Foot Locker (FL) Earnings Report: Q1 2016 Conference Call ...

C ompany Name: Fo o t Lo c ke r Inc C ompany Ticker: FL Sector: Co ns ume r Go o ds Industry: Co ns ume r No n-Dur able s

Event Description: Q1 20 16 Ear nings Call Market C ap as of Event Date: 7.77B Price as of Event Date: 55.18

Foot Locker (FL) Earnings Report: Q1 2016 Conference Call Transcript

The following Foot Locker conference call took place on May 16, 2016, 08:00 AM ET. This is a transcript of that earnings call:

Co mpany Par t ic ipant s

John Maurer; Foot Locker, Inc.; VP, Treasurer, IR Lauren Peters; Foot Locker, Inc.; EVP, C FO Dick Johnson; Foot Locker, Inc.; President, C EO

Ot he r Par t ic ipant s

C hristopher Svezia; Susquehanna Financial Group; Analyst C amilo Lyon; C anaccord Genuity; Analyst Michael Binetti; UBS; Analyst Kate McShane; C itigroup; Analyst Matthew Boss; JP Morgan; Analyst Jay Sole; Morgan Stanley; Analyst C hristof Fischer; Piper Jeffrey; Analyst Robbie O hmes; BoA Merrill Lynch; Analyst Kate McShane; C itigroup; Analyst Tom Nikki; Wells Fargo; Analyst Scott Krasik; Buckingham Research; Analyst Sam Poser; Sterne, Agee & Leach; Analyst Paul Trussell; Deutsche Bank Research; Analyst

MANAGEMENT DISC USSIO N SEC TIO N

Ope r at o r :

Good morning, ladies and gentlemen, and welcome to Foot Locker's first quarter financial results for 2016 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a questionand-answer session.

This conference call may contain forward-looking statements that reflect Management's current views for future events and financial performance. These forward-looking statements are based on many assumptions and factors, including the effects of currency fluctuations, customer preferences, economic and market conditions worldwide, and other risks and uncertainties described in the C ompany's press release and SEC filings. We refer you to Foot Locker Incorporated's most recently filed Form 10-K or Form 10-Q for a compete description of these factors. Any changes in such assumptions or factors could produce significantly different results, and actual results may differ materially from those contained in the forward-looking statements.

If you have not received today's release, it is available on the Internet at , or FootLocker-. Please note that this conference is being recorded. I will now turn the call over to John Maurer, Vice President, Treasurer and Investor Relations. Mr. Maurer, you may begin.

Jo hn Maur e r (VP, Treasurer, IR):

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C ompany Name: Fo o t Lo c ke r Inc C ompany Ticker: FL Sector: Co ns ume r Go o ds Industry: Co ns ume r No n-Dur able s

Event Description: Q1 20 16 Ear nings Call Market C ap as of Event Date: 7.77B Price as of Event Date: 55.18

Thank you, C arlo, and good morning everyone, and welcome to Foot Locker Inc's earnings conference call for the first quarter of 2016. Thank you for joining us today for the first earnings call from our brand new offices at 330 West 34th Street. It's been an exciting transition the last few weeks.

We reported this morning in the press release that the C ompany achieved record net income of $191 million in the quarter, up from $184 million in the first quarter last year. O n a first year basis, Foot Locker earned $1.39 this year, an 8% increase compared to the $1.29 earned in the same period in 2015. It was the highest quarterly net income and EPS result in the C ompany's history. A significant achievement, especially in today's challenging retail environment. We achieved a comparable sales gain of 2.9% in the q u a rte r.

Although this result was a shade below the range of our expectation going into the quarter for a midsingle digit increase, these sales and profits do represent the 25th consecutive quarter of meaningful growth for Foot Locker.

In order to leave as much time as possible for your questions, let me hand the call straight away to Lauren Peters, Executive Vice President and C hief Financial O fficer, to review the results of the quarter in more detail. She'll be followed by Dick Johnson, President and C hief Executive O fficer and newly elected C hairman of the Board, to provide product and trend highlights.

L a u re n ?

Laur e n Pe t e r s (EVP, C FO ):

Thank you, John. Good morning to all of you. The first quarter was our best ever, so we are definitely proud of a very strong result the team produced. That said, we had set the bar even higher than we achieved. So let's dig into what went well and where we fell a bit short.

First, the cadence of our comparable sales were fairly steady during the quarter with a gain landing, as expected, in the mid single-digit range in February while it was up low single digits in Match and April, short of our mid single digit planned gain.

The strong diversity of our assortments and the leadership positions we have in many product categories, enabled us to post that 2.9% comp gain despite basketball footwear being down single-digits. In fact, total company footwear comps were up mid-single digits in the quarter, with strength and lifestyle running and classic styles more than offsetting the decline in basketball shoe sales. Apparel posted a low single-digit gain while accessories were down high single digits, primarily the result of the challenging trends in socks.

Proving that with the right product, basketball still performed very well. O ur strongest division this quarter was Foot Locker C anada with comparable sales gain in the high teens. This result was fueled by a strong double-digit gain in basketball footwear. Although the gain was initially propelled by the All-Star game in Toronto this year, C anada's strong double-digit performance with sustained throughout the quarter and there were meaningful sales gains across the country, not just in Toronto. O ur next strongest store division was Foot Locker Hero, which turned in a high single-digit comparable sales on top of last year's double-digit gain.

O n the other side of the ledger, Runners Point and Sidestep continued to face assortment challenges, with sales in both banners down double-digit from a year ago.

To round out our international division, Foot Locker Asia-Pacific continued its high level of performance, turning in a strong, mid single-digit sales gain on top of last year's gain in the teens.

Turning to our US store divisions, C hance Sports lead the way with a mid single digit comparable sales

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C ompany Name: Fo o t Lo c ke r Inc C ompany Ticker: FL Sector: Co ns ume r Go o ds Industry: Co ns ume r No n-Dur able s

Event Description: Q1 20 16 Ear nings Call Market C ap as of Event Date: 7.77B Price as of Event Date: 55.18

increase. Foot Locker, Kids Foot Locker, and our women's division, Lady Foot Locker 602, were each up low single digits, but action posted a comp loss in the high single digits. There were two primary elements of Foot Action's under performance in the quarter. First, it has a relatively high penetration of basketball compared to other banners. And second, it doesn't offer women's footwear, which has been quite a strong contributor to our other banners recently. In fact, for the quarter, women's comparable footwear sales were up single-digits while our sales of kid's footwear across the banners that sell children's products was even stronger - up high single digits. Sales of men's footwear were down slightly.

A direct to customer segment turned in a solid performance with an overall comparable sales gain of 7.3%. Sales of our store banner dot com businesses, including both domestic and international banners, increased to more than 20% on top of last year's almost 40% increase.

East Bay, on the other hand, declined mid single-digits. The story of East Bay, which caters to the elite high school athlete, remains similar to last quarter with core performance shoes and apparel trending down relative to the casual assortment in which our store banner sites have a stronger position.

O ur gross margin rate was flat in the quarter with 30 basis points of merchandise margin improvement offset by slight occupancy deleverage and higher shipping and handling expense. As we noted on our previous call, we need to comp at least in the low-end of mid single to leverage occupancy, and we fell just short of that this quarter.

An up tick in merchandise margin was fairly consistent across footwear, apparel and accessories, driven by lower markdown.

As expected, our SG&A deleveraged slightly to 18.2% of sales in the first quarter, largely due to incurring almost $4 million of expenses related to the move into our exciting new office space. Without the move cost, our SG&A rate would have held flat 18% thanks to the excellent work of our expense management team. Appreciation expense increased to $39 million $35 million in Q 1, reflecting the company's ongoing investment in enhancing and aligning the customer experience across all of our channels; stores, digital, mobile and social media. O ur first quarter tax rate was 36%, slightly below our expected run rate 36.5%.

Relative to plan, our mix of income in the quarter proportionately more from Europe, where our tax rate is lower than in the US. The record net income we reported for the quarter also lead to strong cash flow. We finished the quarter with $1.062 billion in cash. The first quarter typically represents our peak cash position with balances subsequently declining until we reach the year-end holiday selling period.

O ver time, the proportion of our cash held overseas has grown relative to cash in the US and just this week we closed on a new $400 million credit facility, up from $200 million before. The new expanded facility allows us to maintain our liquidity in the US while continuing to invest in our US store fleet and our digital and mobile platform as well as actively repurchasing shares, funding our dividend program and being prepared for other opportunities or challenges.

During the first quarter we repurchased 1.37 million shares for $87.8 million. We spent approximately $65 million of capital as we continue to track towards our planned expenditures this year of $297 million. An important part of our capital spending this year to elevate our flagship stores here in midtown Manhattan; both the 34th Street Store below our former office and the Locker Store in Time Square closed during the first quarter. O ur exciting new Times Square store will not open until the holidays. The 34th Street store is slated to reopen for back to school, but it will be closed during all of Q 2 and the lost sales from that high-volume store are enough to reduce our overall comp a few ticks in the current q u a rte r.

Inventory increased 2.1% at the end of Q 1, slightly above our target given the 3.9% sales increase on a

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C ompany Name: Fo o t Lo c ke r Inc C ompany Ticker: FL Sector: Co ns ume r Go o ds Industry: Co ns ume r No n-Dur able s

Event Description: Q1 20 16 Ear nings Call Market C ap as of Event Date: 7.77B Price as of Event Date: 55.18

constant currency basis. O ur inventory remains fresh and productive with turns continuing towards our long-range goal. Most importantly, we believe our inventory position supports the mid single-digit sales gain, with primarily full-price selling that we continue to plan for over the balance of the year. We continue to believe we can achieve in single-digit comp for the following year, as well as double-digit EPS growth with 10 to 30 basis points of gross margin improvement. We believe that this performance is also achievable in each of the remaining quarters, including this one.

As we expected, comp sales are running down month-to-date, but we're once again on the negative side of a very significant launch shift; one of the more powerful Jordan releases of this entire year is coming next weekend, whereas last year, a similarly strong Jordan really had already happened by this time in the month. O ver such a short period of three weeks, the impact of the loss definitely has the potential to lift our May comp well into positive territory.

That said, Q 2 is already the lowest volume quarter of the year and this year we have two of our very top stores closed, so SG&A leverage will, again, be a challenge in the quarter. As always, we will manage the business tightly, not just SG&A, but also inventory and occupancy to maximize our profits this quarter and position ourselves for a strong second half of the year.

Let me hand the call to Dick now to cover the product highlights in more depth and discuss how we see the industry and our business shaping up over the balance of the year.

Dic k Jo hns o n (President, C EO ):

Thank you, Lauren, and good morning, everyone. I want to start my remarks today by thanking everyone on the Foot Locker, Inc. team for producing our best, most profitable quarter ever. As you could tell from Lauren's remarks, there was a lot going on this quarter with some fast-moving product category shifts, big events like the All-Star game in Toronto, the temporary closure of two of our biggest volume stores here midtown Manhattan, and of course, packing everyone up and moving into our brand-new offices, although you may hear in the background that we've brought some of the sirens with us.

With all that, we maintained our focus on execution and produced our strongest quarterly results ever and added another quarter to our streak of consecutive quarters of meaningful sales and profit increases. My sincere thanks to all the associates at Foot Locker who made it possible.

It is only because of the diligent work of the last several years to build and strengthen the diversity of our business in terms of product categories, geographies, families of business and channels that, we were able to post a solid comparable sales gain for the quarter in the face of a mid-single digit decline of b a ske tb a ll.

Although we had planned basketball to be off, the category ended up a bit softer than we had expected, which is the primary reason our quarterly gain came in somewhat lower guidance. The basketball business, like all our other categories, thrives on newness and innovation, and where that was apparent, our basketball business remains strong.

The Jordan Brand continues to innovate and produce excellent results, but the sportswear side of that brand, giving the biggest dollar gains. In fact, John here has finally put away his low profile Kobes for a really cool pair of Jordan Horizons he brought back from our House of Hoops store in London. The casual portion of basketball outside of Jordan was also strong, led by models such as superstars by ADI as well as Foamposites and Air Force O nes from Nike .

It was the signature side of the basketball business that saw the biggest decline, although even here we saw important elements of excitement. For example, a step in current issues from Under Armour and the Kyrie Urban shoes from Nike both posted big gians. Meanwhile, Kobe sales hung in pretty well in the

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C ompany Name: Fo o t Lo c ke r Inc C ompany Ticker: FL Sector: Co ns ume r Go o ds Industry: Co ns ume r No n-Dur able s

Event Description: Q1 20 16 Ear nings Call Market C ap as of Event Date: 7.77B Price as of Event Date: 55.18

quarter, likely influenced by the buzz around his retirement.

Primary losses came in Lebron and KD product, a challenge which we've been addressing with our partners at Nike . Between Nike resetting the price value relationship of many of its shoes and focusing their incredible innovation engine, along with the strength of Under Armour and potential momentum and Adidas, we are confident that by the back half of the year, there will be in place all the elements of a more robust, diverse signature basketball business. In the meantime, our leadership positions in footwear categories other than signature basketball enabled us to successfully pivot much of our inventory position into these areas in Q 1.

Lifestyle running footwear was an especially good business in the quarter, with the Roshe and the Huarache styles from Nike and Z X Flush [Hermadi] continuing to be popular sellers. C ategory heat and newness was driven by the Nomad and Boots products from Adidas.

Stan Smith shoes from Adidas is another perfect example of a leadership position we have in an area other than basketball; in this case, classic court shoes. This leading position can be seen in the depth of our buys and in the variety of different model executions we sell; quite a few of which are exclusive. We enjoy a significant number of special makeup styles not just in Stan Smith's, but also in Superstars, Puma Suedes, and various other casual yet premium products.

In retrospect, demand for this special product outstrips supply, giving us confidence in the emphasis of our merchandise position over the next several months. The very strong ADI originals business is also an excellent example of the advantage of our global footprint, since the trend started in Europe where our merchants recognized the excitement early and shared their initial success with our US teams before it exploded into a worldwide phenomenon.

Even with the partial shift out of signature basketball, our customers still expect to find, and are finding, premium sneakers in our stores and on our digital sites; sneakers for which they are willing to pay premium prices. This led to higher work units and average selling prices in the quarter with both up low single digits.

O n the apparel side, ASPs were up even more in the mid-single digit range, driven primarily by lower markdowns. Although apparel units were down low single digits, for the most part, I describe our men's apparel business is improving, especially in Europe. O verall profitability is up both in dollars and rate, which as I said last quarter, is a great place to start.

We're still working on driving more apparel volume in each of our banners, and the investment in our store remodel programs continues to be an important element of our strategy to elevate the storytelling around the premium special products or vendors are beginning to deliver.

O n the women's side apparel comps were known as the Lady Foot Locker and especially the 602 customer has almost completely shifted off athletic performance silhouettes into athletic lifestyle. ADI, Nike and Puma all have some exciting celebrity-driven assortments, but if quantities weren't enough to offset the decline in the sales of performance products from a year ago.

Meanwhile, the overall women's business is being driven by footwear where the Superstar, Stan Smith, and Nike casual running trends are even stronger for her than they are for the men.

Another clear indication of the ongoing strength of the sneaker trend is that traffic was positive in the quarter, up low single digits both in the US and overall. Fortunately, kids still love to touch, feel and try on sneakers, and they love to compare and shop together for the latest and greatest athletic footwear and apparel. Two exceptions to the traffic trends, though, were Runners Point and Sidestep in Germany, where traffic was down double digits. Even for the Foot Locker banner in Europe. Germany was the most

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