Foot Locker Inc (FL) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Foot Locker's second-quarter 2013 financial results 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 fluctuation, customer preferences, economic and market conditions worldwide, and other risks and uncertainties described in the Company's press release and SEC filings.

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

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

If you have not received today'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 John Maurer, Vice President, Treasurer and Investor Relations.

Mr. Maurer, you may begin.

Thank you.

Good morning, I'm pleased that everyone could join us this morning to discuss Foot Locker, Inc.'s second-quarter 2013 results.

In this morning's press release, we reported a 12% increase in second-quarter net income to $66 million, or $0.44 per share on a GAAP basis.

This profit level represents the highest level of earnings from continuing operations of any second quarter in the history of the Company, as Foot Locker, Inc.

This result also brings year-to-date earnings to a record $204 million or $1.34 per share, an increase of 11% over the comparable six-month period last year.

As noted in our release, we incurred approximately $5 million of expenses pretax, related to the acquisition of Runners Point Group, and closing the CCS Retail stores.

The $3 million related to Runners Point is in GAAP SG&A, while the $2 million related to CCS is in other charges.

Excluding these one-time expenses, second-quarter non-GAAP profit was $0.46 per share, a 21% increase over the $0.38 a share we are not a non-GAAP basis in the second quarter last year.

Lauren Peters, Executive Vice President and Chief Financial Officer, will start this morning's prepared remarks with a summary of our second-quarter and year-to-date financial results.

Dick Johnson, Executive Vice President and Chief Operating Officer, will provide an update on some of the major long-term initiatives we have underway to elevate our financial and operational performance, both here in the US and internationally.

And finally, Ken Hicks, Chairman and CEO will provide some color on the drivers of our business in the second quarter, and how we see those drivers affecting our strategies going forward, as we continue to build momentum towards meeting our long-term objectives.

As always, we'll allow ample time for questions after our prepared remarks.

So let's dive right in.

Lauren?

Good morning, John, and thank you all for joining us this morning.

As you know, we planned for comparable store sales to be in the mid-single digit range for the second quarter.

Although we achieved the best-ever sales of ongoing profit results of any second quarter in our history as Foot Locker, Inc., the quarterly comp sales gain of 1.8% did fall short of our expectations.

Though not as strong as we planned, sales were steady throughout the quarter.

We achieved a comp sales gain in the low single digits in each month of the quarter, which, when combined with our 5.2% comp gain in the first quarter, brought our year-to-date comp sales gain to 3.5%.

Our direct-to-customer business continued its strong performance, with a sales gain of approximately 20%, which includes a high single digit gain in Eastbay, and another 40%-plus gain in our store banner dot-com businesses.

Our North American stores, as a group however, posted a low single digit comp decline.

Foot Locker in the US and Canada, Champs Sports and Lady Foot Locker all posted comp losses in the low single digit range, with Footaction off mid-single digits.

Kids Foot Locker continued its strong performance, with a high single digit comp gain.

We also had very strong results outside of North America, with both Foot Locker Europe and Foot Locker Asia-Pacific producing mid-single digit comp gains.

Our business in Europe was particularly strong, with double-digit comparable sales gains in several countries.

In fact our five biggest countries each comped positive, and all 19 countries posted a sales increase in the quarter.

Sales in Foot Locker Europe's base business increased almost 10% in total, driven by the comp gains, and the addition of 25 more Foot Locker stores, compared to a year ago.

We also picked up more than $20 million in sales for the one month we owned Runners Point Group, bringing our all-in quarterly sales increase in Europe to approximately 15% year over year.

I'll let Dick and Ken discuss the specific styles and trends that drove our sales results, but I'll give you some of the overall statistics.

First, footwear was the primary driver of our total Company comp sales, with a gain in the low single digits.

Apparel and accessory sales were both up slightly.

With a double-digit comp gain, children's footwear continues to be a key driver of our overall footwear business.

This is true not just at Kids Foot Locker, but at almost all of our divisions that sell kids merchandise.

Children's basketball styles posted strong sales gains, partially offset by a decline in children's running.

Men's footwear was up low single digits, with basketball and running both posting comp gains.

However, we saw declines in certain classic styles, with seasonal products such as slides and in retro training styles.

Overall, sales of women's footwear were down slightly during the quarter.

In the US stores, gains in technical and performance running footwear did not offset declines in our casual footwear sales, as we strategically reposition our women's assortments to be much more performance-based.

Internationally and online, however, our women's footwear business continues to grow nicely.

In apparel, our children's business again led the way, with a gain of more than 30% off a relatively small base.

Our men's and women's apparel sales, by division, were flat to down slightly.

Within accessories, both socks and hats continue to generate gains.

Although other items, in particular shoe care products, posted declines.

Turning now to the rest of the income statement.

Our gross margin rate ticked down slightly to 31.2% in the second quarter, off 10 basis points from last year's 31.3% rate.

We gained 10 basis points of leverage on our occupancy and buying costs, however this improvement was offset by a decline of 20 basis points in merchandise margins.

Our markdown rate continues to edge lower, even with the softness of our top line sales in Q2, relative to our expectations.

We are clearly still running a primarily full-priced business, with relatively little promoting.

On the other hand, a couple of the factors we have outlined in earlier calls still pressure our gross margin rate.

First, our merchandise margin in Europe, although fairly stable now, has declined from its previous peak, and it is not currently providing the lift relative to the US that it has done historically, primarily due to mix changes.

Second, our initial mark-up rate, or IMU, continues to be under pressure.

IMU was down 30 basis points in the quarter, compared to the second quarter last year.

IMU is impacted by vendor mix.

For example, our private label business, which carries a relatively high IMU percent, has been declining as a percent of sales.

IMU is also impacted by cost increases experienced by our vendors and passed onto us.

Where innovation is strong, these increases can be and have been passed along to customers.

With some in-line styles, however, we've not been able to pass along all of the cost increases.

The mid-single digit increase in average selling prices that we experienced in the quarter was a combination of these higher prices from our vendors, and lower markdowns, which we achieved by continuing to execute the initiatives of our strategic plan.

Although ASPs were up, units were down, impacted by lower mall traffic.

Turning to SG&A, our rate improved 80 basis points in the quarter to 21.6% from 22.4% last year, demonstrating our ability to manage expenses effectively, when comparable sales are running at a low single digit pace.

As the quarter progressed, we adjusted our variable expenses such as store wages and marketing, to align better with the pace of sales.

The depreciation expense was $31 million in the quarter, up $2 million from last year, reflecting the incremental investments we are making in our store fleet, our digital businesses and technologies, to drive efficiency in our operations.

Our tax rate came in at 37.7% in Q2, 100 basis points higher than last year, when we benefited from a tax rate change in Ontario.

This year, our rate was pressured up by an additional state tax provision and the Runners Point acquisition costs, which are not tax-deductible.

Adding it all up, we produced a double-digit percentage increase in profit to $0.44 per share on a GAAP basis.

Excluding the Runners Point acquisition costs, and the expenses incurred to shut down the CCS store operations, in total about $5 million pretax, we achieved a record second-quarter ongoing EPS total of $0.46 per share.

This non-GAAP result was a solid 21% increase over last year's Q2 equivalent earnings of $0.38 per share.

The GAAP to non-GAAP reconciliation reflecting these adjustments was included in this morning's press release.

A quick note on Runners Point.

Though the acquisition costs are excluded from our non-GAAP results, its regular operations are included.

And I'm pleased to say that for the one month of the quarter in which we owned the business, it did contribute a profit.

Less than $0.01 per share, but nonetheless a positive contribution, and we are off to a good start.

It's still very early in the process, but so far, the integration of that business into our European operations is going very well.

As John mentioned, our net income total of $66 million is the highest level of earnings from continuing operations in any second quarter in Foot Locker Inc.'s history.

The year-to-date net income total of $204 million is also the best result in our history as an athletic company.

Turning to the balance sheet, we ended the quarter with $1.3 billion of inventory, a 6% increase over last year's second quarter.

This increase is similar to the total sales gain, however, backing out Runners Point Group's inventory and sales, and adjusting for changes in FX rates, inventory was up less than 2%, compared to total sales growth of more than 4%.

We feel well-positioned with our level of inventory going into back-to-school and have maintained inventory within our aging standards.

As noted in our press release we reinitiated our ongoing share repurchase program in the second quarter by spending $100 million to repurchase approximately 2.8 million shares of our common stock.

Even with that expenditure, and paying for Runners Point Group, we ended the second quarter with an increase in our cash and short-term investment total to $836 million, up from $820 million last year.

Before I turn the program over to Dick, let me give you a brief real estate summary.

We ended the second quarter with 3,495 stores.

This total includes 194 RPG stores under the Runners Point, Sidestep and run2 banners.

Excluding these acquired locations, we were operating 3,301 stores, a decrease of 20 from the end of the first quarter.

So far this year we have opened 49 new stores, led by Foot Locker Europe and Kids Foot Locker.

We have also closed 83 stores this year, including all 22 CCS stores in June, and 28 Lady Foot Locker stores.

I'll now turn the call over to Dick Johnson.

Thanks, Lauren.

Let me pick up where you left off, and touch on our real estate capital initiatives.

In addition to the new stores we're opening, of course a major theme this year is remodels.

With a larger window of opportunity in the period leading up to back-to-school, the pace picked up in the second quarter compared to the first, and we remodeled significantly more stores, mostly Foot Locker and Champs Sports, compared to the first quarter.

We're on track to hit the percent of fleet totals we mentioned at the start of the year, 10% of Foot Locker and 15% of Champs Sports.

We've also updated almost all of the Kids Foot Locker stores.

The remodeled stores continue to meet the productivity standards we set for them, even with the somewhat slower pace of sales in the second quarter.

The Foot Locker stores with the new House of Hoops shop are doing particularly well.

The remodeled Champs Sports stores are also doing well, but with a longer downtime during the remodeling, their impact was still a slight drag on comps in Q2.

As Lauren mentioned, we opened quite a few Kids Foot Locker stores in the second quarter, an important initiative, given the overall strength of the children's business and our strong position with these young customers.

Several of the new kids stores were converted from CCS stores.

We are also in the process of converting some of the CCS stores into our new 602 format, and the reskinned Lady Foot Locker format.

In addition to the three existing 602 stores, we will have four new 602 stores before the holidays, three of which will be in Florida, and the other in Texas.

I would characterize these stores as still in the test mode.

Our current reskinned Lady stores and the 602 stores are significantly outperforming the rest of the Lady Foot Locker chain, which overall, showed some improvement in Q2, with a low-single digit comp loss, compared to a high-single digit comp loss in Q1.

We are still learning a lot about store location, geographically and within the mall.

Store size, the optimal store layout, the right assortments for our new performance-oriented customer, and how best to communicate with her.

It is too early to say we have the formula down solidly enough to think about committing significant amounts of capital to execute a rollout.

I believe we will be in the test mode until at least early next year, which means the first possibility of net door count growth for the women's only stores is in late 2014 or early 2015.

In most markets meanwhile, we continue to skew the assortments in our existing Lady Foot Locker fleet more toward a performance customer, and we expect the base business to continue stabilizing while we test our options.

We will also be launching the 602 website in September, to help extend that brand's reach beyond the currently limited store base.

We're also taking initial steps to update our Footaction banner.

That customer is very important to us.

We're well along with the design of a new Footaction prototype store.

When that work is finished, and we have selected an appropriate location for the first store, we'll be sure to let you know.

At the same time, we are testing more of the Adidas Collective shops in Footaction, and have opened the first test shops in Houston earlier this year.

We remain on track with our overall capital expenditure program of $220 million this year, and we intend to stick close to the original construction and remodel plans for each of our banners over the balance of the year.

We will continue to closely monitor remodels and new store performance, as we begin to develop our plans for next year.

Lauren mentioned the Runners Point acquisition, and her German is far better than mine.

I would also like to echo her comment that so far so good.

I would also like to take this opportunity to welcome the Runners Point team to the Foot Locker, Inc.

family.

The business in Germany is doing well, and we currently believe RPG will continue to provide some accretion over the second half of 2013.

It is still too early to comment on a specific banner integration or customer segmentation plans, but we remain very excited about the potential that exists build an even more compelling group of banners in Germany, and possibly other European markets.

Lauren also touched on the base Foot Locker Europe business, which has once again become a contributor to our comp sales gains, in addition to being the region where we are adding the most stores.

We are pleased to see improvement that is virtually across the board by country.

Europe in general continues to have its economic challenges, but we have shown that we can maintain and grow a profitable business there, even under very difficult economic conditions.

Let me now hand the ball off to Ken, so he can provide his perspective on the business.

Thanks, Dick, and good morning, everyone.

I want to start off by acknowledging that our results in the second quarter did not come in -- did come in below expectations, and our own in particular.

That said, I'm proud of what we accomplished this quarter.

We posted comp sales gains in every month, and in most countries.

We produced a gain in EPS of more than 20%, building on last year's record performance.

We completed a strategic acquisition that contributed to the bottom line, right off the bat, and we continue to execute a major remodel program.

Lauren gave you many of the high-level statistics, but let's look a little closer at the US business, particularly Foot Locker, Champs and Footaction, which is really where we missed expectations.

Basketball and running were both up in the quarter in the US, but at mid-single digits.

The gains in basketball were less robust than in recent quarters.

Retro Jordan releases are still tremendously popular with our customers, but we're going up against very strong numbers, so growth in the quarter was minimum.

We also continue to be a popular destination for LeBron, KD and Kobe product.

Running is definitely another bright spot for us, and performance product continues to generate solid gains, including Nike, ASICS, Brooks, Mizuno, and Adidas.

Lightweight is also doing well, particularly the Nike Free and Roshe Run, as well is the recently introduced Adi Boost.

On the downside, retro training is one footwear category that continues to [trend down] significantly.

It was off double digits.

And while we saw an increase of vulcanized product from Vans and Nike, we experienced a slowdown in Converse and seasonal products, such as sandals and slides.

We're encouraged that the fresher product across all of our categories are working well, and we're positioning our sales for the back half of the year to emphasize these programs and styles.

Overall, while we had several challenging footwear categories, we still managed to generate a solid comp gain.

On the apparel front, we held our own in an environment that was a bit tough.

The weather wasn't much of an ally for this quarter, but the real issue was a style shift away from some of the core athletic looks that we have had particularly successful with recently.

We did better with fashion shorts and tees than the more athletic styles.

Later in the quarter, we were also up against some very strong sales of Olympic product from a year ago, not only in Europe, but also in the US.

T-shirts are still definitely part of the kids summer, and in fact, year-round uniform.

Without revealing too much about what we see coming next in T-shirts and shorts styles, we do believe we're well-positioned to recognize style shifts, and make reasonably quick adjustments to our assortments.

Apparel sales and margin during the quarter were nearly flat for the Company as a whole.

It was a decent result under the circumstances, but it was not as good as it has been, or we expected.

We continue to believe in our ability to navigate these fashion shifts more quickly than the next guy, as we build our buying and allocation capabilities, and remodel our stores to showcase our apparel assortments more effectively.

We still have the opportunity to increase our apparel penetration closer to 30%, with margins above footwear.

We may not have scored a touchdown this quarter, but we didn't exactly fumble the ball either.

I'd also like to touch on our direct-to-customer business, which continues to be a very strong growth engine for our Company.

We aim to deliver a premium personalized customer experience at all consumer touch points, by investing wisely in those features that matter most to our customers.

We have invested in a variety of ways to offer our inventory, in order to better serve our customers.

We've long had a stock locator process that allows product to be shipped to the customer from another store or warehouse, if it isn't available in the store they happen to be in.

Now we'll have buy online, reserve in store; buy online, ship from store; buy online, pay in store; and quite a few other variations.

We are continually improving the customer website experience online, but certainly also in mobile, where our sales are experiencing rapid fire growth.

We have enhanced the layouts, navigation and ease-of-use of our sites.

We keep augmenting the user experience with rich content such as athlete interviews and endorsements, and utilized social media extensively to connect with our customers.

In fact, we have a very large and growing number of friends on Facebook, followers on Twitter, as well as the newer social media outlets, such as Instagram.

We also partner with our vendors to extend the product SKUs beyond what can be shown in the stores, such as large sizes and more colors, as well as additional sports categories.

As Dick mentioned, we'll be launching a commercial 602 website in September, which we expect will help build a much greater awareness of that brand.

And finally, we're excited about the online capabilities of Runners Point Group's Tredex subsidiary.

Tredex is already growing rapidly, and we see potential for it to give our own fledgling online business in Europe a real boost.

Overall, we're optimistic that our direct-to-customer business continue to lead our growth in the coming quarters, and indeed the years ahead.

With that, let me just sum up by saying again, sales in the second quarter were more challenging than we planned for, especially in the US.

Despite this headwind, we produced our best ever second-quarter profit and sales results, demonstrating that the ongoing execution of our strategic priorities continues to deliver solid financial and operational results for our shareholders.

We remain confident that we can achieve a mid-single digit comp sales increase and double digit profit increase for fiscal 2013 as we build momentum in our performance over the long-term.

For the first six months of the year, we have run at a 3.5% comp sales gain, and we're planning for sales to run at approximately the same pace over the rest of 2013.

Month to date in August, our business is in fact performing at a low- mid-single digit pace.

Given that expectation, I'd say there are no major updates to the back half of the year that we need to give, is that right, Lauren?

Yes, Ken, you're right.

Our original guidance remains intact, with the caveat that we expect sales to be in the low end of the mid-single digit range.

We can still lever fixed expenses at that level, although I would remind everyone that the 53rd week shift particularly impacts the third quarter, when we lose a back-to-school week in August and pick up a relatively low volume week in October.

That shift is worth approximately $40 million in sales, and makes leverage challenging.

Remember that on a GAAP basis, we had a $0.06 benefit from a one-time Canadian tax adjustment in the third quarter last year.

We currently expect a new Canadian tax adjustment to add about $0.02 a share to our results in the third quarter this year.

Other than that adjustment, which we will again treat as a non-GAAP item, a fair outlook for the rest of 2013 remains consistent with our previous guidance.

Thanks, Lauren.

We've now reached our 14th consecutive quarter of meaningful sales and profit growth, and I'd like to thank all of our associates for this strong performance.

Our track record of steady improvement is the consequence of effectively executing the key initiatives of the strategic plan that we first laid out, more than three years ago, and which we continue to refine as we identify new and exciting opportunities to increase shareholder value.

We believe that over the next couple of years we'll have a new allocation system, more newly remodeled stores, even stronger apparel assortments, a stronger women's business, a stronger European business with Runners Point contributing for a full 12 months next year, a bigger team sales and service business in Eastbay, and we'll be harvesting the fruit from our digital and other system investments.

These and other initiatives in many cases span multiple years, and may not necessarily provide a big lift in the next quarter or two.

But we have our vision, our strategy and our core values, which we believe will continue to produce improved results that build toward our long-term financial and operational goals.

Thank you, now let's go ahead and get to your questions focusing on Foot Locker and our future plans.

Before we do that, let me just say that we have a lot of callers in the queue, and we would like to give everyone a turn.

Please limit your questions, preferably to one.

If you have a follow-up or another question that doesn't get asked by someone else, please rejoin the queue.

Thanks.

Operator, let's open it up to questions now.

(Operator Instructions)

Kate McShane, Citi.

Ken, I was wondering if you could give a little bit more detail on the increased costs which are passing onto you, which weigh on gross margins a bit.

I wonder why this is happening now, especially in light of what we've done through the last couple of years with raw material costs?

And, what percentage of your product is being impacted?

We saw larger cost increases a year ago, but they continue and will continue to see cost increases, not just because of materials, but because of labor cost and other costs that they are seeing, fuel cost go up.

The cost, we work with the vendors to try to manage the costs to make sure they are focused on products that can accept it, but that said, some of the shoes that have been in the line a while, costs have gone up, they have made adjustments, those are more difficult to pass on.

Newer product with changes, we've seen higher costs on some of them, but, since the customer doesn't have a reference point, we were able to pass those on more readily.

But there have been cost increases and will continue to be cost increases, and they've had an effect on the IMU, it's not a big effect, but an effect.

30 basis points

And, can I just follow up?

Do you expect that to continue for the next couple of quarters or longer?

And at the same level of impact that you saw in Q2?

We probably will live with cost increases for the rest of our lives, but that said, I think we're getting very smart about how we pass them on, and once the price, once we get them and we are able to raise the price of the product, it normalizes the IMU.

And it's one of the dynamics we deal with, and this is why we're so focused on initiatives that we have that will improve merchandise margins for us.

So, the allocation system that we're investing in, helps us get the right product to the right place at the right time, and that means less markdowns.

So, that's how we deal with the dynamic.

Okay, thanks, Kate.

Robbie Ohmes, Bank of America

Ken, could you give us a little more color on the month to date comps, in terms of, is it the same mix that you saw in the second quarter?

Meaning where Europe is comping very strong but US is running negative?

And as you maintain that low- mid-single digit comp guidance, what is different or not different from what you saw in the second quarter that could make comps in the US be the same or worse or better?

Maybe just give us some help on how you now see the fall and holiday playing out for the Foot Locker and Champs business in the US?

We see the US business as improving and the business for back-to-school is off to a reasonable start.

We feel good about it, there's a lot of new product that's helping to drive that, you've got Springblade from Adi, you've got Free Fly from Nike, and so we're seeing those elements do well.

We talked about the growth of Vulcanized and how that's doing well, and that's having a positive impact on our US business, and it's moved to the positive category.

We still see good business internationally and good business online.

We also, in the apparel, are seeing some promising trends with fleece, but it's a little early to declare victory, but fleece has started off nicely.

So we feel very good about the fall with the new product that we've got and the line-up of launches.

So just to clarify, for the back half, in that low- mid-single digit guidance, should we expect little better comp out of the US than what you saw in the second quarter, and maybe not quite as impressive a comp out of Europe?

Is that how you are getting to that guidance?

I think we would expect US to continue what Ken has described.

I would see Europe moving off of its trend.

So, the US should get a little better, and hopefully Europe will continue where it is.

Got it, thanks very much.

Paul Trussell, Deutsche Bank.

Could you talk a little bit more about your expenses management in the second quarter?

It was impressive, and if you can just help us think about the combination of you all managing your variable expenses versus some of the remodel cost coming through the addition of RPG.

If you could just break down some of those different moving items?

Yes, so, as we described, we have thought going in it would be mid-single digit comp and when we saw early on that it wasn't meeting that expectation, we react to that and we look to the levers that we can control.

We're very focused, just as we're focused on sales per square foot we're focused on sales per hour, and so we make adjustments in the hours reflective of sales trend.

So, that was certainly an area of opportunity.

We also -- that we seized.

And we look at other variables, one of those being marketing.

We were able to trim back some of that, that we felt would be less productive in the environment.

So, those are the things that you control.

You've got other variables that link directly with the sales like banking, supplies, et cetera.

So we have a very strong team of expense managers that are into the details, and constantly working on opportunities to improve expense productivity, and they serve those ideas up to our ops team, and it's a collective effort to go after those that we think we can trim and not hurt the business.

One of the things that I think is important to see, and some question we get asked many times on the call is, what can we lever or where can we lever sales and we say we can lever at the low-single digit positive comps, and I think we've demonstrated that clearly this past quarter.

And with the remodels, I think you've already maybe completed 150-plus or so remodels.

I mean, looking back, what has been the impact to the comp in the first half of the year?

I know you spoke about a drag coming from the Champs stores being closed two to three weeks for that remodel.

Could you quantify the total impact from the remodels, and how should we think about that in the second half versus the first half?

We said that the remodel stores were exceeding the sales of the Company, and they were meeting our expectations, and doing well.

That said, 150 stores isn't going to move the ship very much, and so that's why we're moving to get more remodels done, and as we do that, they will have more of an impact on the overall Company

Thank you.

Sam Poser, Sterne Agee

I have a few questions.

Number one, have you seen a later shift in the back-to-school time period?

There's been a lot of talk about that, and it sounds like business hasn't -- is happening in a much tighter window and it's maybe a little later than it has been?

Yes.

Thank you.

Number two, the accretion for RPG that you've built into the guidance, Lauren, can you give us that?

Yes, we said for Q2, it was less than a $0.01 and modest accretion in the back half.

If it's less than $0.01 for a month, and you're going to be open into the busiest time of the year, is that like a $0.05 to $0.06 kind of thing?

No there's seasonality to the business, you can't take one month and extrapolate it to six in the back half.

There's also some expenses as we do the integration that will be included in it, too.

Okay thanks, and then lastly, Ken, your plans.

There's been a lot of rumbling about are you staying or going, and so on and so forth, love for you to comment on that?

I wouldn't.

I'm very happy here.

I like Foot Locker, and it's a great Company with great people and a great future.

That's me personally, and it's the policy of our Company not to comment on any rumors or things that are outside.

Thank you, and best of luck.

Camilo Lyon, Canaccord.

Ken or Lauren, I was hoping you could talk a little bit more about the apparel gross margin opportunity?

I think this is something we've all been waiting to see reaccelerate, or accelerate above where it currently is.

But it seems like there's just a little traction that's being made.

Is there a structural problem to how you're positioning apparel?

Can you actually really accelerate the margin profile of this segment relative to footwear?

Yes, I think we can.

The challenge that we've had, quite frankly, is not that the apparel margins haven't gone up, they've gone up significantly over the last several years.

The challenge we've had is that the shoe margins have gone up at the same time.

And, which is a good thing.

That said, probably the biggest challenge that we have in growing our apparel gross margins, one is making sure that we get our assortments right and that takes time, but I think we've made a lot of progress there.

The second is growing our private label business.

We transitioned the private label business, we're putting together the right team and getting the right products, and that's probably the biggest opportunity, and that's something that we are still making progress on.

But where we have a significant apparel business, such as Europe, we've made a lot of progress and do well with our private label.

We still have some work to do in the States.

Okay.

And thank you for that, and then on -- just a clarification on the August credit to date.

Lauren, you said low end of the mid-single digit, is that right?

Yes.

Okay, and then how many releases, how many releases were in that period versus last year?

Is it a comparable number of releases, more or less?

Yes.

More or less, yes.

Okay, thanks and very -- good luck.

Mitch Kummetz, Robert Baird.

Couple questions.

First I want to get little more color on the comp guidance for the back half of the year.

It sounds like you're looking for similar comp as the first half, you're off to a solid start in August, but Q4 is an easier compare then Q3.

Do you expect the comp to be pretty consistent across the quarters?

Do you expect more comp in the fourth quarter than the third quarter?

How are you looking at that?

Fairly consistent.

Okay.

And then on the basketball, you mentioned that you've seen some sequential deceleration there from the last quarter.

It did sound like that was a bit of surprise to you and did contribute to comp coming in a little bit more below plan.

Can you just elaborate on that?

Are you -- is it just a tough compare to last year?

Are you seeing any shift in trend there, is there anything from a product standpoint that didn't perform as well as last quarter?

Mitch, it's pretty comparable, actually.

We've seen launch comparability, we've seen price point comparability, so I think we're up against a tough compare to last year.

We continue to be the leader in basketball and continue to protect that space.

So, we've got a lot of confidence in the product pipeline that's [feeding] basketball right now

Of I could squeeze in one more.

Just in terms of the remodels, obviously you did a lot in the quarter, 89 in the quarter.

How many are you doing in Q3?

And at what point do you start to see a net benefit from that, where the lift in comp from the stores that you have remodeled overshadows the stores that are closed as you continue to remodel?

I think, we have got to get beyond 10% of the chain.

So, it's when we have a reasonable number and so that will probably -- we really won't see the full benefit or start to see benefit until sometime next year.

We'll accelerate our remodels after the back-to-school season so, we've got a healthy third quarter.

120 that we're forecasting for third quarter.

Got it.

Okay, thanks, good luck

Chris Svezia, Susquehanna.

Thank you, and good morning, congratulations.

I have a question on Europe.

Nice improvement you're seeing there.

I'm just curious a little bit more color, either by specific country, maybe some color from a product perspective, and I guess more importantly, margins in Europe seem to be certainly below that of the US, what does it take to get the margin profile from an EBIT perspective to improve in Europe?

Just your thoughts about that?

We had gains in 18 of the 19 countries.

We feel strong about the big five, big six countries.

From a product perspective, the team there has really taken a strong position in basketball.

Running continues to be the key silhouette, and the apparel business continues to be bigger and stronger than in the US.

So, the wins in Europe have been pretty much across the board, and we see strength in that business continuing.

On the margin front, all of the productivity things that we are working on in the US, we work on in Europe as well.

And as Lauren said that the margins are not as robust as they have been, they still are well above the Company average in terms of margin, so we look at that being a plus.

Okay, but from an EBIT -- from an operating profit -- operating margin profit perspective, is it -- I mean, it's still below the US business, correct?

I guess to get it comparable or closer to where the US is, it's -- what's the primary driver?

Does it really come down to comp growth is what you need?

Comp growth we can lever, and we've also got a Digital business that's in its infancy there, and as that grows, that will help as well.

Okay.

Real quickly, just on the apparel, Ken, you just mentioned the shifting going on, more of a fashion business.

How quickly -- have you made a change as you go into the back half, to address that for more -- slightly more technical part or more of the fashion end of the business?

Well, the thing that will help us going from the front half to the back half is more -- it is different apparel.

Fleece will take over and that will help us, so we'll be -- one of the things we saw is the growth in fashion and shorts in the spring, and in the fall, while there's still some sold, the more important thing is fleece.

And so, we'll be well-positioned by the time that becomes important.

Okay, all the best, thank you.

John Zolidis, Buckingham Research.

Was wondering if you could talk about why the business slowed?

I guess last year, we had double-digit comps the first quarter was plus 5, second quarter plus 2, but what I'm missing is what's going on?

Why is the consumer apparently less interested in buying footwear, athletic footwear at the same rate that they were two and three quarters ago?

You are expressing confidence that you can maintain a mid-single digit comp, or at least the lower end of mid single digit comp in the back half.

Why do you think that we aren't going to see a continuation of a decelerating interest in these product categories?

Well, it's two different questions, the first question is, I don't -- I might have missed something this past week, but it appears to me that we aren't the only ones that are having some slowdown of traffic.

And, our numbers, while not great, are better than a lot of the other people in not just the young person space, but also just overall apparel and footwear retail.

I think it's the consumer that slowed down, overall.

We still are, not great, but we're better than most.

With regard to the future and looking at that, one of the things we're seeing is new product and new ideas have really been the spark to the business.

And we see a lot of new product and ideas, as I mentioned earlier.

You got new product like Free Fly, Boost, Springblade, new product coming out from people like Under Armour.

We've got new additions to the product, we've got some great new Vans product that we put into our assortment.

So in footwear, there's a lot going on there.

And as we continue to develop other new product with the vendors, and the releases we have, we feel pretty good about that.

But, while we're not happy with where we are, looking at what other people, both in the junior and young men segment and in the chain stores, I don't think we were the only ones that saw a slowdown from the consumer.

I mean you may have --

Okay --

That's what I saw

I think you're accurate to point that out.

So some of the factors that contributed to that, I suppose we can talk about whether your business hasn't been incredibly weather sensitive in the past but looking --

We don't use weather, weather didn't help us, it doesn't -- it shifts.

What we've got to look at is, the customer is being more choosy, and therefore we have to have newness.

The good thing we're in a business where newness is important.

Is the customer more challenged financially because of all the different reasons, youth unemployment, lower -- people on one of the calls were talking about lower summer jobs, the income tax or the FICA tax change, gas prices.

I sell sneakers.

I am not an economist.

I track and watch trends and see what's happening to the customer and I see where they're going.

But somebody much, much smarter than I am has got to figure out why the whole economy is having trouble, that's well beyond my pay grade.

Thanks for the answer, and good luck in the back half.

Bernard Sosnick, Gilford Securities.

With regard to Footaction, that business is a little more sensitive to fashion.

Could you give us a little bit of insight as to why that one was weaker than the others?

Where you are in terms of formulating the business plan, as you go about a test for the concept?

Well I think, Bernie, one of the key categories that drives Footaction is retro training, and that's one of the categories that Ken and Lauren call it as being a little weaker.

So it probably had a bigger effect on Footaction where there is not really much of a running business.

From our key categories, one of them was the classics and retro training took a hit in the quarter.

And it couldn't be offset by a positive in running.

As we look at our prototype, obviously there is a little bit more lifestyle fashion impact in Footaction.

So the prototype will definitely be apparel-led, still, we'll sell an awful lot of shoes in feature footwear but the ability to help our core consumer there get dressed from the toe to the head and really be ready when he goes out of the store, we sell Levi's in Footaction, for example, it's the only chain that we've got them in.

We do that as an accommodation for customer, and we do it quite well.

So, those things will continue to be featured as we roll out the Footaction prototype.

And new ideas, we've got trucks that we have -- new vendors that we constantly look and test and they're position in some areas such as some of the vulcanized shoes, more styles of Roshe, help position them differently than the rest of the chain.

On another subject, you mentioned the influence of the Olympics on apparel sales, in late July.

Could you give us a feel for perhaps what that aspect of the business -- had an effect on sales in early August?

It's over now, and it was a modest effect.

Okay, so we really shouldn't take that into account and assume that sales would've been much better without it?

They would have been better, but not much better.

Thank you very much.

Seth Sigman, Credit Suisse.

To go back to the Europe gross margins.

You mentioned that they stabilized, but still down from the peak, and I think you alluded to some mix changes there.

Can you maybe just elaborate on that change, and I think you're also lapping some markdown activity from last year.

How do you think about recovering some of that?

I mean is that an opportunity as we look out over the next couple quarters?

Thanks.

They continue to work to be a full price business, just the way we are in the US.

And there's always vendor mix changes that go on and category mix changes that go on.

So I think, as Ken said, the gross margin still is stronger than the US, it's just not as much of a gap between the US and European margin as it's been in the past.

So, we continue to -- second quarter in Europe is a big sale quarter obviously with a lot of legislative sale periods, so we manage our mark downs.

We look at our IMU and we look at our vendor and category mix to try to balance the gross margin, as Lauren talked about earlier.

Okay, thank you.

Matthew McClintock, Barclays.

I was wondering if we could focus on women's and specifically the product itself?

As you look forward from your vantage point, what gets you most excited about some of the product that's coming down the pipeline?

What improvements should we look for this fall relative to last year, and could you focus both on the footwear side, but also I'd love to hear your thoughts on the apparel side, because we've been hearing some optimistic comments regarding merchandise there?

Thank you.

Yes, I think the thing that actually is most exciting is the apparel business in the women's, that's where we have the biggest opportunity.

We have sold shoes, a lot of shoes in the past, but apparel is what really is the driver and what's really been -- what really provides us the biggest opportunity.

We have been learning and going through that over the past eight, nine months.

We now have a much better understanding of what elements sell better, how to present it, what to go -- what goes with what, how fast do you change it out for fashion, what percentage should be fashion.

We've got some tremendous vendors, and they are all focused on it.

Nike, Under Armour, Adi, ASICS, Reebok, New Balance are all focusing on this as a part of their business, and so they're providing some great new product, and they're learning with us, and I think that will be a big plus for us.

We're seeing it both in 602, where we've got a bigger space to show it, but also in the reskinned Lady Foot Lockers which have, as Dick said, performed well above the rest of the chain.

And in shoes, the performance shoes and the good news is there's a lot going on in performance shoes with lightweight which is -- does very well in women's.

They don't need quite as much is support as I do in their shoes but, we're seeing vendors like -- Nike has got great shoes, Adi, New Balance, ASICS is a real strong performance there because of their emphasis in performance, Mizuno and Brooks, all of which, all of the performance people are doing well, and they all have a lot of new product, and so the new product with better understanding of what works when, really does well for us.

Thank you for that.

Michael Binetti, UBS.

For those of us who watch the industry, we've seen some pretty strong numbers in basketball so far in August, and seeing that such a big part of your business.

And putting it in reference to the low to mid single digit range for the month so far, is there a category or a geography that you're seeing an unexpected drag in bringing the total down in the month, you could comment on?

Yes, it continues to be the same places that we've had a little bit of weakness.

The retro cross-training and seasonal things, it's still the end of summer so some of those seasonal products continue to drag a bit, and our retro training number continues to drag a bit specifically.

And the classics.

And classics, right.

Classics.

Okay.

And then just because we've heard a little bit about this in recent months here, you mentioned the IMU pressures and perhaps some pricing resistance.

We've seen some media coverage that Nike will be taking some meaningful price increases in basketball as we look to calendar 2014.

At it looks like that will be on the retail price.

Is that, considering some of the IMU comments made today, is that a source of concern heading into 2014?

Actually from our perspective, it's not.

We have not seen a lot of customer price resistance.

What's happened is the costs have gone up in some cases, the prices haven't gone up as much, and so as we make adjustments in the prices, particularly on some of the in-line shoes, it relieves some of the pressure on IMU.

Okay, and if I could just make one last one, I saw the share repurchases step up.

And I know you probably wanted to wait to get past the Runners Point acquisition to get back into the market, but can you maybe just update us on how you're thinking about where the repurchases, considering where the stock is now, as you're freed after the acquisition, as we get to the back half of the year with the strong cash flows you do have?

Yes, as you pointed out, first quarter it was not possible for us to be in the market, because of the Runners Point acquisition.

So, --

We have our overall program in place, we have a history of an active program, and you know the value of the overall program.

Okay, thanks a lot.

Okay, is that it?

We've got three more.

We'll take one more call

Eric Tracy, Janney Capital.

I guess -- Ken, if you just want to kind of get at the guide as it refers to the comp, and what you're seeing from a category perspective?

You talked about basketball still being strong, but it does appear that the running business has the most new product introductions, with Springblade boost, Free Fly, just maybe talk to the ability to flex the assortment, whether it's rationalizing and reducing the casual exposure and stepping up on running and/or basketball?

Could you talk about the ability to do that, and how quickly that can be done?

I think, Eric, our merchants to a good job of flexing between categories.

And the basketball product continues to be strong, there is a lot of innovation in running, as you mentioned, so, as we move forward, we continue to rationalize across the other categories.

There will be some decrease in the classic space, seasonal products not as relevant in the back half so we'll adjust accordingly.

If I could just -- go ahead --

We want to try to get maybe one or two more calls in.

Okay.

Taposh Bari, Goldman Sachs.

Ken, I just wanted to ask a question on kind of higher-level.

Foot Locker's place in the world of athletic footwear distribution, I know the vendors are obviously focused on product segmentation, but the reality is that their direct operations continue to expand.

I think a lot of nonathletic retailers continue to get better access to athletic products, department stores have called out athletic footwear as a strong category and their calls this past earnings season.

I just want to get your thoughts on Foot Locker's competitive positioning today?

I think we are positioned as the premier place for sneakers, and what you look at where we compete, we have very almost nothing less than $50 and most of ours is in that $80-plus range.

We also are the place where newness and fashion are the strongest, as well as maintaining a strong position in performance.

So, you put that together, we have the best assortment, and the vendors recognize that.

If you go into a vendor store in the mall and look at their assortment and you come into our store, you will usually find a better assortment of their shoes because we have both the new, we have the classics, we have the performance, and all the elements than they will have a their own store, and the customer recognizes that, and as a result, we're able to get a lot of traffic.

We spent a fair bit of time this weekend in a few of our stores and we saw the customers in our stores buying, we saw that same customer or some of those same customers in some of the other outlets, they looked, but they came to us to buy, because we are the place that has the assortment and that's -- sneakers central for us is what separates us from the competition.

The second part is that we have great service, and you look at the service capability in a number of these places, it's not there, and when somebody spending $100-plus for a shoe, they want to make sure they understand why they're spending that, they want to make sure that it fits, they want to make sure they've got the capability to bring it back, and make sure that it's a great shoe.

Some other place, when you line up and just have standing there a $70 shoe, and a $50 shoe, from experience, where I've done in my own life in the past, they're going to buy the $50.

They don't know why they should spend the extra $20 or $30.

We help them understand the benefits of that.

Okay, thank you, I'll pass along.

Okay, we'll take one more call

Omar Saad, ISI Group.

I thought you did a nice job this quarter given the deceleration everybody's seeing.

So, I just wanted to ask about, just follow up on more time on the cost pressure issues that are impacting the margins little bit?

When you talk about the IMU pressure in certain parts of the business, where there's maybe less marquee product, a little bit less innovation, is it that your -- the cost increases are -- that you're seeing, you're not being able to pass it through in the initial pricing, or is it a situation where you're raising the retail pricing, but then you end up having to mark it down because it's not that marquee innovative product?

Are you working with the vendors to kind of come up with the right balance of with that initial pricing will be relative to the --

We're working with the vendors -- we're working with the vendors to get the right pricing, but in some cases on some of the in-line shoes, the cost may go up slightly.

And we're talking -- we're not talking a huge shift.

So, the costs may go up slightly and the retail may not go up, or in some cases the retail goes up slightly, the cost goes up some, but the difference of the retail going up and the costs did not set the cost increase.

So, that said, we've got some of the mix issues between vendors and countries and things like that.

But what I think Lauren did a nice job of explaining, that our focus is really on the things that we can control, and now we can't necessarily control all the pricing, we work with vendors on it, but what we work on is the other elements, our cost elements, our markdowns and what we're doing there, the productivity, and that's why we get an improvement in overall profit margin, and that's our focus.

Got you, no that's very helpful.

Thanks, good luck.

All right, thanks for everybody's participation on today's call, and we look forward to having you join us on our next call, which we anticipate will be 9.00 AM on Friday November 22, following the release of our third-quarter and year-to-date earnings earlier that morning.

Thanks again and goodbye.

Thank you, ladies and gentlemen.

This concludes today's conference, and thank you for participating.

You may now disconnect.