U.S. Markets closed

Edited Transcript of FL earnings conference call or presentation 23-Aug-19 1:00pm GMT

Q2 2019 Foot Locker Inc Earnings Call

NEW YORK Sep 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Foot Locker Inc earnings conference call or presentation Friday, August 23, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* James R. Lance

Foot Locker, Inc. - VP of Corporate Finance & IR

* Lauren B. Peters

Foot Locker, Inc. - Executive VP & CFO

* Richard A. Johnson

Foot Locker, Inc. - Chairman, President & CEO

================================================================================

Conference Call Participants

================================================================================

* Christopher Svezia

Wedbush Securities Inc., Research Division - SVP of Equity Research

* Janine M. Stichter

Jefferies LLC, Research Division - Equity Associate

* John David Kernan

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Michael Charles Binetti

Crédit Suisse AG, Research Division - Research Analyst

* Paul Trussell

Deutsche Bank AG, Research Division - Research Analyst

* Robert Scott Drbul

Guggenheim Securities, LLC, Research Division - Senior MD

* Susan Kay Anderson

B. Riley FBR, Inc., Research Division - Analyst

* Tom Nikic

Wells Fargo Securities, LLC, Research Division - Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and welcome to Foot Locker's Second 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, this conference is being recorded. And at this time, I would like to turn the conference call over to Jim Lance, Vice President, Corporate Finance and Investor Relations. Mr. Lance, you may begin.

--------------------------------------------------------------------------------

James R. Lance, Foot Locker, Inc. - VP of Corporate Finance & IR [2]

--------------------------------------------------------------------------------

Thank you. Welcome, everyone, to Foot Locker Inc.'s second quarter earnings conference call.

As announced in this morning's press release, the company reported net income of $60 million in the second quarter compared to net income of $88 million in the second quarter of last year. Earnings per share were $0.55 compared to $0.75 per share in the second quarter of 2018. Excluding particular items, on a non-GAAP basis, second quarter earnings were $0.66 per share compared to $0.75 per share last year. The particular items included in this year's results are a $13 million charge related to the closure of 23 SIX:02 locations and incremental $1 million charge related to the pension matter that we have spoken about in the past and a $2 million tax charge related to U.S. tax reform. Last year, the results included a $3 million charge related to the same pension matter, offset by $2 million of tax benefits.

Unless otherwise noted, the figures and rates mentioned during our call today will be based on non-GAAP results. A reconciliation of GAAP to non-GAAP results is included in this morning's press release.

We'll begin our prepared remarks with Lauren Peters, Foot Locker's Executive Vice President and Chief Financial Officer, who will provide details on our second quarter financial performance along with our financial outlook for the balance of the year. Dick Johnson, Chairman and Chief Executive Officer, will then provide an update on our second quarter results along with an update on a number of ongoing customer connected initiatives and our product pipeline.

Lauren?

--------------------------------------------------------------------------------

Lauren B. Peters, Foot Locker, Inc. - Executive VP & CFO [3]

--------------------------------------------------------------------------------

Thank you, Jim. Good morning to all of you, and thank you for joining us today. Overall, I would describe our results for the quarter as challenging in some areas, on track in others and, importantly, showing sequential improvement throughout the period. In addition, we made progress against a number of key strategic initiatives.

We reported a 0.8% comparable sales gain for the second quarter. While it was at the low end of our guidance, the comps improved as we moved through each month of the quarter. By month, May comparable sales were down low single digits, June was up low single digits and July was stronger producing a mid-single-digit increase.

Taking a look at our second quarter results in more detail. Total sales declined 0.4%. The impact of weaker foreign currencies compared to a year ago reduced sales by $22 million. On a constant currency basis, total sales increased 0.8%. Breaking out the comparable sales gains by channel, our stores were down 0.1%, while our direct-to-customer channel led our performance with a 6.5% sales increase.

As a percent of total sales, DTC rose to 14.3% for the quarter, up from 13.5% last year. Store traffic was down low single digits across geographies, while conversion improved overall. Average selling prices were up mid-single digits in the quarter, while units were down mid-single digits.

The second quarter sales performance reflected pockets of strength across our geographies. In North America, Foot Locker Canada led the way with a low double-digit comp gain. Champs Sports was up mid-single digits, while Foot Locker U.S. was up low single digits.

Internationally, Foot Locker Pacific had the strongest performance, with comparable sales up low double digit. Foot Locker Europe produced a low single-digit increase, its fourth consecutive quarter with a comp gain, while Runners Point and Sidestep were collectively flat.

On the other side of the ledger, Kids Foot Locker posted a low single-digit comp decline, while Footaction and Eastbay were each down high single digits. Footaction's result was due largely to soft demand in their men's footwear business, while Eastbay was pressured by softness in its performance footwear and apparel.

Turning to families of business, footwear was the strongest category with a low single-digit comp gain, while apparel was down mid-single digits. In our accessories business, fashion bags had another strong performance, but that was offset by declines in socks and hats, which led to a mid-single-digit comp decline.

Within footwear, women's and kids were again strong contributors during the quarter, each posting a high single-digit comp gain while men's, which was impacted to a greater degree by launch shifts, was down slightly. By category, men's running was up low single digits, while court and casual styles produced a slight gain.

Basketball posted a low single-digit decrease during the quarter; however, we did see positive trends with sales gains across classic styles. The strong performance in women's footwear was driven by classic basketball and court styles, while kids was fueled by gains in running, court and a slight gain in basketball.

Turning to apparel. Comp sales were down mid-single digits for the quarter with men's, women's and kids apparel all down within that range. Despite the challenges, there were areas of growth. Foot Locker U.S. produced a low single-digit gain led by a strong double-digit gain in women's and a solid increase in men's apparel. While in Europe, our women's and children's apparel businesses each posted double-digit increases. Dick will provide some additional color on the second quarter's product drivers.

Moving on to the rest of the income statement. Our gross margin delevered by 10 basis points to 30.1% in the second quarter from 30.2% a year ago. Our merchandise margin rate decreased 20 basis points due primarily to the higher mix of DTC, which carries higher freight costs. Leverage of our relatively fixed occupancy and buyers' compensation provided us with 10 basis points of improvement versus last year.

Our SG&A rate in the quarter increased to 22.2% of sales from 21.3% in the same period a year ago. The higher expense was largely due to the ongoing investments we are making in our digital capabilities and infrastructure as well as higher minimum wages.

Depreciation expense increased to $46 million from $44 million in the prior year. Interest income rose to $2 million from $1 million last year. Our second quarter non-GAAP tax rate was 27.1% above last year's Q2 rate of 25.1%. The prior year period benefited from concluding a foreign tax audit.

Turning to the balance sheet. We ended the quarter with $939 million of cash and cash equivalents, a decrease of $11 million from the end of Q2 last year. During the second quarter, we returned $41 million to shareholders through our quarterly dividend and repurchased approximately 2.9 million shares for $120 million. With management and the Board confident in our long-term plan, we remain committed to returning cash to shareholders, and we'll continue to execute our $1.2 billion share repurchase program in an opportunistic manner.

In terms of capital expenditures, we invested approximately $36 million into our business during the quarter, consistent with the objectives we outlined in March, bringing our first half total to $81 million. This funded the opening of 10 new stores, including 2 more Power Stores, our second store in Hong Kong and 3 more stores in Malaysia as well as the remodeling or relocating of 35 stores. We also closed 37 stores, including 23 SIX:02 locations, leaving us with 3,174 company-owned stores at the end of the quarter. We now expect to spend $250 million in CapEx for the full year. This is $25 million below the target we set at the beginning of the year with a reduction due primarily to changes in timing of certain projects.

Based on this updated outlook for the full year, we now expect to open around 65 stores, including new Power Stores in Frankfurt and Melbourne and to remodel or relocate 160 stores, slightly below our previous guidance. In addition, we now expect to close 170 stores, slightly more than we planned at the beginning of the year.

Inventory continued to be well positioned at the end of July with the year-over-year decrease of 2.2% compared to our 0.4% reported sales decrease. On a constant currency basis, inventory decreased 1% compared to the 0.8% sales growth. With this disciplined approach, we are able to continue flowing fresh exciting products, which keeps our inventory productive and positions us well for back-to-school and the remainder of the year.

Turning to our financial outlook for the full year. We are still on target to deliver a mid-single-digit comp gain with gross margin now expected to be up 10 to 30 basis points, slightly lower than our previous range. We now expect SG&A to be up 30 to 50 basis points, a slight improvement versus our previous guide. We still expect depreciation to be approximately $185 million, and our full year tax rate remains at approximately 27.5%.

Finally, we continue to expect full year earnings per share to increase high single digits, consistent with our previous outlook. In terms of the third quarter financial outlook, we believe we are well positioned to capitalize on the all-important back-to-school selling period. We expect a mid-single-digit comp gain with gross margin likely to expand 10 to 30 basis points and the SG&A rate to be down 10 to 30 basis points.

Finally, regarding the announced tariffs on imports from China. We are actively discussing the subject with our vendor partners in order to limit the impact to our business and customers. Our current guidance does not contemplate the tariff impact, if any.

I will now turn the call over to Dick, who'll provide some color around our second quarter results along with an update on some exciting initiatives.

--------------------------------------------------------------------------------

Richard A. Johnson, Foot Locker, Inc. - Chairman, President & CEO [4]

--------------------------------------------------------------------------------

Thanks, Lauren, and good morning, everyone. Despite the fact that our performance in the second quarter came in at the low end of our expectations, we are making important progress against the strategic initiatives we outlined at our Investor Day earlier this year. We believe that by remaining focused on our 4 strategic imperatives, elevating the customer experience, investing for long-term growth, driving productivity and leveraging the power of our people, we will succeed in accomplishing our long-term goals and deliver significant value to our shareholders.

Further, we believe that with the company's strong financial position, our strategic relationships with our vendor partners and the connection we have with our customers, we are well positioned to build positive momentum in the back half of 2019. The fact that our comp performance improved as we moved through each month of the second quarter is a positive sign. For the back half of 2019, we are optimistic about the upcoming unique product concepts and the overall product pipeline.

To highlight just a few of the bright spots from the second quarter. We had solid results in several men's basketball, running and court styles. Our women's and kid's footwear businesses delivered strong results, and we made important progress on several key initiatives. For example, we expanded on our strategic partnership with our best-in-class partners, including Nike and adidas. We geared up for the opening of an exciting community-based Power Store in a key sneaker market, which I will talk about in a moment.

We made progress on our new FLX membership program. We prepared for the upcoming launch of GREENHOUSE, our in-house incubator. We launched a new in-store format at Champs Sports to fuel our women's business. And we formally brought our Champs Sports and Eastbay banners together to have a united focus on the high school athlete on and off the field.

Let's first take a look at some of the key drivers in our business from the second quarter. In footwear, we saw ongoing strength in Air Max styles and Air Force 1s from Nike as well as the iconic AJ 1s from Jordan. We partnered with Nike on the summer blockbuster's program working with the next generation of Nike athletes: Jayson Tatum, Devin Booker and De'Aaron Fox, which all performed well. From adidas, we partnered on creating the Passport Pack which paid homage to Berlin and Tokyo with unique versions of the NMD which was a success. The PUMA RS-X franchise and Fila Disruptor continue to grow. In the collaboration between Converse and up-and-coming fashion label, Chinatown Market, was also a popular choice.

On the other hand, the launch shifts out of the second quarter that we previously outlined combined with lower demand of some legacy platforms and performance footwear at Eastbay pressured the overall results. Our apparel business took a step backward in the quarter. This result was due in part to softer demand for some of the windwear looks that have been successful over the past year or so. In addition, our shift away from private label also contributed to the decline.

On the positive side, fleece of tops and bottoms, along with branded graphic tees, continued to resonate with our customers but were not enough to offset the challenges in the other categories. Looking forward, we have a number of exciting concepts and exclusives that we have been working on with our strategic vendor partners.

For example, the launch of our exclusive evolution of the Swoosh footwear and apparel collection from Nike, which celebrates the origins of the iconic logo. From adidas, we have the upcoming Logo Distortion collection with new iterations and branding of their world-renowned silhouettes, not to mention a number of YEEZY drops spread across the back half. And there's even more heat coming with other exciting products from PUMA, Menace, Reebok and others in the pipeline.

Now let me walk you through how we are performing against each of our 4 strategic imperatives. First, I would like to touch on how we are elevating the customer experience. We are uniquely positioned to bring and celebrate youth and sneaker culture around the world. Our community-based Power Stores are a great example of how we are using our deep knowledge and connections to create hyper local experiences for our customers.

Earlier this month, we opened the doors to Foot Locker Washington Heights, the second Power Store in New York City. Washington Heights is an important and unique community at the heart of sneaker and youth culture, and our new community-based power store will enable us to engage with that neighborhood in more meaningful ways. The store, which is largely staffed by local associates, helps drive energy through immersive experiences and activations. It also serves as a platform for local brands, artists and creators, who are passionate about the heights. The store includes access to a full family shopping experience with footwear, apparel and accessories from a wide variety of top athletic brands, including Nike, Jordan, Converse, adidas, PUMA and more.

Additionally, the store will offer localized product, including our home-grown initiative with exclusive and limited release apparel from local brands such as Lyfestyle NYC and Triangulo Swag, dedicated women's and kid's spaces, digital my lockers for online shoppers to pick up their orders, artwork from local artist (inaudible) and an activation space for community events.

Beyond that, Foot Locker Washington Heights also serves as an example of the deepening strategic relationship between Foot Locker, Inc. and Nike. Not only does the store leverage our digital assets, it is the first strategic partner store to tie into Nike's digital capabilities. Together, we are combining our know-how to create truly differentiated experiences for Foot Locker and Nike customers alike. It is also the global pilot for connected inventory, which ties in the Foot Locker and Nike ecosystems in order to create data-driven local assortments in a more seamless customer experience.

This connection will offer our customers visibility into the store inventory, not only through our Foot Locker mobile app but also through the Nike app. The technology also offers our customers some additional features on their mobile devices. The first is called Shoecase, which offers members the opportunity for access to coveted sneaker releases. Next is the Unlock Box, which is a digital vending machine where members can use their app to unlock limited edition items. Nike Scan allows customers to scan barcodes to learn more about a product's history and check availability. And this is only the beginning. Over time, we will add other exciting features and benefits through a connected membership program with Nike that will reflect the best of both brands. The partnership at Washington Heights is a clear example of how our companies are working together to evolve retail through innovative experiences that unite physical and digital.

Another important step in our journey would be the upcoming rollout of our new FLX program. FLX represents a shift in how we reward our most loyal customers, moving away from a discount-based system to a program which offers exciting benefits and experiences that members truly value. Some examples of membership benefits include head starts on launch products, gift cards, donations to relevant causes and other benefits. We believe FLX has the potential to deepen our customer relationships, incentivize them to stay within the Foot Locker family and enhance the overall lifetime value of our customers.

Currently, piloting with Lady Foot Locker and Foot Locker Netherlands, we expect to expand the rollout of FLX across our U.S. banners after the holiday period. In Europe, we expect the expansion to begin by early Q4 and continue through 2020 with Asia Pacific to follow later.

Turning now to our efforts around the women's business. We are excited about the progress we are making in creating compelling spaces within our stores that cater to and engage with her. One of those touch points is the new women's shop-in-shop formatted Champs Sports. We are using this space as a destination for her to find those styles that inspire her, whether that's from our strategic brand partners or local products and boutique brands. She will also find authentic storytelling, community workshops and customization opportunities.

The first 3 locations opened during the quarter in Dallas, Santa Monica and San Jose. A fourth location to open in Las Vegas during Q3 with several more expected to open in 2019. We described you earlier this year how building deeper and stronger connections with our customers across the brands, channels and geographies will be an important aspect of elevating the customer experience. With this in mind, as we analyzed our brand segmentation strategy, we saw an opportunity to broaden our appeals of the sport-obsessed athlete by bringing Champs Sports and the Eastbay together under a unified leadership structure.

Under this new structure, Bryon Milburn, who has been the General Manager for Champs Sports, now leads both banners. We believe bringing these 2 brands together positions them to deliver the type of elevated product and experiences that inspire these customers, in-store or online, both for their personal style and to help them achieve their top performance on the court or field of play.

Another part of building these customer connections involves investing in the communities where our customers live and play. Our investment in Super Heroic and the work we are doing with Jason Mayden is an example of how we are empowering our youngest customers through play and helping children see themselves as capable of doing the impossible. Another example is through the Foot Locker Scholar Athletes program, which during Q2 awarded scholarships to 20 exceptional students that will help make college more accessible and enable them to pursue their dreams. Each of these impressive young individuals overcame hardships in their life and became an inspiration through their leadership in athletics, academics and within their communities.

In Europe, Foot Locker celebrated inclusivity in sports and culture through the Women's World Cup through a campaign featuring up-and-coming female referees. We also supported the amateur female referees in the U.K. by funding the cost of their training course and helping them on their path to becoming certified referees. We believe these efforts not only build deeper connections with the communities we serve but also help inspire and empower their members to achieve positive change in their lives.

In terms of our second strategic imperative, which is our focus on investing for long-term growth, I want to highlight GREENHOUSE, our new innovation hub. GREENHOUSE provides our company the opportunity to build and cultivate new relationships, new initiatives and new ideas with an amazing community of brands and creators, some of which we already worked with today and others that we can't wait to get started with. GREENHOUSE will launch as a separate app that will tell one product story at a time with collections across footwear, apparel, accessories, art and other categories.

We expect GREENHOUSE to launch this quarter with collaborations between L.A. streetwear brand, Rhude and Starter, and VFILES and Fila as well as collections including Parisian brand Paperboy, a GREENHOUSE canvas franchise with adidas and emerging Latin artist celebrating Hispanic Heritage Month and the launch of designer Dao-Yi Chow's sustainability platform, O-1, which will feature his own brand, Public School NY for the first trial and the list goes on. Some of these exciting stories and collections will be taken out of the GREENHOUSE to our global audience.

The beauty of GREENHOUSE is that we can be patient and cultivate new partners and relationships for years to come. We're excited about this new innovative approach to connecting with designers and customers, its potential to strengthen the Foot Locker network and our position at the center of youth culture.

Turning to our third strategic imperative. We are also focused on our push-to-drive productivity gains, whether that's through initiatives like RFID, inventory optimization, logistics or expense management. We also have a number of opportunities to drive productivity within real estate. Our team continues to strategically pursue ways to improve leverage in the business. Some of these efforts include more favorable lease terms, leveraging in-store digital capabilities and driving efficiencies in our store design and build up costs. As we make progress against these initiatives, we will continue to update you along the way.

And lastly, leveraging the power of our people. By investing in our people, we are providing them with the tools to not only develop their skills but also enabling them to create elevated experiences for our customers every day and helping us to make meaningful progress in our initiatives in achieving our long-term goals.

So before we open the line for questions, I want to thank our associates for their dedication and continued focus on connecting with our customers and working to drive the business forward. Again, we remain optimistic about our upcoming unique product concepts and our product pipeline for the back half of 2019. With our strong financial position, our strategic relationships with our suppliers and the connection we have with our customers, we believe we are well positioned to build positive momentum in the back half of 2019.

Operator, please open up the line for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question today comes from Tom Nikic from Wells Fargo.

--------------------------------------------------------------------------------

Tom Nikic, Wells Fargo Securities, LLC, Research Division - Senior Analyst [2]

--------------------------------------------------------------------------------

I just wanted to ask -- a lot of investors look out to Q4, and you had a really, really strong performance last year. And I know that there were a lot of YEEZY drops last year, and I think that there's a bit of skepticism in the marketplace about some of the optimism that you're expressing about the 2H comp performance and the product pipeline, et cetera. Is there any sort of additional color that you can give to help us gain more comfort with the back half outlook, particularly against some of the difficult compares that you're up against in Q4?

--------------------------------------------------------------------------------

Richard A. Johnson, Foot Locker, Inc. - Chairman, President & CEO [3]

--------------------------------------------------------------------------------

Yes. Tom, thanks for the question. And clearly, with Q2 not performing where -- it was at the low end of our expectations, but not really where we anticipated it. Q3 lines up really well from a launch prospective, right? We talked on our last call about some of the launches that shifted out of Q2. One of them went into Q1, one went into Q3. And along with the launches comes some traffic elements, right? The people make their way to the stores. So as we lined up the 3 months of the second quarter and saw the sequential gains, obviously, July being the strongest as some of the states started with their no tax weekends and back-to-school lineups. So again, we look at the launch calendar, we look at our open to buy, we look at other releases that support the concept work that we're doing, and it really does lineup strongly for us.

Again, I won't or can't get into the specific numbers behind each of the launches, but I know a lot of you and yourself, Tom, study the launch calendar. If you go out and look, you see how strong the launches are compared to last year. Certainly, the YEEZYs are spread out a bit more in Q3 and Q4 rather than so heavy in Q4, but our merchant team has done a great job of working to find offsets for some of the shift out of Q4 and the Q3. And again, I'm confident. I see our open to buy, I see the launch calendar and I feel really good about the product pipeline.

--------------------------------------------------------------------------------

Tom Nikic, Wells Fargo Securities, LLC, Research Division - Senior Analyst [4]

--------------------------------------------------------------------------------

Got it. And just one quick follow-up. So it seems like in the apparel side, there's been a bit of a shift here away from the windwear that was hot for a really long time. Sort of how quickly can you adapt to that and, I guess, lean in more on some of the stuff that's working and get the apparel side back to growth?

--------------------------------------------------------------------------------

Richard A. Johnson, Foot Locker, Inc. - Chairman, President & CEO [5]

--------------------------------------------------------------------------------

Yes. I think the team has done it, Tom. Quite honestly, I think that as we roll into Q3 and fleece becomes a much more prevalent piece of the consumers' uniform, our team has got the tech fleece. They've got the fleece pieces that are really important. The relationship with Champion continues to grow. So there are all sorts of options that are in play. And as kids really focus on their back-to-school elements, there's a lot of fleece that we'll see consumers buying in our stores.

One of the things that I didn't call out in my prepared remarks, last July 1, LeBron made a big shift to Los Angeles, which drove an awful lot of heat around LeBron and Los Angeles. And while there was great NBA shifts from a free-agent perspective this July, none of them had quite the intensity of that move of LeBron to Los Angeles. So again, that was a little bit of the whole, but the windwear that we called out and you mentioned that shift is ongoing, and I think our merchant team has done a great job to position us with fleece headed into back-to-school.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question comes from Paul Trussell from Deutsche Bank.

--------------------------------------------------------------------------------

Paul Trussell, Deutsche Bank AG, Research Division - Research Analyst [7]

--------------------------------------------------------------------------------

So the second quarter, you're saying, came in towards the very low end of your expectations. As you kind of take a step back, where were the areas, if you will, that may be contributed to some of the shortfall versus you all meeting kind of more in the middle or towards the high end of your plan? And is it fair to say that part of the reason that you're reiterating guidance for the full year is because you have seen the momentum from July continue into the third quarter to date?

--------------------------------------------------------------------------------

Richard A. Johnson, Foot Locker, Inc. - Chairman, President & CEO [8]

--------------------------------------------------------------------------------

Well, I won't comment about Q3. We stopped giving quarter-to-date sort of guidance a number of calls ago. But the weakness in Q2, Paul, I think we hit a lot of it in our prepared remarks. Obviously, we saw sequential improvement from May through July. Part of the May shift was clearly related to traffic and launches that shifted -- launch that shifted into Q1, the apparel business being softer.

Again, I never point to weather. So we won't, but there were some significant weather events around the globe, from heat to significant storms in places. But again I -- for us, it really is -- there's always shifts in the business from a fashion perspective, and the ramp down and -- the slowdown and the ramp-up don't always happen at exactly the same time but the good work that our merchant team has done again gives me the confidence that while we are a little bit light in Q2 that we've got the ammunition to deliver in Q3 in the back half.

--------------------------------------------------------------------------------

Paul Trussell, Deutsche Bank AG, Research Division - Research Analyst [9]

--------------------------------------------------------------------------------

And while I understand the tariff conversation is certainly ongoing and quite fluid, is there any more color that you can provide on the potential impact if you are having conversations about different pricing strategies or sourcing strategies? Just any additional help there would be appreciated.

--------------------------------------------------------------------------------

Richard A. Johnson, Foot Locker, Inc. - Chairman, President & CEO [10]

--------------------------------------------------------------------------------

Yes. On our private label, I'll start there because that's the thing that we control the most. As we work with our suppliers and while private label has become a smaller piece of our apparel business, we're obviously working with our suppliers to understand the implications of the tariffs. We're looking for different sourcing, and we'll figure out from a pricing perspective what we have to do to cover the gap, again, because this is -- the tariffs are ultimately a tax on the end consumer, and we need to figure that out how to soften that blow for the consumer.

On the footwear side, each of those conversations with our vendor partners is a fluid conversation, right? There's a lot of energy in the industry to try to get the footwear piece of the tariffs postponed or pulled out of the next rollout. If they happen, again, we will continue to work with our vendors to understand whether that's an impact that will more than likely be in the early part of 2020 as opposed to the back half of 2019. But again, each of those discussions is a little bit different because each of our vendors has different sourcing locations and the products that we buy are frequently sourced in different locations.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

Our next question comes from Chris Svezia from Wedbush.

--------------------------------------------------------------------------------

Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [12]

--------------------------------------------------------------------------------

I guess, first, I just want to go back to the comp and the implied comp for the third quarter. I just want maybe a little bit more, I guess, concrete evidence. Just sort of given what happened in Q2 when your line of sight at that point when you gave the guidance about that low- to mid-single-digit increase, you fell a little bit short. As we sit here today, based on maybe how the first half has unfolded, just any other concrete examples of product, drivers? Do you expect the apparel business to resume back to positive comp to give investors sort of that confidence that, yes, mid-single-digit is not -- is definitely achievable, if not there's opportunity? And then secondarily to that, as you think about fourth quarter, is it linear in terms of that comp progression just given the YEEZY comparisons in Q4? Or is that more low- to mid-single-digit implying to your stacked and sort of the low teens?

--------------------------------------------------------------------------------

Richard A. Johnson, Foot Locker, Inc. - Chairman, President & CEO [13]

--------------------------------------------------------------------------------

Well, Chris, I hate to sound like a little bit of a broken record, but it really is around the visibility that we've got on launches. I think just as back-to-school got started, the receipt flow, the confidence we have on the launches, again, if I just look at the next few weeks, we've got a strong Retro 12. Today, we got YEEZY's tomorrow. We've got Air Force 1s and Air Max 97s next week. We've got a new color of the joyride next week. We've got a new color of the Zoom Freak, the Giannis shoe, which came out of the gates really strong.

Next weekend, we've got a strong Retro 10. We follow that with the strong Retro 4 and new colors of the Air Max 720. We get to the middle of September, we've got multiple styles from adidas and Pharrell Williams that again the customer has spoken very loudly about their support of. We've got a Timberland SpongeBob execution, and the Timberland 6-inch boot continues to be part of the kid's uniform. So that's really just the back-to-school season, and I haven't even called out all of the releases that are connected to our evolution of the Swoosh and the Logo Distortion from adidas.

So again, I get excited about product, and I see a product lineup going through back-to-school and then through the end of the back half of the year that is really, really strong and I credit our product teams, I credit our vendor partners for creating some really great heat around sneakers, and certainly we believe that apparel will get better. Again, as the uniform of the kid turns to fleece, we've got a great relationship with Champion and some fleece products, obviously tech fleece from Nike continues to be a really important element of that, and they're doing a great job of working apparel into these -- into the concept work that our North American products and marketing team are doing. So again, I get energized by product and the energy level is certainly high in our building right now.

--------------------------------------------------------------------------------

Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [14]

--------------------------------------------------------------------------------

And just Q4, just any thoughts? You referenced mid-single for Q3, just curious how you think about Q4 and how that stacks up?

--------------------------------------------------------------------------------

Richard A. Johnson, Foot Locker, Inc. - Chairman, President & CEO [15]

--------------------------------------------------------------------------------

Yes. Again, we've sort of given you the direction for Q3 and sort of where we see the year. You'll have to back in a little bit on your models to the guidance. But Q4, again, we talked -- I talked early in one of the earlier questions about the YEEZYs. And clearly, there is a bit of a shift out of Q4 into Q3 on the YEEZYs, but all of the launches that I just talked about, our team is working hard to make sure that, that level of heat flows throughout Q4 as well. So -- and it's -- everybody's model is a little bit different. So I don't want to get specifically into Q4. But if you do the backup math, I think you'll get to the right place.

--------------------------------------------------------------------------------

Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [16]

--------------------------------------------------------------------------------

Okay. And finally, just really quick for Lauren. Just on the occupancy leverage on a 0.8 comp, just any color as we think about that and to the back half of the year?

--------------------------------------------------------------------------------

Lauren B. Peters, Foot Locker, Inc. - Executive VP & CFO [17]

--------------------------------------------------------------------------------

Yes. Chris, as we described, our real estate team is very actively working on the points of leverage within occupancy. So engineering, the build-out and the costs there when we have the opportunity at lease renewal, to look at the terms of the leases, they're taking advantage of that. These things help -- and there's a little bit in there of the new lease accounting standard on applying that. So all of those things added up to the bit of leverage that we got in 2Q.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Our next question comes from Michael Binetti from Crédit Suisse.

--------------------------------------------------------------------------------

Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [19]

--------------------------------------------------------------------------------

Lauren, if I continue on that buying and occupancy question for a minute, it seems like you're expecting the leverage point there to be a little bit tougher this year. So I was very happy to see it come down on the comp that was referenced there. Is that -- can we carry some of that lower leverage point into the back half as your expectation for the same-store sales improves, and that should be -- I mean, it sounds like that the things that you're doing should make that line more leverageable than we were thinking coming into the years. Is that a fair way to think about the back half?

--------------------------------------------------------------------------------

Lauren B. Peters, Foot Locker, Inc. - Executive VP & CFO [20]

--------------------------------------------------------------------------------

Yes. Well, we guided to Q3 with an expectation of expansion in the margin 10 to 30 basis points on a mid-single-digit, and that's a combination of both the merchandise margin and this leverage point on occupancy. But I would say that the underlying factors that we saw in Q2 around occupancy reason to believe that, that won't help us go forward.

--------------------------------------------------------------------------------

Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [21]

--------------------------------------------------------------------------------

Okay. And then, Dick, I know you've been very helpful on helping us give some more insights as to what makes you excited on the product launches in the back half and in the fourth quarter, in particular. I'll ask a little bit differently. Since now you have a good read on what's going to be good hot product these second halves. Maybe you can help us think about the premium products in the back half as it compares to the back half of last year and maybe give us an idea of the mix of products on ASP that you see coming in the back half? I know you have a tough compare in the fourth quarter on that. So maybe you could just help us think about the allocation there and how to think about how ASP in particular will contribute as you enter into the tough compare in the fourth quarter?

--------------------------------------------------------------------------------

Richard A. Johnson, Foot Locker, Inc. - Chairman, President & CEO [22]

--------------------------------------------------------------------------------

Thanks, Michael, for the question. ASPs, we talk about it frequently, but it's a pretty complex model for us given the geographies, given the banners and given the families of business that we do -- that we saw product in. And obviously, the YEEZYs is likely the root of your question around the Q4 ASP launch business and premium business are parts of our business, but when you think about fleece pieces that sell for $85, $95, $100, tech fleece that might be $110 to $150, all of those things add up to an ASP that we see continuing to expand.

And again, it's not any one particular item that offsets another particular item. It really is the mix of sales and the mix of the geographies and families of business, right? As we see strength across the premium footwear that generally elevates more premium apparel, which again helps the ASP calculation. But we continue to see the ability with our vendor partners to create premium product that has a high level of interest from our consumers and they really have not shown any resistance to price points as long as there is a price value relationship in their mind. So -- and we see expanding ASPs going forward.

--------------------------------------------------------------------------------

Lauren B. Peters, Foot Locker, Inc. - Executive VP & CFO [23]

--------------------------------------------------------------------------------

And we've got all of that. Our merchants do work very hard to make sure that there is excitement in the product at all price point levels.

--------------------------------------------------------------------------------

Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [24]

--------------------------------------------------------------------------------

Okay. So across the product platform, there is some upward pressure there and not just -- don't just focus on the premium launch stuff. Can I sneak in one more? It's pretty encouraging to see the strength across all the international businesses that you called out here. Is that something you expect to continue into the back half as you laid out the model and the comps you gave us?

--------------------------------------------------------------------------------

Richard A. Johnson, Foot Locker, Inc. - Chairman, President & CEO [25]

--------------------------------------------------------------------------------

Yes. I think that our international business has performed well. We saw -- I think this is the third or fourth quarter in a row of comp gains, fourth quarter in a row of comp gains for the European business, which again some real positives there as we see the premium sneakers and we see a lot of our investments that we've made across Europe specifically start to pay off. The Asian business is clearly still a start-up business, and we continue to expand our door comp there. And our Canadian and Australian businesses can and obviously we include in our North American number. But I think Lauren called out in her comments that Canada and Australia both have the strong second quarters, and we certainly expect that international momentum to continue.

0:46:53.7 (inaudible)(inaudible)(inaudible)

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Our next question comes from Janine Stichter from Jefferies.

--------------------------------------------------------------------------------

Janine M. Stichter, Jefferies LLC, Research Division - Equity Associate [27]

--------------------------------------------------------------------------------

Wanted to ask about the SG&A guide. Looks like it's looking a little bit better than you previously expected. I just wanted to get a sense of what's driving that. And then if you could give us an update on some of the initiatives? You talked about the Analyst Day. I think you talked about using RFID to reduce store labor and just some of the productivity initiatives where are we there? And how should we expect those to progress over the next year or so?

--------------------------------------------------------------------------------

Lauren B. Peters, Foot Locker, Inc. - Executive VP & CFO [28]

--------------------------------------------------------------------------------

Very proud of my expense management team as they do remain nimble and focused on driving productivity, so the elements that we can't control, we're very hard at work on. Yes, we did describe a number of things that we anticipate over the longer-term yielding leverage points within the SG&A, things like the work on RFID, which is now falling in place across Europe allows us to be more efficient on managing the back-of-house operations as there for the hour, so that we can make sure that those hours are more forward facing with our customers, very helpful there.

Things like tech-enabled customer experience, we've described the ongoing investments we're making in tech and that shows up in technology in the hands of our associates that enable them to have a more complete, more eloquent transaction with the customer also a more effective use of ours. Our data analytics investments are investments in data scientists in our data lake is allowing us to look at that data and understand how to make our marketing dollars go further. So marketing efficiency and other elements that we're starting to see some progress on within SG&A. So a whole bunch of things. I've been frequently talking about the beauty of LED label, but that helps us with utilities, there's just so many elements that we remain focused on improving.

--------------------------------------------------------------------------------

Janine M. Stichter, Jefferies LLC, Research Division - Equity Associate [29]

--------------------------------------------------------------------------------

Okay. Great. And then just a follow-up on the occupancy. Can you give us a sense of how many leases you have coming up for renewal over the next 2 years? And then maybe just high level, what kind of reductions you're seeing as you go to renegotiate some of those leases?

--------------------------------------------------------------------------------

Lauren B. Peters, Foot Locker, Inc. - Executive VP & CFO [30]

--------------------------------------------------------------------------------

Yes. That's a bit more granular than we would get into in this format. But with over 3,000 stores and all of those leased, there's always a fair amount coming up for renewal. And it's in some cases taking very short-term leases where we have any concern about the long-term viability of the center that we're in, and we take advantage of that situation to structure very favorable lease terms over that shorter term. It gives us a lot of flexibility to navigate what is a dynamic situation, especially in the U.S., as their -- we have taken some forward steps of moving off-mall where we had any concerns about the mall locations, long-term viability, and those off-mall locations can bring with them some favorable return. So the lease renewal option gives us quite a bit of flexibility.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Our next question comes from Bob Drbul from Guggenheim.

--------------------------------------------------------------------------------

Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [32]

--------------------------------------------------------------------------------

I just wanted to see, could you expand a little bit more on the connected inventory? How that's going to work within Nike business, with your store? And I guess, as you think about what you've done in the Washington Heights store, how many -- I mean, I know it's early in a test, but like is this something you could envision many more stores rolling out to or converting into from a Foot Locker perspective?

--------------------------------------------------------------------------------

Richard A. Johnson, Foot Locker, Inc. - Chairman, President & CEO [33]

--------------------------------------------------------------------------------

Well, we're really in the early days, Bob. I don't know maybe that to 181st Street yet, but it's a pretty spectacular store and a really great sneaker market. The Heights is passionate about sneakers, and we really feel like we are connected to the community and getting more connected every single day. So the connected inventory piece is the opportunity for us to leverage the inventory that we have in our system and the inventory that exists in the Nike system. So as we -- again, it's in the early days. We're seeing that there is some significant benefits for the consumers. They have a broader view of the inventory, right? They know and our associates know where inventory is available and whether or not we can give it to them quickly.

So as we learn from this first store, we will certainly perfect the process and perfect the connectivity. And as we learn from this store, I believe we'll be able to commercialize it and roll it out, but it may not look exactly like 181st Street, right? There will be iterations of this, and I think we've talked long -- many times in our business about building prototypes and testing and then making sure that we've got everything right and working before we roll it out. So I won't comment on the rollout plans because I'm not confident that we've got it perfect. We're certainly going to learn on it. So test and learn.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

And our next question comes from John Kernan from Cowen.

--------------------------------------------------------------------------------

John David Kernan, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [35]

--------------------------------------------------------------------------------

Just wanted your thoughts on the overall growth of the resale market. There seems to be growing hype among some of these market places, and how you fit in with that ecosystem? And do you think that there's dollars being shifted away from some of the primary markets like yourselves towards that resale channel? And I know you had a pretty significant investment in GOAT. I'm just wondering how you see all of this going forward.

--------------------------------------------------------------------------------

Richard A. Johnson, Foot Locker, Inc. - Chairman, President & CEO [36]

--------------------------------------------------------------------------------

Well, we see a holistic -- we've got a holistic view of the sneaker market, right? We serve a very important piece of that market in our Foot Locker Champs, Footaction across our portfolio of banners. Without a primary market, there's really not a secondary market. So again, as we work with our vendor partners and thrive on the scarcity model, I think that does in fact help fuel the secondary market. And the secondary market provides access to product for kids that haven't been able to give it in the primary market, and it's a -- I guess, it's probably the perfect supply/demand sort of model, right, where the ultimate demand meets the supply at the right price point and they're able to do a transaction.

So our investment in GOAT, adding in Daishin and the team is really to help us understand that secondary market better to figure out how we work together with them keeping a clear line of distinction between the primary and secondary markets as we have a responsibility to our core consumers and our portfolio of brands to make sure that we service them and then the product does find its way to the secondary market. I think if you look at the sneaker ecosystem in totality, the whole ecosystem is growing, and that's good for us and that's good for our vendor partners.

--------------------------------------------------------------------------------

John David Kernan, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [37]

--------------------------------------------------------------------------------

Got it. And then if I can just do a quick follow-up on merchandise margin in the back half of the year. Inventory is seemingly in a good position. You seem pretty confident on ASPs going into the back half. You do have a little bit of a tough compare on merch margin going in the back half, but how should we think about your confidence in merch margin and maybe the flow between Q3 and Q4 that you're expecting within gross margin?

--------------------------------------------------------------------------------

Lauren B. Peters, Foot Locker, Inc. - Executive VP & CFO [38]

--------------------------------------------------------------------------------

Again, so our guide for Q3 and full year 10 to 30 basis points expansion in margin. And as we look at Q3 with mid-single digits, that's helpful for us to achieve the leverage. Though it's a complex formula on the merch margin side of it, certainly, we had some pressure in Q2 as we mix a little bit stronger in DTC and the higher freight that's carried there is a bit of a headwind, but the freshness of our inventory has continued to serve us really well on the markdown side. And so it is that mix and the strength on the top line comp that caused us to have that guide.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

And our final question today will come from Susan Anderson from B. Riley FBR.

--------------------------------------------------------------------------------

Susan Kay Anderson, B. Riley FBR, Inc., Research Division - Analyst [40]

--------------------------------------------------------------------------------

I guess I wanted to ask about the new FLX loyalty program. Maybe can you just talk about the pilot? I was curious if you're seeing any different consumer response versus the old program? And is there going to be any profit impact that sounds like the new program is maybe less focused on discounts versus benefits?

--------------------------------------------------------------------------------

Richard A. Johnson, Foot Locker, Inc. - Chairman, President & CEO [41]

--------------------------------------------------------------------------------

Well, you're spot on. We're more focused on benefits as opposed to discounts. And as we test the program really in a prototype phase with Lady Foot Locker and Foot Locker Europe, we're seeing a couple of different things, right? In the U.S., where we've had a loyalty program, the behaviors are a little bit different than in Europe where we haven't had a loyalty program before. So the transference, if you will, on the U.S. side where we're moving somebody from the discounts to the membership has taken a little bit of work, but they're very happy with the redemption center and the options that we've got there.

They're allowing their points to accumulate a little bit. In Europe, it's a little bit different and they are using their points on benefits very quickly, right? It's a new concept for them in terms of Foot Locker having a loyalty program or a membership program. So they're very quickly accumulating points, going to the redemption center and finding something that strikes their fancy and using their points to redeem.

So again, as we learn more and this is again one of the things that we do, we'll roll things out across the U.S., we'll roll things out across some more countries in Europe, and finally, we'll follow with Asia Pacific some time in 2020, but the initial signs are very positive, and we expect it will be a real benefit to us and more importantly to our consumers, keeping them in our portfolio and allowing them to get great benefits out of the redemption center.

--------------------------------------------------------------------------------

Susan Kay Anderson, B. Riley FBR, Inc., Research Division - Analyst [42]

--------------------------------------------------------------------------------

Great. That sounds interesting. And then maybe if I could just follow-up on the apparel questions. I guess, I was kind of curious it seemed like maybe there is a little bit of a lack of newness lately in some of the retro sports apparel brands. I guess, I was curious do you think it was -- a lot of it was weather this past quarter. And it does sound like you're seeing more newness for the back half, I guess, coming from the kind of same brands that you have in the stores right now?

--------------------------------------------------------------------------------

Richard A. Johnson, Foot Locker, Inc. - Chairman, President & CEO [43]

--------------------------------------------------------------------------------

Well, we are certainly seeing newness from the brands that we have in store, but we're also testing some new brands, right? I think that's one of the strengths of our merchant team as they're very willing and very diligent about getting out and testing things, looking for the opportunity to accelerate product opportunities. It's one of the benefits that I think we have of being a global enterprise and the Europe sees trends, the west coast sees trends in the U.S. We're able to communicate amongst our merchant organization and test and try a lot of things. So I'm optimistic about apparel as we go into the back half, as I mentioned. I think the fleece programs that we've got come and the work that our team has done to make sure that there is apparel tied to our concept work, the work that our vendor partners are doing to make sure that there are apparel options around launches, all of that gives me optimism going into the back half.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

And ladies and gentlemen, at this point, I would like to turn the conference call back over to Mr. Lance for any closing remarks.

--------------------------------------------------------------------------------

James R. Lance, Foot Locker, Inc. - VP of Corporate Finance & IR [45]

--------------------------------------------------------------------------------

Okay. Thank you for joining us today. Please join us again for next earnings call, which will take place at 9:00 a.m. on Friday, November 22. The call will follow the release of our third quarter results earlier that morning. And thanks, again, and goodbye.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

Thank you, ladies and gentlemen. That concludes today's conference call. We do thank you for participating. You may now disconnect your lines.