Foot Locker Inc (FL) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

And welcome to the third quarter 2009 earnings release conference call.

(Operator Instructions) 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's Incorporated'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 result 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 begin.

Good morning.

We reported yesterday that, on a non-GAAP basis, we earned $0.10 per share for the third quarter of 2009 versus $0.18 per share last year.

Included in both years' results were impairment charges of $0.14 per share this year and $0.02 per share last year.

Therefore, on a GAAP basis, including the impairment charges, we had a loss of $0.04 per share this year versus net income of $0.16 per share last year.

A reconciliation of our GAAP results to our non-GAAP adjusted amounts is included in our press release to assist in your analysis of our results.

Please note, that as we go through our remarks this morning, we will be referring to our financial results on a non-GAAP adjusted basis.

Bob McHugh, our Executive Vice President and Chief Financial Officer, will begin our prepared remarks with a review of our financial results, including a discussion of the impairment charges.

Ken Hicks, our President, Chief Executive Officer, and recently elected Chairman of the Board, will follow with an operational review and provide some color on current business initiatives.

We expect that our call this morning will last approximately 45 minutes, including a question and answer session at the end of our prepared remarks.

While Bob and Ken will provide the details, I will begin with some of the headlines.

Our US sales continued to be challenging during the third quarter, although we did see some improvement on a quarter-by-quarter sequential basis.

Thus, the tone of the business in the third quarter was stronger than our second quarter results.

In total, our comp store sales decreased 8.2%.

Consistent with our game plan to control expenses to focus on our gross margin, our markdown rate, occupancy costs, SG&A expenses and depreciation were all favorable to last year.

Our gross margin rate was flat with last year, with our merchandise margin rate increasing 90 basis points, offset by a 90 basis point decline in our buying and occupancy rate due to deleveraging as a result of our lower sales.

Our SG&A expenses and depreciation declined $13 million and $3 million respectively.

And very importantly, particularly in today's economic environment, our balance sheet remains strong.

With our total cash position, net of debt, improving by $28 million.

And our inventory, in constant currency, down 5.7% from the same time last year.

I will now turn the call over to Bob McHugh.

Good morning.

Our third quarter adjusted earnings per share were within the range of our expectations going into the quarter, although a few cents below the Wall Street consensus estimate.

As Peter mentioned, our comp store sales in our US businesses continue to be disappointing and the primary reason why our earnings per share fell short of the third quarter last year.

We had a number of positive developments during the third quarter that are noteworthy.

Our comp store sales trend in Europe improved versus the spring season, most encouraging in October, as we generated a high single-digit sales gain for the month.

Our improved inventory position allowed us to operate our US businesses at a lower markdown rate.

Our expense management process continues to pay off, as we benefited during the quarter from reductions in both our occupancy costs and SG&A expenses.

And our depreciation expense was below last year, reflecting our lower fixed asset base.

We expect that the actions that we are taking this year, in terms of improved inventory management, expense reductions and positive cash flow generation, will lead to increased Foot Locker earnings, particularly when consumer spending returns to more normalized levels.

For example, the reductions that we are achieving in our fixed expenses should provide significant leverage for our business as comp store sales improve.

Third quarter comp store sales by region and segment were as follows.

Our combined US store operations decreased low double digits.

Footlocker.com declined high single digits.

Europe was flat.

Foot Locker Canada decreased low single digits.

And Foot Locker Asia-Pacific was up mid single digits.

While our sales results did not meet our expectations, we did see a trend improvement versus the second quarter of this year in each of our US divisions and at Foot Locker Europe.

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

Our third quarter gross margin rate was essentially flat with last year, reflecting a 90-basis point increase in our merchandise margin rate and a 90-basis point decline in our buying and occupancy rate, reflecting the impact of lower sales.

We reduced our total markdown significantly below last year by remaining disciplined on our inventory management and remaining true to our strategy of reducing the promotional cadence in our US stores.

The successful execution of this strategy is helping to offset our current sales weakness and clearly benefiting our bottom line profit.

Our third quarter occupancy expenses, on a constant currency basis, were $10 million below last year, reflecting the benefit of closing poor performing stores and some favorable new occupancy deals negotiated by our real estate department.

We will continue to evaluate our store base closely and consider closing additional underperforming stores, including ones that we believe will not achieve our internal capital allocation hurdle rates.

The current economic environment may provide additional opportunities for us to reduce our occupancy expense in certain US markets and we will pursue these opportunities diligently.

Third quarter SG&A expenses decreased $13 million versus last year.

The strengthening of foreign exchange rates versus the US dollar effected our SG&A expenses negatively by $1 million.

As a reminder, changes in foreign exchange rates from last year effected our SG&A expenses positively by $10 million during the second quarter.

We have had a lot of success during each of the first three quarters of this year, reducing our SG&A expenses versus the comparable periods of last year.

At the same time as we are aggressive in reducing our expenses, we are also being prudent to make sure we maintain the appearance of our stores and continue to provide superior customer service.

As a percentage of sales, our third quarter SG&A expenses were 30 basis points lower than both our first and second quarters.

As I pointed out last quarter, we are accomplishing our expense objectives by aggressively negotiating prices across most of our expense categories.

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

Depreciation expense for the third quarter was $29 million or $3 million favorable to last year.

The decrease in depreciation expense primarily reflects the asset impairment writedowns taken last year.

Net interest expense for the third quarter was $3 million, $2 million higher than last year, primarily reflecting lower interest rates on our short-term investments.

As always, we invest our cash conservatively, with the priority on preservation of capital and not chasing yield.

Our income tax provision for the third quarter was 31%, reflecting the benefit of a $1 million income tax audit adjustment.

As detailed in our press release, the third quarter noncash impairment charges were $0.14 per share this year versus $0.02 per share last year.

This year's charges primarily reflect the write-down of underperforming assets at our US store operations, as defined by the accounting for the impairment of long-lived assets.

Moving to our balance sheet.

Our merchandise inventory position at the end of the third quarter was $34 million or 2.7% lower than at the same time last year.

On a constant currency basis, our inventory was 5.7% lower than at the end of last year.

As a reminder, during the third quarter of last year, we reduced our merchandise inventory by 11.2% versus the third quarter of 2007.

Therefore, over the past two years, on a constant currency basis, we have reduced our merchandise inventory by 16%.

This two-year decrease is greater than the reductions that we made during both the first and second quarters of this year.

As we look forward, we plan to continue to be very diligent with our working capital management, with an objective in improving our inventory turnover, reducing underperforming promotions and increasing return on sales.

Our financial position remains strong, with $438 million of cash and short-term investments and just $138 million of long-term debt.

At the end of the quarter, our total cash position, net of debt, was $28 million favorable to the same time last year.

Therefore, over the past 12 months, we effectively funded last year's $106 million investment in CCS through positive cash flow from operations.

As we look towards the fourth quarter of this year, our outlook is as follows.

We think there is a good opportunity for our comp store sales trend to improve versus the third quarter, if the US economy improves and as the comparisons become less challenging.

With that said, we are still planning for a negative fourth quarter comp store sales.

We expect our total Company sales rate, which includes the benefit of stronger foreign currency rates and our stronger CCS purchase, to be 3% to 3.5% greater than our comp store sales rate.

We expect our merchandise margin rate to be relatively flat with last year, as we continue to focus on managing our markdowns effectively.

Our gross margin rate, which also includes our buying and occupancy expenses, is highly dependent on our sales results.

Therefore, we are not providing specific guidance on our fourth quarter gross margin rate.

We expect our SG&A expenses, in constant currency dollars, to be lower than the fourth quarter of last year but higher than the third quarter of this year.

Favorable foreign exchange rates, while helping both our top line sales, as well as benefiting our bottom line profitability by $0.01 per share, are expected to negatively impact our SG&A expense by approximately $10 million.

Our depreciation expense and interest expense should be similar to that of the third quarter.

And our income tax rate is expected to be approximately 37% to 38%, excluding a one-time noncash income tax expense of approximately $4 million.

We currently expect to record this charge during the fourth quarter, after an anticipated reduction in Canadian provencial income tax rates, beginning in 2012, is inactive.

This tax rate reduction will decrease the value of our deferred income tax benefits related to Canadian tax depreciation and operating loss carry-forwards.

Given the uncertainty of the external environment, we are not providing specific sales or EPS guidance.

We hope, however, that providing more color on the various lines of our income statement will be helpful to you in your modeling exercises.

As always, any strategic decisions that we may take during the quarter could have an impact on our financial results.

I will now turn the program over to Ken Hicks.

Good morning.

And thank you, Bob.

During my prepared comments, I will cover three areas.

The key operational highlights for this recent quarter.

Additional color on the current environment and what that may mean for our fourth quarter results.

And finally, I will provide a few of my initial thoughts on the strengths and opportunities that I see for Foot Locker longer term.

As expected, the difficult external environment in the US continued to put pressure on our top line sales results for the quarter.

We have seen some improvement in our US sales trend versus the second quarter.

However, not as much of an improvement as we expected.

Following up on some of Bob's commentary, we believe that during the quarter, we effectively managed the most controllable elements of our business.

We increased our merchandise margin through improved markdown management.

We reduced our occupancy cost and SG&A expense versus last year through effective negotiations with our important business partners.

We benefited from reduced depreciation expense due to a lower fixed asset base.

And we reduced our merchandise inventory from last year by maintaining a disciplined approach to working capital management.

As a result of these initiatives and being prudent with our capital spending, we generated positive cash flow from operations.

We believe that our strong cash balance and merchandise inventory position will allow us to compete effectively during the fourth quarter.

And as we go through the fourth quarter, we are committed to continuing to improve our positioning, so that we hit the ground running in 2010.

During the third quarter, our US businesses, from both a sales and profit standpoint, underperformed our expectations.

While our international businesses performed much better than their US counterparts.

In the US, we had double-digit comp store sales declines in both athletic footwear and athletic apparel.

Our sales declined across each region of the US, with weaknesses fairly consistent across urban and suburban areas and both inside and outside the mall.

We had sales decline in both genders.

The sales decline in our men's category was less than that in the women's category in both footwear and apparel.

Sales were weak in our two largest men's categories, basketball and running, which represent a large percentage of our footwear business.

Continuing a trend that we have seen all year, we have generated sales gains in some big programs, including key marquis assortments, the lifestyle category and premium classics.

In the marquis category, we had gains in Jordan Retros, Griffey, Kobe and LeBron endorsed footwear, Hyperize and Hyperdunk styles, and some specific Nike Max Air styles.

In the lifestyle category, which includes footwear with vulcanized soles, the strong sellers included; Nike Sweet Classics and Santa Cruise, Adidas Top Ten, and Converse Chuck Taylor's.

In the premium classics category, we generated gains in Nike Big, Prestige and Blazers.

Our average footwear selling prices in the US increased low single digits, reflecting a continuing shift towards more stable prices and lower markdown rates.

Our apparel business in the US continued to be very tough throughout the quarter.

Clearly, I believe that improving our apparel business, over time, is a significant sales and profit opportunity for our Company.

Apparel is an area that will be receiving considerable focus in the months ahead, as we will look to deliver assortments that are more relevant for the consumer in today's marketplace.

As already mentioned, our international sales, during the third quarter, significantly outperformed our domestic results.

Our Asia-Pacific division, with stores in Australia and New Zealand, exceeded both their sales and profit results of last year.

Based on the current trend, we expect our Foot Locker Asia-Pacific division to post record profit results this year, with the high single-digit division margin rate.

Our sales and profit results for the quarter, at Foot Locker Canada, were fairly stable versus the third quarter of last year.

Foot Locker Canada's division profit margin continues to run in the low double-digit range for both the current quarter and year to date.

We are also most encouraged with the recent sales trend at our very important Foot Locker Europe division.

For the quarter, our comp store sales in Europe were relatively flat in both the footwear and apparel categories.

During the month of October, we saw a significant sales trend improvement, with sales in both the athletic footwear and apparel categories increasing high single digits.

The October sales trend improvement occurred in almost every country in which we operate, with very meaningful gains in the larger markets of Italy, France, Germany and the UK.

By category, the important running business turned positive in October.

While basketball is starting to become a more meaningful part of our business in many of the European markets.

As Bob covered, our comp store sales at Footlocker.com/Eastbay decreased high single digits for the quarter.

Total sales of this division, including our newly acquired CCS business, increased high single digits.

Like our US store business, sales in this segment improved versus the second quarter of this year but remained disappointing.

Division profit of our dot-com division decreased slightly 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 single digit rate.

While sales at CCS have not met our expectations, the EBITDA margin of CCS is expected to be double digits for the full year.

We continue to pay close attention and be encouraged with the sales results of our two test CCS stores that we have opened earlier this year.

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

Based on the initial results of these two stores, we plan to expand the test in 2010.

We ended the quarter with 3,601 owned stores, reflecting 33 new stores and 73 closed stores for the year.

We've also remodeled or relocated 130 stores so far this year.

Our 2009 capital expenditures program is tracking to approximately $100 million for the year.

We continue to expect that we will open approximately 40 new stores and remodel or relocate 150 stores during 2009.

While we continue to evaluate which stores that we may close during the fourth quarter, we anticipate closing about 200 stores for the full year.

This represents 160 store closings, net of openings for the year, and approximately 60 stores more than we had anticipated in the US at the beginning of the year.

Our sales were soft in the US for October and continue on that trend line in November.

From a sales standpoint, we are approaching the fourth quarter cautiously.

We feel we have a good mix of new shoes, with a broader level of value in our assortment.

For the fourth quarter, we do not foresee that we will need to step up promotions for holiday selling.

Fortunately, our international sales are holding up pretty well, which demonstrates the benefits of operating a diversified multinational portfolio of businesses.

And our dot-com sales have improved on their year-to-date rate.

Bob already provided some color on the various levers that drive our profitability.

I feel comfortable that we will continue to do a good job in controlling these levers, including capital expenditures, working capital, inventory and operating expenses.

While we will strive as hard as we can to achieve our earnings plans during the fourth quarter, it is equally important that we position ourselves appropriately for the future.

This week, I completed my third month with the Company.

The leadership transition from Matt Serra to me is progressing smoothly.

A large percentage of my time, over this period, has been devoted to becoming involved in the day-to-day operations of the business and beginning the development of a new strategic plan.

As part of this process, I've had the opportunity to visit many of our stores in both the US and international markets.

I've also visited most of the offices of our business units and some of our support facilities.

I plan to complete these visits during the fourth quarter.

Over the next several months, I'll be working closely with the management team to develop a new strategic plan for the Company that builds on the Company's important strengths.

Including our strong retail market position, real estate portfolio, and relationships with the best athletic shoe and apparel vendors.

As I already noted, I see our apparel area is one with significant opportunity.

I also believe that we have numerous opportunities to expand our footwear offerings to provide a broader value for our customers and strengthen each of our individual store banners.

As part of our strategic planning process, we are defining the Company's vision, developing new financial goals, identifying strategic priorities, and continuing to implement short-term tactics to strengthen the Company for the future.

I plan to have more to say on this process during our next conference call.

In closing, I'd like to reiterate that our financial position is sound.

Our fixed and variable costs are being reduced.

Our merchandise inventory is being managed tightly and our infrastructure is strong.

These are all important factors that provide a solid platform from which we will look to build an exciting and sustainable growth plan for our Company.

We'll now be happy to answer your questions.

Thank you.

Thank you.

(Operator Instructions) Our first question comes from Kate McShane from Citi Investment Research.

Hi, good morning.

I was wondering if you could talk a little bit about what you're seeing in the competitive environment in the US?

And how much of your comp store sales declines do you think is the result of any kind of market share loss?

And you had also mentioned, a couple of times on the call, getting more value into your stores.

And I think this is something Matt had mentioned on the last quarterly call.

And I wondered, how much more product can we expect to see in your stores, for the upcoming quarter, that is a little bit more value-oriented for the Foot Locker consumer?

Obviously, it is competitive out there and we are seeing some of our competitors being more aggressive.

We feel that we are properly positioned with our strong position in marquis but we need to continue to build on the value level of our assortment.

Recently, we've depended on more of our clearance items to be -- to drive that value element.

And what we're doing now is working with our key vendors to make sure that we trade in a broader range of value.

Continuing our strength at that high end with that marquis product and what the customer knows us for.

But also, being a good participant at the value portion so that we can offer a full range of product to our customers.

Okay, thank you.

And is there any color behind what the recent strength is in Europe for your stores?

The strength that you saw in October, what do you see driving that strength?

A number of things.

One, we have strength in our assortment and there, we've broadened our assortment to include more strength in classifications, that we're seeing a rise in basketball in Europe but also the strength in running and fashion.

We are -- have strength in our apparel business.

And we've also stepped up our marketing and we're learning from that and to what we can apply in the United States.

Well, thank you.

You're welcome.

Thank you.

Our next question comes from Robbie Ohmes from Banc of America.

Good morning, thank you.

Actually -- hi, Ken.

I was hoping you could give -- since you brought up apparel a few times in the conference call, maybe you could give us a little more detail on what happened in apparel in the third quarter?

And sort of how you view it for the fourth quarter?

And then, maybe some more hints on what you guys think you could do better as you look into next year?

Thanks.

Sure.

Robbie, our apparel business, we're probably too focused on last-yearitis in apparel.

And we need to continue to develop newness, both with our private and branded label.

We are -- we have taken some of the things that we've learned in Europe and are applying them to the United States.

For example, in branded, doing more with color.

So, we're seeing some benefits from that.

We also are working hard to make sure that we keep our assortments new and fresh, with fresh ideas.

The actual inventory is fresh but our focus here is really making sure that we continue to stay current with the market.

And we've, as a Company, are going to make sure that we've got the resources and capabilities to do that.

And you have a pretty large private label business.

Where do you think that ends up going over the next year or so?

We're very proud of our private label business.

However, we think that we will have the opportunity to continue to increase and grow that as an element of the business because of what we're looking at with the new ideas.

So, I would say that you'll see some new things coming out next year in our apparel but right now, we've still got to develop them.

And my last question, Ken, you mentioned the broader value for customers.

Any early thoughts on the store format, mall versus potentially taking Foot Locker more aggressively off-mall?

That's something that we'll look at as part of our strategy but don't have any point of view on that at this point in time.

All right, great.

Thanks a lot.

Thanks, Robbie.

Our next question comes from Bob Drbul from Barclays Capital.

Hi, good morning.

Good morning.

I've got one question for Ken and two questions for Bob.

The first one for Ken.

When you look at the store base today and you look at the CCS opportunity, is there a number of, whether store conversions you would think about?

And the longer-term opportunity for CCS, when you talk about stores closing that aren't hitting your internal return rates, how does it shake out from the standpoint of the possibility for converting some of those underperforming stores?

And how do you think about it from that perspective?

Well, we are evaluating based upon the tests that we have, how big the CCS store opportunity is.

And as I said, we're going to open some more stores this year.

As far as conversions, that's something that we've got to evaluate on a store-by-store basis because it's got to be in the right marketplace and the right size.

We're not going to just shoehorn a store in, if either of those factors aren't important.

So, I think there is the possibility of that but right now, we don't have any firm plans to do that on a significant basis.

Okay, great.

And two questions for Bob if I could.

The first one is, when you look at the SG&A trends for the first three quarters, especially the first half of the year versus what you just reported and based on some of the commentary you gave for the fourth quarter.

What are some of the factors that are a little bit different in the third quarter and the fourth quarter versus what you had in the first quarter, with the decline in the dollar numbers that are out there?

Well, the first part, we pointed out, A, is what is the currency, was a big factor.

The second part is to remember that the variable expense, the sales levels vary by quarter.

So as each -- the sales levels go up and down, the store -- probably the largest component of the variable expense is the store wages.

So we have to flex the store's staffing with the level of expected business.

And so, I think if you look at the sales in the third quarter versus the second quarter, they were higher, which is going to mean you're going to have more staffing in the stores, things like store supplies, banking fees because there's more transactions.

So, those are the big drivers.

Okay.

And I think Ken also mentioned, in Europe, we spent a little bit more money on marketing because it's something we've been trying to emphasize and we believe it was very beneficial to Europe in the third quarter.

Okay.

And then just my last question is, I think with the merchandise margins up 90 basis points in the third quarter, you talked about flat plans for the fourth quarter.

Can you just elaborate a little bit more on why they wouldn't be up, your inventory levels?

Are there concerns in your inventories that you have?

No, I don't think there's concerns in the inventory.

We think the inventory levels are in line with the level of sales.

And as we said, we've been trying to temper the promotional cadence.

So really, there are no concerns there.

Okay, thank you very much.

Good luck.

Thanks, Bob.

Our next question comes from Sam Poser from Sterne Agee.

Good morning.

Can you just give a -- "value" is a word that's used by lots of different companies all the time.

Could you give us a real definition of what you mean by putting value, what value means?

Because to a lot of consumers, the marquis products are a value.

They're selling -- they are expensive but they're a value to the consumer and they're buying them.

So, could you really define what you mean by putting value into the stores?

You're exactly right, Sam.

And that's why it's difficult to put a dollar to it because it depends on the shoe and the apparel, what it is.

So we will be able to offer value at the high end with our marquis product.

We also will be able to offer value at prices that may be below our average retail because of the type of shoes we're able to offer and not just on clearance.

We have had success with that in the past.

We're not looking to sell cheap shoes in the store.

That's not what we do.

What we are looking to do is make sure that the price and what we're offering in the shoe do give the customer a value.

So, you will see more in the shoe and in some cases some, some pricing that allows us to make sure that the customer recognizes their value.

So, putting a definition to it is a little more challenging but it will be what's appropriate for that shoe and that category of shoe.

Okay.

Are you aiming at trying to -- when you take a lot of the markdowns, the stuff that hits the clearance racks versus the expensive shoes, ends up costing it looks like between $50 and $80.

Are you looking -- is that the kind of range where you're looking to add a value piece as a regular thing, rather than it just being marked down?

Am I in the range there?

That's part of it.

You will see some shoes that are -- from some of our brands that are in that range.

You'll also see, for example, there are shoes that the customer looks for that may be at a somewhat lower price than that but there -- in the running area, classification, for example, that we just in the past have a very small selection of maybe one shoe.

And we may offer a slightly larger selection.

That's not going to overtake the store, though.

We're still going to be the leader in high quality, higher end athletic shoes.

Okay.

And thank you.

And then, one of the things I had -- are you going to be working on reducing the overlap of styles, both in footwear and apparel, between your different concepts to better define, let's say, Foot Locker from Foot Action from Champs, from a merchandise perspective?

Is that something you're looking at and if so, what are you looking at?

It is something that we're looking at.

And we do plan to make sure that we have clearer differentiation between the brands and the banners that we have.

Each of the banners needs to stand for what it is.

And in the current environment, we probably came a little -- we created a little too much overlap.

We need to get each of the brands in their distinct space.

How --?

That said --.

I'm sorry.

That said, we haven't got all of those definitions as clear as we need to be so that they can stand in their own space.

So, are we looking at that as like a 12 to 18-month program then?

That will take some time to accomplish that, to make sure that -- because it's easy for us to say it.

What we really have to do is make sure that the customer sees it and knows it and that we stick with it.

Okay, and then lastly, in the comps that you commented about, the international business or the European business in October, that high single-digit increase in October, is that FX effected or was there an FX effect on that number?

No.

No.

So that's in constant currency?

Right.

Yes.

Okay, thank you very much.

Good luck.

Thank you, Sam.

Thank you.

Our next question comes from Chris Svezia from Susquehanna Financial.

Good morning, everyone.

Welcome again, Ken.

Thank you.

Just a follow-up here on the product assortment, particularly on the footwear side.

First question here, just on the timing of when we anticipate some of these changes taking hold?

I think you mentioned in the near term, in terms of fourth quarter and as we head into early next year.

And secondarily, as you think about product and more that sort of value presentation, pricing, are we talking about working with existing brands, how receptive they are to that?

Or are we also talking about maybe -- is it still going to be athletic product being the focus or is there an opportunity to maybe look at other areas, whether in boots or in casual or other assortments, other product?

Or is it really still sticking on the athletic side?

Well, I'll answer your second question first.

It really is focusing on the athletic active side, if you will.

For example, we do sell boots.

We have a very nice boot business, from a number of different vendors, Nike, Timberland, Bear Paw's.

And so, we will continue to focus on active and athletic and primarily from our current vendors.

The changes taking hold, you will see a small step this quarter but it takes time.

And so, we will -- you will see the product changes over time and they will become more noticeable as time goes by.

But it takes us awhile to make the shoes and to make sure that we've got exactly what we want.

So, you will see it evolve, as opposed to a revolution, which I also think is appropriate for the customer.

We don't want to confuse the customer by changing the store.

Right.

And then, as you look at the marquis business, specifically basketball, and some of the general weakness that's been out there in that category, any thoughts as to what specifically could be the contributor, whether it's incremental to product or styling or diversion to other categories?

Or just incrementally, what the issue might be there on the basketball side?

And any thoughts as you move forward into spring in terms of what you're seeing there?

I think there are a number of reasons that are causing it.

Obviously, the economy is having an impact.

The consumer's disposable income.

There have been some issues with some of the styles that the customer hasn't liked.

But the thing that we have seen is when we have the shoe right, they're there, they buy it and they buy it at the price.

And so, our key is to work with our vendors.

And we are working closely with them and they have been terrific in responding to our needs and the customer's needs, in helping to make sure we've got the right assortment and the right shoes at the right price.

Some of them deal with changes in the styles.

And I'm very excited about some of the new things we have coming for this quarter and for next year.

Some of them have to do with pricing.

But I'm -- there's no question, the business is more challenging than it has been.

But I think we're doing a lot of things to work on it, to make it better.

Okay, all right.

Thank you very much, Ken, I appreciate it.

Thanks, Chris.

Thank you.

Our next question comes from Bernard Sosnick from Gilford Securities.

Good morning, and congratulations, Ken, on the new appointment.

Thank you, Bernie.

With regard to the athletic footwear business, it's been historically a branded business that relies on manufacturers' suggested list prices and models provided by manufacturers.

So, in your desire to offer better quality and different features to present greater value, how can you do that within the confines of the brand relationship?

And do you -- are you finding that the brands are going to have a means of being flexible or will the value primarily be through the start of a private label program?

Well, first of all, I'd say, we're very fortunate and we've got a terrific assortment of vendors who have been very supportive of us.

And they recognize that the current environment and the environment we operate in.

And they have been supportive in providing new ideas and new things to make sure that we offer great product.

I'm seeing some new ideas and product that I haven't seen and great value to our customers.

So the good news is our vendors are working closely with us to make sure that we've got the right product for the customer in terms of style and in terms of value.

With regard to private label in shoes, as we look at our strategy, we'll evaluate that but that's not something that we do now.

So basically, you're saying that vendors are willing to give you exclusives, perhaps, on new ideas that you can -- so that Foot Locker can differentiate itself.

Yes.

Okay.

One other question with regard to opportunities in the women's business versus men's, with regard to apparel and footwear and particularly your view on Lady's Foot Locker.

Well, we obviously have a unique position in the women's athletic apparel and footwear business, both in our Foot Locker stores and our Lady Foot Locker stores.

And we are -- feel that that is an opportunity for growth for us.

There are some differences in that business in terms of the penetration of apparel, in terms of some of the styles itself.

For example, running is more important in that business and we're seeing some terrific new ideas and trends that we feel will allow us to be an even stronger player in that business.

Okay, and with regard to your strategic vision, you're working on it and you've begun to implement it.

How -- what kind of timeline, would you say, would be required to get 50% into what you envision to the strategic plan?

That's a tough one, Bernie, since we haven't finalized the plan yet.

It will take awhile to get the plan in and to fully implement it.

And right now, it's too early to call that.

We will come out publicly in the spring with what our plan is and we will make sure that we are very open with the investment community on what that is.

Well, I've had a lot of faith in you in the past position and I wish you all the luck in the new one.

Thank you very much, Bernie.

Our next question comes from Jon Zolidis from Buckingham Research.

Hi, good morning.

Can you hear me?

Yes, we can, John.

Okay, great.

I wanted to ask a question about the store closings.

And I was wondering if you could provide a little bit more color?

You did indicate that you've decided to close a few more locations than you had planned earlier in the year.

Are those kind of equally distributed across all of the banners or is there particular banner that is seeing a greater portion of the closings?

How many of the closings are in malls where you have another location, where you think you can recapture some of those sales?

And what are the criteria you're looking at for closings?

And then, when we look into next year, how should we think about what's going to go on with the US store base?

Thank you.

Okay.

It's a number of questions and I want to make sure that I get them all.

The store closings are in about the same proportion across all the banners.

The additional store closings are about the sane proportion across all the banners that they were, the initial set of store closings.

So we -- there were some of the banners that had more closings in that initial set and they had more closings in the additional.

We are -- the evaluation criteria, obviously, is looking at the profitability and cash flow of those stores.

But also, to answer your second question, are very much making sure that we have a position in that mall, so we aren't abandoning a mall.

So, we're looking at what we have in that mall and make sure that we are positioned well in that.

With regard to next year, we have not finalized our plans on that.

So, I don't want to speak to it at this point.

Okay.

Thanks a lot.

And good luck for the holidays.

I think we have time for one more question.

Thank you.

Thank you.

That question comes from Michael Binetti from UBS.

Thanks, and welcome, Ken, for your first call.

Thank you.

I just want to follow up on the last question about the store counts and how the decision criteria kind of works?

And it seems like you're looking at a mall and you want to have a presence there.

But is that still the case, even if you look at it and you say this store is still -- even if we keep it open, we're not going to surrender these volumes even if it's unprofitable?

We've heard that as a reason for keeping some stores open in the past or just that we think that we can renegotiate the rents to get these to be economically viable.

So, I'm just trying to dig in a little bit more on how you think about the leases and the store closures going forward.

And then, I have a quick follow-up.

Yes, the -- it's really case by case basis, store by store, mall by mall.

We do look at the mall, our presence in the mall by format, the relative strengths of the formats in that mall, the type of mall it is, the customer it serves.

Obviously, the real estate dynamics, in terms of the leases, we look at closely, what we're able to negotiate, what we're not able to negotiate.

What types of things, what are the issues that we think are the store, is it a real estate, is it a sales operations.

There's a lot of different dynamics that go into those decisions.

And so, there's no real set formula, other than, do we believe that store makes sense to go forward with, based on what we know we can do for it?

Either structurally from a real estate perspective or from a merchandise sales perspective.

And if I could just follow up.

In the second quarter, you guys took out about $47 million worth of SG&A.

And in this quarter, it was only down about [$14] million.

I know you said on the last call it may not be sustainable, that you were working hard on it.

But perhaps you could give us a little detail to help us think about the volatility on the line, about what came out last quarter?

What was different this quarter?

And help us think about what may be phasing in or out in the next few quarters?

Well, as I said before, the biggest thing is the variable expenses.

Sales were higher this quarter, so when sales go up, you're going to have more store wages, sales-related expenses, banking fees, supplies and the like.

And so, when we look at quarter-over-quarter, and again, the rate as a percent of sales was lower in the second quarter.

So, to focus strictly on the absolute dollars, I think isn't the right way to look at it.

It is how we flex the expenses with the sales volumes.

Okay, thanks for that.

And then, if I could just put one more on there.

If you look at all the work you guys have done in taking done costs out up and down the P&L.

I ask the obvious question here but what kind of comp number do you think you need, at this point, to start leveraging all the cost reduction work you've done?

We don't think it takes much of a comp.

If you go back, for instance, the first quarter is a good example, where our sales were better than we expected.

Our profits were much better because we were able to hold on more of the flow-through as the sales improved.

So, we don't think it's going to take much.

So, do you think you could leverage a negative comp if it was just slightly negative in the fourth quarter?

It depends, possibly.

Okay.

Thanks, guys.

Thank you.

All right.

We want to thank everybody for participating and wish everybody a Happy Thanksgiving.

Thank you, everybody.

Have a good Thanksgiving.

Thank you.

Ladies and gentlemen, this concludes today's conference.

We thank you for participating.

You may now disconnect.