Foot Locker Inc (FL) 2015 Q2 法說會逐字稿

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

(Operator Instructions)

This conference call may contain forward-looking statements that reflect management's current views of future events and financial performance.

These forward-looking statements are based on many assumptions and factors including the effects of currency fluctuations, customer preferences, economic and market conditions worldwide, and other risks and uncertainties described in the Company's press releases and SEC filings.

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

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

If you have not received 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, Susan.

And good morning to you all.

Welcome to Foot Locker, Inc.'s second-quarter earnings conference call.

Extending the momentum with which the Company started off the year, Foot Locker generated a 9.6% comparable sales gain in the second quarter, and we were able to flow a very strong proportion of those sales to the bottom line, producing record net income of $119 million, a 29% increase over the second quarter last year.

On a per share basis, Q2 earnings were $0.84, a 33% improvement on last year's GAAP results of $0.63, and 31% above last year's non-GAAP earnings of $0.64 per share.

For the first six months of the year, the Company has generated net income of $303 million, the most profitable first-half results in our history.

We have earned $2.14 per share so far in 2015, a 24% increase on a GAAP basis over the same period in 2014.

Here this morning to provide you with the details of our second-quarter performance is Lauren Peters, Executive Vice President and Chief Financial Officer.

She'll be followed by Dick Johnson, our President and Chief Executive Officer, who will highlight the product trends that drove our results this quarter and delve into the execution of the strategic priorities which are behind the record levels of success we have achieved so far this year.

After Dick's prepared remarks we'll open up the call to your questions.

So, Lauren, let's begin.

Thank you, John.

And good morning, everyone.

We are encouraged by the continued strong execution of our business initiatives in the second quarter which led to this record financial performance.

We had consistently robust operating results across our channels, geographies, banners, families of business and product categories, leading to a strong gross margin rate, a low expense rate and improved inventory position.

But it all starts with top-line sales so let's begin there.

By segment, our comparable sales gains in our stores was 8.6%, while our direct-to-customer business again led our performance with an 18.8% sales increase.

Within the direct-to-customer segment, the domestic store banner dot-com businesses collectively increased sales more than 40%, while Eastbay generated a mid single-digit increase.

Overall, direct-to-customer sales increased to 11.3% of total sales, up from 10.5% a year ago.

Within our store businesses, our international divisions produced the strongest sales results, with all regions, Europe, Canada, and Asia-Pacific, posting double-digit comparable sales increases.

We had good performances in the US, as well, with the Foot Locker and Footaction divisions both up high single digits.

Kids Foot Locker and Lady Foot Locker 602 were both up mid single digits and Champs Sports produced a low single-digit comparable sales gain.

For Lady Foot Locker, it was its fifth consecutive quarterly comparable sales increase, and its first positive comp on top of a prior-year comp gain in quite some time.

Due to significantly weaker foreign currencies this year, our 9.6% overall comparable sales gain translated into a 3.3% overall sales increase.

Similar to the first quarter, reported sales were reduced by more than $100 million in Q2 due to the impact of weaker FX rates this year compared to rates in effect a year ago.

Footwear was once again the strongest category, posting a low double-digit sales increase.

And our apparel business improved significantly, posting a mid single-digit sales increase.

Overall, our soft goods sales were up low single digits due to certain accessory categories which faced difficult comps.

Within footwear, running and basketball both posted a double-digit increase.

In fact, in a testament to the current broad-based and consistent strength of our business, each major region posted a double-digit sales increase in both basketball and running footwear.

Comparable sales of kids' and women's footwear were also up double digits.

Men's footwear sales came close, up high single digits.

By month, our comp sales cadence was up low double digits in May and up high single digits in both June and July.

As in the first quarter, we were able to lever these strong sales to improve gross margin this quarter by 60 basis points to 32.6% of sales from 32% a year ago.

Also similar to the first quarter, our merchandise margin rate improved 20 basis points on a constant currency basis, with the lower markdown rate partially offset by a lower initial markup rate.

But FX negatively impacted margin by 20 basis points, thus the overall gross margin gain was primarily the result of leveraging the fixed rent and salary elements within our cost of sales.

I'm particularly pleased that we were able to improve our SG&A expense rate by 140 basis points to 19.5% of sales from 20.9% last year.

Through disciplined expense management across our entire organization, we successfully levered our operating costs, and with the help of weaker foreign currencies, achieved a 3.5% decrease in reported SG&A dollars.

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

Continuing our trend of solid inventory management, we ended the quarter with inventory down 1.3% from a year ago, compared to a sales increase of 3.3%.

Inventory increased just over 3% on a constant currency basis compared to a 9.9% total sales increase on the same basis.

As a consequence of this excellent inventory performance, our inventory turn is tantalizingly close to our goal of 3 times.

Come year end, I'm hoping to be able to celebrate the achievement of that goal, the only one of our goals originally set in 2010 that we haven't yet reached.

The rest of our balance sheet was also strong at quarter end, with cash standing at $970 million, up $13 million from a year ago.

We spent $58 million on capital expenditures in the second quarter, bringing our year-to-date total to $118 million.

A significant portion of the capital has been invested as planned on enhancing our store fleet, including a combination of new stores, the largest number of which continues to be in Kids Foot Locker, and remodel projects, with activities spread across most of our banners and regions.

Many of these projects include a partnership space with Nike, Jordan, adidas, Under Armour or Puma.

We also continued to invest in our digital capabilities, both in the United States and internationally, where we operate eCommerce sites in 10 countries.

For example, we significantly upgraded our digital platform in Europe during Q2, bringing together best practices from Foot Locker Europe in the Netherlands, the Runners Point team in Germany, and our Global Center of Excellence in Wausau, Wisconsin, where our US digital operations are headquartered.

While investing in our business to drive future growth, we also continued to return cash to our shareholders.

Between spending $76 million to repurchase almost 1.2 million shares and our $0.25 quarterly dividend, we returned $111 million to our shareholders in the second quarter.

In the first half of the year, we returned $275 million of cash to our shareholders.

Overall, traffic was up slightly in our stores during the quarter with our international divisions seeing stronger trends than the US.

We believe the geographic traffic differences have a lot to do with a much stronger dollar compared to a year ago, which has led to less tourist traffic in the US.

Average selling prices were up again in the quarter, in line with recent trends.

And conversion also improved due to the effectiveness of our marketing programs, the investments we are making in training our associates, and of course the great product our vendors continue to deliver.

Looking ahead to the back half of the year, we see an ongoing flow of exciting products to support our back-to-school business and the holidays.

Nonetheless, we will continue to plan the business cautiously because we've learned that disciplined planning ensures that our inventory and our expense structures stay in line.

The metaphor we use around here is that we don't want to get ahead of our skis.

So, mid single-digit comps remains our mantra.

And, in fact, our comparable sales month to date are up mid single digits.

With the later start of back-to-school this year, we do believe that there is a good chance for sales to be at the strong end of mid single digits, both this quarter and over the second half of the year.

We continue to believe double-digit EPS gains in Q3 and Q4 are achievable based on current sales trends.

One update to the back half that I will mention is an increase of $15 million in our 2015 capital expenditures to $235 million, which our Board approved this week.

This increase primarily relates to the move of our New York headquarters a couple of blocks down 34th Street.

We're getting underway on building out the new space with the physical staff relocation slated for April next year.

The project also involves a significant reconfiguration of our flagship Foot Locker store that is downstairs from our current offices.

Let me now turn the call over to Dick to give you more of the product details behind our results and more broadly review how we're doing executing our updated strategic priorities.

Thanks, Lauren.

And good morning.

It's great to have all of you with us this morning to share about what drove our second-quarter results.

One of the things we try to do at Foot Locker Inc.

is to always keep looking forward at what we can do better and how we can build the future performance of the business to be even stronger.

But it is appropriate every so often to pause and acknowledge the successes the team has achieved.

And with the quarter we just announced, now is one of those times because it really was an outstanding quarter in the first half of the year.

I want to express my sincere gratitude and appreciation to all of our associates in all of our divisions and support facilities around the world for the teamwork, innovation, and excellence that are clearly evident in our results so far this year.

In fact, I truly appreciate how firmly these and our other core values have been embraced by the entire team at Foot Locker Inc.

That said, we realize retail is a game that never really ends and for 2015 we're just starting the second half, so we recognize the hard work still to be done to finish the year on top.

Turning to the product highlights in the second quarter, they are quite similar to recent quarters.

Lauren already mentioned that both running and basketball were up double digits.

In terms of running, lifestyle running continued to be a big driver of our footwear business in all of our regions, led by Roshe, Huarache and Air Max styles from Nike and ZX Flux from adidas.

Although those are the really big running platforms, we are also working with other vendors to develop new lifestyle running offerings, including Puma, New Balance, ASICS and Saucony.

On the basketball side, Jordan continues to be a tremendously strong brand around the globe.

Jordan retros and classics in particular performed well.

Meanwhile, the marquee player shoe business in the US continued to grow, with ongoing strength in LeBron, KB and Kobe, coupled with stellar growth in the footwear sales of exciting new athletes, in particular Kyrie Irving with Nike and Stephen Curry with Under Armour.

The softer parts of our footwear business continue to be in casual, in particular canvas and vulcanized shoes.

On the other hand, the launch of the new Chuck Taylor IIs from Converse performed quite well recently, indicating that when there is some new or different casual product in our business, our customers know to come to us to find them.

Although seasonally a small business, we brought in some of our boot assortment from Timberland and Nike earlier this year, and the initial sell-throughs were positive, which bodes well for back-to-school and the fall season.

There were abundant signs of progress in our apparel business during the quarter.

Apparel was up solidly at Foot Locker and Footaction in the US where it was primarily a bottoms-driven story, with Nike and Jordan shorts posting strong sales, as well as Tiro pants from adidas.

At Footaction, jogger bottoms from smaller lifestyle brands also sold well, keeping that banner on the forefront of style for its core customer.

Branded tech fleece pants and shorts sold well in Europe where our apparel business continued its rebound with a double-digit comp gain.

Europe's private label and controlled brands gained ground in shorts and tees.

And our soccer business continued to develop into a more meaningful part of our apparel assortment there.

Finally, while posting a comp loss, the apparel business at Champs Sports also improved sequentially, driven by the same branded bottoms trends as in our other US divisions as well as its private label Champs Sports gear, mid shorts and jogger pants.

The losses are still coming primarily from down-sizing what had been a very sizable licensed business.

I'll touch briefly now on our key strategic initiatives.

First, clearly the core business remains strong, with strong connections to the different core customers of the Foot Locker, Champs Sports and Footaction banners.

We are continuing to invest in the remodel program and expect to have touched at least 30% of the Champs stores and our Foot Locker fleet in the US by the end of 2015.

And we will begin to catch up at Footaction as we move into the roll-out mode with the Garden State plaza design in that banner.

We are continuing to develop and roll out our vendor partnership spaces such as House of Hoops, of which we now have 165 in the US and another 25 internationally.

Also, at Foot Locker we now have five Puma labs, and at Footaction we have four Jordan Flight 23 shops with another one slated to open on State Street in Chicago next month.

Our latest partnership, the Armory at Champs Sports, is just a couple of months old and the first store is doing well.

It's too early to say much about it other than the fact that we and Under Armour are both learning from that store and we're discussing an expansion of the test at some point next year.

Our kids business remains robust, just as in the first quarter.

The Kids Foot Locker division posted a mid single-digit comparable sales gain.

With the addition of 20 new KFL stores, total sales at KFL were up double digits.

We are continuing to roll out Fly Zones in partnership with Nike and are up to almost 30 now.

Meanwhile, kids footwear sales in the other banners were up double digits and we continue to add Kids Foot Locker stores in other markets outside the US.

With so many strong performances, it's impossible for us to pick an MVP for the quarter, but Foot Locker Europe would certainly have to be a finalist.

That division posted outstanding sales and profit growth in Q2 with a comp gain of footwear in the teams and apparel up double digits.

Sales in all of the big six countries were up double digits.

Although it is one of our smallest markets with only four stores, even Greece had a comparable sales gain for the quarter.

Our banner segmentation work is continuing in Germany as we position the Runners Point and Sidestep banners to complement our position with Foot Locker banner in that country.

It's still premature to draw firm conclusions from that work.

We'll be able to give you a better idea of a potential banner expansion strategy towards the end of the year when we've gathered more experience executing our multi-banner offerings in Germany and have developed our capital plans for 2016 and beyond.

At the same time, we're reviewing expansion opportunities for the Foot Locker banner in Europe and may look to accelerate somewhat our store growth plans, especially in the markets we believe we're most underpenetrated in, such as France and Spain.

We've already covered a lot of the story behind our next growth pillar, apparel, which is definitely improving.

However, you've also heard today that our growth in footwear is even faster.

As a result, apparel penetration is currently still falling a bit.

Let's just say I'm not telling the footwear teams to slow down so that their apparel partners can catch up.

As we've said, gains in apparel penetration will take time but apparel profitability can strengthen with comp increases and improving margins, and that's what we're beginning to see.

Our next strategic initiative, to build a more powerful digital business, remains firmly on track.

With steady high teen sales increases with strong margins, our digital performance sometimes almost seems automatic.

But having come from and led that business, I know how much really hard work goes into producing such consistently strong results.

It takes a lot of technology investments, product and marketing coordination with our store teams, analysis of massive amounts of data, and outstanding customer service to be a leader in the omnichannel world, and we continue to be just that.

Since we do live in that omnichannel world, we have doubled the size of our test of the Eastbay performance zones in Champs Sports.

We now have eight Champs locations where we feature a select performance merchandise from Eastbay, previously a digital-only banner.

The assortments include both seasonal sports-specific merchandise and an ongoing presentation of categories such as training that are in the performance zone all year long.

Now turning to our women's business, we reported our fifth consecutive comparable sales gain at Lady Foot Locker 602, an achievement not seen in almost a decade.

With the 205 store fleet still being approximately 90% Lady Foot Locker and 10% 602, the gains are still being driven primarily by Lady Foot Locker.

Apparel was up high single digits in Lady Foot Locker 602, led by Nike, adidas, and Under Armour, but with other brands such as Alala, Koral and Lorna Jane expanding into additional stores.

Lifestyle running footwear from Nike and adidas was another key source of strength, while performance brands such as ASICS and Brooks are still a meaningful part of the assortment for her.

Reebok is also beginning to gain some traction in classic running shoes and apparel.

We continue to build awareness for the 602 banner and refine the formulas to maximize our potential to succeed.

It is our primary women's banner in the future.

As with Runner's Point I'd say we are going to spend the rest of the year to reap the rewards of our work building 602's position in the market and will use the insight from that to develop our future capital plans.

At this point, it's too early to provide a meaningful update about what the growth trajectory for 602 will look like after this year, which we expect to end with over 30 stores.

Finally, the women's business in our other banners continues to be strong, with double-digit footwear gains in Foot Locker and Champs Sports in North America, Europe, and Asia-Pacific.

Let me wrap up my prepared remarks, as Lauren did, by focusing a bit on the future.

We certainly intend to continue building on many of our strengths, one of which is the remarkable consistency of our performance across channels, banners, geographies, genders and categories.

However, at every strategy session, in fact at virtually every meeting, we are also trained to take the time to look at what didn't work as well as we had hoped, where we could have done better, and what completely new development opportunities there might be for us.

New ideas come out of almost every such exercise, some of which, like House of Hoops, are now core to our business.

Others of which, well, let me just say some ideas are best put back on the shelf for another day.

We have great partnerships and relationships with all of our vendors and I know we will continue to push each other to find additional ways to succeed together.

We also believe that the casualization of our customer base is here to stay and that this trend will expand over time geographically and by age, providing our business of selling athletically inspired footwear and apparel with potential tailwinds for the foreseeable future.

Thank you.

Let's go ahead now and open the call to your questions.

Susan?

(Operator Instructions)

And the first question is from the line of Camilo Lyon with Canaccord Genuity.

Please go ahead.

Good morning, everyone.

Great job on the quarter.

The first question I had, Lauren, you talked about IMU trend improving.

I think you also said that last quarter.

Could you just talk a little bit about if you peel back the layers what's going on there?

Is it more of a mix benefit that you're seeing or are you seeing something different there that's improving your positioning with respect to the vendors?

Camilo, what I talked about was the fact that our merchandise margins improved during the quarter.

They were up about 20 basis points, which was a combination of us further reducing markdowns and that offsetting a bit of that continued IMU pressure.

But the IMU pressure has progressively lessened.

And really where it comes from, the IMU pressure, is a mix, it was really a mix situation, mix of vendor, mix of product category.

But we remain focused on our opportunities to ever get the product allocated better the first time around.

That's helped with further lowering markdowns.

And certainly as we continue to see progress in our apparel business and its profitability, that helps, as well.

Okay.

And then my second question relates to inventory.

You're clearly managing your inventory very well.

You're guiding to a mid single-digit comp.

It looks like you're being very cautious on how you're planning the business, which if we're looking at this from the perspective of your demand trends, does it feel like you're leaving some sales on the table by not being a little bit more aggressive on your inventory buys or you're feeling that you're capturing all of the demand that you're seeing walk through the door?

Camilo, I don't think we'll ever capture all of the demand that walks through the door.

But I think that the team has done a great job of effectively managing the inventory.

We do plan conservatively but we chase aggressively.

So, when we have the opportunity and see the opportunity to move a little bit faster on the inventory front, we work with our vendors to identify those opportunities.

Our team goes aggressively after them.

I think that one of the things that's driven our productivity across the board is effective inventory management.

I think getting the right product in the right store at the right time is the key.

I think our team, together with Lauren and her planning skills, are getting that done.

So, is that to say that you're able to get more product intra-quarter now than you were in the past?

You're able to chase more successfully now than you have been in the past?

We're able to chase more successfully and we're flowing inventory better.

So, the combination of those two, I think, really puts us in a position to capture the demand as it walks through the door.

We're also doing a better job of looking at our inventory in totality, across stores, across channels.

So, we have the ability to satisfy the customer wherever they happen to be shopping today.

We work very hard internally and with our vendor partners to be as nimble as possible on inventory flow.

And this is all before the systems initiatives come into play which should further the margin outlook and the full-priced sales outlook as those systems come online next year, correct?

We've got the first phase of our merchandise allocation system in place.

It's a learning system, so as that system goes through season after season and continues to learn more, we will continue to see more improvement.

We'll also get improvement as we get the second phase of that system in place starting later this year and rolling into 2016.

Got it.

Best of luck, guys.

I'll turn it over.

The next question is from the line of Scott Krasik with Buckingham Research.

Just one clarification and then a bigger picture question.

When you talked about casual obviously as a laggard, where do you guys put things like the Jordan Eclipse and Roshe, for example, because I see a lot of people wearing that for casualwear.

And then just bigger picture, it sounded to me like there might be a little bit more momentum coming from some of your secondary brands.

Do you feel like this is sustainable and we can start to see really increased penetration from some of the brands that have lost share or were too small to matter in the past?

Scott, I think most of the shoes that we sell are technically used for casual use.

We've talked about before they're not being -- every running shoe that we sell certainly doesn't see the track or the road to run miles in.

Every basketball shoe that we sell doesn't see the court to play a game of hoops.

So, when we refer to casual, we refer to vulcanized and canvas sort of products.

And that's really where the challenge has been through the quarter.

Roshe, by our definition, is a running silhouette.

It's a casual lifestyle running silhouette but certainly a running silhouette.

The future -- our Jordan product is generally categorized as basketball.

When we refer to casual, it's more of the vulcanized canvas shoe.

And while there's been some struggles, the Chuck II that launched late in the quarter certainly has performed better than the rest of the category.

And just in terms of the other brands?

In terms of the momentum of the secondary brands, we work with a number of brands trying to develop programs and platforms that are right for each of our banners.

So, you won't necessarily see some of these secondary brands across all of the banners that we've got.

The Footaction team is working on some specific programs with some of them.

The Foot Locker team is working on programs with some of them.

Champs is working on programs with some of them.

So, yes, we think there's definitely a place for the secondary brands in our assortment and we continue to work with them to grow the opportunities.

Okay.

And then just did you actually give the RPG comp?

We did not.

Since we've anniversaried acquisition we really speak in terms of region.

Is it meaningfully different?

Do you want to throw that out?

We aren't going to break that out.

We're very pleased with RPG's contribution to our results.

It is accretive for us and we're working through the segmentation in Germany of how to position Foot Locker, Runners Point and Sidestep to reach the broadest demographic that we can.

We feel very good about the progress that we've made, in particular with Runners Point, which is really all things running.

And the positioning of Sidestep is a little bit further behind that, that effort in Runners Point.

Okay, thanks very much.

The next question is from the line of Matt McClintock with Barclays Capital.

Please go ahead.

Hi.

Yes.

Good morning, everyone, and congrats on the great quarter -- and the rest of the team at Foot Locker.

I was just wondering if you could elaborate on your comments regarding 602.

You talked about refining the formula.

I know that there's been a lot of work regarding that over the last several years while it tests.

It seems like now you're starting to get to a point where you're rolling that concept out more, you're accelerating that.

How do you think about refining that formula?

And specifically when we talk about additional brands like Lorna Jane, et cetera, how do you think about allocation of space to those brands in the current prototype in terms of size of the store?

Should we be looking at bigger stores going forward?

Thank you.

That's part of the things that we're evaluating, Matt.

We started with slightly bigger stores in 602.

We're trying to strike the right balance of floor space and productivity.

The secondary brands are key to the look and style that the core consumer wants there.

So, the mix of footwear and apparel, the mix of brands within footwear and apparel remain items that we continue to evaluate.

We were just out in Chicago in Woodfield Mall in Schaumburg.

A relatively new 602 there that looks good.

And we see the strength of the brand.

A real initiative is evaluating the performance metrics in the doors and growing the brand recognition in the marketplace at the same time.

That customer is clearly telling us she wants the specialty of specialty retail.

We are working on the assortment to make sure that we deliver that to her.

Thanks a lot.

Really appreciate it.

The next question is from the line of Jay Sole with Morgan Stanley.

Please go ahead.

Thank you.

In talking about apparel, it seems like there's been some real progress in the quarter.

Can you talk about why that's happening now, like's some of the nuances behind that business that are causing the improvement that you're seeing?

The team's done a great job of narrowing the assortment, identifying key items and driving them hard.

We're in a very bottoms-driven assortment time in the US and our team has done a really good job of identifying the key bottoms, the key fabrications, the key styles, and they're driving those silhouettes.

In Europe, it's been a combination of strong branded performance.

Their private label and their own controlled brands have been strong.

And they've really reintroduced lifestyle soccer into the program in Europe, which has been very much a positive.

So, I think it's really been a combination of refining the assortment, going after the key items in depth and moving on.

We've got a better markdown cadence.

We've got a better freshness ratio.

They've taken the bull by the horns on the apparel front and are really making some differences.

The business at Champs across the branded and private label side of the business is improving.

They're still trying to rationalize their licensed product business which over time had become a very big chunk of their apparel business.

And as they start to anniversary that process of lowering their percentage of licensed products, we see the branded and private label at Champs taking over and them getting positive by the end of the year, as well.

At the Analyst Day you talked about some initiatives to continue to improve apparel.

Where do you stand on those?

What's the next step over the next 90 days?

What would you like to see happen just in terms of the operations to continue to drive strong apparel comps?

More continuity of the things they've just really identified, Jay, in terms of identifying those strong apparel trends and items, making sure that we maximize those, we create complementary adjacencies for footwear and apparel, that we're always bringing apparel to the bench to try to add on the sale, that we're creating exciting store environments where apparel is really featured and can be talked about by our associates on the floor.

So, the things that we just started, and we're seeing nice bounce from the great work that they're doing, we're just going to get more ingrained in that.

That's the next step of the continuity.

Got it.

Sounds great.

Thanks so much.

The next question is from the line of Samuel Poser with Sterne Agee.

Please go ahead.

Good morning.

Thanks for taking my question.

You talked a little bit about the impact of the later Labor Day just in the short term, and I wondered if there were some other launch changes, as well, regarding Nike, given the later Labor Day or Jordan, if you're seeing any of that.

Sam, we know that the launch calendar shifts and ebbs and flows based on the timing of the various launches.

But right now the bigger impact is probably the later back-to-school with the late Labor Day.

And you have to remember, too, that we've got a lot of geography differences when it comes to Western Europe.

Their back-to-school cadence is significantly different than it is here in the US.

So, the back-to-school period is really getting to be more like the Christmas period and we have to look at it across the six or seven weeks where various regions of this country and various regions of our Western European business, our Canadian business, do go back to school.

You see no changes in the momentum of the categories or anything really?

You continue to see the strength or are you seeing any changes in categories right now as we've moved into back-to-school?

We called it out, Sam, that when we look at footwear especially, both running and basketball were up double digits for the quarter and across the major geographies.

So, while basketball still has a bigger percentage of the business here in the US certainly, running is the key silhouette in Western Europe.

Basketball is growing significantly there, while running is growing significantly here.

So, at this point, no, the momentum is clearly there on the footwear side and with the progress we're seeing in apparel, we continue to see some tailwind in the sales right now.

I know the question was asked already but can you give us any more color on what you've seen from Runners Point Group, Sidestep and so on and how you're looking at that?

We were looking forward to hearing a little more color once it hit the comp, so just would love to get as much as you can give us.

The work that we're doing, Bart and his team working with Lew and his team over in Europe, are really designed to get us ready to run a multi-banner offense across Western Europe.

So, solidifying the positioning of Runners Point as all things running, and Sidestep being more on the lifestyle side of the equation, that complements the position that we've got with Foot Locker is ongoing work.

When we took Timberland boots and Chuck Taylors out of Runners Point we fired some customers.

So, now we're rehiring customers with technical and lifestyle running and really creating an environment that is core to the Runners Point DNA, which is really where they started, as a technical specialty running shop.

In Western Europe, that business is able to be successful both on the high streets and in the malls.

We've launched a Lighthouse store in Cologne and we've got a second plan to expand the Lighthouse spot into Vienna, in Austria.

That will be the first country that we move into outside of Germany in a significant way.

So, the progress continues and the positioning continues.

But it's something that will take some time to get the multi-banner offense up and running.

But, as Lauren said, Runners Point Group business continues to be accretive to us and we're pleased with the results at this point and are very happy that the acquisition is behind us and the integration continues.

Thanks.

And then, lastly, on a scale of 1 to 10 where are you with the impact of the allocations, the new allocation system that's been put in?

I know you mentioned it was a learning system.

Maybe you could provide a little more color there.

The first phase of the project, Sam, is completely installed.

So, the learning piece of it is out there and it's helping us allocate product into the stores today.

We've changed the process that we use.

We hold a little more inventory back in the warehouse and then we replenish to the stores that have the best opportunity from the systems perspective -- of course, with human monitoring -- the best opportunity to sell that product.

The second phase where that knowledge is part of the order planning system, that's the piece that we'll roll out later this year.

So, we'll continue to get better in the allocation and flow of product into the stores initially.

We'll continue to get better with the replenishment of the product into the right stores, which again helps us lower the markdowns and increase the opportunity to sell to the right customer in the store.

And then we'll get more informed order writing as we go into 2016 and 2017.

So, the system, we'll always learn.

The first round of learning is probably the lengthiest as it goes through a full cycle with us.

But it will continue to learn and we'll be able to take continued advantage of the installation of the system.

We think it bears fruit for several years.

Thank you very much.

Continued success.

The next question is from the line of Matthew Boss with JPMorgan.

Please go ahead.

Hey, congrats on a great quarter, guys.

Given your strong gross margin performance in the first half of the year, any change to the flat to slightly positive full-year outlook?

And then just the best way to think about second half headwinds and tailwinds.

We really have done a good job of flowing through the sales gains above the mid single-digit plan, comp first half 8.7.

And when we're able to do that, we're really able to lever the fixed elements of the margin.

As I've already described, we actually improved the merchandise margin.

So, as we look at the back half, planning mid single, but if we're able to come in at the high end of that range there's no reason to think that we couldn't continue to lever those fixed elements.

So, 40 to 50 leverage basis points on the back half is not out of question.

And then the tailwinds, headwinds, we talked a lot about product strength and what we're seeing coming from product.

We've still got the FX that we're dealing with as a headwind, although that begins to get a bit better the further into the back half we go.

As we look at third quarter, should be less than 100 on the top line but think about it 80 to 100.

It's probably about a nickel on the bottom line for Q3 and then it gets a bit better than that in Q4.

Okay, great.

And then just touching back on that FX, in the expense base, what's the best way to think about expense dollar growth in the back half of the year?

Can dollars continue to be down in SG&A?

And then go forward, just any change to the low single-digit comp leverage point or is that the best way to think about it multi year?

Any investments for us to consider as we think beyond this year?

We continue to see that we can lever low single digit comps.

But on the SG&A, certainly we got a benefit in the first half from the FX as you look at the dollar impact that, as I've described, lessens as you get further into the back half.

But we did do some shifting of marketing expense into the back half to make sure that we were really telling our story during the peak of selling periods.

So in terms of SG&A, I'd continue to stick with our guidance that we gave earlier of 50 basis points over the back half of improvement.

Okay.

Great.

That's really helpful.

Best of luck.

The next question is from the line of Matthew (sic -- Eddie) Plank with Jefferies.

Please go ahead.

Hey, guys, good morning.

I'll add my congrats, as well.

It's Eddie, by the way.

Dick, on the kids business, it's been strong for several years now.

How do you feel about the runway left there?

How much does the global opportunity factor into sustaining that strength at this point?

The kids business has really been one of the shining stars that we've had amongst many, Eddie.

And the opportunity to grow that banner exists both in the US where we continue to add some KFL stores and in our international markets, as well.

So, we see continued upside there.

Obviously as we opened some partnership spaces, the Fly Zones have been extraordinarily well received in this country.

We're looking at that partnership space in Canada and in Western Europe, as well.

So we think there's still upside on the kids business.

And that's just the KFL banner, Eddie.

When you think about our kids business across the other banners where we sell it, that was up double digits in the quarter.

So we continue to see opportunity on the kids side.

Great.

That's really helpful.

You touched on the Under Armour shop-in-shop concept at Champs.

Maybe it's early to ask this question but are you talking about any scalability there to the other banners?

You've got the shop-in-shops with the Puma Lab and the adidas shop-in-shops.

How do we think about Under Armour as a factor in that going forward?

We see Under Armour as a player across several of our banners.

The partnership space right now, the Armoury is clearly focused on the Champs Sports customer and we have to figure out the scale with Under Armour, we have to figure out the scalability of it with the Champs banner.

But several of our banners are working hard with Under Armour to continue to drive product opportunity.

We think Under Armour will play a significant role in our women's business, for example.

They've got some great assets with Gisele, Misty Copeland, people that have real resonance with our female consumer.

We see them having a big impact in the business going forward across banners.

Great, that's helpful.

All the best going forward, guys.

(Operator Instructions)

Our next question is from the line of Erinn Murphy with Piper Jaffray.

Please go ahead.

Great, thanks, good morning.

I was hoping you guys could talk a little bit more about Europe.

I think you talked about accelerating your store growth plans there.

Can you just elaborate what regions you're going to really be focused on?

I know JD Sports has been very aggressive in their store rollout plans there.

How are you viewing your move in terms of being defensive versus offensive at this point?

Thanks.

Erinn, we always play offense.

That's the fun side of the game.

We look at Western Europe with over 600 Foot Locker stores, a couple hundred stores in the Runners Point Group in Germany, and the multi-banner offense presents us great opportunities across the other countries.

That's why the work that we're doing with Runners Point and Sidestep is so critical in terms of complementing the Foot Locker business across the Western Europe theater.

The places that we talked specifically about, we feel like we're a little bit under-penetrated in a couple of the big six countries, France and Spain specifically.

So, we think there's an opportunity to expand our Foot Locker stores there.

And as we get ready to roll out the multi-banner offense, we see, frankly, most of the Western European countries that we're doing business in as an opportunity to run that multi-banner offense.

Thank you.

With JD Sports in particular, are there any other competitors other than them that you're seeing as pretty significant in terms of how they are thinking about their store allocation or store roll-out plans?

There's competitors, Erinn, in each country.

JD's has probably been the most aggressive going across country borders, moving more into the continent from the UK.

But there's competitors that clearly have plans to expand in most of the countries that we do business in.

We look at Western Europe in totality, but the team over there really focuses on specific markets and identifies great opportunities to open stores.

So, we look at it from an offensive point of view and that's every country that we do business in.

This is one of our real strengths, that we're very focused on the local customer and what their product preferences are.

And we've got a rich history of being able to do that, so it is a competitive advantage for us.

That's helpful.

And then when you talked earlier on in the call just about the strength you're seeing in running, you talked about some of the other brands like Puma, New Balance, ASICS, Saucony.

I didn't hear you talk about Under Armour from a running perspective.

How is that brand doing within running in particular?

Their running product is certainly advancing, Erinn.

The call-out that I made was more along the lifestyle side of running.

But the shoes that Under Armour's bringing to bear on the running side of the house certainly have gotten better over the last couple seasons and we see continued progress there.

And we think that both on the running and basketball, and ultimately on the training side, as well, that their footwear is improving.

Got it.

And then just last question, just housekeeping on the model for the back half.

You bought back a little bit less stock in the second quarter versus the first quarter.

How are you thinking about buyback activity in the second half and what's included in your guidance?

Thank you.

We have [$851 million] still open in our authorized program and we're executing against that.

I don't have a formula that I can share with you.

We really look at our capital structure across our opportunities to invest in the business and return to shareholders, and I think we've done a good job of doing both.

Got it.

Thank you, guys, and best of luck.

The next question is from the line of Kate McShane with Citigroup.

Please go ahead.

Thank you.

Good morning.

My question was on apparel, as well.

You had mentioned that the profitability is improving despite the fact that the penetration is declining a little bit just based on the strength of footwear.

Can you quantify at all how the gap in profitability has improved for apparel over the last couple of quarters and what your expectation is for that gap through year end?

Kate, it's a case where we have been improving the margins in both footwear and apparel, I'm happy to be able to say.

We work on flow in all the categories better.

But we have narrowed the gap.

It's still a case, though, where apparel's chasing footwear.

And we still continue to think that the point where we're really at our A game with apparel, that it's got margin potential above footwear margins.

We still have that race going on and happily apparel has picked up speed in the race.

Have you stated ideally where apparel margins should be once you're at that point?

We think that apparel margins should be better than footwear margins in the end.

If we're doing the right thing from a buying and allocating point of view and running the life cycle of the product appropriately with our markdown cadence, we see apparel margins being able to be equal to or better than footwear margins.

It should be meaningfully better.

Okay, great.

That's helpful.

Thank you.

And my last question is for Dick.

It's almost nine months that you've been head of the Company now and six months since the Analyst Day.

Just wondered if you had any insight about what has surprised you during this time period, where you think maybe you have a little bit more work to do than maybe what you initially thought, and any kind of insight into the first eight months on the job.

The continuity of the role has been probably one of the smoother things.

Ken handled his exit in the beginning of the transition as the consummate professional that he is.

Ken and I had worked hand in hand for a long time.

The new plan was a continuation plan.

The team continues to execute at a high level.

From the business point of view, we continue to make great progress and I don't see necessarily any surprises there, Kate.

The biggest surprise that I've had so far is that the CEO role doesn't come with 26 hours in a day.

There's a lot of things that when Ken and I were working together, Ken handled some, I handled some.

And now I'm trying to be a good leader across the business and could use a couple more hours in the day.

I'll have to figure that out.

His teammates try to --.

Pitch in and help, absolutely.

-- pick up some of those hours.

Thank you.

The next question is from the line of Paul Trussell with Deutsche Bank.

Please go ahead.

Good morning.

And congrats on a stellar performance.

I wanted to just ask about price points in a few different manners.

One, as we look forward to the fall and turning around the corner into early 2016 launches, any reason to see the pace of ASP gains slow or alter from recent results?

Second, are you able to speak to your current merchandise mix as well as recent performance across various price points, perhaps below 100, between 100 and 150 and the more premium product above 150?

Be interested if there have been any standout performances between price points.

Third, and lastly, there has been recently a big double-digit percentage increase in the price point of the Kevin Durant basketball sneaker, and there looks likes there's going to be a double-digit percentage increase in the price of the retro Jordan sneaker to come.

How do we think about the elasticity of some of these products with that type of pricing change?

What is embedded in the assumption for how units perform on such a deep increase?

Thank you.

You had a bunch of questions so let me try to go back to the first one.

We don't see price point growth slowing down in the back half, certainly.

I think that the customer, as long as there's great value in the product, they've proven that they're willing to pay the price.

And that's across the various buckets that you talked about.

If you're talking under $100, the consumer there has to see the right value associated with the price.

From $100 to $150, really the wheel house of getting towards that beginning of the premium end, there has to be value for the price.

And when you get up to the higher price points, the people that create those shoes do a great job of limiting distribution and the number of pairs in the marketplace.

So, there is a scarcity model that exists that the consumer that gets those shoes feels really fortunate that they got them and they clearly, to this point, have shown they're willing to pay the price.

Our team does a nice job, Paul, with each launch, with each product that they look at, they look at the cadence of other products before it, the products that are coming after it from a launch perspective and they seem to be right more times than not with the quantities that we put into the marketplace.

The real opportunity lies in maximizing the value for the customer across all of those price points.

And together with our vendors we're doing that.

That's what we really focus on.

And our merchants are making sure that they have compelling product across the price points so that we don't leave anybody behind.

Thank you.

That's very helpful.

Congrats again on a great quarter and please save me a pair of Yeezys tomorrow.

(laughter)

We can't do that, Paul, but I have a feeling that you're already in line somewhere for them.

The next question is from the line of Bernard Sosnick with Gilford Securities.

Please go ahead.

Thank you.

I'd like to say that when you move to new headquarters during conference calls I think I'm going to miss the whine of emergency vehicles unless you pipe it in.

(laughter)

No, you're not, Bernie.

Sorry to interrupt, but we're still on 34th Street.

We'll still have that sweet sound of the sirens behind us.

I know it's early since the release of Compton and Dr. Dre's album, but I'm wondering if you're seeing any inkling of a change in demand with regard to styling toward hip-hop.

And if so, when styling changes like that, will it have any influence on what you're prepared for for the holiday season?

And how quickly might you be able to adjust?

The footwear choices of all of the artists and athletes certainly have a bearing on what our customer chooses to wear.

With social media as active as it is today, they know what whoever is performing tonight wherever is wearing.

The fact that the Yeezy shoe got some press today in the Wall Street Journal tells you that things are shifting.

But our consumer is really driven by the moment.

Our vendors do a great job of helping manage those moments by bringing great products to bear in the marketplace, sometimes with fewer pairs than we'd like to see, sometimes with more pairs than we'd like to see.

But they manage that pretty well.

I think as the athletes and the artists continue to change their footwear choices, our customers react to that and certainly our buying team reacts to that, as well.

Thank you and keep surprising us on the upside.

I think that's all we have time for.

We appreciate your participation on our call today.

We look forward to having you join us on our next call which we expect will take place at 9 AM on Friday, November 20, following the release of our third-quarter and year-to-date earnings results earlier that morning.

Thanks again.

Good-bye.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your lines.