US and Europe, is there any difference between the two of them?

Europe is a totally different business.

Totally non-promotional.

They have their regulated semi-annual sales in many of the countries, and we continue to sell a lot of very high-priced footwear over there, and we continue to sell a lot of low-profile fashion footwear over there, which you really don't see much of that product in the US any longer.

Actually in all our international divisions, the low-profile merchandise still is a very important piece of the business.

Okay, I'll get back in the queue.

Congratulations.

Thank you.

Our next question comes from the Bob Drbul from Barclays Capital.

Please go ahead.

Good morning.

Ken, congratulations.

Matt, congratulations as well.

Ken, I was wondering if we could start, I don't know if you could elaborate on maybe a couple of your top goals as you look at the business.

Ken's not going to speak to that at this time frame.

I believe it's fair -- Ken started five days ago, and on his next conference call -- he's not going to articulate his strategy for the Company.

He will give an outline of what he views as some near-term opportunities.

But I think it would be a little unfair to ask Ken to give you a rundown of all his great ideas which he's going to formulate over the next year or so.

All right, Matt, fair enough.

Matt, when you look from the business perspective over the next three to six months, can you talk a little bit about the product that you think might be driving traffic or what you're most excited about, whether on the footwear side or on the apparel side?

I'm not too excited about apparel.

We really had a tough, tough time.

That's part of the reason for the slight margin decline.

Our private label business has been off dramatically.

I think Ken will bring a lot to the party in new private label ideas.

I'm trying to be as honest as I can.

I think it's going to be very, very challenging over the next six months.

With that said, we've got a rock solid balance sheet, a very, very focused, stringent expense structure, and we're going to continue to work very hard on our real estate transactions, and we're going to stick with our game plan.

We want to sell a lot of exciting new marquee footwear.

We've got some additions for the fourth quarter in Kobe and key selling items.

Kobe is exclusive with us in the mall.

We think that's going to be a major plus.

Obviously we have tons of special color ups and new uppers going in.

Very importantly, the Nike Flywire is a very exciting program.

No matter what that upper goes on, it seems to do well.

In Europe we've added into 165 stores a skate product.

It's off to a very very good start.

And we're going to be working on getting more aggressively into that business.

I don't think we're going to see a full presentation of it for probably close to 10 to 12 months, but we think we need to play somewhat in that arena.

We've got our CCS business, and we've tested two stores that are doing nicely, and we're going to take it slow for awhile, but if they continue to perform the way they are currently performing that could be a meaningful division in a couple or three years down the road here.

And I guess, Matt, when you talk about how tough the environment is, including apparel, but overall, can you just talk about your ability to cope with a higher level of promotional activity in the competitive environment with many of the guys that you are facing, what your game plan is as you look at this type of a sales environment for the next six months?

We're going to have to play a little in there, and buy a little more off-price, or maybe a lot more off-price.

We've never subscribed to the strategy of having the lowest price.

That's a formula for going out of business.

Anybody that ever tells you they have to have the lowest price is not the winner at the end.

At the end of the day, you have to have the right merchandise, and that's the key.

But you have a very valid point .

You see some of the successes that are going, there's few examples, but they are price driven, in many cases.

We're not going to sit back and not play in that arena.

It's to what degree we decide to step our toes in the

Good luck.

Thank you very much.

Our next question comes from Sam Poser from Sterne Agee.

Good morning.

Congratulations to everybody.

Question on SG&A.

The reduction of $47 million, can you break that out on how much of that was on variable costs versus fixed cost items, number one?

Yes, I would say that probably the majority of that was variable, maybe 80/ /2o on variable versus fixed.

How should we look at that on a year over year reduction going forward, for the balance of the year?

We're going to remain vigilant on expense reductions.

Having said that, we may not be as aggressive on store wages, and that'll greatly depend on the sales environment because, as we said, that's our number one lever in terms of how to flex in this environment.

But we're going to continue to be vigilant.

There's a tougher comparison for the fourth quarter because last year we really started to get after the store wages based on the drop of business in the fourth quarter of last year.

So that will be a tougher comparison.

Could we expect to see another $40 million in the third quarter?

We're working on it.

We're not going to give any guidance on it.

We're not going to give any guidance on it but it is clearly our focus to reduce expenses prudently and aggressively.

We don't want to get Draconian.

We want to keep the stores looking fresh and exciting.

To answer your question, we could cut out more than that, but then you start cutting lighting in the stores and the staff, where it's bone levels, and cut the housekeeping and what-not, and we've managed, and Bob and his team have done an outstanding job in really controlling the controllables, which is something that we take great pride in.

Whether it's going to be another $40 million, we're not prepared to say that at this point.

But I would tell you that we think it will be significant.

Keep in mind, the FX comparison is different in Q3 and 4 versus what you saw in Q2.

When you look at the current rates versus last year, they're much more in line, so whereas we had a $10 million gap between the absolute and the constant currency differences.

Got you, thank you.

On the merchandise margins, can you break out how the merchandise margins were again for the quarter?

I think you mentioned it.

I might have missed it.

The merchandise margins were not down that much.

30 basis points.

A lot of that had to do with our private label in particular.

Not only the receipt, but the sales of private label being down so much.

Our mark-up, we did not have a markdown problem.

It was principally mark-up.

And when you have a big private label business like we have here, which is basically close to half our apparel business, and you start experiencing those kinds of declines, and then taking the precautionary measures of not bringing in that much inventory, it can affect your mix.

Thank you.

One last question, just a follow-up on the current trends.

When we're thinking about, given the easier comparisons, given your inventory is down 8% right now, can you give us some idea of -- you mentioned that the quarter is still tough so far -- can you give us an idea of where it's running in the first two, almost three weeks right now?

It's running better than the last quarter, and I think, my initial comments, it's too premature, because of all these shifts, Sam.

There are a lot of shifts, and you are going to have to really take a look at the end of next week.

We're hopeful that it's going to be an improvement.

When we look at your 8.4% inventory decline, can we hazard the guess that you are planning your business for the balance for the year in line with the inventory, or for the next quarter in line with that inventory level?

We hope we're going to do a little better than that.

We hope.

Okay, thank you.

Good luck.

Thank you.

Our next question comes from Robby Ohmes from Bank of America-Merrill Lynch and Company.

Please go ahead.

Thanks, and Matt and Ken, good luck in your new roles from me as well.

Just a few follow-up questions.

I might have missed it.

Can you give us the traffic ticket breakout on comps for the second quarter?

And then as a follow-up to that, Matt, just helping us picture what's going on in your stores, could you give us actually two things, your outlook for ASPs for the rest of this year, and then within your store, maybe a little more color around which price points performed the worst in the second quarter?

For example, was Shox a little disappointing, as that product was taken under $100?

If you could just help us understand where the weakness was in comps that would be great.

Thanks.

Our average unit prices are up low to mid single digits by division.

We're obviously selling less product, there's a lot less traffic in the stores.

Until that economy turns around and we get the mall traffic again, I think we're going to continue to experience that.

We're hopeful that -- and even if we add a certain amount of value shoes, I still think our average out-the-door will be higher than the previous year.

And in Europe, it's a totally different bag there because the average price over there is really high.

The marquee business is huge.

Totally different business.

They don't sell that much basketball, a lot of high-end running.

Did I get what you asked?

Can you actually give us a traffic number for the comp?

Traffic ticket breakout on the comp.

Was it six and six to get to a minus 12?

In that range.

Great, thank you.

Our next question comes from Bernard Sosnick from Gilford.

Matt, I want to congratulate you on 11 successful years.

And Ken, I look forward to working with you, as I did at Penney's.

Matt, with regard to footwear sales, I'm not sure I got the information correctly.

Could you review for us how footwear sales fared in the second quarter by men's, women's, and kids?

Yes.

Women's continues to be the toughest area.

Men's basketball is the strongest, followed by running.

And we had an incredible first quarter in kids' business, I mean, a staggering increase.

And the second quarter, it dropped off.

So, in the pecking order, that's the way the footwear business ran.

Women's business, with the exception of Europe, in general was tough throughout all divisions.

I take it, then, that footwear was down across all three, women's, men's, and kids.

How did the launches of Nike product go from November through July and into early August?

Back to November?

Do you mean talking about the last quarter?

You want to go back to November of last year?

Actually, I'm thinking about June being a pivotal month perhaps in terms of the turn in the business.

It slowed in April and May.

Could you just give me a progression of Nike launches over the periods, say, since April through early August.

As you know, they're very, very important to us.

It's been a mixed bag.

Most of them pretty successful.

But when you get an unsuccessful one, it's obviously very costly.

If you go historically back to what happened last year, we were doing pretty good up until late November, December, and January, and then we came out of the box with, in the first quarter, and all our launches in the first quarter I believe were highly successful.

And in the second quarter, some of the launches slowed down significantly.

The other point that I'm wondering about is that the average selling price moved up a bit, overall sales were down.

That suggests that your low price shoes got hit much harder in terms of sales decreases than the higher priced shoes, and that may be one of the reasons that you're talking about being more aggressive in the future at the low end.

Could you give us a little bit of background on what's been happening at the moderate and lower price points?

I think it's a self-fulfilling prophecy.

I don't think we bought enough of the moderate priced product.

And I think if you don't have sufficient amount of product to offer the consumer, you're not going to sell it.

So in my view, I think we need to step on the gas a little in that zone and do it profitably from an off-price method, not just take it out of our hide.

We always had very successful two for 89 programs around here.

That dissipated a couple years ago.

We had the merger of Reebok with Adidas, and we had a huge, huge business in that white shoe product, as well as with K-Swiss.

Those heavy sole, whatever you want to call them, tennis shoes, shopping shoes, I think some of our competitors have taken that business from us, and that we need to be a little more aggressive in that area.

Actually, I take it back, we need to be a lot more aggressive.

That's very helpful background.

Now, I understand, Ken, you're not ready to talk about anything with regard to your employment at Foot Locker, but could we hypothetically do a pre-employment interview and ask you, with your background at Payless Shoe Source, and then going to Penney, what you might have learned at Penney that you could have applied at Payless Shoes to help improve that business?

I don't want to be rude but I think on the next call Ken will be prepared to articulate some very key ideas.

Anda not his full strategy, but some key ideas.

No, you're not rude.

Actually you told us in advance what the position would be.

Just wanted to try.

Thank you.

Good try, Bernie.

Before we take the next question, I just want to make a clarification to one of Robby's questions.

I'm not sure that we understood it properly.

Our average selling prices for the quarter overall were up low single digits, and obviously the math, then, the parage was down mid teens.

Just wanted to make that clarification.

We'll take the next question.

Thank you.

It's from Kate McShane from CN Investment Research Group.

Please go ahead.

Thank you, good morning.

I was wondering if you could tell us how much exclusive product you currently have in your store that's exclusive in the mall, and how much this could increase over the next six to 12 months.

We generally run around 60% exclusive product in footwear.

And the lion's share of that are exclusive uppers, where there will be a key shoe from one of our valued suppliers that we work on special color ups, and obviously special uppers to make them exclusive, and that's been an ongoing number, 60%, basically since I'm with the Company.

Okay.

Thank you.

And then a question about apparel.

Were things tougher this quarter in apparel partially because you started to lap the mix change of when you went towards more branded apparel?

And were the merchandise margins down on branded apparel in the US as well?

Yes.

But I don't think it had anything -- I think we need to have branded apparel.

We're an athletic footwear and apparel chain, and we've entered into some significant programs with Nike and Adidas in the States.

We're doing extremely well with apparel in Europe and much better in our international operations.

And I think that we really need to intensify our efforts in going after that product.

I see certain chains and competitors where they take it all out.

We added Under Armour almost two years ago, performed nicely for us.

It's in a lot of our doors.

While the margins may be down, it's an integral part of the business, and we need to continue to focus on it.

And quite frankly, the private label piece of our business, I think we need a real refresh in there.

We've been doing the same items for a very long time, which, quite frankly, for five, six years we had enormous growth, and I think they've run their course.

So we've got to come up with some new power items where we sell millions of units, tremendous unit output on some key items.

And I think we've been a little tardy in getting to that piece of the business.

And I know Ken, and I mean this sincerely, has a tremendous background in private label, as I used to, but I think coming in with a fresh eye, he will be looking at adding some of the things that he knows that are very important out there now in the general merchandise area.

As an example, when I joined the Company after a year or year and a half, we put in the infamous five for 20 T-shirts, but it was a 40 million unit program.

We did well with it for six years, and customers, I guess they bought 20 million of them, 200 million of them.

So we need some new items.

Okay, thank you.

It looks like we have time for one more question this morning.

The next question comes from John Zolidis from Buckingham Research Group.

Please go ahead.

Good morning.

My congratulations, as well, to Matt, and welcome to Ken.

Just wondering if you can comment on specific initiatives that you might be doing to help drive the top line.

We can all appreciate that the macro environment is difficult, but we're looking at several years of difficult top line.

So anything specifically that you can comment on that you're doing differently or new that can help the trend against those easier comparisons in the second half of the year.

Thank you.

As I said earlier, in Europe we've gotten into the skate business in a significant amount of doors.

We think that's going to be helpful there.

I think in the second half of the year, that we're going to have to review our posture on moderate priced footwear.

I think we need to play in that arena without over distorting it.

And quite frankly, over the last two-and-a-half years, we made a conscious decision top line to close a lot of unproductive stores.

And that's a significant amount of our sales decline.

Okay, just a follow-up on that.

Looking at the second quarter, ASP is actually up.

It seems like you have more of a traffic problem than evidence that customers are shifting to moderate price points.

Are you seeing within your store a greater propensity for people to buy moderate price points?

Why do you think that's the answer?

Can you just expand on that a little bit?

I don't think that's the only answer.

I think that is one of the answers.

I think everybody is seeing a lot less traffic in the stores.

And as long as this economy is in this mind-set, I think the companies that are controlling the controllables and managing the balance sheets will be the survivors, and then when the sales come back, we'll get more than our fair share.

We have a lot of great merchants in this company, and we really know how to leverage up.

We're experiencing some nice movement in our real estate area, and we'll get some nice leverage from that over the next several years.

And when sales come back, I think we'll have the flow throughs and get back to historical levels.

Great, thanks a lot.

Thank you.

Okay, thank you, everyone, for participating.

Thank you all.

Thank you.

Ladies and gentlemen, this concludes today's conference.

We thank you for participating.

You may now disconnect.