Foot Locker Inc (FL) 2019 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Foot Locker's Third Quarter 2019 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.

(Operator Instructions)

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

Mr. Lance, you may begin.

Thanks, operator.

Welcome, everyone, to Foot Locker Inc.'s Third Quarter Earnings Conference Call.

As reported in today's earnings release, the company reported a strong quarter with net income of $125 million or $1.16 per share in the third quarter, compared to net income of $130 million or $1.14 per share last year.

Included in this year's GAAP results is a pretax gain of $4 million in connection with the acquisition of a Canadian distribution center lease and related assets, partially offset by an incremental $1 million charge related to the pension matter that we have spoken about in the past.

Last year's results included a $2 million charge related to the same pension matter, offset by $23 million of tax benefits related to U.S. tax reform.

On a non-GAAP basis, third quarter earnings were $122 million or $1.13 per share, a 19% increase from $108 million or $0.95 per share 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 remarks with Lauren Peters, Foot Locker's Executive Vice President and Chief Financial Officer, who will provide details on our third quarter performance along with our financial outlook for the fourth quarter.

Dick Johnson, Chairman and Chief Executive Officer, will then provide highlights from our third quarter performance along with an update on our strategic initiatives in our product pipeline.

Lauren?

Thank you, Jim, and good morning, everyone.

We are very pleased to report strong sales and earnings growth for our third quarter.

Our team executed well this quarter, delivering a comparable sales increase of 5.7%, combined with improvement in both our gross margin and SG&A rates.

Collectively, this led to the double-digit increases in non-GAAP net income and earnings per share.

Total reported sales rose 3.9%.

Similar to the second quarter of 2019, the impact of foreign currencies reduced sales by about $23 million.

On a constant currency basis, total sales increased 5.1%.

Winning with our customer when it matters most, we had a very strong back-to-school season in August and September posting high single-digit comp gains in each month.

October, the lowest volume month of the quarter, produced a low single-digit comp increase.

Breaking out the comparable sales by channel, both stores and direct-to-customer delivered excellent results.

Sales at our DTC channel produced the strongest comp gain, rising 11.4%.

Also impressive was the performance of our stores, which increased 4.7%.

As a percent of total sales, direct-to-customer rose to 15.3% for the quarter, up from 14.5% last year.

Almost all of the divisions performed well during the third quarter.

In North America, Foot Locker Canada led the way once again with its second consecutive low double-digit comp gain.

The results of Champs Sports, Foot Locker U.S. and Kids Foot Locker were also notable, with each delivering a high single-digit comp gain.

Footaction increased low single digits.

In our International markets, Foot Locker Pacific had the strongest performance, posting its fourth consecutive double-digit increase.

Foot Locker Europe and the Runners Point Group each produced a low single-digit increase.

The only division to post a negative comp was Eastbay, which was down high single digits.

Dick will touch on the Eastbay results in his remarks.

Looking at our sales by family of business, our comparable sales gains were driven by footwear, which was up high single digits, while apparel and accessories together were down high single digits.

Within footwear, the strength was broad-based, with men's sales up high single digits, women's up mid-single digits and kids up double digits.

Strong growth in men's basketball, which increased double digits combined with a mid-single-digit gain in men's running were the key drivers this quarter.

The growth in women's was fueled by classic basketball and court style.

The back-to-school period demonstrates the strong connections we have with our younger customers and their parents.

A terrific performance in kids footwear was even broader, with strong growth in almost every one of our divisions and fueled by strength across grade school, preschool and infant sizes, with double-digit gains in basketball and running and positive results in casual silhouettes.

Our apparel business remained challenging, down high single digits.

However, we made progress in a number of areas.

For example, the strong results at Foot Locker Canada and Foot Locker Pacific, each benefited from double-digit gains in apparel.

At Foot Locker U.S., our women's apparel business was up double digits.

And in Europe, it was kids apparel that delivered a double-digit gain.

Dick will touch on some of the product details in his remarks.

The trend with store traffic was unchanged in the third quarter, down low single digits overall, while conversion improved.

We had traffic gains at Foot Locker Pacific, Foot Locker Canada and Sidestep.

Average selling prices rose high single digits, while units were down low single digits, primarily due to a decline in our apparel penetration.

Turning to the rest of the income statement.

Our gross margin rate rose to 32.1% in the third quarter, an increase of 50 basis points over last year.

Similar to last quarter, the gain was driven by leverage of our relatively fixed occupancy and buyers' compensation from which we picked up 60 basis points.

This was partially offset by a 10 basis point reduction in our merchandise margin rate, which was due to the softer apparel trends, IMU mix and the higher penetration of DTC.

That brings me to SG&A, which came in at 21.3% of sales, an improvement of 10 basis points from last year.

Leverage on the SG&A line reflects both disciplined expense management and strong top line performance.

Depreciation expense for the third quarter was $44 million, flat to last year while interest income rose to $3 million from $2 million last year.

Our GAAP tax rate for the third quarter came in at 27%, above last year's 10.8% rate which benefited from adjustments related to U.S. tax reform.

On a non-GAAP basis, our rate came in at 27.7%, in line with our expectations.

An important contributor to the strong performance this quarter was the continued productivity of our inventory.

At quarter end, our inventory was essentially flat on both a reported and constant currency basis while achieving the mid-single-digit sales gain.

Our turns continue to improve overall.

And our inventory remains both fresh and productive heading into the holiday season.

We ended the quarter with $744 million of cash and cash equivalents on the balance sheet, a decrease of $4 million from the end of Q3 last year.

We continue to focus our capital allocation strategy around 2 key objectives.

First, we continue to invest in the business.

During the quarter, we spent $45 million on capital expenditures, bringing our year-to-date total to $126 million.

For the year, we're currently tracking towards $220 million, below the prior guidance of $250 million due primarily to project timing.

Included in this capital spend are the investments in our digital and analytics capabilities, the piloting of our FLX membership program, our expansion in Asia, and our ongoing efforts to elevate the customer experience in our stores.

We also made a $3 million strategic investment in NTWRK, an exciting new video, e-commerce and content platform.

You'll hear more about NTWRK from Dick.

Looking at our store base, we opened 11 new stores this quarter, including 3 power stores and 2 new doors in Asia, bringing the total year-to-date openings to 35 stores.

On the other side of the ledger, we have closed 96 stores this year, including 25 in Q3.

For the full year, we now expect to open about 70 stores, remodel or relocate 165 and close 180.

As is usually the case, a large number of the store closures occur post holiday upon lease expiry.

The second objective of our capital allocation strategy is meaningful returns of cash to our shareholders through our strong dividend and opportunistic share repurchase program.

This quarter, we returned $41 million to our shareholders through our dividend of $0.38 per share.

As we have previously described, our share repurchase program is opportunistic which means that when we see value, we may be more active.

In this quarter, we recognized opportunity and increased the pace of share repurchases, spending in total, $178 million to buy back approximately 4.6 million shares.

Through the first 3 quarters of the year, we have spent $300 million to repurchase 7.5 million shares or 6.7% of the shares outstanding at the beginning of the year.

In total, we have returned $425 million through our quarterly dividend and share repurchase programs this year.

In terms of the fourth quarter, our outlook is as follows: comp sales relatively flat, which reflects the trends in our apparel business as well as the challenging comparison to last year's 9.7% fourth quarter comp; a gross margin rate decrease of 10 to 30 basis points; an SG&A rate of flat to up 10 basis points; and mid- to high single-digit growth in earnings per share.

As a result, we now expect our full year comp sales to be in the low single-digit range, with gross margin improvement of 10 to 20 basis points, SG&A to be up 40 to 50 basis points as a percent of sales and a mid-single-digit EPS gain.

Depreciation is now expected to be closer to $180 million and our full year tax rate remains at approximately 27.5%.

One last topic before I hand the call over to Dick.

We've been giving thoughtful consideration to our public guidance practices.

We have gathered feedback from our investors, analysts, directors and other advisers about what is most helpful and productive.

We have studied what others inside and outside our industry do.

With all that information, we have concluded it is time for a change.

Starting next quarter, with regard to fiscal 2020 guidance, we will shift to provide you only the annual comp sales and EPS outlook and not detailed quarterly guidance.

Where appropriate, we will give you additional color to aid your overall modeling.

We believe this approach is aligned with our long-term thinking, reflects how we manage the business and is consistent with current best practices.

With that, I will turn the call over to Dick.

Thanks, Lauren.

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

Throughout the year, I have been speaking with you about how our deepening connections with our customers, combined with our strategic relationships with our vendor partners, had us well positioned to deliver strong results.

And as Lauren described, we did just that in the third quarter.

Our strong top and bottom line performance reflects some of the early benefits of implementing our long-term strategic imperatives.

Elevating the customer experience, investing for long-term growth, driving productivity and leveraging the power of our people.

Before I speak about our strategic initiatives, let me dive into some of the key drivers of our performance in the quarter.

There were a number of areas with outstanding results.

For example, a growing and diverse footwear business, engaging content and storytelling and further progress in our efforts to create physical and digital destinations where our customers can be inspired.

Looking at footwear, we delivered excellent results across men's and kids and posted solid results in women's.

We are pleased to see the basketball category return to growth this quarter.

Our strong Jordan business, led by the classic AJ1s and our exclusive Jordan Rivals pack, combined with robust demand for Air Force 1s from Nike and the adidas Hardcourt, fueled the strong gain.

Signature basketball also had some bright spots, with strong performances from Giannis and Kyrie from Nike.

Our running business again produced solid results driven by premium lifestyle running models, including Air Max styles from Nike, YEEZY and NMD from adidas and the Puma RS-X.

Our concept work with our strategic partners continues to deliver new energy to the marketplace.

Some examples from the third quarter include our exclusive evolution of the Swoosh collection with Nike, which was a leading concept for back-to-school.

The Jordan Rivals pack celebrated Michael's most notable Rivals across a number of colorways.

We teamed up with adidas on the Logo Distortion collection.

We brought our customers the ultra-limited Patrick Mahomes sneaker through a nomadic experience at Arrowhead Stadium and teamed up with former Kansas City Chiefs' great, Dante Hall, to surprise a local underserved high school football team with the brand-new AM4 Mahomes cleats and matching travel gear.

In addition, we partnered with Puma on its bold collection and featured its collaboration with the outdoor brand Helly Hansen.

The areas with the biggest challenges were the same as last quarter, apparel and Eastbay.

While the overall apparel business remains healthy, the results were affected by a fashion shift away from select branded sportswear programs that in prior quarters had helped drive strong results in the category.

On top of that, we felt the impact from our strategic move away from the private label business and tough comparisons in the licensed category.

Moving to Eastbay.

The reasons for the more challenging performance are similar to last quarter, with softer results across performance footwear and apparel assortments.

The current style shift in casual apparel away from wind wear and nylon was also a negative.

We are working to improve performance and did see some bright spots, especially in the basketball category.

Looking forward, we have an exciting lineup for this holiday season.

We have the next iteration of the evolution of the Swoosh collection from Nike.

The positive trend in Basketball is likely to continue with the new Kyrie 6 launch, adding to the early momentum in the signature business.

In addition, Jordan and Air Force 1s will continue to elevate and drive the culture of Basketball.

We're partnering with adidas on the next update of the Logo Distortion collection and have compelling YEEZY drops coming.

And there's even more heat on the way, including the new patches program from Timberland, the Coke-Champion collab and new models and stories from Puma, Converse and others.

Now looking at our progress in executing on our strategic initiatives, I will start with our efforts to elevate the customer experience.

Let's begin with our power stores.

On our last call, we told you about our newest community-based power store in New York's Washington Heights neighborhood.

While still early days, the results are very promising.

Driven by our ability to build deeper connections with the community, we are seeing significant gains across a number of performance and customer sentiment indicators, such as traffic, conversion and overall satisfaction, to name a few.

Our home-grown program featuring local creators has been such a success at Washington Heights that we have begun to amplify it in our other power stores across North America.

The NikePlus ShoeCase and Unlock Box have added even more connectivity and excitement, offering members access to exclusive products.

We opened 2 other new power stores this quarter, bringing our exciting new offense to Melbourne, Australia; and Frankfurt, Germany.

These stores will serve their communities as places where people can come and be inspired, hang out with their friends, find and meet local influencers and discover exclusive and localized products.

Our new membership program, FLX continues to move forward.

It has been well received in our test markets, Lady Foot Locker in the U.S. and Foot Locker Netherlands.

While this is the inaugural loyalty program for our European business, in the U.S., FLX is driving stronger enrollment and metrics compared to our old VIP program.

Across both regions, we are seeing higher average order value and positive sentiment around the program's benefits.

I am pleased to announce that the program is now live in the U.K. and France, and we still expect to expand the rollout in the U.S. post-holiday and across additional European countries in 2020.

We are also elevating the customer experience through new enhanced brand presentations.

Foot Locker Europe has begun rolling out Nike and Jordan consumer experiences in a group of key stores.

The presentations feature enhanced walls and fixtures to deliver elevated storytelling that connect today's customers with the heritage of the classic Nike and Jordan offerings and the brand's latest innovations in our stores.

The results so far have been very encouraging, with increased customer awareness and interaction, leading to improved conversion.

We are also expanding the development and rollout of enhanced women's spaces across select European and U.S. markets, where she experiences a space and product curated for her, a place to explore and be inspired.

We'll also connect with her through improved digital experiences and social engagement.

By the end of this year, we expect to have around 20 elevated women's spaces across Europe, 25 in the U.S. at Foot Locker, Champs Sports and Footaction, with plans to scale the build-out next year.

In Foot Locker Australia, we are now accepting Afterpay, both in-store and online, creating a more convenient shopping experience by opening our channels to those customers seeking to buy now and pay later.

And this is only the beginning.

Given the positive customer response, we are considering similar payment options in our other markets.

Moving on to our second strategic priority, investing in long-term growth, the third quarter featured the exciting launch of our in-house incubator GREENHOUSE.

We created GREENHOUSE to develop new ideas and partnerships that are relevant to youth culture today and in the future.

The GREENHOUSE app highlights one product story at a time.

This quarter, it introduced customers to 5 great stories with some terrific new partners like emerging designers, Nicole McLaughlin, Christina Paik and a collaboration between atmos, adidas and popular media and music conglomerate 88 Rising at complex cons.

We've made a 6 strategic minority investment in an early-stage company, led by CEO, Aaron Levant, NTWRK is a unique platform.

It brings the best brands and cultural icons together on live videos and provides our customers with the connection to shop exclusive products while they watch.

It acts as a storyteller, demand creator and product validator.

We believe we can leverage our relationship with NTWRK to introduce product, generate excitement and drive commercial success in our ecosystem.

One way we plan on partnering with NTWRK is through GREENHOUSE.

While they operate separately, many of the GREENHOUSE products will be sold on NTWRK through our Out of the Greenhouse video franchise.

By leveraging both platforms, we can extend the reach of GREENHOUSE and validate the potential of new ideas.

Turning to Asia.

We continue to move forward in this important region.

During the quarter, we opened up our fifth store in Singapore and our third store in Hong Kong as well as bringing online a third-party distribution center in Singapore.

With this new supply chain capability up and running, we can source product directly from our vendors into the region.

This provides a more efficient and cost-effective way to distribute product to our stores and fulfill sales from our digital channels.

That brings us to driving productivity, our third strategic imperative.

In addition to continued attention to and success in inventory management, logistics and expense management initiatives, our digital and analytics investments provide us with tools to make our business even more productive.

We've built a framework around maximizing customer life cycle management that utilizes machine learning to harness our data in order to make us more relevant for our customers, whether that's how they engage with us or complete their purchase.

For example, applying machine learning capabilities has allowed us to make the keyword search functionality on the Foot Locker U.S. and Champs Sports websites more relevant, which helps drive conversion.

Another area is personalization, where a cross-functional team from marketing, data and finance is developing and testing a platform to create and implement data-led campaigns across our channels.

Initial results from these efforts show that personalization, even as simple as directing customers to their preferred store or offering them the latest release from their favorite brand or model, allows us to deliver an improved, more relevant customer experience and to employ a more efficient marketing spend while driving top line results.

That brings us to our fourth imperative, leveraging the power of our people.

This quarter, we launched Lace Up, our new associate learning and communications platform.

This new interactive training system provides us the ability to engage, educate and empower our associates.

It can be accessed via mobile or on a workstation and is customized to each associate's learning path.

Every shift associates can clock in, Lace Up and hit the sales floor within just a few minutes.

This leaves them with more time to engage with our customers and exceed their expectations.

Before we continue, I want to take a moment to express my sincere gratitude to each and every associate at Foot Locker Inc.

It is through their dedication and hard work that we were able to achieve the results we did this quarter and continue to make progress on our journey to inspire and empower use culture.

We're ready to get the holiday season going.

Yesterday, we launched our 8th Annual Week of Greatness with a number of terrific product releases at the start of our No Matter What digital campaign.

The excitement will be felt across the U.S. and internationally and will continue throughout all of next week and extending into the new year.

We are optimistic about the progress we are making as a company.

Our financial position remains strong, and we are poised to continue advancing towards our long-term financial objectives as we continue to build value for our shareholders.

Lastly, I want to wish all of you a happy Thanksgiving, Week of Greatness and a happy, healthy holiday season.

Operator, please open up the call for questions.

(Operator Instructions) The first question on the line is Chris Svezia of Wedbush.

I guess, first, Dick, can you maybe just add a little color on the apparel business?

Where you're seeing some success in women's and kind of what you're doing about it?

And I know, obviously, kind of tempered the fourth quarter comp a little because of it, but just sort of the outlook and what we can expect in terms of what you guys are doing to kind of turn that segment around?

Yes, specifically on the women's, Chris, we -- as we open more spaces where we've got the right space to showcase and tell stories in the women's apparel, we're seeing pretty good business.

We're seeing her respond to the storytelling that we've got, to the product that we've got in these spaces.

So as I talked about, we've got spaces that are dedicated in the U.S. and Europe.

We'll continue to roll those out as we get into 2020.

So again, that's an exciting update on the women's side.

On the men's side, we've got a little bit of a shift going on in some of the franchises that have been good for us, slowed down a little bit.

And as we transition into a cleaner, less all-over logo sort of look, we've got to just transition through the inventory.

We also have made a strategic step away from some of our private label product, right?

So that's -- we're comping some fairly big numbers from last year that we need to get over to the next quarter or 2. Likewise, if you remember last year with LeBron moving to LA, there was an awful lot of excitement around the licensed products.

Not so much excitement with the moves this year, I think it's created a better NBA, quite honestly, but not quite as much excitement as the LeBron moved last year.

So as we sort of rationalize through that.

We've got the product team focused on it, I feel good about where apparel is, but there will be a little bit of a drag in this quarter.

How does fleece -- I guess that's not enough to kind of offset some of the things that you're seeing there?

And just in terms of -- I know you don't want to talk about next year, but you believe that some of the things we're working on can maybe make this segment less of a headwind as we go for next year.

Just any color about that?

Well, fleece is critical, right?

As the weather changes, fleece becomes our consumers' outerwear in a lot of cases.

So I feel good about where we're positioned with fleece going into the fourth quarter.

As we look forward to 2020, we'll certainly talk more about that when we get into our February call.

But the team is connecting the great story tone that we're doing on the footwear side, trying to get more connectivity with the apparel pieces, the concept work that our team, has done a great job on the footwear side, we're getting better at connecting the apparel with.

So again, I think it's progress.

We stress here, progress over perfection.

And I think the team is definitely moving that way, and we're getting to be a little bit better at apparel.

And I think we've got progress that we've made, and we'll continue to work at it.

Okay.

And just last 2 quick ones here.

Just on the gross margin, Lauren, just how do we think about merchandise margin versus occupancy leverage, if you think about Q4?

And Afterpay when -- what are you seeing more specifically?

And when do you expect that maybe to roll out in your U.S. franchises?

So as we described for third quarter with a very strong top line comp result, we got a lot of leverage from the occupancy element, in fact, 60 bps and 10 backwards in merchandise margin, as we talked about apparel.

And so when you turn to fourth quarter, with a relatively flat comp, that puts pressure on the leverage of occupancy costs.

I don't really see anything different in the underlying merchandise margins.

And on the Afterpay front, yes, that's really been very interesting.

We've had layaway in our format for decades.

But of course, Afterpay makes that much easier digitally and in-store.

So we've been pleased with the response that we've seen in Pacific, and we're bringing on the capability with service providers to extend that to other geographies.

So we will begin to test that.

Of course, that's just one payment option.

There's all sorts of innovations on the payment front.

So we will test and learn.

I look more for that to be 2020.

The next question comes from Cristina Fernández of Telsey Advisory Group.

I wanted to follow-up on the apparel side.

How do you feel about the apparel inventory?

And should we expect more clearance as you have to sort of shift the assortment in that category?

Yes, I think the merchant team has done a great job lining things up as we go into this busy season.

So I think it's going to be a fairly discount-led marketplace around some of the apparel trends that are going on.

So I think our team is well positioned.

It certainly will fit within the parameters of the guidance that Lauren gave earlier.

So I don't see anything dramatic, but that's -- part of the merchandise life cycle is that when you play closer to the fashion realm, you have to move through product relatively quickly at times, and our team is set up to do that going into the fourth quarter.

And then my follow-up on the footwear side, can you talk about how volumes were in the quarter?

And as you look into the fourth quarter, is there any change in the expectations for footwear as far as the product lineup versus your original expectations?

Well, since we gave our full year guidance at the beginning of the year, there's always shifts, right?

We've talked the last couple of quarters about launch shifts that are in and out.

There's -- we've talked about how things move day-to-day, but sometimes they move quarter-to-quarter.

Obviously, there was an awful lot of YEEZY in fourth quarter last year that's been pulled forward.

So we got the benefit earlier in the year this year.

We've got some great YEEZY launches coming, but it's just a different cadence than last year.

So we see continued heat coming in the basketball category.

There's casual and lifestyle basketball, driven by Great AJ1 products from Jordan and Air Force 1s, the adidas Hardcourt.

We see some excitement around some of the player specific signature products.

So again, I feel good about where our footwear business is.

There are some exceptions to last year that we just won't comp based on the calendar and based on the flow from our vendor partners, but I feel good about where we're at from a footwear perspective.

Was there a follow-up.

Ms. Fernández?

Just any color on the footwear volumes in the third quarter?

Footwear volume.

We don't break out our volume by family of business, right?

I mean, clearly, we talked in the comments about footwear being the driver, high single digits, with really good performance across men's and kids and strong performance with women's as well.

And I can add that, that was really across the geographies and the banners, right?

The only -- I guess, a little bit of weakness was the weakness that we talked about in performance footwear and Eastbay.

But beyond that, the footwear business was consistent and strong across the geos and banners.

The next question comes from Matthew Boss of JPMorgan.

So Dick, maybe beyond the quarterly shifts along the way that we've talked about, low single-digit comps for the year.

It's clearly a cut versus expectations for mid-singles, 3 months ago.

I guess, what changed?

And do you still view mid-single digits as the multiyear run rate for this business?

Well, the -- what changed, Matt, is a little bit of this pressure on the apparel front that we talked about.

I really assume that we would get a little bit further ahead of it and that's taken a quarter, and we'll have a little bit of a headwind this quarter.

Some of the timing that impact fourth quarter was some launch shifts that obviously move and expectations weren't met.

And going forward, as we work with our vendor partners, and as we look to continue to expand in the footwear business, identify opportunities on the apparel front, continue to grow the business across the geographies, focus on our strategic imperatives, I think it probably is a mid-single-digit sort of growth opportunity for us, right?

It's -- on the top line, that's where we really see the opportunity to grow.

And there's a lot of things going on when we talk about the power stores.

The work that we did up in Washington Heights.

We see a lot of excitement around that.

So figuring out how we can commercialize that a bit.

These women's spaces are great new opportunities for us.

So every time that we create an opportunity to improve the customer experience, we believe that, that's going to help us drive the top line.

Our relationships with our vendor partners are leading to great concept work that, again, we think distinguishes us in the marketplace.

While we take their best concepts, and we work to tell great stories around them, it really is how can we differentiate ourselves in the marketplace?

And I think our team is doing a great job of that.

So yes, I think on the top line, it is probably a mid-single-digit growth opportunity.

Okay, great.

And then just on the expense front, so SG&A dollars, on average, the last 2 years, have grown mid-single digits.

And I guess, maybe where do we stand on the investment bell curves as we look today?

And more so, how linear is the 5-year SG&A leverage opportunity that you laid out at the Analyst Day?

Meaning, do we see a step change next year to SG&A leverage?

Or is the multiyear opportunity more back-end loaded as we think about that 5-year opportunity?

Well, if -- you've been tracking us along.

And it sounds like you have been -- you've seen the growth in the dollars moderating, right?

So 2018, the growth looked like 7%.

In spring, it looked more like 5% to 6%, third quarter, it was 3%.

So I mean, you can see that we are getting past the big growth spikes as we continue to invest in the business for the long-term opportunity.

As we've described, the investments have looked like tech, and we needed to do some foundational work in there.

We're getting to the place where some of that foundational stuff we can call done.

We've also been investing in our associates.

They are a critical asset for us in our plans.

And so both minimum wage and health care are putting pressure on it.

That's been a bit of that, but that's all been incorporated in our guidance.

The next question comes from Paul Trussell of Deutsche Bank.

Maybe just to touch again on Matt's question around the updated comp outlook.

In the third quarter, you were able to overcome some of the apparel challenges through really strong footwear trends.

So maybe as we hone in on the updated kind of fourth quarter outlook for flat, knowing that you had this tough compare coming.

Maybe discuss just a bit more around what has changed on the footwear front in terms of perhaps different categories that you don't expect to maybe perform at the same levels that you did previously?

Paul, I guess, that I would just reference some of the timing shifts that I talked about earlier, right?

You're all aware of -- the level of YEEZY penetration from a year ago, that's been spread out a bit.

So that put a little bit more pressure, when we originally put our guidance out early in the year, we didn't know the timing of all of that.

As we think about the categories, we're seeing a nice pickup in basketball that I talked about, a lot of it driven by the casual side of it, but Signature Basketball performing well.

I guess, some of it is that when we look at a 2-year stack, we were -- 2 years, we were up really low single digits, 1.8% in the first quarter, 2-year stack, 1.3% in the second quarter.

8.6% in the third quarter, we're going to stack something on top of a 9.7% from last year.

So again, it's about the relativity of what you're up against sometimes.

And we know that we're in a comp business.

So we know that there's -- it's our responsibility to comp those numbers.

The other piece that's a little bit of an unknown is how the calendar shift is going to impact us, right?

We've got a week of greatness that shifts a week later.

There's an extra delivery day in Christmas week.

We haven't seen this calendar since 2013.

And there's been an awful lot of changes since 2013.

So I feel -- as I said earlier, Paul, I feel good about where our footwear business is.

There's always puts and takes.

We see some models in some categories, slow down a little bit.

We see others accelerate.

They don't always line up perfectly.

But I think our putting even a little bit on a 9.7% comp over a 2-year period is a great reflection on the good work that the team has done.

And then maybe if you can just touch on some of the early learnings from the FLX loyalty program, where you have that on the ladies side or in Europe.

And also curious about -- as we think about your strategic partnerships and investments that you've made, which of those are you perhaps kind of most excited about being more of a contributor as we look over the next 12 months?

Those are 2 great questions, Paul, right?

So the early learnings on FLX are 2 different books, quite honestly.

In the U.S., we're seeing an uptake that we really like from the people that were part of our VIP loyalty program, the women that were part of that program at Lady Foot Locker.

So they like what they see from a membership sort of belonging and the benefits that they have access to and the communication that we've got with them, right?

So we've seen them be more engaged with Lady Foot Locker as a brand.

We've seen them accumulate points and use them to get the benefits that are meaningful to them.

So there's been a lot of good positive news there.

And as we get ready to roll out FLX broader in the U.S., we've got many steps to go through.

We just went through a single sign-on changeover, so that you'll be able to use one sign-on across all of our apps and digital sites, which was an imperative that we had to get through before we launched full-blown in the U.S.

When I look at Europe, it's really the first time that they've had a loyalty or membership program.

So we're seeing a whole different reaction, right?

The mix of men to women is a little bit different than we expected.

The way that they spend their points, if you will, and redeem for benefits, she's more willing to wait for something that's really exceptional for her.

He wants to make sure that he spends them really quickly.

So it's like $1 sitting in his pocket that is burning a hole in this pocket.

So there are 2 different learnings, and they're coming together nicely.

We just rolled out FLX in a couple more countries in Europe, in France and the U.K. So we will have much more learning by the time we get to our fourth quarter call and as the schedule sits today, we will have just launched FLX across the U.S. So again, I think, really exciting stuff on the FLX front.

Our team is doing a great job in the way they're thinking about it and the connectivity that they've got with the consumer.

On the investment front, Paul, I'm excited about all of them honestly, right?

It goes back to the first investment that we made with Carbon38.

And Katie and the team there continue to do great work.

And we've got a number of others.

We've done a couple of really exciting creative things with D'Wayne and the PENSOLE Group to really fuel the industry going forward with new designers, Champs Sports just launched an event with PENSOLE.

We've had a number of -- from -- our most recent investment NTWRK, we've had a number of products that have launched on NTWRK.

So they all add tremendous value.

I think about Eddy and Daishin at GOAT and the great work that they're doing, we're working with them to figure out how we best make the secondary market experience more relevant for our consumer.

Rachel and her team at Rockets of Awesome have had a popup, a physical popup here in New York, where we've been able to have a small footwear section that was powered by Kids Foot Locker.

So we see tremendous opportunity there.

And Jason and the team Super Heroic, the energy and the passion that they've got around getting kids out to play is just -- it's infectious.

And so I look at all of them.

And I think that they all become part of the FLX, the environment and our total ecosystem.

They all bring excitement to our core brands.

And I think at this point, we invest in people.

We invest with people with passion and purpose, and we've got that across all of these investments.

And I think as our team continues to metabolize them and think about how they can work with them, we'll continue to see more great opportunities with these 6 investments.

The next question comes from Michael Binetti of Crédit Suisse.

Lauren, just one housekeeping on the model.

Can you help me understand SG&A, how a flat same-store sales guidance only translates to 10 basis points of SG&A in the fourth quarter?

It seems like a bit of a change in the run rate there.

So I just want to make sure I understand it, or if you would tell me if there's any puts or takes I should think about.

Yes, relatively flat top line, flat to 10 delever on the SG&A.

So you do the math on that, as I've already described, the growth in SG&A moderating.

Is there anything in -- it seems like the leverage point moves down for some reason on the spending in the fourth quarter.

Is there any call-outs there?

We're not ready to call a leverage point anything other than mid-single-digit growth in comps.

But the rate of growth in SG&A, moderating.

So we continue to do an awful lot of work on the elements to look for opportunity to improve that.

You heard in our prepared remarks that some of the digital things that we've done are beginning to pay off in that way.

We described machine learning and how that's helping us be more effective with our marketing spend.

You heard us describe the Lace Up training app for our associates, which is just a great learning tool, helping them deliver a better customer experience.

So these things, and we've talked about others in the past.

RFID, some of our automation efforts on the backside of the house.

These are the things that we're working on to improve that leverage point.

Okay, okay.

Let me, I guess, back up then and ask a bigger picture, Dick.

I would say one would listen to the combined commentary here, you spoke to Matt's question about the mid-single-digit revenue, growth rate, Lauren, you said -- you described this year as a catch-up on some investing that you felt like you needed to get in, it would -- one would tend at least those comments thinking that the pace of the business next year against the goals you laid out in the 5-year algorithm would pick up.

So I'm just -- I'm wondering if I can specifically ask about 2020.

Do you feel like next year, when we see the pace of the business start to -- obviously, you'll need to deliver some years along the next 4 years above the algorithm.

After this year, do you feel like the leverage point improves next year?

And I'm asking this in the context of consensus looking for mid-single-digit earnings growth next year versus your guidance for the long-term at about 10.

Can you describe some of your comfort with where the consensus is now based on thinking the revenue opportunity is still mid-singles, and it sounds like the leverage point should improve next year as some of the investments are in this year?

Well, we'll talk much more about our 2020 plan in our fourth quarter call.

And we talked about it in our Investor Day, Michael, that the puts and takes won't be level across the 5-year sort of time horizon.

The investments will be -- there'll be cycles of investments and then there'll be a period where we get to reap some of the benefits of that.

But we -- I think we talked about it at the Investor Day as well that the investment -- to continue to stay relevant for our consumer is going to have to continue over time.

So again, I'm not ready to comment about 2020 and consensus of where you all are at, but we will certainly get into the 2020 commentary on our fourth quarter call.

The next question comes from Jonathan Komp of Robert W. Baird.

Just wanted to maybe follow up on the apparel discussion, to understand a little better.

Dick, it sounded like maybe last quarter, you expressed some optimism about apparel directionally in the second half.

And I'm just curious if kind of the pace of some of the shifts you talked about have changed or the shifts themselves were different than you were expecting.

And just trying to get a sense of any differences versus what you saw a few months ago.

Well, the changes -- Jonathan, the changes are about what we expected.

The pace is a little bit different and our ability to catch-up is a little bit different than I anticipated at the time.

But again, I think the team is moving in the right direction.

As I mentioned to Cristina, I think, it's going to be a fairly discount-led apparel world in the fourth quarter, and our team is prepared to do what they need to do to move through the inventory, which sets us up for a 2020 sort of apparel business.

But it's not significant differences, right?

There certainly are a little bit of headwinds that we thought would have dissipated a bit.

But again, it's -- in our business, it's a hard call as to exactly when the shift is going to happen and exactly when the inventory is going to catch up.

So I'm comfortable where we're at, but we know that we've got work to do on the apparel front.

Okay, that's helpful.

And then maybe just one follow-up on the outlook in the fourth quarter.

I'm curious for any more color on how you formulated the guidance for the comps and part of that may be across channels, just given the pretty extreme difference in comparisons you'll face for stores versus the direct channel?

So any more color there would be helpful.

Well, we don't guide channel by channel.

But I think from a gut level feel, we all know how important the digital connectivity is to our consumer.

When you think about the holiday season, it certainly is one of the seasons that digital experiences accelerate.

So from the -- what's become -- what's changed from Black Friday to Black November, I guess, because the deals are all out there early.

The intensity around the Cyber Monday days and the work that can be done digitally, I think, certainly puts pressure on everybody that sells product digitally.

So I think I expect a good digital quarter, I expect good traffic in the stores, this is one of those, have to buy, sort of periods where we seem to be winning with our consumers.

Lauren mentioned the winning with consumers during back-to-school season, stepping in the holiday now is another one of those times when the consumers are out.

So we look for good business on both channels.

Again, up against a 9.7% comp from a year ago.

I think the team is well positioned to win with our consumers as they're shopping for the holiday and post-holiday with all of their gift cards.

The next question comes from Omar Saad of Evercore ISI.

Two questions.

Just wanted to ask a follow-up -- a quick follow-up on the apparel.

Is it the retro kind of big logo, big brand name types of product that you're seeing the customer shy away from?

And if that's the case, is the aesthetic moving back towards more of a performance?

So is that a possibility?

And I also wanted to ask about the North American kind of hyper-local power store strategy, the community activation, the using the localization data.

I think you have 5 that you opened last year and of course, the one in Washington Heights.

And I think from the Investor Day, you had a pretty aggressive plan over the next few years to open more of those or convert more of your locations into those power store formats.

Would love to kind of get an update on what's going on with those and what you think the opportunities are there.

Sure.

Well, on the apparel front, Omar, it really is the bigger logo stuff that's slowing down a bit.

It's going to a much cleaner sort of aesthetic on the product.

I don't know that it's more performance-based, right?

I mean, it's still very much casual led and -- but it's a cleaner aesthetic than it has been.

And that's one of the shifts that's going on in the marketplace.

When it comes to the power stores, clearly, the one that we're learning the most for or learning the most from is Washington Heights right now.

It really is community-based.

But we're seeing great results continue from Detroit and Philadelphia, where we've got strong community-based power stores as well.

So we did talk, I think in the Investor Day, we talked about the opportunity to roll these out.

We see the potential of probably 100-ish sort of communities based power stores over the 5-year period.

We're learning from each of these.

And I will tell you that we learned, when we moved to Washington Heights, about the proper spacing and sizing of our women's business, right?

We had undersized the women's business in the Detroit 8 mile store.

And I think we got it right in Washington Heights.

We feature women's and kids on the main level and men's in the activation zone are featured upstairs.

So I think in each case, we learn a lot, the local connectivity, the home-grown effort has really exploded up in Washington Heights.

Designers, local guys and gals that -- they may operate out of their garages with a very skeleton sort of crew but they have a real connectivity with the local consumer.

And we've seen some of those brands really resonate.

And we've actually tried a couple of times to push them a little bit broader in the DMA, and we're seeing some success with a couple of them as they're able to supply us products.

So each of them provides a learning opportunity.

We're not going to rush the rollout because we really believe that they have to be in the right location, and we have to have the right understanding of the community.

But we think it's a great opportunity to connect with our vendor partners to create unique experiences and most importantly, to connect with the local communities.

And the last question today will come from Sam Poser of Susquehanna.

So I guess, I want to follow up on the guidance.

I mean you mentioned, Dick, that -- in answer to one of the other questions regarding that 9.7% comp is a difficult -- the 9.7% on a stack base is a difficult comparison.

What -- can you talk to us about what exactly sort of the magnitude of what changed and from when you gave guidance in -- at the end of Q2 and today?

So the big things, I've already covered off on Sam, right?

I mean the timing of the YEEZYS has been different than we expected.

The headwinds with apparel have been a little bit more severe than I expected.

So those are really the dynamics that have changed from our earlier guidance.

And again, the 9.7% has been out there.

We've known that, obviously.

But again, as these things shift and we've had benefit of the YEEZYS earlier in the year, as the apparel has become a little bit tougher than we expected, that becomes a headwind.

Eastbay on the performance side has not performed at the level that we thought that it would.

So again, those are probably the biggest variables that have changed from earlier guidance.

And so that you didn't know exactly how many YEEZYS nor when they were going to launch when you provided the guidance at the end of Q2.

No.

Sam, launches -- as you are well aware of because you follow the industry really closely, launches move both quantities and date shift fairly dramatically at times so...

From what I understand, there's a launch tomorrow, there's a launch in mid-December and there's a new one in January.

So is this a pairs issue more than a number of launch issue?

Well, it's always a combination, Sam, right?

If you go back and look at the YEEZY launch calendar last year, we had more YEEZY launches.

We had a YEEZY launch in week 1 of November, a YEEZY launch in week 2 of November, a YEEZY launch in week 3 of November and a YEEZY launch in week 4 of November.

We had a YEEZY launch in week 2 of December, right?

We had a YEEZY launch in week 5 of December and week 4 of December.

So again, it's both.

It's launch dates, and it's always quantities that move.

So we share what we know.

We base our guidance on what we know.

But again -- right.

But my -- but I mean, apparently, you weren't -- you didn't know what you would be getting or when you would be getting it at the time.

So why did -- after being it missing, after tracking to a lower than mid-single-digit comp in the first half of the year, why did you guide that if you weren't sure what you were going to get and when you were going to get it?

And how -- what have you learned from what happened from sort of the pace of things this year as far as guidance and talking to the Street and so on?

And also, are you going to narrow the range of some of this guidance?

Because you're -- based on your guidance, it looks like your mid-single-digit EPS growth again is at the very low end of that range of mid-single digits for the full year.

The mid-single-digit EPS growth is at the very low end of this 3.5% to 6% range.

I'm not sure what your question is, Sam, sorry, right?

So what have we learned?

I mean we've learned that launches aren't comps necessarily.

We've learned that, but we've known that.

We expect that launches will fall within a range.

So again, I'm -- we share our guidance, Sam.

We share with you all what our assumptions are at the time that we provide the guidance, right?

Things do change in the industry.

I think that you know that, you've worked in the industry, you've been there around the industry a long time.

But then, wouldn't it be better to provide guidance based on current trends?

So if you're going to trend a low single-digit comp this year, could we presume that you'll probably guide low singles for next year?

Just as discretion would be the better part of valor, given that things can change the way they did towards the back half of the year, this year.

So Sam, we'll give guidance on '20 when we talk about our fourth quarter results, and I will reiterate that what we described about, now it's time for us to make a change, and we'll be changing to annual guidance.

It's the way we run the business and shifts can happen from quarter-to-quarter, as Dick has explained quite a bit of detail.

We'll be providing annual guidance.

I would like to turn the call back to Mr. Lance for closing remarks.

Okay.

Thank you for joining us today.

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

on Friday, February 28.

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

Thanks again, and Happy Thanksgiving, and goodbye.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.