Foot Locker Inc (FL) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the second-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 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.

John Maurer, Vice President, Treasurer and Investor Relations.

Mr.

Maurer, you may begin.

Thank you.

Good morning, and welcome to Foot Locker's second-quarter 2011 earnings release conference call.

Our prepared remarks today will begin with Lauren Peters, who on July 1st was appointed Executive Vice President and Chief Financial Officer.

Lauren will provide details about our second quarter financial results, and update our outlook for the rest of 2011.

Ken Hicks, our Chairman and CEO, will then follow with an overview of our progress executing our strategic plan, including how we intend to address some of the near-term challenges we face in the athletic industry, and the economy generally.

After these prepared remarks, we will have time to answer your questions.

Welcome, Lauren.

Thank you, John, and good morning.

I am very pleased to be here for my first Foot Locker earnings release conference call.

Of course, being able to report earnings of $0.24 per share, 6 times higher than the earnings we generated in the second quarter last year is an excellent way to start.

The momentum we gained in the first quarter which was consistent across all major product categories and regions carried on through the second quarter.

During our previous call in May, Bob McHugh mentioned that we would be planning the rest of 2011 cautiously, but that we also felt well prepared to capitalize on the positive factors contributing to our first-quarter success.

And capitalizing on those factors is just what we did again in the second quarter.

We achieved an 11.8% comp store sales increase, continuing the strong top line sales that we demonstrated in the first quarter.

Total sales increased 16.3% when factoring in the impact of foreign currencies, and increased 11.7% on a constant currency basis.

We posted low double-digit comp gains in both May and June, while July came in at high single digits.

We chose not to anniversary a couple of promotional events in July, so although comp sales were not double-digits that month, demand was stable throughout the quarter.

Margins were significantly better, not just in July, but throughout the quarter.

Encouragingly, all of our divisions posted a comp gain in July.

Geographically, the second quarter unfolded very much as the first did, with our international divisions matching our expectations by producing a mid single digit comp increase.

Foot Locker Europe, our largest international division, was the strongest performer, followed by Foot Locker Canada.

The US businesses were again the star performers of the quarter.

Our total domestic store businesses posted overall comps in the low teens.

While our Direct-to-Customers segment, which includes East Bay, topped 20% comps for the second consecutive quarter.

Within the Direct-to-Customers segment, our store banner dot-com sites continue to deliver our strongest comparisons.

Among the store divisions, the sales gain leader for the quarter was Champs.

However, all our divisions posted a comp in the quarter with the exception of Lady Foot Locker.

Early in the quarter, Lady Foot Locker was up against significant toning business from a year ago.

Our second-quarter comps were broadly based across our divisions, and were strong across all families of business, as footwear, apparel and accessory comps were all up double digits.

Unit sales and average selling prices were both up again in the second quarter.

Within overall footwear, men's and kids posted double digits comps.

Overall women's comps were up mid single digits, but certain categories of women's footwear, especially technical and light weight running, continued to more than offset the last remaining headwinds from the toning category.

Last quarter, we highlighted the acceleration of our apparel business, and that trend continued in the second quarter, with overall apparel comps in the teens and in the high teens in the US.

Our customers continued to respond favorably to the improved and fresh apparel assortments we offer in each of our banners.

Our gross margin rate increased by 260 basis points, compared to the 200 basis point improvement we achieved in Q1.

The gross margin story in the second quarter was much the same as in the first quarter.

We effectively leveraged our predominantly fixed buying and occupancy expenses.

This leverage added 170 basis points to our overall margin rate.

Merchandise margin contributed 90 basis points of the gross margin improvement in the current quarter, above the outlook of 40 to 60 basis points we provided in May.

The improvement in merchandise margin comes primarily from better merchandise flow, which is allowing us to continue reducing our mark down rate, especially on footwear.

So anticipating your question, our margins on apparel are still below footwear margins, but we continue to work on closing the gap.

The good news is that margins remain on the upswing in both categories, as well as in accessories, and we see opportunities for further improvement ahead.

SG&A expenses as a percent of sales declined by 90 basis points compared to the second quarter of 2010, as we continue to manage our costs carefully.

SG&A dollars increased 12%, but more than half of this increase was related to variable expenses that flex up with higher sales, and the effect of stronger foreign currencies on our expenses as reported in US dollars.

As mentioned on our last call, much of the remainder of the SG&A increase was due to our additional investment in marketing and advertising programs.

We began the second quarter with an exciting campaign to reposition Champs Sports in the marketplace and establish that banner as the place to go for those who know game.

Given that Champs has been the leader among the store divisions in driving our overall comps so far this year, we are pleased with the returns we are seeing on that investment.

We also spent more on marketing in Europe and certain other divisions, including the Direct-to-Customers segment, all of which we believe has contributed to our strong and broad-based performance.

Depreciation expense for the quarter was also pressured somewhat by stronger foreign currencies and was $28 million, compared to last year's $26 million.

Interest expense was $1 million, down slightly from last year's $2 million, due to an uptick in investment income earned on our cash balances.

Our second quarter effective income tax rate was 36%, not materially different from last year's 38.8%, given that second quarter earnings are lower relative to the rest of the year.

We still expect our full year tax rate to be about 37%.

The combination of these factors allowed us to produce our Q2 EPS results of $0.24 per share, our best second quarter since 2005.

It also brought our year-to-date EPS to $0.84 per share, tied with 2004 for the best result over the first 6 months of the year.

Turning to the balance sheet, our merchandise inventory was up $50 million or 4% over last year.

Some of this increase was the result of our decision to deliver additional private label product earlier in the back-to-school season.

Our inventory aging continues to improve, and each of our divisions is well within the tighter aging standards we established at the beginning of 2010.

As a result, our inventory is clearly more productive, but we still see opportunities to improve as we implement new merchandise flow initiatives.

Our operating cash flow continued to be strong as a result of our higher earnings and better inventory productivity.

We ended the second quarter with cash and short-term investments of $681 million, an increase of $162 million from a year ago.

Our steady cash flow allows us to continue to execute the strategic capital allocation steps we have outlined on previous calls.

First, we are well along in implementing our program to invest approximately $160 million of capital directly into the business this year.

Most of the expenditures will go toward new stores and remodeling our existing locations, but we are also supporting the growth of our e-commerce business by investing in additional online and mobile features and functionality.

Second, we increased our dividend by 10% at the beginning of the year.

At $0.165 per quarter, our current dividend payout remains one of the most attractive in our industry.

And thirdly, we spent approximately $29 million in the second quarter to repurchase 1,255,000 shares of our common stock.

This brings the number of shares repurchased year-to-date to just under 2.8 million at a cost of $59 million.

Clearly, we outperformed expectations in the second quarter, just as we did in the first quarter.

We are enthusiastic about the strength of demand across a wide variety of athletic footwear and apparel styles.

Our vendor partners are doing an excellent job supporting the cycle with their ongoing innovation and focus on customer preferences.

Meanwhile, we are consistently executing our own strategy, which Ken will review in a few moments.

These Foot Locker-specific initiatives are definitely helping us build momentum.

That said, there is still more than a little uncertainty in the economic outlook globally.

There are many external factors such as rising retail and commodity prices, stubbornly high unemployment, disappointingly weak economic growth here and abroad, and various geopolitical uncertainties that could impact our business around the world.

Therefore, I'll spend the rest of my remarks outlining our current thinking for the rest of 2011.

Recall that we posted strong comps of 8.1% and 7.2% respectively in the third and fourth quarters of 2010.

Given those strong results, we originally planned the back half of this year in the mid single digit comp range, and this is still where we are planning it.

Achieving that level of sales would bring the full-year comp gain to high single digits, factoring in the double-digit comps we have posted through the first half.

We are prepared, if customer demand supports even higher sales, but given the volatility we see in the external environment, we will remain cautious.

Given our ability to execute against additional opportunities to improve merchandise flow, and based on the comp assumption I just gave, we now expect our gross margin rate to improve about 60 to 70 basis points over the remainder of the year, versus the 40 to 60 basis points we mentioned on the last call.

We are encouraged by this potential improvement, especially in light of the fact that we will be comping against last year's already significantly improved footwear and apparel margins.

SG&A expense dollars are likely to increase in the mid-single digit range over the rest of the year, as we factor in our ongoing strategic investment in powerful marketing campaigns, as well as stronger foreign currency.

Annual depreciation expense is now projected to be in the $108 million to $110 million range, up a couple of million dollars from our previous outlook, as FX rates are having an upward impact in this area as well.

Interest expense is trending to be about $7 million, down from the estimate of $10 million with which we started the year.

And as I mentioned, we continue to forecast our income tax rate for the year at about 37%.

The strength of the currencies in the regions where we operate is likely to add $0.03 to $0.04 per share to the translation of our 2011 net income, compared to 2010 FX rates.

Given that we had strong comps in the third quarter last year, we are pleased that so far in August, the back-to-school season comp gains have been running in the mid-single digit range, in line with our expectations for the period.

We are confident that our strategies have us on the right track to achieve sustained earnings performance over the long term.

I'm pleased to now turn the program over to Ken, who will provide you with color on the specific strategies that are driving our current strong performance.

Thank you, Lauren.

It's good to have you here.

Good morning, everyone.

As is evident from the excellent second-quarter results we announced yesterday, we continue to have broad-based success along a wide range of the athletic footwear and apparel marketplace, and we're showing that we can sustain our performance over time.

As Lauren mentioned, we produced double-digit comps in both of the last 2 quarters, but perhaps more importantly, we've now posted 6 consecutive quarters of sales and profit increases.

Lauren also mentioned that our year-to-date EPS total of $0.84 per share matches our best first half results of any year in the previous decade.

As proud as our team is of that accomplishment, the most exciting part is that every day, we are seeing and capitalizing on opportunities to get even better, whether that opportunity is next quarter or next year.

The results of the last few quarters have certainly reinforced our conviction that the initiatives that we have taken to support our vision, which is to be the leading global retailer of athletically inspired shoes and apparel are the right ones to drive our connection and success with the customer.

First, we broadened the range of athletic shoes and apparel that we offer and have reached more customers by more clearly defining our brand banners.

We started by defining more thoughtfully what each of our banners stands for, and then committed to merchandising the stores accordingly.

Through new fixturing and other initiatives, we've also differentiated the look and feel of the stores.

Once these key initial steps were in place, we were able to invest in powerful marketing programs to ensure our customers are aware of what each of our banners stands for.

We mentioned the most prominent example from the second quarter, which was the new positioning of Champs Sports, but all of our banners are implementing stronger marketing efforts to some extent, and we see the results in improved traffic to our stores, even in an environment in which overall mall traffic is not up.

As a result of these initiatives, our improvements have been consistent across many areas.

We enhanced our assortment of running shoes, and within running, light weight running was up the most, led by shoes like the Nike Free and Lunar, as well as Reebok with the Flex and Zig.

Other brands such as Adidas, New Balance and ASICS are also delivering innovative, light weight product.

Technical running is still strong with Mizuno, Brooks and Saucony joining the other brands in building excitement in this category.

Meanwhile, we haven't lost a step in the basketball category, where we maintain our solid leadership position.

We continue to roll out our House of Hoops stores, mostly within existing Foot Locker stores, and plan to have about 50 of them worldwide by year-end.

Player-endorsed marquee footwear including Jordan, Kobe and LeBron and the Crazy Light Row shoe all sold well throughout the quarter, even after the NBA season was over.

Although not basketball footwear per se, various marquee styles of Griffey shoes also performed well and Converse continues to be very solid for us.

As a result, we have a much more diversified portfolio of offerings than we have had in the past, running, basketball, apparel, and lifestyle constitute a solid base, a 4-legged stool upon which to successfully navigate changing customer preferences.

All of our banners are participating in the recent success.

CCS for example, while still not as productive as we expect it to be, has begun to turn the corner on the top line with comp sales gains in the second quarter.

Our second major initiative, to improve our apparel business, is still a work in progress, but we certainly continue to move the business forward as can be seen from the high teen comps we produced in the US.

The major brands continue to respond to customer demand by effectively hooking up their footwear and apparel offerings.

A powerful example of this is the Adicolor program which is driving sales gains in many of our markets around the world, with this kind of innovation.

Our branded business is leading the way in terms of apparel improvements.

We've also taken on board some of the lessons from last year's efforts to create a meaningful private label apparel business and expect to see more gains in this category during the back-to-school selling season.

Our licensed business meanwhile, although somewhat inconsistent, is showing improvement too.

We believe our inventories are in very good shape.

They're growing, but at a slower rate than sales, a sure sign of improved productivity.

Fresher, more productive inventory of course means more full-priced selling and less clearance activity.

And having fresh apparel inventory has certainly contributed significantly to our ability to differentiate our brand banners.

Third, our stores and Internet sites are becoming more exciting places to shop and buy.

A key driver of strong customer demand right now is product newness.

The vendors are delivering this newness and our inventory position provides us with the flexibility to continue flowing in fresh merchandise in line with this demand.

Good examples of this in Q2 were our highly visible Nike Fresh Air campaign and the new Reebok Flex program across all of our channels, which we believe helped keep customers coming to our stores and online.

We've also rolled out what we call flip books in all of our domestic banners, which allow customers to compare styles and see what additional color ways and sizes are available from us, whether in another store or online.

We also keep innovating in our store designs, as can be seen in our new Champs prototype store in the Tyrone Square Mall in St.

Petersburg.

We've been successful in driving customers to our Internet sites and catalogs as the 20%-plus comps that we've achieved there for the past 2 quarters clearly demonstrates.

As noted in our previous call, we recently introduced Sneakerpedia, an online community, powered by Foot Locker, dedicated to the sneaker fanatic.

This effort won the Gold Lion award over hundreds of entrants in the cyber category at the Cannes Festival of Creativity during the second quarter, an accomplishment for which we are very proud.

The fourth initiative of our strategic plan is to pursue growth opportunities.

We are expanding our international position by concentrating our new store growth in Europe this year.

A good example of this is our new flagship store in central Milan, which contains a House of Hoops section and helps to solidify an already strong position in that market.

We're also filling in stores and countries where we're underpenetrated or where new malls are being developed.

Finally, we're expanding geographically with 2 new stores in the Czech Republic already opened this year, and we expect to open our first store in Poland this fall.

We continue to focus on increasing the productivity of our assets, which is the fifth element of our strategic plan.

In many of our stores, we've rearranged the presentation of running, basketball, and women's assortments along the shoe walls in order to maximize the productivity of our space.

We've also shown again in the second quarter our ability to lever our fixed expenses into significantly higher gross margin rates and solid profit flow-through.

I'm pleased with our ongoing overall expense discipline which gives us the flexibility to invest a certain amount of expense dollars into powerful profit generating initiatives such as the Champs Sports marketing program we mentioned earlier today.

Our inventory turns are improving and our sales, both per square foot and per payroll hour are going up across almost all of our divisions.

In addition, we're investing in systems to drive further operational efficiencies in the future.

As a result, our profit rates and returns on capital are going up steadily.

And we make good progress towards the financial goals embedded in our strategic plan.

Finally, we continue to build on our industry-leading retail team.

In May, we announced several management changes including of course the promotion of Lauren to the position of Executive Vice President and Chief Financial Officer, succeeding Bob McHugh who has transitioned to a new role of Executive Vice President Operations Support.

This change will allow us to focus more attention on driving best-in-class processes globally across our support functions.

On the division leadership side, we've consolidated the leadership of all of our stores worldwide under Dick Johnson, while also elevating the Direct-to-Customers segment under Dowe Tillema, which I have mentioned is the fastest growing part of our business, to report directly to me.

I believe that making major senior management moves such as these is best done when things are going well.

This management reorganization will allow us to focus our key business units on improving execution and to continue building on our recent success.

Consistent with our strategic priorities, it will also enable us to strengthen our brands and put more emphasis on our high potential growth areas of dot-com and international development.

Before I take your questions, let me address some of the concerns that I'm sure many of you have about how events and things outside of our control may impact our business.

First, I cannot predict whether the NBA lockout will result in a cancellation of some or all of the upcoming season.

We certainly hope not, because we would expect this might have some impact on our business.

As we saw the NFL settled at the last minute, and we're pleased there won't be any disruption there, it is no doubt possible that the NBA lockout will go down to the wire as well.

I'd rather go into that scenario as the leader in basketball instead of as a follower, because we believe the customer for the basketball silhouette is not going away and knows to come to us for the styles he wants.

Meanwhile, we're working closely with the major brands to develop contingency plans to minimize the impact a lockout would have, not just on us, but on the industry as a whole.

For competitive reasons, we don't want to go into too many details, but they could include initiatives such as additional player appearances and events, emphasizing the NCAA basketball, encouraging personal participation, and so on.

We believe that eventually the NBA will get back to playing.

In the meantime, many of the key players will be visible playing somewhere, whether in Europe or in local 3-on-3 competitions, and this will help sustain interest in the basketball category.

Second, input costs are rising, especially towards the end of the year and into early next year.

We feel well-positioned to maintain our margins through selective retail price increases, which we believe will not have a significant impact on unit sales, given the strong product cycle we see continuing into next year.

Our products are a highly desired item for many of our customers who are not likely to be deterred by manageable price increases.

That brings me back to the general economy, which is a factor definitely outside of our control.

As Lauren mentioned during her remarks, some dark clouds remain on the economic horizon.

However, they've been there all year, and we still managed to post strong comp sales increases.

The ongoing possibility of another economic downturn makes for a challenging consumer environment, and we continue to plan cautiously.

However, even in this environment, we see more opportunities for continued growth of our business.

To sum up the quarter, we delivered outstanding execution of our strategic initiatives on many fronts.

I'm very proud of the entire team of Foot Locker, from store associates engaging directly with individual customers, to all of the support staff around the world at every level of the organization.

I want to thank them for their efforts.

With all of us guided by our core values, I'm proud that we significantly increased sales and profits across all geographies, families of business, and major categories, but the race is far from over.

In fact, we can see some possible bumps and potholes in the track ahead in terms of the external risks I just outlined, so we're going to continue to focus on our strategies and initiatives and look for new and better ways to deliver exciting products to our customers.

Thank you.

And we'll now be happy to take some questions.

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions).

The first question is from Robbie Ohmes from Banc of America-Merrill Lynch.

Please go ahead.

Good morning, Ken, how are you?

Good, how are you?

I'm good, thanks.

Just two questions for you.

First, terrific results but the apparel is really great to see that comping so high.

Can you give us a little more detail on the product outlook in apparel for fall and holiday?

Are you looking to do more with Under Armour with their Storm Cotton expansion, et cetera?

Are there other brands that you think could come into the store either this fall or for holiday that could keep that momentum going?

And then the second question would be on international growth, and are you looking at accelerating meaningfully either European growth or entering new markets?

There's a lot of focus out there these days on mono brand stores in eastern Europe and China, sort of getting saturated and the need for multi-brand stores and just curious your strategic thoughts on Foot Locker sort of getting involved in that.

Thanks.

Sure.

Thank you.

On the apparel outlook, we definitely feel that there's significant opportunity with all of our branded vendors.

We've got new programs that we're putting in place from Nike and depending on the banner, more lifestyle in a banner such as Footaction and more performance in Foot Locker.

The Charge Cotton program has worked well for us from Under Armour and that's an opportunity for growth.

We've got our own private brand, which we really didn't concentrate on over the past year that we're strengthening.

We've got for example a new brand in Lady that's called Actra that we put in that's met with success.

But we see the growth in apparel coming pretty evenly from both our brands and our private label.

It's coming from new programs and items that they have, but also just a part of it is just getting our assortment right by banner.

So I think we continue to see good growth there.

And international, our major emphasis will be in Europe and it's really 3-fold there.

First, in countries that we're not in, we just announced as I said the Czech Republic and I think this is the first time we've come out and said Poland.

Both of those are significant opportunities.

And underdeveloped countries, where we are not as heavily penetrated, France is a good example of that, Turkey we've got one store and there's an opportunity there.

And then even in developed markets like Italy, where we have a lot of stores, they're opening malls and that provides an opportunity.

So Europe is a significant opportunity.

With regard to other locales, we are looking and exploring opportunities but we don't have any definite plans at this time.

Great.

Thanks very much.

Sure.

Thank you.

The next question is from Chris Svezia from Susquehanna Financial.

Please go ahead.

Good morning, everyone, and congratulations.

Thanks, Chris.

Good morning everyone and congratulations.

I guess I'm curious, when you look at your footwear business right now and the repositioning that you've done in that business over the past 18 months or so, more running, more sneaker business, more training, et cetera, kind of where are you right now in that transformation from a product perspective, and maybe from a margin perspective at this point?

On a product perspective, I think we have made a lot of progress, but we still have a ways to go in terms of positioning ourselves, and quite frankly, we really stepped up all the legs.

And as I said in the call, basketball, we're obviously strong on, and it's good to see the basketball business has come back.

And working with Nike and the introduction of basketball shoes from people like Adi, Reebok and Under Armour all support the growth of this business.

Running's a business that we're continuing to find our way in.

And we've sold a lot of running shoes for a long time but we've really positioned ourselves more strongly there, and finding the right items to put in the right stores provide a good opportunity there and we're learning our ability to sell performance running is much bigger than we probably anticipated and we're expanding that.

And then the third is the lifestyle and we're seeing good opportunities there with things like Converse and growing and expanding the business there in Kids, when you look at lifestyle, we've got Ralph Lauren and Skechers.

And so we've got an opportunity to have all 3 legs to improve and grow and you ask -- it's difficult to say what inning, because you never get to the end of the game.

There's always innings added.

I think we still have a fair ways to go before we get positioned the way that I would feel satisfied.

I know you don't want to talk too much about the NBA and what's going on there from a competitive perspective and what you're thinking.

But I guess from an exposure perspective, I mean, footwear is much more fashion forward, it's much more of a fashion-related business.

There are some technical attributes there, but it seems like there would be some risk but maybe more so on the apparel side, and maybe you have a lot of flexibility to make changes from a license perspective.

I guess maybe just add any color at all in terms of your thinking or thoughts or where that risk may lay and does Nike possibly or some of the key brands defer some launches possibly until there's some clarity?

First of all, I want to preface by saying I have no idea what's going to happen on this.

But we're working with them on things that we can do to keep the business alive and I mentioned some of the elements.

The players are going to be playing.

Almost all of the key players have said they'll be playing.

And the customer will still -- you may be watching Kobe play in Turkey or something, but you're going to -- they're going to watch Kobe.

Or they may be seeing LeBron play a 3-on-3 tournament versus a regular NBA game.

That will I think keep the excitement up.

I think you hit the key point.

This is more lifestyle and we know that the young people are loyal to those players and they follow the players and we're going to keep the visibility up enough that there will be opportunities for appropriate launches and the shoes will be exciting, so I think that there's this fall, whether there probably could be some impact on some of the team apparel, which is a business of ours but it's not a huge business, we think with regard to the shoes and the apparel that people play on the court to play themselves, because they might have some more time to go out on the weekend or the evening and play themselves, that provides an opportunity.

Okay.

Helpful.

Last question real quick.

Of the improvement in gross margin you expect in the back half, maybe talk about how much of that is just coming from opportunities to leverage occupancy and how much of that is just coming I guess from product margins, any thoughts about that?

Well, we certainly expect the metrics that we saw in the first half to be the pattern that we'd follow in the second half.

So as we have comp increases, we've got predominantly fixed occupancy and buying costs.

We can really lever against that.

But we do still expect that fundamental improvements that we're making in merchandise flow will continue to give us benefit in the product margin.

Chris, one of the things that -- the last year some of that margin improvement has come from event reductions we've had and we played out that.

We still have some things that we can do.

But what we see the big opportunity coming for us is the improvement in flow and the ability to sell more regular price and reduce the level of markdowns that we have to take.

Okay, great to hear.

And congratulations, best of luck.

Thanks, Chris.

The next question is from Sam Poser from Sterne Agee.

Please go ahead.

Good morning, and thank you for taking my question.

I guess the first question I have is, within the guidance that you're giving, how -- where are you looking at the NBA lockout and these other things?

Or is your guidance saying -- is your guidance taking in that you just don't know yet and if the NBA lockout goes away, things will get better?

What's in that -- in the way you're talking about the balance of the year?

I would say that our guidance includes the possibility that there will be some games missed.

It does not include, as we said, the whole season.

So we kind of averaged nothing to everything, and so we think there probably could be some games missed.

The good news is that early in the season in NBA, it's kind of like the game.

The first half isn't very meaningful but the fourth quarter is very meaningful.

Early in the season is not as impactful as it is, as the season goes along.

Thank you.

And then I just want -- you said -- hold on.

I'm sorry.

Lauren, welcome to this fun, and you said just in the improvement in the merchandise margins for the back half, how were you talking about that?

You went very quickly and I missed it.

I'm sorry.

We've said that the back half, that we continue to expect improvement and that although we were originally thinking 40 to 60 basis points from the back half, we are now thinking that's going to be more in the range of --

60 to 70.

Thank you, 60 to 70.

And -- thank you.

And then lastly, in the numbers that you -- in the guidance to sort of mid to high singles for the balance of the year, just looking at the numbers, 2 things.

One, it looks like Q3 might be a little more difficult than Q4, just on the comparisons, and two, what are you thinking about as far as the impact of currency within -- how are you thinking about the impact of currency?

Similar to the second quarter or not quite as much?

I'll take the first part of that and then Lauren will repeat what she said in the presentation.

The first part, when we say mid to high or --

Mid for the rest of the year.

Mid for the rest of the year.

Averages for the full year to high single digits.

High single digits for the rest of the year.

We said mid.

Right.

One of the things to look at is the two year stack.

The two year stack's about the same with the first half.

So you think you can run -- all right.

Okay.

Very good.

And then Lauren, on the currency?

So we're expecting that the foreign currencies will add $0.03 to $0.04 per share to the translation of our income for the full year compared to last year.

And it's already been about $0.02.

Year-to-date.

Year-to-date.

It was a little less than $0.02 for the second quarter.

Does that help?

It does, and continued success.

Thank you.

Okay.

Thanks, Sam.

Thank you.

The next question is from Michael Binetti from UBS.

Go ahead.

Congrats on a great quarter.

Thank you.

Just a quick housekeeping question on the guidance.

In that guidance do you expect Europe to comp positive with that guidance, and I guess also Canada.

I'm just kind of trying to think about how you're thinking about international for the back half of the year.

Our international business has been pretty steady.

Canada, the first quarter was a little bit soft because of the -- they were up against the Olympics last year.

But, yes, we expect them to comp up in that mid single digits to maintain their current performance.

Okay.

And then just I know it's early to talk about 2012, but if I look back at the analyst day you hosted at headquarters last year in March.

The gross margin guidance you gave was 30% to 31%, that was a 5-year target.

If I look at the trailing 4 quarters you're now at 31.1%.

We're kind of above where you thought you would be in 5 years already, so obviously congrats on that.

To look at it another way, you're not telling me the back half is going to delever by 25 basis points.

You're telling us it's going to continue to lever.

I'm just trying to think, as we think out more long-term now, how should we be thinking about gross margins and where you think they should go to at this point?

We want to get through 2011 before we project 2012, Michael.

But with the programs that we put in place with flow, we believe we can have continued success with our margins.

As we hit the objectives that we set forth in our plan in 2010, we will adjust those accordingly and -- but I want to make sure we hit them before we reset them.

Is it fair to assume that from here, if we look more I guess at the operating margin guidance we gave, is it fair to assume that we see more of the leverage on the SG&A side than gross margins going forward I guess on a longer term basis?

I think on longer term, it's too early to call on that, and partially because there's some volatility in pricing went up and some of the components have now come down so there will be adjustments on that, so it's a little too early to call.

Let me ask it a different way.

I think trailing 4 quarters you're about 22% of revenues on SG&A, and I think your target was for 20 to 21% longer term.

So maybe you could just help us think about, would more of that come from increasing your sales per foot?

I think you listed sales per foot increases and also reductions in expenses, maybe you could help us think about those 2 buckets and how much would come from each.

Thanks.

Probably we're going to continue to push on expenses but there's some elements of expenses such as marketing that we're going to continue to grow.

So a lot of it will come from productivity improvements.

Okay.

Thanks, guys.

Sure.

Thank you.

The next question is from Robert Samuels from WJB Capital.

Please go ahead.

Yes, hey, congratulations, guys.

Just a quick question.

Just given the strength of the balance sheet and Ken it sounds like your positive outlook on the business, why would you not think about doing something a little bit more substantial with regards to either a buyback or something in terms of returning value to shareholders here?

We continue to have a very balanced approach in use of cash.

We feel that we've got one of the highest-yielding dividends in our space, or almost in any space.

We have an active stock buyback program going on, and we've got good opportunities for investments within our current business and we plan to continue that and take advantage of other possibilities for investments in our business and then finally, the economic situation as we stated is still uncertain enough.

As recently as watching TV this morning, that people are talking about the need for making sure that maintain flexibility by having a good balance sheet.

So those are the 4 things and we feel that with our -- the dividend program and the stock buyback program we have, we are making sure that we take care of our investors.

Fair enough.

And then can you just elaborate on some of the new merchandise flow you mentioned with respect to inventories?

We've got a number of those.

Lauren has actually been the leader of that effort so I'll let her talk about them.

It's all about getting the product to the right store at the right time and it can be as simple as deciding how long a product is going to be in your stores and then staging the delivery of it to live over that life cycle.

No need to bring it all in from day one if it's going to sell over a period of several months.

So these are the types of things that we work with our vendors on and we invest in our merchandise systems to help us go after.

So things like, we used to buy a big chunk of the merchandise up front.

Now we buy less of it up front, and we have multiple flows, use more items on replenishment.

We're looking at new allocation systems to make sure that we get the right sizes in the right store, and looking at different activities that improve the flow of merchandise to, as Lauren said, get the right merchandise in the right store at the right time at the right quantity at the right price.

And the right sizes.

And in the right sizes, thank you.

A lot of elements.

Okay?

Thanks, best of luck.

Thanks, Rob.

The next question is from Kate McShane from Citi Investments.

Please go ahead.

If I could focus my question on just the marketing aspect of your business.

And I know you're investing in all your banners, but I wondered if you could talk to why you decided to pick Champs first in regard to focus of your marketing investment and with the success that you've seen, are there any near term plans to turn focus on your other banners.

Champs probably was one of the banners that had lost some of its identity in the consumer market and I don't know if you've seen the program that we launched in May and June, but it's really hits the customer, who Champs' customer is and what they expect from Champs.

The reason for Champs was, it was a good place for us to test it and it also was probably more necessary there.

We are looking at programs for the other banners and stepping them up and being more definitive.

I think the educator program that we have going on at Foot Locker right now really speaks to their customer and who they are.

Great.

Thank you.

And while we're focused on banners, I think you had a comment during your prepared comments on Lady Foot Locker and how it comped relative to the house and I wonder if you could just repeat that.

Is it more an element of lapping the toning business or is there something else going on with women's footwear or Lady Foot Locker that is a reason for a slightly lower comp?

I think the first is what you said, lapping the toning, we've seen a significant improvement from where it was.

That said, we continue to look and evaluate, as do the vendors, how we can do a better job with our women's business.

As Lauren said, we're overall up in women's across the entire Company.

Lady has been a little bit more challenging, but we think that as we better define that and get that positioned right, we will -- there's a tremendous opportunity.

There's actually probably more women who work out than men.

Men play games and women have a tendency to exercise and work out.

My very last question is on CapEx.

Thank you for outlining where the dollars are going between remodel of stores and eCommerce.

I wonder if you could tell us where more of the dollars are going over the second half of the year?

Well, it's not so much a first half, second half split, because it's really pretty consistent.

The majority of the dollars go to our store fleet, between new stores and remodeling existing stores, with a fair amount invested, though, in our eCommerce business which is certainly a big growth area for us and systems infrastructure to support both brick and mortar and the eCommerce business.

But across the year, there's not a tremendous difference in that breakout.

Yes, we spend a little more in the first part, just because we aren't doing a lot of store stuff in the fourth quarter.

That's true.

But completing the projects, we take a pause during back-to-school because we don't want to interrupt the stores.

Back half gets a little less in stores, but overall there's not that much variable in the percentage between stores and non-stores.

Thank you very much.

Okay.

Thank you.

The next question is from Eric Tracy from FBR Capital Markets.

Please go ahead.

Hey, good morning and I'll add my congrats as well.

Thanks, Eric.

Ken, if we think about the back half, obviously a lot of macro uncertainty, but just in terms of the sustainability of the athletic cycle, can you speak to kind of the visibility you have to kind of new pipeline fills, new product innovations coming?

Obviously the compares stiffen, particularly on the running side.

Just trying to get a sense of visibility, the back half of this year, maybe into spring 2012?

Don't want to give away any trade secrets but we do work with the vendors up front and we feel good about the launches that we have coming up this fall.

We feel good about the product, both in terms of running and basketball.

And the other thing to keep in mind, next year's an Olympic year and there is a huge step-up historically by the brands during an Olympic year and also interest of the consumer.

So the pipeline that we can see looks pretty good.

Okay.

And then just sort of following on that, in terms of, you mentioned obviously the input costs coming through, be it 4Q or into 1Q next year.

You seem to be pretty comfortable in the elasticity.

Maybe again speak to what on average type price increases we might expect.

I know you're not going to get too specific on a category or product basis, but just how we should be thinking about that, and what's sort of embedded within the guidance?

Well, we -- it varies by shoes so much.

It's very difficult to say exactly what the increase will be.

The other advantage that we have over other businesses is that the shoes change.

So one type -- in the spring, a shoe might cost this and then the sister to that shoe that comes out in the fall or next spring is higher.

But there's some bells and whistles that have been added.

It's not a comparable price increase.

It's not like a can of Coke is $0.50 today and it's $0.60 tomorrow because it's the same can of Coke.

This is different merchandise, and there's some continued value-add to warrant some of the increase.

But it varies by shoe and by price point.

There are some shoes that there are no increases coming on.

There are other shoes, there may be $5 to $7 or $8 on.

In some cases, some of the most desired shoes, launch shoes, may be $10.

Those shoes sell out in one day and if the shoe's $10 higher, I don't think that will slow it down.

Even if it does and it goes into the second day, we wouldn't notice it.

Okay.

Okay.

That's fair.

And then maybe just lastly, turning to real estate, domestically in particular.

Maybe just speak to where you are from a lease renegotiation, versus maybe closing of underperforming doors versus maybe just feeling better about the productivity levels and, therefore, even on a net basis opening some doors, maybe speak to the real estate side.

We feel good about the real estate and we talked this year about being flat.

The irony is that because we feel good about the real estate, we may take a few more closures of stores that we think are not going to come out of it, just to -- it's a good time to clean up.

So flat to closing a few more stores.

But we constantly are moving through, adding stores and closing stores.

The openings for the most part are in the States.

I'm sorry, are in Europe.

The closings for the most part are in the States.

I think one of the things we would like to do is close some of the underperforming stores to give us an opportunity to open some more stores in the States going forward, so that we kind of cleaned up the market a bit.

Okay.

That's very helpful.

Thanks, guys.

Best of luck.

All right.

Thanks.

Thank you.

The next question is from Bob Drbul from Barclays Capital.

Please go ahead.

Hi, good morning.

Hi, Bob.

Was wondering -- hi, Ken.

Was wondering if you guys could put a little bit more color on some of the early reads on back-to-school by markets or any changes within the different name plates throughout the business?

And the second question that I have is, you talked about the contingency plans with the overhang of the NBA lockout.

Have you cancelled any orders, or have you put orders on hold or what are the opportunities around contingency plans?

On the early reads, we've said that we're running where we thought we would be, mid single digits.

That said, the stores that have already gone back to school have -- they're performing well, which actually gives us a little bit of optimism, because we know that more and more kids are going back to school and then buying.

So it comes later.

So if we're where we want to be now, it's possible it could get better.

But right now we're happy with where we are and I wouldn't -- I'm not disappointed and I'm not overly enthusiastic.

I just think it's good and good is good.

With regard to the contingency on the NBA, one of the things that -- the program that Lauren worked with the vendors on in flow actually helps this, because we're able to work closer to the vest with the vendors, and we haven't necessarily -- we haven't cancelled any orders, but we've got more flexibility than we would have had last year at this time.

And in terms of the flexibility, is it just because you will take delivery later and there's still the opportunity to cancel?

We can -- for example, a particular shoe, as we said, we would take a certain amount up front, then there would be a follow-on and a follow-on and the third follow-on may be contingent.

We may be able to cancel it.

But we would have enough read that we could cancel it, and they're not stuck with it.

So it's not -- in the past, you'd buy it all at once, and you'd say but we don't sell it with the exception of some launches all on one day.

It sells over time.

Thanks, Ken.

Okay.

Thanks, Bob.

The next question is from Bernard Sosnick from Gilford Securities.

Please go ahead.

Good morning.

Hey, Bernie.

Could you give us some examples of systems you've invested in and how it may be improving the business?

We've invested and put in a planning system that we feel has helped us significantly in our planning and the ability to move to flow.

We invested in a new POS system in Europe that sped up customer transactions and information.

We have invested in inventory visibility, so we know -- a store knows when a customer comes in if they don't have it, is it online or is it in another store nearby that they can get the shoe.

But those are -- we've invested in hand-helds that allow the associate to on the floor know whether they have the shoe in the stockroom or it's somewhere else.

But those are some examples.

Ken, you've had a history of having a catalog Internet report to you elsewhere.

Now that it's doing so at Foot Locker, what do you see as the opportunities in terms of how things may change in Foot Locker and be enhanced?

Well, catalog is a tremendous opportunity.

Not catalog but Direct-to-Customer.

The Internet is a tremendous opportunity.

The biggest thing that we've got an opportunity with is better connecting the banners with the stores and we're starting to see that.

The thing that I just said about being able to know that they can go online and they've got the shoe online.

The flip books I talked about.

So that somebody comes in and they see for example an Adi shoe in 3 colors, to know that there's 5 or 6 colors, or a Nike, the basketball team comes in and they see green and blue, but the school color, the team color's red and they say we want 5 pairs or 7 pairs in red, can we get red, and they know and we can go online.

Marketing, the events, doing more events together.

So the coordination is a big play.

We also are looking at other opportunities in terms of efficiency and things like that.

So I feel that we've got tremendous opportunities.

Dow and I are getting to know each other a lot better and I was just up there, and then he was just with me at another recent meeting.

We're working closer with the vendors than we ever have in the past.

So this is something -- our goal as I said is to get our banner dot-com businesses up to about 10% of the brick and mortar and we're not there yet.

We've got a ways to go in some of the banners and we're working on that.

One other point on Lady Foot Locker.

To my eye, the stores look a lot better than they did before.

And you sort of suggested that there's an opportunity to turn those stores into something much better.

Is there something coming within the next year or so?

Could you give us a little bit of explanation about that?

Well, I think that we continue to look and evaluate that business and while it's improved, and I appreciate that, when you look at the -- what we can do -- for example, we can sell more apparel.

That's why we put in a stronger presence with Nike and with Adi and our own private brand.

The type of apparel we sell is an opportunity.

Make it more feminine, and we've got some work to do there.

I think you will continue to see improvements and evolution.

Don't know if it will be a revolution at this point but we are going to make -- based upon the customer base, based upon what other retailers are doing, it's too big of an opportunity for us to not take advantage of.

Thank you.

You're welcome.

Thank you.

The next question is from John Zolidis from Buckingham Research.

Please go ahead.

Hi, good morning.

Good morning, John.

And great job in the first half.

Thank you.

Question on the profitability of the e-commerce and I guess the international segments, which I believe are broken out in the Q or at least e-commerce is.

Historically that's been several hundred basis points higher on an operating profit basis, relative to the rest of the business.

With the rest of the business, the store business showing such big improvements, has the spread been maintained, i.e.

are you seeing improvements in profitability in e-com as well?

Or is the US store business kind of catching up to it?

We see profitability improvement in e-commerce, because of the ability to lever it.

You've got one big facility, the ability to lever that.

That said, we're investing more in marketing and things because of the opportunity for growth and the opportunity for leverage.

But they're both growing, both international and dot-com are growing because of our ability to lever with the higher sales.

Okay.

And you want that to ultimately get to 10% of sales, the e-com business.

There's 2 parts to our Direct-to-Customer.

One is East Bay, the other is the banner.

We don't differentiate between the 2 because they're run out of the same operation.

I would like the banner elements of those to be 10%, and East Bay to continue to grow also, which by the way, it is.

Okay.

And so ultimately that will be a nice component to the longer term operating expansion.

Yes.

Thanks a lot and good luck.

Thank you.

Thank you.

The next question is from Michelle Tan from Goldman Sachs.

Please go ahead.

Great.

Thanks.

Hey, guys.

Obviously --

Hi, Michelle.

Hey.

Obviously you're doing extremely well in the first half and still into August, but we have seen the data for the sector slow pretty dramatically, and it does sound like your business has decelerated sequentially in August.

So I'm wondering if you could give us any more color on what you're seeing in terms of consumer behavior?

Are you seeing greater volatility around these non-peak periods?

I think, Ken, you referred to the strength in the back-to-school markets in particular in an earlier question.

So are you seeing anything change in terms of consumer behavior that's driving that slowing?

Not in terms of buying.

The launch events that we've had this summer have actually been terrific and so those continue to be strong for us.

And by the way, one of the things that gives us some confidence in the fall for the non-basketball is they're not playing basketball in July and the shoes that we launched in July sold out just as fast as when the basketball is going.

It's just kind of the levels dropped down and I think the higher comps -- we had a very good back-to-school last year and you put the 2 together and that's why I made the comment earlier.

I think you look at the stack, that probably is something to keep an eye on, if I were an analyst I'd watch that, and say okay, that's fair.

But we're seeing -- let's face it.

In this current environment, mid single digits is pretty darn good and we see that.

For us to step out even more would be, I think not prudent, but we have the capability.

We've got inventory and we've demonstrated it in the first part of this year, that if we sell above plan, we can still do a good business.

But I would say it's just dampened a little but no real trend changes.

Okay.

That's helpful.

Yes, I know certainly the compare is very difficult and mid single digits is still very strong I just was curious if you would seeing behavioral pattern changes?

Believe me, Michelle, the question's a very good one because we are watching that.

My guys are tired of me asking about that, but we're watching that very closely.

Great.

Thanks for the color.

Good luck, guys.

Thank you.

Appreciate it.

The last question is from Taposh Bari from Jefferies & Company.

Please go ahead.

Hi, good morning.

Thanks for squeezing me in.

Good morning.

I guess two questions I had.

One was just on ASPs, clearly been a driver and contributor to your comp, driven by mix and fewer promotions.

Just trying to get a sense of where ASPs are kind of in historical context, and where you think they can go over the next several quarters.

We haven't said the percentage but they are up.

I think we did say they were up.

And it's a combination of less markdowns and selling more premium shoes and some higher prices on some shoes.

But I would see them continuing to go up in the rest of this year, for the same reasons.

Okay.

And then just a follow-up on Europe.

Can you just talk about the nature of that product cycle?

I know it's different from what we're seeing here in the US.

Is it really lightweight driven there or is it more just a kind of classics-driven cycle there?

It's much more lifestyle, yes.

And it varies by country.

Germany has more performance than Italy.

Italy is more lifestyle.

They don't work out in Italy.

They don't have to.

They're all beautiful people.

But we see the trend continuing because, again, when you think about it, lifestyle comes from the performance, and as the performance continues to innovate, that moves into the lifestyle, and we've got some new styles, and our apparel business there happens to be very good and there continues to be new and fresh ideas in apparel.

Great.

And final question for Lauren, just wanted to get a sense -- I appreciate your color on kind of your outlook and clearly a lot of uncertainties out there.

Just wanted to get a sense of how flexible you think -- how much flexibility you think you have, like on occupancy and/or SG&A in the event of any kind of macro deterioration or an extended NBA lockout?

Thank you.

Well, I mean, occupancy costs are fixed.

So there, your opportunity to lever is on the upside.

The SG&A does have a variable component, and where we through being in place for sales were challenged, we do have the ability to flex that element with our decline in sales.

Taposh, one of the things that we do also is we are seeing in some landlords, depending on how the mall is doing, if the mall's doing well, they're not as negotiating as much going forward as we renew leases but in malls where there's challenge, there's still flexibility.

So we continue to have good negotiations and in an A-mall that's 100% leased, the rent's not going down.

In some the other malls, which by the way, we happen to do very well in, I was in a mall in Florida this week, and there's some vacancies and it's not an A-mall, but we are doing very well in that mall because it's got our customer in it.

So we're seeing flexibility on things like that.

Got it.

Yes, I guess my question was more related around kind of an extended deterioration kind of retail, on the retail environment, just based on the fact that you're a very large landlord out there, and it seems like in a contracting retail environment with the Internet, you guys are driving traffic so I would imagine you have a decent amount of leverage there.

We're not landlords, we're tenants, unfortunately, or fortunately, I guess.

We are seeing -- we've got some leverage, and particularly where we've got 4 or 5 banners in a mall.

We have some leverage and we're working on that.

It also allows us some flexibility as we change.

We may convert a Lady to a Kids or a Kids to a Lady depending on what's happening in a market or a Footaction becomes a Champs and so we've got some of that going on too.

Okay.

Thanks a lot.

Best of luck.

Thank you.

Thank you everyone.

Thank you.

We look forward to having you join us on our next call, which we anticipate will take place at 9.00 AM on November 18th, following the release of our third-quarter earnings the previous evening.

Thank you and that concludes today's conference.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.