Foot Locker Inc (FL) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Foot Locker's fourth-quarter and full-year 2013 financial results conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session.

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

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

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

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

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

Please note that this conference is being recorded.

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

Mr. Maurer, you may begin.

Thank you and good morning, everyone.

Welcome to Foot Locker Inc's fourth-quarter and full-year 2013 earnings conference call.

We are pleased to announce this morning record financial performance for both the quarter and the year.

In the fourth quarter, we earned net income of $121 million, or $0.81 per share, an increase of 19%, bringing our full-year earnings to $429 million, or $2.85 per share.

These full-year earnings compare to the $2.58 per share generated in 2012.

On a non-GAAP basis, we earned $0.82 per share in the fourth quarter, a 28% increase over last year's 13-week non-GAAP earnings of $0.64 per share.

For the full year on a non-GAAP basis, we achieved a 16% increase in earnings per share to $2.87 from $2.47 a year ago.

As we describe changes in quarterly or annual ratios and margins during this call, we will be referring to non-GAAP results that also exclude the extra week in 2012, since in our view, this approach provides the most useful basis of comparison.

In this morning's press release, we have included a GAAP to non-GAAP reconciliation, and in the 8-K filed this morning, there is a detailed calculation of our non-GAAP performance measurements.

Here with me this morning to provide the details are Lauren Peters, Executive Vice President and Chief Financial Officer; Dick Johnson, Executive Vice President and Chief Operating Officer; and Ken Hicks, Chairman and Chief Executive Officer.

We have a lot of ground to cover this morning, so I'll hand it right over to you, Lauren.

We sure do, John.

Thank you and let me thank all of you who have joined us this morning to cover the details of Foot Locker's 2013 results and to hear about our current view of 2014.

As noted in our press release this morning, the fourth quarter of 2013 was another strong performance by our Company, our best fourth quarter as an athletic Company.

We achieved a solid of 5.3% comparable sales gain and a 9.7% total sales gain, lifted by our comps and $70 million of sales by Runners Point Group.

The fourth-quarter sales results brought our full-year total sales to $6.5 billion, another record for us, and a 6.6% increase over last year's 52-week results of $6.1 billion.

Most of the broad trends we saw throughout the year continued in Q4.

For example, our strongest segment was our direct-to-customer business, which generated a 13% comparable sales increase.

Within that segment, Eastbay was up low single digits, CCS was down high teens, and our store banner.com sites were up, again, more than 40%.

In fact, our store banner.com sales were up more than 40% for the year overall, the second consecutive year at that level and the third consecutive year with at least a 30% increase.

Within the store segment, we produced sales gains in every region in which we operate.

In the US, our improvements were led again by our children's business, with Kids Foot Locker itself up low double digits in the quarter.

Foot Locker in the US also posted a strong result, up high single digits.

Footaction was up low singles, while Champs Sports and Lady Foot Locker were down slightly.

Internationally, our Foot Locker Asia-Pacific business had a terrific quarter, generating a low double-digit sales gain, while our businesses in Europe and Canada were up mid-single digits.

Comparable sales were positive throughout the quarter, with November up low single digits; December, the month you really want to hit the ball as far as you can, was up high single; and January was up in mid-single digits.

By category of business, footwear was the driver of our success in the quarter, with a gain in the mid-singles.

Average selling prices and unit sales were both up.

Basketball was definitely the strongest component of footwear, with many divisions posting double-digit gains.

In the US, running was down a bit, which is not too much of a surprise, given the challenging winter weather much of the country experienced in the quarter.

Internationally, where the weather was relatively mild, we had solid gains in both running and basketball.

Apparel and accessories sales were down mid-single digits.

Average selling prices were up a tick, but unit volume was down, as we continued to transition our assortment toward the more premium offering.

Dick will talk more about apparel in a few minutes.

Turning now to the rest of the income statement, our gross margin rate ticked up 10 basis points in the quarter to 32.5%.

For the full year, our gross margin rate was flat at its record high level of 32.8%.

The familiar pattern of fixed cost leverage, offset partially by a lower initial market [rate], was evident in the fourth quarter.

Unlike most of the year, however, in Q4 we did increase markdowns slightly higher than last year in order to ensure that our inventory position remained fresh heading into 2014.

We believe that strategy worked well, as inventory at year end was up just 4.5% over last year, compared to the 9.7% sales increase I mentioned at the beginning of my remarks.

Using constant currencies and excluding Runners Point, our inventory was up just 1.3%, and was actually down slightly on a per gross square foot basis.

Footwear margins improved about 20 basis points, while apparel margins fell in the quarter.

The story was much the same for the full year.

So in total, apparel penetration fell back slightly to 23.1% in 2013, and apparel margins still have yet to catch and surpass footwear margins.

We continue to believe doing so is possible, but it will clearly take time and a lot of hard work.

While we believe our margin and inventory performance was strong, it was our expense management that as CFO, I was particularly proud of.

Our SG&A rate improved 110 basis points to 20.3% in the quarter, and for the full year, we came in at a record low 20.4%, down 60 basis points from 2012's rate.

Top-line growth, coupled with diligent expense management, is a powerful combination.

I would like to thank our many team members responsible for that accomplishment for a job well done.

In Q4, our store wages, the biggest component of SG&A, declined almost 20 basis points as a percent of sales, due to both a very strong performance by our store operations teams and to various technology tools we have implemented over the last year or so in order to improve our hiring and labor scheduling processes.

We also reduced our marketing expenses compared to a year ago, although we were still able to develop some very memorable marketing campaigns, such as the All is Right campaign during the Week of Greatness, which produced more than 1 billion -- billion with a B, impressions over the course of the quarter.

It was quite remarkable.

Our depreciation and amortization came in at $36 million for the quarter, 2% of sales, and in line with our expectations.

Our tax rate came in below last year, due primarily to the ongoing effect of certain recently implemented tax planning initiatives, which received a particular boost in the fourth quarter due to a favorable development in our foreign tax position.

In fact, these initiatives should enable us to achieve a somewhat lower tax rate going forward, which I will describe a bit later when I provide our outlook for 2014.

The bottom-line was a very healthy non-GAAP net income result in the quarter of $122 million, an impressive increase of 26% over Q4 2012, and non-GAAP net income of $432 million for the full year, a solid 14% increase over last year's record performance.

On an earnings-per-share basis, we improved 28% in the quarter, from $0.64 to $0.82, with the additional increase coming from the reduction in our outstanding shares.

As noted in our press release, we repurchased almost 1.6 million shares of our common stock in the fourth quarter at a cost of $63 million.

That's brought our full-year repurchase program to 6.4 million shares at a cost of $229 million, up appreciably from the $129 million we spent in 2012.

In addition to this significant return of cash to shareholders, we also paid $118 million of dividends during 2013.

Last month, we announced that our Board had authorized a 10% increase to our current quarterly dividend rate to $0.22.

This is the fourth consecutive year with a meaningful dividend increase.

Overall in 2013, we returned $348 million of cash to shareholders in the form of dividends and share buybacks.

This amount represents more than 80% of our net income for the year.

We also finished 2013 having spent $206 million in capital to invest in a variety of store, digital, technology, and infrastructure projects.

I will let Dick cover the details of that program in a moment, but suffice it to say that even with funding all these initiatives, plus the acquisition of Runners Point, we ended the year in a strong financial position with $728 million of cash, net of balance sheet debt.

We ended the year with 3,473 stores, an increase of 138 from the beginning of the year.

Excluding Runners Point Group, our store base decreased by 55 stores, with the biggest decreases coming at Lady Foot Locker, Foot Locker in the US, and CCS, where we closed all 22 of our CCS retail stores.

The primary increases were in Kids Foot Locker and in Foot Locker Europe.

Let me now turn the call over to Dick to add more color to these strong results.

Before we get to your questions, I will jump back in to discuss our annual and quarterly expectations for 2014.

Dick?

Thank you, Lauren.

I want to start by expressing my gratitude to everyone on the team at Foot Locker for doing so much to make this past year such a success.

There were so many important contributions all around the globe, that there's just not enough time to do justice to any of them -- to all of them, but rest assured, your efforts are truly appreciated.

For the fourth quarter, I will touch on some of the key product themes that drove the business.

I started off last quarter highlighting the strength of the Jordan brand, and sure enough, that brand continued its very strong performance in all of our markets around the globe.

Jordan Retro, Classic, and Performance shoes all sold well, as did Jordan tees, fleece, shorts, and socks.

Lauren mentioned that basketball was the strongest category in Q4, and so in addition to Jordan, we drove very solid sales results in signature product.

Innovative styles of Lebron, Kobe, and KB footwear performed very well, along with Foamposites and certain other marquee player shoes.

Running was down slightly in the US, but within the category, we saw continued strength in performance running.

For example, the relatively new SpringBlade program from Adidas sold well, as did the well-established Nike Free.

Among the lifestyle running silhouettes, the Roshe Run from Nike has shown a lot of life, both in the US and in Europe.

Lauren mentioned that running was up in Europe, and in addition to the Roshe, several Air Max styles sold well.

Boots were a popular footwear choice in the quarter, especially Timberland and Nike.

This was primarily a style choice, because Timberland boots, along with accessories such as knit caps, sold in warm-weather markets in the US just as well as they did where it snowed.

Apparel sales were down a bit in the quarter.

Jordan apparel was certainly an exception, as the Hook-Up graphic and logo tees and fleece in particular sold very well.

The apparel that hooked to the marquee player shoes also sold through at good rates.

It was primarily the more lifestyle-driven apparel that posted declines.

There was a lot of pretty intense promotional competition in the mall for that customer during the quarter.

While there is definitely a place for some of the less athletic apparel in our banners, overall, we will continue to focus on a more premium, performance-based brand of assortment, which we believe is what our customers expect us to deliver.

On the accessories front, our performance sock business continues to expand, as does the backpack business, which also tilts towards the premium end of the price spectrum, with fashion hooks to the key shoes and apparel in our stores.

Turning to our 2014 capital program, we are targeting a total of approximately $220 million.

We continued to generate strong sales lifts from most of the remodel formats we began rolling out in 2013.

We have many different types of projects, with very different amounts of capital spent per project, so the lift required to justify the expenditure is also very different.

This is one of the reasons we have not given a single number in terms of the sales lift from the remodels.

But we watch carefully the financial performance of each and every project relative to our hurdle rates and make adjustments to future projects accordingly.

In 2014, we expect to continue to remodel programs in Foot Locker and Champs Sports and expect to have touched at least 20% of the domestic Foot Locker and 30% of the Champs stores by the end of the year.

The basic reformatting of the Kids Foot Lockers is already complete, but we do have a Nike Fly Zone shop in KFL that we are testing more of in 2014.

We opened two new Footaction prototype stores in 2013, and based on their initial success, we plan to expand that test in 2014.

We are also very excited about the potential for new Jordan Flight 23 shops in Footaction.

We have one prototype store now, and we believe that this type of shop in shop could provide a real lift to many of the stores in that fleet.

We have allocated capital to both SIX:02 and Lady Foot Locker in 2014.

First, for SIX:02, we are continuing to build the brand and refine our model during the current test phase.

The stores are doing well, but we need to continue reading the results, making layout and assortment adjustments, at least through the spring selling season, before finalizing our rollout strategy.

We will keep learning in order to maximize the potential of the SIX:02 banner.

For Lady Foot Locker, 2013 was a year of assortment transition, shifting out of lifestyle businesses and into fitness and performance.

We are rolling out our Bridgewater format in many of our existing Lady Foot Locker stores this year, based on successful tests.

Our Bridgewater format is essentially a smaller scale version of the Parks format.

You may recall that we have 19 Parks format stores where we have adjusted the look of the store and the assortment to be performance-oriented like SIX:02, but still with the Lady Foot Locker name above the door.

Bridgewater is the new format which we are using, which can be applied to a variety of store layouts, including some of the smaller Lady Foot Locker stores that can't accommodate the full performance apparel assortment of the larger stores.

In Champs Sports and Foot Locker, we have two different $1-billion men's businesses in the US, and ultimately, we see no reason why we can't have $1 billion women's business also.

Finally, let me touch on our European business: overall, Europe produced a mid-single-digit comparable sales gain and improved profit contribution.

As you might expect, some of those countries were stronger than others, and one of the strongest countries was Germany, where we also added significantly to our business in 2013 by acquiring the Runners Point Group.

Runners Point Group generated a small profit in Q4 and was slightly accretive for the period in 2013 that we owned the business.

We are satisfied with that initial result.

We look forward to realizing the benefits from a number of merchandising, market-segmentation, and operational improvements that we have started to make there.

With our heritage in running, Runners Point's biggest selling season is in the spring, and we haven't owned the business during that period yet.

We fully expect Runners Point Group to be profitable in 2014, and the accretion should grow over time, as we develop the business and implement strategies to improve our financial and operation performance.

I'll hand the ball off to Ken now to add his perspective on the business.

Thank you very much, Dick.

Let me echo your thanks to the entire Foot Locker team that delivered these exceptionally strong results.

During the last few years, the team has built strong momentum in our overall performance.

As a result of diligently executing the many initiatives that support our strategic priorities, we have delivered a growing number of strengths and opportunities upon which we can continue to build as we strive to reach our long-range goals.

We have substantially diversified many aspects of our business in recent years.

First, we have a very strong men's business, and now our children's business is quite robust too.

We also have a very strong solid strategy for the women's business to bring it up to the productivity level of the rest of the Company.

We recognized that we could not accomplish that goal with the layout and size of the stores and the merchandise assortments in most of our existing Lady Foot Locker fleet, so we are undergoing the major transformation of the women's business that Dick described.

Second, our position in basketball is very strong, and we have also strengthened our running and casual footwear offerings, as well as our apparel assortments.

This has given us a better merchandise balance than before.

Third, we have clearly differentiated our banners, enabling each of them to focus on a particular customer set, whether it is on the performance end of the spectrum, such as Foot Locker, Eastbay, Runners Point, and SIX:02; or the lifestyle end, such as Footaction, Sidestep, and CCS.

Meanwhile, Champs Sports is able to effectively serve customers across a broad athletic spectrum.

Fourth, we are no longer just a US-focused Company with a modest international presence; we are now a large, global Company.

Including our franchise partners, we operate well over 1,000 stores in 29 countries outside the US, and along with our international and local country digital sites, we are approaching $2 billion in international sales.

And finally, we are not just a bricks-and-mortar business.

We have a strong, fast-growing collection of digital sites, both in the US and abroad, and we've grown our digital sales to be more than 10% of our total sales.

All of these strengths have provided us with an exciting number of opportunities to drive our business forward in the coming years.

Fortunately, some of these opportunities are having an impact now, and we expect that they will continue to do so over the relatively near term, which I define as the next -- into the next year.

These include first, our children's business, across not just Kids Foot Locker where sales increased at a mid-teen pace in 2013, but across all of our banners, channels, and geographies.

Second, growth in Europe, where we have seen recovery in most of our markets and where Germany, given the Runners Point acquisition, is now our largest market.

In the near term, we'll focus on customer segmentation inside Germany and expansion of the Foot Locker banner in markets where we believe we are underpenetrated.

Third, improvements in our running and apparel business, both of these categories are strong but growth slowed in 2013.

Looking ahead, we have a promising pipeline of premium running products from many vendors, including Nike, Adidas, Asics, Under Armour, Mizuno, New Balance, and Puma.

Fourth, continued expansion of specialized presentations in our stores and partnership with our vendors; with Nike, these include the House of Hoops, Yardline, Kids Fly Zone, and Jordan Flight 23 shops.

With Adidas, we have the Adi collective and original shops, and we recently opened our first two Puma Performance Labs.

Fifth, we will continue to enhance the connectivity between our store banners and our banner e-commerce sites.

We are stepping up our investment to make the sites more engaging, entertaining, and shopper-friendly.

Finally, we used technology to improve our customer service, inventory effectiveness, and productivity of our sales associates.

In the intermediate term of, say, 2 to 3 years, we have additional opportunities to build on our momentum.

Examples include the cumulative sales lift of our store remodel programs as we start to hit critical mass; the potential expansion of the Runners Point and sidestep banners outside their current markets; investing in technology, the most prominent example of which is the new merchandise allocation system we intend to rollout later this year; and the development of a more meaningful team sales and services business.

And Dick spoke about what is perhaps our biggest single, long-term opportunity, the women's business.

Between the promising SIX:02 banner and the merchandise assortment changes we are making to Lady Foot Locker, we believe we can create a large, profitable women's business.

That's a lot of opportunities to seize upon, and not all of them will develop exactly how and when we have envisioned.

But the breath of promising growth and profit opportunities I've just listed make for a very exciting future for Foot Locker, not just of this year, but I believe for many years to come.

Now, before we get to your questions, let me hand the call back to Lauren to talk more about the specifics of how we are planning 2014 and all the news that you've been waiting to hear.

Lauren?

Thank you, Ken.

As you mentioned in the press release this morning, we are planning for a mid-single-digit comparable sales gain and a double-digit percentage EPS increase during 2014.

Many of the themes from 2013 we expect to carry over into 2014, with one notable exception, which is that thankfully, that we don't have to worry about significant quarterly sales shift caused by that extra week in 2012.

So in fact, we are planning for mid-single-digit comp sales gains in each quarter.

Until July, remember, we will have incremental sales from Runners Point Group, at which point their sales and expenses will be in both periods.

RPG sales will be in our consolidated comp numbers starting in October.

On the gross margin front, we expect to experience some ongoing initial markup pressure, but we believe we can continue to improve our mark-down rates to hold merchandise margin relatively steady in 2014.

And we should pick up leverage of our fixed costs to generate an overall gross margin gain of about 30 to 50 basis points.

We should also lever the six elements of SG&A to produce a 20- to 30-basis-point improvement in our SG&A expense rate.

What we are currently planning for depreciation and amortization expense to increase to a range of $145 million to $150 million this year.

Our interest expense we see being flat with last year at around $5 million.

Meanwhile, as I alluded to before, our tax team has done a terrific job implementing various tax-planning initiatives, and going forward into 2014, we are now expecting a 36.5% effective tax rate, down from our prior expectation of 37%.

We are planning for a $220-million capital expenditure program in 2014.

We're anticipating about 60 new stores and will likely close about 100.

We'll spend about the same amount this year on store remodels.

At about 300, the number of projects in 2014 will be close to the number that the team executed last year.

The balance of the capital program will be spent on our technology initiatives, our digital sites, our logistics and other facilities, and our regular store maintenance requirements.

We have $371 million left on our share repurchase program, which, as you have seen, we were active in executing during the course of 2013.

We expect the share count to continue decreasing as we execute this program.

We intend to be disciplined with our inventory growth in 2014, with a goal of ensuring that inventory increases at no more than half the rate of sales growth.

That inventory discipline has served us and the entire industry well in recent years.

It also set us up for a solid start to 2014, and in fact, our comparable sales are up low double digits so far in the first quarter through yesterday.

That said, there's still a long, long way to go in the quarter and the year, so we're going to stay focused on executing our initiatives.

In a meeting earlier this week, Ken said something about it being good to score a touchdown on the first possession of the game.

It's certainly better than snapping the ball into the end zone for a safety, but it doesn't mean you are going to win the game if the team doesn't keep playing it's best.

So with that bit of good news, let's get to your questions now.

And John has just informed me that we have so many people in the queue to ask questions that we may not be able to get to everyone on this call.

If you will all keep to just to one question each, we will get to as many of you as we can.

Operator?

Thank you.

(Operator Instructions)

Michael Binetti, UBS.

Hello.

Good morning, guys.

Congratulations on a great quarter.

Thank you, Michael.

Lauren, one quick question: could you clarify the merchandise margins versus the buying occupancy in the fourth quarter for us?

I apologize if I missed that in the comments.

Yes.

We picked up in the fourth quarter 10 basis points improvement, so we got some leverage out of the occupancy.

We [gave it back] in merchandise margins, net to that 10 improvement.

That's based on the 13-week to 13-week comparison.

Okay.

You're not breaking out both components though?

No.

Okay.

And can we back up a minute and chat a little bit about Champs.

I think that you said the comps at Champs were negative in the quarter; I think they were as well in the third quarter.

I know that that's been a focus of the remodeling program, and I think the stores come out of the comp base as a remodel, so perhaps that's what it is.

But if you could give us a little bit of the components behind what you're seeing at Champs, and the trajectory for that chain here this year?

Thank you.

Yes, the stores don't come out of the comp mix when we remodel them; they stay in.

But one of the things that we talked about with the apparel being down slightly in the quarter.

And you know that Champs has a great licensed product business.

And the teams that we had in the playoffs, both professionally and in the college ranks, were not the same level -- not at the same level of sales as the prior.

So you combine that with a few late remodels, and I think that explains.

We believe that by the end of 2014, we will have touched of 30% of the chain.

So we think that we will be at critical mass there with the remodels on the Champs fleet.

Do you -- can I ask you, do expect the Champs business to be positive in 2014?

Yes.

Thank you.

Have a great day.

Thank you, Michael.

Robbie Ohmes, Bank of America.

Hello.

Good morning, everybody.

Hi Robbie.

A couple questions, the first one is on the comp momentum you are seeing now quarter to date.

Could you talk about what may -- what is driving that?

And then the confidence in maintaining mid-single-digit comps through 2014.

Ken or Dick, could you talk about the spring pipeline, key exclusives that you may have?

And then the what's the apparel or approach or assumption in maintaining those mid-single-digit comps?

And then I have a follow-up.

Thank you.

Yes.

February obviously, is an important basketball month, so we feel good about where February ended, obviously, and where we are quarter to date.

We think the pipeline, as Ken mentioned in his comments, from a running perspective, we've got great running silhouettes coming from many vendors, along with great basketball performance product.

And we have extended the basketball season certainly beyond the traditional season, so we're fairly optimistic.

On the apparel front, obviously, we continue to make changes to a more performance-based assortment in many of our banners.

We see great opportunities with Under Armour apparel and with Nike apparel, so I think that we've got a pretty good confidence level, Robbie, that the mid single-digit number is achievable.

And the other question I had was on Europe.

Could you remind us roughly where the operating margin in Europe has been?

And where do you think you could take it to over the next couple of years, if you are successful with Runners Point and some of the initiatives you have going on over there?

The operating margins have improved both in the US and internationally.

And we think that we still have a [pine] opportunity in both.

It's a bit less promotional environment in Europe, so that certainly helps.

But remember that we've been adding stores in -- out of Europe, so you don't get the full flow-through that you do when you are just talking about comps.

Great.

Thank you very much.

Thank you, Robbie.

Chris Svezia, Susquehanna Financial.

Good morning, everyone.

Great job on the quarter.

Thank you.

Sure.

One of my big question is when you say -- I know you are not going to update your long-term targets, but if you back into some of the assumptions here, you're going to be pretty close to your 11% EBIT margin in 2014.

Any thoughts about really where you think this business can go to and any thoughts about how we should think about that as we move forward?

Obviously, it seems like there is opportunity for that to go higher, some thoughts around that.

Yes, Chris.

We do believe, based upon what I've talked about a number of times, the continued leverage that we get with productivity.

And I think one of the things that I'm proudest of that we've done is to increase the productivity of all of our assets, our real estate, our people, and our inventory.

We think that, as we continue to get things right in apparel, and continue to improve there and develop a stronger business there, continue to improve in women's and develop that business, we are seeing -- we're putting shoots on the new formats that we talked about, plus the women's business and the other banners improving there.

And the new allocation system that we are putting in, all will help us continue to drive the overall profitability.

And obviously, it's not -- it can't be infinite, but we think we still have upside there.

Okay.

Thank you.

And then on the apparel, I'm curious, any color between private label and the branded side?

And as you think about 2014, do you think there's opportunity to actually comp positive in apparel, as you think about the product pipeline and what you are doing?

Yes.

We definitely believe that we can improve our apparel business.

We continue to, on our private label, hold down the commodity elements and build ideas.

We've got a women's brand that's doing well called Actra.

We've got a brand in Europe called Sneaker Freak that's doing well.

So our Champs Sports gear has done well.

So we've got the ability to develop a better element in our private label.

The transition is a bit of a challenge, as you pull something down and build something up.

You can pull down faster than you can build up.

We also believe that the continued development of the premium apparel and how we show that and what we show is becoming more important, so our plans for this year are positive apparel.

Okay.

Sounds great.

All the best to you guys in 2014.

Thank you.

Thank you, Chris.

Kate McShane, Citi Research.

Good morning.

My question is on Runners Point; you mentioned that it came in at a slight profit during the quarter.

Do you have an ultimate goal for the profitability of that banner?

I wouldn't see why it couldn't run the [profits] that we do in the rest of our European business.

And is there any -- I know you have been very happy with their e-commerce platform; is there any chance that it could be more profitable because of that?

That's one of the reasons why, we, Kate, why we think it could be more profitable.

They've got the strong Tredex business, but they are slightly different model.

They have a smaller store.

They replenish more frequently.

And we actually think there's some things that we can learn, because we have smaller stores in Europe than we do in the states, from them on some of those supply-chain elements, as well as they can learn from us on things like the allocation and distribution of products.

So we believe that there is an opportunity for continued profitability improvement and, as Lauren said, there's not a governor on it that would say it couldn't get to the level of the rest of the Company.

They were a profitable Company when we bought them.

But as we work and continue to leverage both the corporate office that we have there, plus the real estate and inventory and people, we feel very good about Runners Point.

Thank you.

Thank you, Kate.

Sam Poser, Sterne Agee.

Good morning.

Thank you for taking my question.

More questions about the store remodels.

Can you give us on the -- clearly you've got some significant lift over on kids.

Can you talk to me about with Champs, the differential between the overall under-performance and those particular stores that have been done in the quarter or last year?

Because you did -- you were a net little negative there -- were the re-dos up?

Yes, the remodels are up.

We don't really break the chain apart and see them in detail.

But as I said in my comments, we monitor all the performance of all the remodeled stores and they all meet our hurdles.

We make adjustments along the way.

So I think getting to critical mass with the Champs stores, having 30% of them remodeled by the end of the year, will all play positive in the Champs business.

We wouldn't be going forward with them, Sam, if they weren't performing well and performing better.

And obviously, one of the things that it does, it allows us to better show the apparel, which is a stronger business with them, with the shoes.

And so, we've gotten good reaction from the customers on the new format.

Thank you.

And then real quick on a follow-up --

One other thing to keep in mind -- the kids -- and about remodels, the kids stores were probably the easiest and most straightforward, and almost all of our kids' stores have been reconfigured.

They're not really a remodel, but reconfigured.

So one of the things that has helped the kids' business is that we've had that reconfiguring in all the chain, and the others are -- it's more of a process than it was in kids.

Thank you.

And then real quick on Runners Point Group, could you talk about what kind of accretion that you think you'll get this year from it?

And how you think -- what kind of accretion you are going to get from it and what kind of sales growth you are going to get from it as well?

As you know, we don't break out the divisions individually, but we do feel good about what Runners Point will contribute this year, as Dick mentioned, spring is with our running [depth].

It's very important to that.

Thank you, guys, very much and good luck.

Okay.

Thank you, Sam.

Matthew Boss, JPMorgan.

Congratulations on the nice quarter, and especially quarter to date in this environment.

Can you talk about -- no problem.

Can you talk about the business intelligence system, the localization initiative, and how this -- when this is rolling out and the opportunity here over a multi-year period?

Yes.

We've got BI in place right now, and I think that our merchants are doing a great job of understanding the market basket, what is being sold together, how the transactions are being put together in the stores.

So that's something that, from a localization point of view, we are already doing and working on.

I think Ken and Lauren and I have all mentioned the merchandise allocation system, which is a much more detailed, much more in depth process and initiative, that we'll test this year.

And we'll be in a position, hopefully, to roll out completely in 2015.

The advantage that that gives us, quite frankly, is it will allow us to better utilize the BI information that we have.

Right now, we're getting BI information, and we're inputting in our current systems, but we feel the new allocation system will allow us to better utilize the localized information in terms of products, sizes, quantities, things like that.

It will really help us take assortment planning to the next level, and of course, because that's a planning impact that that bears fruit go forward.

Great.

We're excited about BI that it really -- that information has legs beyond product, and so we are starting to see how it might be used to help us with operations and some other things.

Great.

And then can you touch on what the basis for the acceleration quarter to date?

And do you think there's some pent-up demand on the running side, given the weather that we have had, as we head into the spring here?

Well, we certainly -- basketball is a big deal in February with the All-Star game and all of the events and the launches that happen in February.

So that has certainly been one of the things that'd driven the quarter.

And a general belief in the US is, yes, there is probably some pent-up demand on the running side.

But again, remember, as Ken mentioned, we are a stronger global business at this point.

And the winter has not been as difficult in many of the markets in Europe, so our running business was actually up in Europe for the quarter.

So in the US, I would say, yes, we see some pent-up demand and believe that there will be some -- when winter breaks, and it will inevitably break, we see some good things.

Congratulations.

Best of luck.

Okay.

Thank you, Matthew.

Matthew McClintock Barclays.

Hello.

Good morning, and congratulations to the entire Foot Locker team for a great quarter.

Thank you, Matt.

I was actually wondering if you could update us on your thoughts about expansion, net expansion, this year looks like it will be another year of net store closures.

And as you think about the comments earlier on maybe taking Runners Point Group outside of its core markets, how do we think about that longer-term in general.

Thank you.

Well, one of the things -- it's a little deceptive in terms of expansion, because when you look at expansion, as we are closing some of our less productive stores, one of the things that we're doing is we're adding to.

We've got now well over 100 [House of Hoops] that make our stores bigger, things like adding the collective, or the Puma Labs or the Kids Fly Zone.

Those are where we are taking more square footage, but cutting down on the number of locations and helping our overall productivity, both in terms of space.

So I think -- several years ago, I was thinking, okay, you have got to grow stores.

We have a couple of things going on, both in terms -- first in terms of the overall productivity that we are able to drive out of one location.

The second is the addition, which causes larger stores with regard to the new concepts that we are putting in the stores.

And the third is the growth of dot-com, and the ability for that to help to make us more productive, not only online, but in our stores.

So I think what we're going to see is a holding pattern around a level of stores, but a much more productive.

We finished the year at $460 a foot; two, four years ago, we were doing $320 a foot.

So that's over in three, four years, one-third improvement in the productivity.

With regard to Runners Point, we want to get to know that business a little bit better, but we believe that, based upon the success that we've had with them, based upon some testing we're doing by focusing their formats, we have the ability to expand the Runners Point stores and the Sidestep stores into other markets.

And the interesting thing about that is there is some markets, Italy for example, that probably would be more receptive of Sidestep, and there are other markets, such as Scandinavia or Holland, that would be more receptive of Runners Point.

You don't see that many Italians out running a lot, but they do want to look good.

And so we think that -- and that's why we put it in that -- the mid-timeframe as an opportunity that we can start expanding those chains into other markets than just greater Germany.

I appreciate the color, Ken.

Okay.

Thank you, Matt.

Eric Tracy, Janney Capital Markets.

Hello guys.

Good morning.

I'll add my congratulations on great execution.

Thank you, Eric.

If I could, on the digital business, Ken, now greater than 10% of the mix.

If you could update us again on strategy?

Is there an optimal side to that business that you are thinking about?

Clearly we saw somewhat of an inflection this holiday season in retail in general in terms of migration to online.

Really, an update there from a banner perspective and the opportunities that you have going forward.

Yes.

Our -- first of all, I think this last holiday was a little deceptive, because three weekends in a row before Christmas where you have a big chunk of the country cut off from shopping has an impact, plus the industry didn't help itself with the miss deliveries.

That said, it's going to continue to grow, and we are prepared for it.

And we are doing a number of things.

One, we are updating our sites and what's on our sites and how they work.

We've really, I think when you look at some of the new sites, you look at the new SIX:02 site, you look at our new Footaction site, they are different and they behave differently than each other.

We show more hookups and outfits on the Footaction side.

You can go to SIX:02 and do intelligent search.

So we continue to update and upgrade that.

We're looking at how we can bring more of that to the store and connect it to the store.

We've added buy online/ship to store, buy online/ purchase, pick up in store.

You can order in the store something that they don't have in their inventory and have it shipped to you.

So we've got a whole bunch of things that we are doing to connect the stores and the Internet.

We are looking at things that we can do to connect even more, and we're going to test something.

We're not ready to announce it yet, but we're looking at a new idea that we'll test sometime hopefully this summer.

But there is a significant opportunity to continue to grow and develop the dot-com business, and not necessarily at the expense of the store if we put them together, because the most used sites on our websites happen to be store connected; store locator, inventory, things like that.

And we are going to make sure that we are able to give our associates something so they are better connected.

We are using hand-held devices and all-in-one devices in the store, so we're using technology as an opportunity.

It will grow.

What the peak is, as I told everybody, you set a goal of 10%.

Now the 10%, by the way, is the banner.com, and we're not there yet.

We did have a banner past the 10%, but we've got to get all the banners up over it, and as we do here, and was alluded to earlier, when we get that goal, we'll set a new one and we'll move beyond.

I think there is some limit.

What that limit is, is it 20%?

Is it 30%?

Is it 40%?

I don't know yet, but --

The customer will tell us.

The customer will tell us, because we are going to be able to grow both ways.

What we want to do is give the customer the product the way they want it.

That's perfect, thank you.

And real quick for Lauren, as we think about the gross margin next year, leverage on occupancy but maybe still a little bit maintained on that IMU.

As we think about that relative to opportunities to mix up price, and I know there's certain segments of the business that are perhaps dragging on that, but we also know -- Nike in particular is starting to test and push some pricing, particularly within basketball.

So is there an opportunity there, as you think about the pipeline for the year, and some opportunity for upside on that IMU, if in fact, you take some pricing?

Yes.

I think we continue to work with the merchants and try to figure out where the price sensitivity is.

There's a lot of categories where there may be a little bit of upside, but we continue to face some pressures.

And I think that I don't see it being significantly different in 2014 than it was in 2013.

Okay.

Great.

I appreciate it, guys.

Best of luck.

That is really why we stay very focused on what are our other opportunities to improve that merchandise margin, and there are other things that we can do.

We work internally and very collaboratively with our vendors on figuring out how to flow the product better, and the allocation system is going to help us make sure that we've got it right place, right time.

All of those things come together to help us do more business at full price, and that gives us some room there on that margin.

Yes.

We believe, and we work closely with our vendors to make sure that we get the best IMU and margin possible, but our focus is not -- we're not like the United Nations.

Our focus isn't based upon negotiating with other people.

Our focus is on what we can do.

We will negotiate with the vendors to try to get as much as we can, and they work with us because they want us to be strong too.

But at the same time, we are going to focus on what we can do.

And so that's why the things you hear us talk about and the numbers you hear us talk about are what we believe we can do.

That's really helpful.

Thank you, guys.

I appreciate it.

Thank you, Eric.

Seth Sigman, Credit Suisse.

Okay.

Thank you.

If I could follow up on the remodel work that you guys have done, it sounds like you are pleased with the improvement in sales that you are seeing in some of these stores.

I'm trying to dig in a little bit further where that improvement is actually coming from.

Do have a sense of -- are you getting better traffic in those locations, maybe some incremental customers?

Or are you seeing better conversion, more attachments with the apparel assortment?

Just trying to get a better picture of what is going on there.

All of the above.

I think when we remodel a store, it adds some excitement to the mall, so we see traffic come up.

I think the ability to hook up and show through adjacent product the footwear and apparel hooks or accessory hooks has improved in all of the formats that we are rolling out.

And I think that that ability to hook up changes our conversion in those stores.

So I think that all of those levers work, and I think the reasons that we've gone through the remodels are to do just that, to increase the flow of traffic to make the [floor] more productive, to allow us to convert and hook up with a bigger basket going out the door.

One of the things that happens in retailers is, sometimes -- you say, well I want to change the format and do something.

And normally in my life when the retailer does that it's nice, but you don't see the impact.

I give Dick and his team a lot of credit, because we are seeing the impact from these remodels.

And they -- as we said, we've got criteria.

They are meeting and exceeding the criteria, so it's a good thing.

Okay.

Got it.

And it sounds like apparel is a big piece there.

Is there any way to quantify the apparel penetration in those stores versus the non-remodeled stores or the Company average, something along those lines?

Yes.

There is.

But we don't disclose it.

It's going to continue to grow.

We monitor it very closely and we're prepared for it.

(multiple speakers)

Okay.

Got it.

If you look at the stores, one of the things that stands out more is that we got a better balance between apparel and footwear.

Sure.

One other driver that you mentioned was the development of a more meaningful team sales and service business.

Yes.

Haven't really talked about that much recently.

Where is that business today?

What's the opportunity there?

We -- it's a $2 billion business.

All the players are pretty small.

We had significant growth with the business this past year.

We see the opportunity.

We're in 11 states, and we're going to continue to build those 11.

We're going to continue to slowly add more.

We're going to figure out how we can better hook the Eastbay and team sales, so I feel very good about it.

This business should be well over $100 million business, and that's what we're working towards.

We're professionalizing something that is kind of not very professional out there, but it's a big business.

All right.

Thank you for the color.

Okay.

Thank you, Seth.

Paul Trussell, Deutsche Bank.

Good morning, guys.

Hi, Paul.

I wanted to go back to the conversation around the women's business; $1 billion is a big number.

If you can drill down a little bit more on what we should expect from the SIX:02 format as you continue to test that this year.

What we think about how to drive growth in Lady Foot Locker long term, and is there any other avenues to reach that target outside of these two formats?

Well, we have three elements in our women's business.

First is the Lady Foot Locker, which is our biggest direct women's business.

And the thing that we know is apparel is a more important part, and we are through the new Bridgewater format, which is basically a less-expensive version of Parks.

We are able to get a nice pickup with the apparel by putting more apparel in, what the assortment is, and we feel very good about where we are with that.

And we will roll that out -- we are starting to roll that out this year, and we will have a number of stores that we'll be putting in place.

The second part of it is SIX:02.

We are pleased with where we are in SIX:02, but we know we still -- there's still some tweaks and improvements, so we have modifying the stores we have.

We've got a few more stores we're going to be opening up this year, and we would hope by the end of this year, we'll have a pretty good feel.

And that's something that we can move on and rollout.

And then the third element are the women's shoes and all of our other banners, and that is a sizable business.

And we are better defining what Foot Locker women's is, what Champs Sports women's is.

And as we do that between our female banners, which are very performance-driven; Foot Locker, which will be more fashion; Champs, which will be a mix of fashion and performance.

We'll have a very strong business, and it's a $40-billion plus business at our level.

I'm not including the discount level, $40-billion plus business.

There's not a player that really has the heart and mind of that women.

We are going to work to do that, and we've got a team, I think, that's dedicated to that.

And we are pushing on it pretty hard.

We've got women's opportunities around the globe, as well, with a lot of women's shoes in Europe, Canada, Australia, New Zealand.

And when you think about Runners Point, half of the people are runner women.

So again, great assortment opportunities around the globe, as well as in the US.

Good call.

And a quick follow-up, since you're mentioning those other countries.

Dick, there's been no conversation about further international expansion.

Obviously, I understand you have -- RPG still hasn't even been a year yet, and you can roll out that format into other countries.

But is there any thought process about further global expansion, particularly, some of the bigger emerging market countries out there like Brazil and China?

Thank you.

We constantly look and evaluate and determine where we think -- if we could develop a meaningful and profitable business.

I think that talking to people in our business, they've said the last year, who would have thought our two most developing countries are North America and Western Europe?

Some of the developing countries are having some significant challenges now, and we will evaluate and look and see when the right time is.

But right now, we've got tremendous opportunities where we are.

And we [insist on] meeting our hurdle rates no matter where they are in [the globe].

We have to be confident that we'll do that.

Okay.

Thank you, Paul.

Taposh Bari, Goldman Sachs.

Hello.

Good morning.

Great year.

Thank you.

I wanted to dig more into this disparity between running and basketball.

I get that the weather is, obviously, unfavorable for running, but what percentage of your customer is actually using this product for end use?

And the reason why I'm asking is there's obviously a very easy excuse for the running business, but is it really all weather?

Is there an ASP thing going on there?

Is fashion playing a role?

No.

Let's face it, the majority of our shoes are not used for performance.

But we had -- there's some been tremendous development between Kobe's KBs, Lebron's, Jordan, that have really helped basketball.

We are seeing this spring a plethora of running that will help running.

So there's new product.

You've got the new BOOST.

You got new Flies coming out.

You've got the new shoes from Under Armour.

There's a lot of new product coming, that I feel will help running.

So yes, the weather did have an impact, but it was the newness.

There's some fashion.

In fact, you look at some of the basketball shoes, they have a tendency to look more like running shoes.

But I think that the new idea is, yes, I am looking at some shoes here, some KDs that John is wearing, that look like running shoes.

But what I think is that this will balance out, and we sell -- through all of our channels, we sell as many running shoes as anybody else out there.

In fact, we've got a stronger position with some great brands, and we will continue to be a leader there.

And what about this idea, I know that Women's Wear Daily article a couple weeks ago about white shoes making a comeback.

I think, Dick, you are actually quoted in that article.

Is that a big deal or is that small, and what does it actually mean for your business?

Well, quick, casual, white-on-white, black-on-black shoes are -- they are always a base business.

They ebb and flow, and when you look at things like Air Force Ones, classic, clean K-Swiss shoes, they have their moments.

And right now it feels like we're going into one of those moments.

So as Ken talks about the legs on our stool, one of those legs is casual footwear.

And certainly the clean white plays into that casual footwear line.

Okay.

Great.

All the best.

Okay.

Thank you, Taposh.

We have time for one more question.

Absolutely.

Bernard Sosnick, Gilford Securities.

Yes.

Thank you very much, and my congratulations as well.

Thank you, Bernie.

Ken, with regard to the banners and digital, could you go over a little bit of the experience in developing those banners digitally, because that was a little bit late in coming relative to the digital cycle.

How far along are you?

You said you've made major differentiations among banners.

What can we expect over the next few years?

Well, first of all, we really didn't get into the digital business -- push the digital banners until a couple of years ago.

We were focused on Eastbay.

And [Dow] and his team, I think are doing a much better job balancing that, still pushing Eastbay, but also developing the digital banners.

And when you look at Foot Locker.com, ChampsSports.com and connecting them with the stores.

So we now are much more coordinated in what we do with the stores and dot-com.

It used to be if they had the same shoe up, go buy a lottery ticket that day because that was pure luck.

Now they are talking constantly.

I've talked about the connection with buy online/ ship to store, buy online/purchase in store, the inventory lookup, the using our stock locator.

So the connection and giving -- I was just down at our team [weeks] for both the Foot Locker and Champs, and the field leadership there -- and they were talking about, do you know how many shoes you have in your inventory in your store?

And they would say, we'll I have got X. You have got 250,000 SKUs.

And they said wow, I didn't -- because you have got that stock locator, and we are seeing much more of that.

We have updated a couple of the sites.

We have more to update.

We will continue to improve and adapt.

We will continue to put more technology in the store.

So I would say we are still in the early innings.

I feel that we're as far along as anybody else is.

We probably don't toot our horn as much as other people, but we are as strong as I think anybody is out there in the capability that is meaningful and important to the customer.

Thank you very much, and a wonderful job.

Congratulations on what you have accomplished.

Thank you, Bernie and thank you, everybody, for the call.

Yes.

Thank you for participating on the call today.

We look forward to giving you an update on our next call, which is tentatively scheduled for May 23rd.

Thank you very much.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.