Foot Locker Inc (FL) 2018 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Foot Locker's Fourth 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 the forward-looking statements.

Please note that this conference 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.

Thanks, Shelby.

Welcome, everyone, to Foot Locker Inc.'s Fourth Quarter and Full Year Earnings Conference Call.

As reported in today's press release, the company reported fourth quarter net income of $158 million compared to a $49 million loss for the 14-week fourth quarter last year.

On a GAAP basis, this year's fourth quarter net income was $1.39 per share compared to a loss of $0.40 per share for the 14-week period last year.

Included in these results is a pretax impairment charge of $19 million or $18 million after-tax, related primarily to Runners Point and Sidestep and a $1 million charge related to the pension matter we previously disclosed.

In addition, there were 2 large items affecting our tax expense, a $4 million write-down in our deferred tax assets due to a change in Dutch tax rates, largely offset by $4 million tax benefit related to the U.S. tax reform legislation enacted in late 2017 as detailed in today's press release.

A year ago, the fourth quarter included the following: a $128 million pretax charge or $81 million after-tax for the pension matter.

Pretax impairment charges totaling $20 million related to write-downs of certain SIX:02 and Runners Point Group assets and tax items that totaled $109 million of expense largely related to tax reform.

Excluding these items, on a non-GAAP basis, fourth quarter earnings were $1.56 per share versus last year's $1.26 per share on a 14-week basis.

Last year's extra week produced earnings of $0.12 per share, thus resulting in a 13-week non-GAAP EPS of $1.14.

Lastly, the 2018 full year 52-week non-GAAP earnings were $4.71 per share compared to $4.11 for the 53-week prior year.

Excluding the impact of the 53rd week, earnings were $3.99 per share.

Unless otherwise noted, the figures and rates mentioned during our call today will be based on non-GAAP results and for comparability, there will exclude the 53rd week impact from 2017.

A reconciliation of GAAP to non-GAAP results is included in today'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 fourth quarter financial results along with our financial outlook for fiscal 2019.

Dick Johnson, Chairman and Chief Executive Officer, will provide highlights from our fourth quarter performance, along with an update on our recent strategic investments and our early thoughts on 2019.

As a reminder, last month, we announced that we will be hosting an investor meeting here in New York on March 28, at which time we will lay out our strategic priorities, growth initiatives and long-term financial objectives.

Therefore, during today's Q&A, we would ask that you focus your questions on our fourth quarter results and the outlook for 2019.

With that, I'll now turn it over to Lauren.

Thank you, Jim.

Good morning to all of you, and thank you for joining us this morning.

I'm pleased to report that we delivered a very strong performance in the fourth quarter of 2018.

We were able to improve on the top line momentum that we had build throughout the year, posting a 9.7% comparable sales gain.

Including the fourth quarter results, our total sales for the year were $7.9 billion, a 3.3% increase over last year's 52-week result of $7.7 billion.

Comparable sales were positive throughout the quarter.

November was up mid-single digits.

December, with incredible product heat and excitement during the holiday season, was up double digits.

And January was up high single digits.

Average selling prices were up double digits.

Traffic was down low single digits overall, with trends in North America better than international.

In regard to channels, we delivered strong performances across stores and digital across our geographies.

As a group, our stores posted a 5.7% comparable sales increase, while our digital channels delivered a 29.7% comp gain.

As a percent of total sales, DTC increased to 19.1% for the quarter, up from 16.1% a year ago.

Our North American divisions all posted positive sales results.

We saw impressive performances from Eastbay, Foot Locker U.S. and Foot Locker Canada, with each banner posting double-digit comp gains.

Champs also delivered a strong performance, up high-single digits.

Kids Foot Locker was up mid-single digits and Footaction posted a low single-digit comp gain.

Internationally, our Foot Locker Pacific business had a terrific quarter generating a double-digit sales gain.

Our Foot Locker Europe business continued to improve and was up high single digits, while Sidestep was down in the mid-single digits and Runners Point decreased double digits.

By family of business, footwear posted the strongest sales gain, up double digits overall in the quarter.

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

By category, men's running and classic styles posted strong double-digit gains, while men's basketball was down mid-single digits.

Our apparel business continued to perform well, posting a mid-single digit increase, with gains driven by strong sales of branded tees and fleece from Champion, Nike and Jordan.

NBA apparel, led by Lakers apparel, also sold through a good rate.

Our children's apparel business was up strong double digits.

Our men's apparel posted a mid-single digit gain, while women's was down low single digits.

The trends that we saw throughout the year in our accessories business continued in Q4, with gains in bags more than offset by decreases in hats and socks, resulting in a double-digit comp sales decline.

Moving down the income statement to gross margin.

We produced an excellent 160 basis point improvement in the quarter to 32.4% of sales from 30.8% a year ago.

This improvement was evenly split between merchandise margins and leverage on our relatively fixed buyer and occupancy expenses.

The 80 basis points from increased merchandise margin was due primarily to lower markdowns across footwear, apparel and accessories.

While all families of business contributed to the margin lift, apparel margins improved more than footwear margins in the quarter and actually surpassed them.

This consistent improvement in our apparel performance points to the great work by our apparel team and strong collaboration with our vendor partners.

For the full year, our gross margin improved by 40 basis points to 31.8%, better than the guidance we provided at the beginning of the year.

Our SG&A rate increased by 70 basis points to 19.9% in the quarter, below the 100 to 120 basis point increase we guided to on our last call.

Our team did a good job managing our expenses during the quarter and flowing through the stronger top line sales.

For the full year, SG&A came in at 20.3%, up 100 basis points from 2017's rate.

The higher spend reflects the investments we made in our digital capabilities and logistics and higher incentive compensation.

Incentive compensation was about 50 basis points of the increase.

Depreciation expense decreased slightly this quarter to $45 million from $46 million a year ago.

For the full year, depreciation and amortization increased 3% to $178 million due to the ongoing investments in our stores, digital and supply chain capabilities and improvements in other infrastructure.

Our fourth quarter non-GAAP tax rate was 27.3%, below last year's Q4 rate and in line with our expected run rate.

Altogether, the fourth quarter was marked by an improving top and bottom line, resulting in an impressive non-GAAP net income of $177 million, an increase of 27% over Q4 2017 and non-GAAP net income of $547 million for the full year, a 7% increase over last year.

During the quarter, we repurchased a total of 1.2 million shares for approximately $62 million, bringing our full year total to 7.8 million shares at a cost of $375 million.

We also returned $158 million of cash to our shareholders through our quarterly dividend in 2018, which brought our total return to shareholders for the year to $533 million.

As we announced in February, our board increased our quarterly dividend payout rate to $0.38 per share and authorized a new 3-year $1.2 billion share repurchase program.

We invested $187 million through our capital expenditure program in 2018 and funded $89 million of the $124 million of strategic investments that were announced during the year.

I'll let Dick cover the details of those investments in a moment, but suffice to say that even with funding our internal initiatives as well as capitalizing our new strategic opportunities, we ended the year in a strong financial position with $767 million of cash net of balance sheet debt.

Further, taken together, these actions demonstrate our confidence in Foot Locker's ability to continue to build upon the momentum of 2018, invest for the long-term growth of the company and deliver enhanced returns to shareholders.

Before I hand the call over to Dick, I'll take a moment to review our inventory, which is fresh and increasingly productive.

At actual FX rates, inventory ended the quarter down 0.7% compared to the 7.4% total sales increase.

Using constant currencies, our inventory increased 1.3%, within our standard when compared to the 8.8% total sales increase.

This outstanding inventory performance, combined with a strong top line result, allowed us to increase inventory turn and ultimately achieve return greater than our long-term target of 3x.

Increasing inventory productivity has been a company focus and I can't say enough how proud I am of the team for the hard work and dedication it took to achieve this goal.

Hurray, we did it, well done.

And with that brief moment of celebration, I'll now turn the call over to Dick, but I'll be back in a bit to provide you with our initial guidance for 2019.

Thanks, Lauren, and good morning, everyone.

I want to begin my remarks by recognizing all of the associates whose dedication to us to the success of our company and whose passion for creating incredible experiences for our customers wherever and whenever they interact with us led to the stellar results Lauren just described and the momentum we see in our business as we begin 2019.

I'm proud to be able to report the top and bottom line results met the high end of our expectations as we laid them out for you at the beginning of the year.

With a comparable sales increase of 2.7% for fiscal 2018, total revenues reached $7.9 billion, a new record in our history as Foot Locker, Inc.

And we were able to achieve non-GAAP earnings of $4.71 per share, an increase of 18% over the 52-week equivalent in 2017.

In addition, as Lauren mentioned, we finished with an inventory turnover above our long-term goal of more than 3x.

This is a meaningful accomplishment we've been working on for some time and a testament to our continuing focus on driving further productivity gains.

In the next few minutes, I will touch on some of the drivers that fueled the business and the progress we made on several key initiatives.

I will then give some color around our recently announced strategic investments and highlight some of the early energy from the NBA All-Star Game.

After that, I will turn the call back over to Lauren to update you on our outlook for 2019.

Taking a look at our fourth quarter performance.

The strong growth in footwear was fueled by the strength of our marquee business that is more diverse than ever, with a great mix of running and basketball styles.

This included YEEZY from adidas, a strong Jordan business and the continuing demand for Max Air.

In addition, the strong performance in our women's and apparel businesses combined with the breadth and depth of exciting products from brands, such as Fila, Vans and Champion as well as the addition of lifestyle brand, such as OG illustrates the great work our team has done to extend the reach of our company.

As I did last quarter, I want to tell you about some of the things we're going to share the excitement and energy of sneaker culture with people around the world.

We are doing this in close collaboration with our strategic vendor partners and together, we continued to deliver great products with elevated storytelling and locally relevant experiences.

With Nike, we celebrated the 20th anniversary of the iconic Tuned Air silhouette, an exclusive to Foot Locker, Inc.

family.

The fourth quarter also included the Home & Away collection, which focused on the vibrant sneaker communities of Houston, Atlanta and Miami.

New iterations of the campaign will continue in early 2019, providing an opportunity to take pride in what makes each city unique.

With adidas, we partnered on the launch of their new Asterisk Collective, an exclusive to Foot Locker that launched with the '90s-inspired TRESC Run.

This community-focused campaign brought together 6 celebrity creators and illustrated how each aim to make a difference in their respective communities through unique initiatives.

For example, Kansas City Chiefs quarterback, Patrick Mahomes, engaged in sports-related events like viewing parties at local hospitals; while musician, Kid Cudi, helped kids experience healing through music, art and design.

An exciting program launched during the quarter was the bringing together of 2 iconic brands, Timberland and Champion, with a footwear and apparel collection that connected our customers with the brand's history and ties to music.

Foot Locker celebrated the launch with NBA player, Lance Stephenson and comedian Renny debating how the collaboration came to life.

In another exclusive concept, Foot Locker partnered with PUMA to release its 1980s-inspired RX platform with the Toys and Transformers collections during the holiday season.

At our 34th Street flagship, we transformed our PUMA Lab into a Transformers theme.

While the Optimus Prime truck visited our Marble Arch Power Store in London.

We also announced the next phase of our strategic relationship with adidas.

Together, we created a revolutionary initiative powered by the adidas SPEEDFACTORY that allows us to get closer to market and deliver adidas made for shoes created from local and cultural insights.

An exciting example of this was the launch of the AM4 Detroit, new shoe designed by Detroit native, Kayla Donaldson at the opening of our store on Detroit's historic Eight Mile Road, our first iteration of a Power Store in North America.

This store offers full family shopping with the women's shop-in-shop and Kids Foot Locker and brings together the excitement of local sneaker culture: art, music and sport.

It features Detroit specific products.

For example, pair of Detroit inspired Home & Away Air Force 1s, custom art from Detroit artist, Desiree Kelly, and it has a dedicated space for events and activations for the sneaker-obsessed consumers.

At the end of the quarter, we opened our second North America Power Store outside of Philadelphia and now have 5 Power Stores open across the globe.

We expect to open more than a dozen additional Power Stores in 2019, including new locations in Los Angeles, New York and Milan.

2018 was also a distinctive year for us as we invested $124 million into some innovative young companies at the forefront of change in our industry.

We've talked at several calls now about the need to evolve with our consumer.

We believe these investments will help us do just that by opening opportunities to leverage innovative technologies, access new business segments and creative talent and expand the breadth of products and brands that we offer and ultimately, create a richer ecosystem for our customers that deepens their emotional connections to our brands.

I will start with GOAT, our $100 million investment in this premier sneaker marketplace is truly a game changer for our industry.

GOAT's Cofounders, Eddy Lu and Daishin Sugano have created a platform that in a very short time has captivated sneaker culture.

Together, the power of our global store footprint, combined with GOAT's digital capabilities, will enable us to expand the sneaker ecosystem and create unmatched experience and engagement.

We entered this partnership understanding the greater responsibility that it comes with and are absolutely committed to delivering incredible benefits for the broader sneaker community.

We also invested in 2 innovative companies focused in the children's space.

First, we invested $3 million in Super Heroic, an exciting and differentiated kids footwear brand.

We are excited to collaborate with Jason Mayden, Super Heroic's founder and a true visionary in the industry.

The opportunity to leverage Super Heroic's connection to communities through inspiring kids to play is something that deeply connects with our core values as a company, and we are beginning the work of bringing Super Heroic to life in our Kids Foot Locker banner.

We also invested $12.5 million in Rockets of Awesome, a high-quality children's apparel business.

Rockets has done an amazing job with its digitally native shopping and subscription model.

We are delighted to partner with Rachel Blumenthal and her team as we look to broaden our kids offering and unlock insights to connect more deeply with kids and moms and dads with products, loyalty and experiences, including shop-in-shops with exclusive Rockets of Awesome assortments in our Kids Foot Locker banner.

Next, we saw an opportunity to invest in the future of talent in the footwear industry.

PENSOLE Footwear Design Academy led by D'Wayne Edwards is helping to curate the future of our industry through education and design.

Along with our vendor partners, Foot Locker and PENSOLE will collaborate new educational programs along with the design and manufacturing of exclusive products for the Foot Locker, Inc.

family of brands.

Shifting to our women's business.

It's no secret that we've been on a mission to evolve and grow this important segment over the last several years.

The impact our female customer has on youth culture is undeniable, and we continually evaluate the ways in which we can best serve her.

With that in mind, we made the decision to wind down our relatively small SIX:02 banner over the coming months to more sharply focus our resources on building the existing women's business in each of our core banners.

We learned much from our SIX:02 team's efforts, including that when we create unique experiences in dedicated women's spaces within our current store footprint, she responds well and the spaces are highly productive.

That is our go-forward focus and will include in-store concepts, social, digital and community activations dedicated to her.

In addition to these spaces, we will continue to nurture our investment in Carbon38.

In fact, we made an additional $10 million investment shortly after year-end.

Katie Johnson and her team have done a great job building a strong luxury activewear brand with a loyal customer base.

We are continuing to partner with her to further develop the business.

Of the many opportunities we believe our strategic investment provides, perhaps the most exciting is the window into the broader women's consumer set Carbon38 serves, as we strive to accelerate and expand our connection with female shoppers.

We often talk about investing in the right companies, but what's equally, if not more important, is investing in the right people.

Whether it's Eddy and Daishin at GOAT, Katie at Carbon38, Jason at Super Heroic, Rachel at Rockets of Awesome or D'Wayne Edwards at PENSOLE, I couldn't be more proud or excited for our company to partner with such high quality and diverse group of entrepreneurs.

Our goal moving forward will be to empower their growth, while harnessing the insights capabilities and innovation that can help shape our business for the future.

Now the work of bringing these investments to life gets underway, and our teams have many exciting things planned, some of which we'll share with you at our Investor Day on March 28.

Turning now to fiscal 2019, we see a lot of energy, product innovation and exciting events for the coming year.

It all began with this year's NBA All-Star Game in Charlotte and the extension of our hashtag BecauseSneakers creative platform, which involves sneaker enthusiasts, fashion and sneaker designer Jerry Lorenzo and LA Lakers player, Lance Stephenson.

The All-Star Game brings together the excitement and passion of the sneaker obsessed at an annual celebration with sports, music and style.

To build on this energy, we took our House of Hoops courtside experience to this key basketball moment.

We offered our customers access to exclusive footwear launches, player appearances, personalized footwear as well as workshops and panel discussions.

But we didn't stop there, we set up shop with the exclusive retail partner for PUMA Basketball in Charlotte.

Also, on the first quarter we will have 4 more cities of our Home & Away collection.

The debut of Young Guns a new Nike program as well as all the energy around Air Max month.

We will also have another release from the adidas Asterisk Collective, and we will be launching exciting new concepts from Champion with mascots and Fila with Disruptor feature.

and this is only the beginning of what is in store for 2019.

Lastly, in early February, we announced the realignment of our organization into 3 distinct geographic regions: EMEA, Asia Pacific and North America.

This new structure better aligns our resources across our international businesses as we, at the same time, develop an infrastructure to support our expansion plan in Asia.

As part of the realignment, we announced some key organizational changes highlighted by the appointment of Lew Kimble to Executive Vice President and CEO of Asia Pacific and Vijay Talwar to Executive Vice President and CEO of EMEA.

I would like to congratulate Lew and Vijay on their new roles.

Jake Jacobs will continue to lead our North American divisions.

I, again, want to thank the entire team for the passion and dedication to the company in its performance.

To the investment community, I look forward to seeing you at the end of this month when we come together for our Investor Day where the management team and I will share with you in greater detail how we plan to drive the business forward, our updated long-term goals and strategies and how we are building an even deeper connection with our global customer base.

Lauren, back to you.

Thanks, Dick.

We have indeed built momentum in our business and are optimistic about our positioning as we began 2019.

We have a lot of opportunities to seize upon to drive the business both in the near and long term and we look forward to outlining the details of those initiatives later this month at our Investor Day.

But first, let's take a look at how we see the current year unfolding.

Starting with the top line.

For 2019, we believe, we can achieve a mid-single digit comparable sales gain and a double digit percentage earnings per share increase.

The foreign currency is weaker now relative to the U.S. dollar than they were at the same time last year.

Our total sales will have a slight headwind in the first half of the year.

We are planning for an improvement in our gross margin rate of 20 to 40 basis points for the full year, mostly driven by leverage of our buyer and occupancy costs.

While we continue to work on initiatives that support full price sell-throughs and logistics efficiencies, our markdown rates are nearing personal best.

Hence, our plans look for more from top line leverage.

For the ongoing investments we are making in our digital capabilities, which come with both a capital and operating expense impact, our SG&A expense rate is expected to be up between 40 to 60 basis points year-over-year.

This annual SG&A guidance also incorporates all known minimum wage rate increases and continuing upward trends in health care costs.

Looking at our capital expenditures, we are now planning this year's capital program to be $275 million.

The higher capital spend this year reflects our intention to continue investing in ways to elevate the customer experience across our physical and digital touch points and to continue to invest in our supply chain and other infrastructure projects.

We plan to spend approximately $175 million to improve our store fleet in 2019, including 80 new stores with over a dozen new Power Stores, further expansion in Asia and approximately 190 remodels or relocations of existing stores.

In addition, we plan to close about 165 stores.

The store closures will be across our geographies with the greatest concentration in Foot Locker and Lady Foot Locker in the U.S., SIX:02, Foot Locker and Runners Point in Europe.

There are also the investments in our digital customer experience and supply chain capabilities I mentioned, including investments in personalization, a reimagined membership program, the rollout of our global point of sales software platform in our international markets and the upgrade of our international websites to our new platform to name a few.

With this level of investment, we expect depreciation and amortization expense to be in the range of $185 million in 2019.

We are planning interest income to be relatively flat to the $9 million of income in 2018, and we are continuing to plan our effective tax rate to be approximately 27.5% in 2019.

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

Although we are planning a mid-single digit comp gain in each quarter, we are keeping an eye on the impact on the top line from the slower pace of tax refunds, combined with the lower average refund size compared to a year ago.

Also, the FX headwinds, I mentioned, will have the greatest impact on the first quarter.

I think that covers the highlights of 2019.

So I'll end there and ask Shelby to open up the call to your questions.

(Operator Instructions)

Shelby, this is Dick.

Before we get to the first question, I would just want to take a moment to acknowledge the passing of Jon Epstein.

Jon was, I would say, the epitome of a shoe dog who had just incredible passion for sneaker culture.

Jon was a true friend of mine and partner of Foot Locker, Incorporated, and he'll be missed by all.

Our thoughts and prayers certainly go out to his wife, Carol, and to Gene Yoon and the entire Fila family.

So with that, Shelby, back to you for some Q&A.

(Operator Instructions) Your first question comes from Matt McClintock of Barclays.

Dick, 2 questions.

The first question one is just there's clearly a lot going on at Foot Locker and now it's definitely a good time to have an Investor Day to tell us the details on it.

But just it seems like in the last month, you've done more things than you've done in the last 10 years.

And I was just wondering if you can give us like a little bit of background into the timing of the acquisitions, how you went about going through the process there, how you went about shutting down SIX:02, all of that because it's just so much to be had in a matter of a couple of weeks that seems like you just decided woke up one day and you're just going to completely change things.

Well, I don't know that we woke up one day and decided to change, Matt.

I understand the thought, but if you go back to August of 2017 when we acknowledged that our customer was moving fast and we needed to change the way that we did business, we started the evaluation process, both an internal and an external view of some of the capabilities that we might be lacking, some of the opportunities that were out there.

And as we looked across the various opportunities, the fact that we've mentioned we called out and made the investment and the early one was Carbon38, that was about a year ago that we first invested.

We've had a relation -- long-term relationship with D'Wayne and the folks of PENSOLE, we decided to formalize that and invest to make sure that we're giving back to the industry that fuels us.

We looked at Jason and the team at Super Heroic, they've got a great concept.

It's about getting kids active in playing, which, again, drives our core community effort and connects really well with our foot -- Kids Foot Locker effort as does Rockets of Awesome with Rachel and her team.

And the kids business is really something that's important to us and we saw those 2 opportunities to expand the product in the way that we speak with that consumer.

And then GOAT.

The secondary market is something that's highly critical to sneaker culture, and Eddy and Daishin have done a great job of creating, what I think is, the leading marketplace in the secondary market and the relationship that we can have to extend benefits to the entire sneaker culture with GOAT is tremendous.

So yes, it's all been announced over a relatively short period of time.

We came to bear fruit over a short period of time, but it's work that we've been doing for 10, 12, 18 months in some cases.

Yes, I would echo that because when you make a decision to make an investment, it comes after very thoughtful conversations about whether the goals are aligned and if mutually see things that will be favorably received by our customer.

So it -- I understand the perspective, it all seemed to come at once, but that was not the case.

Well, that's good to see that you're investing because that's the only way to stay on top of the changing marketplace.

But I think the second question.

Dick, you were always pretty consistent saying that the heat -- the product was getting better as we go to the back half of this year going into next year and you were getting better allocation, et cetera, yet, you're now implying a mid-single digit comp for the full year, does that imply that you just don't see the same level of heat as what you are seeing today?

No, not by any stretch, Matt.

Again, the comp numbers are sometimes what you're up against, it's the flow of holidays, it's the flow of money into the marketplace.

So there's a lot of variables when it comes to the guidance and the comp, but we see a tremendous amount of innovation from our partners across the industry, the heat continues to come, so I -- we're -- I'm comfortable with a mid-single digit comp.

We've got a lot of work to do that, right?

It's -- every day you have to come in and the team has to lace up their sneakers and go to work hard because it's difficult out there and there's a lot of competition, but we think we are well positioned with our vendor partners and the collaboration that we've got to continue to lead the industry.

Your next question comes from Chris Svezia of Wedbush.

I guess, first just on Europe for a moment.

You've seen a nice sequential improvement throughout 2018.

I'm curious about how you think about that region as you move forward?

And I guess, more specifically, on the margin, I know it's been promotional there.

Just sort of where that stands at this point?

And any thoughts about Brexit.

I know from a supply chain perspective, you're based in Rotterdam and just how that might affect movement of product to the U.K. that kind of thing.

Just any kind of color about Europe would be great?

Those are a lot of questions in one, Chris.

But we feel good about the momentum that we've seen across our Foot Locker banner in Europe.

They've done a good job of getting the assortment shifted.

It took a little bit longer than any of us would like.

But I think, they have a really strong position heading into 2019.

We are a full-priced business, right?

So the marketplace is promotional, probably a little promotional than it has been, but the fact is that we're building deep connections with our customers, right?

The Power Stores that we opened in Liverpool and Marble Arch in London show us that the consumers got tremendous appetite and as we create exciting product and content, they enjoy shopping and they're willing to pay for price.

So again, our focus is on full-price selling and will continue to be.

When we think about Brexit, there's a lack of clarity still what it's going to mean, but undoubtedly, it will change the flow of products a bit, which means we have to think differently about shipping from the continent to the U.K. We will likely end up with a distribution point in the U.K. that helps us moderate some of the impact of Brexit, but as much as I want it to be resolved, I think there's still a lot of work to be done based on all that I read and hear.

So we'll continue to evaluate the opportunities with Brexit and what it means to our European business.

We're about to be as nimble as possible.

Understood.

And then just on -- second question is on the apparel business.

The comment about margins finally surpassing that of footwear.

Congratulations.

But I guess, the question is where does it go from here?

Do you feel like that can continue to accelerate based on your visibility and how does that play into your sort of, I guess, 20 to 40 basis point improvement in gross margin on the year?

Yes.

We don't really break gross margin down by product category, Chris, but we feel comfortable with the work that the apparel team is doing, but we want our footwear margins to get better too by the way, but the team did a great job with some collaborations and putting exciting product into the marketplace and as we get better with apparel and they manage the life cycle of the apparel better, we continue to believe that there's upside in the margin.

So again all of the categories sort of come together when you talk about improving product margin.

We need to get our accessories business a little bit healthier.

When we do that, we'll see that will add a couple of bps to the mix as well.

So again, our apparel team has done a tremendous job complementing the great work that our footwear team is doing.

So from a margin perspective, they'll keep working away at that.

Your next question comes from Sam Poser of Susquehanna.

Well, some of the questions have been answered as you answered a lot on the call.

Just a quick housekeeping, and then I'll have another one.

Lauren, what do you think the tax rate's going to be for next year within -- for this year within your guidance?

27.5% would be our guidance on that.

That high?

Yes.

Okay.

Yes.

Remember, we've got a mix of international business, Sam, and that we don't get the complete benefit of just being a U.S.-based business.

Got you.

Got you.

And then also, could you give us -- you've got apparently a lot of pairs of the Eazys in the fourth quarter.

Can you give us some idea of sort of how you think about that 8 months from now, 9 months from now?

And can you tell us sort of how you -- where you are on loyalty program and changing sort of the way you flow products versus where you really want to be?

Well, in terms of Eazy, you're right, we certainly benefited from some Eazy business in the fourth quarter as there were some really great launches across that particular model.

We expect Kanye and adidas will continue to bring heat across the Eazy platform.

So whether the launches all line up perfectly, I mean, that's one of the challenges of the business, as you know, Sam, that we look at comp days, but we're happy when we can find the right launch cadence with our vendor partners.

So again, I'm confident that our merchant team is working with adidas to make sure that we've got the Eazy flow correct for our business.

In terms of loyalty, we are continuing to drive on our membership program.

We'll share more details with that later in March as we go through our Investor Day, but it will be an exciting program for the industry, I believe.

And the product flow, I feel pretty good about where we're at from a product flow perspective, Sam.

I'm not exactly sure what the question around was that, but as it relates to the various geographies, the rhythm feels pretty good right now.

I was really discussing sort of the flow of products versus sort of how quickly the kid is changing his mind all the time.

Your sneaker -- changing their mind, so you need to put less -- I mean, arguably less pairs of more product more frequently?

Yes.

No, you're absolutely right.

And again, the kid -- our core consumer is moving faster than ever.

We've talked about that on a number of calls, and we don't expect that to slow down.

So the great work that our product and marketing teams are doing to connect with the vendor is to flow the product appropriately, things like the initiative we talked about in the prepared remarks with adidas and the SPEEDFACTORY, which allow us to do some very localized product for various events, those are all things that connect with this fast-moving consumer, but I don't expect the consumers preferences to slow down, their changes in preferences to slow down.

And then one last thing.

For the first -- you talked about the headwinds in the first quarter, but from a comp basis, I mean, given the comparison and all and coming out of the quarter, I mean, would you expect comps at the -- in the mid-single digit range to be better let's say, the first half of the year, specifically, first quarter versus the second half of the year just given the comparison?

Yes.

I want to reiterate the guidance we gave, mid-single-digit comps and we're seeing that across the quarters by watching Q1 as the tax money flows.

Your next question comes from Camilo Lyon of Canaccord Genuity.

I was just thinking if you could give a little more color on your basketball business.

I think you said it was down mid-singles in the quarter.

Maybe if you could just parse out what you're seeing from Jordan as well as some Signature and how that flow should evolve in 2019?

And what composition of -- what expectations do you have for that business for '19 and how that goes into the comp execution?

Yes, I'll provide a little bit of color, Camilo, but my feeling continues to be the same that our kid is motivated by the coolest product.

They are far less category dependent or respondent than they are just around cool.

So one of the hottest shoes in the marketplace today is the AJ 1, which is a classic basketball shoe.

It may get classified in some cases as a classic and then some people might call it a basketball shoe.

But right now it's got a lot of heat behind it as does the Air Force 1. We've seen some sparks of heat around some of the Signature product from LeBron, specifically and a little bit from Kyrie.

So again, I think, that there is great momentum around the coming basketball, and I think the reenergizing of the House of Hoops that we've seen through our mobile effort in Charlotte, certainly, when we did the hunt and the effort out in Los Angeles around LeBron's first game as a Laker.

There's still a lot of energy around basketball, and we're confident that the product flow will be there to support it.

Again, I'm less riveted about when basketball turns positive because our kid cheers about the coolest product, and we're going to continue to drive heat through cool product.

Can you say if Jordan was positive for you in the quarter?

The Jordan sell-through numbers were improved over a year ago.

So the Jordan team and Nike does a great job of controlling the flow into the marketplace, and we believe that we get, I don't know if fair share is the right word because fair is not a word that works in business that often, but I saw -- we saw great sell-throughs on the Jordan products that we brought into the marketplace and a healthy sell-through numbers with Jordan is what really motivates the heat and motivates the kid in our category to come to the stores and shop online with us.

Got it.

And then just my next question, and if you could it, for Lauren, this comp performance of 97 was the best comp put out since 2015, and during that period your EBIT margins were substantially higher than where they landed out this year.

Is there anything structurally preventing you from getting back to that low double digit, low teens margin rate over time as you have discontinued kind of product-led -- in-store lead sort of momentum that's driving discontinued comp strength?

Yes.

I appreciate the question, and we're going to get to March 28, and we're going to talk about all the stuff that is going on for the long term and what that means to us financially.

So I could ask you to hold that.

We'll have lots of opportunity to talk about all the good things that we're working on in depth in the financial results.

I think Lauren's guidance around 2019 was pretty clear to where we -- where your model will get us to, but we'll talk more long-term when we get to the 28th.

Okay.

Maybe if I can ask it a different way from the perspective of the spend and the initiatives that you talked about for this year.

There's certainly a lot that you're going after as you rightly should be.

If you were to classify where you're at on this investment cycle, can you give us some sort of context?

Well, I don't know that the investments, as we talked about before, Camilo.

I don't know that the investments really...

Is your question around CapEx?

Yes, both.

Yes, absolutely, CapEx and then how that obviously affects the P&L from an SG&A perspective?

So clearly, you're always going to be investing and there's no shortage of things to invest in, but there'll be years in which you invest more than others and where projects start to create a leverage and give the returns that you hope that they would do.

So any sort of articulation as to where are you in that investment cycle would be great?

Yes, understood.

Clearly, we're still investing in our fleet.

We know physical experience is important to our customer.

And again, we're going to tell you lots about the things that we're doing.

We described what that excitement and experience looked like in the fourth quarter for you pretty completely, and it got just through the Q1 sort of thing.

So those come to life in a physical way and therefore, we continue to invest in the fleet.

We also described more new doors than we had in 2018.

So as you open a new door, you get better leverage on that investment over the longer term.

But we also described a fair chunk in the CapEx that relates to digital and other infrastructure logistic.

So it was too barefooted over the longer term.

And again, I -- you're going to get a better picture for what all of that looks like when we talk at the end of the The digital initiative, some bit of that as we've described before is foundational in its nature.

So that when you look to a longer term, you get passed, but we're working on some exciting forward stop, that's also reflected in that spend.

Sounds great.

Looking forward to the Analyst Day for more color.

Your next question from Jay Sole of UBS.

Dick, it sounds like your digital business grew almost 30% in the quarter.

It sounds like an acceleration point.

Can you talk about what some of the key drivers were in that part of the company?

Well, we've been talking about it quarter-after-quarter, Jay, right?

We've invested in the new platform.

We've reorganized, so the team is thinking about it from an omni point of view.

We're utilizing our stores as opportunities to leverage the inventory that sits in stores even though you're shopping online.

So it's a ton of work that's going on for a long time that really is starting to bear fruit.

And I think -- I don't know how to prioritize those things, but they're all important and we continue to believe that there will be improvements in that along the way.

As our team thinks more from an omni point of view, as we leverage more efficient supply chain, as we figure out more ways to connect with this consumer, but we are true believers that it's a physical and a digital presence that really stands -- helps separate us in the marketplace.

And our consumer likes to be in our stores.

Lauren talked about traffic being down a little bit, but we firmly believe that our traffic is better than the traffic in the malls.

And that we are destination for these kids.

So it's a real marriage of the digital and physical that's making the difference.

They're just -- they're synergistic where we give the comps split out between the 2, but when you're really focus on it from a customer journey, the channels are synergistic.

Got it.

And maybe, Lauren, if I can follow up with one more.

Just on the inventory.

If you have inventory positioned for say the NBA All-Star Game in February when tax refunds are supposed to come, is that -- let's say the tax refunds, they're starting to get better now.

Let's say, if they show up in the next few weeks, is that inventory still as relevant to the consumer if they have money sort of like in the first part of March versus the last part of February or do you get into a situation where just because that inventory is maybe a couple of weeks older than you thought, it was going to be when people are coming in, there's sort of a markdown pressure?

Yes, I think really the life cycle is not that short.

So our team does an excellent job of figuring out the flow of that product and what they think our customers' going to respond to, and thankfully you don't measure the life cycle of product, and we -- that's short.

I do measure it in weeks, but not that short.

Your next question comes from Erinn Murphy of Piper Jaffray.

I guess, a couple of questions.

First one, a double-digit ASP growth, could you help us think about how much was driven by product mix versus true like-for-like pacing?

And then, I guess, Lauren, you alluded to that markdown control is almost at record high, so just curious on those 3 major components that drove the double-digit ASP growth?

Well, again, we haven't really segmented out the 3 pieces, Erinn, specifically, but we had a great mix of products.

When you think about the price point of the Eazys that were mentioned earlier on the call, when you think about the Timberland Champion collab that we had, when you think about the premium fleece that we sold in the store, when you think about the benefit of some elevated kids pricing, all of those things contribute to the ASPs.

Lauren talked in her remarks about our markdowns being at almost record lowest for us, personal best, as she put it.

That's good inventory management, which allows us to sell more at full price.

So it's a combination of all of them, right?

I mean, it's a pretty complex model when you get to our ASP model.

Okay.

Fair enough.

And then just kind of carrying that through to the 2019 guidance on the mid-single digit comp.

What's your assumption for traffic versus kind of ticket or pricing as do you think about mid-single?

Yes, of course, we think through all of that, but again, we've described it as combination of physical and digital.

So anything about traffic, you got to really think about it across the channel.

The customer is responding to this compelling product, where they find value in it, where we're bringing them something different, it's supports these ASPs.

But I would add on to Dick's commentary that our merchants are very, very thoughtful about the offering across the price point as we really want to make sure that we have compelling product across the spectrum.

And when they respond to it at full price, you get those kind of lift on ASPs.

Got it.

And then last question for me.

On the relationship with GOAT, I'm curious if you guys have access to use their data.

They've got about 11 million users.

I mean, in your due diligent process kind of what was the overlap?

Or could you see any overlap between your loyal members versus their users?

Yes, we're not going to get into the specifics of the relationship, Erinn.

And they have a ton of sneaker lovers, we have a ton of sneaker lovers, and it is about delivering a great experience to the broader sneaker market.

And we will be able to learn from them, they will be able to learn from us, and at the end, I believe, the consumer, the sneaker consumer will benefit.

Your next question comes from John Kernan of Cowen.

Dick, can you talk about Europe and what you're seeing over there?

Obviously, trends have improved significantly.

Adi went through a period of contraction in terms of their overall growth rate within that region?

So I'm just wondering what you're seeing overall in Europe and then also Asia sounded like it was pretty strong as well.

So just if you can give us some more detail on international that will be great.

Well, I'll start with Asia because it's relatively small, right?

We just stood up 5 stores across 3 countries and the Power Store in Hong Kong is off to a fantastic start and our presence is certainly being felt in the marketplace being a premium destination of multi-branded opportunities and the consumer across Kuala Lumpur, Singapore and Hong Kong are all responding well.

So again, we're excited about that, and we'll be accelerating the growth, but we're going to be pragmatic about it.

We've got a lot to learn about the region and the geography, but the shift in our organization to put Lew directly over just the Asia Pacific business will allow us to focus our resources in that marketplace.

When you talk about Europe, it still is a market that's driven by the running silhouette.

So the chunky midsole, the Fila Disruptor, et cetera, those shoes have been very positive over there and we've seen a tremendous resurgence of Nike Air products over there.

The 20th anniversary of Tuned Air, which really has been a strong product across those 20 years in the European market brought a lot of heat in the fourth quarter and throughout the year, and we expect the positive nature of the Max Air product to continue.

The team over there is working on collaborations as well that are unique to the marketplace and bring a lot of heat.

So I'm -- we're seeing a lot of the right signals in Western Europe certainly and we believe that we can be strong there.

Got it.

And then I think on this call, you've talked a lot about some of the smaller up-and-coming brands, whether it's Vans, Fila, you mentioned Timberland x Champion, can you talk about how much interest in traffic and how much these brands are contributing more than they were in the past as you kind of -- and obviously Nike remains an enormous portion of business.

But I'm just wondering it feels like you're talking more about some of the newer brands that you're introducing to consumers and going through collaborations with and partnerships with?

So just talk about some of the other brands other than Nike and adi and the performance there?

Well, we don't break out the performance.

When we file our K, you'll see the big performers listed, but the truth in any quarter is our team has done a tremendous job of finding energy with some of these secondary brands to complement the great heat that Nike and adidas and Jordan bring to the marketplace.

So when you think about a Timberland, Champion collab, right, I mean, there's something that's unexpected, our consumer responds quickly and passionately about those sort of opportunities.

When you think about some of the things that Vans has done, they created a tremendous amount of heat in the marketplace and the consumer wants to be part of that.

So the thing that's really changed it or accelerated I think is continues to be the digital presence that all of those brands have and the work that everybody does to fuel the sneaker culture, and our consumer is right at the heart of that.

So they see it...

They are hyper-informed and they want to be part of it.

And I think their receptivity to brands, discovering brands, being part of that is sort of highest I've seen in my career.

All that being said, we know that our big brands continue to drive tremendous heat across the marketplace and our consumer response to that as well.

We've got time for one more question, I think, Shelby.

Your final question comes from Michael Binetti of Crédit Suisse.

A quick modeling question.

Just the rough framework you gave, Lauren, mid-single digit comps.

I think the EBIT margins down a little bit, get back a little bit on the operating line.

So with the tax rate you gave to Sam earlier, it looks like a lot of the EPS growth comes from share repurchase this year.

Is that -- am I thinking about the components there correctly?

I'll reiterate, mid-single digit top line comp, 20 to 40 bps of expansion in gross margin, 40 to 60 decline in the reign on SG&A, and so more pressure on SG&A, and tax rate 27.5% and expectation we execute opportunistically on share repurchase, double-digit EPS growth.

Okay.

Let me ask you, I think, on the merch margin, Lauren.

You mentioned the gross margin will be up this year.

You just gave us the numbers again, and it will be largely from buying and occupancy, but you did see markdowns when you're peak, the merchandise margin as we track quarter to quarter clearly isn't.

I'm trying to follow you there.

I don't see a significant distortion in the mix of categories or geographies.

And you even said apparel margins had some momentum.

Is there some change in the merchandise margin within the footwear category that would limit merch margins from going back to the historic levels?

Again, our markdowns, which is the biggest lever, we're at personal best or getting close to.

Again, it's different by geography and some mix question to some degree.

But as we think about it, the focus is at your personal best on markdowns then the other levers would create longer-term opportunities.

So we are looking at what we've got, and logistically that would help us flow the product more effectively, et cetera.

But again, these are things longer term that we can give you more color on at the end of the month.

Okay.

And let me just put one last one in there on the SG&A growth implied in the margin numbers you gave there, that's a lot of investment.

I certainly understand why you want to plow back some of the top line momentum here to keep that going.

But can you just help us think about the leverage point on the SG&A this year, how much of that could be more leverageable if you can drive comps of that mid-single-digit range?

Just...

Well, I think if you look back to '18, you can see that we were very thoughtful of healthy expenses and levering anything incremental to the bottom.

So within SG&A, the biggest expenses are selling wages, certainly we're well-versed in what's happening with that, and marketing.

But it's one of the beauties of all the data is that you can get ever smarter about how you use those marketing dollars more effectively.

Those are the bigger lever points.

We have no further questions at this time.

Okay.

Thank you for joining us today, everyone.

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

on Friday May 24.

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

Thanks, again, and goodbye.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.