Foot Locker Inc (FL) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the first-quarter 2011 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 release and SEC filings.

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

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

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

Please note that this conference is being recorded.

I will now turn the call over to Mr.

John Maurer, Vice President, Treasurer and Investor Relations.

Mr.

Maurer, you may begin.

Thank you and good morning.

Welcome to Foot Locker's first-quarter 2011 earnings release conference call.

As we highlighted in our press release yesterday afternoon, we earned $0.60 per share in the first quarter.

Our highest first-quarter earnings since we became Foot Locker, Inc.

almost a decade ago.

This result represents an increase of 76% compared to the $0.34 a share earned in the first quarter last year.

We noted in our release that these earnings were driven by a 12.8% comp sales gain, a gross margin rate improvement of 200 basis points, and a decrease in our SG&A expense rate of 140 basis points.

Our prepared remarks will begin with Bob McHugh, Executive Vice President and Chief Financial Officer, who will provide more details of our first-quarter financial results.

Bob will also address the extent to which our first-quarter results have affected our outlook for the rest of 2011.

Ken Hicks, our Chairman and CEO, will then follow with an update on our progress in executing our strategic plan.

Bob, the floor is yours.

Thank you, and good morning.

We are very pleased with the earnings of $0.60 per share that we generated in the first quarter, which significantly exceeded our expectations going into the quarter.

We have momentum across all major product categories in regions where we operate, and we feel that we are positioned well to continue providing our customers with the exciting new products they want.

Ken and I will talk this morning about many of the elements of our business that have generated our recent strong results.

However, I would like to mention at the outset that we still intend to be cautious in how we plan for the balance of the year.

In brief, there are many risks in the external environment, such as rising retail and commodity prices, stubbornly high unemployment, slow economic growth here and abroad, and geopolitical uncertainties.

We feel well prepared to capitalize on the positive factors contributing to our current success, but we also remain vigilant for these external factors which could affect the pace of business, not just for us but in the general economy as well.

Turning to our first-quarter results.

As John mentioned, we achieved a 12.8% comp store sales increase, which certainly exceeded our expectations at the start of the year and the outlook we gave you in early March.

This significant breakout on the topline encourages us that our key strategic initiatives are working.

This year February got us off to a good start with low-double-digit comps, which was the third year in a row with solid gains in that month.

We and our vendor partners have done an excellent job of creating a lot of excitement in the month of February for the consumer of athletic footwear and apparel, which Ken will discuss a bit more later.

With the shift of Easter from March to April we were somewhat concerned about March comps.

But they came in in the high-single-digits, which in turn led to a very strong April for us, with comps exceeding 20%.

For the quarter, our international divisions matched our initial outlook by producing a mid-single-digit comp increase.

Foot Locker Europe, our largest international division, was the strongest performer, while Foot Locker Canada struggled a bit with the anniversary of last year's Vancouver Olympics and a much later arrival of spring in Canada this year compared to a year ago.

Thus the engine that really drove our strong comps was clearly our US business.

Our total domestic store businesses posted overall comps in the teens for the quarter, despite the slight drag caused by the year-over-year decline in the toning business.

The good news is that toning becomes even less of a drag as we go through Q2.

Our Direct-to-Customers segment, which includes Eastbay, topped 20% comps for the quarter.

Our store banner dot-com sites had especially strong comps.

First-quarter footwear comps were up double-digits in the US.

The positive footwear comps included gains in men's, kids and even women's, as gains in other categories of women footwear, especially lightweight running, more than offset the drag I mentioned from the toning category.

Accessory comps in the US were also up double-digits, but the strongest gains came in apparel, which topped 20% in the US.

Our efforts to develop a compelling apparel assortment have really begun to resonate with our customers.

Our gross margin rate increased by 200 basis points.

50 basis points of this improvement came from merchandise margin, in-line with our expectations.

The merchandise margin improvement came mostly in apparel, as we continue to close the margin gap between footwear and apparel.

Footwear margins are still higher than apparel margins in our domestic businesses, but we are making good progress.

The real driver of our gross margin rate came from the leveraging of our predominately fixed buying and occupancy expenses.

On a constant currency basis our buying and occupancy expenses were up only slightly, despite the large increase in sales.

We have shown a consistent ability to leverage improved sales into much higher gross margin results.

We also kept tight control over SG&A expenses, which increased slightly more than the 1% to 2% we had expected at the beginning of the year, but declined as a percent of sales by 140 basis points.

We controlled variable expenses very well, although we did invest some dollars in additional marketing efforts.

The strength of the euro, Canadian dollar and Australian dollar during the quarter also put upward pressure on local currency expenses as reported in US dollars.

The impact of currency rates this year added about $4 million to SG&A expense this quarter compared to last year's.

So between leveraging fixed expenses and our gross margin, and keeping a tight rein on operating expenses, we achieved a very good 38% flow through of higher sales to higher pretax profit.

Depreciation expense for the quarter was $27 million, up slightly from last year's $26 million and in-line with our annual guidance.

Interest expense was $2 million, down slightly from last year's $3 million due to higher cash balances and slightly higher rates on investments.

Our effective tax rate was 37%, up a bit from last year's 35.6% as our profits in the US, where our rates are higher, increased as a proportion of the total.

Turning to the balance sheet.

Our merchandise inventory was up $13 million or 1% compared to a year ago.

Clearly our inventory is fresh and becoming increasingly more productive.

The strong earnings and improved productivity of our assets led to very strong cash flow, as our quarter-end cash balance was $799 million, up $183 million from a year ago.

But solid liquidity position is enabling us to take several strategic steps in terms of capital allocation.

First, as mentioned last quarter, we are investing more money directly into the business.

We have begun to implement our program to spend approximately $160 million this year on capital projects, as compared to just under $100 million a year ago.

Most of the expenditure will go towards new stories and remodeling our existing fleet.

We are also investing significantly in our e-commerce business, as well as in new systems to improve our operational efficiency and effectiveness.

Second, we have increased our quarterly dividend by 10% to maintain a meaningful dividends to our investors.

And third, we repurchased 1.5 million shares of our common stock in the first quarter at a cost of $30 million.

It has been an encouraging start to the year for us.

The consumer interest in athletic footwear and apparel has been building for well over a year now, based on several factors Ken will discuss.

As I said at the beginning, there is still some uncertainty in the economic outlook globally, and any number of factors could impact our business around the world.

Therefore, while we will currently expect to continue to deliver strong results for the balance of the year, we do not think it is prudent in the face of a still difficult economy and tougher comparisons in the second half of the year to plan the pace of our business to remain as robust as it was in the first quarter.

We believe that the annual outlook we gave you in March is still appropriate for the remainder of the year, even as our first-quarter results suggest that upside sales opportunity may exist, particularly in the near term.

So I will spend a few minutes updating our previous outlook to reflect the actual first-quarter results.

We currently expect comp store sales to increase in the mid-single-digits over the last three quarters of this year versus our previous outlook of low- to mid-single-digits, keeping in mind that our comparisons get tougher as we cycle through the latter quarters.

Factoring in the strong first quarter this would result in an upper-mid-single-digit comp for the full year.

Our gross margin rate is expected to improve 40 to 60 basis points over the remainder of the year versus the 30 to 50 basis points we had previously mentioned.

Keep in mind that we will be comped against already significantly improved footwear and apparel margins last year.

We believe that the opportunity to continue leveraging our fixed expenses are still very meaningful.

So if the pace of business were to continue above our current expectation, we have room to lever up the gross margin rate beyond this outlook, which is of course, what we were able to do in the first quarter.

We were planning to increase our SG&A expense dollars somewhat more than the 1% to 2% outlook we gave in March.

We are strategically reinvesting profits into strong marketing campaigns and flexing variable expenses to support higher sales.

For example, here in the second quarter we have launched a significant branding campaign for our Champs Sports banner.

In addition, foreign exchange rates are driving up the US dollar value of our international expenses compared to our original outlook.

The combination of these factors is likely to lead our SG&A expense dollars to increase for the full year by about 4% over last year, with a somewhat larger percentage increase in Q2.

Depreciation expense is still projected to be in the $106 million to $108 million range, although foreign exchange rates are also pressuring that amount up slightly.

And interest expense is trending slightly below the $10 million figure that we provided in March.

We continue to forecast our income tax rate for the year at 37%.

And we expect the impact of translating the 2011 profits of our international operations at current and foreign exchange rates to improve our reported earnings by $0.02 to $0.03 per share compared to 2010 foreign exchange rates.

Based on our first-quarter sales trends, which has continued thus far in May, we are even more confident that we will deliver double-digit percentage increases in EPS in each of the remaining quarters of this year.

All in all, therefore, we are pleased with our solid performance in the first quarter, which as John said, exceeded our earnings in any first quarter since our Company became Foot Locker, Inc.

Our sales volumes in both our stores and online have accelerated, both unit sales and average selling prices were up.

We believe we have our inventory positioned well to take advantage of the encouraging trends in the athletic industry.

Our inventory aging metrics have been getting better each quarter.

Our improved inventory management helps on many fronts from lower markdowns to lower shrink to better in-store productivity.

And of course, it means we can continue to flow in fresh merchandise in-line with consumer demand.

With that I will turn the program over to Ken Hicks.

Thanks, Bob, and good morning.

I believe everyone at Foot Locker is very proud of the progress that together we are making in executing our strategic plan, as evidenced by the outstanding first-quarter results we announced yesterday.

As we suggested on the cover of our 2010 annual report, we are off to a good start.

2010 was the start of our run towards our long-range goals, and now that we have started the race our Q1 results show that we beginning to really hit our stride.

But this is a very long race.

In fact, in reality it never ends.

For everything that went well in the first quarter there was something we could do better, and we intend to do better in the future.

So let's take a look primarily at what went well in terms of the six major strategic initiatives, which we first laid out publicly a little over a year ago, to achieve our vision of being the leading global retailer of athletically inspired shoes and apparel.

First, we strive to be the power merchandiser of athletic shoes and apparel.

We came out of the gates fast in February by emphasizing and executing on our clear leadership of the basketball category.

We centered our efforts around elevating the NBA All-Star game in Los Angeles, which was a very successful, high-profile event for us.

As a result, we had good double-digit gains in basketball in February, with several of the player-endorsed marquee shoes selling really well.

It is great news for the category that there is some strong new players like Derrick Rose, John Wall, and Kevin Durant to go along with Kobe, LeBron, Howard, Wade and others.

And now, in addition to Nike, we have several other brands that have also developed exciting player-endorsed products -- adidas, Reebok and Under Armour have some very compelling basketball product in the market.

To capitalize on our leading position in basketball, we have been rolling out our House of Hoops concept with some of our Foot Locker stores, and now have 29 of them with a target of more than 40 by the end of 2011.

But our stool no longer has just one leg.

We also significantly amplified running in the Locker divisions and Champs Sports.

Within running we have several options for the consumer, from technical to the fast-growing lightweight running and from performance running to value.

Our vendor partners are doing an outstanding job innovating and delivering fresh, exciting running product.

In addition to the Nike Free and Nike Lunar, we have Reebok with Zig and Flex, and adidas with CLIMA.

Under Armour, K-Swiss, Saucony, and others are also helping the category, full of new -- keeping the category full of new technology profiles and colors.

We have also strengthen our position with technical running brands such as ASICS, Brooks and Mizuno.

The growth rate of running has been very good, even higher than basketball in the quarter, although both are on an upswing.

The other aspect of power merchandising we've had success in is in elevating lifestyle.

For example, we had an integrated presentation of the Nike Fresh Air campaign in Foot Locker.

In Footaction we emphasize lifestyle, running.

And we also introduced some new footwear brands, such as Nautica in Footaction.

In Kids Foot Locker we had success across most categories, as we delivered product geared especially for kids, instead of just take-down versions of the adult shoes.

Overall, in terms of footwear assortments it is in the lifestyle element where we have made the most progress in clearly defining our brand banners.

In fact, we have good balance between the results of our urban and suburban stores, both of which showed double-digit sales growth in the quarter.

We feel these results help validate our belief that each of our domestic banners has a different set of core customers.

When it comes to differentiating our brand banners, however, it is the development of compelling but different apparel assortments for each of our banners, which certainly lifted our results in the first quarter.

This is the second major initiative of our strategic plan.

As Bob mentioned, we had over 20% comps in apparel in the US.

This included gains in men's, women's and kids.

And the margins were up significantly as well, as our apparel inventory is fresh as it has been in a long time.

We have made the most progress on the branded and license side of the apparel business, from Nike, adidas and Under Armour especially.

The brands continue to do a terrific job innovating and hooking up the apparel assortments to the footwear.

Meanwhile, we learned a lot last year about what we need to do to develop the right mix of private-label product to augment these branded offerings.

We expect our improvements to take hold, especially in the back-to-school period.

Third, we took steps to make our stores and Internet sites even more exciting places to shop and buy.

As Bob mentioned, our Direct-to-Customer segment posted a sales increase of over 20% in the quarter.

This is on an already meaningful and profitable base since it includes the industry-leading Eastbay catalog business.

The Internet sites associated with the brand banners had even faster growth.

During April we unveiled upgraded mobile commerce sites for each of our athletic footwear retail banners -- Foot Locker, Lady Foot Locker, Kids Foot Locker, Footaction, Champs Sports and CCS, with added functionality and enhancements to provide customers with a seamless and optimal cross-channel experience.

Our new mobile sites have been upgraded to include advanced features and technology to further integrate our online and in-store offerings.

Building on our online leadership is, in fact, one of our key growth initiatives, which is a fourth initiative under our strategic plan.

We are also growing our store base in Europe, as the majority of our new store initiatives in 2011 are slated for there.

And we are filling in those markets where we are already established but under-penetrated.

And also entering new countries, as we did in April by opening our first store in the Czech Republic.

We had 541 stores in Europe at the end of the first quarter, with about 25 more scheduled over the rest of the year.

Fifth, we continue to focus on increasing the productivity of our assets.

Our first priority is keeping a tight control over expenses, which our team has done well.

Our 20.4% SG&A rate in Q1 was one result of those solid efforts.

By maintaining discipline in spending and reducing our markdowns from last year's already much improved rate, we generated a solid 38% flow through of incremental sales to incremental pretax profits.

As we have previously mentioned, we are investing some of our capital into technological initiatives.

These initiatives include improving merchandise flow, labor management and customer service among others.

Such investments should continue to drive efficiencies, and ultimately drive up our customer conversion rate by allowing our store associates to concentrate on doing what they do best, selling.

Which brings me to our sixth and final strategic initiative, building on our industry leading retail team.

We are investing in additional staff and technology in the areas of talent acquisition and associate development.

For example, we are rolling out a new Customer First training program in all of our stores worldwide in order to increase customer engagement and conversion.

Overall, we executed our strategic initiatives well across all areas of the business -- footwear, apparel, and accessories, men's, women's and kids, domestic and international, online and bricks and mortar, topline and bottom-line.

But there are things we can and will do better.

Our sales and profits are still down from several years ago, and we still have some unproductive stores around the world.

We continue to look at ways to improve the productivity measures of all of these stores by, for example, increasing customer conversion rates, lowering operating costs, or negotiating better terms with landlords.

Only after exhausting all of these possibilities do we finally close a store.

The returns of our CCS business also remain below our standards.

We know from looking at the results of some of our competitors, and even within some of our own brands, that the skate customer is out there.

We probably didn't evolve the CCS business as fast as we should have.

In addition to the merchandising and operational steps we have taken to turn this business around, we also recently hired a new experienced Managing Director to lead CCS.

We also have opportunities to further define and differentiate the brand banners through traditional and online or viral marketing campaigns.

For example, we are in the midst of an exciting rebranding campaign for our Champs Sports business, which we believe will strengthen our position with the customer who has game.

We also just rolled out our Sneakerpedia, an independent online community dedicated to the sneaker heads who really love sneakers and are proud of the collections they have accumulated.

And we can continue to build our apparel assortments by leveraging the strong partnerships we have with the top athletic brands and by filling in our private-label assortments, such as Actra, Champs Sports gear, and Sneaker Freak to provide the customer with a full range of exciting choices.

As optimistic as we are about the recent trends in the current athletic cycle, and encouraged as we are about the additional runway we have to improve our capabilities internally, we are nonetheless mindful of the pressures our customers face.

As Bob mentioned, unemployment is still high in most of the markets in which we operate.

Incomes are not rising as fast as prices, especially food and energy.

And economic growth is uncertain as many governments face pressure to raise taxes or cut jobs, or both.

Moreover, we expect that there will be price increases coming in our industry.

The effect will increase in the latter part of the year, and we are working to ensure retail prices increase only in sensible ways.

Given the strength of the current athletic cycle with lots of exciting new product technology, we believe these price increases will in general be accepted by our customers, despite the macroeconomics headwinds I mentioned.

We intend to maintain the right relative value propositions, both within our stores in terms of higher priced, premium product compared to more value oriented product, but also compared to other retailers targeting our customer.

There are also looming lockouts in the NFL and NBA later this year.

We have developed contingency plans to maintain our momentum even in the event that one or both of these leagues do not play next season.

I'm not going to get into the competitive details, of course, and clearly we would prefer that the players play, but we are not planning to throw our hands up in the air if they do strike.

We will have exciting initiatives to rollout in any case.

To sum it up, I am proud of the team here at Foot Locker, Inc.

We have stepped up the challenge and produced our record first-quarter earnings.

I want to again thank all of our store associates, as well as our home office, distribution center and data and finance center associates who provided the support to the stores.

As Bob mentioned, we are not planning for the remaining three quarters of the year to be much different than we thought at the beginning of the year, despite the strong start in the first quarter.

We are facing too many of the same potential headwinds as before to risk overextending ourselves in the relatively low volume second quarter.

That said, we are ready from an inventory and operational perspective to continue to take advantage of every opportunity the market affords us.

As I said at the beginning of my remarks, we are off to a good start, and we are excited to be where we are in this race, but we still have a long way to go.

Thank you, and we will be happy to answer your questions now.

We will now begin the question and answer session.

(Operator Instructions).

Kate McShane, Citi.

I was wondering if you could give any more detail on the momentum that you are seeing in May.

You have indicated that April was up very strong.

And is that momentum in May a comment about the continuing momentum that you saw in April, or just the strong strength that you saw during the quarter?

I would say it is the strength of the quarter.

May -- you have to call it Maypril, because May -- with the Easter switch there was a little shift.

But we had a good March, a good April, and that has continued across all the businesses.

Okay, great.

That's helpful.

Thank you.

Inflation, we are hearing from Nike -- we have heard from Nike that they are not able to take prices up until spring 2012 because of their futures program.

So how much inflation will we actually be seeing in your stores in the fall and for the back-to-school period?

Well, the way the system works, we buy the shoes in advance; they go and make them.

And their cost change, that is why they're not able to take the prices up, because we have already bought them.

Now we are placing the shoes for the fourth quarter and some shoes and apparel for the start of next year.

We are seeing some increase.

It varies, some items are not going up at all.

Some items are going up mid-single-digits.

It is not outrageous inflation, but there is some price adjustments.

But I think most of it is being handled in a very thoughtful way.

Whether we realize a price point or a particular value is desired by customer, we are working with all of our suppliers to manage that to not hurt the volume.

So you will see some items that go up more, some of the most desired items that we feel are more elastic.

And you will see some items that will not go up as much.

So it is difficult to say exactly the percentage, but hopefully we will be able to maintain it because we haven't seen all the pricing yet at a reasonable level.

Okay, great.

Then my last question is just based on your guidance today it seems that you're well above the pace in achieving your 8% operating margin goal.

So I was wondering if we will be receiving any kind of update to your five-year financial goal that you put out last March?

Well, we've got to win the race -- this one first -- before we start the second.

But as we achieve the goals, we will continue to update.

And as I said in my presentation, we will continue to raise the bar as we get closer to them.

We are not going to back off at all.

But at the same time as you get closer to a goal it gets more challenging to cross the finish line sometimes.

But we feel that we will make sure that we keep the organization challenged and we continue to deliver strong results.

Thanks so much and congratulations.

Michael Binetti, UBS.

Congrats on a great quarter there.

I am going to start with just asking Kate's question maybe a different way.

So as we were looking back at your five-year presentation from last March, on a lot of these metrics you gave it is looking like you could actually hit these five-year target numbers this year.

When you look back at that presentation, Ken, what do you feel has been better than you expected versus just faster than you expected?

Or, in other words, are some of these programs now going to reach profitability levels above where you were estimating at that time, or did you guys just chop the wood faster than you thought you could?

I think it is a combination of the two.

On some of the goals we have moved faster than others, and we will adjust sooner than others.

On others, you know, have been a little longer.

Sales, for example, is one of the more challenging ones because of the -- the sales goal is $6 billion -- because of the number of stores that we closed last year.

But we see our ability to make that within the planned timeframe.

On the other hand, a productivity measure like sales per square foot with what we are doing, we may be able to achieve that sooner.

And we constantly reevaluate the plan and the goals to make sure that we keep stretching ourselves.

It is one of these that, like you see in the cartoon with the horse pulling the cart, and it has got the carrot out in front of it.

We keep moving the carrot out in front, so we keep moving forward.

But we, I think have moved a little faster.

And some of them -- some of the objectives we probably had a little bit more opportunity than we might have felt we had a year and a half ago.

Thanks, that is really helpful.

When we talked about the remodeling component of the CapEx this year, how many stores will you be remodeling this year?

How many have you done?

And can you help us think about what kind of a lift you are seeing to sales maybe in those stores as you get into that program, so we can think about how that program is going to influence comps this year?

The remodel program, and I will have Bob gave the exact number, is effective and it meets our [carb] programs on an overall basis, or some stores do, some stores do.

So we are looking at -- you know, the program is effective.

We are also looking at improving the formats to make them even more effective, so that capital we spend does get the return that we require on it.

But we think that we can do more than just facelifts, and there is the opportunity to make a more exciting shopping environment.

We are exploring opportunities at that, and that is something that we will do next year probably.

We expect to touch between 180 and 200 stores in some fashion this year.

In addition, we said we were going to open 60 new stores, so it is a pretty robust program.

And that is one of the things, during the downturn we did continue to remodel and reload the stores and make them more exciting, but it is about 180, 200 projects.

But we also will do a lot of fixturing in other stores as well.

Can I just end with asking about your apparel comments.

With apparel going at -- I think you said 20% in the US at this point?

Yes.

So we have talked a lot about how margins there are below footwear.

How much was apparel as a contributor to that merchandise margin?

How much opportunity, I guess, do you think there is footwear to continue to be upward pressure on the merchandise margin.

And I will leave it there, thanks.

We haven't given the margins differences between the businesses, but except to say that apparel is still below shoes.

And that was part of the increase.

The good news, or bad news, depending up on your point of view, apparel margins are still below the footwear margins.

And we are private brand in apparel, so you would anticipate they should be higher.

Our inventory methods that we have taken, working with flow and improving the assortments that we have have helped the sales and the profitability.

But we still believe that the margins for apparel can exceed the margins for shoes.

There is no reason why they shouldn't, and that is our overall goal.

So there is still some, as the expression goes, juice to be squeezed from that as we look to the future.

Thanks, guys.

John Zolidis, Buckingham Research.

Congratulations.

A question on differentiating the brands or the banners, rather, with the apparel assortments.

It seems like when you have 3,000 stores in the US that is one of the biggest challenges that you face is attracting a unique customer segment to each one of those banners.

I was intrigued by your comment about using the apparel to drive that differentiation.

So I was wondering if you could give us a little bit more detail and some examples of how that is working and how you're thinking about it.

Sure.

The apparel assortment really is the key for a couple of reasons.

One, a key shoe is a key shoe.

And for the most part the shoes, 75% to 80% of the shoes are about the same.

That said, we make some adjustments.

For example, Footaction is the only banner that is carrying the Nautica shoes.

We have a much higher level of (multiple speakers) has unlimited number of them.

But Footaction has a stronger -- much stronger position with Nautica, and we just have a few of the shoes in our Foot Locker.

We have much higher proportion of technical in Foot Locker than we do in Champs.

So the shoes, 75% to 80% are about the same.

The apparel is a big differentiator, because that sets the lifestyle of the banner, first of all.

And second, it also is the most visible thing and the thing that changes most frequently.

So in a Footaction we will carry Rocawear and jeans.

In a Foot Locker we will have more technical apparel.

In a Champs we have a very strong position with [adi] and really powerful NBA statement in the apparel.

So we've got a position for each of the banners.

And as you look outside from the mall, or you walk into the store, you immediately see the difference.

Okay, thanks very much, and continued success.

Bernard Sosnick, Gilford Securities.

Congratulations.

Your sales are running very strongly and your inventories are up just a bit.

There is going to come a point prior to the back-to-school season where you may need to build your inventories.

Is there any chance that we might see a slowdown in sales owing to inventories in June, July?

It did happen a year ago.

And what are your inventory plans for back-to-school?

We didn't suffer a slowdown last year because of inventory.

I believe one of our competitors talked about that.

But we work pretty hard and our vendors have been very supportive of us of moving up merchandise and staying.

We also, quite frankly, as we said, didn't have the turn that we needed, and so we were carrying too much inventory.

So the last year inventory is not as important a comparable as what is the appropriate inventory.

We also have improved our flow of the merchandise, and so where we used to take in an order for a shoe or apparel all at once, we now place multiple orders and have it come in over a period of time, so there is a constant flow.

It allows us to get the right shoes in the right stores and not have some stores backed up and other stores out of the product.

So that said, we are keeping a close eye on inventories, because you're right, there will be some of the better selling items that we may run low on in some stores, and that is an issue.

But it is our job to equalize that through flow and be able to sell the other product that we do have.

No buyer ever bought something that they didn't think was good, but there are some things that are better than others.

Our focus, quite frankly, in inventory is to make sure that we start the back-to-school season in a good position.

That is something that we are working very close with our vendors on so that we don't get into a bind.

But between having too much inventory in the past, improving our assortments, getting the right flow, and quite frankly, excellent support from each of our vendors, we have been able to operate with leaner inventories than we have in the past.

That's great.

So you don't -- you do not foresee inventory constraining sales.

Not at this time.

That said (multiple speakers).

The other thought that I have about back-to-school, could you perhaps give us an overarching theme in terms of what you foresee developing for that season?

I know that you -- without revealing your particular plans.

Well, you got to be careful.

We think that it is one -- obviously, one of the key times for us.

And we've got some, I think, strong marketing programs that are in place.

We've got some new looks in shoes and apparel that we think will help us.

And one of the other things is, to your point, where we have planned up the inventory for the end of the second quarter to be ready for back-to-school compared to last year, so that we can be positioned where we need to be when that occurs.

So we are going to have a strong inventory position.

We've got some new product.

We have some new marketing.

And that marketing, a lot of that will be around new media because that is hitting that kid who wants to be dressed right when they head back to class.

Well, my congratulations.

I salute you on what you have accomplished.

Robbie Ohmes, Bank of America Merrill Lynch.

Congrats as well on a great quarter.

Just two quick follow-ups.

The first, can you -- I know you don't want to give too much, but can you talk a little bit more about is there going to be a significant expansion of branded apparel items for fall?

And maybe remind us on the Under Armour Charged Cotton products, the number of doors it is in now, and whether that expands as you move through the year, and you've if you expect a lot more items, particularly in that area?

Then the other question I had is, I think you guys said that men's, women's and kids where all strong in the quarter.

Did any of those uptick a lot more than the others?

Have you seen any significant change in momentum, either women's versus the rest of the group, or kids, etc.?

That would be helpful as well.

On fall apparel, we do have some new programs coming in from some of the brands.

And within existing programs some of our vendors have really done an excellent job in new styles.

This is one of the things where our European division helps us, because they have a tendency to be a little bit faster and heavier into apparel.

We have seen some things that work there.

We are bringing them back to Canada, Australia, Pacific and the United States, because not everything that works in Europe, obviously, works in the United States.

But we are seeing some things.

So there'll be some neat new programs there.

We also are seeing more technology that is working.

And we will see more of that from vendors like Nike with Dri-FIT.

And then you mentioned the Under Armour Charged Cotton, that program has gotten off to a good start.

We would envision that they will have -- in fact, we know they will have some additional products within that line.

We think based upon the acceptance of the Charged Cotton T-shirts that those will be successful.

So we think that that program will continue.

But we are seeing from each of our key branded vendors -- Nike, adidas, Under Armour, and the fashion vendors that we have for people like Footaction and Eastbay and CCS, that there is enough newness that will keep that going.

We also -- with regard to your question to men's, women's and kids, the women's business was a little bit tougher, but -- because of the anniversary of the toning, which we are coming to the end of the big numbers, and now it is an ongoing part of the business.

And we feel it is an ongoing part of the business, just at a lower level than what it was this time last year.

So that was a little tougher.

The kids business was very good as we continued to expand our assortment with more kid-like shoes do really go along with the great take-downs we have.

And it is a combination of those two that have worked.

When you have both basketball and running working in men's, that is a nice thing.

So I would say they all performed, as Bob said, well.

The most challenging was women's, but we see that picking up because a lot of the underlying elements like running and apparel are performing strongly.

Terrific.

Thanks a lot.

Eric Tracy, FBR Capital Markets.

I will add my congrats as well.

I don't want to just completely focus on the negatives here, but in terms of the potential headwind out there, be it rising gas, fuel costs, the potential for an NBA and NFL lockout, and obviously the price increases coming through, which of those give you the most concern in terms of potentially stalling out the strong athletic cycle?

What do you feel like you've got most control over to deal with and combat?

We actually do spend most of our time thinking about the challenges we face, both in terms of external, how to address them in internal what we need to do to improve ourselves.

So I don't necessarily have a problem talking about them.

The biggest concern that I have on an ongoing basis are anything that impacts the consumer's ability to buy discretionary items -- gas, jobs.

And as those stay up that is a challenge.

One of the things I think we are benefiting from now this year is the FICA tax reduction that everybody has got.

And people have a little bit more money in their pocket.

That is why I don't think we are feeling the gas situation, the food prices, quite as much as we might have, because people have $30, $40, $50 a month that they wouldn't have had, had we not had that.

So when that goes off or if gas prices stay high, that is a challenge.

The strike in, particularly the NBA but also the NFL, that is something that concerns me.

I will tell you we have had several meetings with our vendors, a number of meetings internally.

And our merchants have really worked hard to develop contingency plans about what product we should have, what type of marketing, and how to address that if there is a strike.

We spent a fair bit of time planning for the alternatives.

And if it doesn't happen, great, we hope it doesn't.

If it does happen, we will be prepared and hopefully minimize the impact.

The prices and cost of shoes that is something, again, that concerned about, but so far we have been able to manage it because of the new technology and the exciting product that we have had.

And the consumer has been willing to pay the $1 or $2, or in some cases it may be $5 or $10 more.

We will see if they go too high or the newness slows down, that is an issue.

But right now that probably is the one that is, of the three that I just gave, the lowest.

In fact, I think I gave them in the order of priority of what we think about them.

And we spend a lot of time thinking about each of those.

That's fantastic.

I really appreciate that.

Then, following e-commerce obviously really strong quarter here -- a big piece of the overall strategy going forward.

Can you update us thoughts there, where you are.

Maybe if there is any updated targets on where you want the business to be as a percentage of the mix?

Obviously, a very accretive growth vehicle, just if you could touch on that.

Well, we are fortunate that we have a strong direct-to-customer base with our Eastbay business, and it is very well received by the consumer.

Unfortunately, what we did not develop as much -- our store banners as we should have.

Our goal would be to have the store banner business to approach 10% of the brick-and-mortar business.

We are not there yet.

We feel that -- and it varies, by the way, significantly by banner.

We have got a good opportunity to push that.

We know based upon some of the banners we have, we have the ability to get there in all of them.

To do that we have taken a number of initiatives.

I talked about mobile, what we are doing in mobile, in-store marketing.

We've got our flipbooks.

We are putting up more signing and things to encourage the customer.

We've got our in-store dot-com operation where we can order shoes in store if we don't have it, either a style, a color or a size.

We put on all of our websites -- we just upgraded, by the way, our Champs website went online yesterday and it looks terrific.

We put on a really -- with what we call -- on the Foot Locker we obviously don't call this on the others, but in Foot Locker it is Striperpedia, where you can go in and find out about how to fit shoes, what type of foot strike you may have.

A lot of information about for the customer to buy the right shoe.

So we are giving information, doing more videos, making it more enticing and intriguing to get the customer there.

And at the same time, we opened this week -- we launched in the US the Sneakerpedia website, which is really for the consumer to take advantage of.

And we don't have any input, we just power it.

And the consumer talks about what their favorite sneakers are, shows their collections and things.

So to get more interest in sneakers, we figure we will benefit from that.

Then, finally, the marketing.

We are using the direct mail that we have for both Eastbay and CCS to increase the conversations and not just -- they're not just catalogs, they are really things to entice the people to go to the dot-com.

So this is a full force effort by us.

And it is really designed to connect the stores, the customers and the Internet all together.

That's fantastic.

Then I guess if I could, just lastly on capital allocation.

Obviously, a building cash position here.

Buying back shares in the quarter, increasing the dividend, maybe just talk about that strategy going forward relative to investing, be it in the core or even in potential growth internationally.

Talk about maybe Europe, you're adding some doors there, but those sort of investments in capital allocation.

I think our first priority obviously is to invest in the business.

I think as we improve our performance and we achieve our objectives it certainly makes us more comfortable about investing in the business.

We do think there is opportunities.

And we start to see more opportunities now as things improve and the environment improves.

I think that the first order of priority in terms of store growth, as we said back in March, was to look at our international business.

We are embarking on that.

We're going to open -- a substantial amount of the new stores this year will be in the international market, particularly Europe.

But, however, we also see the opportunities, for instance, in the dot-com business, as well as making improvements to the existing store base as well.

So, again, the first priority is the business we have today and making it more productive and effective.

Like everybody else, we are presented with a lot of opportunities from time to time.

And we have continued to look at them, and if they make sense and they fit into our strategies, perhaps.

But again, that is more of a wait and see.

Again, we are focused on returning -- making meaningful returns to our shareholders through the dividend and the share repurchase program.

Okay, great.

I appreciate it.

Thanks, guys, best of luck.

Michelle Tan, Goldman Sachs.

It seems like your comps on the footwear side are really starting to outpace the sector by a widening margin.

I was wondering as you look at the process and assortment flow and allocation changes you're making that are driving some of this success, can you be a little more specific about what elements of those changes have kicked in and what is still on the come?

Well, obviously, we first wanted to maintain our position in basketball, and I think we have done that.

That part of the business has done well for us.

Where we were lagging was in running, both if you will, the casual runner and the technical.

We have stepped up that effort.

And that has paid dividends, bringing in a new customer and also helping us participate in the whole lightweight trend.

Then the place where we probably have the biggest opportunity is -- and the four fourth leg of our stool, if it is running, basketball, apparel, is in the casual side of the business.

We are working with our vendors, because we think that part of the business is also an important opportunity for us.

But that -- when you look at it -- that probably is the part of the business, and it is also one of the more difficult ones to define, that is -- I won't say it is bad, but is not just up to the pace of the other parts.

I guess on that front, as you think about the mixes in the assortment, with all of this great product now coming out of a broader range of vendors, are you rethinking at all how that mix should be constituted when you look at the proportion of casual or the proportion of value and blend of brands, how are you thinking about that?

We are letting the customers help us define that.

The good news is that all of our vendors are coming out with new product.

We are working hard with all of them to grow, albeit, some are growing a little bit faster than others.

But we don't see it is our job, as much as it is helping the customer to make that decision.

And that is one of the advantages that we have as a company is that we have the house of brands, and allow us to make sure that we get the best thing in front of the customer.

And then we follow up on that as quickly as possible to make sure that they want to have it.

We are introducing new ideas and new things.

And as vendors come to us with new ideas, we are moving quickly on those, and building on big ideas like Air with Nike or Flex with Reebok, the CLIMA with adi, the basketball from Under Armour.

We are working with all of them to make sure that we are positioned with their best product and their new product.

Then as you think about their pipeline going forward, I guess when you look at the amount of innovation that is coming out now do you think it is a sustained change in the way the vendors are producing and thinking about innovation, or do you think it is more of a moment in time?

I think we are fortunate in that there was a backlog, but I think the vendors -- in fact, I know the vendors see the importance and opportunity with newness, and they are constantly working hard to develop and come up with new ideas.

After -- use adi as an example.

After Zig you would have said -- okay, what could they do?

Well, you look at Flex.

Free has been out there for a while.

Nike came with Lunar, and now they've got new lightweight shoes.

All of the vendors now have a position in that market.

So I think from what I have seen there is a very good pipeline for the foreseeable future of the new and important ideas.

Great, thanks.

Good luck, guys.

I think we have time for one more question.

Sam Poser, Sterne Agee.

Thank you for taking my call.

Just a couple -- can you talk in the quarter about the -- like how the change in the average selling price is, the traffic and conversion matrices for us?

Say again.

Like average selling prices, conversion, traffic and --.

We don't break down all of those.

There was an increase in average selling price; we saw that.

And that was both in terms of the cost of the product -- we are selling more premium product.

We also had fewer markdowns, because we have continued to reduce our aging and our promotional events.

Traffic overall was about flat.

Transactions were up because conversion was up.

Thank you.

Then just to follow-up on one of the questions earlier.

What is the appropriate amount -- as things evolve of the weeks of supply that you should have from an inventory perspective?

Because you're trying to continue to drive turn, what is that amount?

Are you looking at 12 to 15 weeks?

Is that in the ballpark of what you would like to have on hand all the time?

Well, it obviously varies by what type of shoe and the vendor's ability to replenish.

And also apparel is different than shoes.

So it varies.

We are looking for that overall three turn.

We believe that apparel will turn faster than shoes.

Which, by the way, it hasn't until this past year -- it started to turn faster than shoes.

So, obviously, the buyers look at the weeks of supply by item.

But it depends on what the item is and whether there is backup.

But we are really, as an overall corporation, and what we have released publicly, is focused on making sure that we get that turn measure up.

So that means that you can still -- this is to Bernie's question -- that you can still theoretically then bring your inventories down more than you have, given the way you are flowing goods and so on and so forth?

If I am (multiple speakers).

I wouldn't say that we would bring our inventories down, we would get our sales up with the same inventory.

Okay, on a relative basis, on a year-over-year number, okay.

(multiple speakers).

Yes, because we --.

On the ratio.

We plan, for example, the inventory in the end of the second quarter to be above last year, but the turn will be up because the sales are up.

And our view is to grow inventory less than we grow sales.

Thank you.

Just one last -- two last things.

Number one, from the product that you're seeing out there for, I guess, holiday now or even -- I don't know if you are seeing spring 2012 yet -- from what you're seeing as far as innovation, what are you seeing there?

How is it making you feel?

Two, you mentioned in the casual business or lifestyle business you're trying to grow that.

Are you seeing any move towards classics, white leather business?

That is a business that has been on the sidelines for some time now.

Well, I will answer your second question first.

Yes, we are seeing classics, and white leather business is doing well, so that business continues.

Things like the All-Stars, things like the Chuck Taylors, and those things continue to perform well.

And so the classics are doing well.

In terms of innovation, yes, we are seeing some good innovation out there.

I feel comfortable with the innovation we are seeing.

I will -- if it is all right, we will extend the call for a few minutes more and take a question or two more.

Thanks for your help.

Bob Drbul, Barclays Capital.

Thank you very much, I appreciate it.

Good morning.

I guess just a couple of questions.

On the category performance, can you talk a little bit about -- the House of Hoops concept is it outperforming your basketball performance in your own stores?

And similarly, can you talk a little bit about that RUN test store that you have?

And how are those stores doing versus when you have a broader arrangement of categories in your store?

The House of Hoops we have a higher productivity than we do in the Foot Locker store, and they are performing very well.

But they are store within stores for the most part now.

Almost all of them that we are opening, although we just opened one in Europe that was a separate store -- but almost all of the ones we are opening are side-by-side.

They have a higher productivity than the store, and they bring the overall store up.

Actually the interesting thing is they bring in an additional customer, and they shop the whole store and they shop the House of Hoops.

So that has been very good for us.

In terms of the RUN stores, we have opened the two.

We are looking for a limited number of more, because those are very special stores.

But what it has done is -- and in our Empire store here on 34th Street, we put in a format, we have done it in Australia Pacific, that is similar look and feel.

We have upgraded the running assortment within those stores.

And we are seeing a benefit.

So where the RUN stores had been particularly helpful is the things -- the learnings that we can apply to more of the Foot Locker stores.

So you're going to see more of the format look of those RUN stores that we have in Foot Locker stores.

For example, we moved running up to the front of the store, along with basketball.

So you enter the store and on one side is basketball, one side is running for men.

Then we moved kids and women into the back of the store.

We have seen a benefit from that.

And the learnings from the RUN store are more about running than they are -- for the Foot Locker than they are about those stores in particular.

Great, and then just my last question is, as you look at what you guys have delivered thus far in the year and where you are today, and the promotional environment for the rest of the year, do you think it will be more intense as you get into back-to-school or about the same level from where we are today?

I think about where we are today.

You look at how the business is running.

We are on -- obviously, benefiting from a trend.

And hopefully nobody will do anything stupid, but right now I think we are taking advantage of the trend as an industry, and that's good.

That said, we talked about all the headwinds and all the things that could be an issue.

That may have an impact on what happens there, and we will have to wait and see.

The good news is we are positioned well for the -- with the product, with our inventory to manage along either front, we feel.

Great, thank you very much.

Okay, thank you very much.

I think that is all we have time for today.

All right, operator.

Thank you very much.

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

Thank you for participating.

You may now disconnect.