Foot Locker Inc (FL) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

And welcome to the third-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, the 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.FootLockerInc.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 third-quarter 2011 Earnings Release conference call.

As we highlighted in our press release yesterday afternoon, we earned $66 million or $0.43 per share in the third quarter this year, up 30% compared to the $0.33 we earned in the same period last year.

Our third-quarter comp sales increased 7.4% relative to last year.

These results represent the seventh consecutive quarter of sales and profit increases over the comparable prior year period.

Year-to-date, we have earned $1.27 per share, compared to $0.71 in the first nine months of 2010, an increase of 79%.

These improved earnings have been driven primarily by our year-to-date comp sales gain of 10.6%, and strong margin expansion.

Lauren Peters, Executive Vice President and Chief Financial Officer, will begin our prepared comments with additional details about our third-quarter financial results and how we are planning the fourth quarter.

Ken Hicks, our Chairman and CEO, will then discuss the success we are having as we implement the key initiatives of our strategic plan.

Ken will also focus on some of the opportunities and challenges we face in the athletic industry, as we head into the key holiday shopping season and into 2012.

As always, we will have time to answer your questions after we wrap up our prepared remarks.

Good morning, Lauren.

Thank you, John, and good morning to you all.

As John mentioned, we had another excellent quarter, earning $0.43 per share versus $0.33 last year, a 30% increase.

We produced strong overall sales gains and a robust gross margin gain of 220 basis points during the quarter.

Starting with the top line, we achieved a 7.4% comp sales increase, continuing the strong sales results that we produced in the first half of the year.

Total sales increased 8.9%, when factoring in the impact of foreign currencies, and increased 7.3% on a constant currency basis.

We posted that 7.4% comp increase for the quarter on top of an 8.1% gain in the third quarter of 2010.

Therefore, on a two-year stacked basis, we have gained 15.5% in Q3, following the stacked 14.3% gain in Q2, and a 17.5% two-year gain in the first quarter.

In other words, although we did not produce another double-digit comp gain in the third quarter, our overall sales momentum clearly continues to be quite strong.

In addition, on a very positive note, our comp gains accelerated by a month during the quarter.

As mentioned on our previous call, we started the quarter with a mid single-digit comp gain in August.

This was followed by an upper single-digit gain in September, and a gain of just below double digits in October.

We have sustained this acceleration into November, with comps this month through yesterday up high single-digits, with solid growth both domestically and in all of our international divisions.

This start to the quarter is an encouraging sign, especially given that November represents our toughest monthly comparison of the fourth quarter.

But of course, we know the big days of the quarter still lie ahead of us.

With that said, we continue to plan fourth-quarter comp sales in the range of a mid single-digit increase.

Recall that we posted a strong 7.3% comp store gain in the fourth quarter last year.

So on a two-year stacked basis, our planned Q4 comp gain would be roughly in line with our results for the first three quarters of the year.

Almost all parts of our business continued to perform well in the third quarter, leading to the strong overall sales results.

Just as was the case in the first half of the year, the strongest sales gains in the third quarter came from our US businesses.

Sales of our direct-to-customer business, which are included in our overall comp results, once again produced the biggest gains.

The FootLocker.com Eastbay division, led the way, moving up over 20% for the third consecutive quarter.

Our store banner dot-com sites continued to deliver our strongest comparisons within the direct-to-customer segment.

On the other hand, CCS.com produced a negative quarterly comp.

Among the store divisions, Champs Sports once again topped the charts, with a comp store gain well into double digits, on top of a similar gain last year.

We believe we have done a very good job connecting with the Champs customer, who knows game.

We activate this connection through strong marketing messages, and complete the connection by delivering footwear, apparel and accessories, with many head-to-toe color hookups exclusive to Champs to create a strong loyalty with our customer.

Foot Locker US was our second strongest performer in Q3, with a high single-digit comp store gain, followed by Footaction, with another solid performance.

Internationally, Foot Locker Canada had the best comp sales results, coming in with a high single-digit increase.

Foot Locker Europe and Foot Locker Asia-Pacific both had comp gains in the low single-digits.

The only store division to post a negative comp was Lady Foot Locker.

Ken will touch on both our Lady Foot Locker and CCS businesses in his remarks.

All families of business, footwear, apparel, and accessories, posted impressive positive comps.

Footwear gained mid single-digits while apparel and accessories continued their run of double-digit gains.

Within footwear, men's and kids posted strong gains.

Our women's business was flat with growth in lightweight and technical running offsetting the decline in toning sales.

We also drove increases across our major categories of basketball, running, and casual.

Apparel comp gains in the third quarter were in the teens, and in the high teens in the US, just as they were in the second quarter.

All year, we have highlighted the acceleration of our apparel business, and clearly that trend continued in the third quarter.

Our banner differentiation is progressing across all categories, but it is in our apparel assortments where the improvements are most striking.

Our gross margin rate increased by 220 basis points, following the 260 basis point improvement in Q2 and the 200 basis point improvement we achieved in Q1.

The gross margin story in the third quarter was unchanged from the first half of the year.

Merchandise margins improved in footwear, apparel, and accessories, adding 130 basis points to gross margin.

And we also effectively leveraged our predominantly fixed buying and occupancy expenses.

This leverage added another 90 basis points to our overall margin rate.

The 130 basis point merchandise margin improvement in the third quarter exceeded the outlook of 60 to 70 basis points we discussed in August.

Our clean, fresh inventories have allowed us to keep reducing our mark down rates in almost every division.

We continue to work to generate apparel margins that exceed shoe margins.

However, our improved merchandise flow, especially in the US is allowing us to continue increasing gross margins in footwear as well.

As a result, for the year, apparel margins remained below shoe margins for the total Company.

The positive news that we called out last quarter is still true, margins remain on the upswing in both categories, as well as in accessories, and we see ongoing opportunities for further improvement.

For the balance of the year, though, the margin comparisons get increasingly tough.

So we are planning only a modest total gross margin improvement of about 50 basis points in the fourth quarter.

SG&A expense as a percent to sales increased 60 basis points or almost 12% in dollar terms, compared to the third quarter last year.

Of the $33 million increase, $5 million was related to currencies, and $8 million was due to our enhanced marketing program, which we discussed last quarter.

These additional marketing dollars are primarily being spent in the US, both from our store and direct-to-customer businesses, which not coincidentally, is also where we are seeing the biggest sales gains.

We also had significantly higher wage expense, $15 million in the quarter.

Some of this expense was related to the higher sales levels, but we also recorded a $7 million adjustment to properly state certain vacation pay accruals related to our European operations, which stretch back over several periods.

Absent this one-time adjustment, our SG&A expense rate would have been about flat compared to last year's third quarter, and only slightly above the outlook we provided in August.

In the fourth quarter, we expect SG&A expense to be flat to slightly lower on a rate basis, compared to last year.

We will continue to invest in incremental marketing programs, especially in the US, to drive customers into our clearly-differentiated domestic store format.

There will be other expenses that naturally flex up with sales, but we believe we will effectively control them in order to maintain a solid flow through of higher sales to the bottom line.

Depreciation expense for the third quarter was $27 million, the same figure as in the third quarter last year.

For the full year, we expect depreciation to reach about $110 million.

Third-quarter interest expense was $1 million, below last year's figure of $2 million, due to a slight increase in investment income on our cash balances.

Fourth-quarter interest expense should be in the same range.

Our third-quarter effective income tax rate was 37.3%, in line with our annual outlook of a 37% rate.

The bottom line was earnings of $0.43 per share for the quarter, bringing our year-to-date EPS total to $1.27, significantly above our previous best nine-month result for continuing operations since we became Foot Locker, Inc.

more than 10 years ago.

This very strong result is something all of our associates should be very proud of.

Meanwhile, our merchandise inventory continues to improve with turns up and aging at record levels of freshness across almost all divisions.

Merchandise inventory dollars were essentially flat with last year, despite an overall sales gain of almost 9%.

Even with the productivity gains that we have achieved so far this year, we continue to drive new merchandise flow initiatives that we believe will improve merchandise statistics even further in future quarters.

Higher earnings and more productive inventory is of course the right formula for generating strong operating cash flow.

Achieving both, our cash and short-term investments increased $157 million from the third quarter of 2010 to $698 million.

We continued to execute the three main elements of our capital allocation strategy.

First, we remain on track to spend approximately $160 million of capital to maintain, enhance, and expand our store base, add features and functionality to our online and mobile capabilities, and strengthen our support functions.

While I'm mentioning our store base, let me point out that we have already closed 76 stores this year, and expect total closures to be about 100 by year-end.

Our original projection at the beginning of the year was that we would close about 55 stores this year.

We have been able to take advantage of additional opportunities to close unproductive stores.

At the same time, our new store opening program is up about 10 stores to 70, from our outlook of 60 at the beginning of the year.

We continue to believe that in 2012, we will reach the inflection point where we open as many or more stores as we close.

The second element of our capital allocation strategy is to pay a very meaningful dividend, which we positioned ourselves to do at the beginning of the year, by increasing it 10% to an annual rate of $0.66 per share.

Our current dividend yield remains one of the most attractive in our industry.

The third element of our strategy is to maintain an active share repurchase program, and we elevated the program further in the third quarter by spending approximately $38 million to repurchase 1.9 million shares of our common stock.

The number of shares we have repurchased so far this year stands at 4.6 million, at a cost of about $97 million.

We continued to deliver top-line strength, margin improvements and good flow-through to the bottom line.

While we have a couple of soft spots, such as our women's and skate businesses, we continue to focus on implementing the major initiatives of our strategic plan across all of our divisions.

We are partnering effectively with our vendors to deliver trend-right products across all categories and families of business, and we remain confident in our ability to identify opportunities to further build momentum in our best-performing units as well as our softer businesses.

With that, I will turn the program over to Ken Hicks, so he can provide additional details on the strategic elements behind our current success.

Ken?

Thank you, Lauren, and good morning.

I'd like to start off by emphasizing something John mentioned at the start.

The third quarter represents our seventh consecutive quarter of sales and profit increases, and the increases have been meaningful.

That sort of consistency in execution is what we strive for every day at Foot Locker, not just overall, but in every division, every region, and every element of our business.

It is a difficult thing to pull off for a specialty retailer, but developing an effective, diversified business is a key step in achieving consistent results.

We are diversified in a number of ways, by product, by banner, by geography, and by distribution channel.

First, we strengthened the four product pillars of our business, basketball, running, lifestyle, and apparel.

We are very proud of our leadership position in basketball, but for anyone who still thinks of us as predominantly a basketball shop, they have not been in our stores lately to see the industry-leading assortment of running shoes we offer, from innovative vendors such as Nike, adidas, Reebok, New Balance, ASICS, Mizuno and Brooks.

They haven't been in to see the tremendous selection of lifestyle and casual shoes we carry from many of the same vendors, but also from the likes of Puma, Timberland, Nautica and Lacoste.

And they haven't seen the strength of our apparel business, which has been supported by key brands such as Nike, adidas and Under Armour, but also includes our own private label brands as well as licensed apparel.

I should also mention the strength of our accessory business, led by categories such as Nike Elite socks, New Era snapback hats and innovative products such as the exclusive Court Grip we launched in Foot Locker during the third quarter.

The second element of our diversification is banner differentiation.

All four product pillars are represented in essentially all of our banners, but the assortments are increasingly differentiated by banner.

Although there is some overlap, many of the basketball shoes we sell in Foot Locker or the House of Hoops are different than the shoes we sell in the basketball category in Footaction or Champs, or for that matter in Europe or Australia.

The same can be said for our running shoes, our lifestyle shoes, our apparel, and our accessories.

In other words, we've diversified our product offering by banner to serve each banner's target customer much more effectively than we ever have before.

Third, we're also diversified by geography.

We have multiple successful businesses in the US, but we're also successful in Canada, Australia, and New Zealand, and all across Europe.

And even within Europe, our merchandise assortments are differentiated across countries.

The product assortment in Germany, which skews towards the person who is more serious about training, is very different than in Italy, where our customers don't seem to have to work out as much to look good, so the assortment there is more fashion-oriented.

And fourth, we're diversified by distribution channel.

We have a lot of stores, but we also have a big and successful direct to customer business.

Within the direct to customer segment, we have rapidly-growing award-winning store banner and Eastbay Internet and mobile sites.

We're also launching our dot-com sites in several Continental European countries after having been active in the UK for a couple of years.

In other words, we can deliver product to our customers in many different ways based on evolving preferences and technologies.

The four components of diversity that I just mentioned, together represent a significant competitive advantage for us, and at this stage in our Company's progress, it is clear that our customers have reacted favorably to the multiple initiatives we've undertaken.

The marketing spend that Lauren mentioned, which is uniquely tailored for each banner, is certainly contributing to the broad-based success we've had in recent quarters.

We've been able to drive increased traffic to our stores at a time we know that many retailers are seeing lower traffic.

We're also able to deliver consistent stories to our customers, and we support the messages effectively with the right products and displays as well as the right people in our stores and in our call centers.

These enthusiastic associates are better able to provide technical guidance and hook up ideas to our customers, leading to improved conversion rates across almost all divisions.

In addition, these efforts have led to both higher footwear unit sales and average selling prices across the Company as a whole.

That said, Lauren also alluded to a few soft spots in our lineup.

First, we're conducting a thorough review of the Lady Foot Locker model as well as the overall women's business.

Lady Foot Locker is not performing as well as our other businesses, but we believe there is a place for Lady Foot Locker in the market.

We feel that with the study we're doing, we will be in a better position to meet the active female customer's needs and significantly enhance this business' performance.

Second, the CCS business slipped back to a negative comp in the third quarter, after showing positive signs in the second quarter.

By studying our competitors in the skate business, we know the skate customer is still out there, but our kid seems to be shifting to a more lifestyle look rather than just core skate.

This evolution should play to our strengths.

But in the short term, we have more work to do, to develop the consistency in the business that we expect of all of our divisions.

We continue to work hard to adjust our merchandising strategies to better serve this customer.

Just last week we reviewed the division's plans for the future, and we feel good about the direction CCS is headed.

Both the women's and skate businesses offer more upside and diversity for our future which is why we continue to work to develop strong operations in these areas.

Before I get to your questions, let me address one that I know is on many people's minds.

The NBA lockout.

To date, we've seen little impact on our business due to the NBA lockout.

In fact, we are on track to sell more basketball shoes this year in our Foot Locker and Footaction divisions than in any year in our entire history, even with the ongoing labor stoppage.

We see a strong basketball product pipeline from our vendors, such as Nike and adidas, and solid enthusiasm for basketball silhouettes by our customers.

As a result, our basketball business continues to provide solid growth.

Basketball footwear has developed a huge lifestyle appeal, which is not dependent on just the NBA.

First, the guys still need the latest basketball shoes to play in for their high school team, or on the playground.

They're still going to buy the shoes regardless of what the NBA is doing.

Second, guys who are buying the latest launch shoes from Jordan, Kobe, LeBron, Rose and Howard are doing it because of the lifestyle appeal, because it's important to who they are.

And finally, customers are buying basketball silhouettes because of the strong fashion appeal.

While our business has not been substantially impacted, we continue to be disappointed by the lack of a settlement between the owners and the players, and a timely settlement could be a plus.

Meanwhile, we have worked with our key vendors to drive the business in the absence of the NBA games.

For example, recently we've had a large number of appearances in our stores and in other events, which have helped generate a lot of buzz around the upcoming product releases.

This helps focus attention on the star athletes themselves, who are driving sales.

We're also developing programs to emphasize special games amongst the star players, as well as college events from Midnight Madness to the Final Four.

Price increases are another area of concern that we've been asked a lot about lately, especially as we head into 2012.

We've been working carefully with our vendors to make sure price increases can be supported at retail by the customer.

For the most part, we believe the strength of the product with new features and great new looks will enable that to happen.

As I've said before, it isn't as simple as saying prices are going up a specific percent.

Almost all of the shoes next year are different in some meaningful way, and that newness is a big part of what is driving the athletic cycle.

So, for example, some shoes may be priced substantially higher than a predecessor's shoe and others may not go up much at all.

In most cases, where there are price increases, we believe there is a good product innovation and most customers will accept these increases.

Let me wrap up our prepared remarks by saying again how proud I am of the entire team for delivering yet another strong quarter.

We continue to get better each quarter, by building on our successes and learning from the mistakes we've made.

Despite the NBA lockout and difficult economies around the globe, we believe we can continue to deliver double-digit percentage profit gains in the fourth quarter.

Every day I see our entire 39,000 strong team of associates focusing on those things that are within our control such as buying and allocating the right, exciting new product, getting it to the stores or directly to the customer's home on time, telling great marketing stories, and providing great customer service.

As a result, we delivered outstanding execution of our strategic initiatives on many fronts, and I want to thank everyone for their contributions to another quarter of outstanding financial results.

The external environment remains challenging.

We can't control the economy, the weather, or whether or not Greece votes for austerity.

But the athletic cycle shows no sign of weakening as our vendor partners continue to offer innovation in silhouettes, technology, fabrications and colors, and we look forward to working with them towards achieving our vision of being the leading global retailer of athletically-inspired shoes and apparel.

Thank you.

Operator, let's open up the call now to questions.

Thank you.

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

(Operator Instructions) And our first question comes from John Zolidis from Buckingham Research.

Please go ahead.

Two questions.

One's on the dot-com business and then one's on the long-term operating margin target.

On dot-com, can you just give us a little more color in the US, what percentage of the business is that now?

And then did I hear correctly that you're not doing dot-com yet in European countries aside from the UK?

Is there any reason why Europe couldn't be, 10% of the business couldn't be dot-com there as well?

And then on the longer-term op margin target, two years ago you gave us an 8% EBIT margin target.

I think absent giant change in trends in the fourth quarter, you're going to hit that this year.

Would you care to comment on the potential for a higher target?

Thanks.

Okay.

With regard to dot-com, total dot-com business runs about 9% of the total business.

That includes our Eastbay business.

We feel that ultimately the banners should approach 10% of each of the banner sales, so we have a significant continued opportunity there and we're working towards that, and as I said, they are by far fastest growing business for each of the dot-com banner businesses.

We've had a dot-com business in the UK for a couple of years, as I said, and we've been selling on that.

There are all sorts of technical and legal and different requirements in each of the European countries, and we wanted to test it out and see how it worked in the UK, but we've now expanded it.

We now have it in France and Germany and it's -- we're doing a soft launch, actually, starting this last week, and we see that to be a good opportunity across all of Europe, as we expand and become a Pan-European dot-com business.

So we think that's a good opportunity.

With regard to the margin targets, from your mouth to God's ear on the 8%.

We do plan to, or are in the process, I should say, of reviewing our strategy and what the new objectives should be, but at this point, we have not finalized those, but we do plan in the spring season to announce a new strategy and to -- with that have new targets.

Great.

I hope the new strategy is as good as the one you're doing right now.

So do we.

Okay.

Good luck.

Our next question comes from Chris Svezia from Susquehanna Financial.

Please go ahead.

I guess first, with regards to the fourth quarter, I guess what kind of assumptions are you making for the NBA?

You were just making the assumption that we don't have a season, in terms of your sort of mid single-digit comp outlook, and what are you thinking also about international, specifically Europe, for your thoughts for fourth quarter as well?

Okay.

For the NBA, we have said this before.

We have a number of contingencies in place, and quite frankly, we're planning that as if there was not a season.

We're hoping there is, because that would be a plus, but right now we've got contingencies in place that we're working on between player appearances and what we're doing with college and launches, and that goes on regardless of whether there's a season or not.

But we, like everybody else, love the game and want to see the players on the court as soon as possible.

With regard to international, we watch that very closely.

It is, by country, really impacted.

Some countries are more challenging than others.

But so far, we continue to have a good business in Europe.

We are managing our inventories very closely, make sure that if there are issues, we can address them quickly.

But we're following the situation closely but have not seen a significant impact at this time across all of Europe, it's more by country issue.

Can I ask -- just on Europe, can I ask the question this way?

As you went through, I guess, into November your comment about high single digits for the total Company, is Europe still comping positive?

Yes.

In November, Europe is still comping positive.

Is there -- just between Southern Europe and Northern Europe, like UK versus Germany and France and Italy, how are the variations between those countries?

Well, I would -- Greece, obviously, is a challenge.

But we only have three stores there.

But right now, it's comping positive across all of Europe, and in our big five countries, we're comping positive.

We continue to comp positive and the big five include Italy, Germany, France, UK.

Okay.

And then my last question is just when you guys talk about product flow and merchandising flow on the margin and the job you're doing in the US, doing a great job.

Can you maybe just talk about either -- I know in Europe you've been doing a job there too, but where are you in that process as it pertains to shoes, either by banner or by geography, how much more of an opportunity, realistically, just on product flow on shoes do you see?

I'll take that one.

The merchandise flow initiative will pay dividends for us over a number of years.

There are some quick hits which we've been able to put in the done column, and work for us now.

There are others that will take years to come to fruition completely.

We have said that part of our capital investment is investing in infrastructure to support our initiatives, and some of that helps us in merchandise flow, investments that we're making in our merchandise planning and allocation systems.

So those systems, some of which are in place and others which we are piloting, take time to, A -- get in place, B -- become experts in using, so, therefore, it continues to help you over a longer period.

It's early days, and we'll see the benefit for some time to come.

Lauren has really been the key player here and she's led this and I think one of the things she's talked about -- internally some of the things she's done, but one of the other things that she and the team here have worked with is the vendors and they are also changing how they work and we're seeing benefits from that as they learn to better flow the product.

And that, again, takes time and will occur over -- we get some benefit on the short term, but most of that will take a couple of years to get fully integrated into their processes as well as ours.

Okay.

Sounds great.

Best of luck to you guys.

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

Please go ahead.

Ken, two questions for you and your team there.

One question, I was wondering if you guys could help us think through the SG&A spending run rate over the next couple years.

You had a nice increase in marketing.

It looks like it's working.

But is it something that you think you will keep accelerating in the next year?

I think it would, maybe, help us to understand more your thoughts on the SG&A spending outlook.

And the second question is, I was hoping you could give us a little more detail on some of the things you have been doing at Lady Foot Locker.

Have you tried anything in any stores that show signs of working?

Because you mentioned some initiatives that you're hoping to help turn that business, so maybe a little more color would be great.

Thanks.

Let me start with Lady Foot Locker, and then I'll l get to the SG&A, because I'll have Lauren help me on that.

We are doing a number of things at Lady Foot Locker.

We have a format that we've put in place, we call it the White Format, and we've seen that help the productivity.

We also have increased the level of apparel.

We changed the assortment to be more performance-oriented and less lifestyle-oriented, and we've seen success with that.

And so those are some of the things that we've done.

But as we study the business, we are looking at, not just ourselves but the industry, and we see there are a number of opportunities for us to better define who we're targeting, and then make sure that we have a full program against that, and as I said, we have the largest women's athletic chain in, I guess the world, but for certain in the country, and over 350 stores.

And we think if we get that right, it will be a significant opportunity for growth for us, because we know that that customer is -- from our research we've done is looking for a better place to shop.

With regard to -- and I'll cover a couple parts of SG&A, then let Lauren conclude.

We do plan to continue to market more, both our product, but also the banners, and so as we grow, and the growth provides opportunity for more marketing, we are taking up our marketing.

We had the banner campaign, for example, the We've Got Game program for Champs and we've got other marketing planned for the other banners.

We also benefit as we grow, with the improved productivity, which helps in terms of the productivity of sales per square foot and sales per hour, which help on the rent lines, and quite frankly, the selling lines.

So the productivity improvement is important to managing that.

Lauren, I don't know if you have --?

Yes.

Ken mentioned the selling wage productivity, and again here, that's an area where we're making investments in our infrastructure to further that productivity.

We are investing in a time and attendance labor scheduling system which will help us make sure we have our best associates staffed at our peak selling time and that helps that productivity measurement.

We are very focused as an organization on flow-through to the bottom line, and so controlling that SG&A is a key element to that.

We do want to invest more dollars in marketing, but we will look for every opportunity to reduce our overhead costs associated with -- overhead costs, period.

So that helps the SG&A rate.

So as a team, we think about those dollar increases and hold ourselves to standards on what comes through to the bottom line, and that will lever the SG&A rate accordingly and we really can lever it to low single digit comps.

Okay, great.

Thanks very much.

Our next question comes from Kate McShane from Citi Investment Research.

Please go ahead.

Wondering about the women's product in the main Foot Locker doors.

Did you see any difference in performance of women's in the main Foot Locker doors, versus the Lady Foot Locker?

Yes, we have.

We did not have the penetration of toning in our other banners as we did in Lady, and therefore, actually, our women's business in the Foot Locker stores and, for that matter, the Footaction stores, has been positive and has performed more in line with the overall store.

But we also believe that, to some degree, that's a bit of a different customer than the Lady Foot Locker customer, and so we have a somewhat, as we talk about differentiation in banners, we have a somewhat different assortment in a Lady Foot Locker than we do in a Foot Locker store.

Okay.

Great.

Thank you.

And in regards to some of your square footage growth, I know you were focusing on expanding your square footage, mainly in Europe over the next few years.

I wondered, just in light of everything going on, if there's been any kind of change of thinking with that strategy?

No, we're continuing to expand and this year we will add to the number of stores that we have in Europe and looking at doing that next year.

But the expansion is in new markets.

We've opened a store in the Czech Republic.

We've opened a store in Poland or are opening a store in Poland the first of next month.

We look to possibly expansion in countries like Turkey, where we're very underpenetrated.

We have one store.

So it's going into new markets and underpenetrated markets and in other countries where we may have a stronger position, we are looking at really going to places that we're not, like malls, as these countries expand and put in malls and so we're locating there, which has not had a significant impact on our business which has historically been on high streets and free-standing stores.

So we see this, the expansion in Europe, while obviously the economic situation is challenging, we still have an opportunity there.

Thank you very much.

Our next question comes from Camilo Lyon from Canaccord Genuity.

Please go ahead.

Lauren, you mentioned in your prepared remarks that the apparel margins were still below those of footwear for the year.

How does that shake out for the quarter?

That would be true of the quarter as well.

We remain very optimistic and commence with the initiatives that we've got going, that one day we will see apparel margins, total Company, in excess of footwear.

Great.

So sounds like a lot of the margin improvement that you're realizing is coming from the flow initiatives?

They certainly are helping, yes.

One other thing to keep in mind is that when we started this program, our apparel margins are above the initial shoe margins.

The thing that's happened is our shoe margins keep going up too.

So the apparel margins are chasing the rising shoe margins, which is a good problem to have.

Absolutely.

Sounds like there's a lot more runway there in that endeavor.

Shifting gears a little bit to your basketball product and your commentary on the NBA, have you seen any change in your vendor strategy with respect to product releases as a result of the increasing potentiality of a truncated season or no season?

We have roughly the same number of launches that we had last year.

We've adjusted the timing on a couple of them because of -- there might have been an event or something with a game.

But for the most part, we've been reasonable reasonably consistent there.

But more importantly, we've seen the reaction of the customers just as strong as it has been in the past.

The customer wants the shoes regardless of the player, and we're working with our vendors, as I say, between what they're doing with the colleges, the athletes and appearances and some of these pick-up games that they're playing, they're wearing the shoes in those and the real die-hard fan is seeing that, and desirous of those shoes.

We had a terrific launch with Howard in the summer.

There's no basketball in the summer, and that's continued and the Nike shoes are the same way.

So it's fair to say, then, that the most important part of the basketball category is really fresh product, continuation of fresh product coming to market versus NBA games played or not being played?

No question, it's the fresh, new product, and that's one of the things that's happening with regard to look and weight and also I think an important element is, the kids really follow the players now more than the teams, and those are also important in the mix.

So you put performance, you put look, you put the players, and you put the events that we've got, those are helping.

We would love to have the NBA playing.

We think that would be a plus.

So far, we're holding up okay.

And then my final question relates to your allocation of advertising dollars per banner.

I think you've talked about Champs being the first banner that you really focused on driving some of that advertising around, and you've seen the comp lift in that banner come through pretty nicely.

At what point do you gain some comfort that the category -- that the banner, excuse me, has gained enough attention, so that you can start to switch some of those advertising dollars to the other banners?

It really is the story.

Champs did a great job, the team down there, in developing the message, the We've Got Game, and so we put the money behind it.

As we do that with the other banners, we will do it.

That's not to say that -- we have stepped up the marketing for each of the banners with the programs and the messages behind each, but Champs was one that we invested in their messaging, and we're looking at doing the same thing with the other banners as we move forward.

And that gives us that ability to have the continuity, rather than do it all at once and then you're up against it, and you don't have the continuity across the Company and the diversity with which we talked about.

Great.

Best of luck in the fourth quarter.

Thank you.

Our next question comes from Sam Poser from Sterne Agee.

Please go ahead.

I have a quick question for you.

When you mentioned the gross margin, were you talking about the merch margin being up over 50 BPs or the overall gross margin being up 50 BPs for Q4?

Overall margin.

So, I mean, does that mean that you're expecting the merch margin to be down in the fourth quarter?

Our comparisons in the fourth quarter get tougher.

We will have anniversaried now the change in our promotional cadence in all store events and so the fourth quarter won't benefit from that as the other quarters have.

Could then -- let me just follow up.

The effect of the new distribution allocation systems and the processes that you're putting in place, how much effect of the growth of the gross margin in Q3, what was the impact of that?

Could you put a percent on that?

One more time.

Can I break out the --?

Could you say like what the impact of the changes in the manner, in your processes and how that affected the increase in the gross margin.

Could you say that was worth 20 BPs or 10 BPs or nothing, or whatever?

I can't break it down for you like that.

We were 130 out of merchandise margin, we were 90 out of lever.

If you run a similar comp in the fourth quarter you should still lever the 90.

So I could assume merchandise margins you're thinking are going to be down.

Is that a fair thought?

No.

No, because we beat the plan in the third quarter, and that was why we were able to lever.

So we think with the plan, we get the 50 and if we beat the plan again, yes, we should be able to lever and it will be higher than that.

But we don't plan on beating the plan.

We plan on the plan.

Okay.

Couple more -- two more questions.

Number one, can you break out traffic ticket conversions and UPTs for us for the quarter?

We said the traffic conversion and UPTs were all up.

And average selling price was up too.

Okay.

Lastly, this is not serious, but is Amare Stoudemire, did he get a raise yet from you guys?

(laughter) For those that haven't seen it, he did a clip for us and he worked as a striper and the funniest line was the manager asked him why do you want to be a striper and he said I'm out of work, I need a job.

But he actually was down in our House of Hoops in Florida, so he got a promotion.

Cool.

Thank you.

Check out the commercials, they're really great.

Thank you very much.

Continued success.

Our next question comes from Bernard Sosnick from Gilford, please go ahead.

Right now we're focused on the NBA and soon enough we're going to be looking at the Olympics and what that might mean for the business.

Over the last months, you and others have been talking very positively about what you see coming in the spring and toward the Olympics, and I'm wondering if you can flesh out some of your forward-thinking for us?

Well, the Olympics, historically the Olympics have been a plus for us, not so much for the product, because we don't sell a lot of the product, but more because of the enthusiasm.

It gets people behind what's happening.

We have seen hints of the product.

We actually have a couple of meetings set up in the next few weeks with the vendors where we will get the full view of the product and -- but the hints look very good.

We think our vendors are going to step out and make a major play with the Olympics, both in terms of Olympic product directly, but also just making sure that they've got new innovation as people come in.

We also think we'll benefit in Europe, particularly in the UK, because of all the traffic and all the people there for the Olympics.

Could you perhaps give us a little bit more color on what you see coming for the spring?

In terms of -- well, we've got a number of new product launches coming from all of the key vendors.

We've got -- from a Nike, adidas, Reebok, we've got new product coming from Under Armour in running.

We've seen in shoes; we've seen apparel improvements coming.

We've got a good lineup of launches planned and we've got some good promotional activity that we're working on together.

So I feel pretty good about the spring season to date.

Great.

Just keep it up.

Thanks a lot.

Our next question comes from Bob Drbul from Barclays Capital.

Please go ahead.

Ken, just a couple, just a quick question.

On the pricing side of it, with these results and -- whether the holiday and as you look into the spring, where are we in terms of seeing the price increases from some of your vendors work their way through the supply chain?

And your AUR, I think you said, was up this quarter, have you seen any resistance to the price increases that the Company's been taking?

We have seen some of the price increases for the fourth quarter -- or third quarter.

We're seeing more in the fourth quarter and I think we'll be complete the first part of next year.

To date, we have not seen resistance from the customer because the product is so new and fresh and so the customer can look at it and say, this is worth the extra money.

It's not like a bottle of water that you raise the price on and it's the same bottle and the same water.

When you look at the product, there are innovations and looks that really make them stand out, and so, so far we have not seen the resistance.

That's one of the reasons why I said we're working with the vendors to manage that, so the increases aren't excessive, one, and two, that they're applied properly on a new product versus something that may be continuity.

The other thing that we've seen, obviously, is some of the pressures that were on the pricing, like cotton and petroleum have mitigated to some degree.

There's still some of the challenges with labor, but it's not as much pressure as there was six months ago.

Got it.

And you said November's been a very strong month to date.

As you look to sort of next week, Black Friday, ahead of that and the weekend, are there any things that we should be looking for out of your stores as we go and check them out?

We've got some tremendous launches and we're going to have a strong program with launches on Black Friday and all through that weekend and through the holidays, quite frankly.

We also are going to make sure that we have fresh product on a continual basis and things to bring the traffic in.

And on Black Friday we're going to -- we will have programs that will allow that customer who is looking for a bit more value, so we will have some elements in that.

But our focus is really going to be on the launches and the great new shoes that we have and the buzz out there on the blogs and websites is pretty strong.

People are pretty excited.

I'm hearing the associates talk about it already, and that's a good sign.

Thanks, Ken.

Good luck.

Our next question comes from Michael Binetti from UBS.

Go ahead.

Just a quick little math question for you.

You guys have remodeled about 150 stores this year.

Can you give us a number on what the average remodel costs you, and what kind of sales lift you're seeing from those remodels?

The remodels are dependent on what the particular store needs.

When we decide to do one, we go in and take an assessment.

It can be as low as $30,000, $50,000.

If it's a case of a full remodel it can be a couple hundred thousand, with a total refresh.

But depends on the need of the store.

The range is significant, from anywhere from just a paint job to refixturing, or we might move the store, in some cases, a relocation within the mall.

Close to a full new store.

Which is close to a full new store.

We have hurdle rates.

We're looking for returns of 11% ROIC, 13% on IRR so when we decide to do one of those it's because we believe we're going to see a sales lift that supports that.

We do in fact track the project.

We track the projects and report it to the Board.

Regularly.

The current tracking and you've got to look backwards, so it's not the ones that we just remodeled this year but the ones we remodeled made the -- on average, made or exceeded our hurdle rates.

I think this was asked earlier.

I'm going to ask it a little different way.

Ken, you kind of took some ambitious language about how you're going to fix up some of the banners that were falling behind when you stepped in a few years ago.

Lady Foot Locker is the only one that seems to not be -- you haven't really cracked the code on yet.

What do you think has gone wrong versus the initial strategy you took, which has worked so well across other banners at Lady Foot Locker?

What do you think you misunderstood when you first got to the Company that you're now realizing?

I think the challenge was that we, in the past four years, have changed the Lady Foot Locker customer at least three times, and so the problem was that we were trying to figure out who we were.

This project is really to say, help us identify who we're going to be, where that white space is and properly position Lady and then be able to market and bring that customer in and have the product, so she's not disappointed.

But if one year it's young women and they come in and it's fashion apparel, and the next year it's all about performance, and the next year there's not apparel, and the next year there is apparel, there's no question that the customer is going to be confused and we're going to not be able to satisfy them.

Because my expression is when you fire a customer, they know instantaneously.

When you hire a customer, it takes a while before they know they need to come in.

We just have been moving around too much and the strength that we've got right now is for each of the banners, we know exactly who we are and what we want to be.

Lady, we're still defining that.

Got it.

And then just one last question.

We publish a lot on this and we spend a lot of time talking to your investors about it.

Really trying to understand the NBA thing, and you and your peers have all come out at this point and had fairly constructive comments, that they don't think there will be a material impact.

If I look ahead past right now, I guess, to the spring season or February when there was an All Star game last year and I think back to all the wonderful adidas commercials for the new shoes they had out that were blasted over prime time airwaves with those shoes being launched.

That marginal customer saw it there, that might have driven them to the store.

As you enter February this year, and the potential of having no All Star game and nothing on TV to watch, no slam dunk contests, help me get comfortable with periods like that, that are important basketball periods for you, that let you say to yourself we think we can manage our way through it with such a big vacuum of media on television at night?

There's no question that's a challenge, and we were going to have a challenge moving from LA to Orlando anyway.

But the thing is, it's not just the NBA.

It's all of the other elements.

And so if we've got a challenge with the NBA, what we're looking at is we devote those resources to basketball shoes that may not be as dependent on the NBA or that game.

Other elements like running, lifestyle, and apparel, so what happens is we're like you.

We move money around to where we think we're going to get the best investment.

So while basketball may not be benefiting us as much as we would like and I think the challenge is, if they went to start playing tomorrow and I hope they do, or I would wish they would, we would benefit.

It's the upside.

But it's how we invest and where we invest to move that money from one place where it's not going to get as -- be as productive to another place.

And so you're going to see us continuing to drive basketball with the players, with the performance basketball, and we're going to continue to drive running.

We're going to continue to drive apparel and we're going to strengthen our position in lifestyle.

That's how we alter it.

It's not that we won't -- it won't have an impact and if it were there, it's what we do to offset that impact.

Got it.

All right.

Great job on third quarter.

Good luck.

Our next question comes from Michelle Tan from Goldman Sachs.

Please go ahead.

I was wondering if you could just expand a little bit, I think Bob asked about the price increases that you're going to start to see more significantly in 2012.

Is there a time we can look back to where you've seen -- where you last saw kind of across-the-board price increases from the vendors and maybe give us a sense of how that played out?

Is it possible that we actually start to see total revenue growth acceleration as AUR layers on, or does the consumer really more buy dollars than units?

I can't speak to this business as much as I can other businesses, in experience, although in talking to the vendors, they have said the history shows that there is a short adjustment period for them as they work through the contracts.

But overall, if they provide the new product, the customer buys -- is more buying the unit than the dollars.

So they will pay $5, $10 more for a shoe, in some cases, than they would have in the past.

So I think your question, which was a little leading, is on the right point, that they will -- this is actually an opportunity for sales growth as much as anything.

Great.

Thanks.

Good luck for holiday.

Operator, I think we have time for one more question.

Your next question comes from Taposh Bari from Jefferies.

Please go ahead.

Just had a couple quick questions.

I guess the first, I know there's been -- appreciate all the commentary you've given so far on November and the impact of the NBA situation.

I guess just wanted some more clarity, if you're willing to comment on your Jordan versus your non-Jordan businesses in the basketball category, any kind of color you can give on that so far in November would be helpful.

Our Jordan business is continuing to perform well, in line with the other basketball.

And that speaks to the importance of the athlete and the product as much as the game.

He hasn't played in a while.

I think that's correct.

(laughter) And his shoes are still selling well.

Okay.

That's helpful.

And then the second question that I had was just on ASP, I don't know if you actually quantified what ASP did last quarter, if you can do that and also how are you planning that into the fourth quarter, vis-a-vis your mid single digit comp guidance?

We didn't call it out specifically, but ASPs are up about 2% in Q3.

How are you planning them for the fourth quarter?

About the same.

Okay.

And then just a last question I had was you have a decent amount of business in some of these more macro challenged geographies.

I think you addressed Europe.

I wanted to ask specifically about Canada, high single-digit comp is extremely encouraging despite some of the commentary we're hearing out of some of the other US-based retailers operating there.

Could you talk about that geography, what you're seeing there specifically?

Again, we have really stepped up our game there.

We increased the level of performance while maintaining a strong lifestyle position.

We've continued to grow the apparel part of the business there, so it's really adding to the strength, which was more lifestyle, with more apparel and more performance.

We also, I think, are doing a much better job up there executing across the country and making sure we define the difference between what happens in the Prairie Provinces, what happens on the West Coast and what happens in Quebec and Toronto.

Each of those are different markets and the team is doing a much better job identifying and defining those, so that we're able to best serve those customers.

So our differentiation isn't just at the banner level.

It's down to the market level and really to the store level.

And that's where some of these systems and things that Lauren talked about will be long-term benefits to us as we localize the assortments for our different stores and markets.

Okay.

Appreciate it.

Best of luck and, again, great job on the quarter.

Thank you everyone.

I think that's all we have time for today.

We look forward to having you join us on our next call, which we anticipate will take place at 9.00 on March 2, 2012, following the release of our fourth quarter and full-year earnings the previous evening.

Until then, Happy Thanksgiving and have a Happy Kicksmas.

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

Thank you for participating.

You may now disconnect.