Foot Locker Inc (FL) 2018 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Foot Locker's First Quarter 2018 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.

Management undertakes no obligation to update these forward-looking statements, which 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 more fully in the company's press releases and in reports filed with the SEC, including the most recently filed Form 10-K or Form 10-Q.

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

Please note that this conference call is being recorded.

I will now turn the call over to Jim Lance, Vice President, Corporate Finance and Investor Relations.

Mr. Lance, you may begin.

Thank you, Dorothy, and welcome, everyone, to Foot Locker, Inc.'s First Quarter Earnings Conference Call.

As reported in this morning's press release, the company reported net income of $165 million in the first quarter compared to $180 million in the first quarter of last year.

On a GAAP basis, this year's net income was $1.38 per share compared to $1.36 per share in the first quarter of 2017.

Included in these results is an incremental $12 million charge related to the pension litigation we have spoken about in the past.

Excluding this item, on a non-GAAP basis, first quarter earnings were $1.45 per share, a 7% increase compared to $1.36 last year.

Unless otherwise noted, the figures and rates mentioned during our call today will be based on non-GAAP results.

A reconciliation of GAAP to non-GAAP results is included in this morning's press release.

We'll begin our prepared remarks with Lauren Peters, Foot Locker's Executive Vice President and Chief Financial Officer, who will provide details on our first quarter financial results, along with our financial outlook for the balance of the year.

Dick Johnson, Chairman and Chief Executive Officer, will then review the key drivers of our first quarter performance, along with a progress report on our 2018 real estate and digital initiatives.

Lauren?

Thank you, Jim.

Good morning to all of you.

As you may recall, when we last spoke to you in March, we expected 2018 to start off challenged, with comparable sales similar to or slightly worse than we experienced in the second half of 2017.

I am pleased to report that while we faced many of the challenges we anticipated, the 2.8% comparable sales decline in the first quarter was an improvement over the second half of 2017.

And there are encouraging signs, as Dick and I will tell you about, as we move through 2018.

But keeping to the first quarter for now by month.

February comparable sales were down high single digits.

March benefited from this shift in Easter and comped slightly positive, whereas April was negatively impacted by the shift and was down low single digits.

Total sales were up 1.2%, with the impact of the weaker U.S. dollar contributing about $55 million to the top line.

Before we continue, I want to remind you that beginning this quarter, we are reviewing the business on the basis of integrated sales channel, both brick-and-mortar and digital.

So all of our commentary about our banners will be on an omnichannel basis.

Moving on to the details of our results.

There were some solid performances that stood out above the rest and other areas where it will take some more time to improve our footing.

Starting on the positive side of the ledger, Kids Foot Locker led our banners with a high single-digit comparable sales increase, based on an improved availability of premium styles in kids' sizes versus a year ago.

Kids Foot Locker was followed by Foot Locker in the U.S. and Eastbay, both of which posted low single-digit comp gains.

On the other side of the ledger, Footaction, Champs Sports, Foot Locker Canada and Foot Locker Asia Pacific were each down mid-single-digits.

Foot Locker Europe posted a low double-digit comp decrease, while Runners Point and Sidestep were both down double digits.

Women's footwear was again adversely impacted by a lack of new on-trend offerings to offset last year's strong demand for PUMA FENTY product and select Adidas silhouettes.

The weaker footwear sales had the biggest impact at SIX:02, which led to a double-digit comp decline for that banner.

Breaking out comparable sales by channel.

Our stores collectively posted a 3.1% decline while comp sales at our direct-to-customer channel were essentially flat.

As a percent of total sales, DTC was 13.9% for the quarter, flat to last year.

Overall, store traffic was down low single digits for the quarter, with our U.S. banners experiencing stronger traffic than our international banners.

By family of business, footwear was down low single-digits.

Apparel was an especially bright spot, up double digits, with gains across all genders, while accessories was down double digits due to weakness in socks, hats and insoles.

Within footwear, Men's and Kids comparable sales were down low single-digit while women's footwear declined low double-digits.

Average selling prices in footwear were up, while units were down.

In apparel, both ASPs and units were up, reflecting our customers' steadily increasing demand for our more premium assortments.

Turning now to the balance of the income statement.

Our gross margin came in at 32.9% in the first quarter, down 110 basis points from last year's 34%.

The lower rate reflects a 60 basis point decline in our merchandise margin rates and is 50 basis points of deleverage of our occupancy and buyer's compensation.

The lower merchandise rate was primarily the result of higher markdowns as we continue to proactively manage our inventory, clearing slower-moving styles while maintaining a strong inventory position in new and exciting products.

Despite the higher markdowns, our overall gross margin came in better than the guidance we provided on our last call, which reflects our customers' positive response to our improving position in more on-trend styles, which Dick will be talking about in a moment.

The progress in our margins was most evident in the U.S., where, as I mentioned, Foot Locker and Kids Foot Locker posted positive comp sales.

However, we did feel some additional pressure from Foot Locker Europe, where our merchants had to rely on increased promotions to move through some slower-selling styles.

Our SG&A expense rate rose in the quarter by 50 basis points to 19% of sales, with higher FX rates contributing 20 basis points of that increase.

The further 30 basis points of deleverage was attributable to the significant investments we are making in our digital operations as well as wage pressures and legal settlement costs, partially offset by about $5 million of Hurricane Maria-related insurance proceeds.

Depreciation expense increased to $45 million from $41 million in the prior year.

This expected increase reflects the investments we have made and continue to make to elevate the customer experience in our stores and across our various digital channels as well as improvements in our logistics network and other infrastructure-related projects.

Our first quarter tax rate on a non-GAAP basis was 28%, 500 basis points lower than last year and close to our expectations.

Noted on our last call, the lower rate reflects the new 21% rate on our federal income taxes combined with the impact from state, local and foreign taxes.

Moving on to the balance sheet.

We ended the quarter with $1,029,000,000 of cash and cash equivalents, a decrease of $20 million from the end of Q1 last year.

During the first quarter, we repurchased 2.6 million shares for $112 million and paid out $41 million through our quarterly dividend.

We also invested $64 million of capital in our business, which includes the opening of our new Champs Sport flagship store in Times Square.

Overall, we remain on track to spend the planned $230 million of capital in 2018.

We ended the quarter with 3,284 company-owned stores, down 26 from the beginning of the year.

This includes the opening of 11 new stores, remodeling or relocating 43 stores and closing 37 stores.

We continue to proactively manage our inventory, posting a 5.4% decrease in the quarter compared to a 1.2% increase in total sales.

Using constant currencies, inventory decreased 7.1% compared to a 1.5% sales decrease.

Our inventory discipline, which included the use of markdowns, leaves us well positioned to flow in fresh and exciting product throughout the balance of the year.

In terms of our financial outlook for the remainder of 2018, we see the top line aligned with the guidance we provided on our prior call.

Beginning with the second quarter, we still anticipate comparable sales to be flat to up slightly, and we are still planning for a low single-digit comparable sales increase in Q3 and Q4, strengthening within that low single-digit range as we progress through the year.

For the full year, we still expect a flat to low single-digit comp sales gain.

Second quarter gross margin is likely to improve by about 20 to 50 basis points.

Driven by improved product flow, we expect merchandise margins to begin to recover in the second quarter, along with less deleverage in our occupancy costs due to the shift of about $50 million of sales into Q2 related to the impact of last year's 53rd week.

We expect our Q2 SG&A expense rate to increase as a percent of sales by 110 to 140 basis points, which reflects the increased digital investments I discussed, which are still ramping up.

Our incentive compensation expense is also higher this year versus 2017.

As you may recall, in Q2 2017, we reduced our bonus accruals in line with our updated outlook.

For the full year, we continue to believe we can achieve solid double-digit EPS growth over the $3.99 we earned in 2017 on a non-GAAP 52-week basis.

Gross margin, also on a non-GAAP 52-week basis, is now likely to improve 10 to 30 basis points.

Compared to last year's 53-week gross margin rate, the range is plus 10 to minus 10 basis points.

Our gross margin expectation reflects the improving performance in the U.S., partially offset by the additional markdown pressure in Europe.

SG&A is still projected to delever by 100 basis points for the full year.

As a reminder for your modeling, due to the 53rd-week shift, around $60 million of sales will shift out of Q3 and about $20 million will shift out of Q4.

I'll now hand the call over to Dick to cover the product highlights in more depth, along with an update on our 2018 real estate and digital initiatives.

Dick?

Thank you, Lauren.

Good morning, everyone, and thank you for joining us today.

As I noted during our last earnings call, consumers want experiences.

They want cool product with connected stories, and they want it all fast.

While this may be viewed as disruptive to the retail industry, it has served to reaffirm and accelerate our efforts are around connecting with youth culture in more relevant and powerful ways.

These efforts include the significant investments we are making to elevate the digital experience across our brands as well as the ongoing investments in our store fleet, testing innovative off-mall retail formats and leveraging our vendor partnerships to create truly differentiated retail destinations.

Furthermore, we remain confident in our strength and positioning at the premium end of athletically inspired footwear and apparel.

Taking a look at our first quarter comp performance through the product lens, men's footwear was down low single digits.

This result was the combination of a growing running category, a somewhat improving but still down basketball category and a slight decrease in casual styles.

Looking at these category results in depth, men's basketball was down low single digits as we are starting to see some of the benefits of Nike's tighter distribution of the Jordan brand across the marketplace, along with improved full price sell-throughs of Jordan Retros.

As we have previously discussed, the reduced allocations will continue to be top line headwinds over the next few quarters, but it will sequentially lessen as we progress through the year.

While signature basketball was down overall, we continue to see strength in the LeBron business, led by both the game shoe and the Soldier.

Additionally, the PG posted healthy gains.

Running continued its momentum with a low single-digit comp increase, where we saw an influx of new, innovative platforms from Nike, such as the Air Max 270, VaporMax 2.0 and the Epic React, as well as the X_PLR and Deerupt from adidas.

We also experience solid gains in Nike Tuned Air, which as many of you know, is exclusive to Foot Locker, Inc.

Within our casual business, which was down slightly, there was a lot of heat around Vans Classic styles and the Fila Disruptor, but this was offset by softness in select styles from adidas, PUMA and Converse.

A clear bright spot in the quarter was apparel, which continues to benefit from the shift to more premium assortments.

The strength in our apparel business was relatively broad-based,, with gains across most of our geographies, channels and genders.

These strong results were led by branded assortments from Nike and adidas as well as through a resurgence of '90s-influenced brands like Champion and Fila.

In terms of our omnibanner comp performance, as Lauren mentioned, sales at Foot Locker in the U.S. were up low single digits.

The positive results were fueled by the Nike Air Max platforms, Jordan Retro, Air Force 1s and Vans in footwear.

Adidas, Nike NBA, Nike tees and Jordan led the way in apparel.

Given this performance, we are feeling good about how our lead banner's positioned for the remainder of the year.

Another positive development was in our Kids Foot Locker banner, which produce a high single-digit comp gain.

This was driven by strong double-digit gains in apparel and a mid-single-digit increase in footwear.

Kids Foot Locker benefited from many of the same trends that drove our men's business, including strong Jordan Retro sell-throughs and the Air Max platforms.

In apparel, Champion was the standout among several brands that performed very well.

The primary drivers of these solid results in apparel include tees, fleece, shorts and infant sets.

Champs Sports and Footaction were both down mid-single-digits.

Both banners benefited from strong-performing styles from Nike, including Max Air and Air Force 1s.

Conversely, both banners were impacted by difficult Jordan Retro comparisons.

On a positive note, both banners posted strong high single-digit comp gains in apparel.

Taking a look at Foot Locker Europe, sales were down low double-digits, with footwear down low double-digits and apparel down low single digits.

As you may recall, Foot Locker Europe has historically experienced a higher penetration of adidas than its U.S. brothers.

Furthermore, adidas has been highly sought after over the past few years, with Foot Locker Europe being the first to capture that increased demand.

While adidas is still a vibrant and exciting brand, the demand from our fast-moving consumer has come off that peak, which has led to a more promotional environment.

Looking forward, adidas has recently put some newness into the marketplace, like the Deerupt, and we have seen some improving demand for this platform as we shifted into warmer weather.

Foot Locker Europe also faced some headwinds in PUMA, due in large part to the tough footwear comparisons against last year's platforms and baskets programs.

In line with our U.S. banners, Foot Locker Europe has also seen growing excitement from other brand offerings, including the various iterations of Nike Air Max, Vans and Fila.

While we expect these new offerings will drive more full-price selling, we still have some work to do in Europe, near term, in order to clear through some of the slower-moving styles.

We anticipate that the Foot Locker Europe business will progress in the back half of the year as we improve the depth of up-trending styles from Nike, adidas, Champion, Vans and Fila, just to name a few.

Next, I want to update you on our 2018 real estate initiatives, which support our commitment to elevating the customer experience and enhancing our footprint across the globe.

In the U.S., Champs Sports opened its newest flagship store at 10 Times Square in March.

This multilevel space celebrates sneaker culture and brings and immersive retail experience, combining permanent digital elements that showcase the best brand stories from our leading vendor partners.

Across some of our key geographies, we will begin testing power stores, a new retail concept to inspire, build community and provide a seamless shopping experience for our customer.

This concept is all about community with a hyper-local approach.

We believe the design and programming of the space will provide inspiration to our customers through premium product and experiences presented in unexpected ways.

The first of these test concepts will open during the second quarter in London and Liverpool, with plans to expand the test in the U.S. market later this year.

Our 2 European power stores will be delivering enhanced customer experiences and engagement through various initiatives.

Lastly, we are excited to be expanding into Asia.

In the third quarter, we plan to open our first power store in Kowloon, Hong Kong.

Later in the year, 3 stores are slated to open in Singapore along with 1 store opening in Kuala Lumpur, Malaysia.

In terms of building out our digital capabilities, we are being pragmatic in our efforts to convert our websites to our new platform.

Several sites have already been upgraded to the new platform, with the others scheduled to come on later this year.

The new platform will provide brand-specific features and functionality and allow for future updates to be rolled out seamlessly across all of our banner platforms.

We also recently launched a new mobile app for Kids Foot Locker.

We are now working to launch or relaunch other banner apps within the next few months.

There's also a lot of work underway regarding our new loyalty program, which will be focused on maximizing our portfolio of brands.

We currently anticipate rolling out the new program in the U.S. later this year.

Longer term, we believe the power of these digital initiatives will position us to become even more connected with our customers while engaging and creating increased loyalty with them and enhancing our top and bottom line performance in an always-connected omni world.

In terms of the outlook for the balance of the year, we believe the product flow and depth in key styles will continue to progressively strengthen.

The Air Max platform's a prime example of the innovative product coming from Nike, which is driving a lot of the excitement and demand across our banners.

Additionally, we will have depth in key brands like adidas, Vans, Champion, Fila and New Balance, not to mention some of the exclusive offerings that should resonate with our customers.

It is the combination of our outstanding product pipeline and our continued strategic focus on elevating the customer experience that gives us confidence that we can deliver on the top line and bottom line results to which we have guided throughout the balance of the year.

In closing, I want to thank our outstanding team of associates for their continued focus, passion and energy around the business as we continue to build upon and strengthen our position centered on inspiring and empowering youth culture.

Dorothy, please open up the line for questions now.

(Operator Instructions) Your first question comes from the line of Camilo Lyon with Canaccord Genuity.

Dick, you talked a lot about the product improving.

You clearly are making strides on working down the slower-turning SKUs and styles.

I'm wondering if you could just articulate how do you feel about the receipts that you have coming through the pipeline, if there -- if we should expect to see continued pressure on the product that you don't have on hand, but you expect to see.

You talked about that little happening -- a little bit happening in Europe, but how does the U.S. market look from that perspective?

Thanks for the question, Camilo.

We feel good about the product pipeline.

As we talked about in fourth quarter and now on this call, the outlook of the product, the things that are driving excitement, there's a breadth and it is combining with the depth that we talked about earlier, that we feel good about the U.S. marketplace.

We feel good about the European marketplace as well, but we do have some overhang there that we still have to clear through.

So again, I think the strength of the product lies in the things that we mentioned earlier on the call, and getting an increased depth across those key silhouettes.

Great.

And then my follow-up question is for Lauren, specifically as it relates to gross margin and your commentary around Q2 gross margins.

You have clearly the easiest comparison in Q2 from last year, yet you're only looking for a fairly modest assumption of gross margin recovery.

Could you just help understand -- help us understand the puts and takes around that, especially given the incremental benefit on the top line from the $50 million of the shift in the weeks, because, just, I would have thought that there would have been a little bit stronger of a gross margin recovery in the second quarter.

Well, I think it relates to what Dick just took us through around product, the puts and takes by geography.

So we've got visibility into how that product flows across the period, and we factor all of that into that guidance.

Got it.

And then just finally for me, just on the digital platforms you spoke about.

New platforms coming online later this year.

Any sense as to which platforms you expect and the timing of those launches?

Well, Camilo, we're moving all of our websites, our digital sites to a common platform.

We've been on a legacy platform, and through this project that we've been working on, we've been very pragmatic about moving the sites over to the new platform and making sure that it functions and does everything that we expect it to.

So that will continue throughout this year.

We'll then have everybody on the common platform, the newer platform, and that will allow us to make subsequent changes more effectively and efficiently across the common platform.

So again, some of the banners have already moved over.

Other of the banners are in progress as we speak today, and some of them will be a little bit later in the year.

So the customer-facing changes won't happen until next year.

Is that the right way to think about it?

Some of the customer-facing changes are happening as we speak, right?

I mean, they -- ideally, it's a lift and shift over to the new platform.

But we're adding functionality.

We're adding some look and feel differences.

The KFL app that I mentioned is brand new.

So there's constantly both legacy back-end things that are being updated as well as the customer-facing front end.

Your next question comes from the line of Chris Svezia with Wedbush.

I guess, first, just to go back on the gross margin for a moment, more specifically, Lauren, for you.

The 20 to 50 basis point improvement in Q2, maybe more specifically, how much of that is actually merchandise margin improvement?

You mentioned an inflection, that you're expecting that to actually turn positive.

And then I think for the year, I think on the last call, you called out 30 to 40 basis points in total for the year.

I think here you said 10 to 30, and then you threw out something about the 50 out of 52- and 53rd-week basis.

Maybe a little bit of clarity about that on the annual, and maybe why it's a little bit different than before.

Okay.

Well, why don't I take you again through the full year guidance because models -- we want to make sure that you're understanding 52-week non-GAAP versus 53, depending upon how your model works.

So on a 52-week basis, full year, we're looking for 10 to 30 basis points of improvement.

If you're doing your modeling off a full 53-week last year, it looks like a range of plus 10, minus 10, around that result last year.

So our -- so that was intended to give you some clarity.

Okay.

And the second quarter between merchandise margin and occupancy costs?

I don't want to parse that out, but we are thinking through it, as we obviously get a little bit leverage out of that top line shift impact.

And we've got the situation with the merch margins of improving U.S. full price sell-through.

We've got challenges in the international as we work through our slower-moving styles.

And just a reminder.

In Europe, most of the sale period falls into second quarter.

So from a markdown perspective, it's an opportunity for us to push some of the slower-moving products so we can get them into a fresher inventory position.

Okay.

And just on Western Europe.

I know in the second quarter I think you were up against negative high single and then it turns to, I think, negative low double digit for the back half of the year from a comp perspective.

Where -- is this comp by region or geographic region?

But would you anticipate at all significantly narrowing the gap?

You've seen a turn to positive in North America, which is encouraging for Foot Locker.

But could you just maybe give us some timeline or thought processes to how we think about where that inflection can take place, maybe in Western Europe?

And is it just strictly product-driven at this point?

Well, as we talked about in our remarks, Chris, the -- we see the Western Europe business progressing through the back half of the year.

There's some headwinds against some of the slower-moving product that we have to get through.

The flow of new innovative product and depth that we talked about is improving in the back half.

I'm not going to call out a specific inflection point, other than to say that we do see it getting better in the back half of the year.

Okay.

Final question just on apparel.

You've had good momentum in apparel.

It seems like it's accelerating a little bit here.

Just sort of your thoughts about how you think about the apparel business for the balance of the year relative to the kind of flat to low single comp for the total company.

Our apparel, I think this is 7 quarters in a row that we've had comp-positive gains in apparel.

So our apparel team has done a really, really good job in terms of turning the inventory and getting it fresh with the consumers.

So there's a tremendous buzz around some of this '90s influence.

So Champion's been on a great run; Fila apparel's been on a great run.

And we expect that to continue.

And as we work with those vendor partners to get increased of that so that we can cover a broader store base, we feel good about our apparel business in the back half.

It was -- it had a great first quarter, and I think the inventory -- well, I know the inventory's in great shape.

So we have some confidence around apparel in the back half.

But that's offset by a continuing weakness in our accessories business, and we usually lump those together in a lot of cases.

And we're continuing to try to get the sock business right-sized.

Headwear's become less important to our customer.

So we've got to keep that in balance, but feel good about the actual apparel side of the business.

Your next question comes from the line of Jonathan Komp with Baird.

Lauren, I was hoping that maybe, first, just to clarify on the gross margin guidance for the year, you gave it kind of the 2 different ways.

Did that change versus the prior view?

And I'm just wondering, I know you overdelivered in Q1 and it sounds like Foot Locker U.S. is improving.

So I'm just trying to understand any moving parts there.

Yes, it does reflect an update.

When we gave our guidance in March, we were looking for 40 to 60 basis points, and we didn't call out at that point 53 versus 52.

Hence, our desire to make sure that you understood with that additional week last year how we were thinking about it, GAAP and non-GAAP, without the 53rd week.

Okay, great.

And then a bigger-picture question, going back to looking at trends in Europe versus the U.S. and I guess maybe a little different question.

But I'm wondering how much of the divergence is a sign that some of what's starting to work in the U.S. is working or not over there versus some of the issues that you're facing in Europe getting worse.

I'm wondering if you could give any more clarity on what you're seeing.

And specifically, I'm wondering if the new Nike product, where you're getting more depth and expect to, is having any varying degrees of success here versus in Europe.

Well, the consumer's so connected these days, Jonathan, that once they see it, they want it.

So the things that are working here are beginning to work in Europe as well.

The difficulty that Western Europe faces is that they have a -- historically had a much bigger penetration of adidas product.

They were first to catch that wave on the way up.

They rode it hard.

It got to be a big part of the business.

And as certain silhouettes have slowed down, they're facing some headwinds from it.

And as they reposition some of that product, as they get the right amount of Nike receipts, that's why I have some confidence that it'll get somewhat better in the back half.

But again, the things that work, generally speaking, work all over if we have access to them.

You have to remember that assortments vary by geography from our vendor partners as well.

Okay, great.

Then maybe one other question as you look at the pipeline coming up, would you characterize it more as broadening depth of what we currently see in the marketplace in terms of the new styles?

Or are you expecting more new releases that aren't obvious yet in the marketplace?

And I guess that's a global question kind of across brands of what you're seeing.

It's a combination of both, Jonathan, right?

I mean, there's some -- we've talked about it in the last couple of calls that we see the depth of key styles increasing as we get to the back half of the year.

So whether that be scaling VaporMax, celebrating the 20th anniversary of Tuned Air, some really exciting things that we see going on, it may be new color ways, it may be new compilations of materials on the upper and it may be new silhouettes.

But we feel good about the product heat from a lot of our key vendors, a lot of our top vendors.

Your next question comes from the line of Tom Nikic with Wells Fargo.

I was wondering, Lauren, I believe you said that the DTC comps were only flat in the quarter.

I guess I was sort of a little bit surprised.

Even late last year, when you were comping worse overall, you still sort of had positive DTC comps.

I was kind of wondering what exactly happened there.

Well, I'll take it, the question, Tom.

A lot of the things that impacted.

Certainly, the stores impacted, even to a greater degree, the digital business.

So some of the pullback in the Jordan Brand had a huge impact to our digital business because we sell -- sold and sell a lot of launch product through the digital sites.

And while they may not have sold out day of a year ago, we had a long tail that we were able to sell online.

So as we saw some of the allocations get pulled back a bit, it certainly had a disproportionate impact on our digital business.

As we look to move through some of the slower-moving silhouettes, where we're very channel-agnostic with that and try to leverage the power of the digital business.

So we were fairly aggressive in some situations in terms of moving through some of those, the markdown product.

So while you get some impact, you don't get the same top line as if you were selling full priced product.

So there's -- structurally, the team has done a great job with taking on the omnichannel work.

Our GMs are responsible for their brands now in their entirety and are very channel-agnostic.

So it's about driving excitement with the consumer.

So we see that accelerating as we get through some of the allocation challenges and we get through some of these markdown foundations.

And we get some of the benefit from the investments that we're making in the capabilities.

Absolutely.

That's helpful.

And just a quick follow-up on real estate.

I think on the Q4 call, you called for 40 openings, 110 closures this year.

Should we still sort of think that, that's the general framework?

And just bigger picture, I mean, you've been a long-term net closer of stores in the U.S., I think something like 10 or 11 years in a row.

Do you have any sense as to sort of how long that continues, what your sort of ultimate store footprint looks like?

Anything like that would be helpful.

Well, the anticipation is we'll probably have the opportunity to close a few more stores than we guided to originally.

Today, I would tell you it will likely be in the 120-plus sort of range.

We look for opportunistic times to close those stores, and some of it's mall demise; some of it's our choice to move.

The openings will be about where we talked about, around the 40 mark.

And over time, this concept of power stores, bigger square footage, really locally connected to the community, will sort of alter the portfolio a bit.

So I'm really excited to get a chance to test these out in London and in Liverpool and then in U.S. market later this year.

So we'll see a continued management of the portfolio.

And we look at it long term.

Our real estate team and our lease team have done a great job of building flexibility in.

So we have the opportunity to extract some lower rents, in some cases, and to build flexibility into our ability to get out of some of the stores that we need to get out of.

Your next question comes from the line of Sam Poser with -- from Susquehanna.

First of all, on the loyalty program, you talked about a change there.

Can you give us some details as to what that is?

I mean, how -- yes.

Yes.

Sorry, Sam, not ready to give any details yet, other than to tell you that we're completely reimagining our loyalty program and it will leverage the power of our portfolio as we think about loyalty in the future.

But not ready to talk about it in detail yet.

I mean -- so just to follow-up real quick.

I mean, does that -- if that implies that the Champs loyalty program will be intertwined with the Foot Locker loyalty program.

Is that a good way to think about it?

That's certainly one scenario that you could think about it in.

The portfolio is a powerful, powerful thing with all of the digital sites in the brands that we've got.

So -- and we'll have more to talk about later this year.

We do know that our customers, that they are really enamored of this category, look to our different brands for different shopping occasions.

So we know that they do cross-brand shopping, and we want to make sure that we're recognizing and recording that.

And then, secondly, I mean, could you talk a little bit about -- Nike, adidas and others have talked about the flow of their product and how they're going to the shorter time frame.

With what you see, how are you -- I guess, are you buying products with -- for less weeks of supply so you can move from one thing to the other more in step with how quickly many of your core customers are changing -- are evolving their pace, I guess?

Well, we're certainly trying to adapt to the way our consumer moves and the way that our vendors flow product into the marketplace.

There are some things that you continue to buy very much the way that we've always bought, a white Air Force 1, for example, which has great marketability and is very consistent that there's a pattern with how we buy that.

When we think about some of the excitement that comes in and pops and then goes away quickly, we do buy as aggressively as we can, but we know that we're going to be out of that.

We've talked for a long time about how the peak of product receptivity of our consumers is much, much faster from the old days of seed to scale.

We need to go seed to scale quicker, and we're working with our vendor partners to do that.

But yes, ultimately, you have -- across the assortment, Sam, you have fewer weeks of coverage so that you can get into the next thing quicker.

And then lastly, it looks as if, sort of based on your guidance and based on your inventory levels and the accordant accounts payable, it looks like your accounts payable is up disproportionally.

Does that mean that a lot of the change and a lot of the influx of the new product really showed up right towards the end of the quarter?

And that new product's what's giving you confidence of the improvement in the same-store sales relative to the old stuff that you were working on clearing?

I realize you're still clearing goods in Europe, but is that sort of generally the right way to think about it?

Well, Sam, well, there was some impact of product flow.

And again, with a 53rd week shift, there's a little bit of that, too.

But the bigger impact on that '18 number was that a year ago there would have been more credits for RTVs in that number, reducing the APs and -- this year.

So that's helped the bigger difference.

Your next question comes from the line of Kate McShane from Citi.

Just wanted to check in on a couple of tests that you're running.

I think last quarter, you had told us about a test in 9 stores that you're looking at with athletes.

And then also, the power stores that you mentioned on this call.

Just wondering what the expectations are for this test, and will it be something that replaces current formats?

And will it be mall or off-mall?

Kate, thanks for the question.

Yes, we continue to work with Nike on the bringing Nike athletes in and working on the in-store experience with Nike and our other vendor partners.

So we've seen positive results.

We continue to expand that out a bit.

And obviously, for our core consumer today, it's all about the in-store experience.

So the power stores that we've mentioned a couple of times will provide us an opportunity, in some cases, to pivot off mall, right?

It's the locations where we know that the customer is there, we want to provide great excitement in the store and we haven't been able to necessarily get the right flexibility in the malls or the malls happen to be going away.

So it could be a strip mall, it could be a power mall, it could be off the pad, but it will allow us the opportunity to do more on the street, if you will.

And of course, in Western Europe, we've got about half of our fleet that's high street-based.

So it's not a truly new concept for us to be off-mall or on the high street.

But taking some bigger spaces and creating experiential sort of retail is where we're really taking this power store concept.

Okay, great.

That's helpful.

And then my second question is on women's footwear.

I just wondered in terms of the guidance, the overall comp guidance, what your view is on any improvement within women's footwear for the year.

Well, we feel better about women's going into the back half, Kate.

Some of the miss on the women's side is really very, very high-level, launch-specific from last year.

The FENTY product from PUMA last year, the Rihanna product was phenomenal.

And there just is nothing that's replacing it in the marketplace right now.

But that exposure goes down as we get later in the year.

And with some of the great Max Air platforms that are coming, with some of the adidas product that's coming, she's very much into Vans these days.

So we feel very good about the women's footwear business getting better in the back half.

Your next question comes from the line of Eric Tracy with Buckingham Research.

I guess, Dick, for you, just a little bit bigger picture as you think about exclusivity and exclusives, be it in in-store or digital in this ever-evolving sort of landscape; your confidence around Foot Locker participating, be it basketball or running; just around the launch schedule.

We see not only the brands going direct, but using social media platforms now for some exclusives.

Just big picture, wanted to talk through your confidence level in Foot Locker maintaining, if not increasing, the -- on the exclusive side.

Well, we know that that's what motivates our consumer, Eric, right?

They want what's cool.

They want what we're able to work on with our vendor partners.

There's a lot of collabs that are out there that -- there's not always a ton of product available, but they drive a tremendous amount of heat.

And our team is focused on working with our vendor partners to continue to create exclusives.

And it's not colorways, right?

I mean, a kid will response to a great colorway, but it's really more about creating a concept around the product.

It's about engaging that -- connecting that product with an engaging story that our customer understands and driving that to a scalable model.

And that, I think, is really the key that, for us, we've got a lot of customers that shop a lot of different ways.

And we have to work with our vendor partners to bring this heat to a scalable level.

And that's the work that goes on.

The team spends an awful lot of time with our vendor partners to get that accomplished.

But we do believe that, that exclusivity, the unique connectivity, sometimes it's very hyper-local things that we want to do, but our team is absolutely focused on that.

And that really is a competitive advantage of ours, because we can be the strategic partner to our suppliers on developing this unique product and doing it at a scale that makes sense for them to produce it for us.

Yes, okay.

And then just shifting a little bit.

Lauren, for you, as we think about SG&A, certainly just appreciate if comps inflect positively better, this fixed cost leverage.

But as you think about the investments behind digital, as we move through the year and even thinking to next year, just the opportunity to better leverage and/or moderation of some of that spend?

Yes.

Well, this customer is connected 24/7.

So making sure that our digital offering is complementary to that event of theirs are very, very important.

Hence, the investment.

But certainly, as you've seen, when you look back at our history, we are very responsible stewards of the expense.

And when we get to comp-positive, we can really lever that, that top line result.

Your next question comes from the line of Erinn Murphy with Piper Jaffray.

It's Eric on for Erinn this morning.

I just wanted to ask around digital priorities in terms of what is the most impactful in your view for your key customers, whether that's -- and how would you prioritize between shipping speed, Web interface, checkout speed, supply chain systems, free shipping threshold.

What are your biggest focus areas of kind of this investment that you guys are taking on this year?

Well, we're tackling it all, quite honestly, right?

I mean, the consumer really won't let us sort of piecemeal it out.

So we're doing some really heavy lifting around the foundational work that's got to be done.

So the pipes have to be made bigger, the plumbing's got to be in place and we're doing all of that.

We're improving our apps.

We're -- we've been in the digital business or direct-to-consumer business for 20-plus years, right?

So we understand free shipping thresholds.

We understand what free shipping does to the model, our financial model.

The model is different for some pure plays.

We have great experiences in store, so being able to leverage the store business with the digital business is one of the competitive advantages that we bring, allowing consumers to pick product up in the store, making all of our inventory readily available to wherever the consumer happens to be browsing and shopping and engaging with us.

So we've got work streams behind it all.

And it will mature at different levels.

The platform work, as I said, is in progress today with some of the platform -- with some of our sites already on the new platform.

The digital work from an app perspective, the team's doing some really heavy lifting there as well.

So it's all really interconnected.

Great.

And then just one more.

It looks like rent expense was up almost $50 million year-on-year last year.

I'm just curious how much of that was sort of dark rent for new headquarter -- or new flagships?

And -- or what is the kind of the underlying core kind of rent run rate we should be thinking about?

And is there any opportunity for reductions or getting more aggressive on that line?

I think you hit on it in regard to some of these bigger properties that we've invested in.

We would have some flagship openings in -- over the recent period.

The dynamics of accounting for the rent is on a straight-line basis, so it smooths that over the period of the lease, right?

So that's been part of that dynamic.

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

So the first quarter showed good execution and progress from the second half of '17.

Just want to push you guys a little bit.

Going from 1Q, you're still a negative comp to the second quarter guidance.

It's still little bit of a leap forward as we now have our eyes set on positive comps.

So could you just give us a little bit maybe more clarity or color around what is driving that sequential progression?

For example, how should we think about the Europe business and the ability to show any improvement quarter-over-quarter?

Has the U.S. store business already showcased an acceleration quarter to date?

Is there any expectation of the Jordan headwinds to alleviate?

Or is this all about additional SKUs of 270s and other innovation?

Just looking for clarity there.

Well, we've hit on a lot of it, Paul.

I think there's -- it's clear that we're improving in the big Foot banner in the U.S. that we talked about, right?

We don't give quarter-to-date guidance, so not going to go there.

But as, I think, Lauren mentioned in her commentary, that reaffirmed in mine, we're seeing some real progress in North America.

So there's certainly a bit of headwind around the Jordan allocation numbers, but we're seeing better sell-throughs.

And nobody does market allocation better than that brand.

And they are doing what's right for the marketplace.

So we see that improving in the back half.

The depth of the SKUs, some of the SKUs that you mentioned, whether it be 270s, whether it be scaling VaporMax, access to better quantities in some of the apparel brands that we mentioned from Champion and Fila, our relationship with Vans continues to improve, so there's more depth coming across key silhouettes.

And that's really what we see powering the U.S. Those same things will be going on in Western Europe.

The issue with Western Europe is a little bit of the overhang that they've got from getting through some of the slower-moving silhouettes.

They go into their sale period across many of the countries in the second quarter, which they will be able to take advantage of and move through some of that product.

That's why I see it getting better in the back half.

So absolutely, we feel that the sequential improvement, based on the things that we've talked about, based on some of the things that you called out, we definitely see as very possible in the back half.

Got it.

And then just quick follow-ups.

Just what is the ASP outlook for the balance of the year?

And what was it in the first quarter?

And then also, obviously, the apparel business is doing well.

If you can just discuss the margin profile of that business today.

Well, ASPs were up in Q1 and we continue to see the ability, especially at this premium apparel and footwear mix that we've got, for ASPs to continue to improve throughout the year.

Some of that really is being driven by the apparel business that you called out.

As we up our assortments and we sell more premium apparel, that certainly has a very positive impact on our overall ASPs.

We still do some private label business, which is also beneficial for a lot of our customers.

But we've seen our customers migrating to a much more premium apparel position.

As we get through some of this markdown pressure, it also is additive to the ASP calculation.

So we see that as being positive, and we see ASPs able to grow throughout the year.

From a margin perspective, we are certainly seeing margin improvement on the apparel front.

I think that's -- we've been talking about it for a long time.

We want to the apparel margins to get ahead of footwear.

We're getting closer, but we're not there yet.

But definitely moving in the right direction, Paul.

Dorothy, we have time for one more question.

Your next question comes from the line of Michael Binetti with Credit Suisse.

Let me just continue on Paul's question there for a minute on the composition of the footwear comps.

It's been interesting to look back at your commentary on ASPs and how it's positive, I think, all of last year as you moved through much higher clearance levels and negative total comps.

You said that ASPs were higher this quarter and units were lower again.

But can you talk us through that?

Is that intuitive to you that ASPs remained positive last year?

And do you think there's a path back to positive units as you build towards the positive sales growth in the back half?

Well, ASPs, we've talked about it many times, Michael.

It's a pretty complex calculation, right?

I mean, we have a lot of things going on across a lot of categories.

So the price of T-shirts going up, going from X for Y sort of offer to $25, $35 each sort of T-shirts.

Premium fleece certainly drives things up.

Is it intuitive that even during the markdown periods ASPs went up?

Not completely intuitive.

But again that, I think, shows you some of the complexity of the ASP model.

So certainly, as we see traffic improvements, as we see our ability to utilize our digital sites better, I'd love to see units go up as well.

That certainly is an objective.

But we can be successful with this accelerating ASP growth, and everything that we do on the increase on the unit side of things should just be incremental positives.

And then, could you just -- I know we've beat up Europe a little bit, but maybe I could ask it a little bit in a different way.

Could you speak to, I guess, the slow-moving inventory in Europe?

Lauren, it looks like you ratcheted down the gross margin for the year.

I'm looking at about roughly 30 basis points.

If you saw something in first quarter that didn't go the way you saw it in Europe, can you help us understand?

It's sounds like from Dick's comments that there's going to be a big focus on promotion in the second quarter and then it clears up.

Is that really -- you saw in the first quarter, product that you had in stores was not working and we're going to rip the Band-Aid off fairly quickly.

Is your thought that you're through most of that merchandise, the inventories in Europe enter a much cleaner position into the second half as well?

Yes.

So, Michael, thank you for asking one more time at the gross margin for the full year, as you give me the opportunity to correct myself.

When we gave the guidance in March, for the full year, it was a 30 to 40 basis points.

And we updated it on the 52-week basis now to 10 to 30.

So that gives you a feel for the incremental difference that we're talking about.

And yes, we've got to deal with the inventory in Europe and taking advantage, as Dick described, of the sale period that happens here in Q2, a great opportunity to do that.

So as we see the flow of product and getting the breadth and depth into the stuff that the customers' responding to, both in the U.S. and Europe, that's why we're encouraged in the back half that the situation will look a little different and be improved.

Okay.

Thank you for joining us today.

If we didn't get to your question or if you have any follow-up questions, I'll be back at my desk shortly.

Please join us again for our next earnings call, which we anticipate will take place at 9:00 a.m.

on Friday, August 24.

The call will follow the release of our second quarter results earlier that morning.

Thanks again, and goodbye.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.