Foot Locker Inc (FL) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Foot Locker's third-quarter 2016 financial results conference call.

(Operator Instructions)

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

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

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

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

If you have not received today's release, it is available on the internet at www.prnewswire.com or www.footlocker-inc.com.

Please note that this conference is being recorded.

I will now turn the call to John Maurer, Vice President, Treasurer and Investor Relations.

Mr. Maurer, you may begin.

Thanks, Emma.

Good morning, everyone, and welcome to Foot Locker, Inc.'s third-quarter earnings conference call.

I'm joined this morning by Lauren Peters, Executive Vice President and Chief Financial Officer, who in a moment will provide the details of the Company's strong third-quarter financial performance; and by Dick Johnson, Chairman and Chief Executive Officer, who will highlight the strength of our position in the athletic industry and discuss some key recent merchandise trends.

First, though, let me give a high-level overview of our results.

Driven by a comparable store sales gain of 4.7%, the Company generated earnings of $157 million in the third quarter or $1.17 per share.

This strong result includes two significant accounting events, a tax adjustment and an impairment charge, which together increased earnings by $0.04 per share.

Thus on a non-GAAP basis Foot Locker earnings were $1.13 in the quarter, up 13% from our non-GAAP result of $1 a year ago.

While a full reconciliation of our GAAP to non-GAAP results can be found in the tables attached to this morning's press release, let me very briefly say that the tax expense adjustment resulted from a scheduled reassessment of the value of the intellectual property provided by Foot Locker in the US to our European business.

Driven by the recent strong performance of the Foot Locker business in Europe, the new higher valuation resulted in increased deductions that reduced tax expense by $10 million, adding $0.07 per share to our GAAP earnings.

Going the other direction was an impairment charge primarily related to certain underperforming store assets of Runners Point and Sidestep, which overall continued its negative sales trend.

This charge was $6 million on a pretax basis or $0.03 per share after tax, resulting in the net $0.04 differential between our GAAP earnings of $1.17 per share and our non-GAAP result of $1.13.

The strong third-quarter performance when added to our first-half results brought our year-to-date non-GAAP earnings to $470 million.

This equates to EPS of $3.46, 10% over last year's earnings of $3.14 per share on a non-GAAP basis.

With that summary let me pass the call to Lauren.

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

We appreciate your interest in Foot Locker and thank you for joining us this morning.

As John mentioned, the third quarter marked yet another strong performance for Foot Locker.

And it all starts with the top line where we produced a 4.7% comparable store sales gain, in line with our previous guidance of a mid single-digit increase.

This strong result was on top of last year's robust 8.7% comp gain.

In terms of cadence our comparable sales increased mid single digits in each month of the quarter.

Looking at the details, we saw that many of the same trends we have spoken about this year remained unchanged during the third quarter.

By category, footwear and apparel were both up mid single digits, while accessories posted a low single-digit decline.

Women's footwear was quite strong, posting a double-digit comparable sales gain.

Superstar from adi was especially popular with women and led the increase across virtually all of our geographies and banners where we sell women's products.

Our children's footwear business also performed well and was up mid single digits, while our men's footwear sales finished up low single digits.

By category, running and casual footwear were both up in the high single-digit range, while basketball was down slightly.

Lifestyle running, led by Nike and adi, continued to be very strong, while among our casual styles of Stan Smith from adi, Vans Classics and Puma Suedes and Clydes were top consumer choices.

Within basketball, strength in court classic styles such as superstars, largely offset declines in performance shoes.

Average selling prices in footwear were up in the low end of mid single digits, while units were also up low single digits.

Unlike a lot of retail, our store traffic in the US was up and our comparable sales in the store segment were up mid single digits.

On a percentage basis, the top performer this quarter was SIX:02, with the comp sales increase well into double digits.

This exciting performance was driven by footwear with strong gains in Puma, adi, and Nike.

Foot Locker Canada continued its strong performance, producing an excellent double-digit increase, driven by strong results in men's, women's and kids.

Footwear was up double digits and apparel and accessories were both up high single digits.

Among the male banners in the US, the top performance was delivered by Champ Sports, which produced a double-digit comparable sales gain, driven by a mid teens increase in apparel and a high single-digit gain in footwear.

The Foot Locker division in the US, which now includes our remaining Lady Foot Locker stores, was up mid single digits.

As previously mentioned, we have found that our Lady Foot Locker customer largely responds to the same influences as the female customer in our Foot Locker stores.

Kids Foot Locker, meanwhile, was up in the low end of mid single digits while Foot Action posted a low single-digit gain.

No doubt the most exciting event of the quarter for us was the reopening of our flagship store on 34th street at the end of August.

The grand opening generated tremendous excitement amongst the legions of customers that took part in the launch of the newest, most premium sneaker experience in New York.

The space includes not just the pinnacle Foot Locker experience but also contains shops to highlight the best product story of all of our fantastic innovative vendors.

And for me, most exciting of all, is the first SIX:02 presence here in New York City, a key step that we believe will build brand awareness for the banner, not just in New York but nationally, and even, to some extent, internationally.

Elsewhere among our international divisions, Foot Locker Asia Pacific comped up low single digits.

Foot Locker Europe was pressured by declines in traffic, especially in Italy, France and Spain, and produced a low single-digit comp sales decline.

Our women's business in Europe stood out with a strong performance in both footwear and apparel.

We believe that the current negative traffic trends in Europe will dissipate.

Our youthful customers tend to be resilient.

And we believe the investments we are making to elevate the experience of our European sneaker enthusiasts and build even deeper connections with them will drive future increases in traffic.

Our weakest store banner performances were at our Runners Point and Sidestep banners, which continued to face traffic and sales challenges, and were down double digits during the quarter.

Our direct-to-customer segment turned in a solid overall performance with an 8.9% comp gain.

Our collective store banners.com business in the US continued its strong growth with sales up slightly over 20%.

While our international direct businesses, including the digital operations of the Foot Locker banner in Europe and Canada, were up approximately 50%.

Eastbay, on the other hand, declined high single digits.

Dick will provide some perspective during his remarks about this result and our ongoing efforts to improve the performance at Eastbay.

Overall, direct-to-customer sales increased to 12.8% of total sales, up from 12.4% a year ago.

Moving to the rest of the income statement, gross margin improved by 10 basis points to 33.9% of sales.

The uptick was driven by merchandise margin which also improved by 10 basis points.

The progress in merchandise margin was the result of the lower markdowns in our stores, partially offset by a decrease in the merchandise margin of our direct-to-customer business.

As we noted on our previous call, Eastbay, which is still our largest digital banner, continued to be more promotional than in the past in response to weakening traffic to its website.

Our team did another very good job managing expenses during the third quarter.

Our SG&A expense rate improved by 20 basis points to 19.4% of sales, despite increased marketing costs within the direct-to-customer segment, which we mentioned would persist when we provided guidance on last quarter's call.

Depreciation expense increased $40 million, up $2 million compared to last year.

Consistent with previous quarters, this increase reflects the incremental investments we are making in our store fleet, our digital businesses, and technology to continue to drive greater productivity from all of our assets.

On a GAAP basis our Q3 tax rate came in at 30.9%, the result of the tax benefit in Europe that John mentioned in his opening remarks.

On a non-GAAP basis, our tax rate was 34.9%.

We expect to realize a modest ongoing tax rate improvement in future periods from the new intellectual property valuation.

This benefit will be included in future guidance.

Turning to the balance sheet, we continue to manage our inventory effectively and ended the quarter with inventory up 1.9% from a year ago compared to a sales increase of 5.1%.

On a constant currency basis, inventory was up 2.2% compared to our 5.5% sales increase.

Our inventory remains fresh and exciting, and we are well-positioned for the important upcoming holiday season starting this weekend with this year's addition of the Week of Greatness.

It's going to be great.

Just ask Tom Brady.

We ended the quarter with cash and cash equivalents of $865 million, down $13 million from a year ago.

We continued using our balanced approach to capital allocation, including reinvesting in the business and returning cash to shareholders.

First, capital expenditures in the quarter were $62 million, bringing the year-to-date total to $193 million, and leaving us on track to reach the full-year target of approximately $290 million that we mentioned last quarter.

Second, we returned $37 million to our shareholders through our quarterly dividend and, finally, we spent $76 million to repurchase 1.15 million shares of common stock.

In total we have returned $463 million to our shareholders through the first nine months of the year, while continuing to make the strategic investments in the business necessary to drive our future growth.

Before I turn the call over to Dick, let me reiterate that for the fourth quarter we continue to expect a mid single-digit comparable sales gain, slight improvements in both gross margin and SG&A, and a double-digit EPS.

As a result, we are on track to achieve the annual guidance we gave you at the beginning of 2016 -- a mid single-digit comparable sales increase and a double-digit gain in EPS.

Let me now hand the call to Dick to discuss our important leadership role in the industry and highlight a few of the major product trends this quarter.

Thanks, Lauren.

Good morning, all, and thanks for joining us.

In our last call, I began my remarks by describing the many dimensions of leadership that Foot Locker has in the athletic industry.

These dimensions of leadership include our excellent people, our strong brands, our extensive global reach, the diversity of the categories in which we operate and ultimately, our outstanding financial performance.

The very first dimension I discussed is actually the most important one, and that is the leadership position we have with the core customers of each of our banners.

I want to come back to this aspect because it is a crucial element of our ongoing success story.

In the past, we have talked about the casualization of the dressing styles around the world and the ongoing adoption of healthier, more active lifestyles, both of which support steady growth of our athletic footwear and apparel businesses.

But our teams' work with our customers is much more dynamic and powerful than that.

It comes down to this; our brands are at the epicenter of sneaker culture and we work hard every day to stay there, because what drives sneaker culture is changing all the time.

What is sneaker culture?

It means different things to different people, but the heart of it is a true, deep passion for sneakers.

And what defines the epicenter of sneaker culture is a bit different for each of our core customers.

The forces driving a love for sneakers with our muse at Champ Sports are not exactly the same as the forces motivating our customers at Foot Action or Foot Locker.

And the Foot Locker customer in New York is different than the one in LA, or London, Paris, Milan, or, for that matter, Sydney or Aukland.

Sometimes it's a musician, sometimes it's an athlete, and very often that athlete style off the court or pitch is even more influential than what he or she accomplishes in their sport.

Our female customers have an even broader range of style influences, and not surprisingly, the muse at Lady Foot Locker is very different than the one at SIX:02.

That's one of the key reasons we separated the management of these two businesses.

With the ubiquity of social media, there are, of course, some overarching style themes that each of these sneaker lovers share, but it is our own passion for sneakers and our understanding of these subtle differences that are key to our ability to maintain critical points of differentiation between our banners and from the competition, keeping our interaction with our customers authentic.

Authenticity is a key concept in connecting with the customers who are affectionately called sneakerheads, those who buy the most sneakers and who set or influence the athletic footwear and apparel styles for their peers.

We strive to be authentic with our customers and the products we showcase in the quality of the physical spaces they shop in, and the seamlessness of the digital interaction we get with them, and in the knowledge and enthusiasm of our associates as they engage with our customers each and every day.

In terms of physical locations, Lauren mentioned the high energy flagship store on 34th Street that we reopened in August, which is off to a great start.

If there's an epicenter of sneaker culture in New York, it's got to be on 34th street.

This quarter, we will also debut our exciting New combined Foot Locker, Kids Foot Locker and SIX:02 stores near Times Square.

That grand opening is slated for January.

The best thing about sneakerheads is that they come from all over, in all shapes and sizes, ethnicities, genders and ages.

In fact, kids are starting earlier and earlier to develop into sneaker aficionados.

We actually have four-year-old sneakerhead customers.

Sometimes their parents, who also grew up loving sneakers, get them involved, and sometimes the kids push the parents, but either way it's been a huge benefit to our leading position in the kids' business.

Although some kids grow out of being sneakerheads as they become teenagers and then adults, fortunately, it turns out a lot of them don't.

It's a common occurrence for shareholders to tell me they have a teenage son or daughter who is absolutely passionate about sneakers.

And on more than one occasion I've also had the pleasure of talking in depth about our various business strategies with the portfolio manager who, as the meeting was wrapping up, has come up to me privately and said -- hey, I get it, I've got 30 pairs of sneakers in the closet myself.

I usually tell them that with 30 pairs, they are just getting started.

As great as our vendors are, and they are all excellent, style preferences of our customers shift between them which is why being a multi-brand retailer is so important.

Our vendors have certainly come to recognize and support the critical position we have built within the industry in terms of providing that feeling of authenticity to our customer.

As our tag line says, if it's at Foot Locker it's approved.

We work continuously with our vendors to share the insights we gathered during the journey of discovering what our customers find to be the best, coolest sneakers and apparel at any given moment.

Ultimately, it is having available the most innovative products from our outstanding suppliers that keeps our banners top of mind with our most influential customers.

There are always competitors who would like to knock us off our spot at the epicenter of sneaker culture.

We never take it for granted that we will remain our customers' preferred destination.

And we work hard every day to maintain our unparalleled connection with and understanding of the customers of each of our banners.

We started a few years ago with the male muse for each of our banners and a female muse for our women's business.

We have progressed dramatically since then to identify the core male, female, and child customers of each of our banners.

And for our kids business, we've even started talking about the parent muse.

As I said, it starts with our store associates who often proudly describe themselves as sneakerheads, and it extends to our marketing teams, our merchants, and, indeed, everyone in our Company.

It is vital to our ongoing success of staying at the center of sneaker culture.

While Lauren mentioned quite a few banner, geographic, channel and category highlights that illustrate how all of that excellent work is driving our strong overall performance, she also mentioned a couple of softer parts of our business, which highlights how difficult it is to build and maintain our central position.

The solution to these two areas that I'm about to talk about I firmly believe are rooted in doing an even better job understanding and engaging with the core customers at these banners.

First, Runners Point and Sidestep banners continue to struggle, as seen in the negative comp result and the impairment charge taken this quarter.

While part of the challenge is related to German retail in general, I believe the more fundamental issue is that we fired too many customers when we embarked on our banner segmentation strategy in Germany a couple year ago.

We made some assumptions about who our core customers were in these two banners, and worked with our vendors to deliver product assortments we believed would be right for them.

In retrospect, the team there didn't have the same process and discipline for listening to our customers that we have developed at our other banners.

So, we have now redoubled our efforts to make those connections.

I can't say yet that we have it solved perfectly going forward.

And even to the extent that we have improved our own understanding of what motivates the customers of these banners, we still have the challenge of making sure all of our vendors equally understand and allocate the right product.

For example, while the sharp point of differentiation at Runners Point is on the performance running side, we know this banner's customers wear sneakers for a lot of other occasions in their life and we need to be the destination for those sneaker purchases, as well.

We remain committed to the runners Point and Sidestep business and believe we can get their performance back to the previous levels of profitability, which is the starting point for the ultimate goal of expanding those banners outside Germany.

Turning to Eastbay, a big factor in that banner's recent struggles continues to be the overall shift in style preferences away from performance-oriented products to more athletic lifestyle assortments.

That said, this is an area where we let ourselves get knocked off center a bit in connecting with the elite high school athlete who has always worn both casual athletic and performance footwear and apparel.

But we are still strongly positioned with him and her.

And we have recently hired a new leader for our digital business, [Najay Talwar], who brings a wealth of knowledge, experience and energy to the challenge of again making Eastbay the first choice for that important customer.

Before we get to your questions I'd like to just touch on a few product highlights.

First of all, one of the most significant dynamics in our industry right now is the continued growth of adidas across multiple platforms.

On the lifestyle side, adi originals, such as Nomad and Superstars, are continuing to be on trend, while the performance styles of Pureboost and Ultraboost are growing in importance in all of our geographies.

Nike certainly remains our largest vendor by far overall and largest in each of our banners.

Lifestyle running continued to be a tremendous strength for Nike, with significant sales of Roshe, Huarache, Presto, and Max Air cross all our markets.

The Jordan brand continues to build popularity around the world.

And there was also strength in Foamposites and seasonal boots from Nike.

While signature basketball overall remains soft, Nike's Kyrie Irving shoes sold quite well, as did the Curry 2.0 and 2.5 product from Under Armour.

Another strongly uptrending brand in the quarter was Puma.

Puma creepers, platforms, and suedes delivered excellent performance across almost all of our banners, especially in our women's businesses.

While limited to certain banners and geographies, we're also seeing encouraging momentum in other brands such as Vans, Reebok, Asics, and New Balance.

Our boot business, led by Timberland, is still quite important although it has gotten off to a somewhat slower start this year compared to last year.

In apparel, I'm very pleased with the mid single-digit sales increase that Lauren mentioned.

We are making progress in our apparel businesses in most of our banners.

Overall apparel profitability is up, to the point where margins are close to catching up to the already strong footwear margins.

ASPs in apparel were up double digits, reflecting the success of our strategy to focus on a more premium assortment.

Apparel units, as expected, were down.

The windwear category, led by products such as the Nike Windrunner, continues to be the hottest trend right now.

Our overall t-shirt business performed very well, propelled by our own team edition group, as did CSG fleece and nylon jackets at Champ Sports.

I'd like to close my remarks by saying how proud I am of the entire team at Foot Locker, Inc.

This was our 27th consecutive quarter of meaningful sales in non-GAAP profit growth.

And Lauren outlined our belief that we can attain yet another record performance in Q4.

We have diligently executed our strategic initiatives over several years and built a high-performing business, not just from a macro level but also from the ground up.

As a business, we strive for consistent, authentic and memorable interactions with each customer who comes into our stores or visits our website.

Between our 3,400 stores and our numerous websites, such interactions happen literally millions of times every day.

And it is the preparation, skill, the passion of each and every one of our associates that creates the authenticity of these interactions and which motivates our customers to position us at the epicenter of sneaker culture, right where we want to be.

Emma, let's open the call for questions, please.

(Operator Instructions)

Our first question comes from Robbie Ohmes from Bank of America Merrill Lynch.

Thank you very much.

Dick, I was hoping, there was a lot of commentary you gave us, can you take all of that and put it into how we should think across the banners, what the outlook is from an average selling price versus unit perspective when you take into account all of those different trends across your banners?

Good morning, Robby.

The interesting piece about the business is that as we mold it all together across all of those banners we continue to see growth in both ASPs and unit prices.

I mentioned that unit prices in apparel were up, units were down based on our fewer twofer offers or buy one get one offers.

But overall, ASPs and unit prices both wash out to be positive.

That's great.

What we are really experiencing is twofold -- that we have been very focused on the inventory and flowing the product well, getting it to the right place, right time.

And that has supported more full-price selling.

So, part of the ASPs has been less promotion.

But the other piece is that the customer is really resonating, responding to the premium product.

This is where they find their cool, so they are opting for that.

All of those factors combined are what we are seeing show up in ASP.

But our team remains very focused on making sure that we've got a solid offer across the price points so that our customers have good choice.

Great, thanks very much.

We now have Sam Poser from Susquehanna Financial Group.

Thank you very much for taking my questions.

A couple -- as you look at the SIX:02 you decided not to open stores this year.

You have 34th Street, you're going to open Times Square within the big Foot Locker store there.

How should we think about planned SIX:02 growth into next year?

Sam, as we talked about, we intentionally slowed down this year to make sure that we get these two big flagship opportunities on 34th and Times Square right.

We've seen a shift in the assortment, we've seen a shift in the engagement with the consumer.

So, our anticipation is that we'll open some doors in 2017, likely in the back half.

We're still looking for the right deals, the right places, but we anticipate that we'll begin the process in the second half of 2017 and be in a position to ramp it up a bit in 2018.

Do you expect to have net store openings next year, in general, or is that still going to be a net closing situation as far as you see it right now?

We've been close this year.

It's about a wash this year.

We could be a little bit net positive next year, could be a little bit net negative.

The plan is to be a few doors bigger.

The truth is that we close stores when we come across the right opportunities to close the right doors.

And for us, Sam, as you know, it's a productivity story.

In a lot of the remodels and partnership stores that we're opening, as we remodel and relocate we take more square footage on.

So, even with the door closures we've seen square footage growth be fairly consistent over the past few years, and we expect that to continue.

We still see door count expansion opportunities, certainly in Europe and with our Kids Foot Locker banner.

And then, lastly, could you talk about maybe the difference between, let's say, your day-to-day footwear business versus the launch businesses, and maybe an idea.

Lauren, you talked about the price, the variance of the different price points.

So, basically there's shoes that are designed for Saturdays and then there are shoes that are designed for the rest of the week.

Could you give us some color on how you think about that, because I think everybody in the investment community tends to get focused on the Saturday shoes.

Launch is certainly part of the business, Sam.

As you know the business well, launches aren't just Saturday launches anymore, by the way.

We launch products throughout the week.

ASPs are a combination of the entire week matched together.

So, while we like the way the launch calendar lines up in Q4, I also like the flow of, as you put it, Monday through Friday product.

We have great innovative product from our vendors.

Not all of it has a don't sell before date or a launch date.

A lot of it comes in and we're able to sell it immediately.

So, the mixture of great innovative product Monday through Friday with some heat that comes through launches on Saturday makes for a great combination across our banners.

Thank you very much.

Good luck.

We now have Camilo Lyon from Canaccord Genuity.

Thank you.

Good morning, everyone.

I wanted to get your thoughts on what's going on with the brand shift -- and the shifting strength within your category brands, in particular how that's affected your basketball business, excluding superstars, so the performance basketball.

How do you think about the brand mix developing and unfolding into next year?

Is this going to be a continuation of the trend that we have been seeing?

And do you see product down the pipe that can actually start to reverse the trend in basketball to turn it more positive?

I think the brand trend I talked about in my prepared comments.

We take great pride in being a multi-branded retailer.

We have great brand partners across all of our geographies in all of our banners.

Our consumer, while brand is important to the consumer, cool is more important to the consumer.

So, they move to where they find the coolest sneaker that appeals to them.

That appeal may come from social media, it may come from the group of people they hang out with, it may come from the jean style that they choose to wear.

But we continue to see strength in the key brands that I called out certainly.

Adidas is on a great run, they're having a lot of success.

But we, at the same time, have tremendous successes across the Nike brand.

The one place that you called out, Camilo, signature basketball, is a place that's a little bit softer.

With that being said, we saw some good pop on the KD 9 that came out.

The Kyrie Irving shoe continues to perform exceptionally well.

The Under Armour Curry product, the 2.0 and 2.5, during the quarter did very well.

So, it's a combination and certainly we see product that we believe is going to excite the customer.

Some of it's in signature basketball, some of it's in lifestyle running.

I've talked the last couple calls that our team does such a tremendous job of moving open to buy dollars from vendors and categories.

We don't really think in terms of categories as much as maybe the analyst community does.

We think in terms of what's going to motivate the kid to buy, and we create in store and online and digital environments to appeal to that.

So, yes, we see good products coming, and some of them are certainly in performance signature basketball, but they're spread across the range of product offerings.

Thanks for the color.

I think your visibility probably takes you through fall of next year.

Is that fair to say?

Assuming that's the case, do you see any major trend shifts that are noteworthy from a product perspective?

Or is this more of a continuation of the increasing amount of inventory that can support the continuation of what's been a very strong lifestyle running casual trend?

Again, I think the trend that drives our consumer, Camilo, is whatever is the coolest, most innovative product.

You can say -- well, a Stan Smith is not overly innovative -- but for this generation that is seeing it for the first time, this group of sneaker aficionados that's seeing it for the first time, it was very cool.

She really found the Stan Smith and the Superstar as shoes that intrigued her.

So, again, not highly innovative but very exciting for that consumer.

And they know that they come to us and get the special editions of those classics.

I think the shifts that we'll see, Camilo, will be driven by innovation, it will be driven by things with knit uppers, there's mid sole things coming along.

We've got great relationships with the vendors and we work with them and give them the insights that we get from our consumers, and hopefully that leads to exciting products for the consumers to buy in our stores.

Great.

And just a final question for you, Lauren.

As you think about the margin contributors, the gross margin contributors, the puts and takes, what opportunities are left for some margin expansion?

Is it just really relegated to apparel or are there other opportunities within the business that can be positive catalysts to gross margin expansion?

Thanks.

We are not done with getting the right product to the right place, the flow initiatives.

There's always more there and we certainly have a number of things we're working on.

So, that will continue to help full-price selling

As we make the experience between bricks and digital ever smoother, that also helps with more full-priced selling.

It makes your inventory that much more effective.

But, yes, certainly apparel, as we get to our A game in that.

As we said, we did have margin rate improvements on apparel, and the chase is back on with apparel chasing footwear.

We think one day that apparel margin can be significantly above footwear.

So, yes, we remain encouraged by upside to both the gross margin and SG&A.

And, of course, on the SG&A side is where pursuing that sales per square foot of $600, that's a powerful productivity driver.

That's great.

Thank you for the color and good luck in the holiday season.

We now have Mr. Tom Nikic from Wells Fargo Securities.

Hi, good morning, everyone.

Thanks for taking my question.

The downturn in southern Europe seems a little surprising.

Europe had been one of your strong points in the last couple quarters.

Do you have a sense as to what happened in those Markets?

And you mentioned you're confident that it will bounce back.

What drives that confidence?

There's a lot of macro things that happened, certainly in France, beginning with the Bastille Day terror attack and some things that obviously are out of our control.

I think it caused people to take a pause, specifically in France.

The Italian consumer is a little bit fickle.

They shop at exactly the right moments.

And while the back-to-school season seemed to be okay, traffic after back-to-school dropped off.

We see the earthquakes that hit in the center part of Italy certainly shake the culture of the country.

They were felt a long way.

But the thing that I can tell you, Tom, is that, as we see traffic up and down, the European consumer is very resilient.

This young consumer is really obsessed with sneaker culture and they will be back.

As we head into the holiday season our team is certainly ready and prepared and the product assortments will draw them back.

There's great marketing that going on, the team over in Europe is doing a fantastic job.

Lauren referred to our week of greatness and this year's campaign, I think, is by far the best that we've done, but it also is the most international that we've done.

We've got a couple of international versions of it that will certainly drive some traffic over in Europe, featuring a couple of key football players over there.

We're confident, the team in Europe is confident, that traffic in the markets that we called out will certainly be back over the holiday season.

Our young customer, no matter which geography we're talking about, they define their cool and their styles by their sneakers.

So, we remain confident that they are going to come in to see us to get them.

That's great color.

Thanks very much.

We now have Jonathan Komp from Robert W. Baird.

Yes, hi, thank you.

Lauren, maybe first question just following up on the merchandise margin.

Any chance you can parse out what type of improvement you saw at the store levels?

It sounds like the direct-to-consumer has been a bit of a drag for a couple of quarters.

We did see improvement in the stores margin and a bit of a further pull back in direct.

The Eastbay business we highlighted in particular got a bit more promotional, trying to improve the traffic to the website.

So, yes, the 10 basis points that we got was the plan to cross the two with those two dynamics.

Do you have any sense on the direct side how many quarters that might be a head wind yet?

We're going to attack it quarter by quarter, Jonathan.

The traffic, we believe, will find some drivers that motivate the consumer to come back, deeper connectivity with that customer.

I don't have that crystal ball but I know that we're committed to addressing it quarter by quarter, and we believe that we will continue to make progress.

Okay, great.

And then Dick or Lauren, I'd be curious to hear a little more how you're thinking heading into the holiday.

I know you're not giving quarter-to-date comps anymore.

The context of my question is, I think comps are up 4% year to date, and obviously you held mid single-digit guidance, which implies at least 4% and maybe higher in the fourth quarter.

So, I'm curious to hear how you're thinking about the next couple of months.

Jonathan, the glass is always half full when you're in our spot.

But as I mentioned on an earlier question, we like the way the launch calendar lines up for the fourth quarter.

I really like the way that the product flow is set up across our banners.

It's that time when the shoppers are out.

And the team is certainly energized.

When you combine all of those things, some of the investments we've made, both in the physical stores and on the digital side, to make the connectivity a bit better, I'm cautiously optimistic all the time, but just the way the product flow is, I think the customers will respond favorably.

Okay.

And last one, if I could just sneak it in there, do you have any sense -- I'm curious on your expectations for Under Armour and the Curry platform to sustain momentum against some tougher comparisons coming up?

Any thoughts on more of the outlook there?

I think Under Armour is doing a great job investing in their footwear business.

As I talked about, the 2.0 and 2.5 Curry shoes in third quarter performed well.

The 3.0 is fairly new into the business.

It started off a bit slower than the two previous models but, again, it's early days.

I think their commitment to the footwear business, they've got a great asset in Steph Curry, obviously, and they expand their asset base, as well, beyond Curry.

The thing that we all want to see them have is a multi-platform footwear business, and Curry is certainly in the lead.

We're optimistic that they are going to be able to continue to keep that platform with some momentum behind it and certainly expand their footwear offerings.

All right.

Thank you both.

Now we have Omar Saad from Evercore ISI.

Thank you.

Nice quarter, guys.

I wanted to ask, in Europe, maybe if you could dive in a little bit the performance of the Foot Locker banners in Europe.

Maybe you can share some of the differences in the performance between the footwear Locker banners and the two Runner Point and Sidestep that aren't working as well.

If there's any learnings there or insights you could share, that would be helpful.

The biggest difference is that Foot Locker Europe covers 19 countries.

So, there's ups and downs across the countries but they've got a much broader base.

Runner Point and Sidestep are, for the greatest part, domiciled within the borders of Germany.

So, if there's traffic issues in Germany, Runner Point and Sidestep don't have any other place they can be lifted from.

The connectivity with the consumer, I think the Foot Locker Europe team has a deep connectivity in understanding and engagement with their consumer base.

That varies country to country, obviously.

The north of Europe and the south of Europe have very different buying patterns and buying characteristics and product desires.

The Sidestep and Runner Point business have, relatively speaking, no apparel.

There's a little bit of performance running apparel in Runner Point stores.

Part of the strength of Foot Locker Europe is a really good footwear business, in general, and a much improved apparel business over the last six or seven quarters.

Probably the biggest thing is that Runner Point and Sidestep don't have the ability to diversify from a geography point of view or a family of business point of view.

So, the weight is all on sneakers.

In Runner Point it's all on running silhouettes of sneakers and Sidestep has got no apparel mix at all.

So, those would probably be the biggest differences, Omar.

Got you, that's helpful.

And I also wanted to ask about the Nike HyperAdapt.

There's been some noise in the press.

I think it's launching for holiday.

I don't know the allocation you're getting.

The price point is going to be really high.

If you have any comments there, it would be helpful.

Well, it's back to the future for all of us, right?

Again, it's where Nike can continue to lead innovation.

They've got very limited pairs in the marketplace that they are launching in their retail.

The question that I think is the most important one around the HyperAdapt is how does that become a commercializable, in a meaningful way, technology.

What do they learn from the HyperAdapt that they can take into the broader line.

I know that they look at things from an innovation point of view, always seasons ahead.

I applaud them for the HyperAdapt.

We all wanted it when Marty McFly had it on, and now we will get a chance to get it.

Thanks, guys.

Good luck for holiday.

Our next question comes from Matthew Boss from JPMorgan.

Thanks, guys.

On the women's front, can you just talk about your learnings, changes you made to the assortments, and how best to think about the global potential SIX:02 store opportunity longer term?

I'll back down from global to tell you that we've got to get it right in the US first before we think about it as a global platform.

I think what we learned, probably the biggest learning, we started out very much performance-led, with fashion being the second feature of the assortment, certainly from an apparel point of view.

The big shift that's happened, Matt, is that we now look from a lifestyle/fashion perspective first and know that the function of the performance aspects have to be built into a lot of the assortment because she wants to look great but she expects it to perform.

Some of the Rihanna product that we launched with Puma, right as we opened the store in late August, beginning of September, people look at it and say -- well, that's very fashion forward for a Foot Locker banner.

And they're right, it is.

But that's the attraction that our muse in that banner, in the SIX:02 banner has.

The shift has been from performance-led to lifestyle-led with performance attributes.

That's both on -- mostly on an apparel point of view but also on a footwear point of view.

Some of the creepers and things that we mentioned in our prepared remarks obviously resonated really well with the SIX:02 consumer.

The energy that we see in the SIX:02 store on 34th Street here is helping us understand what that in-store experience for the consumer should be like.

And we'll be able to take those learnings and take it across the other 30 stores in the fleet and, as I mentioned earlier, be ready to expand a bit in the US later in 2017.

Once we get it right there then we can come back to your question about a global impact, Matt.

Got it.

And then just a follow-up, as we look at your balance sheet, I think roughly 60% of your cash is overseas.

How are you thinking about capital structure opportunity and deployment opportunities in terms of priority going forward?

Our number one priority remains investing in our business.

As we have described what we're doing on a CapEx front, it looks like we're going to be about $290 million this year as we are investing in making the store experiences terrific, and also on the direct side making sure that the websites are equally a good experience for our customer.

And then as we look at these long-term objectives and be top-line growth, there are infrastructure needs in order to be able to support all of that.

So, that is the third element of the CapEx.

We do look for that to continue to be elevated go forward but we have a very balanced approach to capital structure, and have been consistent and meaningful returns of cash to the shareholders.

So, that is a very important priority to us.

Our Board looks with us at what we're doing with the dividend and share repurchase on a quarterly basis to make sure that we are competitive there and making the right decisions with those capital dollars.

So, there are a lot of dynamics and one of them, you rightly point out, is where the cash is located.

But, as we've described, we really do feel very good about the opportunities in Europe outside the US to further our business, and that would be part of the use of that capital.

So, we think our approach is balanced and we've got the flexibility to execute it.

Best of luck.

We now have a question from Michael Binetti from UBS.

Good morning, guys.

Thanks for all of the detail there.

Just a couple modeling questions for you, Lauren.

First of all, the buying and occupancy, I think, if I'm right on your metrics, you gave on the gross that the buying and occupancy was flat in the quarter and almost a [5%] comp.

Is that the leverage point we should think about going forward into the fourth quarter?

We think about the leverage point as being at the low end of mid single.

The dynamic that we had this year, we had some significant properties, big properties where we were paying rent without sales, a couple here in New York.

So, that created some headwinds on leveraging that occupancy.

But as those projects get completed, we begin to get back to a place where we would get leverage.

Okay.

And then a similar model question, you started the year, I think, referring to 2016 as a peak investment year.

Can I assume that that's still the right way to think about this as we look out over some longer-range planning for you guys?

Yes, when we get to next year we'll give you further color around CapEx, but at this point we have described the next couple of years as being still elevated at about $250 million.

But we will give you more insight into that in February.

Okay.

You're several years into the remodel program at this point, and you're probably getting out to pretty solidly renovating the middle tier of your stores at this point.

Are the earlier remodels still trending above the corporate average?

And how do you think about the eventuality that at some point you'll have to go back to those stores with the next big thing over the next few years?

One of the things we've learned through this process is that you have to keep the environments exciting, and the customer has to feel comfortable and energized when they walk into the stores.

So, yes, we're making progress in the remodels.

But we've got a 3,400-door fleet in multiple geographies across multiple banners and across multiple formats.

We continue to plan on investing in the remodels.

Our team is always looking for the next thing.

We know that we'll be back to update or change as we move forward.

But even the later renditions of our Willowbrooks or GSPs at Footaction or our Tyrones at Champs, they've got slight modifications to them, things that we've learned from the early remodels that we've been able to improve on in the later remodels.

So, we're going to continue the program.

We're in the mid [30%]s, I think, right now, or that's what the forecast is for the end of the year -- mid to high [40%s] of the fleet having been touched.

We want to change the remodel program when we hit the last store that passes the hurdles.

I don't know exactly where that's going to be, but the store fleet being refreshed is really important to our success.

And a lot of those remodels are done based on lease expirations.

And they weren't all the top stores first and now we're getting down.

We did a little bit of more of the top stores but it's a mix.

We still have some good stores, big stores to remodel.

Okay, thanks a lot, guys.

Our next question comes from Mitch Kummetz from B. Riley & Company.

Thanks for taking my questions.

Dick, could you talk a little bit about allocations?

I guess you would say you always wish you had more of the best-selling stuff.

But just anecdotally, it seems like, whenever I go into my local Foot Locker store you guys are a little short on Ultra Boost and NMDs.

I'm wondering if there's been a catch-up taking place there, just given the resurgence of adidas particularly around some of those styles.

And moving forward if you might be in a better position in terms of allocations with some of that hottest product.

Mitch, my suggestion would be that you pay close attention to the launch calendar so that you know the day that they are going to be launched so you can get there.

The thing that fuels our business with our consumers is a scarcity model.

So, while we always wish that we had a little bit more of the best product, the likelihood of us ever being able to satisfy the last customer, we certainly don't want that to happen, frankly.

It takes the excitement away if everybody can get exactly what they want.

We want to keep your appetite high for that type of product, Mitch.

We work close with the vendors on allocations and distribution.

Certainly we try to get more, we try to get what we think is the appropriate amount for our stores.

But it's an ongoing conversation.

And as significant partners with our suppliers, I think we end up with -- I don't know if our fair share is the right way to put it but we end up with a model that the consumers are driven by because they know they have to get into the stores and get it or they might not have the chance.

So, the scarcity piece of the allocation model is important to our success, as well.

We like our position with this consumer who leads fashion, right?

So, it's important to our vendors to win with that customer because they are the ones who are defining cool.

So, that's helpful to us.

Okay.

And then, speaking of the launch calendar, obviously you've got the Week of Greatness coming up.

And I see that on the 23rd you've got the new Harden shoe.

Adidas hasn't been that successful in basketball of late.

And, obviously, Dick, in your comments you talked about them showing progress across categories.

It seems like basketball is the one where they haven't seen it yet.

I'm just wondering how optimistic you are that, that third leg of the stool might be able to turn on for them with this particular shoe and some of the other stuff that they are doing around basketball.

I think it's certainly a start.

You know they've got a great asset in James Harden, a character, a great athlete, a great player and a style leader.

The shoe is interesting, of course.

It's got boost in it.

And they've got some new design talent that they are trying to leverage.

I'm optimistic that they are going to get basketball right and I think it does start with the Harden shoe.

I appreciate the question, Mitch, because it will certainly strengthen their product stool when they get a winning combination with performance basketball.

Got it.

Thanks.

Good luck.

The next question will come from Christopher Svezia from Wedbush Securities.

Good morning, everyone.

Thanks for taking my question.

First, on the international side, for Foot Locker Europe, I'm curious, Dick, Sidestep, Runner Point, I think third quarter last year it also was negative, I vaguely remember.

I was curious, what's the time frame on turning this around, number one.

And, number two, for Foot Locker Europe you talked about initiatives, marketing, to improve the traffic there.

Is it fair to say that potentially Foot Locker Europe turns flattish to maybe positive comp trend for the fourth quarter?

That's my first question.

We don't get into banner comps by quarter on the call, Chris.

But, again, I mentioned the marketing work that's going on.

I mentioned some of the outside macro events that you can't guarantee aren't going to recur.

The team there is excited about their product flow, excited about some new stores, excited about great products that are going to be in their doors and on their shelves.

So, from a Foot Locker Europe perspective, I'm optimistic.

And how long is it going to take in Runners Point and Sidestep, as I said in my prepared comments, I don't think it's necessarily going to come back suddenly.

But I think that the work that's going on is identifying the connectivity with the consumer that we may have just made assumptions around and didn't really have as much fact-based information as we do in some of the other banners.

The team in Recklinghausen is focused on that connectivity with the consumer.

They are focused on engaging with the vendors to make sure that we've got the right product assortment for both the customers that we have today and the customers that we aspire to get over time.

Okay, thank you.

Lauren, for you, on tax rate, you referenced that potentially it could be lower going forward.

Any assumptions about a tax rate we should use going forward?

Should we just take third quarter and that's the trend line?

Any thoughts around that?

If you're asking Q4 tax rate, we won't get into next year's tax rate until next year.

But in a Q4 you're guided at about 36%, you'd be in the neighborhood.

Okay.

And then the last question, you've talked about other brands and how there seems to be a more broad-based brand performance going on.

How do you think Foot Locker benefits in that environment where you have more consistent success across multiple brands, maybe not every category but most categories?

Is it good to be in that situation versus just having one brand really more dominating the overall category performance?

The consumer doesn't think about categories, Chris.

They really don't.

Unless they happen to be a basketball player or happen to need a pair of football shoes, or whatever it happens to be.

So, to think that one brand will get it right 100% of the time, as good as our brands are, I don't think that that's going to happen.

The consumer always wants choice.

And our consumer is motivated by cool, by sneaker culture.

They are not motivated, it's not a basketball culture, it's sneaker culture that drives us.

Sneaker culture crosses all of the brands and all of the categories.

I mentioned some of the brands that we're seeing specific geographic success with.

They have a window of opportunity.

It may be along the I-95 corridor, it may be a California-based thing.

But we have a lot of store density in those two areas.

So, some of these brands that I mentioned -- Asics, Vans -- they've got huge opportunities in a segment of our stores.

The consumer really -- we like to say the consumer votes with their feet at the end of the day.

They go out and they find what the coolest shoe is.

We've always been a multi-branded store.

And I think the work on 34th Street to really showcase those brands, the work in all of our remodels to showcase brands, brings the brand strength together and allows us to tell powerful stories around the great products that our manufacturing partners deliver to us.

So, the multi-branded strategy, the strength of those brands, is, again, an important part of our success.

Okay.

Thank you very much and all the best around the holidays to you, guys.

Thank you.

Thank you, everyone, for the excellent questions today.

If we didn't get to you or you have a follow-up I'll be back at my desk shortly.

Please join us on our next earnings call, which we anticipate will take place at 9.00 AM on Friday, February 24 following the release of our fourth-quarter and full-year results earlier that morning.

Thanks again and goodbye.

Thank you.

Ladies and gentlemen, that does conclude today's conference.

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

Have a wonderful day.