Foot Locker Inc (FL) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Foot Locker's second-quarter 2016 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 releases and SEC filings.

We refer you to Foot Locker Inc's most recently-filed Form 10-Q 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, Beatrice.

Good morning to everyone, and welcome to Foot Locker Inc's second-quarter earnings conference call. I'm pleased to report that the Company achieved net income of $127 million in the quarter, on the strength of a 4.7% comparable sales gain and an improved gross margin rate.

Earnings per share came in at $0.94, up 12% from a year ago, and 47% up above our EPS two years ago, as we continue to drive consistent improvements in operating and financial performance over the long term. In fact, this quarter was the 26th consecutive quarter, with meaningful sales and profit gains over the prior-year period. The strong second quarter result brought our year-to-date earnings to $318 million or $2.33 per share, a 9% increase over a year ago, and the best start to a year in Foot Locker's history.

Lauren Peters, Executive Vice President and Chief Financial Officer, will start us off by discussing the Company's second quarter financial performance, followed by Dick Johnson, Chairman of the Board and Chief Executive Officer, who will discuss the various strengths Foot Locker has in the athletic industry, and highlight some key product trends. After that, we'll be happy to get to your questions. Lauren?

Thank you, John.

Good morning to all of you, and thank you for your interest in Foot Locker. While overall, the second quarter finished near where we planned the business, as usual, there were some performances that stood above the rest, and other areas where traction was somewhat elusive.

Starting on the positive side of the ledger, Foot Locker Canada again led our store divisions, followed closely by Champs Sports. Both with low double-digit comparable sales gains.

Foot Locker Canada pulled off a hat trick, with double-digit gains in footwear, apparel and accessories. Champs Sports posted gains in all three areas too, representing an important inflection point for Champs, where apparel and accessories constitute the largest sales penetration of any of our banners.

Several store divisions produced comp gains in the mid single digit range, including Foot Locker in the US. As we noted on the last call, our flagship Foot Locker store on 34th Street was closed for the entire quarter, negatively impacting the total Company comp by a few ticks, ticks meaning tens of basis points. The Foot Locker US division itself was impacted by more than 100 basis points, but we are pleased with how well the Foot Locker team in the US navigated that headwind.

Foot Locker Europe, Foot Locker Asia-Pacific, and Foot Action were the other divisions with mid single digit comps. With the performance of some exciting new stores, such as State Street in Chicago, Foot Action in total generated a double-digit sales increase.

The strategy to expand our leading position in the Kids business continues to be a major contributor to our success. Although Kids Foot Locker itself produced a low single digit comp increase, with the net addition of 26 stores, total sales were up almost 10%. Sales of children's footwear in our other banners were up double digits.

Lady Foot Locker SIX:02 comped down low mid singles, unfortunately breaking its two-year streak of comp gains. Although footwear sales continued to be strong, apparel was down double digits. Lifestyle apparel sold well, but we didn't keep pace with the rapid shift out of performance styles by our female customers.

Runners Point and Sidestep banners continued to run off double digits, pressured by traffic declines, which seem to be, at least in part, a function of local events in Germany. Traffic was also down in our Foot Locker stores in Germany. And Foot Locker sales were softer there, than in most other markets.

Turning to our direct to customers segment, the business overall comped up 7.1%. Sales by our store banner dot-com businesses in the US increased in the teens, with significantly higher growth rates at Foot Locker's digital businesses in Europe and Canada.

On the negative side of the ledger, Eastbay continues to struggle, with sales declining high single digits. The shift away from performance continued to challenge this very sports-focused banner, as did the heightened sporting goods liquidation activity that went on during the quarter.

For the total Company, footwear continued to be the stand-out category, with an overall gain in the upper end of mid single digits. Running was up mid single digits, and so was basketball, where court classics and casual styles led the way with high single digit gains.

The fairly consistent sales results across footwear categories this quarter is yet another excellent example of our ability to navigate the never-ending shifts and style preferences of our customers, who continue to look to our stores and online sites for the most innovative, trend-right sneakers. They know they can count on us to have what's hot, or should I say, what's cool.

Maintaining the trends of recent quarters, both average selling prices and units were up in footwear during the quarter, while in apparel, ASPs were up and units were down, reflecting our ongoing shift to more premium apparel assortments. Our apparel business continues to improve, with men's apparel, by far the largest piece of the category for us, up mid single digits, and kids apparel up double digits.

The women's side, as I mentioned before, was challenged, as were accessories. The sock business was the main culprit in accessories, still running down double digits, although we generated gains in hats, bags and shoe care products.

You'll recall that when we gave you our quarter-to-date comp result back in May, we were running negative, but we said we expected the month of May to end positive, which is in fact what happened. We then had a very strong June, up high single digits, with July up mid single digits. The overall result was the mid single digit comparable sales gain to which we guided early in the quarter.

After looking at the relationship over time of our quarter-to-date comp with our finished comps for the quarter, and by listening to many of you, we have concluded that our quarter-to-date results as of the time of our of call are not useful indicators of the expected pace of business for the total quarter, and so after this call, we will no longer provide the quarter-to-date comp. Rest assured, the quarter-to-date comp, whatever it is, will be factored into the comp guidance we do provide you for the upcoming quarter.

If there are some special short-term effects that warrant calling out, we will do so. But between launch shifts, holidays, payday shifts and the like, we believe providing early quarter-to-date comps does not add value to understanding our business. That said, for this final mention of quarter-to-date comps, they are up mid single digits, in line with our expectation for comparable sales to be up mid single digits for the full quarter.

Turning now to the rest of the income statement, John mentioned the strong gross margin rate, which was 33% for the quarter, up 40 basis points from a year ago. The gains were driven by lower markdowns in our stores, partially offset by a decline in the merchandise margin of our direct to customer business.

In response to the competitive environment and the softening of traffic to our US websites, we were more promotional in our digital businesses than we had expected heading into the quarter. We also spent more to drive traffic to our websites, which contributed to a slight deleverage of our SG&A in the quarter to 19.7%. Overall, we had very good expense management, especially in store wages. However, as we noted on the call in May, with two of our biggest stores closed for the entire duration of what is already our lowest sales volume quarter, our leverage point was challenged.

Depreciation expense continues to trend up, as a result of our ongoing investments in customer experience, both in-store and digital, while our tax rate continued to run slightly below our plans, due to the proportionately higher mix of income from our international operations, relative to the US.

We continue to manage inventory very closely, posting a 1.7% increase compared to a 5% total sales increase. This inventory discipline is key to our ability to continuously flow in the fresh, exciting product our customers expect, and extend our full price selling even further. Meanwhile, our inventory turn rate is inching ever closer to the 3 times target we set as our goal several years ago.

The income statement and balance sheet performances we have executed in recent years have positioned us to deliver on the balanced approach to capital allocation to which we are committed. Specifically, we invested $66 million of capital into the business during the quarter, as we execute our elevated capital expenditure program this year.

That said, it is probable that we will come in $5 million to $10 million below the $297 million target we set at the beginning of the year, with the shortfall primarily the result of the timing of certain substantial projects, related both to stores and infrastructure initiatives. Any shortfall in spending this year will likely roll over to next year.

We also spent $188 million in the quarter to buy back 3.35 million shares, bringing our total year-to-date shareholder returns, including dividends, to $350 million, compared to $275 million in the first half of 2016, with the mid single digit comparable sales gain that I mentioned we're planning for the third quarter, we will likely see similar operating metrics to that seen so far this year, with gross margin up slightly, and a bit of deleverage in SG&A, driven by the digital business, leading to an EPS increase that should be double digits or close to it. Our outlook for the full year remains in mid single digit comparable sales gain, and double-digit EPS growth.

Let me now hand the call to Dick to discuss our leadership positions in the industry, and highlight a few of the key product trends this quarter.

Thanks, Lauren. Greetings, everyone.

Foot Locker is a leading Company. Our vision for many years has been to be the leading global retailer of athletically-inspired shoes and apparel.

The goal of any competition, however, and retail is a terrific competition each and every day, is not to be leading at the mid-way point of the race, it's to be the leader at the end. Except in retail, there is never an end to the race. So we strive through our strategic initiatives to build our Company to be an enduring retail leader, with strengths across a variety of dimensions.

First and foremost, we must be leaders with our customers. We are leaders in understanding what our customers want, and how and when they want it. We spend a tremendous amount of time identifying the key characteristics of the core customers of each of our banners, and what makes them want to engage and transact with us. This work in turn make us a leader partner for our world-class vendors, as they create and market their most innovative athletically-inspired products.

The investments we have made in our store fleet, both in the physical appearance of the stores, and the quality of the merchandise assortments, have led to our stores being destinations for our customers. This can be seen in our traffic results, which consistently outpace overall mall or high street traffic. Our traffic was up in the US this quarter, although it was down somewhat in Europe.

Being a strong retail destination positions us as a leading partner with our landlords in the malls, and increasingly on the prime shopping streets across our global footprint. And our most important investments have been in our people, leading us to have, in my opinion, the best talents in retail, including our associates in our stores, in the field, and in all of our support facilities. This powerful combination enabled us to build strong leadership positions across the athletic retail industry.

Let me first talk about product categories. We believe we're the leading retailer of premium sneakers, period, not just a specific category of sneakers, sneakers. Full stop.

Yes, we're the leader in basketball. Lauren mentioned the basketball footwear was up mid single digits. The gains came in a variety of silhouettes, primarily from Jordan retros, Nike Foamposites, Superstars from Adidas, and certain signature basketball shoes such as Kyrie Irving from Nike, and Stephen Curry from Under Armour, to call out a few.

We were up in running footwear, where we also lead the market. The category here was led by lifestyle products such as the established Roshe and Huarache programs from Nike, with growth driven especially by Nomads and Ultra Boost from Adidas, and the Presto from Nike.

Finally, we lead the market in sales of various casual and premium classic shoes. This quarter, some of the standout styles were Stan Smith from Adidas and Puma Suedes and Fierce. We have strong inventory positions, as well as important exclusives and collaborations, in many of these classic styles, just as we do in running and basketball.

Our vendors know that our banners provide the perfect battleground to fight it out to win market share, especially with the young male customers who buy the most sneakers, and who are the style influencers for the rest of their generations. And increasingly for the rest of us, since every day, it seems more and more adults are wearing sneakers too. And that's why the leading brands continue to be highly motivated to collaborate with us on these exclusive and strong allocations.

We're a leading retail of premium athletic footwear and apparel, not just in the US, but also across Western Europe, Canada and Australia. Lauren mentioned that the Foot Locker banner was up mid single digits in Europe and Asia-Pacific, but what she didn't mention is that both of those gains came on top of strong double-digit gains a year ago, leading to two-year stacked gains close to 20%.

Running is the leading product category in both of those divisions, by the way, not basketball. And Canada's double-digit comp gain this year also came on top of a double-digit gain last year. Those are definitely all industry-leading performances.

We are not just leaders in store productivity, but our digital businesses are approaching annual sales of $1 billion, as we continue to connect with our customers, often multiple times on their journey to selecting their favorite sneaker or piece of apparel. Those connections are more and more often happening on mobile devices, where we lead in social media interaction, including some of the newer platforms such as Instagram Stories, Facebook Live and Snapchat.

Right now you can check out the recent exclusive Twitter Q&A we hosted with James Harden, and next week, we are partnering in the launch of the Bitmoji app. We'll have Foot Locker House of Hoops and SIX:02 stores within Bitmoji Fashion where customers can outfit their avatars in the latest products from Nike, Adidas and others.

Finally, I want to mention that we've been hard at work creating what I believe will be the leading destination for the best in athletic footwear and apparel and accessories, right here in midtown Manhattan. Our flagship store on 34th Street is slated to reopen in a matter of days, and we couldn't be more excited about it.

The space will include not just pinnacle footwear experiences but also a new and exciting presence for SIX:02 here in the city, as well as partnership spaces with multiple vendors. The details are still a bit under wraps, but rest assured, there will be plenty of fanfare about it soon. So please look for that over the next couple of weeks, and if you're in the area, be sure to visit the store once it opens.

All of these efforts I've just described have led to the strong financial performance we have produced over the last 6.5 years, which has in turn enabled us to provide industry-leading shareholder returns, including the elevated share repurchases Lauren described earlier. Yet, we feel our work has just begun. As I said before, the competition in retail is never over, and we still have a long way to go to reach most of the 2020 objectives we laid out at the beginning of last year.

Within our solid growth plan, we have initiatives that are delivering excellent results now, such as expanding the Kids business globally, building out the Foot Locker banner in Europe, and growing our digital business. Plus, our core business of selling athletic footwear to young males in the US is making steady progress towards the productivity objectives embedded in our long-term goals, based in large measure on the remodel program we continue to execute.

Meanwhile, we're making real headway in the apparel business, as seen especially by the strong results in Europe, and the turnaround in Champs Sports. It will still take some time for our improvements in apparel to substantially move the needle, so I see this as a very important intermediate term opportunity for the Company, along with the turnaround in the Runners Point and Sidestep banners we're working on diligently.

Finally, the women's business remains a tremendous long-term opportunity. As I said, we're excited to bring SIX:02 to New York City in a few days, with another key shop opening in our Times Square location towards the end of the year. And if you're not in New York or near any of our other SIX:02 stores, you can see the exciting progress we're making at SIX:02.com.

We will keep partnering with our vendors to create and deliver the exciting lifestyle products connected with the meaningful assets to which our female customers have responded enthusiastically. Although we've known all along it will take quite some time to build the business profitably to scale, we do have some exciting product and marketing initiatives coming in the near term. These include a continued and enhanced relationship with Puma, featuring neon asensi products that we believe will help give the SIX:02 brand an immediate momentum boost.

Before we get to your questions, I must thank the excellent team of associates we have at Foot Locker for producing yet another record quarter. The second quarter used to be our toughest quarter. In fact, it still is. But now, instead of barely breaking even in the second quarter, as we did early on in our journey, this year, we earned $127 million or $0.94 per share. It took a lot of excellent teamwork over several years to get us to this level of performance.

So as we look to the future, and how we can improve the business even further, I have to acknowledge all the tremendously good work done by everyone that went into producing the high quality, industry-leading results that we announced today.

Thank you all very much. Beatrice, let's open the phone call for questions.

(Operator Instructions)

And our first question, Jonathan Komp from Barclays is on the line with a question.

Hello, this is Matt McClintock. I was confused there for a second. Congrats, really impressed by the results there.

Two questions, actually. First, Dick, you talked about traffic and positive traffic for the quarter, and how you're a destination. There's a lot of discussion in retail today about the closing of anchor tenants in malls. I was wondering if you could dive a little bit more into how you view your positioning, particularly in malls where anchor tenants may be closed, and maybe provide some color about success you've had in malls, that maybe aren't even A or B malls? Thanks.

Sure. Our US traffic was up in the quarter, Matt, and the closing of anchor stores has been going on for a while. We believe there's only a couple of places in the mall that people will line up for products. One of them is a Foot Locker family store, and one of them is the Apple store.

So we know that our customers, our core consumers want to be in our stores. So the anchors, certainly there's some lease ramifications when anchors close, but our focus is more on the connectivity with our consumer, the engagement we have with our consumer, building exciting places to shop and buy. They interact with us digitally on their way to the mall. They, in the mall, will take a photo of the sneaker on their foot, and they'll tweet it out, or they'll send it out to their group of friends, and get the responses back. The anchors closing is a change, certainly in the make-up of the malls, but our consumer is still driven to the malls as a place for social interaction with their friends. So we're confident that regardless of anchor positioning, we should continue to drive traffic into the malls.

And we have success on both ends of the spectrum, I think was the second part of your question, Matt. Whether it's an A mall, where we have premium placement and great shopping environment, or a B mall, where the mall environment isn't quite the same as those A malls, but our core consumer shops there, and our associates are definitely engaged with the consumers across the entire spectrum. The malls are far from dead, regardless of what's going on with the anchors.

I would add to that. This conversation around malls is centric to the US, and Foot Locker, our business outside the US, specifically in Western Europe, it's much more at parity between street locations and mall locations as the development of malls there has trailed what it's been in the US.

So we have deep experience in locating stores off-mall, with good traffic, and building them to the unique characteristics of off-mall. And if you're in New York City, you've experienced that here in the US, but increasingly you'll see us taking some of those locations off-mall in the US. Where the customer is, we're going to be.

Okay. And then one more follow-up, if I may. Just on innovation in both basketball and running, you have a little bit better visibility into what's coming down the pipeline.

Can you maybe just fill us in on some of the excitement that you're potentially seeing, as we close out the year and round into next year, in terms of innovation platforms, some newness in product that may continue to drive, or should continue to drive meaningful comps in both those categories? Thanks.

I think you've seen some of that product, Matt, in the Olympics. You've seen more knit versions of product, the KD 9 launch that came that was the knit upper, closer to the ground product. That's going to roll out more effectively in the back half of the year.

There's no significantly new platforms that are coming. There's some tweaks to things that we've seen, but the vendors continue to bring innovation and add excitement, whether that be with knit uppers, whether it be with new silhouettes. So the pipeline looks good certainly for the back half of the year across running, basketball and certainly casual styles as well.

Thanks a lot.

Eric Tracy from Brean Capital is on the line with a question.

I'll add my congrats on another great quarter. Dick, and maybe even Lauren for you, I guess just speak to what inning, where we are in terms of the reformatting of doors, system enhancements, obviously to be supportive of both the comp and productivity bump, but maybe just talk through where you feel like we are and still the opportunities to come.

Well, we continue, Eric, with the enhanced or the expanded capital program this year, which is certainly fueling our remodel program, each of the banners is at a different position. Foot Locker had the earliest start. Footaction is trailing a bit, because we just really started that. We'll be roughly a third of the stores --

Yes.

Give or take by the end of the year.

Roughly. Foot Locker, roughly about a third. Champs a little bit more than that, more like 40%. Footaction as you pointed out a little behind that, but it would be about 30%. And Europe, about the same, about 30% by the end of the year.

But as we have described earlier in the year, elevated this year, we had a couple of things going on, New York headquarters, and some infrastructure things, where we were making an investment in our digital experience that will help support the go-forward growth. And we would look then, as we continue to execute the remodel program in those digital initiatives for the next couple of out years, to be at a bit more elevated level. But we will of course describe that for you in much further detail as those plans firm up for next year.

Eric, I would just add that the inning analogy infers that there's an end, and in the game of retail, as I said in my prepared comments, there really is no end. So we have this remodel program that's going. As we finish this one up, we'll be looking at what's motivating the consumer and what it takes to create exciting new shopping environments, so it's -- whether it's online, digitally or in store, we're going to keep investing in the business to make sure that we keep pace with what the consumer -- what's motivating the consumer to shop with us.

Fair enough. And then I guess my follow-up, in terms of digital, solid comp, but you did touch on some promotional, elevated promotional cadence there. Maybe just speak to what exactly you're going. And then in terms of the investments being made behind the digital platform, when we can expect a better chance for leverage within that business?

The trouble there on our digital business is really the Eastbay brand. We saw some pressure on the traffic and the pricing in the quarter, especially across the technical categories.

So the team out in Wausau is focused on bringing some traffic back to the banner, which has led to some elevated promotions based on what was going on in the marketplace in Q2. And they're shifting their assortment. They're still very focused on the sport-led high school athlete but they've also expanded their casual offerings and we expect that to pay benefits.

The investment in our digital space is also an ongoing investment. We're running as fast as we can there to make some upgrades, and we'll start to see -- it's a long range project, because there's a lot of plumbing that has to be changed out. So we'll start to see improvements, probably a little bit of leverage, later in 2017 would be my guess at this point, the forecast.

Perfect. Thanks. Best of luck.

Kate McShane from Citi is on the line with a question.

One of your competitors was out last week, saying that they do think that there's quite a bit of excess pairs of footwear floating around post the TSA liquidation. Just wondered if you could walk through how that could potentially impact the business in Q3, and back-to-school specifically?

Against the bulk of our brick and mortar banners, I don't necessarily see a big impact, because the level of distribution and product segmentation at both TSA and Sport Chalet is different than what we sell at the premium end. I think there is a bit of pressure against the Eastbay business, as the cleated numbers that you hear, and I have no idea if the numbers that we hear are true or not, but there's some pressure against the cleated side and the performance side of the business. But as it relates to back-to-school and what kids are buying, I don't see a lot of impact to our brick and mortar business, or brick and mortar brands, I should say.

Okay. That's helpful. And for my follow-up question, just because you have the exposure in Western Europe and the UK in particular, is there any detail you can give around what you saw during the quarter, given Brexit and what your thoughts are for the rest of the year on the UK business in particular?

I think we saw a little bit of impact on traffic on the day of the vote, but not much since then. We do have a bit of a currency impact, in that we buy for that market in euros and sell in pounds. And so we do what we can to hedge that currency difference.

I don't think we'll really see much, Kate, until the world starts to understand what it really means, and that's an ongoing debate at this point. The consumer's back and shopping in the UK. So we'll keep you posted, if we see things differently.

Okay. If I could just sneak one more in. I know you had some good call-outs in the basketball business during the quarter, with some of the Nike product and the KD 9. Can you update us at all about the other signature basketball products, since there does seem to be other improvements that have been made since the last time we spoke with you.

I spoke about the Kyrie shoe from Nike and the Curry shoe from Under Armour, both performed well in the quarter. The KD 9 that launched, again, a different price value, a little bit of innovation in the upper, a great mid-sole and out-sole combination so the consumer responded to that. The LeBron Soldier product that he wore in the playoffs sold well.

There's more work going on in basketball, and we'll wait until the vendors really bring that to market to talk about it. I certainly would not think of preempting some of the good work that they're doing, and talking about it, before they talk about it. Basketball, as Lauren mentioned, was up nicely in the quarter. Some of it is signature driven, some of it is lifestyle driven, but still good performance for us. So we see good things in basketball in the back half of the year.

Thank you.

Matthew Boss from JPMorgan is on the line with a question.

Nice quarter, guys. Can you talk about the increased category and brand diversification that you're seeing in the results? I guess, do you see this as a competitive advantage, given you have the more one stop shop? And just any change in pricing or overall ASPs that we should consider, as some of this mix changes?

Well, we've said it many times, Matt, that our consumer's not driven by categories, they're driven by cool and sneaker culture. So our buyers and our merchants do a great job of working with our vendor partners to bring in assortments that resonate with our consumers. The consumer moves very quickly, so our team has to be very nimble and adjust on-the-fly, so-to-speak. I'm less focused on categories. We're less focused on categories than we are making sure that we have the assortment that is really stimulating the consumer's engagement with us as a brand.

So from an ASP perspective, they do a great job of managing that as well, and we're not talking about trading $200 signature basketball shoes for $49 shoes. We're talking about a lot of these casual silhouettes still being elevated, and price points, and our focus is really on the premium area of sneaker culture, and the consumer is definitely responding to that. So I don't -- Lauren, you may want to comment on ASP mix, but I don't see any changes in the back half.

No. The trend has been there for quite a while now. ASPs have been up. The customer has voted for these shoes, that they feel have really good price to value, and that price has been a bit elevated.

That, coupled with all of the really good work that we're doing on improving our allocation to get the right product to the right place, right time, and keeping control of the inventory growth. That too has fueled lower markdowns. Therefore, that is a bit of the higher ASP as well. Our merchants are very thoughtful about the assortment across price points, to make sure that we're bringing compelling product, and it's not skewed to the point that we're pricing folks out.

Great. And then just a follow-up. On gross margin, what was the breakdown this quarter between merch margin and occupancy, and does the 10 to 30 basis point guide for year still stand? Just trying to think about the best way to think about 3Q and 4Q, between merch margin and occupancy.

We had a flat Q1, 40 in Q2, which was really driven by underlying merchandise margins. We had a bit of a delever on occupancy. We had this dynamic of some -- couple of properties here in New York that were closed. So you got some sales and you got rent. So a little bit of a delever there. So as we look to full year, that 10 to 30 that we guided to still makes sense.

Great. Best of luck.

Mitch Kummetz from B. Riley & Company is on line with a question.

You talk a little about ASPs. ASPs were up in the quarter. I think there's a general concern out there that slips over time, as some of the new basketball product comes out at lower price points. Maybe there's a shift in mix more toward classics as a lower price point. Can you talk about how you see that playing out?

Well, Mitch, the ASPs are -- I've said this for three or four quarters now, because that concern seems to be out there, but the ASP formula, algorithm, is really complex. So a shift in basketball can be offset by lower markdowns. It can be offset by elevated Stan Smiths or Superstars. So our team, I can't give them enough credit. They do a great job of mixing price points across footwear, across apparel, across accessories.

You combine the great assortments that they put in play across those price points, across those categories, and you combine that with great inventory management that Lauren mentioned, and having the right product in the right store at the right time, so we don't have to mark as much product down, puts us in a position to continue to drive the premium end of the market, which keeps the ASPs at the level that we're at, and growing. So I can't do much about the concern that you all see. I can just rely on what our buyers, our merchants, and our vendor partners do to the mix of product, that we sell to our consumers.

Just as a quick follow-up to that, you talked about markdowns. I'm curious, if you got like a KD 9 MSRP at like $150, versus the old one at $180, or maybe a new LeBron at $175 versus $200, is that ultimately better for you because your out-the-door price is probably closer to MSRP, versus maybe the older version, even though it was a higher MSRP? Maybe you were marking that down more? Is that how to think about it also?

That's one element, certainly. Again, if there were just a straight A plus B equals C formula, we might share that. I'm not sure that we would. But we might. But certainly that's one way to look at it.

The great product that stimulates the customer to buy it at the premium price points is good for us, and the less markdowns that we have to spend to move out of product, whether it be seasonally or because of sales performance, the better that is for our gross margin line. So when you combine all of that, certainly having great products across all of the price points is one of the things that allows our ASPs to stay elevated.

Okay. And then Lauren, just real quick follow-up on merch margin. I know it was up in the quarter. You talked about lower markdowns. Where did IMU come in, and how are you thinking about IMU over the balance of the year?

The IMU has really stabilized, and it has been pretty stable for the last several quarters. We are past the point where shift in category and brand mix is impacting the IMU.

Okay. All right. Thanks. Good luck.

John Kernan from Cowen and Company is on line with a question.

Congrats on a very strong quarter, both on the top line and bottom line. SG&A isn't levering at this point on 5% comps in Q2. You're guiding it fairly flat for the year. One of the things we continue to hear is the theme of higher wages, and minimum wage is inevitably going to move significantly higher in California and New York. I'm just wondering how labor costs factor into your long-term margin structure, your ability to leverage SG&A?

Obviously the results in the guidance that we give, we've factored in what we see happening with minimum wage, and change to overtime exemptions, et cetera. The reason why we are pleased with our wage compensation structure, that includes the commission element that's helpful to our store associates, it rewards those who are better salespeople. They have the ability to determine their wage, and significantly earn above minimum wage, if they are good sales folk. That helps us manage that.

But also, the reason that we continue to invest in things that give us some productivity advantages in the store, things like the processing of inventory, trying to make that more efficient, so that we can focus the hours on sales activity as opposed to stock keeping activity. All of those are things that we work on to be able to manage that wage rate. And as I described, we felt very good about how selling wages came out, and the leverage that we had on that.

That's helpful. Thanks. Can you also talk a little about adidas. Obviously the inflection there has been pretty substantial. Can you talk about your ability to get increased allocations around some of the NMDs that were just launched, the BOOST technology that's been coming out, both in running and basketball? Thank you.

Well, we are on a nice run with adidas, absolutely, John, and getting the allocations relates to the great relationship that we have with all of our vendor partners. And right now in several markets, no matter what retailer you talk to, they would tell you they don't have enough of the best product. But that's one of the things that our vendor partners really do, is they control the scarcity model, they pump in the appropriate number of shoes.

Our merchants would always like more. They like to feed at the trough when something's hot, but the vendor partners do a good job of controlling the flow into the marketplace, and keeping that ever-present demand out there, and I think it helps to keep the heat in our industry. It helps to keep the consumer excited about getting the next. By and large, it's a good thing. And we continue to work with all of our vendor partners to increase our allocations, and the story telling that we do in the store to connect better with the consumer, and connect them with the product stories.

That's helpful. Finally, you bought back a ton of stock this quarter, took advantage of a cheap valuation with the stock. What should we expect for the share count at year end, and the level of share repurchase for the remainder of the year?

We have a very balanced approach to our capital allocation. The number one priority is investing in our business, hence what we have described as elevated capital with our remodel program and digital efforts, around giving the customers a great store experience, whether they come into the stores or digital. And that investment is part of what we're doing to get after our long-term objective.

So priority number one is that investment, but we are very committed to returning cash to our shareholders, in both a strong dividend program and an active share repurchase. At this point, we have $361 million remaining on our $1 billion share repurchase authorization. It is not formulaic, so I can't describe something to you that would help you with that model. But you can see, we recognize good value.

Thanks. Best of luck.

Susan Anderson from FBR Capital Markets & Co is on line with a question.

Congrats on a good quarter, also. I was wondering if you could drill down a little bit on the women's business. When do you think you're going to be able to get more fashionable product in the stores to turn that around? And then also, is there anything going on out there in the competitive environment that you also think is impacting this, such as maybe a glut of product? There's obviously been an influx of competitors, but maybe just drill down on that a little bit.

Sure. From a store count perspective, Susan, we've announced or we talked about the last few quarters that we slowed down our store development here in 2016, because we've got two very significant properties that we're going to open in New York City, to give our SIX:02 banner a real presence in the city, and that's the 34th Street store that we'll see open in the next couple weeks, and then Times Square, which will have a SIX:02 shop within it, that will open hopefully by the end of the year.

So that was a decision that we made to slow down the store rollout, to make sure that we get those two doors right. The SIX:02 team has done a great job of bringing in some new brands, catching up with the lifestyle side of the equation. Again, this female consumer that we're after is very discerning in that she's expects all of the performance elements to be present in every piece that she buys, everything that she buys, but it's got to be very stylish. And we've got some great new brands, the best place to see and measure the progress, if you're not near a SIX:02 store, is on SIX02.com and you can see some of the great showcase product that we've got there.

The intent would be to make sure that we've got the assortment right with some of the exciting things that we're going to see in 34th Street and Times Square. We've got the physical space right. We'll likely accelerate door count when we get into 2017.

We said all along that this is a very competitive marketplace. The fashion is changing. The look is changing. The response and reaction to some of the asset-driven models are changing.

So she's a very discerning, very quick moving customer, and we're trying to capture her interest, and get her engaged with the SIX:02 brand. It's been a little bit difficult with only 30 doors, so I'm a firm believer that the excitement that's going to be generated out of the doors here in the city will certainly give a big momentum push, as will some of the good work that we're going to do with some of our key vendor partners in the SIX:02 space, to drive real energy around that banner.

I'll tell you, I'm encouraged, because where we brought this customer the special product, she has really responded to it well.

Absolutely.

I think that the team is on to some good stuff.

Great. Sounds good. If I could throw one more in there on the Olympics. If you could talk about if you've seen anything yet, in terms of consumers getting excited around the Olympics, the new product, and maybe just historically what you've seen in terms of the benefit as you flow through the quarter after the Olympics. Thanks.

There's always -- I've talked about it before, Susan, that the level of patriotism and the focus around sport and the excitement is driven by things like the Olympics, like the World Cup, like the NBA playoffs. It may or may not be a direct connection or correlation to the product. A lot of the product that you're seeing on the Olympians' feet and bodies will certainly be commercialized in the back half of the year and into next year, maybe not at the same price points that the special product for the Olympians has been built to, but at price points that are meaningful and commercializable in our stores.

There's excitement around the Olympics, certainly. We have some very clear country-related and Olympic colored product in the stores, and there's been great response to that, but that's not what really moves the needle. It's the after-effect and you'll see some of the great -- if you've been watching any of the track and field, there's an awful lot of great Nike product on the feet of a lot of the sprinters and distance runners that will certainly be in the Eastbay catalog. Same thing with stuff from adidas and Puma. Obviously Puma with Usain Bolt and the great performance that he's had. The branding presence that you've seen from Under Armour, all those things are going to be positives to the business in the back half of the year.

Great. Very helpful. Good luck next quarter.

Omar Saad from Evercore ISI is on line with a question.

Great quarter. Wanted to ask about -- I think you made a comment up front about the women's business on the apparel side, seeing a shift away from performance towards more of the fashion product. Can you maybe elaborate on that, help us understand what's going on there?

The consumer that we're really trying to attract into SIX:02, she expects the performance elements to be built in. So again, she's still very active. She wears it to the classes that she goes to, whether it's yoga, spin, out for a run, whatever. It just is more fashion led. There's influence from some of the style leaders out there in the marketplace today that require it to be more than just a basic garment. It's got to perform. That's the expectation. But it's got to look great and help her project that athletic fashion image that she's really after.

Makes a lot of sense. If she's wearing it everywhere, she wants it to look really good and special. And looking to us as a specialty retailer, we've got to bring her special. It needs to be something different that she can't find everywhere else.

And while our core athletic brands are certainly making a lot of progress in that area, there's brands like Alala, and Koral, and Spiritual Gangster that are in SIX:02, that really bring the fashion twist to this performance product. So it's not a lack of performance, or a real shift from the performance, it's just that the performance expectation is built into her mindset, when she buys the garment.

Got you. Actually that's really helpful. Thank you. I wanted to ask on a broader -- on the footwear side.

There's been so much talk about a shift from performance to more sport fashion sneakers. How do you see this trend? Do you see a shift? Is it supplemental? Is it complementary? How do you see consumer behavior evolving around sneakers, essentially across categories?

Omar, it's a good question. The facts are that most of the basketball shoes that we sell never see a basketball court. Most of the running shoes that we sell never see the roads or the trails or the track to run in. They just look really good, and they're part of the sneaker culture that we really support.

So as our vendors continue to bring heat across the categories, whether it's deemed a performance shoe or a lifestyle shoe, our core consumers, the people that we really -- that are the sharp point of our muse work, they don't really distinguish things like that. They're really more focused on how does it look, what message does it send to the people that I hang out with, et cetera. So as long as people are talking about and wearing and in love with sneakers, we continue to support the sneaker culture, that certainly across the markets that we're in, is a significant part of today's pop culture. And I think will be going on.

It's self-perpetuating, too. You think about adults today grew up with sneakers. They are getting ever-more discerning at an earlier age about the nuances between the different sneakers. I think you see that in the results in our Kids business. They fall in love at an early age, and they're not falling out of love with the category.

Got you. Thanks. Good luck.

Michael Binetti from UBS is on line with a question.

Let me add my congrats on a great quarter. I know a lot of the questions have been answered here. Let me ask you about Runners Point Group for a second. It sounds like you feel that was partly the market in Germany. Last quarter I think you were a bit more concerned about a few of the specific challenges to your own brands in that business. Could you just maybe help us revisit that a little bit? What do you -- aside from the market, what do you think is missing in your business, that you need to do to steady the ship there?

It's a good question, Michael. And certainly Q2 I would chalk up part of the toughness to the market in Germany, because none of our banners performed well in the economy, with some of the traffic issues that we saw. But from a broader perspective, we're repositioning both Runners Point and Sidestep, and we did some -- you know how we operate.

We test things pretty significantly before we go ahead and roll them out, and the tests that we saw back in 2014, when we positioned Runners Point was all things running, and Sidestep more on the lifestyle end of the spectrum, with our Foot Locker banner right in between. The results in 2014 were pretty positive, and it convinced us that we could go ahead with that.

In hindsight, what he we found was there were a couple of really significant silhouettes that were driving the running side of the business, especially in Germany. Each market in Western Europe is different. Germany was definitely locked on to a couple of key silhouettes that have fallen out of favor a bit.

So it really caused -- first we fired a bunch of customers from Runners Point, because we took out the vulcanized shoes, we took out the skate shoes, we took out the boots, and we really focused it on the running consumer. And then that running consumer moved off a couple of the key silhouettes that had really been propping up the results. So it's an assortment mix. It's a brand mix. I think the team in Recklinghausen is addressing it as quickly as they can, with the vendor partners.

Then the other piece is on the Sidestep side of the house, making sure that we've got the right lifestyle piece of it and a little bit more fashion forward. So we've got work to do there, but the team is diligently working on it. We spent a little time over in Germany this summer, and we see some progress. But we do definitely have work to do.

Okay. Thanks. Very helpful. Back on your commentary about women's. If we go back a few years, there have been a few starts and stops on that business. Sounds like you're fairly high conviction that it's a product issue right now, and the teams are working on it. But it seems like longer-term the reality is the demand in that category changes at a much different cadence than what you're used to in your men's business.

Looking at that, as you mentioned we hit pause on the store reopenings, what's your thinking on how much capital you want to deploy behind the women's business over the longer term, knowing that it's a more volatile category, that it changes quite frequently, and these product issues seem to be a bit guardrail to guardrail, more than the men's business.

We're definitely committed to the SIX:02 brand and the amount of capital, Michael, we'll figure out as we keep moving forward. We have to get a little brand recognition out there. We have to make sure that we've got our target muse, and the right asset led, and scarcity model.

She's not that different from our male consumer, once we get the right product assortment in. We have found when we bring the right product assortment in that's asset led and it's a little bit scarce, she's very reactive to that, and very much in those moments she looks very much like our male consumer. But we have to win her every day, and that's where the shifts that you refer to, that we have talked about, are critical that our team is on those.

So from a -- we're certainly supportive and 100% behind the SIX:02 brand. We'll get more brand recognition and momentum as we get through these openings in New York City, and 2017 and 2018 will look different from a capital investment perspective for her, I'm sure.

Thanks a lot. Very helpful.

I think we have time for just one more question.

Paul Trussell from Deutsche Bank is on line with a question.

Congrats. Wanted to just follow up on the remodels. You mentioned that you're around 30% complete of the store base globally. Any metrics that you're able to provide for us at this time on four wall or comps, or returns, relative to the rest of the store base? And then also as we think about exclusivity, because of your House of Hoops banner, I think it's well understood the partnership that you have on the basketball side with Nike, maybe you can just give us a little bit more color around your mix of exclusives with Nike on non-basketball products and the same with other vendors, such as adidas, Under Armour, Puma, et cetera.

Well, couple of things, Paul, going back to the first part of your question. We don't break out the exact performance of the remodels because each of them performs a little bit differently. But it's -- I can tell you that the remodels outperform the balance of the chain, and in totality they surpass all of the hurdles that we have from a financial point of view, from a capital investment point of view.

So again, ideally we'd want to stop remodeling at that first one that doesn't pass all of those hurdles appropriately. I'm not sure that anybody in the organization has that good a crystal ball, to tell us which one that's going to be. We continue to be investing in that program, as Lauren talked about.

And I guess I'd also point out that beyond the House of Hoops, that's certainly our biggest partnership program with our vendors, but we've got vendor partnerships across multiple brands. We've got The Armoury with Champs Sports and Under Armour. We've got Flight 23 and Jordan shops with Footaction. We've got the Fly Zone with KFLs and Nike. Those are open around the globe. We've got The Collective with adidas.

They're all committed to bringing fresh, new, exclusive product into those spaces. So I'm not going to get into the amount of exclusives that we've got in each of those, but the commitment that we've made, we signed the lease, we share the build-out costs, they deliver great product, some of it exclusive, some of it with time leads, et cetera. We do the servicing and the story telling in the stores, and we have great partnerships that continue to fuel sneaker culture. So they're all working and we're very positive about the vendor partnerships.

Thank you. Then just a follow-up. Apparel was comp positive as well, this quarter. You mentioned that I believe units were down, ASPs were up. Maybe help us better understand for your men's customer, your teen customer, what is it that they're attracted to on the apparel side currently, and how do you feel in terms of your positioning and your assortment going forward?

Well, we've had a great run in fleece on the high end, the tech fleece, et cetera, not so much in Q2, but still the kid was buying -- our consumer was buying fleece, even in Q2. We've got a great position in wind wear going into the fall, and we've seen good early results from that. So we're positive about that. We've got the licensed product business in Champs Sports, at the level that we want to it to be, and they're having a nice run with licensed product where they're able to chase and fill in on the right team, the right player, et cetera, the right sport moment.

Dad hats are a winner on the accessories side. So there's a lot of things that are interesting the consumer right now. Graphic tees, the right graphic tees, some of them are sport moment led, some of them are culturally led, and some of them are just brand reads that our consumers are after. The apparel is so much different in each of our banners that there's winners, and obviously some things that aren't quite as positive in each of the banners. But it goes across the full spectrum.

Our merchants are doing a great job of really tuning into their local customer, and what appeals to that local customer in apparel, and assorting to it. I think that's one of the things that we're seeing show up in the apparel results.

Great. Congrats, good luck.

John, before you jump in I just want to make sure that we call out and have the people of Louisiana in our thoughts. We've got a bunch of teammates down in Louisiana that have been flooded out, and we know that they're working hard to put their lives back to normal, but it's something we should all think about and remember, so --

Okay. Thanks, Dick. Thanks for everybody's participation today. If we didn't get to your question, or you if you have a follow-up, I'll be back at my desk shortly. Please join us for our next earnings call, which we anticipate will take place at 9:00 AM on Friday, November 18, following the release of our third-quarter results earlier that morning. Thanks again and good-bye.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.