Foot Locker Inc (FL) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

And welcome to the first quarter 2010 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.

As reported yesterday afternoon, our first quarter earnings were $0.34 per share this year versus $0.20 per share last year.

Bob McHugh, our Executive Vice President and Chief Financial Officer will begin the call with a discussion of our first quarter financial results.

Bob will also discuss our expectations for the second quarter.

Ken Hicks, our Chairman and CEO, will follow with an operational and strategic update.

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

Overall, we are very encouraged by our financial results for the quarter, which included a 70% increase in our earnings per share versus the first quarter of last year.

Our earnings per share increase was fueled by the following key factors.

A comp store sales increase of 4.8%, a gross margin rate increase of 140 basis points, an SG&A expense rate improvement of 100 basis paints and depreciation expense declined by $2 million.

Just as important, we produced very strong cash flow during the quarter as our total cash position net of debt was $190 million favorable to last year.

I will now turn the call over to Bob McHugh.

Good morning.

As Peter stated, we are very encouraged by our first quarter financial results, which exceeded our expectations going into the quarter and positioned us well for continuing growth in the coming year.

We got off to a good start.

Our financial results are particularly encouraging given that the external environment in the United States has not yet returned to pre-recession levels and consumers are still cautious about spending.

In this regard, while some economic metrics, such as consumer confidence, employment, and GDP are improving slightly, these figures have not translated into a more normalized consumer spending environment in the United States.

Therefore, at the same time as we are encouraged with our first quarter financial results, we believe that the best course of action for us is to remain cautious in our planning process until we see greater evidence of a sustainable economic recovery.

Overall, our first quarter comp store sales results outpaced our expectations by a significant margin at our US businesses while achieving the high end of our expectations at our combined international stores.

Our better than expected domestic sales results were accomplished while reducing our level of promotions and special events, allowing us to strategically redirect markdowns towards clearing slow-selling products.

The effect of this strategic change is reflected in both the year-over-year improvement in our merchandise margin rate and inventory aging.

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

Our combined US store operations increased mid-single digits.

The best performances were in our Lady Foot Locker, Champs, and Foot Locker divisions.

Our dot com segment increased low single digits.

Europe increased mid-single digits.

Foot Locker Canada increased mid-single digits and Foot Locker Asia Pacific decreased low double digits after increasing low double digits during last year's government stimulus fueled consumer spending environment.

By month, our results were very solid in February for the second year in a row with comp store sales increasing mid-single digits.

Comp store sales increased low double digits in March as we benefited from an early spring and the Easter shift from the first week of April last year to the last week of March this year.

Conversely, reflecting trends seen across the retail sector, our comp store sales decreased low to mid-single digits in April.

Taken together, our combined comp store sales in March and April were fairly comparable with the month of February.

Our first quarter gross margin rate increased by 140 basis points from last year, reflecting an 80 basis point improvement in our merchandise margin rate and 60 basis points of leverage on our primarily fixed buying and occupancy expenses.

The improvement in our merchandise margin rate primarily reflects lower markdowns and stock shortages as we benefited from a more favorable inventory position than last year.

Our first quarter buying and occupancy expenses, on a constant currency basis, were $3 million below last year.

Our total occupancy expenses are currently impacted by four key factors.

First, in some of the B&C malls where we operate, we are benefiting from lower occupancy cost or rent negotiations.

Second, in the better A rated malls, we continue to experience increases at rent renewals.

However, our recent rent increases have been less than we've experienced in the past.

Third, our store openings are focused in international markets, where in many cases, market rents are higher than we experience in the US.

Keep in mind, however, that our profits are generally higher in these stores as well because of the higher level of productivity.

And fourth, we are operating 148 fewer stores than at this time last year.

Our first quarter SG&A rate improved by 100 basis points versus the first quarter of last year, reflecting leverage on our fixed expense base.

First quarter SG&A expenses in dollars increased $2 million versus last year.

On a constant currency basis, our first quarter SG&A expenses decreased $4 million.

The decrease in our SG&A expenses on a constant currency basis primarily reflects lower division overhead as well as reduced store wages and other store costs due to operating fewer stores, partially offset by some increased variable expenses, such as banking costs and incentive compensation accruals.

Depreciation expense for the quarter was $26 million or $2 million favorable last year, primarily reflecting the asset impairment writedowns last year.

Net interest expense for the first quarter was $3 million this year versus $2 million last year, reflecting lower interest rates on our short-term investments.

Our first quarter income tax rate this year was 36%, slightly favorable to last year's tax rate of 37%.

All these factors taken together contributed to our earnings per diluted share increase of 70%.

From a balance sheet perspective, our merchandise inventory position at the end of the first quarter was $91 million or 7.4% lower than at the same time last year.

On a constant currency basis, our first quarter inventories in total were 8.7% lower than last year and on a per square foot basis, 4.5% lower than last year.

We ended the quarter in a very strong financial position with $616 million of cash and short-term investments and just $137 million of balance sheet debt.

Our total cash position net of debt was $190 million favorable to the same time last year.

We repurchased 500,000 shares of our common stock during the quarter for $7.7 million under our $250 million share repurchase plan that was extended by our Board this past February.

In summary, we are off to a good start to the year with both a very strong earnings increase and substantial cash flow from operations.

While mall traffic and consumer confidence in the United States is improving, we believe that in the near term, there remains much uncertainty in regard to consumer spending.

Therefore, as I mentioned earlier, we will remain cautious in how we plan and manage our business.

For the second quarter of this fiscal -- of this year, we expect our financial performance to reflect the following.

A comp store sales increase in the low single digits, total sales to be approximately 3% lower than our comp store sales, due to operating approximately 4% fewer stores than last year and the effect of changes in foreign exchange rates.

Gross margin rate, including both our cost of merchandise and occupancy expenses to improve 40 basis points to 60 basis points versus the second quarter of last year.

Total SG&A expenses to increase approximately $10 million versus the second quarter of last year, primarily reflecting increased incentive compensation accruals, offset in part from expected cost saving measures.

Depreciation expense of approximately $26 million, interest expense of $3 million, an income tax rate of 36% to 37% and finally, we expect foreign currency translation will not have a material effect on our earnings comparisons to last year's second quarter results.

This estimate is based on current exchange rates which reflect the weakening Euro currency offset by the strengthening of the Canadian dollar.

This second quarter outlook is in line with the comments that we made during our March conference call when I stated that we expect our second quarter comparison to the same period of last year to be our most difficult due to the significant expense reductions reflected in the 2009 results.

At the same time as we were planning our second quarter sales cautiously, we are encouraged by recent sales results which reflect a mid-single digit comp store sales increase for the first two and a half weeks of May.

We are planning on a sales gain for the quarter below this recent trend due to the uncertainty of the external environment and, therefore, planning our second quarter EPS to be slightly below last year's level.

However, if the current sales trend were to continue along with some additional margin rate expansion, we would expect to generate a profit increase for the quarter.

I will now turn the program over to Ken Hicks.

Thank you, Bob.

Good morning.

I'm quite pleased with the substantial progress that we've made as an organization over the past several months which is validated by our first quarter financial results.

As you know, we invested a great deal of time during the fall season of last year making strategic decisions for the long term and planning our business carefully for 2010 and beyond.

It is very satisfying to see that the hard work of our associates and the initiatives that we have put in place are reflected in our improved performance.

I want to thank all of our associates in our stores, home offices, distribution centers, and data and finance centers for delivering these strong sales and profit results.

Without the entire organization's hard work, these results would not have been possible.

From an internal standpoint, I believe five key factors led to our profit increase.

First, our improved inventory position at the beginning of the year allowed us to flow fresh assortments to our business on a more timely basis and make strong merchandising statements on fresh goods throughout the quarter.

We were able to bring in many of the new products that deliver in the quarter and also a strong statement with many of our ongoing programs.

Second, our strategy of broadening our merchandise assortments allowed us to service a more diverse customer base and increase sales in more categories.

Third, we executed well at the store level, by keeping our associates focused on customer service and managing store hours efficiently.

Fourth, our tight control of tenancy and operating costs led to a very strong flow from incremental sales to incremental profits.

And fifth, our continued improvements in working capital management and conservative capital allocation policy led to a strong cash flow and the strengthening of our financial position.

From an external standpoint, I believe we benefited from three factors.

First, while the consumer remains cautious and has not returned to a more normalized level of spending, the evidence suggests that our core customer is somewhat less cautious than at this time last year.

Second, I believe our business benefited from some warmer weather trends this year during key weekends in March that coincided with school holidays and the Easter selling season.

And third and most importantly, I believe the athletic footwear industry in general is benefiting from new exciting styles and technology from a number of different suppliers, including new assortments in the running and toning categories.

As Bob mentioned, our combined US stores posted a mid-single digit comp store sales increase for the quarter.

Our athletic footwear sales in the US were particularly strong, increasing high single digits for the quarter.

As previously communicated, one of our key long-term strategic initiatives is to broaden our range of athletic shoes and apparel to reach more customers.

The early results of implementing this initiative are very encouraging as we generated strong sales gains in both men's and women's footwear in across a number of categories, including basketball, running and toning, as well as by providing our customers with an ongoing assortment of value footwear.

On the men's side of the business, we generated a modest sales gain in our powerful basketball business, led by gains in Nike products.

Our strongest sales gains in men's footwear were generated in the running category.

A fashion trend shift from the casual and lifestyle footwear assortments to the running category accelerated for us during the first quarter.

The improvement in our running shoe sales coincided with our introduction of new technology such as lightweight footwear as well as new, exciting styles from several different suppliers.

The improvement in women's footwear sales was led by the explosive growth of the toning category.

As most of you know, Reebok and Skechers were the first players to the party with the EasyTones and Shape-Ups, respectively.

More recently, other suppliers, such as New Balance, have introduced their own toning shoes.

In total, our average footwear selling prices in the US increased mid-single digits, reflecting stronger sell throughs of new shoes, lower promotional markdown rates, and a favorable mix shift towards higher priced footwear.

We are also making some noteworthy strides in improving our apparel assortments.

While it will take us some time to get our apparel assortments to where we'd like them to be, we expect to make incremental progress through the fall season.

In total, our US apparel sales for the first quarter declined low single digits versus the same period last year.

Clearly this is a meaningful improvement versus the double digit comp store sales decline that we experienced in our US apparel sales during the fourth quarter.

Most encouraging is the improvement that we are seeing in women's apparel as demonstrated by our first quarter comp store sales gain in both our branded and private label categories.

We are doing a better job, particularly in our Lady Foot Locker stores, in purchasing, displaying and selling workout apparel that hooks up with our performance and toning footwear.

The first quarter income increase from our US stores made the most significant contribution to our total company profit gain.

The income increase from our US stores resulted from a combination of a healthy sales increased, improved merchandise margin rate, and reduced operating expenses.

We generated a very strong flow through from incremental sales to incremental profits by tightly controlling expenses and optimizing our markdowns.

As Bob covered, our international sales were positive in two of the three regions in which we operate, positive in Canada and Europe while negative in the Asia Pacific region.

In total, our international sales produced a low to mid-single digit comp store sales increase and a strong double digit division profit gain.

At Foot Locker Europe, our largest international business where we currently operate 520 Foot Locker stores, we had a solid sales increase in both footwear and apparel.

Our sales gains in footwear were fairly broad based with increases in running, basketball court, and casual categories.

Our apparel sales increases in Europe were generated in the license area.

By region in Europe, we generated a positive comp store sales gain in many of our largest markets, including France, Italy, Germany and the United Kingdom.

Our second largest international business is our 129 store Foot Locker Canada chain.

Foot Locker Canada produced a mid-single digit comp store sales increase for the quarter and more importantly, a double digit division profit margin.

Our comp store sales increases in Canada were, again, broad based with gains generated in men's, women's, and kid's footwear as well as in apparel and accessories.

As Bob discussed, our first quarter business at our Asia Pacific division was challenging.

As we commented on during our fourth quarter call, last last year at this time the Australian government was providing a significant financial stimulus directly to the consumers in this region.

We would expect our business to remain challenged in this region until we cycle past this comparison during the fall season.

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

The strongest part of this business segment was the sales gains generated through our internet sites that are aligned with our store brands.

We have put a great deal of effort during the past several months to improve the look and functionality of our store brand sites and more closely coordinating them with our brick-and-mortar stores.

Clearly these early results are beginning to pay off.

We believe we have a much more meaningful opportunity in both the near and longer term to generate increased sales and profits while connecting our channels more seamlessly.

As previously communicated, this is one of our long-term strategic objectives.

Overall, our first quarter sales and profit results of our dot com division beat our expectations.

Our core Footlocker.com, Eastbay business continued to generate a double digit profit rate while CCS.com underperformed both our expectations for sales and profit.

For the full year, however, we still expect CCS to generate a double digit EBITDA margin.

We continue to be encouraged with our CCS store test and opened a third store in Florida during the first quarter.

During the second quarter, we plan to complete our CCS store opening plan for the year, with nine new stores, thereby ending the quarter and the year with 12 CCS stores.

We ended the quarter with 3,485 owned stores reflecting 14 new stores and 29 closed stores.

We also remodeled or relocated 42 stores during the quarter.

Our capital expenditure program is tracking on plan to $110 million for the year.

This program includes the opening of 40 new stores and the closure of up to 150 stores.

We're working closely with our landlords in an effort to agree to mutually beneficial terms as we look to reduce our closures from the 150 stores that we have planned to shut this year.

In summary, we're very encouraged by our improving sales results in the first quarter profit performance and believe we are well positioned for the year.

Our 70% first quarter earnings per share increase reflects a 54% flow through of incremental sales to increase pre-tax profit versus last year's results.

While we remain cautious with our operating strategy in the near term, there are several emerging signs that are cause for optimism.

The external environment, particularly consumer spending, is beginning to improve somewhat.

Our key suppliers are providing us with new, exciting footwear products that we can offer to our customers.

An improving athletic trend is emerging as evidenced by industry sales gains in technical running and the relatively new toning category.

We are benefiting from a more rapid sell through in many of our marquee basketball shoes endorsed by key athletes, including Jordan, Kobe, and LeBron.

The athletic retail industry appears to be relatively clean of excess or dated inventory, including here at Foot Locker.

We also believe that we have a meaningful opportunity to continue to improve our US apparel business.

We understand that this is a longer term initiative, but we're determined to capitalize on this opportunity.

In conclusion, we're off to a good start to the year with our earnings per share up 70%.

We have more elements of our business working today than at this time last year as we begin the implementation of our long-range plan.

Our efforts to broaden our range of products to reach more customers are beginning to pay off.

As we look to the second quarter, we're off to a good start in the month of May.

We believe, though, that it is prudent to remain conservative in how we manage our business until we see more enduring signs of improvement in the external environment.

We'll 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 Michael Binetti from UBS.

Please go ahead.

Thanks, guys.

Congrats on a great quarter, Ken.

Thank you.

So one quick question for you here.

I think the industry footwear data in your guys' fiscal first quarter in the athletic specialty category suggests that the footwear was up about 7% in the quarter and you were saying your US footwear numbers were high single digits.

I thought you were going to tell us that a lot of the upside for your comp came through maybe some apparel flowing in that we weren't able to see the footwear data, so I was a little pleasantly surprised to hear that, especially with basketball looking flat.

Maybe it sounds like you guys are starting to gain share in the category.

Maybe you can give us some comments on your outlook for that going forward?

And maybe a little bit more granularity on what you're seeing with the new product that's flowing in your stores that's making you more competitive in the channel?

Well, thank you for the comment.

We are seeing our basketball business is holding steady and as I commented, we are seeing some good results there.

But more importantly, our other categories, the running, the toning and other businesses that we're in, we are seeing a pickup and the customer is looking to us for that product, all the way from very technical running to the lightweight running.

So we're pleased with the product and results we're seeing with this expansion which shows that our strategy to expand our customer base is working and is the right strategy because the customer has given us permission to expand into these other areas because they expect it of us.

If I could just follow up -- thanks for that.

If I could just follow up really quickly.

A comment that you put in the release today that your financial results reflect a 50% flow through of incremental sales.

I haven't heard that comment out of the company in a while.

I was wondering if maybe you could give us a little bit of detail on how you got that number and where it was and I guess maybe what it means going forward here as profitability is improving.

This is Bob.

It's something we very much focus on here, which is making sure that we get the most margin and flow through profit for each sales dollar.

So it really would be the difference in the earnings before taxes year-over-year versus the sales change year-over-year.

Because that's really how we want to measure ourselves going forward, which is how much of that additional sales dollar can we bring to the bottom line?

And Mike, it's one of the reasons why we plan conservatively because we know the opportunity is there for higher flow through and as we said in the call, the stores did an excellent job with this higher sales, managing the hours.

Bob's being a little bit bashful because he's done a very good job managing the overall expenses and we took action, as you know, in the beginning of the year to reduce our expense structure and those things are paying off.

So our ability to convert is something that Bob manages very, very closely.

Thanks, guys.

Thank you.

Thank you.

The next question is from Tom Shaw from Stifel Nicolaus.

Please go ahead.

Hey, thanks, guys.

Congrats on the progress to date.

I guess the first question, maybe you could just remind us, June and July you're up against some of the easiest comparisons from last year, I think comps were down mid-teens.

Just remind us maybe what you saw last year or didn't see last year?

And if any of the product that's coming out, whether it's a continued build of toning, or a continued building of basketball gives you any confidence over the next couple of months pre-back-to-school?

Well, we do feel good about the product that we have and product that we're seeing coming forward.

And while last year was a challenging second quarter and we are predicting an increase, by the way.

While last year was a challenging second quarter, we had started to clear a lot of merchandise, so we were much more aggressive in some of our pricing in the second quarter than we plan to be this year.

So that's one of the challenges that we're up against.

But we also know that the second quarter is a slower time for athletic footwear and we don't want to get ahead of ourselves during this period.

Okay.

And, yes, everybody is keenly aware of what Nike is doing and their efforts to elevate its brand with partners.

I guess, are you seeing additional opportunities to work with them, maybe beyond what you're doing with the House of Hoops program?

Oh, yes, Nike is a terrific partner and obviously we are expanding the House of Hoops and have a strong position with them in basketball, but we just had the exclusive launch of the Air Attack shoes which performed well for us.

And we continue to work closely with them on new product and ideas to develop our mutual business together.

And I will say that the relationship we have right now is probably the best it's been in some time and they're a good partner.

Thanks.

Best of luck.

Thank you, Tom.

Thank you.

The next question is from Sam Poser from Sterne Agee.

Please go ahead.

Good morning.

Just could you talk a little bit about how you're looking at -- you said that currency would be flat in the -- not effective in Q2.

But how are you looking at that for the rest of the year given the weakness of the dollar -- or the strength of the dollar against the Euro and also did -- last year, I think the international business was about 29% of the total.

Was there any change in that in this quarter as a percentage of your total business?

Can you talk about that?

Yes, there wasn't much change in the mix and looking at the currencies, there's two things to point out here.

One, yes, the Euro is getting weak, but by the same token, the Canadian dollar is remaining to be very strong.

So, as Ken mentioned before in our prepared remarks, that we have a significant business in Canada as well.

So we think that it will be neutral Q2 based on the current rates and we think there's probably a $0.01 of risk in Q3 and $0.02 in Q4.

Okay, great.

And then also, can you talk a little bit -- I mean, can you talk about what your growth plans in Europe is for this year as far as stores and so on, be a little more specific as to that?

Well, the 40 stores that we're going to open, roughly half of them are going to be in Europe and then we talked about the ten CCS stores and then the remaining ten are the other banners.

And we're not -- obviously of the 150 closures, the majority of those are in the United States and not in Europe.

So Europe will be a net store increase and we still see the same strong productivity out of our European store growth.

Is there any specific banners, I mean how is -- what are the decisions going in to making the store closing decisions as to which stores close or is it by banner, by productivity?

How are you weighting those decisions?

It's really case by case basis, Sam, because we look at each store individually, particularly with all the stores we've closed, what we're down to now is we really want to make these stores work.

So it comes down to the negotiations we have with the landlord because keep in mind most of these stores are at lease expiry dates, so it's really whether we continue to operate or close them.

So the store economics and what we think based on our new strategic plan and current performance, what we can do with that particular location.

So it's really not banner specific.

Yes, it is not banner specific, it is focused on the productivity in the store and our positioning in that mall, making sure that we maintain the proper position relative to that particular location.

So it's a combination of those two things.

Okay.

And then lastly, Nike is opening some of their own stores.

They're opening a big one in Roosevelt Field apparently in August.

How are the discussions with them going on this?

You know how extensive that is.

How do you look at that impacting you and any other question you want to answer regarding that?

Well, Nike has a strategy.

We've had discussions with them about that and we feel -- both of us feel that it will help the overall shoe business and help our business overall by raising the visibility of athletic shoes.

We know we compete very effectively because we offer a broad assortment of shoes.

Nike, if somebody wants a particular Nike, that works well for them, but if somebody shopping for an assortment of shoes, they come to us.

So we think it will help the overall shoe business and, therefore, we will benefit and Nike agrees.

And so we're working with them, in support of them in their strategy.

Thank you very much.

Good luck.

Thank you.

Thank you.

The next question is from Kate McShane from Citi Investment Research.

Please go ahead.

Hi, thank you.

Good morning.

Ken, you had mentioned the sequential improvement in apparel sales during the first quarter.

Can you make any comment on how the margins looked for the category quarter-over-quarter?

They were significantly better as a result of -- we cleared a lot of old goods the end of last year and the first part of February.

And we are seeing an improvement both as we improve the business, selling more of the new merchandise and significantly reduce the older merchandise that we're clearing in the assortment.

We have changed our aging standards so that we are moving our apparel through the system faster and we have seen a pickup in the overall margin as a result of these efforts.

Okay.

That's great.

Thank you.

And I was wondering if you could give any more detail behind what drove the comp between traffic and conversion.

And also I was surprised to hear about the strength in Champs just because they have a little bit more apparel, I guess, than some of your other doors and not as much toning and running.

I'll answer the second part of that first.

Remember, we said that the decline in apparel was not as great as it was last year.

They have a larger apparel business, so they had -- the impact of that decline reduction helped them more.

They also have a broader overall mix and of footwear and accessories and that also helped them.

With regard to drivers, we saw a pickup, as I said, in our average unit retail, this resulting in the average market basket going up.

We also had an improvement from what we can tell in conversion, although we're very, very early in the stages of measuring conversion and traffic.

We don't have the ability to look at last year's traffic, so it's difficult to monitor that.

But in terms of transactions, we're up.

The average unit ticket was up for all the reasons that I said in the call and our conversion was up slightly.

Okay.

Thanks very much.

Sure.

Thank you.

The next question is from Christopher Svezia from Susquehanna International Group.

Please go ahead.

Hi, good morning.

This is Tom Haggerty in for Chris.

Couple of quick questions.

A little more color on Europe.

Seems like trends are holding up pretty well there.

Do you think the macro pressures going on are going to maybe hit results a little bit going forward or do you think your trends are sustainable?

And, also, maybe if you could touch a little bit on any benefits you've seen on the World Cup.

Well, I'll start again with the Europe trends.

We have three stores in Greece and they obviously have been impacted.

But most of Europe, we're seeing good results, as I stated earlier, and so the -- some of the things that you're seeing on the news and from what our talking to the people there, that hasn't impacted the European customer yet.

And we're pleased with the overall business and the overall opportunity.

We are seeing some selling in the World Cup apparel and both in the United States and in Europe and we're pleased with that.

Thanks for that.

Then just a quick question on your 2Q outlook.

Your gross margin, you're looking for, I think, 40 basis points or 60 basis points you said.

I'm assuming that has to do with a lower comp, maybe you're getting a little less leverage out of the occupancy.

Yes.

So are you seeing merchandise margins still probably be pretty strong in the second quarter?

Yes, we think there's an improvement in the merchandise margin.

Okay.

So if you can sustain your mid-single digit trends, you think you can still see that leverage you saw this quarter?

There -- the thing that we have the ability with the sales increase to improve our flow through so there is that opportunity.

That said, we are still planning conservatively and we want to make sure that we hit our plan and we very much would like to exceed it, but we're planning for our plan.

But on the upside, you probably could see it on the gross margin side, as opposed to maybe SG&A.

Is that fair?

Yes.

I would just keep in mind that our sales in the second quarter aren't as high as the first quarter, so you don't get as much leverage in the second quarter as you do in the first.

All right.

Understood.

Thanks a lot, guys, good luck.

Thanks, John.

Thank you.

The next question is from Bernard Sosnick from Gilford Securities.

Please go ahead.

Good morning.

Could you remind us a bit about the dynamic factors during the back-to-school season last year and contrast that with what your plans are this year?

Well, we're not going to give our game plan out to the competition who is listening to the call, but last year's back-to-school was challenging, although there were some elements that did perform well.

We do have a game plan for back-to-school .

We're going to -- we feel it's a good game plan and we're going to execute to achieve that, but -- and there are a lot of things we're doing, but I know that Ed and all the other competition are listening.

So they're not going to tell me their plans, I'm not going to tell them

Oh, I didn't expect revelations like that.

But I was thinking about you talking about your own business in terms of what might have been missing last year and how the assortment is going to be changed and might help you this year without talking about promotions and stuff like that.

Well, we've -- obviously we're broadening the assortment from what we had last year, so the strategic things we talked about.

So, we're going to have a broader assortment.

We've got the new shoes that we talked about, like Air Attack from Nike, the toning shoes.

We've got a broader position in running.

We are going to have a strong position in basketball.

We are going to have a better position in apparel than we had.

So one of the things, I think, that's important to look at is the strategies that we've laid forward actually will be -- help us a lot for back-to-school.

Because those are a lot of the things that we probably missed last year for back-to-school, apparel, running, and making sure that we were -- we also, last year, had to slow some of our receipts because we were -- of the stock position we had.

This year we'll have a better flow, so we'll be in a better in stock position for that key back-to-school time.

And your entire strategy with regard to broadening the merchandise assortment, it doesn't happen with the wave of a magic wand.

It takes place in stages as forward orders come in.

To what extent would you say that as we begin the second quarter, you've moved along the broadening strategy and where might you be for the back-to-school season?

I would say that you are exactly right.

It doesn't occur with a magic wand and the reality is, interestingly enough, Bernie, that it's really not us as much as it is making sure the customer understands that we have that assortment and making sure that we get those customers in.

That probably will take longer.

In terms of the assortment, having that fully understood.

That will actually probably take us at least a cycle around because we're learning what elements sell well within different stores in terms of running, in terms of casual, how -- the mix with basketball, how we manage the value elements that we have in the assortment.

I would say we're probably about 30% there, by the fall, we'll be 50%, 60% and then by the end of the year, we'll be further along.

And then next year we'll really be in a good place because we will have been able to read and understand what the best elements are and respond at a local level, which is probably what's most important.

Great.

And finally, Lady Foot Locker was a troubled business, but the arrival of toning shoes, the change in your view toward apparel, how would you assess the prospects for Lady Foot Locker?

There is a definite place for Lady Foot Locker in the market and we're seeing that.

It was troubled for a number of reasons.

One, we were positioning it wrong, two, we didn't have the right product in and, three, there wasn't some of the newness.

While toning has helped the business a lot and I think I've mentioned it to you all before.

Every week I ask when we're talking about the Lady Foot Locker business what would it be without toning?

It would still be up without toning because the other elements that we've changed, such as more technical running, a better assortment of apparel for that customer are also working.

So there is a definite place for that business and we are -- as we continue to position that properly, we are seeing the results.

Great.

Thank you very much.

Thanks, Bernie.

And congratulations on the progress.

Thank you very much, Bernie.

Thank you.

The next question is from John Zolidis from Buckingham Research.

Please go ahead.

Hi.

One housekeeping question and one broader question.

On the housekeeping side, can you give us what the occupancy was, I guess, excluding foreign currency?

Year-over-year change.

We had -- buying together, John, if you could just hold on --

Yes, we did.

I want to make sure we give you the right number.

Yes.

I'm sure we gave him the right number.

We'll just reiterate that.

Okay.

And while you're looking -- okay.

They're looking it up.

On a constant currency basis -- hold on.

Why don't you ask the other question and we'll look up -- while we're looking it up.

(inaudible) occupancy on a constant currency basis were $3 million below last year.

That's constant currency.

And then, I'm sorry, with the currency what was the number year-over-year?

Well, we said -- what we disclosed was the 140 basis point improvement in gross margin, 80 basis point was merchandise margin, 60 basis point was leverage on the buying occupancy.

Okay.

I'll work it out from that.

Yes.

So my question -- my other broader question is on apparel.

I've been in a number of your stores and some of the stores I've seen, for example, one of the items you talked about was putting in running shorts.

And I've seen them in some stores, but not other stores and then as far as the upgraded private label apparel, again, some of the stores seem to have some elements in there.

But a lot of the stores are still just presenting the five for $25 T-shirt programs and so on.

So I was wondering if you could talk a little bit more specifically about I guess what drove the improvement in the apparel comp in 1 Q?

Was there any specific program that you can cite and what should we expect to see as the second and third quarter plays out in terms of new introductions or changes to the apparel assortment since that seems to be one of the areas of focus and largest opportunities?

Thank you.

Sure.

We saw an improvement in our private label program and part of that was because we had pulled down our clearance and so we had more fresh goods selling at regular price.

We also saw in some of our branded programs an improved performance because we got those assortments better.

We stepped up areas such as with Adidas and Jordan and we saw improvements with those.

With regard to the -- not having all of the new private label programs in all of the stores, there's a couple of reasons for that.

One is just how fast we can make it and get it out and expand it.

The other is we're testing and learning what works and what doesn't work, rather than have an idea, put it out in all the stores and say, well, that wasn't such a good idea and having to mark it down.

We're able to -- we're going to test, learn and then the best elements will be expanded, plus the best elements of how to present and get it across because I don't think we're doing as good a job there as we would like to yet.

You will see a deeper penetration in the third quarter.

Dick Johnson constantly reminds me, and says it takes a little while to make this stuff, get it over and get the right stuff in the right stores and we are seeing that growth.

But we will see an improvement in the second -- I'm sorry, in the third quarter for back-to-school, for the fourth quarter we'll see an improvement.

And then again next year as we get a better understanding of the seasonality, timing and location, we will see an even better improvement of the private label programs and the corresponding branded programs.

We're seeing improvement working with each of our vendors, Nike, Adidas, Under Armour to make sure that we improve the assortment that we have from them.

You will also see a more distinctive apparel approach in each of our brands as we better define our banners and so you're going to see very different apparel in a Footaction than you would in a Foot Locker, than you would in a Champs.

And for example, we're trying Levi's jeans in Footaction and getting some nice results in some stores there.

So while it won't be a huge business for us, it's a good business for us.

Okay.

Thanks and I look forward to seeing that.

Thanks a lot.

Good-bye.

Okay.

Thanks, John.

Thank you.

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

Please go ahead.

Thanks.

Good morning, Ken and everybody.

Actually, just two quick follow-up questions.

The first is can you clarify the men's versus the women's comps in the first quarter?

Were the women's comps significantly stronger in footwear than the men's due to toning or did men's keep up with women's and then the other question --

Women's comps were better than the men's, although both, as I said, were top performers and I would say probably the difference was the element of toning on top of the underlying business being better.

Got you.

And then the other question is just the -- you may have covered this, but I missed it, the inventory per square foot plan you guys would have for the balance of the year?

It was pretty incredible how much it was down at the end of the first quarter.

How are you guys thinking about inventory levels each quarter through the rest of the year?

About the same.

Down about 7%?

That wasn't --

That was the total.

That was the total.

The per square foot on a constant currency basis, hold on a second -- About 4 --

About 4.5% because of store closures, so we took that out.

We think that there's an opportunity as we get out and improve our aging and flow through of merchandise.

Flow through is an important initiative that we're working on that we should see a continued improvement in the inventory.

Got you.

Thanks very much.

Sure, Robby.

We have time for one more question.

Your last question will be from Robert Drbul from Barclays Capital.

Please go ahead.

Thanks, Peter.

The --

Got in under the wire.

Peter Brown.

The question I have, Ken, one, can you talk a little bit more about the internet business?

I think you said up low single digit and a lot of retailers are generating some better performance and I just wonder the outlook for that business?

We are very positive on our internet business and versus some of our competition, we have a different situation.

Because where we're seeing some very strong results are on our brick-and-mortar banners, the FootLocker.com, Champs.com, Footaction.com.

Those are very, very strong.

But we have this much larger base of an ongoing, existing internet business that's a free-standing business in our Eastbay and while that's a good business.

And it's growing, it's not growing at the rate that the banner sites are because if we were to report those independently, I think we would be competitive with some of the other things that you're seeing.

Okay.

Great.

And just another toning question, when you look at the comp results overall, is there a way to back out to say that toning accounted for 2 points of the 4.8 comp?

Or is there a way you can look at it from that perspective?

And I think when you look at your plans for the full year, you talked about Q4 toning being -- Q1 being better than Q4.

Do you expect that to continue to build through this year or do you think that it will flatten out?

In answer to the first question, yes, we can and do back out toning as a portion of the overall growth, but we don't make that a public number.

And we manage that way, so we know that it's additive.

The second part to your question, we see toning continuing to grow and one of the reasons why the first quarter was better than the fourth quarter is that we have more shoes.

There's more vendors involved and they are better positioned.

And we would anticipate that the rest of the year would improve because we're going to -- last fall we had serious stock issues with toning, so the industry did.

There will be a better position.

While it will be more competitive, I also think that more people will know about it.

And I'm wearing my toning shoes and hopefully you are, too, so that you make your workouts more productive.

But as more people see and feel the benefits of it, I think that category will continue to be an important category within the athletic shoe business.

And that's not to say -- what we're seeing is more and more people are using toning shoes as part of their workout, so they'll have a pair of toning shoes and they'll have a pair of walking or running shoes in addition.

So it's not in lieu of, it's in addition to.

That's why we're seeing it as a plus to the business.

Thank you very much.

Sure.

Thanks, Bob.

All right.

That concludes the program for today.

Thank you for participating and everybody, next weekend, have a great Memorial Day.

Have a good weekend.

Thank you all very much.

Thank you ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.