Foot Locker Inc (FL) 2015 Q3 法說會逐字稿

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

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session.

This conference call may contain forward-looking statements that reflect Management's current views for 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 release and SEC filings.

We refer you to Foot Locker Incorporated's most recently filed Form 10-K or Form 10-Q for a compete 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, Chris, and good morning everyone, and welcome to Foot Locker Inc's third quarter earnings conference call.

As reported earlier this morning, Foot Locker Inc sustained its strong operating momentum in the third quarter, by posting an 8.7% comparable sales gain.

Non-GAAP net income was $141 million, equating to earnings of an even $1 per share, a 20% increase over the $0.83 per share the Company earned in the same quarter last year.

Included in our GAAP results this quarter was a $100 million pretax charge related to pension plan litigation.

Including this expense, which was $61 million after tax, or $0.43 per share, our GAAP EPS was $0.57 in the third quarter.

In September, the US District Court ruled in favor of the plaintiffs in this case, which was initiated in 2007.

The case relates to the communications to plan participants 20 years ago, around changes to the benefits under Woolworth's pension plan in 1996.

As noted in our press release of September 30, the Company disagrees with the court's decision, and has filed a notice of appeal.

Lauren will provide some context to the case a bit later.

But because this litigation is pending, we will not be able to provide any additional information about the case in response to questions after our prepared remarks.

A reconciliation of our GAAP to non-GAAP results is provided in the press release issued earlier today.

For the first nine months of the year, the Company has generated record net income of $444 million, or $3.14 per share, on a non-GAAP basis.

This EPS figure is 22% higher than the $2.58 per share earned in the first three quarters of 2014.

Lauren Peters, Foot Locker's Executive Vice President and Chief Financial Officer, and Dick Johnson, our President and Chief Executive Officer, are with me here this morning, and will now provide the details of our operating performance during the third quarter.

Lauren?

Thank you, John.

And let me thank all of you for joining us on our call this morning in New York.

We are very pleased to be reporting such strong sales and earnings for our third quarter, as we continue to build on our successful model of delivering to our customers the most innovative, athletically inspired footwear and apparel in the market.

Our success has been remarkably consistent across multiple geographies, banners, families of business and product categories.

We drove strong top and bottom line performance in both our stores and digital segments, demonstrating once again the importance of connecting with and serving our customers, however they choose to shop.

As mentioned during our previous call in August, the back-to-school season shifted later this year.

Our comps were running up mid single digits at the time of our call, which is where August landed in total.

As many kids held back shopping until later in the season, our September sales accelerated nicely to low double digits, and our momentum carried over into October, which increased just shy of double digits.

We've continued to drive solid comparable sales gains since then, with our November month-to-date comp gain towards the high end of mid single digits.

Let's start our review of the third quarter with our store segment, which in total posted an 8% comparable sales increase.

The gains were led by Foot Locker Europe, which generated an outstanding increase in the high teens.

Foot Locker Europe generated double-digit gains in almost all countries and in all major categories, including men's, women's and kids', footwear, apparel and accessories, and in running, basketball and classic styles.

Runners Point and Sidestep, however, did not participate in the strength experienced by Foot Locker in Europe, with comp sales declining low double digits.

Dick will provide more color on the dynamics behind this result during his comments.

The rest of our international business was strong, with a high-single-digit comp gain in Canada, and yet an even stronger result in Asia-Pacific, where comp sales increased low teens.

Our domestic stores executed very well, too, with Foot Locker and Kids Foot Locker both up high single digits.

Champs Sports and Lady Foot Locker 602 were both up low single digits, while Footaction ended the quarter with a slight comp decline.

Footaction actually posted a mid-single-digit overall sales increase, but its comp and traffic were negatively impacted by some big stores that were temporarily closed for remodeling.

Footaction is at the same early stage of remodeling its store fleet that the Foot Locker and Champs Sports banners were a couple of years ago, with not enough remodeled stores experiencing a sales lift to compensate for the several weeks that certain key stores are dark for remodeling.

Those Footaction stores that have been remodeled are in fact doing quite well.

Our direct to customer segment posted another fine performance in the third quarter, with an overall comparable sales gain of 13.4%.

Eastbay was up mid single digits, while our domestic store banner dot-com businesses collectively increased almost 30%.

Our international direct businesses, which are much smaller than the US, were also up close to 30%, with strong gains in Foot Locker Europe and Canada, partially offset by weakness in Runners Point.

Direct to customer sales increased to 12.4% of total sales, up from 12.1% a year ago.

Overall, footwear continued to be our strongest category, posting another low-double-digit sales increase, while apparel maintained its pace of a mid-single-digit sales increase, partially offset by certain accessory categories, which continue to face difficult comps.

Within footwear, running was the strongest category, with a mid-teens gain, while basketball was up mid single digits.

The other leg of our footwear stool, including boots and classics, was also very strong.

Dick will provide more details about all of these categories in a few minutes.

Comparable sales of men's and women's footwear were both up high single digits, and kids' footwear sales increased in the teens.

Similar to the prior quarters of 2015, reported sales were reduced by about $90 million in Q3, due to the impact of weaker FX rates this year compared to rates in effect a year ago.

Thus, our 8.9% total sales gain translated into a reported sales increase of 3.6%.

Our strong third-quarter sales results were joined by a strong gross margin performance, with the rate improving 60 basis points, to 33.8% of sales, from 33.2% a year ago.

Of note, this quarter was the first in a long time that our initial markup rate did not decline, as vendor and category mix have stabilized.

Merchandise margin improved about 70 basis points, on a constant currency basis.

A bit of the gain related to the final liquidation of CCS inventory in our results last year, although the bigger contributor was an incrementally lower mark-down rate.

Fixed cost leverage also contributed 10 basis points to our improved gross margin rate, while FX rates took away 20 basis points.

Effectively leveraging our shared services model for most support functions, we continue to be very disciplined in managing our expenses.

Helped by FX, our reported SG&A dollars were again down slightly in the quarter, with our expense rate improving 80 basis points, to 19.6% of sales, from 20.4% last year.

Our income tax expense rate landed better than planned on a non-GAAP basis, due primarily to releasing a reserve in a jurisdiction where statute of limitation expired.

On a GAAP basis, our tax rate was lowered significantly, due to the fact that the litigation charge reduced our US income where our tax rates are highest.

Our inventory continued to be very well positioned at the end of October, with a year-over-year increase of just 0.9%, compared to our 3.6% reported sales increase.

On a constant currency basis, inventory was up 4.5%, compared to our 8.9% sales increase.

Our inventory is very fresh heading into the holiday season, and we are excited to get going on this year's best-ever Week of Greatness that starts tomorrow.

We also maintained our balanced capital allocation strategy during the quarter.

First, we invested $57 million of capital into our business, bringing our total year-to-date capital expenditures to $173 million.

Second, we paid another $0.25 dividend, totaling $35 million.

And finally, we spent just shy of $111 million to repurchase 1.56 million shares of our stock.

That brought our year-to-date total share repurchase to $316 million, a reduction in shares outstanding of more than 3%.

And we did all that while still ending the quarter with $878 million of balance sheet cash, down a bit from a year ago.

The story with traffic this quarter was the same as last quarter, with the modest decline in US traffic offsetting strong traffic trends internationally, producing a small overall increase in traffic.

As mentioned in Q2, we believe that the different traffic patterns, here and abroad, relate to the significantly stronger dollar this year, which has led in particular to less tourist traffic in the US.

Average selling prices continue to increase, both in footwear and apparel.

Unit sales were also up in footwear, but down in apparel, as we continue to transition our assortments towards more premium styles.

Conversion also ticked up.

With the investments we are making in exciting store environments, merchandise systems, training programs for our associates, and really terrific marketing programs, all have combined to increase the chances of our shoppers leaving our stores with a bag or two full of the innovative shoes and apparel that our vendors continue to deliver.

So as we head into the holidays, we still see Q4 potentially shaping up as follows.

A mid-single-digit comparable sales gain, perhaps at the high end of that range, 30 to 40 basis points of improvement in both gross margin and SG&A, and a double-digit EPS gain.

Before I hand the call to Dick for a product and strategy review, I want to put in perspective the litigation charge that John mentioned at the beginning of this call.

Most importantly, I want to emphasize that we have a very strong balance sheet and a well funded pension plan.

The Company's reasonable estimate of the litigation expense is a range between $100 million and $200 million, with no amount within that range more probable than any other.

In accordance with US GAAP, therefore, we recorded a $100 million accrual.

We believe our pension plan is sufficiently well funded today to absorb a liability of $100 million or more, without requiring any cash contributions by the Company to the plan in the near term.

Thus, this charge does not change our ability to invest in the business, to reach the 2020 goals we laid out at the beginning of the year, and to return cash to shareholders, just as we intended to before this litigation charge.

Thanks, Lauren.

That's a very important point to make as we focus on the future.

Good morning, everyone.

We really appreciate your interest in our Company, which has now generated 23 consecutive quarters of meaningful sales and profit growth.

We've talked a lot over the last several years about how we've diversified the business, the strength of our different banners and channels, the global reach of our footprint, strong businesses in men's, women's and kids', and the multiple legs to our product category stool, basketball, running, and classic sneakers, along with apparel.

This quarter, and in fact the entire year to date, represents a perfect illustration of how building that diversity has helped us sustain record-setting growth over multiple quarters and years.

True, not every one of our initiatives is performing up to our expectations, and I'll touch on those.

But we have so many outstanding examples of success that I could easily fill up this entire call talking about them.

But I know you'll have plenty of questions, so I'll make sure to leave the usual time for those at the end.

First, Europe.

The Foot Locker banner there turned in an exceptional performance, with strong double-digit gains in both running and basketball footwear, as well as in classic sneakers.

Running was led by lifestyle products such as Huarache and Roshe and Max Air from Nike, and the ZX Flux from Adidas, while basketball was driven by Jordan.

Classic styles were highlighted by Superstars and Stan Smiths from Adi, and Air Force Ones from Nike.

Boots, led by Timberland, were also up double digits.

Apparel in Europe was even stronger than footwear, with both Nike and Adi doing quite well, along with our own private label business.

As proud as we are of the success Foot Locker is having in Europe right now, we're certainly not satisfied.

First, we are still below the peak productivity levels we reached before the Great Recession.

Second, we believe that the systems, remodeling and associate training initiatives we have put in place globally in the recent years can lift our European results to new record productivity levels in the future.

On top of that, our Kids Foot Locker business in Europe is doing very well, with growth opportunities both in terms of comp gains and adding productive new Kids Foot Locker stores.

Finally, Foot Locker's online business in Europe is still quite underpenetrated, so as we enhance the digital connections with our customers there, we see tremendous opportunity for even better performance.

Right now, our Runners Point and Sidestep banners are not participating in the momentum seen at Foot Locker.

We are still working through our market segmentation strategy in Germany.

The initial tests last year of that strategy, which was to take Runners Point back to its roots of being all things running, and positioning Sidestep as a true lifestyle banner, were very encouraging.

However, the athletic market in Germany has shifted a bit, revealing in hindsight an over-reliance on a few key styles that are no longer as relevant for those banners' consumers.

We still believe in our segmentation strategy, but we have work to do to build enough diversity into that product assortment at both banners, to ensure that we can respond to fashion shifts more nimbly than we have so far this year.

Now, turning to the US, our Foot Locker and Kids Foot Locker banners both turned in excellent quarters.

Here's a perfect example of how the product diversity that we have developed, really a focus on delivering the coolest premium sneakers to our customers across categories, helps us ensure we can generate strong results despite fashion shifts that, in the past, may have caused our product stool to wobble.

Because what led the performance this quarter was running, court classics and boots.

We have developed a leadership position in lifestyle running in the US, and in fact all of our markets, including Max Air, Roshe, and Huarache from Nike and ZX Flux from Adidas.

Meanwhile, we continue to build bigger lifestyle programs with Puma, New Balance, Saucony and ASICS.

As in Europe, exciting new executions of classic court shoes such as Air Force Ones, Superstars and Jordans also performed very well in the US.

Recognizing that our boot business is more about fashion than the weather, we brought in bigger quantities and more styles of Timberland and Nike boots for back-to-school, and the results were terrific.

Finally, let's not forget about the US basketball business, because we have an increase there too.

Signature basketball witnessed a shift, with gains in Kyrie Irving at Nike and Steph Curry at UnderArmour, not to mention strong gains in Jordan, creating a solid marquis basketball business overall, despite what we believe is a temporary slowdown in sales of the more established player shoes.

Meanwhile, lifestyle basketball styles sold very well, and some of the performance business has also shifted into the court classic styles I just mentioned.

The end result of all of the shifts in footwear in the US, we believe is a more balanced product portfolio and vendor mix.

It helps keep the legs of our product stool steady, positioned for consistent sales growth.

Our kids business continues to perform very well.

Not just in Kids Foot Locker, but in virtually all our banners that sell children's products.

The merchandise highlights here were mostly the same as at the big brother Foot Locker banner, as we capitalized on the same trends.

We also continue to open new Kids Foot Locker stores, both in the US and overseas, as we look to solidify our leadership position in kids in our key geographic markets.

Lauren mentioned a couple of reasons why Footaction's comp was down slightly.

What drove Footaction's total sales to actually be up mid single digits was the opening of several new power stores this year, such as the one in Del Amo Fashion Center, south of LA, and of course the new flagship store on State Street in Chicago.

This exciting new Footaction store also includes a Nike Kicks Lounge and a Flight 23 shop, creating the premier Jordan brand experience.

Lady Foot Locker SIX:02 produced a sixth consecutive comparable sales gain, a solid achievement as we continue our work to develop SIX:02 into our primary women's brand.

Just this week, we're opening our 28th and 29th SIX:02 stores.

And last week, we conducted our second annual It's Your Time SIX:02 6K race in Dallas, a fun event that combined a competitive 6K race with special post-race style events.

Footwear was strong at Lady Foot Locker SIX:02, led by several lifestyle running silhouettes.

The Nike Flyknit performed well, as did the Puma Creeper, a good example of an active lifestyle fashion success story.

Apparel, on the other hand, was a bit challenging this quarter.

A nice pickup in Adi and Nike lifestyle apparel was not enough to offset declines in some of the more basic branded performance shorts and bras.

We're working with our key vendors, all of whom have called out women's athletic apparel as an important focus for them, to develop special programs and styles for our athletically active customers in SIX:02.

In the meantime, our women's business and our other banners continue to be strong, with sales of women's footwear up low double digits.

We have heightened our focus on the female muses for each banner, a process we went through much earlier with our men's businesses, leading to having more of the right product assortments for her in the different banners in which she chooses to shop.

Turning to our digital business.

It remains very robust, and is on pace to be our next $1 billion business.

Better yet, we have tremendous opportunity to accelerate growth, especially in our international markets, where our digital penetration remains low.

We have in place our new digital platform in Europe that we're just beginning to take full advantage of, and a relatively new website gaining traction in Canada.

We have created excellent connections with our core customers online, connections that start well in advance of their developing an intention to buy anything from us.

Whether it is our Foot Locker app with innovative shoe-mojis, the launch calendar feature on Champs Sports, links to our outstanding ads on YouTube, or simply the store locator function on all of our sites, our customers are interacting with us 24/7.

Although roughly 80% of transactions start with some sort of digital interaction, 88% are still completed in a store, demonstrating how critical it is to have both great digital content and exciting places to actually go touch, feel and try on the product, and experience our brand.

We will continue to invest meaningfully in both digital and bricks and mortar.

Let me stop the business review there, because we want to get to your questions.

But before we do, one last thing.

$1 per share of earnings in the quarter.

It was another outstanding effort and performance by everyone on the Foot Locker Inc team.

Yes, it's a tough retail environment out there.

We hear that all the time.

But in my experience, retail is a challenging game even in the best of times.

But by focusing on the customer, creating exciting places to shop and buy, investing in our people and processes, living by our core values, and partnering with the best suppliers in the world, we have a very real chance to continue having a lot of happy customers, and to win every day.

I want to thank all of our associates, here and around the world, who once again pulled together to set a new standard of excellence in our financial and operational performance in Q3.

I can't wait to see it happen again this quarter.

As we head into the holiday season, we want to wish all of you the very best.

And remember, every holiday outfit looks best with a brand-new pair of sneakers.

Chris, please open the call to questions now.

Thank you.

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

(Operator Instructions)

Our first question comes from the line of Mitch Kummetz with B. Riley.

Please go ahead.

I want to start, Dick, on the basketball side.

It declined sequentially from where it had been the prior quarter.

And forgive me, but I couldn't -- I think Lauren said it was either up low or mid singles.

I'm not sure which one.

But could you talk a little bit about what's happening, particularly with some of the signature shoes, from some of the more established players?

And why you think that business comes back?

It was up mid singles, is what Lauren said in her comments.

And we look at the basketball category in total, and certainly, there's a lot of excitement around some of the new players, with Steph Curry, Kyrie Irving, Anthony Davis, with Harden going over to Adidas.

We believe that there will continue to be a lot of excitement around the signature player shoes.

We also look at some of the more established players.

And the customers voted a little bit and said, we like the excitement with some of these new guys.

And we continue to work with our key vendors to make sure that there's excitement across their entire basketball range, and across the entire set of price points.

So I'm confident that, as we roll into 2016, the established players will continue to sell well, and probably get back to where they've been in the past.

Okay.

And just a second question.

On Runners Point/Sidestep, you mentioned that some styles were no longer as relevant there.

Could you just elaborate on that?

And what changes are you making to adjust to that?

And is there any, really, change in the strategy to the segmentation that you're doing in those stores?

There's no change to the strategy.

We're working hard on the segmentation strategy, to make sure that Runners Point is positioned as the destination for all things running, from the lifestyle running to the performance running.

And that Sidestep is really more of a casual lifestyle, fashion-led footwear destination.

The fact is, we fired some customers when we moved the bulk shoes and the boots, et cetera, out of Runners Point.

And as we looked at the test results, there were a couple of running silhouettes that were very dependent -- that Runners Point was very dependent on, in the German market in particular.

And those have softened a little bit, with Nike Free being one of them, in that particular market.

So the merchant team in [Recklinghausen] is working hard to find replacements for those silhouettes.

They're working hard with our vendor partners, again to make sure that we've got the right mix of product, and that we can react quickly when we do see some of those trends start to change.

(multiple speakers) Our Runners Point team is hard at work at establishing the connection with the runner in the local communities, and seeing success with that.

We've opened up a couple of flagship stores where that has really resonated well.

Okay.

Thanks.

Good luck.

Thanks, Mitch.

Our next question comes from the line of Christopher Svezia with Susquehanna Financial Group.

Please go ahead.

Good morning, everyone.

Thanks for taking my question, and nice job on the quarter.

Thanks, Chris.

Sure.

I was just wondering if you can just elaborate a little bit on Europe for a moment?

Just given the sustainability and the momentum there, as you see it playing out, how much you think is being driven by tourism versus just the product momentum?

And also, I'm just curious, when you mentioned bringing some styles that are working in Europe, like I think Superstar and something you're doing with the Air Force One, et cetera, how is that helping you to drive the US business, to a degree?

As you bring some of those more casual lifestyle products to the US?

Sure.

We certainly think that the business in Europe is sustainable, Chris.

I think that the team there has done a great job of maximizing product trends, working with vendor partners to create excitement in the stores.

Our remodels over there are having a tremendous effect.

The website platform that we referenced in our prepared comments, we've now got the Runners Point team and the Foot Locker Europe team on the same platform.

So we're leveraging that digital content and that experience.

So we think that there's great opportunities to continue to grow the business in Western Europe, both through comp gains and store expansion.

We haven't got to the point of really taking Runners Point and Sidestep very far outside of Germany.

One of the stores that Lauren mentioned with Runners Point is in Vienna.

So we're starting to expand that.

But we haven't really begun the march across Europe with that yet.

So as they look and identify styles, we have the benefit of seeing what's going on style-wise in Western Europe.

Our team's on a video call every Monday morning, talking about what's working around the globe.

And as we see things working, we can work with our vendor partners to make sure that those styles get adopted into the North American range if they're not, or vice versa.

When things are working in the US, that they get adopted into the Western Europe range.

One of the classic examples is the Tiro pant from Adidas, that the Europeans started selling -- I don't know -- between two and three years ago, and having a pretty good run with it.

We brought it over to the US at that time, the cuffed bottom pant, and really the US market wasn't ready for it.

But the Europeans continued to have great success with it.

We brought it back over about 12, 14 months ago.

It was the hottest item over the last year.

So our global reach, that global penetration, really allows us to see what's working in other markets, and allows us to adopt those products across geographies in a much quicker fashion.

And Lauren, just a question for you.

It looks like, from a long-term goal perspective, based on the guidance, you'll be roughly at that 12.5% operating profit goal, potentially, at the end of this fiscal year, just several years ahead of plan.

Any thoughts -- and around that, and the ability to go above and beyond that?

I suspect we're going to get a few I told you so's.

(laughter) There's just no doubt.

We've done a terrific job on getting after the gross margin improvement, levering the fix there, and just done an excellent job of managing the expenses in line with the top line growth.

So I have confidence in this team, that we will continue to focus on that kind of productivity and flow-through.

So I guess that's a long way of me saying that I think there's still upward potential.

Okay.

All the best on the holiday.

Thanks.

Thank you.

Thanks, Chris.

Our next question comes from the line of Omar Saad with Evercore ISI.

Please go ahead.

Thanks.

Good morning.

Great job again, of course.

Wanted to ask a question on the ASPs.

I know it has been a benefit to you guys, and some of the vendors in the space.

I don't know, you guys have a better insight, probably, into the future product pipeline than we do, of course.

Do you think the innovation is there, the product is there, the technology is there, to continue that positive AUR, ASP trend that's been benefiting you and others in the sector?

And then I have one follow-up.

Thanks.

Yes, the ASPs will continue to rise.

I think there's a steady innovation pipeline that continues to bring excitement to the product mix.

And going into 2016, we're looking at an Olympic year, where innovation becomes very important across many footwear categories, certainly, and apparel categories.

One of the other things that's changing is, we're creating a more premium apparel assortment.

So as we look at total ticket, our apparel prices are rising, as well.

So there is certainly the opportunity to continue to increase ASPs.

And then --

And a part of that is also controlling mark-downs.

And we have been less promotional, and that has the effect of increasing ASPs.

Yes, definitely.

No, absolutely, you guys have done a great job with that.

And then on the inventory, real quick, you guys have been running so lean, really well controlled.

Do you feel like you're missing sales at all?

Or is it -- are you really happy to keep this very lean level of inventory, and manage the mark-downs, as you mentioned?

Or do you think there's an opportunity to boost the inventory level, given the demand for the products you're selling?

I'm looking across the table at Lauren, and she's got a big smile on her face.

One of the things that we have to do is continue to increase our turns.

So it's about the flow of product, and we installed a new merchandise allocation system, which is helping us flow the product into our stores on a more timely basis.

We're getting the benefit of that.

Operating the inventory clean is one of the objectives that we've had internally for a long time.

I think the work is paying off.

Our inventory's fresh, it's clean, and I don't believe that we're missing sales.

I think our store managers are surprised that, right as they're selling out of product, the next product shipment is getting there, which is the way that it's supposed to work.

That's great.

Thanks a lot.

Have a happy Thanksgiving.

Thanks, Omar.

Our next question comes from the line of Michael Binetti with UBS.

Please go ahead.

Hey, good morning, guys.

Let me add my congrats.

Great job on a tough quarter there.

Thank you.

Lauren, a question for you.

Did buying and occupancy, I think you said it was about maybe 10 basis points of leverage.

Obviously a little bit below what we would have expected on a 9 comp.

Maybe -- I don't want to lead you to an answer.

But it reminds me of when you guys started the -- accelerating the remodel program a few years ago in the US, and that upside slowed a little bit.

But would you mind -- let me know if I'm wrong or right on that?

Or if there's something you could point to, as to whether there was a change in the leverage point there?

I can confirm that you're absolutely right on that analysis.

That we had, in the third quarter, as opposed to the first half, more dark rent periods, with stores closed for re-mod.

Yes, so no top line while that's happening.

So that's fair.

We think it's anomaly to the third quarter.

Contained to the third quarter, hopefully?

Yes.

Okay.

And then help me marry two comments together, please.

You've been talking about mid single digits for a while, but delivering high single digits pretty easily.

But then as we think about how important you are to the basketball customer, and the slowdown you talked about there.

If the slowdown in the mid single digits in basketball doesn't end up being temporary, excluding any other change, do you think, at this point, your position in the other categories to continue delivering upside in that mid-single-digit range?

Yes, we are.

I think the third quarter was a classic example of that, where the -- our job isn't to be the number one basketball seller in the world.

That's one category that we drive.

And I know that some folks have us pegged as the basketball guy, but we're far more than that.

And this quarter proved that, with a really strong quarter in running, strong quarter in casual shoes, our merchant team taking a risk bringing boots in early, and having great success through the back-to-school period, and selling an awful lot of basketball shoes.

So the work that we've done to diversify the business across product categories, to create a strong, solid stool, doesn't mean that every leg of the stool is going to work every quarter.

And our merchant team is like a money manager.

They move the money around, to make sure that we are bringing the best product assortment to the customers, and appealing to the customers' needs based on trends.

And historically, when basketball was a much bigger chunk of our business, the stool was very uneven.

But right now, our stool has four very powerful legs, between basketball, running, casual shoes.

And as our apparel business continues to get better, that's the fourth solid leg of the stools.

Thanks a lot, guys.

Congrats again on a great quarter.

Thanks, Michael.

(Operator Instructions)

Our next question comes from the line of Camilo Lyon with Canaccord Genuity.

Please go ahead.

Thanks.

Great job, guys.

Thank you.

My questions are going to center around apparel.

The first part is, if you could just update us on how the apparel transition is unfolding at the Champs banner?

And when you expect that to fully cycle, and see more traction there on the sell-throughs?

And then just broadly speaking, on apparel, you talked about a mix to a more premium product.

We've noticed a greater proportion of higher end Nike sportswear in the stores, particularly at Foot Locker.

If you could just help us understand, or give some insights as to, is the consumer responding to that more premium product?

And how you think about evolving that product across more of those banners?

Sure.

The Champs business apparel continues to get better.

We're still rationalizing against a much bigger licensed product business a year ago.

So while the business wasn't positive at Champs for the quarter, they continue to make progress.

And as we get into Q4, and then on into Q1 of 2016, we should have cycled through most of the license changeover.

Their private label business has been fantastic.

So again, it's making sure that we've got the right branded mix, the right private label mix, the right mix of license to be appropriate in Champs.

And then to get all of the accessories categories working, as well.

And as it relates to the second question, Camilo, on the mix, the change to premium, the customer's definitely responding positively.

The tech fleece from Nike, the Tiro pant from Adi, some of the Under Armour product that we've got in stores, customers around the globe are responding to the product mix that we've got.

I think it's a great step that our merchant team has taken.

We sold a lot of cotton by the pound in the past.

And as we continue the transition away from $9.99 T-shirts to $24.99 T-shirts, with great graphics on them, the customer is responding very positively, with, I would say, Europe serving as the flagship right now.

The business there has done a complete turn, and the merchant team in Western Europe has got the right mix of branded, controlled brands and private label, and a little bit of licensed product that really is working.

And they were up in the double digits in apparel for the quarter.

In the US, you see the premium apparel, certainly led by tech fleece in all of our banners, but each of the banners has a little bit different diversification of product to make that piece of their puzzle in each -- assortment puzzle in each store be unique.

Some of the work that the Footaction team is doing with what I call -- they call the Seventh Avenue Garmentos, where they can get in and out of product very quickly, because it's fashion-right, has really changed the dynamic in the Footaction apparel, as well.

The customer's looking for something special from us, and that's what we're trying to deliver with the apparel mix changes.

So Lauren, with that momentum across the different banners in apparel, does that mean that 2016 could finally be the year where apparel margins exceed those of footwear margins, and trend to where they normally should be?

We continue to believe that ultimately, the apparel margins go ahead of the footwear margins.

I can tell you that we narrowed the gap in the third quarter, but we still have this case of a chase going on, where we're improving margins in footwear and apparel, and they haven't -- those apparel margins have not yet gone ahead.

So yes, we are still of the belief that will, long-term, be a boost to the margin rate.

Okay.

All the best during the holiday season.

Thanks, guys.

Thanks.

Our next question comes from the line of Paul Trussell with Deutsche Bank.

Please go ahead.

Good morning, guys.

Great quarter.

Good morning, Paul.

Thank you.

You checked all the boxes, frankly, this third quarter, with good product and vendor diversity.

You sound confident heading into the Week of Greatness and the holidays.

And as you mentioned, next year is an Olympic year, which may bring on some innovation.

But stepping back from all of that, Dick, if you can just really remind us, what is driving the strength overall in sneaker sales?

It's gone on for a number of years, and your guidance suggests that it can continue throughout the next few years.

Just put a little bit of context on us, on what is driving this sustained robust growth?

Sure.

The younger generation is definitely about casualization, and they are perfectly comfortable wearing sneakers all the time.

I was on the train the other day, and a young gentleman that doesn't work for Foot Locker was sitting on the train in a suit, suit and tie, dressed to the nines, with a beautiful pair of Nike Air Max 2015s on.

And I looked at him and said, do you wear sneakers every day?

He says, I wear sneakers every day because they're more comfortable than anything else I could wear.

And that's really the attitude.

There is a generation of dads that have grown up during the sneaker revolution, if you will.

They're comfortable with their kids in sneakers, as are moms comfortable with their kids in sneakers.

And I -- that's going to continue.

I don't see kids putting leather shoes back on, dress shoes back on, to go to the office, to go to work, to go anywhere.

And so there is this generation, and this feeling of comfort, in a casual environment with sneakers, and using sneakers as dress sneakers.

Now they have dress sneakers and casual sneakers, and they're comfortable all the time, Paul.

So I'm an advocate of that.

I'm a believer in that.

I wear sneakers every day, no matter where I am.

It's part of my job, of course.

But I think that the young generation, and even getting into the middle age folks, are finding out that sneakers are really, really comfortable.

Got it.

And if we can just touch on some of the banners, actually, just to get a little bit more detail on updated thoughts if where we are, specifically Footaction.

If you could just help us understand, what are the changes going on with the remodels, with SIX:02, just in terms of the outlook for future growth?

And then just Champs, as that did under-perform the core Foot Locker banner.

Thanks.

Footaction is relatively new in its remodel process.

We've got the Garden State format is what we call their new format.

And where we've opened the doors, they're really performing well, as Lauren mentioned in her comments.

It was a little bit of a leap of faith.

We took footwear off the side walls, and we put footwear along the back, with some real highlight fixtures that call out the great footwear that the team buys.

But in order to get to the footwear, we have our core consumer that are walking through a lot of really fantastic apparel.

And one of the biggest changes in Footaction is the apparel mix that we've seen, and that's made a big difference to that consumer.

Also, the partnership spaces that we've got with Nike.

We've got Nike Kicks lounges, we've got Flight 23 shops that are connected to several of our Footaction GSP remodels.

So good progress being made there, but as Lauren mentioned, they've got some dark days.

It takes a number of weeks to get these stores completely remodeled.

So as we ramp up and get more of them open, we would expect to see that performance moderate a bit.

SIX:02, as I mentioned, we opened our 28th and 29th stores.

I think we've got one more to go this year, so we should end the year at 30.

We're looking at the opportunities for next year.

We've got a couple of flagship stores that will open here in New York, one on -- next year on 34th Street, and one, early in 2017, up on Times Square.

SIX:02 will be a significant part of that.

We continue to work with our vendor partners, as we mentioned in the prepared remarks, to get that something special on the apparel front, to really drive that consumer.

And we're seeing, where we attach the right assets, if you will, the right people to product, much like the support that Rihanna gave to the Creeper from Puma, we're seeing real success.

So she responds to that active lifestyle, fashion-led environment.

And we've been straight up all along that we're going to make sure that we've got SIX:02 right before we press the full acceleration, and we see that in late 2016, beginning in 2017.

So comfortable where we're at.

Continue to get better with SIX:02.

And Champs, actually, while it under-performed the Foot Locker banner, it actually over-performed where it's been sequentially the last couple quarters.

So they were up low single digits.

The apparel mix there is really important.

As we get through some of this licensed product challenge -- it's funny, we haven't talked about Major League Baseball.

But as we got into the League finals, we had four teams, and they all produced great sales results for the Champs banner, and a little bit of the licensed headwear and some T-shirts, et cetera.

Of the four -- we would have certainly preferred to see Toronto win, because we have a great Toronto following at Champs.

But that didn't happen, and we took advantage of the Kansas City win.

So they're making a lot of steps forward, Paul, at Champs.

And the fact that they were positive and up low single digits this quarter shows that they've got a strong footwear business, and an improving apparel business.

Thank you.

Best of luck, guys.

Thanks, Paul.

Our next question comes from the line of Jonathan Komp with Robert W. Baird.

Please go ahead.

Yes, hi, thanks.

Dick, I want to follow up on some of your comments.

I know you've talked about a lot of the factors you think are driving your own strength for the Foot Locker banner, and maybe even want to ask more on a relative basis.

It looks like your relative performance gap continues to improve recently.

Just want to ask if you have any high-level thoughts on maybe why that might be?

If it's the strength of your relationship with the vendors?

If it's the -- really the broader view of the consumer, and the different styles of footwear you're offering?

Or if it's the merchandising initiatives?

Or any thoughts of what's driving the relative performance?

The thing I really like, Jonathan, is when guys answer their own questions.

So you hit on a lot of the real keys to what I think is driving our performance.

And we really worry about what we do; we focus on what we do.

We've developed great relationships with our vendor partners around the globe.

We've got a global view, as I mentioned earlier, which I think really helps us.

So as we see something start to work in one of our geographies, we can pass that information around all of our banners, all of our geographies, and see how we can leverage that, while remaining diversified in each of our US and European banners.

So I think that really helps our positioning across the marketplaces.

The vendor relationships are important.

I think our global reach is important.

I think just the strength of our team is really what drives it home.

We've got people that are driven to win.

They really do worry about winning every single day, and it's a testament to their resolve.

Every morning they get up, and they know that the score card is reset overnight, and it's 0-0, and they've got to go out and win.

And our team does that better than any in the mall.

And we're not afraid to invest in our business.

Lauren talked about the amount of capital, something over $170 million, that we've spent on our stores this year alone.

So we invest, we've got a great team, we've got great relationships, and that drives our relative performance, I think, in the marketplace.

And all of it is absolutely riveted on our customer, with a very clear understanding of who the customer is for each of our banners.

Great store environment for them, great merchandise for them, and a digital experience that makes sense for them.

All of that, with great marketing that keeps our brands at the forefront.

Great, and maybe just a follow-up on the customer portion.

Thinking specifically about the basketball business and some of the discussion about the established basketball marquee platforms, maybe seeing a little less momentum recently.

Do you have any signs, when you look at your data for that customer who was buying the LeBron or the KD?

Are they shifting their purchases to some of the newer styles?

Or is that customer just slowing down their frequency altogether, and you're seeing a newer customer buy some of the younger player styles?

Or any thoughts on -- based on the data you see?

It's really a mix, I think, Jonathan, where the excitement right now the customer sees happens to be in Kyrie and Steph Curry, and they're really responding to that.

They're looking at some of the other shoes on the shelf and saying that we need a little bit more innovation, maybe a little bit better price/value relationship.

We need a little bit more out of a couple of the other signature players that you mentioned.

But the fact that our basketball business, in totality, continues to be up tells me that the basketball consumer and the basketball silhouette is still very relevant to our core consumers.

And as I mentioned earlier, I look at our merchant team really as money managers, and making sure that they get their open to buy dollars invested in absolutely the right categories, to motivate this customer to be excited about the product assortment and do business with us.

Great.

Thanks.

If I could just sneak one more.

Lauren, any thoughts on any SG&A pressures from wages, going forward?

Much appreciated.

Thank you.

Yes, as we've talked about before, and we have, for our sales associates, a base plus commission structure.

So they get to determine their wage.

And the better at sales they are, the higher their wage, the higher their take-home pay.

And that's worked well for us.

So we're very much, as we're focused on sales per square foot, we're focused on sales per payroll hour, and making sure that compensation structure rewards really great salespeople.

So we're feeling good about our ability to navigate what's happening in the US on wages, and we'll make sure that we remain competitive.

Great.

Thanks again.

(Operator Instructions)

Our next question comes from the line of Kate McShane with Citi.

Please go ahead.

Hi.

Thank you.

Good morning.

Good morning.

Good morning, Kate.

You had mentioned that you'd start getting the benefit of entering into an Olympic year next year.

Can you just remind us how the Olympics works for Foot Locker, in terms of some of the product maybe that's introduced, pre the Olympics or during the Olympics?

When do you start to see that in the store?

And how much of a preview to that do you have?

Our vendor partners are all focused on the Olympics, and the product pipeline to support the Olympics.

And probably the first place that gets a taste of real Olympic product is our Eastbay banner, where some of the early track and field shoes, some of the football cleats that will be used on the soccer pitch, are debuted there, actually pre or just pre or just post Olympics, so right around that time frame.

Some of the other technologies flow into the commercial lines a little bit later.

Flyknit was the innovation in conjunction with Lunar, when you go back and you look at 2012 in London.

Obviously, Flyknit, it has taken a while to get commercialized, but now it's one of the hottest things that we've got going in our stores.

So there's a little bit of a curve with it, Kate.

But we expect to start to see Olympic color waves, Olympic connections, going into the second quarter, and then the commercialization more so after the Olympics.

Okay.

Great.

Thank you.

And then my second question was, I think mentioned before by Nike and by Under Armour, Nike is pursuing an initiative with Jordan sportswear, and Under Armour has the Armory, I guess, in one of your Champs stores.

Can you update us on those two initiatives?

Sure.

We're opening Flight 23 shops in conjunction with Footaction, across a number of stores.

So as we remodel Footaction, some of them, like 34th street here in New York, certainly Del Amo out in California, State Street in Chicago, have fantastic Jordan shops that open up, along with Nike Kicks lounges, as well.

So we'll continue to expand that with Nike, as we roll out more -- and brand Jordan, as we roll out more of our Footaction remodels.

The Armory is a one-store build-out, but -- in the Champs doors right now, but we've got plans to expand that in 2016.

We've also taken some of the -- we've taken it down to some wall units inside the store.

So we've got a number of stores with units that look different on the wall, that takes some of the elements of the Armory, and bring it into more Champs stores.

And that effort will also continue, as we roll into 2016.

You know how we operate, Kate.

We have a prototype, then we test some things, we test different geographies, we test different size stores, we test different markets.

And once we get a level of confidence with our vendor partners, we accelerate the rollouts.

But both of those are great initiatives, with two really important partners.

Thank you.

Thanks, Kate.

Our next question comes from the line of Sam Poser with Sterne Agee.

Please go ahead.

Thank you for taking my question.

Good morning.

I've got a few here still.

One, where are you -- you mentioned the allocations --

Sam, we're --

Could you hear me?

Yes, we're already at 10:00 AM.

So make it short.

All right, just real quick.

Where are you with the allocation systems?

The US brick and mortar business sounds like it was up mid single digits.

Want to confirm that.

And then Dick, when you look at your consumer -- and I think you're just saying this -- you're totally ambivalent.

You don't care if you're selling a basketball shoe, a running shoe, a casual shoe; you're just trying to get the right stuff for your consumer.

Is that a fair point?

And lastly, when you look into the holiday season, with the big Jordan launches post-Thanksgiving and right before Christmas, how do you feel about those two shoes, relative to what happened to the big shoes you had last year?

Sam, I get to be a little bit ambivalent, in that the categories are somewhat driven by our consumer, not driven by me.

So I really have a tremendous amount of respect for the work that our merchants do to get the right product for our consumers.

And I -- one of our strengths is that we are so laser focused on our consumer, by banner.

And as the consumer moves a little bit, as some of those lifestyle preferences change a little bit, as the bottoms that they're choosing to wear, whether it be a Tiro pant or a denim jean, that drives a lot of their sneaker choices.

Sometimes basketball is the perfect silhouette; sometimes running is the perfect silhouette.

But our team does a really, really good job of getting those categories and those products merchandised appropriately.

So I like to drive sales.

I like the customer to wear what they're most comfortable wearing.

And we don't have a bounty on any specific category, to say the least.

We want to drive them all.

I look at our Week of Greatness, which starts tomorrow, Sam -- and I know you talked about some of the launches that are upcoming.

I like the way the calendar lines up for us.

The Week of Greatness has got some fantastic shoes that actually start today, with the Curry II, and then roll out significantly over the next week.

Great shoes, across our markets, each day of the season -- or of the Week of Greatness, I should say.

And then when we get to the pre-Christmas launches, again, I like the way the calendar lines up, and the way the shoes line up.

So we have a degree of confidence, certainly, going into the holiday season.

(multiple speakers) And then about the allocations?

Yes, the allocation tool is up and running, has been for the better part of a year, for our North American business and Europe.

The next phase of it is the order planning module that lets us impact the orders that we write, and that's an early 2016 pilot.

Thank you very much.

Continued success.

Thank you.

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

We appreciate everybody's participation on our call today, and we look forward to having you join us on our next call, which we currently expect will take place at 9:00 AM on Friday, February 26, following the release of our fourth-quarter and full-year earnings results earlier that morning.

Please note that's one week earlier than we have traditionally announced full-year results.

Happy holidays.

Thanks again, and good-bye.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.