Foot Locker Inc (FL) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Foot Locker's first-quarter financial results for 2015 conference call.

(Operator Instructions)

This conference call may contain forward-looking statements that reflect management's current views of the 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 more 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 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, Christine.

I'd like to welcome all of you to Foot Locker's Inc.'s first-quarter earnings conference call.

Driven be a strong comparable sales gain of 7.8%, this morning we reported first-quarter net income of $184 million, or $1.29 per share.

This net income result is an increase of 13% compared to last year's GAAP net income of $162 million and 12% higher than our non-GAAP result last year of $164 million.

The $1.29 earnings per share figure is 17% higher than the $1.10 per share we earned in the first quarter of 2014, with the higher percentage increase in EPS compared to the increase in net income attributable to the continued reduction of shares outstanding resulting from the execution of our share repurchase program.

The $1.29 earnings per share result also represents a 16% increase over our non-GAAP earnings of $1.11 in Q1 last year.

Lauren Peters, Executive Vice President and Chief Financial Officer, will open our prepared remarks this morning with a detailed review of our first-quarter financial results.

Dick Johnson, our President and Chief Executive Officer, will then provide additional product and operational insight into our first-quarter results and review the progress we are making on our recently updated strategic priorities.

As always, we look forward to answering your questions following our prepared remarks.

Lauren?

Thank you John, and good morning to you all.

2015 has started off on a very strong foot, with the first-quarter results representing another record financial performance.

In terms of nominal net income dollars, it was the most profitable quarter in our 100-plus years as a public company.

The 7.8% comparable sales gain that John mentioned translated into a 2.6% overall sales increase, factoring in the impact of significant weaker foreign currencies compared to a year ago.

On a constant currency basis, total sales increased 7.9%, with strength in all of our regions and channels.

Breaking out our comparable sales gains by segment, our stores were up 6.5%, while the direct-to-customer business lead our performance with an 18.5% sales increase.

Within the direct-to-customer segment, Eastbay generated a low single-digit increase while our domestic store banner dot-com businesses collectively increased sales almost 50%, for a two-year stacked increase of over 90%.

Clearly our investments in digital capabilities have been effective, as have our initiatives to create a customer experience that seamlessly incorporates all the ways they engage with us: desktop, mobile or in the store.

Overall, direct-to-customer sales increased to 12.3% of total sales from 11.3% a year ago.

Our international divisions produced the strongest sales results within our store segment.

Europe was up low double digits overall with double-digit sales increases in all of the major countries on a constant currency basis.

Our Foot Locker Asia-Pacific business, which operates in Australia and New Zealand, posted a comparable sales gain in the low teens; while Foot Locker Canada generated a gain in the high single digits.

We also had strong performance in the US, with the Foot Locker and Footaction banners both producing high single-digit gains.

Kids Foot Locker and Lady Foot Locker generated gains in the mid-single digits.

And that was the fourth consecutive positive sales result for our women's division.

Champs Sports posted a low single-digit comparable sales decline, with strength in footwear not quite enough to offset an ongoing decline in apparel sales.

While Dick will touch on some of the current product challenges at Champs, it remains a highly profitable chain with significant opportunities to get back to positive sales growth.

Turning families of business.

Footwear continued to be the leader in the first quarter, with a gain in the low double digits.

Apparel was close to flat overall, with some pluses and minuses by division and region, while sales of accessories were down high single digits challenged by changing trends in socks and hats.

By category, running sales increased in the mid-teens, with Foot Locker Europe posting the strongest gain.

Basketball was up low double digits overall, with growth even higher outside the US.

The casual category was mixed, with gains in boots and certain classics offset by declines in various vulcanized styles.

We noted on our previous call that February's comp gain was in the mid-single digits.

The shift of Easter this year to the beginning of April, two weeks earlier than last year, benefited March sales, which were up low double digits while April's comp gain was back to mid-single digits.

We were able to lever these strong sales to improve gross margin by 40 basis points to 35% of sales from 34.6% a year ago.

Our merchandise margin rate improved 20 basis points on a constant currency basis.

FX changes cost us 20 basis points, and leverage of our relatively fixed buying and occupancy costs gave us 40 basis points of improvement.

The improvement in merchandise margin was primarily the result of operating with low markdowns in both our stores and our digital business.

While our initial markup rate declined slightly again, the vendor and category mix issues we mentioned frequently in 2014 moderated substantially during the quarter.

Our SG&A expense rate improved 100 basis points to 18% of sales from 19% last year.

60 basis points of the improvement was the result of expense control and sales leverage, while the other 40 basis points was related to FX, as translating operating costs denominated in weaker foreign currencies actually led to a decline in reported SG&A dollars.

The investments we have made in the training of our associates, as well as the hiring and scheduling tools we have rolled out to almost all of our divisions around the world, continue to yield benefits by getting our most productive associates engaged with our customers during peak selling opportunities.

This enhanced productivity, as measured by across-the-board gains in sales per payroll hour, is an important component of our ability to lever SG&A expenses to the record low levels we saw in the first quarter.

At $35 million, depreciation expense was down slightly from last year's $36 million, due in part to FX which reduced this year's figure by $2 million.

We still expect depreciation to trend up over the course of 2015, reflecting the higher levels of capital investments we are making.

And it should come in at approximately $150 million for the year.

The rest of the income statement, primarily interest expense and income taxes, came in very close to our expectations going into the quarter.

Our inventory management continues to improve along with our sales and profit results.

At actual FX rates, inventory decreased 2.7% compared to our 2.6% sales increase.

On a constant currency basis, inventory increased 2.4% compared to our 7.9% currency-neutral total sales increase.

These results reflect the progress we are making on one of our least talked about long-term objectives, although it is one of my favorites: inventory turns exceeding 3 times.

While it is an internal measure, I can say we are making consistent progress improving inventory efficiency, pushing our turns towards this goal, especially in footwear.

We ended the quarter with $986 million of cash, a decrease of $21 million from the end of Q1 last year.

We continued to execute our share repurchase program, acquiring 2.3 million shares for approximately $129 million during the first quarter.

And we also paid an increased quarterly dividend of $0.25 per share.

Together the share repurchases and dividend amounted to $164 million of cash returned to our shareholders, almost 90% of our net income in the quarter.

We also invested approximately $58 million of capital into our business, including opening 37 new stores and remodeling or relocating 55 stores.

Many of these projects include a vendor shop-in-shop, such as a House of Hoops, Fly Zone or Puma Lab.

We closed 41 stores, with the largest number of closures continuing to be at Lady Foot Locker.

We ended the quarter with 3419 Company-owned stores.

Touching briefly on some of our operational metrics.

An increase in average unit retail was driven by the lower markdown rates I mentioned, as well as the ongoing trend of customers opting for more premium product.

For example, from a less expensive vulcanized shoe to a special print Roshe or a ZX Flux shoe.

While traffic and units sold were down a bit in the quarter, conversion ticked up as our product and marketing differentiation efforts ensured more customers came into our stores ready to shop and buy.

And our outstanding sales associates were ready equipped to serve them.

To sum up, we delivered results in line with or better than our guidance on just about every financial and operational metric, fueled by sales that exceeded plan.

And we were able to flow those incremental sales to the bottom line at a good rate.

Although in line with our expectations, the stronger dollar took away almost $100 million from our top line, which flowed down to a $0.05 hit to EPS in the quarter.

Overall, there were no real surprises in the quarter to create a need to adjust the annual guidance we gave you back in March.

To summarize that guidance again, we expect comparable sales gains to be in the mid-single digits with no significant deviations by quarter.

Gross margin to be flat to up slightly.

SG&A to be improve 50 to 60 basis points.

Depreciation to be approximately $150 million, and our effective tax rate to be about 36.5%.

That all should lead to double-digit EPS growth for the year.

The second quarter, being a relatively low sales volume quarter, will likely be the quarter most negatively impacted by the stronger dollar.

We've been planning a mid single-digit comp gain in the second quarter, and we're off to a very solid start with a double-digit month-to-date comparable sales gain.

That said, there are some launch ships coming up that will likely impact that month-to-date comp rate.

Let me now turn the call over to Dick to delve into more of the product details behind our strong first-quarter results, and more broadly review how we're doing executing our updated strategic priorities.

Thanks Lauren, and good morning.

I appreciate everyone taking the time to be with us this morning.

Let's start by looking at our core business, which we have defined as selling basketball, running, and casual footwear in our men's stores in the US, in other words, Foot Locker, Footaction and Champs Sports.

Lauren already mentioned the strong comparable sales gains at Locker and Footaction, where our merchant and marketing teams have done a great job creating clear swim lanes by differentiating the assortments in those banners.

Both have taken full advantage of the strong trends in lifestyle running footwear, including platforms such as the Roshe, Huarache, and Max Air from Nike, and ZX Flux from Adidas.

At the same time, they have also sharpened their focus on their core customer, with Foot Locker really taking advantage of the ongoing strength in signature basketball.

It is very encouraging that our customers are embracing new signature athletes such as Kyrie Irving with Nike, Stephen Curry with Under Armour, and Damian Lillard at Adidas, all while the established players, LeBron, KD and Kobe are posting sales gains in footwear also.

The Footaction banner is on many of those trends as well, but it also has an especially strong position in other lifestyle footwear silhouettes from Jordan, Nike, Timberland and Puma.

On the apparel side, Footaction is generating nice comparable sales gains by focusing on the lifestyle assortments of the established athletic brands while also working with smaller nontraditional vendors to bring a fresh and different fashion look to our customers.

We are beginning to roll out our remodeled Footaction store design with excellent results so far, as well as additional Jordan Flight 23 and Nike Kicks Lounge shop-in-shops inside our Footaction stores.

Champs Sports has participated in many of the strong footwear trends I just mentioned, as well as the Adidas Super Star business that also performed well around the globe in the first quarter.

However, this banner does have a larger exposure to training and performance running styles, which has limited its footwear gain.

The relative weakness of Champs continued to be apparel.

Fleece bottoms sold well, but it was not enough to offset the exposure to licensed apparel and losses in shorts and performance socks.

The team at Champs continues to work with our vendor partners to strengthen assortments in both footwear and apparel as we cycle against some of the programs that are down-trending.

Turning to our growth pillars, our kids business turned in another solid quarter.

Lauren mentioned that the Kids Foot Locker division was up mid single digits, although I'll mention that the other banners that sell children's footwear, our business was up double digits.

While still posting a strong result, our kids division did suffer a few times in Q1 with delivery issues related to the West Coast port delays.

Looking ahead, we believe deliveries are in good shape, and over the rest of the year we will be accelerating the roll-out of one of our successful partnerships with Nike, the Fly Zone at Kids Foot Locker.

We'll also continue to add KFL Stores to our fleet, both in the US and internationally.

We had an outstanding result in Europe, another of our growth pillars, with the overall business up low double digits in the quarter.

Basketball, driven by Jordan, was up double-digits while running was up in the high teens, with Adidas ZX Flux and Nike Modern Comfort Styles leading the way.

Our court business was also very strong, led by classics such as the Adidas Superstar and Stan Smith's.

Among the many encouraging developments was a modest comparable sales gain in apparel, reversing a negative trend over the last several quarters.

Gains in Nike tee and tech fleece more than offset ongoing declines in other older styles and licensed apparel.

We believe we have cycled through the most challenging parts of our European apparel business, and as a result that category can again contribute to productivity gains there.

Another encouraging development is the broad-based nature of our gains in the quarter.

As Lauren mentioned, all of our big countries produced double-digit comparable sales gains, including Spain and Italy which had lagged a bit last year as their economies struggled to gain traction.

While it is possible that macroeconomic headwinds may still occur from time to time, our business in Europe has remained profitable throughout, and we intend to continue building out our Foot Locker and Kids Foot Locker presence in the European countries with the most opportunity for store growth.

At the same time, we are adjusting the models for our Runners Point and Sidestep banners to create the necessary differentiation from the Foot Locker banner and maximize our potential, both in Germany and in other markets.

Just last month we opened the newly designed and assorted Runners Point store in Cologne that has attracted great attention from the local running community.

It's a model we will test in other markets as we continue to prepare that banner for future expansion.

I've touched on our apparel results already.

So let me turn to the next pillar of growth for us, our digital business, which had another outstanding quarter.

Lauren noted the top-line growth of our US store banners dot-com and Eastbay.

The team was able to deliver healthy margins to go along with those strong sales.

The primary product drivers of the excellent sales growth of the store banner dot-com sites were similar to the store business that I have described.

In its specialized assortments for the elite athlete Eastbay also continues to perform exceptionally well, with gains in baseball, football, soccer, training, including our strong position in weightlifting shoes and our team sales.

Although we've had our stock locator program in place for quite some time, the benefits are accelerating from the investments we have made in opening our inventory up across all of our channels.

Our buy-online ship-from-store capabilities are becoming an increasingly important incremental driver of sales and margin for our business.

Turning to our European digital businesses, growth rates are high, with plenty of opportunity for increased penetration relative to the store business.

Margins are up significantly, due in part to a reduced emphasis on off-priced selling -- off priced clearance merchandise, though as part of the digital business we acquired with Runners Point.

We have brought the management of the digital business in Europe under one combined team and are moving those sites to a common platform.

As a result, we are able to draw on best practices not only from Foot Locker and Runners Point in Europe, but also from our global center of digital excellence in Wausau, Wisconsin.

Finally, we recently launched our digital business for Foot Locker Canada, and that business is off to a very encouraging start.

Turning now to our women's business.

We had another solid comparable sales gain at 602 Lady Foot Locker, marking four consecutive quarters of comp gains.

Footwear was up mid single-digits, led by many of the lifestyle running styles from Nike, Adidas that drove the men's business.

Asics also remains a very important brand to this customer.

Apparel, however, was the real bright spot with a low double-digit gain.

Fitness pants, capris and tops both Nike and Adidas powered most of the volume, but Under Armour and Reebok are generating gains as well off smaller bases.

The vast majority of the chain still consists of Lady Foot Locker doors, and we are pleased with the progress we are making there with our updated assortments, with as much emphasis as possible on key apparel elements while still driving a healthy footwear business.

Meanwhile, we now have twenty 602 stores open.

We continue to elevate the assortments in our 602 stores, with not only the best products from the major athletic brands but also key items from brands such as Alala and Lorna Jane.

We're continuing the exciting work of building a brand, including weaving with our 602.com website which enables a national outreach while we build up our store network by market.

We are also developing various community outreach and grassroots marketing efforts as we work diligently to have her discover the 602 brand and spread the word about it to all of her friends.

Finally, the women's business in our other banners is also doing very well, with double-digit footwear gains in Foot Locker in the US, Europe and Asia-Pacific.

Let me wrap up our prepared remarks by thanking the entire team at Foot Locker, Incorporated for the tremendous achievement of producing the most profitable quarter in the 100-plus years of our Company.

We have now produced 21 consecutive quarters of comparable sales gains and profit increases.

This first quarter was the fourth consecutive all-time record of first-quarter earnings, and we have achieved broad-based diversified gains around the Company, with strong performances across regions, channels, banners and categories.

It took each person in the Company working together with passion, energy, skill and the true love of the game to deliver these outstanding results.

And I am very proud to be a part of this high performing team.

Thank you.

Now we'll be happy to take your questions.

Go ahead, Christine.

(Operator Instructions)

Our first question comes from Paul Trussell from Deutsche Bank.

Please go ahead.

Hey, good morning.

Very good results overall.

I'm actually going to nitpick a bit here, then.

First, average price points certainly continue to assist.

What's the outlook for the go-forward period on ASP, and what can you do to overcome some of the weak overall mall traffic to boost that metric up?

Second what's the comp from the stores that have been remodeled versus the rest of the base?

Champ's performance suggests there may not be as much of a lift being provided, given the apparel weakness, which I would also like for you to address, if there's any assortment changes or any initiatives on that front that we should look forward to?

Sure, Paul.

Thanks.

From an ASP perspective, we continue to see the ASP moving up slightly.

Some of it's a shift out of lower priced vulcanized product maybe into some of the modern comfort running styles.

There continues to be high price point basketball offerings.

The ASPs, in transaction values, I think, are going to continue to increase a little bit.

And I think the customer is certainly willing to pay when they see the exciting product that our vendors are bringing to bear in the marketplace.

I think there will continue to be some growth there.

The traffic comment, I think as long as we can continue to bring exciting product into our stores, our customer chooses the avenue that they're going to shop on any given day.

When you combine our digital business and our in-store business, we want to be accessible to the consumer however they choose to shop and interact with our banners on any given day.

That's going to continue to ebb and flow, and traffic is different around the globe.

I think that there's been some reduced traffic in key tourist stores in the US.

At the same time, traffic has looked solid in Europe as some of those visitors may be staying home and shopping.

I think, again because of the diversification we've got in geography, traffic is mixed around the globe.

The comps in the remodeled stores, we haven't separated out our comps from the remodels and not.

I can tell you that across all banners, the comps in our remodels are outperforming the balance of chain and the remodels are meeting all of our hurdle levels.

So we're continuing that program across all the banners.

And we've got a little bit of work going on in every banner, with right now the emphasis being on the Foot Action here in the US.

But Foot Locker continues to remodel and add vendor shops.

Champs continues to remodel as well.

The program is going to continue.

Then clearly on the apparel assortment, we've seen the turn in Europe.

I think when you look at Champs, probably the biggest change in the assortment and the steps that we're going to take, they're changing their mix of licensed product.

They're the banner that had the most exposure to license into jersey specifically.

So while they're continue to have a footprint in license, it will not jersey-based.

It will be a little bit different mix of product that's relevant to the local market.

Again, we're confident that the team at Champs is working hard on the apparel piece.

We do believe that the remodels are helping on the apparel presentation and the Tyrone concept.

The guys are working hard, and we expect it to turn.

I appreciate that color, Dick.

Thank you.

One quick one for Lauren.

Just merchandise margins were up this quarter, which was nice to see.

But with the guidance for gross margin I believe still just flat to up slightly, my assumption is that there's no expected gains in merch margins going forward.

Why is that?

And also how should we think about the embedded assumption for occupancy leverage on the mid single-digit comp?

Yes.

So the dynamic that we have in the balance of the year, similar to what we had in the first quarter where we've got some headwinds because of weaker foreign currency that shows up with a challenge to the gross margin, as we saw on the first quarter with a 7.8% comp, those kind of comps helps the leverage.

So that's part of the offset there.

We were successful in the first quarter in lowering our markdown rate.

And so that's what led to the 20 basis point improvement that we saw in merchandise margins.

Those are the dynamics.

And as we look to the rest of the quarter, we've got this FX thing to ride out.

Understood.

Thank you, and congratulations.

Thanks Paul.

Thank you.

Our next question comes from Jonathan Komp from RW Baird.

Please go ahead.

Maybe Lauren the first question I have.

Just as it relates to the earnings guidance for the year, I think you said no real reason at this point to update the prior range.

And I think part of that is double-digit growth, obviously, is fairly open-ended.

So maybe in the context of the results you just posted for the first quarter, I guess has your degree of confidence in the outlook changed at all, or is the level of double digit growth that you're expecting any different from the prior level of double-digit growth?

Or can you give any more perspective on that?

I'm not going to refine double-digit, but no, we're not modifying the guidance.

So still looking for mid single-digit.

First quarter came in high on that spectrum of mid-single comp.

But no, that translate with the flow-throughs that we're describing double-digit EPS after we factor in the FX currency, which again cost us $0.05 in the first quarter.

As we stated, the guidance on FX for full year, that's going to continue to be an element.

Okay, got it.

And I know you called out specifically the second quarter up mid single-digits for the EPS, which is consistent with what you said a few months ago.

Is that the only quarter you expect to be kind of below that double-digit rate, or how should we think about the reasons for calling out the second quarter specifically?

It's got the biggest gap from where the currencies are today to where they were a year ago and relatively lower sales top line.

So that dynamic puts more pressure on the EPS growth in 2Q.

Okay.

That's helpful, Thanks.

And then maybe just one last one.

Just to clarify for the second quarter, you mentioned the comps off to a very strong start and also called out some shifts coming up during the balance of the quarter.

Could you maybe provide a little bit more color on what those shifts are and how you expect the quarter to play out from a high level?

Well, we've been pretty clear.

I mean, the launch shifts change month to month, sometimes quarter to quarter.

There's -- not all launches are created equally, and a launch is just a portion of the business.

We've got some sales tax shifts -- sales tax holiday shifts that happen at the end of this quarter.

So the guidance to mid single-digit comp gains just is sort of the -- we're only less than two weeks into Q2.

So the fact that we've had a great start to Q2, we expect to have a strong Q2, but it will moderate a bit from where we are today.

All right.

Thanks for all the color.

Thanks, Jonathan.

Thank you.

Our next question comes from Susan Anderson from FBR Capital Markets.

Please go ahead.

I was wondering if you could talk a little bit more about what's working at Lady Foot Locker.

And also we noticed in the stores you're starting to take out some of the ladies product in the Foot Locker segment.

Are you maybe focusing more on the Lady Foot Locker brand?

Thank you.

Yes, we've had both footwear and apparel have a strong porter at Lady Foot Locker and 602.

And obviously with only 20 602 doors open, the strength of the gains right now are coming from Lady Foot Locker.

The assortment changes a bit in the other banners, but there's been no decrease of women's footwear in any of our other banners.

They all have a strong position in women's, depending on the mall that they're in and the adjacencies that they've got.

So we've seen good casual running styles selling at Lady Foot Locker and 602.

We've seen some performance models that have been successful.

We've seen really strong pushes in some of the apparel things that we're testing and bringing.

Probably the driver right now is that we are bringing, I think, a better apparel assortment into the Lady Foot Locker stores, especially when we have enough room in those stores to show it appropriate.

Got it.

That's helpful.

So should we think about the Foot Locker brand starting to focus more on men's and then still kids, and then the lady brands more at Lady Foot Locker and 602?

I think that all of our banners except Foot Action have women's footwear and will continue to have women's footwear assortments going forward.

The girl or the female that walks into a Foot Locker is a little bit different than the female that we're targeting with 602.

We've got 1100 Foot Locker stores in the US.

We've got something less than 200 Lady Foot Locker stores.

So there's a lot of malls where there's not a Lady Foot Locker store, and we still expect to be able to service a female customer.

So they're creating, as we said earlier, clear swim lanes so that the female that shops in each of those stores has a different offering.

They will all live in harmony as we continue to service various female customers in the mall.

Great.

That's helpful.

Congrats on the quarter and good luck next quarter.

Thank you, Susan.

Thank you.

Our next question comes from Chris Svezia from Susquehanna.

Please go ahead.

Good morning, everyone.

Thanks for taking my question.

Nice job.

First question, just a point of clarification regarding kind of second quarter and comp.

You're off to a very strong start.

It seems like there's -- you got a good launch coming this weekend and towards the tail end of the month there's also a good launch.

Is it just the viewpoint that as you get towards the tail end of the quarter, some of the tax-free holidays shift into August, and that's where you'd comment that comp is unsustainable?

Because it doesn't seem like there's big meaningful shifts in the product launch that would cause that.

I'm just curious in clarification around that.

Yes, we had good strong launches last year.

So, I mean, we're up against good strong launches in those weekends as well.

And there are shifts that happen that can be quantitative, can be week to week.

You called out the sales tax shift.

I mean, that impacts some of our stores here in the US.

Again, the first 12 days, 13 days of the quarter have been (multiple speakers)

Have been a full quarter mix.

Yes, exactly.

Have been strong, and we feel good about it.

And we're happy to have the running rate that we have right now.

But I also know how our guys have looked at the quarter in great detail, and that's where we see it moderating a bit.

Okay.

Fair enough.

I mean it's still a tremendous start, so that's great to hear.

So I'm just curious.

Switching to Europe for a second, and just it's nice to see the progress on apparel finally.

I'm just curious about, number one, the sustainability there.

And number two, kind of how that plays into your viewpoint on the margin profile, whether EBIT or product margin profile and the opportunity there in Europe, as well, as you move forward.

Yes, I think that clearly having a positive gain in apparel for the quarter was a positive for the Europe team.

And they bounced along trying to make changes to the assortment.

They've gotten there.

They're still -- we talked about it in the prepared remarks.

They've got some older silhouettes and some older programs that they have to work through.

But we expect the newer stuff and the direction that they've taken the assortment to continue to improve, which should in fact help us on the margin line.

So I think that they've done a nice job reassorting the stores.

They've got things going in the right direction.

But the old stuff that wasn't successful doesn't go away, right.

You've got to make it go away, and it takes some markdowns to do that.

They've done a really good job.

They're just going to be coming into their summer sale period.

A lot of the countries in Europe have regulated sales periods.

They'll use some markdowns to move through the old stuff.

As we get to the back half of the year and they've gone through some of the older programs, I expect the apparel margins to improve in Europe.

Okay.

All the productivity measures and initiatives that we have apply to Europe just as they do in the US.

The things that we're doing on allocation, the things that we're doing to help make our associates ever more productive, all of those coupled with strength in apparel will help margins, both in Europe and the US.

Okay.

Thank you.

And then just finally, just on the inventory.

I know crossing -- being the three turns, in terms of what we see is nice.

I know, Lauren, you have a much higher or different metric you look at.

Where are we in relation to that metric at this point?

And I guess the inventory allocation, which really kicks in next year, plays an important role to getting that where you want it to be.

Sort of curious as to where you are internally on that number, halfway there, whatever?

We're continuing to make progress.

We haven't crossed the three mark yet, but we are making progress on that.

You can read it as you look at what our total inventory growth is relative to the sales growth.

As long as we're continuing to manage that below the sales growth, making progress on the turn.

It's coming -- in footwear, we're making significant progress.

And as these apparel initiatives gain traction, that gives us fuel to help further that.

The allocation tool that we've invested in is in the process of roll-out, of coming online.

We're adding more product to it as we progress through this year.

But as you call out, it gets more powerful for influencing that turn as we get into next year and start benefiting from its learning.

And are at the point next year and into the following year where it helps us place our orders for ever better flow allocation.

So yes, it's a multi-year play.

But we'll keep you posted on how we're doing on that.

It is improving.

Okay.

I'm sure you will.

Thank you, and all the best.

Thanks.

Thanks, Chris.

Thank you.

Our next question comes from Jay Sole from Morgan Stanley.

Please go ahead.

Hi, good morning.

Good morning.

Dick, wanted to ask you about your online business.

Really strong growth this past quarter.

And at the same time you mentioned, I think, traffic in the stores was negative.

Do you see a direct relationship between traffic in stores and traffic online?

Is there an inverse relationship where when one is down the other is up more?

If you could just talk about that a little bit, that'd be really helpful.

I don't think there's a direct correlation, Jay.

I think that, again, our focus is making sure that we engage with the customer however they choose to on any given day.

Traffic is influenced by a lot of factors.

We don't talk about weather often, but when the weather's crappy sometimes people don't go out.

And again, the traffic phenomena is different around the globe for us.

I mean, we've got some areas in Western Europe where traffic is up nicely.

Is that related to maybe the Europeans not taking US vacations this year?

I think if you read a lot of the press in tourist markets, they will tell you that traffic is down right now in a lot of different ways.

So I think our focus is truly engaging with the customer however they choose to engage with us any given day.

So we certainly want to drive them to the stores, but we also want them to look at us online.

If they get excited by the latest local Foot Locker-approved commercial that they see on YouTube and they hang out watching that stuff with Foot Locker in mind all day long, that's a win for us.

Interesting.

If can ask you about 602 at the same time.

Can you give us an update from what you talked about at the Investor Day?

You have 20 stores open right now.

You're elevating the assortment.

How close do you feel like you are to really accelerating the growth of the concept and feeling like you got it exactly where you want to be?

I'm not sure we'll ever feel like we got it exactly where we want it to be.

That's the way that retail works, that there's always improvements and things that we can do better.

Our thoughts haven't really changed from Investor Day, Jay.

I think the target that we talked about is something over 30 stores by the end of this year.

And then we'll be in a position to examine the ramp-up as we look at 2016 and 2017.

We're very bullish on the business.

I think that our team that's focused on 602 is doing a great job finding the right sweet spot on the apparel mix, working to get the right footwear silhouettes in, testing some new brands.

It's part of the evolution.

And I think we talked about the excitement of building a brand from scratch.

We haven't done that for a while around here.

There's a lot of energy that goes into it.

And making sure she finds the store, figuring out traffic drivers and grassroots marketing, things we can do to connect in the markets where we're clustering our stores, along with growing our online banner, the 602.com business.

Again, I think we're in the same place from a though process as we were at our Investor Day, Jay.

But again, that place is very bullish on the 602 business.

Got it.

Thanks so much.

Thanks Jay.

Thank you.

Our next question comes from Matthew Boss from JPMorgan.

Please go ahead.

Great quarter.

Just from a bottom-line perspective, I don't want to get ahead of you too early here, but larger picture, any structural hurdles that would prevent the model from reaching mid-teens EBIT margins over time?

No.

I mean, we talked about that at Investor Day, too, Matt.

I think that structurally there is nothing that will inhibit that.

But it's a long climb, and we know how much effort and how much work it takes with our vendors and our team here to add a tick or two to that EBIT margin along the way.

We see steady improvement and that's our goal and objective, is to keep driving that number up.

Okay, great.

And then just to clarify more near midterm.

If mid-single digit EPS growth, is that still the forecast for the second quarter?

And if so, is that based on mid single-digit same store sales?

The guidance was mid single-digit comps, not significant variation by quarter, and double-digit EPS for the full year.

Second quarter again, was challenged on an EPS double digit in the second quarter because of the -- where the currencies are today versus where they were a year ago.

Okay.

Great.

I think it was three months ago you laid out mid single-digits for the second quarter, and I think that's why -- I think that's some of the clarification people are looking for, just to make sure it didn't --

We did not say that mid single-digit on EPS for second quarter.

We said it's the most challenging quarter.

Okay.

Great.

Best of luck.

Thanks, Matt.

Thank you.

Our next question comes from Kate McShane from Citi.

Please go ahead.

Hi, thanks.

Good morning.

My question was focused on Runners Point and the Sidestep business.

And you had mentioned during the call you had made some changes there in order to better define the banners.

Can you walk us through what some of those changes are and what the roll-out strategy is?

Kate, thanks for the question on Runners Point, because we're making good progress there.

I think we talked about it at our Investor Day.

But the Runners Point stores are truly going to be everything running, right, I mean, from casual lifestyle running to performance running to race day running.

And we've added a bit of women's, a bit more women's.

So as you walk into a Runners Point store now, one wall is men's, one wall is women's.

We're adding some training into the mix, as well.

So it will be about running and training.

They've got the apparel assortments.

We opened a little bit bigger store in Cologne with some design elements that we're testing to see if they work, if the consumer responds to it.

And again, the initial -- it's been open about three weeks now I think, and the initial response from the local running community, which is a big part of growing the Runners Point stores, has been very positive.

We're going through the same exercise in Europe, segmenting product, looking at the different consumer muses, and creating the right assortments so that Foot Locker or Runners Point and Sidestep all have clear room to work and the full Locker banner is very clearly established.

The Runners Point banner, we've now put in place.

With that being said, that also means that we fired some customers at Runners Point, right?

There's no more canvas product in Runners Point, no more boots.

No more vulcanized product.

That's the type of the product that the consumer will find at Sidestep.

We're now going through the work process with Sidestep to define their muse clearly and get their assortment right.

So we're learning with the store in Cologne, a little bit bigger format.

Almost becomes a key lighthouse store in a market, and then we'll surround it with more traditional-sized Runners Point stores to strengthen the fuel in any community.

We're also developing the model to reach out into that running community and make sure that we've got the strong connection.

Again, you know that we're pretty pragmatic.

We think about a prototype.

We build that prototype, whether it's physical or the community-building piece of it.

We test it, we tweak it and then we develop our roll-out strategy.

That same process is going on with Runners Point and Sidestep.

Okay.

Great.

That's very helpful.

And then my last question is just on, the innovation pipeline, particularly for running for the rest of the year, Just wondered if you could walk us through what the dynamics are with the innovation pipeline prior to an Olympic year.

Do you see things slow down a little bit in terms of what's being turned out, and then you see a surge around the Olympics in terms of a new platform or new idea for the following year?

Historically, that's been the pattern, Kate, that the new things that will drive an Olympic year start to show up later in the year before.

But innovation comes in a lot of forms for our consumer, right.

A very cool Roshe becomes exciting and an innovative thing on a kid's foot.

You know, the ZX Flux shoe that we've got from Adidas that's got very cool patterns and connected to apparel and head wear.

Those things, our kid sees as innovation.

We talk about new technology, absolutely the Olympic year will fuel exciting things.

All of the vendors are bringing exciting product to market.

The innovation is helpful and we all look forward to that.

But right now our kids are finding the product mix pretty exciting.

Okay.

Thank you.

Thank you.

Our next question comes from Michael Binetti from UBS.

Please go ahead.

Thanks, and congratulations on a great quarter and a tough quarter for the retailers.

I wanted to see if we could just think about your comp guidance for a little bit here.

Lauren, maybe you could help me out.

The mid single-digit comp gain that you guys pointed to.

You did mention that I think units were down in the first quarter and implied that traffic at brick-and-mortar were down, which is not anything different than we're seeing at the mall.

Can you talk about how you built up your guidance for mid single-digits in each quarter?

I'm guessing you expect some price increases or a mix shift towards premium to continue in the second half.

That's been going on in a while, particularly in basketball.

So maybe a good time to reflect on what you expect as far as building up to that mid single-digits in the back half.

Really, I mean, the expectation is that the trends that we've been seeing, we don't see any reason for those to change.

So, yes, AUR has been -- increasing AUR has been the story now for quite some time.

Several factors have been contributing to that.

We've been less promotional and the customers we've described has been opting towards this innovative, more premium product, which is of course our specialty.

So that's part of it.

And also coupled with our remodel program and the exciting vendor shop-in-shops that we've been adding, that have delivered these increases.

So as we thought about mid-single, we've thought about what we were doing on the CapEx and how those remodel storms were performing.

Okay.

And then Dick, you mentioned --

And I'm also -- I'm going to go back to the tape, because I have done that on the Q2 guidance.

I absolutely did tell you in March that Q2 being the most pressured on a mid-single, we were thinking about that being mid-single digit EPS because of that fact.

So it -- I would tell you that we saw a nickel of pressure in the first quarter.

We planned the year thinking the euro would be about a buck 10, buck 11 before I walked in this morning.

The pressure on Q2, think about it being about a nickel.

A nickel is bigger on Q2's volume than it is on Q1 as a percentage basis.

Again, we said full-year EPS impact if the euro stays at about a buck 10, it was $0.16 to $0.18 for the full year.

So did that help?

I think that was to someone else's question, but it is interesting.

Do you -- are you trying to tell us that the -- I'm trying to figure out if you're telling us that the guidance for mid single-digit earnings growth in the second quarter that you commented on in March, is that still where you're guiding the second quarter or not?

I said if the euro stands out where it is today, it's about a nickel's worth of pressure.

So I mean, there a possibility for it to be double-digits, we're very focused on productivity and flow-through.

So to the extent that we beat sales plan?

Yes, that can happen.

Okay.

Thanks for that.

And then just back to the -- some of the thoughts on the comp for the year.

Dick, you mentioned that you have confidence in the team working on the Champs business, and that they're working on the merchandise assortment to get it back to positive territory.

What did you count on in the rest of the year, particularly in the back half, for Champs?

Do you think you'll have it back in positive territory by then?

Yes, I'm confident in the team and I believe that it will in fact get there.

We've got some older things still to cycle through and that license exposure I talked about in some of the sock business.

The brands and the team are working close together.

So I'm somewhat optimistic that they can get it positive by the end of the year.

Okay.

Thanks a lot, and congratulations again on a great quarter.

Thank you.

Thank you.

Our next question comes from John Kernan from Cohen and Company.

Please go ahead.

Hey, good morning.

Thanks for taking my question.

Just moving away from discussion on Q2.

It looks like Kids Foot Locker led in both remodels and openings.

Talk about trends there, both by category and by vendor.

And then just on running.

It sounded like running got better, I think you said up mid-teens.

Can you talk about what in running drove that?

Thank you.

We talked about KFL in the prepared remarks, and while the actual comp was a little bit tougher in KFL based on some West Coast support issues, we're very bullish on the business and it's bounced back nicely in Q2 now.

We have continued to open doors.

We're remodeling some doors and adding the Kids Fly Zone with Nike, a shop-in-shop with Nike in some of our KFL stores.

That's been successful.

So we continue to see that happening.

There's a lot of similarities between Foot Locker and KFL from product that's working.

It's take-down of marquee and performance, signature athlete basketball shoes.

It's some of the same silhouettes on the running side, whether it be ZX Flux or Max 90s or whatever it happens to be that's driving the adult side.

A lot of similarities there on the footwear side.

And the team is working hard on the apparel side in KFL as well.

On the running front, it's driven right now more by the lifestyle running than it is necessarily performance running.

But when you talk about ZX Flux and you talk about the Huarache and the Roshe, the Max Air product from Nike, those are all really important silhouettes and really important platforms for our businesses around the globe right now.

So we've got the ability to see what's going well in Europe and then we can see if that works here in the US.

I think the diversity of our geographies helps us to identify those hotter silhouettes.

So would you say premium running is getting better relative to some of the trends in the back half of last year?

Premium running, yes.

Technical running, not necessarily.

Okay.

I think that we're seeing some nice play in some of the more expensive premium sort of running silhouettes.

They're not always truly technical performance based.

But again, most of the shoes that are built to run in aren't actually used to run in.

So I think that the customers is finding comfort, and some of that I think has got to do with (technical difficulties) the apparel pant of choice was the cuffed bottom pant, which looks better with a running silhouette.

I think that some of that's going on as well.

Thanks.

Good luck.

Thanks, John.

Thank you.

Our next question comes from Camilo Lyon from Canaccord Genuity.

Please go ahead.

Thanks.

Nice job.

Lauren, my question was on IMU.

You mentioned that vendor and KFL on the initial market, but I was wondering if you could give a little more detail around that?

And if that's a trend that should accelerate as the year progresses?

That was a little bit broken up.

I think your question was around what we're seeing with the IMU that vendor and category mix that we talked about a lot negatively impacting moderating in the first quarter.

So did I get your question right about what you're wanting more insight into?

Yes, IMU pressure (technical difficulties) a little bit, and how that (technical difficulties) outlook for the rest of the year should (technical difficulties)

Sir, you're breaking up.

The questions is, I think, around IMU and what we're seeing.

So moderated (technical difficulties) the pressure still down a bit from a year ago IMU.

And, again, it's being driven (technical difficulties) in the cost of the product to us, but by the (technical difficulties) of categories and vendors, moderated in the degree of (technical difficulties) the year before (technical difficulties) quarter.

(Technical difficulties) that that would be the case, and that helps the merchandise margins, at least (technical difficulties) point from it.

We're further (technical difficulties) finished margins by the fact that we are less [promotional] and working on initiatives to (technical difficulties) the markdowns.

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

Yes, thank you.

And our final question comes from Eric Tracy from Janney Capital Markets.

Please go ahead.

Good morning, everyone.

The call did seem like it starts to break up, so hopefully you can hear me.

But congratulations again, just great execution from the team.

Most have been asked.

Let me just, if I could, get a little bit of color as to the planned remodels for the balance of the year by banner.

Is there -- have you ever broken that out, or could by get some color on that?

No, Eric, we have not broken out (technical difficulties) by banner, other than to say by the end of 2017 we expect about 10 of the Champs stores and about 50% of the Foot Locker stores to be (technical difficulties) by the end of 2017.

Any way to say that's --

I think we've also described to you that [the actions] new remodels came on just recently.

So it's in the early days, but we're working through that banner as well.

And applying some of what we've done in Foot Locker US with the Willow Brook design internationally.

So we've got some updates (technical difficulties) as well.

Okay.

And then just if I could on capital allocation.

Again, understand consistent dividends, buyback.

Is there any kind of thoughts potentially for another Runners Point type of thing, be it an international play?

Sort of exploiting maybe some of the dislocation in the European markets to pick up something that's attractive?

Or is it really stay the course in terms of cap allocations?

Talked about it at our Investor Day.

There's no other acquisitions built into the plan that we put out for 2020.

We have a lot of open-to-lists and open-to-consider.

It's not contemplated in our plan, but who knows?

Fair enough.

Okay, guys.

Thanks so much, and best of luck.

Thanks, Eric.

Thank you.

Thank you for your participation today, and that's all we have time for.

But we look forward to having you join us on our next call, which we anticipate will take place at 9:00 on Friday August 21 following the release of our second-quarter and year-to-date earnings results (technical difficulties) that morning.

Thanks, and good-bye.

Thank you.

And thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.