Foot Locker Inc (FL) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Foot Locker fourth-quarter 2015 and full-year financial results 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 release and SEC filings.

We refer you to Foot Locker's most recent 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 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, Carlos, and good morning, everyone.

Welcome to Foot Locker Inc' s fourth-quarter and full-year 2015 earnings conference call.

Thank you very much for joining us today.

As reported in this morning's press release the Company achieved GAAP net income of $158 million in the fourth quarter, up from $146 million in the fourth quarter last year.

On a per share basis we earned $1.14 this year on a GAAP basis compared to $1.01 in the same period a year ago, a 13% increase.

As noted in our release we had one-time items in both this just completed quarter and last year's Q4.

This year the Company recorded a pretax charge of $5 million, $4 million after-tax, to reflect the impairment of certain Runners Point Group assets, thus reducing earnings by $0.02 per share.

A year ago the fourth quarter included a gain from the sale of a property as well as a writedown of a trade name.

Excluding these items fourth-quarter non-GAAP EPS was $1.16, a 16% increase over the $1 a share we earned on a non-GAAP basis last year.

A reconciliation of our GAAP to noncash GAAP results is included in our press release.

And, except as otherwise indicated, the numbers mentioned during our remarks this morning will we based on the non-GAAP results.

The strong finish to the year brought our annual non-GAAP net income to $606 million, also 16% up from a year ago and our fourth consecutive year achieving record annual earnings.

On a per share basis, earnings were $4.29 for the full year, an increase of 20% over last years $3.58.

Lauren Peters, Executive Vice President and Chief Financial Officer, will lead off our call this morning with a detailed look at our fourth-quarter financial performance, followed by Dick Johnson, President and Chief Executive Officer, who will touch on product trends and our progress in year one executing our current strategic initiatives as we work towards the long-term financial objectives outlined in last year's Investor Day.

Lauren will complete our prepared remarks with an overview of our annual and quarterly expectations for 2016.

Lauren?

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

We do appreciate you joining us as we review our 2015 results and take a first look at 2016.

It was indeed an outstanding year for Foot Locker.

And I'm pleased to report that in the fourth quarter we were able to sustain the top-line momentum we had built throughout the year, posting a 7.9% comparable sales gain on top of last year's 10.2% increase.

Our international divisions had had an outstanding year.

In fact, total sales increased more than 10% in local currency in each of our regions.

The fourth quarter was led by Foot Locker Asia Pacific, with a mid teens comparable sales gain on top of a double-digit increase in the fourth quarter last year.

Close behind were Foot Locker Europe, with an increase in the teens and Foot Locker Canada which was up double digits.

Unfortunately, our Runners Point Group stores did not share in that success, with both the Runners Point and Sidestep banners down mid single digits.

This performance contributed to the impairment charge John mentioned which had two components, a writedown of the assets of some underperforming stores and the impairment of the trade name SP24.com, the clearance website that Runners Point was operating when we acquired the business.

We have decided to de-emphasize SP24.com as not consistent with our Company's overall position as a retailer of premium full-price athletic footwear and apparel.

Our direct-to-customer segment turned in another strong performance with an overall comparable sales gain of 9.6%.

Our domestic store banner dot-com businesses collectively increased sales more than 20% with even faster growth outside the US.

Eastbay sales declined low single digits.

The true performance part of the athletic industry where Eastbay's assortments are strongest have slowed relative to casual.

We also believe the strength of the US dollar kept some Eastbay customers shopping locally in their home markets.

The domestic divisions all posted solid sales performances, with Kids Foot Locker leading the way with a high single-digit comparable sales gain and a double-digit total revenue increase, factoring in the addition of 13 net new Kids stores during the year.

Foot Locker in the US, Champ Sports and Lady Foot Locker SIX:02 were each up mid single digits, while Footaction was up low single digits this quarter on top of a double-digit increase in Q4 last year.

Footwear once again drove our sales gains, up double digit its overall in the quarter.

Men's footwear was up high single digits, while women's and kids' footwear were both up double digits.

By category, running was up in the teens, while basketball with underlying shifts that Dick will highlight in a moment, was up at the low end of mid single digits.

True apparel, meaning tops and bottoms, was up low single digits, while the smaller accessories business, including socks and hats, posted a high single-digit comp decline.

Overall, sales of apparel and accessories were down just a few basis points.

Similar to the other quarters of 2015 reported sales were reduced significantly in Q4 due to the impact of weaker FX rates this year compared to rates of a year ago.

That's our 7.9% comparable sales gain translated into a reported sales increase of 5%.

Although it is early days for 2016 and we have no special insight as to where currencies are going to go, for now we seem to have cycled through the bulk of the FX impact.

Our monthly comp cadence was highlighted by an exceptionally strong December, which was up in the teens.

Comparable sales in November finished at the low end of mid singles and January increased at a low single digit pace.

While January was running stronger than that, the snowstorm Jonas and the slower distribution of income tax refund checks in the US caused sales to tail off in the last two weeks.

Moving down the P&L to gross margin, we produced an excellent 70 basis point improvement to 33.6% of sales from 32.9% last year.

There were two primary factors driving the increase.

First merchandise margin improved 50 basis points due primarily to lower markdowns, although the increased proportion of footwear in our sales mix also provided a margin lift.

Apparel margins improved even more than footwear margins in the quarter, although they still remain below footwear.

Second, we achieved leverage of 40 basis points on our relatively fixed buyer and occupancy expenses.

These two factors were partially offset by 20 basis points of headwind related to FX.

Our team once again did a good job managing expenses in the quarter, as our selling, general and administrative expense rate decreased to 19.3% of sales from 19.6% of sales last year.

While we were headed for a bit more SG&A leverage the sales dynamics in the last two weeks of the quarter did not leave much room to adjust variable expenses.

Overall, our full-year SG&A expense rate improved by 80 basis points from 19.9% to an all-time low, 19.1% as we continued to drive productivity.

For example, our sales per payroll hour improved in almost every division, and our overall sales per gross square foot surpassed $500 for the first time, reaching $504.

Depreciation expense increased this quarter to $39 million from $33 million.

For the full year, depreciation and amortization increased 6% to $148 million due to the ongoing investments in the customer experience in our stores, our digital sites, and various system technologies.

Our adjusted earnings before interest and taxes reached a rate of 12.8% of sales, above the long-range goal of 12.5% we set for ourselves at the beginning of the year, and the first of those goals which we have reached.

Our fourth-quarter tax rate was 35.4%, above last year's Q4 rate but below our expected run rate of 36.5%, due largely to the expiration of statutes of limitations on foreign tax positions the Company had taken in prior years.

The bottom line was another record quarter for our Company, and another record year.

EPS of $1.16 in Q4 marked the third quarter this year that we achieved at least $1 per share in earnings.

Adjusted net income was $606 million in 2015, a 16% increase over last year.

Our net income margin was 8.2%, approaching our long-range goal of 8.5%, while return on invested capital improved to 15.8%.

Unequivocally, it was another excellent performance by the entire team at Foot Locker that enabled the Company to achieve such outstanding results.

Full-year EPS was $4.29 compared to $3.58 last year.

The 20% improvement in EPS was 4% higher than the increase in net income, reflecting the significant return of cash to shareholders we executed throughout the year via our share repurchase program.

For the quarter we spent $103 million to repurchase a total of 1.64 million shares, bringing our full-year total to 6.7 million shares at a cost of $419 million.

We also returned $139 million of cash to investors in the form of dividends during 2015 which brought our total return to shareholders for the year to $558 million, more than 90% of adjusted net income.

As we announced last week our Board declared a 10% increase to our quarterly dividend pay out rate to $0.275 per share.

And at year-end we had $637 million remaining on the $1 billion share repurchase program that was authorized a year ago.

With a solid financial position and a history of generating significant annual cash flow, we and the Board believe that the Company has the ability to continue returning a substantial amount of cash directly to shareholders, while also continuing to invest in the strategic initiatives that we believe will drive our financial performance towards our long-range objectives in the years ahead.

My final comment before I hand the call over to Dick is on inventory, which remains current and increasingly productive.

It increased 2.8% of actual FX rates compared to a 5% sales increase.

Using constant currencies, inventory was up 4.1%, in line with our standards when compared to our 8.8% total sales increase.

I'll turn the call over to Dick now and be back in a bit to wrap up our remarks with 2016 guidance.

Thanks, Lauren, and good morning, everyone.

My first earnings call as Chief Executive Officer came just about a year ago, and I recall being very pleased then to be able to report the remarkable record-breaking achievements that the team produced during 2014.

And today, I could not be more proud to report that the team was able to surpass in 2015 almost every financial and operational metric from 2014.

Although we know that breaking records is what is expected of the high-performing team I must first thank all of the individual associates who made it happen.

Their love of the game was apparent everywhere I visited this past year, from the store associates I watched engaging with customers to the various division headquarters teams working out how to win consistently with their core customer, to the support facility personnel teaming up with operations.

I saw them making sure everything they do helps lead to a happy customer as he or she leaves the store or one of our websites with some exciting new sneakers or apparel.

All along the way I witnessed a lot of passion for winning with our customers.

In a pattern that has developed in recent years, we achieved sales gains in all regions, channels, and genders in the most banners and product categories.

We believe this broad-based consistent performance reflects the leadership positions we have developed as a Company across our merchant and operations teams, not to mention our equally talented support functions.

I'm not going to spend a lot of time going over product highlights since most of the trends of the first part of the year carried over into the fourth quarter.

I will say that we made substantial progress improving the sales and productivity of all four legs of our product category stool -- basketball, running and casual footwear, along with apparel.

As the year unfolded, I believe it became increasingly clear that we have developed the leading position in more than just basketball sneakers.

A perfect example was our running business in which we delivered a mid teen comparable sales gain in the quarter with double-digit gains in every region.

This excellent performance was driven by lifestyle silhouettes such as Roshe, Huarache and Max Air from Nike and ZX Flux from adidas, as we lead the market in delivering trend-right styles.

Meanwhile, the rumored death of basketball, where our leadership position is most widely recognized, has been greatly exaggerated.

Although growth in the basketball category during the quarter was modest relative to running, it was nonetheless growth, with three primary factors contributing.

First, strength in the Jordan brand, especially in North America.

Second, the rise of new marquee stars such as Kyrie Irving at Nike and Stephen Curry at Under Armour.

And, third, momentum in classic basketball styles such as Air Force 1s.

Gains in these areas were more than enough to offset the current slowdown in sales of other signature products.

We also led the industry in sales of a wide variety of classic sneakers, demonstrating the strength and diversity of our footwear assortments.

We took a strong position in highly original styles, such as Superstars and Stan Smiths, while also delivering popular casual styles from New Balance, Puma and Asics.

And, not least, our Timberland boot business performed exceptionally well despite the relatively mild winter weather during much of the quarter.

Let me now turn to a brief progress report on our strategic initiatives.

First, our core business continued to perform very well, producing robust top and bottom growth in quarter and full year.

We built on our leadership position creating fresh and engaging store environments, having now remodeled approximately 30% of our domestic Foot Locker and Champs Sports stores and just under 20% of our Footaction stores.

We also opened more than 40 shop-in-shops in partnership with our vendors, about half of which were House of Hoops.

In 2016, we intend to continue expanding both our remodel and vendor partnership programs.

Second, our Kids growth pillar demonstrated outstanding progress, increasing sales well into double digits when considering sales of children's product across all of our banners.

In addition to the 13 net new KFL division stores Lauren mentioned, we also added Kids stores in Europe and in Canada, and we also added about 30 new Fly Zone shops in the US in partnership with Nike.

This strategy, too, we plan to continue in 2016.

Third, our Foot Locker business in Europe delivered a double-digit comparable sales gain in almost every country and double-digit growth across all families of business.

The team there did a truly exceptional job this year leading the entire market in offering the hot new styles I mentioned earlier such as the various Nike Modern Comfort and adi Originals line, as well as Air Max and Jordan.

We continue to work hard at refining and implementing our European banner segmentation strategy, and we remain fully confident that the Runners Point and Sidestep banners can contribute much more to our future success in Europe.

Meanwhile, the expansion of our Kids Foot Locker banner in Europe is already proving quite successful and we intend to build on that strength over the next several years.

We made progress on our next growth pillar, apparel, although at a somewhat slower pace than the others.

Lauren mentioned that sales in the category were down slightly in the quarter.

The same was true for the year, although apparel profits, both in terms of rate and, most importantly, dollars, were up significantly.

Foot Locker Europe posted the best apparel performance with a double-digit sales increase and an improved margin rate.

We're working hard with our vendors to develop special athletically inspired and fashion-right assortments, differentiated by banner to drive the level of excitement in the apparel category to be on par with the premium footwear selections our customers expect from us.

We've been strengthening our team and working with our partners for some time on this, and clearly success has not and will not come overnight.

However, given how important apparel is to the vendors own growth objectives, we remain highly confident that together we will win with the customer for his or her apparel needs, too.

Our digital business had another successful quarter and year.

We have invested in mobile and desktop sites as well as apps to deliver an enhanced digital experience, including more personalized interactions with our customers.

As you can imagine from our young customers, mobile represents a huge part of our online traffic and a rapidly growing percent of our digital sales.

Our direct-to-customer sales reached 12.7% of total sales, up from 12.1% a year ago.

And our domestic FootLocker.com and LadyFootLocker.com businesses were both well above the 10% target we set for our dot-com sales as a percent of total banner sales.

We are completely channel neutral as a Company with roughly comparable margins for both our store and direct segments, so we intend to let the customers decide what the direct-to-customer penetration rate will ultimately be rather than trying to steer it one way or the other.

Our other growth pillar is women's, and we made good progress there, especially in footwear.

The Lady Foot Locker SIX:02 division delivered its seventh consecutive quarter of comp store sales gains, and our women's footwear sales in Foot Locker and Champs Sports increased double digits for the year.

We opened 15 new SIX:02 doors, bringing our total to 30.

We still aren't quite where we want to be with the performance of SIX:02, so we are slowing the store openings in 2016 as we focus on developing brand awareness, resetting the product assortments, relaunching the SIX:02 website and creating pinnacle SIX:02 experiences inside our New York City flagship stores.

To oversimplify the situation a bit, we believe we have over-emphasized the performance aspect of what our customers want in terms of athletically inspired apparel.

It's a given that she expects the product to have performance functionality but the SIX:02 customer really wants apparel that also has a sharp fashion edge.

We are working hard with our vendors to elevate our product offerings through innovation, style, and scarcity based, in many cases, on celebrity designs or endorsements such as what we're seeing with Rihanna.

As in men's apparel this is not a one or two season fix and the vendors are highly committed to making this work.

As I said, we're already making progress so we remain confident and fully committed to delivering exceptional growth in women's footwear and apparel.

As part of that commitment, we announced last week some key organizational changes, highlighted by the promotions of Jake Jacobs to head our store business in North America, and Lew Kimble to head our businesses outside North America.

They have each done an exceptional job meeting their respective teams and the execution of the key initiatives of our strategic plan.

In addition to their promotions, we reconfigured the leadership of each of our banners under a Vice President and General Manager.

We believe this structure will well position us in the global athletic marketplace, align with our key vendor partners, and, most importantly, elevate the relevance, connectivity, and experiences that the customers of each of our banners expect.

We separated the leadership of SIX:02, which will continue to be led by Natalie Ellis, from Lady Foot Locker, which will fold into the Foot Locker US banner led by Andy Gray.

We have come to realize that the core customer of Lady Foot Locker is more similar to the female Foot Locker customer than she is to the SIX:02 customer.

And Natalie can now focus solely on building the SIX:02 banner into the premier athletic retail destination for the more fashion-forward active young woman without the added responsibility of simultaneously managing the transition of Lady Foot Locker.

I want to congratulate Jake and Lew and all of the new General Managers of our banners.

Foot Locker's depth of talent around the globe is a tremendous strength contributing to the high-performing Company we have become.

I'm very excited to see the team continue to execute our strategies and achieve even greater success in the years ahead.

With that let me turn the call back to Lauren to give you more specifics on how we see 2016 shaping up.

Thanks, Dick.

We have indeed become a high-performing Company and we believe our momentum should continue in 2016.

As a result, we can once again provide the same high level guidance for 2016 that we've given in recent years.

We believe we can deliver a mid single-digit comparable sales gain and a double-digit percentage earnings per share increase this year.

We have planned the year with FX rates close to where they are now, with the euro around $1.10 and the Canadian and Australian dollars around $0.70.

The latter two currencies are weaker now than a year ago, so there will be a few cents of FX headwinds in 2016, but much less than the $0.23 with stronger dollar cost for EPS in 2015 relative to 2014 FX rates.

We are planning for a slight improvement in our annual gross margin rate in the 10 to 30 basis point range, mostly driven by leverage of our buyer and occupancy costs.

We do believe that we have the ongoing opportunity, with the benefit of our merchandise allocation system investments and other productivity initiatives, to improve full-price selling and thus improve our merchandise margin, as well.

We intend to remain disciplined in managing expenses in 2016.

We should also be able to lever on the fixed cost elements of SG&A to produce a modest 10 to 30 basis point rate improvement.

We do have a Q1 headwind due to our office relocation down the block in New York City, which will add about $4 million of expense due to paying rent on both locations plus the cost of the move itself.

Our lease here is up at the end of April so after Q1 this expense will normalize.

However, we could actually delever SG&A slightly in Q1.

This annual SG&A guidance also incorporates all known minimum wage rate increases and changes in healthcare costs.

Let's talk capital expenditures for a minute.

As you've seen, we've announced a $297 million program for 2016, up from the $225 million we spent last year.

We intend to continue our remodel and vendor partnership programs as we elevate the customer experience across our banners.

Combined with approximately 90 new stores concentrated in Europe, Kids Foot Locker in the US and Footaction, we expect to spend more than $200 million on improving our store fleet in 2016.

This amount includes close to $10 million to transform two of our New York flagship stores, one here on 34th street and the other up at Times Square.

There are some other large non-recurring outlays included in this year's capital plan, including more than $20 million to build out our new headquarters location and a similar amount for our new online order management system and related customer experience initiatives.

Although we believe 2016 will represent a peak in capital expenditures, we now project spending closer to $250 million in the couple of years after this, up from the annual $225 million we mentioned in our Investor Day a year ago.

With this level of capital investment in the business, we expect depreciation and amortization expense to be in the range of $170 million to $175 million in 2016.

In addition to opening approximately 90 stores, we plan to close about 100 which will leave our store count relatively flat year over year.

The store closures will once again be concentrated in Lady Foot Locker and Foot Locker in the US.

We are planning interest expense to be fairly flat to this year's $4 million, and we are continuing to money our effective tax rate of 36.5% in 2016.

Our guidance of a double-digit percentage increase in earnings per share also assumes a lower share count based on the continued execution of our share repurchase program.

Although we are planning a mid single-digit comp gain in each quarter the profit flow through challenge may be greatest in Q1, in turn creating a challenge to achieving double-digit EPS growth this quarter.

With the income tax refund shift I mentioned, and the difficult compare of last year's NBA all-star game being in New York, we're expecting February's comp to be up low single digits, and we're expecting a solid mid single-digit comp in the remainder of the quarter.

That covers the highlights of 2016.

We're looking forward to another very exciting year.

Let me now ask Carlos to open up the call to your questions.

(Operator Instructions)

Our first question comes from the line of Eddie Plank.

Hi, good morning, guys.

Thanks for taking the question.

Lauren, you talked about already achieving the 2020 operating margin target this year.

How do we maybe think about that potential going forward?

You talked about a little bit of gross margin improvement this year and SG&A improvement but is there anything structure that would prevent you from taking that even higher over the course of the next three to five years, let's say?

We don't see a structural impediment to improving that rate.

But, again, I would reiterate the guidance that we gave you for 2016 around margin 10 to 30 and SG&A 10 to 30 basis point improvement in each.

We still believe there are opportunities for us to improve that merchandise margin, and we can lever the fixed costs.

And the same would be true of SG&A, that we've got fixed elements within that lever, but we've got variable elements that we remain focused on, productivity improvements on, and have initiatives around.

So we're not ready to come out with a new rate yet but we don't see any impediments to it improving.

Okay, that's fair.

Thanks for that.

And then just real quick.

Could you guys maybe talk about the product cycle ahead and maybe where you'll see some of the bigger opportunities this year?

Is there anything coming down the pike around the Olympics, for instance, that you're excited about, or anything to give us an outlook on how you view the products at this point?

Eddie, this is Dick.

The Olympics certainly drive innovation every time that you go through an Olympics cycle.

And we're excited about what the vendors have cooking for the Olympics.

And as we've talked about in the past, sometimes it takes a little bit longer to commercialize that innovation.

But based on the product engines that we've seen, the look-ahead that we've got based on the ordering cycle in the year and in our business, we see good things coming down the pike from a product perspective, both on the footwear side of the business and the apparel side of the business.

Great, that's helpful.

Thanks for that, Dick.

And best of luck going forward.

Great job, guys.

Our next question comes from the line of Paul Trussell.

Good morning, guys.

How you doing?

I wanted to just keep the conversation going on revenue.

You mentioned, for example, that February is expected to be up low single digits.

And obviously you were facing strong results from a year ago.

But obviously those tough compares will just continue and continue to add up just given your success over the past few years.

So, if you can, maybe elaborate a little bit more on what gives you that confidence, not just for this year's mid single-digit comp growth but just as we go forward through the 2020 plan, specifically if you can touch on the basketball category, as well as overall ASPs that you're seeing in your stores.

Thank you.

Thanks, Paul.

The confidence comes from having some vision into the pipeline, obviously both in footwear and apparel, as I said, great product coming down the pike.

February is a little bit of an anomaly given the incredible all-star game that we had last year in New York.

We had a great all-star game up in Toronto.

But just based on the store coverage and the Greater New York city area and the places that we had to activate with consumers Toronto just doesn't have that sort of store base for us.

So, o as we look at Q1 and on into Q2 and the Olympics we'll be really heating up.

We've got the Euro championships going on, as well.

So, a lot of excitement around sport, which elevates all of the product offerings and the excitement with the consumer.

The ability to drive those comp gains, Lauren talked a lot about the productivity tools that we've identified, the amount of money that we're reinvesting into our store fleet to make them more exciting places to shop, and create more engagement with our consumers regardless of the channel they want to engage with us on.

All those things are just a continuation of the great work that's been done in the past, with new peaks coming along the way.

We've remodeled about 30% of our domestic Foot Locker and Champs stores.

We're getting after the Footaction remodels a bit this year.

We've got remodel projects going on in Europe, Canada and Australia, as well.

The productivity gains that we're seeing we believe can continue.

We also believe that the inventory management and expense management that our team does gives us the flow-through opportunities that Lauren talked about.

I think all of those things add up to really make us the first place a customer will come to check us out for great product, the product that they love.

Absolutely.

Just then turning to Europe, if you can just give a little bit more color on what do you think is driving the strength that you're seeing throughout a number of countries there in Europe?

And how do we get Sidestep going in the right direction?

I think there's two different things going on, Paul.

One, the Foot Locker Europe business with the strength of the categories, they had a nice rebound in apparel this year, which certainly helped on the comp line.

We see exciting products, big product pillars that are driving the business in Western Europe for Foot Locker.

Certainly some excitement around the Kids business there, as well.

The segmentation work that we're doing with Runners Point and Sidestep we started late in 2014.

The initial results look very promising.

During 2015 we saw, as we repositioned Runners Point as all things running, we saw a couple of key running silhouettes soften dramatically, some really big silhouettes in the German runners minds' softened dramatically.

The team in Recklinghausen is working hard to get the assortment right.

We've also got some buildout configuration things that we're testing in both Sidestep and Runners Point.

We remain confident that Runners Point and Sidestep doors are a big positive for the future.

Even with the impairment that we talked about, they were accretive to our business this year.

The writedown of SP24.com, which was a heavy liquidation site, not really the way we do business anymore.

Runners Point, prior to the acquisition, drove a lot of business through there.

We've done the look at the business and decided that that's not where we are going to operate that business.

So, a lot of moving parts with it but we remain committed and confident that Runners Point and Sidestep play a big role going forward for us.

Thank you.

Good luck.

Our next question comes from the line of John Kernan.

Good morning.

Thanks for taking my question.

Congrats on the great results.

I'm wondering if you could shed some light on ASP growth.

Obviously some of your key vendors have been pushing price higher, particularly in basketball.

Can you talk about the sustainability of that and if you've seen any elasticity towards higher prices in some of the key basketball relaunches lately?

ASPs are a function -- it's a price-value relationship with our customer.

And as long as our vendors bring innovation and excitement to the silhouettes, the customer doesn't really seem to have a lot of price resistance.

The Flyknit Air Force 1 is a great example.

It's $175 because that's sliding it up or changes the complexity of the shoe, and in the consumer's mind changes the price-value relationship.

The upper level of signature basketball got a little bit formulaic with everything bunching up in price points.

So, as we look forward, when you look at a Steph Curry shoe or you look at a Kyrie Irving shoe, you start to see a little bit more variance in those prices.

And I expect that's what we will see along the way.

Our vendors do a great job of introducing a silhouette at a price level and then continuing to lever that up a bit as they add more excitement, whether it be finishes, whether it be textures, whatever, that the consumer is willing to pay a little bit more for.

We continue to see upside on ASPs, as we mix it across our entire portfolio.

And I'd just add that we work on getting the right product to the right plus at the right time, and all of that means fewer markdowns and that supports further the ASPs.

Okay, that's helpful, thanks.

You talked a little bit about the product cycle for this year, and certainly Nike is a big part of that.

But it seems like some of the other smaller vendors to you are also having a lot of success.

Can you talk about efforts with Under Armour and adidas this year particularly on the footwear side of things?

We've got a small group of very good partners.

There's not a ton of people we can do business with that have the authentic athletic heritage that our consumer wants to see drive the business.

Certainly Nike is the leader in the marketplace but we've had great success with adidas.

We've got some success starting with Under Armour on the footwear side of things.

They've leveraged a great asset and they've got a good portfolio of assets that they will leverage going into 2016.

We've got a store buildout, the Armory at Champ Sports, that we are testing a dedicated space in.

We've got some build outs with adidas, wall units and buildouts, that we're testing across the fleet.

Adidas's penetration in Europe continues to be significant.

They have some silhouettes that are really resonating with the European consumer.

One of the strengths of our business is that we're able to see those things that happen in Europe and our US team was able to react to them quickly to be first to market with things here in the US.

So, secondary vendors are critical to our success and we spend a lot of time working with all of them trying to bring innovative fresh product to the consumer.

Okay, thanks.

That's helpful.

If I could just sneak one more in -- is there any way to quantify the comp store lift you're getting from the remodels that you've been in the process of for the past several years?

We haven't gotten specific.

The fact that we're committed to continuing tells you that they continue to meet all of our internal hurdles and pay back on the investment that we're making.

But we haven't gotten into the specifics.

It varies so much by geography, by banner, by buildout.

The thing that you can remain confident of is that they are meeting our internal hurdles or we would not be as proactive with the campaign.

Okay, thank you.

Our next question comes from the line of Kate McShane.

Hi, good morning.

It's Corinna Van Der Ghinst on for Kate.

I was wondering if you could talk about the release schedule for the Jordan brand and how it might be different in 2016.

It seemed that there were fewer total releases around the Week of Greatness and the all-star break.

Do you guys agree with that?

And, if so, what kind of impact did it have on your business?

Releases are part of our business but, again, they're just a part of the business.

We don't get into the specifics of quantities or number of releases.

We're impacted by timing of the releases.

As you know, we've got a big release tomorrow that a year ago would have been last Saturday.

We're certainly impacted by the shift of the dates of the launch.

We work closely with Nike, obviously, to try to minimize those shifts.

But Nike, Jordan, adidas, Under Armour, they set their launch calendar, they set the amount of product that they want to put into the marketplace, and we work closely with them, obviously, to maximize our position across all of the launches.

Again, a lot of people focus on launch, and it's an important part of the business, but you have to remember, the strength of our business is really a four legged stool, with basketball being significant, running being significant, casual being significant, and apparel certainly starting to become significant.

Okay, thank you.

And then I'm not sure if you stated this earlier but what percentage of stores are you targeting for remodels to be completed by the end of this year?

And how many Armory shops are you planning to open this year?

With the capital program that we described we should be at about 35% of the Foot Locker US fleet touched, about 40% of Champs, approximately 30% of Footaction, and Foot Locker Europe about 30%.

The Under Armour shops, we've got five more in the plan for this year.

Again, part of it is dependent on us getting the right real estate to test these shops in, but the next ones will open up in the Texas market.

And just to follow-up on that Armory shop-in-shop, how is that performing relative to expectations?

Are you getting the quantity and level of product that you are looking for those shops?

The customer continues to find great product in the Armory.

Obviously we've got a very pragmatic approach of building prototypes, tweaking them a little bit, rolling out a little bit further tests.

That's where we are at with the Armory.

We will roll the expansion out to five more doors this year.

We'll make sure that the product engine is robust enough to keep the hot innovative product in those doors flowing.

And we'll make sure the customer reacts as positively in other geographies as they have in the Greater Baltimore area.

We're very bullish on the format and working closely with Under Armour to make sure the product engine is robust enough to support those great shop-in-shop spaces.

Great.

Thank you and good luck.

Next question comes from the line of Robbie Ohmes.

Thanks for taking my question.

Actually a couple questions.

The first one is I just wanted to follow-up on the first quarter.

Can you just walk us through?

First quarter started out low single digit.

Can you just walk us through where the confidence in getting the acceleration to mid single digit comes from?

And then maybe tie into that -- and this is my second question -- can you just help us understand how the ASP and blend of slowing basketball versus strong casual in running works, meaning how do you keep the momentum and the average selling price growth in casual and running moving forward as basketball slows?

Thanks.

I think Q1, Robbie, is a function of, we talked about some of the slowdown in February being driven by a tax situation and a really robust all-star game from last year.

Those things will both neutralize going into the rest of the quarter.

We've obviously seen the product flow and we understand what the product engines are going to deliver over the remainder of the first quarter.

So, I'm very confident that mid single digits is where we will drive the quarter.

We'll reaccelerate for the pace that we were at, I believe, before we came across the all-star game comp specifically.

As it relates to ASPs, again ASPs are influenced by a lot of things.

Part of it is the manufacturers' suggested retail price.

Part of it is our ability to sell full-price goods by having them in the right store at the right time in the right size so the customer is happy.

Part of it is driven by our ability to leverage our cross-channel efforts to make sure that we have the ability to sell the last unit that's available in our entire fleet.

And those efforts all contribute to an ASP build.

I mentioned in the prepared remarks we talked about our Timberland business, for example.

Timberland six-inch wheat boot is exactly the same class to some of the marquee basketball shoes.

The Air Force 1 Flyknit shoe is in the same range as some of the signature basketball shoes.

As we continue to model the portfolio from the full range of price points and values that the customer sees, we're confident that ASPs will continue to grow.

It's really, if you take one specific segment, one specific category launch or signature basketball, you don't get a true model of what the portfolio looks like.

But when you start to take $100 shoes that become $110 shoes, that also has a positive impact on our ASPs.

You take a look at not having to mark down a bunch of shoes that historically we may have had to mark down prior to the good inventory work that the team's done and the productivity gains that we've seen.

WIth all the variables in the pricing model, we're confident that ASPs will continue to rise as our vendor partners continue to bring great innovative products into the marketplace.

No matter what the category.

That same price-value relationship exists in casual that it does in basketball.

That's very helpful.

And just to understand the quarter, if you do mid single digit for the quarter does that mean you could see some high single-digit comps potentially in March and April?

We've talked, as Lauren said in her commentary, the belief that we can drive mid single-digit comps for Q1 is very real and we're very confident that we'll be able to do that.

Got it.

Thanks very much, guys.

Our next question comes from the line of Matthew Boss.

Hey, good morning.

As we break down gross margin from here, what's the best way to rank the merchandise margin drivers, both domestically and international?

And what comp today is needed to lever the buying and occupancy?

There are a number of things around the merchandise margin -- certainly the technology investments that we've made that help us get the right product to the right place at the right time.

So, that allocation tool that we've put in, as we've described before, is really a multi-year project.

It continues to deliver dividends as that learning system learns more and the humans using it learn more about it.

The apparel element, as well -- we described that the apparel margins, while they improved significantly in the quarter, are still running behind footwear.

And we really think that when we get to the place where we're at the top of our game in apparel, that those margins will be meaningfully ahead of footwear.

So, that's an opportunity for us.

And Dick described making that last unit of inventory available no matter where it is in the system as another thing that helps us with getting more value out of each and every unit, that helps the margins.

With the breadth of things we're working on, we continue to think that we've got opportunity there.

But to lever on the fixed, we have described that we have gotten into some big properties and doing some things in flagship spaces.

That does add higher rents that comes with those, and puts a little bit of pressure on levering.

We think that we can still lever, it looks more like the low end of mid singles on those fixed elements within margin.

Great.

And then just a follow-up, as we think about the domestic store fleet, so 100 closings this year, do you feel comfortable with the size of the chain today?

And just what's the evaluation process of the fleet going forward?

We evaluate the fleet and the entire portfolio door by door, mall by mall, street location by street location.

I don't know what the magic number is in terms of door count.

We continue to work to elevate the doors that we have by opening vendor shop-in-shops with various vendor partners, working with the developers to get better locations inside the malls.

We'll continue to do our due diligence against each project and make sure that, whether renewing a lease makes sense, does upgrading the store with the remodel make sense, does a vendor shop make sense.

We're still firm believers that stores are a critical part of our strategy going forward in all of our geographies.

We know that our consumer still enjoys being together, being in the mall, touching, feeling product, checking each week to see what's changed, to see what the hot releases are.

They may start their adventure with their digital device in hand, but we still do a tremendous amount of volume through our doors.

As Lauren talked about, our sales per square foot topped $500 for the first time in our history.

So, we know that we're being more productive and we know that we're building exciting spaces for our customers to come and visit.

We'll just remain riveted on productivity of the units and let the customer decide how they want to shop, where they want to shop.

Great, best of luck.

Next question comes from the line of Eric Tracy from Brean Capital.

Hey, guys, good morning.

And I'll add my congrats.

Just a great quarter in a tough environment.

Just to follow on that last question in terms of the optimal size of the fleet, Dick, philosophically, obviously a lot of concerns out there in terms of the consumer continuing to migrate online via third-party online retailers or vendors direct.

Maybe just speak to, again, what's defendable within the Foot Locker model, be it your own DQC growth, the willingness of vendors to invest behind you all with shop-in-shops, superior allocation.

Just speak to what you've seen over the last few years and what the expectation is in that evolution of the consumer.

I think I mentioned it last call but I love when you answer your own questions.

Yes, it's all of those things.

Our DTC, we're continuing to invest across all channels.

So certainly, our online and digital business, we engage with our consumer there.

We tell great stories.

We want them to start their morning and end their night with one of our brand banners on their digital device.

We also know that the consumer likes to still touch product and see product and have an immediacy of being able to get that great new release product.

So, the stores become, realistically, the only place that you can have it now when it releases.

As we continue to invest with our vendor partners to create more exciting places to shop in the malls, as we continue to find better location in malls, as we continue to right-size properties and drive productivity, those things we believe are all defensible.

Our service model we think is defensible.

We've got the best fleet of people across our portfolio to take care of customers.

They are the resident experts.

People come in and look to our stripers in the Foot Locker doors as the sneaker expert.

Our customers come in and want to talk about releases.

They want to talk about what happened in the game last night, and do you think the Kobe shoe will be retroed.

All of those things.

That, we believe, both from a physical engagement in the store and a digital engagement, we think those are all defensible.

And obviously the wholesale part of our vendors' business is still the much bigger chunk of our vendors business.

The fact that they are willing to continue to invest with us, jointly invest with us, walk out and say loudly -- we opened up 40-plus properties last year that we partnered with our vendors on.

We continue to see that opportunity going forward.

The consumer likes choice.

And I know that on a digital device choice is only a click away.

But they sometimes like to look at that wall and say -- hey, that's really cool, that's really cool.

And we've got some exclusive product that's only available within the Foot Locker family.

So, those things all create defensible positions, I think, Eric.

That's great.

And then just a follow on to that, there is some rationalization going on in this space, be it one of your bigger competitors, 25% of their fleet going away, a bigger sporting goods player out there potentially going into bankruptcy.

How do you think about, one, just in near term, if there are any liquidation impacts throughout the channel; and then, two, the benefits, the opportunities for share grabs as you guys are decently positioned?

I think our leadership position, Eric, is clear across all of the categories that we've talked about and the in the markets where these guys are going to be closing down doors.

You have to remember that we've rationalized a lot of space over the last few years.

We've closed in North America alone well over 600 doors over the past half dozen years or so.

We believe the right sizing of the fleet is an ongoing thing.

We believe there's market share to be captured any time.

We don't necessarily need a competitor to close their door.

We think we're going to capture market share based on our assortment, based on our people, based on the storytelling and the engagement we've got with our consumers, and based on the passion that our customers have for the product.

So, will we be active in the markets where doors close?

Absolutely.

But we're active in every market.

We want to win every single market regardless of who the competitor happens to be in that market.

That's great.

If I could just sneak one last in on the women's business.

Mentioned Lady Foot Locker and SIX:02 slowing a little bit of the growth at SIX:02.

Maybe just speak a little bit more to that, what you're seeing on the women's side of the business.

And turning to more of a fashion element, is that at all bringing some risk factor to that or am I just overly reading the fashion component of that?

I think you're over-reading fashion a little bit.

Our muse Grace in SIX:02 leads a very active lifestyle but she wants to look great while she's doing it.

She expects all of the product to have performance attributes and perform regardless of whether she's in a spin class, she's out for a run, she's doing yoga.

It doesn't make any difference.

She knows that the product that's going to be in SIX:02 is going to have performance characteristics.

But she's also very informed about style and wants to be looking different, looking good in her classes, going out after class for juice or coffee, whatever it happens to be.

She wants to have that style quotient invested, as well.

We use the word fashion.

I would compound that by saying it's really more style and making sure that it's not about necessarily being the ripped hard body.

It's more about looking great as I do things.

We're working with our vendor partners and we've seen some success.

The Alala and Koral product that we brought in that has a little more style quotient to it has performed well.

On the footwear side we've seen the connectivity with Rihanna, on the Puma Creeper and the venti product that's launching, I think, today, very well received by the consumer.

So, it's more style than fashion, Eric, but something that I think we probably didn't have enough of in our early renditions.

So, as we get the product assortment right, the vendor assortment right -- again our confidence level is high on SIX:02.

But the other reason for slowing -- and we talked about it in the prepared remarks -- we're going to have really pinnacle spaces in Manhattan for SIX:02 that we have not yet had up to this point.

SIX:02 will have a store inside a store, if you will, of our flagship locations here on 34th street come April, then up on Times Square later in the year.

And that's a really big effort because those stores will really be the face of the brand for a lot of our industry.

We're excited about those opportunities.

So, we're confident in the women's business, confident that SIX:02 is our go forward banner, confident that we'll get the assortment mix right with our vendor partners.

That's great.

Thanks so much, guys.

Best of luck.

Our last question comes from the line half Matthew McClintock.

Good morning, everyone.

Actually my question is just a follow-up to Eric's question on SIX:02.

Thanks a lot, Dick, for that information and color that you provided.

I was thinking about it more from a perspective of brand awareness.

Clearly, as you get the product right, that should expand the brand.

But what we've seen with a lot of smaller, what we say, competitor style, yoga, women's brands that are out there, it just seems that there's a hurdle to getting that awareness out there.

I was just wondering, besides maybe the flagship, maybe that's the aha moment, but how should we think about that aha moment when brand awareness meaningfully accelerates for SIX:02 specifically?

And then is that more of a slow grind over time or would it be more of an aha moment when you get it all right?

Thanks.

We would like it to be an aha moment, quite honestly.

I think the two flagship locations are going to be, as I said, the face of the brand for the industry and for a lot of people that look at us.

A tremendous number of customers are going to walk through those doors and be introduced to SIX:02.

We've also got a big effort in 2016 to relaunch the website to make sure that that is by far our biggest store and has the most resonance with this consumer.

So, it's a combination of both.

Once we feel like we've got all of the elements in place, there will be an aha moment from a brand campaign point of view.

We started out by trying to grow the brand more from a grassroots point of view -- smaller, local events.

And as we get the confidence that we've got this formula right, there will be a bigger opportunity for an aha moment and it will tie in the flagship stores here, it'll tie in the 30 doors that we've got around the country, and it will certainly tie in our digital space that will be relaunched this year.

Again, it's a work in progress.

And we've said it before -- if this women's space was easy, there would be a lot of people winning in this space.

And while there are a lot of people competing for the space, there's nobody winning in the space of being a place that's designed for her, that has a service model for her, that can provide her product assortment from head to toe.

And that's what SIX:02 will be in the marketplace.

If I could follow-up on that, could you maybe talk a little bit more about the collaborations with your vendor partners for SIX:02 and how the work there has improved, and what needs to be done in terms of, I don't know whether it's reducing lead times or improving speed, or just what needs to be done there to make SIX:02s product more compelling?

Thanks.

It's a couple of things.

It's speed to market, certainly.

It's excitement in the industry.

The connectivity between Puma and Rihanna has changed the model on the women's side.

In most cases our vendor partners have looked at female athletes as that role model, or as that model, if you will, very similar to the men's side of the business.

But as we see the success with Rihanna, we see some of the success with Stella McCartney from the adidas brand, there are designers and celebrities, if you will, that connect with this core consumer.

So, our ability to work with our vendor partners to bring exciting product to the marketplace quicker, to you point, speed to market is important with her because once it's seen, she wants it.

It's not dissimilar to what you saw in the New York Fashion Week where a couple people in Fashion Weeks are making their product directly available for sale right after Fashion Week.

Rather than -- saying this is the fall line up, you can buy it next fall, they are saying -- here is this product and you can have it today.

That's the sort of environment our consumer lives in and we'll continue to work with our vendor partners to accelerate the speed to market.

It's a great opportunity.

Best of luck.

We'll have to stop there.

We're sorry we couldn't get to all of your questions.

I'll be back at my desk to field additional questions in a few minutes.

Meanwhile, thanks again for your participation on today's call.

Please join us on our next earnings call which we anticipate will take place at 9 AM on Friday, May 20, following the release of our first-quarter results earlier that morning.

Thanks again and goodbye.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.