Foot Locker Inc (FL) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

And welcome to the fourth 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 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 begin.

Good morning.

Overall, our fourth quarter results were in line with our expectations going into the quarter, which we discussed with you during our November conference call.

They reflect some encouraging signs as we enter 2010.

On a GAAP basis, our net income was $0.14 per share for the fourth quarter of 2009, versus a loss of $0.81 per share last year.

Included in our results were charges of $0.10 per share this year and $1.06 per share last year that we highlighted in our press release and excluded in a non-GAAP comparison.

As this comparison shows, on a non-GAAP basis, we earned $0.24 per share this year, versus $0.25 per share last year.

During our prepared comments, we will refer to our financial results on a non-GAAP adjusted basis to help facilitate your analysis of our financial results.

Bob McHugh, our Executive Vice President and Chief Financial Officer, will begin our prepared remarks with a review of our financial results, including the charges that we have excluded in our non-GAAP adjusted comparison.

Ken Hicks, our Chairman and Chief Executive Officer, will follow with an operational review and provide some color on current business initiatives.

We will conclude the program with a question-and-answer session.

Our pre-tax income from continuing operations increased $2 million versus the same period last year.

The primary factors that contributed to this improvement were as follows.

Our total sales increased 0.6%.

Our gross margin rate which includes our occupancy expenses improved by 10 basis points.

And our SG&A expenses in constant currency dollars declined $6 million.

Our cash flow for both the quarter and full year was also very encouraging, and as a result, we ended the year with our total cash position net of debt of $185 million favorable to last year.

I will now turn the call over to Bob McHugh.

Good morning.

Our fourth quarter adjusted earnings were at the high end of the range of our expectations going into the quarter, and in line with the Wall Street consensus estimate.

As Peter mentioned, I will discuss both our quarterly results for this and last year on a non-GAAP adjusted basis, which excludes the adjustments detailed in our press release.

I will discuss each of these adjustments separately.

Besides achieving our EPS target for the quarter, we also had a number of other positive developments that we believe bode well for 2010.

Our comp store sales improved fairly meaningfully on a sequential basis throughout the quarter.

In fact, during the month of January, our comp store sales increased high single digits at our international operations, and were flat at our US operations.

Our merchandise margin rate for the quarter improved by 20 basis points, reflecting a lower markdown rate than last year.

We remain diligent with our expense management, benefiting from reductions in both our occupancy costs and SG&A expenses.

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

All of these factors taken together contributed to our $2 million pre-tax profit increase for the quarter.

We also began to implement some important strategic initiatives during the fourth quarter in line with our new strategic plan that we will communicate next week.

For the fourth quarter, comparable store sales by region and segment were as follows.

Our combined US store operation decreased mid double digits.

FootLocker.com generated a small increase.

Europe increased mid single digits.

Foot Locker Canada had a small decrease.

And Foot Locker Asia-Pacific decreased high single digits.

By month, comp store sales declined high single digits in November, declined low single digits in December, and increased low single digits in January.

We are very encouraged by the significant improvement in our sales trend in each of our US and international regions as we progress throughout the quarter.

The sequential improvement in our sales trend continued through February, with our comp store sales results up mid single digits in both domestic and international markets, as well as our dot-com business for the month.

Also of note is that February is our most difficult monthly comparison versus last year.

Our fourth quarter gross margin rate improved by 10 basis points versus last year, reflecting a 20 basis points improvement in our merchandise margin rate, and a 10 basis point decline in our buying and occupancy rate.

The improvement in our merchandise margin rate reflected a reduction in our markdown activity versus the fourth quarter of last year.

The markdown reduction is encouraging, considering that we stepped up our promotional activity during the month of January to clear slow-selling apparel as we began our transition to a new apparel strategy.

We believe that in order for our new apparel strategy to be a success requires that we tighten our inventory aging standard.

To achieve this new aging standard at year-end required that we record a $14 million inventory writedown during the fourth quarter.

Our fourth quarter buying and occupancy expenses, stated in constant currency dollars, were $5 million below last year, primarily reflecting the impact of closing 73 under-productive stores during the first three quarters of this year.

Our occupancy expenses will benefit further in 2010 from the closing of an additional 106 underperforming stores during the fourth quarter, most of which were shuttered at the end of January.

Fourth quarter SG&A expenses increased $6 million versus last year.

The strengthening of foreign exchange rates versus the US dollar since last year affected our SG&A expense comparison negatively by $12 million.

On a constant currency basis our fourth quarter SG&A expenses decreased by $6 million.

Expense reductions in store wages and other store expenses were partially offset by higher marketing expenditures, store closing costs, and pension expense.

We will continue to work hard at identifying additional opportunities to reduce expenses strategically across each of our businesses.

At the same time, maintaining the appearance of our stores, providing superior customer service, and investing prudently in marketing and branding strategies will not be compromised.

Our fourth quarter SG&A expense rate was 22.3%, favorable to each of the first three quarters of the year.

Depreciation expense for the fourth quarter was $27 million, or $6 million favorable to last year.

The decrease in depreciation expense primarily reflects the asset impairment writedown.

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

Our income tax provision for the fourth quarter was 32.8%, higher than last year's rate of 28.6% which included an income tax adjustment so that the full year tax rate was properly reflected.

Therefore, while our pre-tax profit was $2 million higher than last year, our net income and EPS were flat with last year, and $0.01 per share lower than last year, respectively, reflecting the higher income tax rate and a slightly higher diluted share count.

The income statement adjustments for the fourth quarter that we excluded from non-GAAP comparison for 2009 are as follows.

A $14 million inventory writedown, as I just discussed.

A $5 million restructuring charge related to our Lady Foot Locker organizational change and costs associated with corporate staff reductions.

An income tax benefit of $7 million related to the inventory writedown and restructuring charge, partially offset by a $4 million tax expense related to the writedown of Canadian deferred tax benefits due to a Canadian tax law change.

Last year's charges reflect the writedown of the value of certain underperforming assets at our US store operations in accordance with GAAP.

Moving to our balance sheet, our merchandise inventory position at the end of the fourth quarter was 7.4% lower than at the same time last year.

On a constant currency basis, our inventory was approximately 10% lower than at the end of last year, and approximately 6% lower on a square foot basis.

Our cash flow for the year was very strong, as we generated $468 million of positive cash flow from operations.

From which we invested $89 million in capital expenditures, funded $100 million to our pension fund, and paid $94 million in shareholder dividends.

We made a $16 million contribution to our pension fund during the fourth quarter.

Thereby increasing the funded status of our North American qualified plans on a GAAP basis to 87% from 72% at the end of last year.

At year end, we had $589 million of cash and short-term investments and $138 million of long-term debt.

Our cash position net of debt was $185 million favorable to the same time last year.

As we look towards 2010, we are cautiously optimistic that our comp store sales will begin to increase as we refine our merchandise assortments and the external environment begins to improve.

As I said earlier, our sales results in February are cause for cautious optimism.

Regardless of these factors, we will remain diligent in controlling the more controllable aspects of our business model, including inventory, markdowns, operating expenses, and cash flow.

With that as a prelude, our outlook for the year versus our adjusted results for 2009 is as follows.

We expect our comp store sales to increase low single digits, and as I already indicated we are off to a good start based on our February results.

We expect both our gross margin rate and our SG&A rates to improve slightly versus last year, reflecting our more favorable inventory position, and continuing prudent expense management.

Our annual depreciation expense is expected to be approximately $10 million below 2009, depending of course on foreign exchange rates.

Interest expense should be relatively flat with last year at approximately $10 million.

And our income tax rate is expected to be approximately 37%.

We are not providing EPS guidance for the year, but do expect to produce a double digit percentage increase.

For the full year, we do not expect that foreign currency translation will have a meaningful impact on our EPS comparisons with last year, based on current exchange rates in Canada, Europe, Australia, and New Zealand.

Obviously that outlook could change as foreign exchange rates fluctuate during the course of the year.

By quarter, I would expect to generate EPS increases in each of the first, third, and fourth quarters of this year, with the most meaningful increase during the fall season.

Our second quarter comparison for the same period last year will be our most difficult due to the expense reductions reflected in the 2009 numbers.

Looking beyond 2010, we are encouraged that we are at an inflection point for a meaningful and sustainable longer-term improvement in our financial results.

I will now turn the program over to Ken Hicks.

Thanks, Bob.

And good morning.

As announced last night, we will be hosting an investor meeting at our corporate headquarters building next Tuesday morning at 10 AM Eastern time.

The purpose of the meeting is to review our new strategic plan and highlight the financial objectives that we will work hard to achieve over the next several years.

In the meantime, during today's call, my prepared comments are concentrated on discussing our fourth quarter results and the strategic actions that we have already taken.

I am pleased with the operational execution of our associates worldwide, which led to our improving financial performance and strong cash flow that we posted for the quarter.

As already mentioned, from a financial perspective, we achieved what we expected to, for the quarter.

At the same time, we also began to take some meaningful strategic steps, each carefully designed to position our Company better for the future.

As we do this, we are encouraged by our significant sales trend improvement as we progress through the quarter, including a high single digit increase at our international operations and a flat sales performance at our US operations in January.

I am also pleased to report that our sales have improved further in the month of February, with mid single digit comp store sales gains at our US, international and dot-com businesses.

We also executed well from an operational standpoint.

Our merchandise margin improved reflecting a lower markdown rate.

Our occupancy costs were reduced as a result of closing underproductive stores and negotiating effectively with our landlords.

Our SG&A expenses were reduced by negotiating aggressively with our vendors.

Our depreciation expenses were below last year, due to a lower fixed asset base.

And we generated strong cash flow reflecting the impact of our expense initiatives, improved working capital management, and lower capital spending.

As a result, we ended the year in a very strong cash position, and our inventories are positioned appropriately for 2010 due to the actions we took during the fourth quarter, including the steps on inventory aging.

In the US, our athletic footwear sales declined low single digits, where our athletic apparel and accessories declined double digits.

We generated a small comp store gain in men's footwear, low single digit decline in women's footwear, and a mid single digit decline in kids' footwear.

During the fourth quarter, we began to see two important fashion trends emerge that we believe bode well for our Company.

First, the toning category contributed to the higher sales and is breathing new life into the women's business.

And second, both men's and women's technical running shoes are quickly gaining momentum.

We generated solid sales gains during the fourth quarter in the running category, through various key styles from Nike, ASICS, New Balance and puma.

In the Marquee basketball category we continued to post strong gains in Jordan Retros, as well as Griffey, Kobe and LeBron-endorsed footwear.

Classic styles from converse, puma and Adidas sold well.

As highlighted in the women's category, the biggest buzz in the industry is the strength of the toning category which has contributed to the athletic look regaining its popularity.

We generated strong sales gains during the fourth quarter with the Reebok Easy Tone style and Skechers Shape-ups.

We also generated strong sales gains in women's running shoes, in both higher-priced technical, and mid-priced value zones, led by ASICS, Nike, and New Balance.

In total, our average footwear selling prices in the US increased low to mid single digits for the quarter, reflecting our continuing mix shift toward higher-priced footwear, and a lower markdown rate.

Our apparel business in the US was very tough throughout the quarter.

Even as we began to clear dated assortments.

Clearly, improving our apparel business is one of our significant sales and profit opportunities for our Company.

And will be an important strategic objective that will be a focus for us over the next several years.

We will discuss the initiatives behind this strategy next week.

Moving to our international businesses, our comp store sales in Europe increased mid single digits during the fourth quarter in both footwear and apparel.

During January, our comp store sales in Europe accelerated to nearly double digits, with a strong gain across each of the major countries in which we operate.

By category, we had our strongest increases in basketball, which is becoming a more significant piece of our business in Europe.

We also generated some meaningful sales gains in Skate styles, as well as Nike, Adidas, and LaCrosse Plim soles.

Our most powerful category in Europe is running.

Our running sales were relatively stable during the fourth quarter.

Our increase in apparel sales in Europe included branded tees, outerwear, and licensed apparel.

Sales of Foot Locker Canada declined slightly for the quarter.

But like our business, increased meaningfully during the month of January.

Foot Locker Canada generated a small profit increase for the quarter by managing both its markdowns and operating expenses effectively.

Our Asia-Pacific business had a difficult fourth quarter with the comp store sales down high single digits and profits below the fourth quarter of last year.

It is important to note that during the fourth quarter of 2008, consumers in Australia were provided with economic stimulus checks from the government that contributed to our comp store sales increasing mid teens at this division last year.

Therefore, the unfavorable comparison in Asia-Pacific to the fourth quarter of 2008 was due to the strength of last year's results, not due to a slowdown in the tone of our business this year.

For the full year, Foot Locker Asia-Pacific posted record profits and a high single digit division profit margin rate.

The division profit of our core Foot Locker.com East Bay division was flat with last year, with a slight comp store sales increase.

The division profit margin rate of the core Foot Locker.com East Bay business remained very strong in the low teens.

Our sales results at CCS declined mid single digits for the quarter.

We continue to learn a great deal from our two test CCS stores that we opened earlier this year, the first in Santa Monica, California and the second in garden State Plaza in New Jersey.

Based on the results of these two stores, we decided to expand the test in 2010, adding an additional ten stores.

We ended the year with 3,500 owned stores, reflecting 38 new stores and 179 closed stores for the year.

We also remodeled or relocated 188 stores this year.

These projects were funded under our capital expenditures program and totaled $91 million for 2009.

During 2010, we plan to open approximately 40 new stores, and close approximately 150 underperforming stores, as we continue to improve the productivity of our store fleet.

Our capital expenditures plan for 2010 has been increased by approximately 20% from 2009, to a total of $110 million.

This increase primarily reflects the funds required for several sales driving technology projects including the continued rollout of a new POS system in Europe.

As we enter 2010, there are encouraging signs that the external environment is beginning to emerge from the recessionary environment of the past two years.

As mentioned, we have experienced a very meaningful sales improvement each month since last November with a positive comp store sales gain for the last 10 weeks.

We believe the steps that we have already taken to improve our merchandise offerings have contributed to our stronger financial results.

A considerable amount of time has been devoted over the past several months by our management team to develop a new strategic plan for the Company.

This plan, which we will communicate at our investor meeting next week, is designed to result in a significant improvement in our financial performance beginning this year.

We will outline the Company's strategic vision, near-term tactics, long-term strategic priorities, and new financial objectives.

Due to limited space, attendance at the meeting is by invitation only.

However, the meeting will be available live at 10 AM Eastern time to all interested parties from our Web site at Footlocker-Inc.com.

In addition to this, we also plan to be more active in meeting with the investor community this year than we have in the past.

Bob already provided some color on our expectations for 2010 and the various levers that drive our profitability.

As always, we will strive for operational excellence by executing effectively at all levels of our organization.

We will maintain an ongoing focus on controlling the controllables such as capital expenditures, working capital, inventory, and operating expenses.

At the same time, we will also pursue meaningful growth opportunities.

As we look to increase shareholder value, over the years ahead, we are building on a strong foundation.

Our organization and people are strong.

Our financial position is sound.

Our fixed and variable costs are being reduced.

Our merchandise inventory is current and in line with sales.

And our infrastructure is solid.

We will now be happy to answer your questions.

Thank you.

Thank you, we will now begin the question-and-answer session.

(Operator Instructions).

The first question is from John Zolidis from Buckingham Research.

Please go ahead.

Hi, good morning.

And congratulations on seeing some improving results.

I want to ask a question about the mid price strategy that had been discussed on some previous calls.

You did disclose that your average selling price was up and there seemed to be more interest in some of the technical running shoes.

Are you still trying to diversify the product assortment and add in more mid-price point offerings?

Is that something that is going on?

We will talk more about that on Tuesday, but the answer is we trade from mid to Marquee level shoes and we will continue to offer a meaningful assortment at all levels.

And we have in the past focused our mid-level shoes on clearance and we will make sure that we have a consistent offering at those price points, as well as maintain our position as the place for Marquee shoes.

Okay, great, thanks.

And I look forward to seeing you guys next week.

Good.

Thank you very much.

The next question is from Robby Ohmes from Banc of America.

Please go ahead.

Thanks.

Good morning.

Just a couple of questions on your outlook on the product side as you move through this year.

One is, if you could comment on Nike's Fresh Air campaign, that they've talked about a lot, what kind of role Foot Locker is expected to play in the Fresh Air campaign and does it build as you move into back to school?

And maybe as a follow-up question, I think you called out toners and women's running.

What do you think could be the driver to get the men's business comping positive or more positive as you move through back to school this year?

Any thoughts on how you're going to drive that would be great.

Thanks.

Thanks, Robby.

We feel very good about the product lineup coming.

We see a number of significant introductions this year that we think will have an impact.

We work very closely with Nike and we feel that we have a strong program with them on air, going forward, something that we will announce later this spring that I think you will feel it is very exciting and we will keep that program strong and vibrant.

And we will go into back to school which, as you know, is an important selling period for us.

On the toners, we're very enthusiastic about that business.

Obviously, it is performing well.

We continue to see new product coming.

And the men's product is really just now hitting, and I think again, there is some new introductions this spring that will help make that a more viable business in the men's, as it is in the women's.

And Ken, just to clarify, some of the introductions, do you feel like the exclusives that you're going to be getting with Nike are as strong or stronger than they were last year?

How does that look?

We have a tremendous relationship with Nike.

And I think that will continue and we will have product that will drive traffic into Foot Locker.

Great.

Thanks a lot.

The next question is from Chris Svezia from Susquehanna Financial.

Please go ahead.

Good morning, everyone.

A couple of questions.

First, Ken, I was wondering if you could just maybe elaborate, as you saw the improving trends in February, I know apparel is a long-term strategy but any thoughts on what's going on in apparel, if you saw any improvement there as well?

We really focused recently on clearing our apparel, making sure that it is right.

But we've got some programs.

We have a strong apparel business in Europe, and we're going to be bringing some of those ideas to the United States, some of the branded.

We also have brought in a new team that is really positioning us well in apparel, in our US stores.

So I think it is a little early to call, but some of the new things that we're doing with regard to our performance, our branded apparel, will help us.

And we're seeing the trend has improved so far this year, but it is still not to the level we want.

But as the team that we've got starts to kick in, and more of that product hits the floor, I think we will see a benefit from the apparel business.

Okay.

And then just on store closures, for one second, the stores, as you've progressed, over the years, and you look at areas or clusters of areas where you've closed stores, whether at multiple concepts in one mall and you have closed one or two of them, can you just comment on what you've seen on those remaining stores in those malls or in those close proximity, just in terms of the comp performance and the trends in terms of what is happening as you closed those stores in those areas?

Generally speaking, what we hope for is that when we do close a format in the mall, that we do drive some of the business to the remaining formats in the mall.

That is always the objective.

And we think we see some of that.

We have, for the most part, seen pickup, but whenever you do close a store, there is a transfer loss, but what you expect to do is pick up in the expense benefits.

So there is a sales impact.

But what you're looking for is a positive expense and profit impact, and we have seen that in most of the closures that we've had.

And then the last question I have, to what extent you can comment on this, but I've visited your new Run by Foot Locker store, and I'm just curious in terms of, maybe you want to save this for Tuesday of next week, but any thoughts behind it, any color you can add, what you've seen.

I know it has been very, very early but any thoughts behind that concept would be helpful.

Thanks for visiting the store.

And hopefully you're excited about it as we are.

And we know that running is a trend that is performing well.

It is also a significant part of the business that stays reasonably stable, or has stayed reasonably stable through time.

We feel that as a business, running is an opportunity, and we have learnings both from this idea, and we will determine whether or not it is appropriate or not, and we will talk more about that next week.

But also we're having learnings for the Foot Locker chain as to what shoes and ideas work, and we will apply those appropriately.

All right.

Thank you, and we will see you next week.

The next question is from Bernard Sosnick from Gilford Securities.

Please go ahead.

Good morning.

With regard to the online business which has been sluggish, I'm sure you're going to be detailing this more during your discussions next week, but could you give us some indication as to whether or not there are technological investments that need to be made, or other approaches that could help stimulate that side of the business?

Sure, Bernie.

We have made some significant changes in the late fall to our Web sites, and we have actually received some very high ratings from people who review Web sites, and have seen a pickup in business.

One of the key things to understand is our store banner Web sites are actually performing extremely well.

In the double digit category.

And the East Bay business had been tougher but it is now improved and it is also running positive.

But where we are really seeing gains are on the Web sites for each of our banners.

And that is a result of changes we've made to the Web sites to make them more interactive.

We've added ratings to our Web sites.

We have done the wide screen, easier checkout.

It is faster, more product shown, easier to navigate.

And since we have done that we have seen some very good results.

And we feel optimistic about what is happening on dot-com.

Thank you very much.

Look forward to hearing more about it.

The next question is from Sam Poser from Sterne Agee.

Please go ahead.

Good morning.

First of all, you have gotten your inventories down over the last few years to quite a degree.

How much lower, reasonably, with the store closures and stuff, do you think you can get them, let's say from an average stock position?

Sam, this is Bob.

We still think there is an opportunity in inventory, really through improving the turns.

There will also be a benefit from closing more stores, obviously, when we are going to close 150 stores but we still think the combination of both of those, we're going to be able to make a meaningful reduction in our inventories.

What is your turn goal, let's say?

Short-term goal?

We are going to talk about that next week.

Okay.

And then can you give us both the composition and the timing of your store closing plans?

For the most part, most of the store closings occur at year end, which is when most of our stores have their natural lease expiration.

And then the composition, the different concepts?

We're working on those closures, as we speak, and quite frankly we haven't identified where all they will occur and over the course of the year, that will develop.

Is this a conservative number, or is this a number that could go higher?

It could go higher.

It really depends on the environment out there.

And the store performance.

And what we think we can make of the stores that are out there that have the possibility for closure.

And then besides the store closures, what other expense saving opportunities do you see?

One of the areas we continue to make a lot of progress in, we do a lot of e-procurement or online auctions of the basic goods and services we buy for store supplies and other Company supplies, and we think there are still opportunities there.

We just still think there are some things we can do from a productivity standpoint, in terms of taking advantage of some technologies.

We also have a very rigorous profit improvement program with the Company where we encourage our associates to develop ideas.

And we reward them for that.

Some of the things we've done in the past year is developed some new reporting, to help our stores reduce some of their freight And we have also had some good progress on procurement with store fixturing, and as well as store hours.

People talk a lot about cutting store payroll but that is something that is easy to say, hard to do, particularly with the size of the fleet we've had, and we have done a lot of work in that area and saved significantly without harming customer service because, first and foremost, that's what our objective is, to continue to have the outstanding service that we have in the stores.

One of the things that we're investing in, as part of the capital for next year is improved store scheduling.

And we feel that that will help us both in terms of the service that we're able to give, but also the expense management of our labor.

Just one last thing.

Can you restate what you said the men's women's and kids' businesses were in the US for the fourth quarter?

I want to get to the right page so I don't misquote it.

For the fourth quarter, we had a small comp gain in men's, low single digit decline in women's, and a mid single digit decline in children's.

And I would assume that Sketchers is going to get a nice part of the kick-in to help your kids' business with all of the sparkly shoes for girls.

Twinkle Toes?

Twinkle Toes is a good program.

Thank you very much.

And look forward to seeing you next week.

Good luck.

The next question is from Robert Samuels from Oppenheimer.

Please go ahead.

Good morning.

Can you just help me understand a little bit the delta between negative 2.3 comp and the total sales number?

And then also, can you just talk about the recently announced partnership with the NBA and how you're thinking about differentiating the concepts from one another?

The delta between the positive and the negative is really FX.

And then the partnership, with the NBA Champs is really setting up a very strong position in each of our stores, each of our Champ stores, to support the NBA, in particular the NBA team of a particular city, in each of the stores.

So they will have a dedicated presentation.

And if you go into the Champ stores, you will be able to notice with both the visual and the level of merchandise the strength of the offering for NBA apparel and accessories.

Are you planning on doing any other types of exclusives with any of the other divisions?

We are constantly working on new ideas that will help us.

For example, we've got a very strong position with Nike on the House of Hoops, and we have opened House of Hoops stores.

At the same time we have strong House of Hoops presentations in many of our Foot Locker stores.

And we're looking at other opportunities like that with different vendors.

Thanks.

The next question is from Michael Vinetti from UBS.

Please go ahead.

Good morning, guys.

Congratulations on a nice quarter there.

I have a couple of questions.

The first one, I was wondering if you could help us with a little more color on what gives you confidence in the low single digit comp outlook for the year.

Obviously we've seen quite a few quarters of negative comps looking backwards.

As I look at the transcripts over the past few year, there have been some instances we've heard the outlook improve based on some emerging trends that you guys have seen, but I don't think you would say that the results have hit the Company's targets or the results that you were optimistically hoping for.

So I think it would really help us to get a little more color, besides a few years of these comparisons, to help us get some confidence in that number.

And then I have a follow-up.

There are a number of actions, and we will talk about them in more detail next week, but when you look at, first of all, we are going to trade broader.

We are stepping up our effort, for example, in the running category, which is a category that is performing well, as well as maintaining our strong position in basketball.

We've seen better performance with recent launches, as we've continued to learn and understand what has worked well, with the launches of Marquee shoes.

There are some exciting trends.

The whole toning trend is exciting.

And there are some new ideas and new technologies that are coming out from a number of our vendors such as Zig from Reebok, and we've got some new ideas coming from Nike, and several of our others.

The apparel business, we are working very hard so that is not a drain on what we're doing, and we're making a number of changes there to improve that.

Our international business continues to be strong.

(I've got to find some wood real quick, tap on that.)

And then frankly, as we continue to close our poor-performing stores, that allows the rest of the fleet to move up.

So those are just a few of the actions.

And we will go into more detail next week.

And talk about other things that we're planning on doing that give us some optimism.

As well as the overall environment.

At some point, it is going to pick up.

I'm not an economist.

There are people in Washington that are a lot smarter on this than me and they have a better understanding.

But we are seeing in parts of the country that it is picking up.

And so you say, okay, you got all of that stuff in and you've said that before, does it really mean anything?

Well, we've talked about the good start we had in February, and that was our last comp plus month.

So we were up against a tougher month.

We had snow storms to beat the band.

And we still had a good performance for the month.

And because of the things that I mentioned earlier.

That's helpful.

And it might be helpful next week if we could see the delta between some of the stores you're closing and some of the stores you're keeping open in terms of run rate comps.

I can tell you that the ones we're closing are performing significantly worse than the ones we're leaving open.

We won't go public with the delta, but we're not closing our good-performing stores.

Got it.

And just to hit on one point you brought up there, if you could talk a little bit about your early thoughts for the Lady Foot Locker brands.

Specifically the trends there have been sluggish for a number of years and we've seen you guys accelerating the store closures there lately, but that has been called out by a lot of companies as one of the positive points in the industry right now.

I'm curious do you feel like you're shrinking your exposure to that business at the right time?

And maybe you could just give us some color on that.

No.

And again, we will talk more about that next week, but we feel the women's business is a strong opportunity for us.

But it is an opportunity for us both in terms of women's Foot Locker, and Foot Locker.

So the question is, you close the women's Foot Locker, or consolidate them with Foot Locker, and we have already started to see some significant benefits in our Foot Locker stores by that action, and strengthening the Lady Foot Locker stores.

The expression we use is the cannons are now turned out and not in.

We're not competing with ourselves.

We're competing with the competition.

And we're being much smarter what we do with each of the banners within the mall.

Next week, Dick Johnson is going to talk about how we're going to differentiate that lady Foot Locker, because that is different than just the Foot Locker, and I think you will see that we've got a good plan.

That is why the question was asked earlier, about are you targeting store closures.

We think we're at a good size with Lady Foot Locker overall.

There will be some poor performing stores that we will close, but overall, it is about right for what we should be able to get.

It is in a lot of the right places.

On that, Ken, can you give us a little color on your decision about how you're closing stores at this point, or maybe how that decision has changed and how you think about the hurdle rates for the stores.

And maybe how that is different than how you guys have closed stores in the past and how you're looking at that.

I will let Bob do that.

I don't think there has been any change in how we decide how we close stores.

It really is, as we've said before, a case by case basis.

First of all what causes us to look at them first of all, for the most part they are stores that are coming up for renewal or lease expiration and whether we want a renewal.

So we look at that particular store, the prospects for that store in that mall, the prospects for that mall.

And how our other formats are performing in that mall, and whether or not we think we would be better off closing or not.

And then, of course, what kind of rent we will be looking at going forward in terms of the negotiation on a renewal, we might be having with the landlord, is a factor, as well.

So as I said, it is really a case by case.

It is not our objective to close a store if we can get the right kind of metrics.

But we're not changing our hurdle rates.

And so we look at that financially, and we put that together with the competitive position in that market and in that mall, and with the other stores, and how much of it can we capture, and how are we positioned in that particular market.

And we put all of those elements together.

And probably the thing that is a little bit different is we are, as we look at those competitive factors, and our positioning, we're making sure that we have the opportunity to capture the most business possible.

And if closing a store allows us to do that, and the economics work out, or keeping a store open, we determine what is the best.

And in a number of cases, for example, we have moved from one store to another location, because it was a better location, and closed a smaller location, but wound up with a bigger Foot Locker store, which is able to accommodate whatever other element we might have closed.

Thanks, guys.

Look forward to meeting with you next week.

The next question is from Bob Drbul from Barclay's Capital.

Please go ahead.

Good morning, guys.

Just two questions.

First, Ken, you can talk a little bit, how much is the toning category driving the comp improvement?

And then how sustainable do you think that trend is for the business?

And then the second question is, on the ten CCS stores for 2010, are those new stores are are those converted other Foot Locker owned or controlled stores that you're converting over?

On the toning, the good news is that what we're seeing in women's, the women's business is fairly stable without toning, because I ask that every week.

I say, what would the comp be without toning.

And it is coming in flat to up slightly.

So that business has stabilized significantly without toning.

Which gets to something that we're also using, is while toning is a business now, it is driving new traffic in, and we are using that to sell other parts of the business -- our running, our apparel, our accessories.

And so people are getting to know Lady Foot Locker again, or Foot Locker, and it has been a significant plus for us in helping to drive in traffic.

With regard to the sustainability, there is new product coming out and new ideas, and I think that will help sustain it for a period of time.

The long-term sustainability, quite frankly, will depend on what women's behinds look like over a longer period of time.

And right now, I will tell you, I've been in a lot of stores recently, watching people buy it, and talking to them, and understanding, they really like the product.

The number of women who have come back to buy a second or third pair of shoes is quite impressive, because they feel that they're getting some results, which makes me happy.

With regard to CCS, what we're doing with the ten additional store, they will be spread across the country so we will get a better feel for how that model works in different markets, and they are, for the most part, new locations.

Thank you very much.

I think we have time for one more question.

The last question will be from Tom Shaw from Stifel Nicolaus & Company.

Please go ahead.

Thanks, guys.

Good morning.

Just a little more detail maybe on February.

I'm curious, Ken, you just mentioned the weather but how much of an impact may that have been, from not only a store closure type perspective, but maybe how it benefited a category like boots?

I never let anybody be a weatherman.

I would say I watch the evening news, and I can get the weather there.

So we did have some store closures.

It did have an impact.

But we were able to overcome that.

It did not significantly impact our boot business, because for the most part, by February, if they haven't bought a pair of boots, they're not going to buy them, or they're buying our clearance boots, and we're moving out of that.

It is the same amount of clearance as we had last year.

So boots was not a significant impact for us.

We feel good.

The overall tone of the business across all of the different categories of business, across all of the divisions, was good.

And so while weather was a bit of a negative, next year, we will look forward to picking up those days.

Okay.

And maybe a quick question for Bob, on the gross margin guidance, up slightly in 2010.

Can you just elaborate, maybe I missed this, but some of the pieces there.

Occupancy should continue to work in your favorite.

Merchandise margins, probably based on the initiatives you will discuss next week, should work.

What other factors are in there that tones down that guidance from what we might expect?

I don't think it is -- we expect our margins to improve, but I think we probably expect to see more improvement in the merchandise margin rate than perhaps the occupancy and buying side of that.

Okay, fair enough.

Last question.

The 40 new stores, about a quarter of those are going to be CCS.

Should we expect the bulk, the remainder of that international?

Yes.

All right.

Thanks, guys.

And we will talk more about that next week.

All right.

I just want to thank everybody for their participation today.

And we look forward to telling you more next week.

Thank you.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.