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Edited Transcript of FL earnings conference call or presentation 28-Feb-20 2:00pm GMT

Q4 2019 Foot Locker Inc Earnings Call

NEW YORK Mar 24, 2020 (Thomson StreetEvents) -- Edited Transcript of Foot Locker Inc earnings conference call or presentation Friday, February 28, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Conference Call Participants

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* Christopher Svezia

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

* Erinn Elisabeth Murphy

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* Janine M. Stichter

Jefferies LLC, Research Division - Equity Analyst

* Michael Charles Binetti

Crédit Suisse AG, Research Division - Research Analyst

* Paul Trussell

Deutsche Bank AG, Research Division - Research Analyst

* Paul Lawrence Lejuez

Citigroup Inc, Research Division - MD and Senior Analyst

* Susan Kay Anderson

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

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to Foot Locker's Fourth Quarter 2019 Financial Results Conference Call. (Operator Instructions)

This conference 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 the reports filed with the SEC, including the most recently filed Form 10-K or Form 10-Q. Any changes in such assumptions or factors could produce significantly different results, and actual results may differ materially from those contained in the forward-looking statements.

Please note that this conference is being recorded.

I would now like to turn the conference over to Jim Lance, Vice President, Corporate Finance and Investor Relations. Mr. Lance, you may begin.

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

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Thanks, operator. Welcome everyone to Foot Locker Inc.'s fourth quarter and full year earnings conference call. As reported in today's earnings release, the company reported fourth quarter net income of $141 million compared to $158 million for the fourth quarter last year. On a GAAP basis, this year's fourth quarter net income was $1.34 per share compared to $1.39 per share last year.

Included in these results are: pretax impairment charges of $38 million, $29 million after tax, related primarily to Footaction; and a $1 million charge related to the pension matter we have previously discussed. In addition, there were 2 items affecting our tax expense: A $2 million benefit in our deferred tax assets due to changes in Dutch tax law, offset by a $2 million charge for a valuation allowance on losses from certain foreign operations.

A year ago, the fourth quarter included net charges totaling $20 million. Excluding these items, on a non-GAAP basis, fourth quarter earnings were $1.63 per share versus last year's $1.56 per share. Lastly, the 2019 full year non-GAAP earnings were $4.93 per share, up from $4.71 in 2018. 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 today's earnings release.

We'll begin our prepared remarks with Lauren Peters, Foot Locker's Executive Vice President and Chief Financial Officer, who will provide details on our fourth quarter financial results. Dick Johnson, Chairman and Chief Executive Officer, will provide highlights from our fourth quarter performance, along with an update on product trends and the progress we made towards our long-term strategic imperatives. Lauren will complete our prepared remarks with our initial outlook for 2020.

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

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

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Thank you, Jim. Good morning, everyone, and thank you for joining us today. We were pleased to report this morning that total sales for the year surpassed $8 billion, the first time in our history as Foot Locker, Inc. We delivered another year of positive comp sales growth, and earnings per share increased mid-single digits. Although below our initial expectations for the year, overall it was a solid performance. It demonstrates early progress in delivering on our long-term goals.

For the fourth quarter, comparable sales declined 1.6%. When we provided a relatively flat comp guidance on our previous call, we were expecting our results to be somewhat challenged due to the softer demand in our apparel business combined with a difficult launch comparison. However, softer-than-expected demand during the compressed holiday season and a highly promotional environment for apparel further impacted our performance, leading to the results coming in below our expectations.

Breaking this down by month, November, which lost a post-Thanksgiving week compared to the prior year, comped down double digits. December was flat while January benefited from some high-heat releases and posted a double-digit comp gain. Total sales were down 2.2%, with the impact of weaker foreign currencies reducing sales by $6 million. On a constant currency basis, total sales decreased 2%.

By channel, sales at our stores collectively posted a comparable sales decline of 1% while comps at our direct-to-customer channel were down 4.3%. To provide you with some perspective, our DTC channel gained nearly 30% in Q4 last year, fueled by a robust launch business and the positioning of our inventory for the longer holiday shopping period. As a percent of total sales, DTC penetration was 18.7% for the quarter versus 19.1% a year ago. For the full year, our DTC penetration rose to 16%, up from 15.4% last year. Average selling prices were up low single digits, with units down mid-single digits. Overall, traffic at our stores declined mid-single digits while conversion improved.

In our North America geography, Foot Locker Canada, Footaction and Champs Sports posted solid results for the quarter, each up low single digits, while Foot Locker U.S. comped down low singles, Kids Foot Locker was down mid-singles and Eastbay declined double digits. Internationally, Foot Locker Pacific finished off a terrific year with another strong performance, generating a low double-digit comp gain in Q4 on top of last year's double-digit increase. Runners Point Group was up mid-single digits, while Foot Locker Europe was flat for the quarter.

Looking at our business by brand. Across footwear and apparel, sales with our largest supplier, Nike, continued to strengthen with sales outperforming the overall company results. Collectively, the results from our other suppliers were more challenging in the quarter.

From a family of business perspective, footwear was relatively solid given the tough comparisons to last year, with comp sales essentially flat. Women's footwear had a strong quarter, up mid-single digits. Kids produced a low single-digit gain while men's was down low single digits.

By category, men's basketball posted its second consecutive quarter with a double-digit gain. Men's running, which was impacted by the shift in Eazy releases relative to last year, and men's casual and seasonal styles were each down double digits.

Looking a little deeper into the footwear performance. Our expectation going into the fourth quarter was that the impact of the Eazy shift would be mitigated by a pickup in demand across other adidas platforms and models, together with a better result in our seasonal boot business. While that performance did not meet expectations, our team took action by partnering with Nike and Jordan to accelerate future orders of key on-trend styles to capture some of the customer demand.

Similar to the results we experienced in the third quarter, apparel remained challenging, declining mid-single digits. Our men's and kids' apparel businesses were both down mid-singles while women's was flat. Dick will talk more about footwear and apparel highlights in a few minutes. Additionally, our accessories business driven mainly by hats, shoe care and bags was down high single digits.

Moving on to the rest of the income statement. Our gross margin declined 90 basis points to 31.5% of sales. The lower rate was driven by a 70 basis point decrease in our merchandise margin rate and 20 basis points of deleverage on our occupancy and buyers' compensation expenses. The lower-than-expected merchandise margin rate was driven by 2 factors: first, higher markdowns on apparel, both at stores and online, as we worked to clear slower-moving products within select branded programs, performance assortments and licensed apparel as well as mix pressure due to our pullback in private label, which was partially offset by strength in our footwear margins; second, pressure from lower initial markup rates due to vendor mix and category mix were also a contributing factor this quarter.

Our team did an excellent job managing expenses in the quarter as our SG&A rate improved by 50 basis points to 19.4% of sales. As the quarter progressed, we carefully managed our variable expenses, such as wages and marketing, to align with sales. In addition, we reduced bonus accruals based on our overall performance. So as you think about your models for next year, please note that the bonus reduction benefited this quarter's rate by 70 basis points.

For the full year, our SG&A expense rate increased to 20.6% from 20.3% last year due primarily to our ongoing investments in our digital capabilities. Our depreciation and amortization came in at $45 million for the quarter, flat to last year, while net interest income was $2 million, down from $4 million last year, reflecting lower interest rates. Our fourth quarter non-GAAP tax rate was 26.1%, below last year's Q4 rate and better than our expected run rate of 27.5% due primarily to the geographic mix of income.

Turning to capital allocation. We invested approximately $187 million in the business in 2019. This was below our prior expectations due in large part to a shift in the timing of expenditures on store projects. In addition, we spent $50 million on strategic investments for the year.

We returned $164 million of cash to our shareholders in the form of dividends during 2019. And combined with our share repurchase program, this brings the total cash returned to shareholders for the year to $499 million, more than 90% of our adjusted net income.

As we announced last week, our Board declared a 5% increase to our quarterly dividend payout rate to $0.40 per share, an approximate 4% rate of return. In addition, at year-end, we had $867 million remaining on the $1.2 billion share repurchase program that was authorized a year ago.

We and our Board believe that our strong capital structure allows us to pursue the initiatives that will drive our performance and enable us to deliver on our long-term objectives while also continuing to enhance shareholder returns through our dividend and share repurchase program.

Before I hand the call over to Dick, let me touch on inventory, which finished the year in good shape. In actual FX rates, inventory ended the quarter down 4.8% or $61 million from a year ago. Using constant currencies, inventory decreased 4% compared to total sales, which were down 2.2%. This disciplined approach to inventory management enabled us to increase inventory turns for the year and to continue to flow fresh, exciting assortments as we move into fiscal 2020.

Taken together, we produced a solid result in the first year of our new strategic plan. We continue to make meaningful investments in the business, delivered adjusted net income of $538 million for the full year and produced a return on invested capital of 12.5%, up 50 basis points over the prior year period.

One last exciting item I want to share with you. During the fourth quarter, we produced a record day with total sales exceeding $115 million, a milestone that wouldn't have been possible without the great work of our associates together with the operational benefits of the investments in our digital and supply chain capabilities. At record volume levels, our websites, logistics systems and associates delivered on our commitment to provide outstanding customer experiences.

With that, I will turn the call over to Dick and be back in a bit to provide you with our outlook for 2020.

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

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Thanks, Lauren, and good morning, everyone. About a year ago at our Investor Day, we outlined our new strategic plan to differentiate our business and become a truly agile organization that can adapt quickly to satisfy our customers in this evolving marketplace. Overall, 2019 was a solid year that demonstrates early but meaningful progress across many aspects of our business, including investments in exciting, new stores that connect with local communities; capabilities across our digital ecosystem, which enable us to build even deeper connections with our customers; and our supply chain and logistics systems. We also strengthened our relationships with our strategic vendor partners and together delivered new, unique concepts and the most sought-after styles across all of our geographies.

Now turning to the fourth quarter. Our performance was certainly more challenging than we expected on the Q3 call. Despite having leading positions in key on-trend styles, our results were pressured during what was a compressed holiday shopping season, with softer demand for seasonal categories and a very promotional apparel marketplace. We were also up against tough launch comparisons relative to the fourth quarter of last year. With that said, there were a number of bright spots, and we are encouraged that we finished the year in a promising position with comp sales in January up double digits.

Starting with footwear. The momentum in our basketball business continued to build across all of our geographies, divisions and across men's, women's and kids. Classic basketball styles from Nike and Jordan again led the way with strong sales of Air Force 1s and AJ 1s. Also fueling the category were a number of highly sought-after Jordan Retro launches and lifestyle models, strong interest for the Giannis Zoom Freak and the Hardcourt from adidas.

We also drove strong performance in women's footwear on top of last year's high single-digit comp gain. This year's result was led by classic basketball styles from Nike and Jordan. We also had success in Converse and PUMA. Notably, Q4 was the fifth consecutive quarter with positive comp sales for both our women's and kids' footwear businesses. And being up against the double-digit comp in Q4 2018, our footwear business was essentially flat for the quarter.

Apparel was more challenging, as it had been in the past 2 quarters. Our U.S. banners faced significant challenges driven by the declines in assortments from our secondary brands, softer demand for licensed and performance apparel as well as a planned decline in private label and the highly promotional marketplace.

On the flip side, we did see some bright spots in apparel as well. Nike Tech and Club Fleece performed very well. We saw green shoots with some up-and-coming brands connected to youth culture. Additionally, we had positive results in several international banners. So while the margins in apparel retrenched in Q4, we see an opportunity to remix our assortments to drive top and bottom line improvement. This includes opportunities to dimensionalize our branded assortments along with new offerings that connect with youth culture.

Our Foot Locker Pacific division turned in another exceptional performance with strong results in footwear, including double-digit gains across men's, women's and kids' as well as a high single-digit increase in apparel. The team did a great job this year, posting the division's fifth consecutive quarter with double-digit comp gains.

Foot Locker Canada posted another solid performance this quarter and finished the year up high single digits. At Champs Sports, footwear posted a mid-single-digit comp gain in the quarter, led by kids' and women's footwear, and Champs finished out the year up mid-single digits.

Next, I will provide you with a progress report on our strategic initiatives, beginning with our efforts to elevate the customer experience.

I'm happy to report that our new membership program, FLX, is now live across all of our U.S. banners. This means that our customers in the U.S. can now be rewarded for engaging and shopping across our entire family of brands. Through the program's centralized redemption center, our members have access to exclusive experiences and offerings that reflect our customers' multifaceted interests, inclusive of music, sports, art, design and more. They will also be rewarded with a head start just for becoming members, which helps their chances of securing highly sought-after releases. Looking forward, FLX, which is launched across the Netherlands, France and U.K., will continue to expand to additional countries over the course of 2020.

In Europe, we are making important strides in our digital and mobile platforms. During the quarter, we completed the upgrade of our Foot Locker website in the first of 17 countries. This new platform, which has been a success for our North American digital channels, will be the foundation for an improved consumer experience with better storytelling, greater functionality and improved bandwidth for those key high-volume moments. While we started out with a smaller market in Norway, we expect to continue the rollout to additional markets this year.

Turning to our store fleet. We intend to invest for long-term growth through our global footprint. First, we continue to refine our Power Store offense. Our community-based power stores, which feature hyper-local assortments and activations, have been well received, and we intend to build on that strength over the next several years. After opening 6 power stores in 2019, we plan to open approximately 20 more in 2020 with new locations in the U.S. and across our international markets.

We also intend to allocate capital to our core stores around the world. We have an opportunity to evolve our fleet, layer in the best elements of our Power Store offense, improve the productivity of our existing square footage and drive faster growth through these investments. This includes a test of an exciting, new core store format in the U.S. Altogether, we plan to remodel or relocate 125 stores, with 110 of these focused on our core stores.

Additionally, we continue to invest in new, dedicated spaces for our female customers, where we can inspire her with curated assortments and unique experiences. We ended 2019 with 17 elevated women's spaces across Europe; 34 in the U.S. at Foot Locker, Champs Sports and Footaction; and we plan to scale the build-out in 2020 with 40 to 50 additional new spaces globally. Our plan also includes further expansion in Asia. We opened 2 stores in the fourth quarter and now have 14 stores in the region. For 2020, we expect to open an additional 12 stores, including both core and Power Store locations, in new and existing markets.

We also remain laser focused on our third strategic priority: To drive productivity. We believe our investments in supply chain and logistics will be key to achieving further gains in this area. 2019, we completed the retrofit of our Junction City, Kansas facility, enabling us to supply our stores and efficiently process orders for digital channels. In fiscal 2020, we have allocated capital for the upgrade of our Camp Hill, Pennsylvania facility, which will transform it to a full-service distribution center serving the Eastern part of the U.S. The upgraded facility will enable us to fulfill customer orders more rapidly, replenish stores more often, improve the overall customer experience, yielding freight and labor savings from an optimized shipping network, all while lowering our greenhouse gas emissions and our carbon footprint.

Leveraging the power of our people. In 2019, we took advantage of our improved systems and training to ensure we have the right associates on the sales floor with access to the right product, at the right place, at the right time. We were pleased to see this translate into gains in conversion, sales per payroll hour and sales per gross square foot while delivering a consistent, high level of service. Importantly, this all led to meaningful improvement in our key customer metrics, including overall customer satisfaction and Net Promoter Score. But we believe these are still early days, and there are numerous opportunities to drive even further gains.

Of course, none of this would be possible without the efforts of our team. Last quarter, I introduced you to Lace Up, our new interactive communications and learning platform. The response from our associates to this new system has been tremendous. They're engaging, learning, having fun and driving productivity. Building stronger connections with the communities where we live and work offers additional paths to fostering local, long-lasting relationships with our customers.

I'm proud of the efforts across our organization. For example, partnering for the 31st year in a row with the Fred Jordan Missions in L.A. to help 3,000 underprivileged children with back-to-school supplies; joining forces with the Daily Bread Food Bank in Toronto to give back to the community; or, as our team in Europe did this year, working collectively to donate books, toys, games and food to charities that support underprivileged kids.

As we look to fiscal 2020, we have a number of opportunities ahead of us with great product, exciting events and the expansion of our power stores to new communities. The excitement began in Chicago with our takeover of the city for the NBA's All Star Weekend. In addition to exclusive footwear launches and customization workshops, this year we had appearances with NBA players such as Giannis, Damian Lillard and Ben Simmons; panel discussions and hoop challenges with tastemakers, musicians and influencers and more.

It was a great way to get the year started, but we have a lot more to come. For example, in the first quarter, we will have more energy around basketball, both classic and signature styles from Nike and Jordan, and the Nike Pregame, a House of Hoops exclusive. From adidas, the Superstan, paying tribute to the 50th anniversary of the Superstar with a celebration of both iconic sneakers. And we'll celebrate creatives through our Off the Blank franchise with Vans. We also expect to open our next Power Store at the new American Dream Retail and Entertainment Complex at the Meadowlands in New Jersey. And we'll bring even more unique experiences and access to exclusive offerings through FLX.

Let me reiterate that we built upon our strong foundation in 2019. We are optimistic about our company's future. We believe we have the right plan in place to deliver against our long-term financial objectives. And by making progress on our strategic imperatives, we will strengthen our position at the center of sneaker and youth culture, creating value for our shareholders.

Before I turn the call back over to Lauren, let me share a few last thoughts with you. First, I want to touch on the outbreak of the coronavirus. The health and safety of our associates and their families, our customers and our suppliers is our top priority. This is a fluid situation that we are actively monitoring, starting with those areas of the world where we operate in and where we have seen some impact to store traffic, for example Hong Kong, Singapore and Italy. We are also having ongoing conversations with our vendor partners with respect to the supply chain, and we will work closely with them as the situation unfolds to manage the impact on our business.

On a more positive note, I want to take a moment to welcome 2 recent additions to our Board of Directors, Darlene Nicosia and Tristan Walker, who bring a range of experiences and capabilities in global supply chain management and consumer brand marketing that will be a great source of insights to our Board and management.

And finally, I want to thank each associate at Foot Locker Inc. for their dedication and commitment. Without their focus, execution and passion for the game, we would not be able to deliver great customer experiences and achieve our long-term objectives.

Lauren, back to you.

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Lauren B. Peters, Foot Locker, Inc. - Executive VP & CFO [5]

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Thanks, Dick. Indeed, we continue to see opportunities to drive the business forward in fiscal 2020 on our way to reaching our long-term objectives. But first, let's take a look at fiscal 2020. As a reminder, starting with today's call, we are only providing annual comp sales and EPS outlook, not detailed quarterly guidance.

For fiscal 2020, we believe we can deliver a low single-digit comparable sales gain and low to mid-single-digit earnings per share growth. FX will again be a top line headwind with foreign currencies weaker relative to the U.S. dollar than they were at the same time last year. If the euro-to-U. S. dollar rate stays where it is today, the headwind will be more pronounced in the first half. We are planning the gross margin rate to be up 10 to 30 basis points for the full year mostly driven by improvement in our merchandise margin rate.

Our SG&A expense rate is expected to be up between 40 to 60 basis points year-over-year. This annual SG&A guidance also incorporates our ongoing investments in our digital capabilities, additional minimum wage rate increases and, as I said earlier, the normalization of bonus, which is 30 basis points of delever.

Looking at capital expenditures. We are planning this year's capital program to be $275 million. The higher capital spend this year reflects our increased investment in community-based power stores together with our commitment to elevate our core stores. In addition, the plan includes further digital investments and initiatives to upgrade the company's U.S. supply chain, as Dick described in his comments. We plan to spend approximately $150 million to improve our store fleet in 2020, including 65 new stores, with further expansion in Asia and approximately 125 remodels or relocations of existing stores.

We plan to close approximately 150 stores. The store closures will be split between the North America and EMEA regions, with the greatest concentration in Foot Locker U.S. and Europe along with Runners Point. In terms of depreciation and amortization expense, we expect it to be approximately $185 million in 2020. We are planning interest income to be about $4 million due to the lower interest rates in the U.S., and we are continuing to plan our effective tax rate to be in the range of 27.5% to 28% in 2020. Our EPS guidance assumes a lower share count based on our opportunistic execution of our share repurchase program. That covers the outlook for 2020.

Lastly, before we open the call up for questions, I want to update you on recent developments concerning 2 of our strategic investments. Based on information that's come to our attention this week, we will be evaluating investments made in 2018 of approximately $16 million for potential impairments. To be clear, the financial results we reported today do not contemplate any potential impact from this evaluation. If we determine there is an impact, we will disclose it in our 2019 10-K that we will file next month. Consistent with past practices, any impairments would be excluded from our non-GAAP results.

With that, operator, please open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Susan Anderson with B. Riley.

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Susan Kay Anderson, B. Riley FBR, Inc., Research Division - Analyst [2]

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I guess on the guidance front, I know you're not giving quarterly guidance, but are you assuming in the numbers any impact from the coronavirus? And are there any big differences in cadence that you would call out by quarter?

And then on the apparel front, I guess how are you thinking about just the health of the inventory now after fourth quarter? Do you feel like there's still some clearing to happen with apparel to kind of get the newer product in the doors?

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

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Thanks, Susan. I'll touch on the coronavirus a little bit more in depth than the prepared remarks. Clearly, it's a fluid situation, and we've built into the guidance what we know today. It's easy to say that what we know today will be different than what we know tomorrow, right? The situation is changing. We're working closely with our vendor partners to understand the impact to the supply chain of product, to factory capacities, et cetera. We're also monitoring our traffic in places that have been most impacted: Hong Kong, Singapore and now, with the outbreak, in Italy. So again, I would tell you that the guidance encompasses what we know today, but I expect that to be fluid and continue to change. I don't know, Lauren...

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Lauren B. Peters, Foot Locker, Inc. - Executive VP & CFO [4]

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No. I would also say it assumes that -- it's consistent with what we hope, that it resolves and it's not a protracted situation.

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

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And then on the apparel front, the health of the inventory, the marketplace was really promotional in the fourth quarter. We anticipated that. It was probably a little more promotional than we expected. I think the team did a good job of moving through some of the styles where we had the biggest problems. The opportunity now is to flip the inventory to get in sync with the summer consumer headed into spring and summer here as well as some of the changes from the high brand reads that we've seen to low brand reads and more tonal things. So I think the team is doing a good job.

As you deal in fashion, there's always a little bit of a hangover from prior seasons, but I think the team did a great job in the fourth quarter to move through what we could in the promotional environment. So I feel good about where our inventory sits today, Susan.

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Operator [6]

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Our next question will come from Michael Binetti with Crédit Suisse.

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Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [7]

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Dick, I want to follow that apparel question really quickly. I think you were previously of the assumption that it might take a quarter or 2 into 2020 to really get the apparel inventories clean and kind of repositioned to the new planogram. How would you -- would you describe that apparel is probably going to continue to be somewhat of a drag on the gross margins in the first quarter as we kind of think about a little bit ahead here at this point? That's my first question.

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

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Yes. I think there will continue to be a little bit of a hangover as we work through the seasonal piece, the winter that never was across much of the country. We don't sell a lot of outerwear, but we sell heavier-weight fleece, et cetera. So again, I think as we turn the inventory, there likely will continue to be a little bit of a headwind. But again, I think the team made a strong effort in Q4. And it will be there in Q1. It's more important that we get the inventory flipped and the right fresh product in that's good for the season that's forthcoming.

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Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [9]

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Okay. So a little inventory come out. I mean would you describe the fourth quarter, though, as the peak of the pressure from that clearance on the gross margin? Is it at least diminishing in the first quarter? Can we think about it that way? Or...

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

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I think that's safe. I think between the end of the third quarter and beginning of the fourth -- or the fourth quarter in terms of pressure to move through the inventory and that -- the pressure was magnified by the promotional marketplace that blew up really starting right after Halloween, right, going into the quarter as opposed to a normal Black Friday blowup where everybody gets down and deep discounted on apparel. So I would posit that the fourth quarter was probably the peak. And while there'll be a bit of a hangover, it should not be at the levels of Q4.

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Michael Charles Binetti, Crédit Suisse AG, Research Division - Research Analyst [11]

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Okay. That's good to hear. And I also want to ask about the basketball numbers being up double digits 2 quarters in a row. And I think you called this quarter -- I think you referred to it as a sequential improvement in the momentum in the fourth quarter after a nice number in the third quarter. You sound more confident there. That's been a really big, important category for you guys in the past. Maybe just a little more thought on what's helping, what's driving there? And the fashion trends have been moving towards more of the streetwear things. But seeing baseball come back for you guys, just knowing how big of a category that is, it's pretty encouraging. I'd love to get a sense of what you think is working and how sustainable those trends in basketball are after -- I know it's been a long time before third quarter since we heard that category is positive.

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Richard A. Johnson, Foot Locker, Inc. - Chairman, President & CEO [12]

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Well, it's great at the category level to see that growth, Michael. And I would reiterate what we've said repeatedly, that our consumer is less motivated by category than some of the data we look at is that's all category specific. But our consumer is really driven by what's the hot silhouette in the marketplace. And right now, the basketball silhouette and some of the classic basketball, quite honestly, between AJ 1s, Air Force 1s, the Hardcourts, those are pretty classic basketball silhouettes that the consumer -- this current consumer finds exciting, and I think the brands are continuing to push heat into that area. And you add to it a little bit of excitement around the Giannis shoe, you look at the Kyrie shoe, you look at PUMA entering the basketball marketplace, you look at New Balance entering basketball, and there's a lot of great energy around the category. And the influencers that our consumer looks to are wearing more basketball product -- what we categorize as basketball product, and I think that bodes well for the future.

Plus, we've got the only stand-alone basketball store in the marketplace with our House of Hoops, and we continue to fuel growth there and look for exciting ways to drive both basketball footwear and apparel connectivity with our consumer.

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Operator [13]

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Our next question will come from Janine Stichter with Jefferies.

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Janine M. Stichter, Jefferies LLC, Research Division - Equity Analyst [14]

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My question is on SG&A. So understanding that a bigger part of the lower spend in 4Q was incentive accruals, can you just help us understand what kind of flex is in the model if comps come in maybe below your plan of low single digits? And then just any savings you're seeing to offset some of the areas of inflation in the model like wages?

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Lauren B. Peters, Foot Locker, Inc. - Executive VP & CFO [15]

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Okay. Yes. So again, reiterating our guidance for 2020 full year, 40 to 60 basis point of delever on low single digits with a normalization of bonus accounting for about 30 bps of that. So the dynamics around SG&A, continued investment in our tech spend and in our supply chain infrastructure and capabilities. As we've talked about before, we, on the tech spend, are feeling good that we're seeing results. We -- as we talked about, our record day that we experienced in the fourth quarter and our systems holding up really well in that, we're pleased with the progress that we've made on the systems front. But as we think about that spend go forward, we've talked before that we've benchmarked where we think tech spend should be long range, and somewhere in the low 2% of sales is the bench level to keep our systems up to date and delivering. And I would say, as we think about that tech spend, we're seeing the shift to that -- those dollars are now progressively moving away from initiatives that we would categorize as foundational, more towards things that are enhancements on our capabilities and things that our customer will experience very positively. So we feel good about what that does for the model.

Now the other call-out that I would have for you as you're thinking about SG&A, our FLX program looks less like the loyalty program that we had before, which was focused a bit more towards discount, right? So moving to FLX, which is more focused on rewards, the way that shows up in the P&L is less markdown, so improvement to the merchandise margin rate, but a bit more in SG&A as those incentives are expense-related items.

So those are the dynamics, coupled with increases in minimum wages that we know about that's all been factored in. So the leverage point really still looks like mid-single-digit. Hopefully, that was helpful.

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Janine M. Stichter, Jefferies LLC, Research Division - Equity Analyst [16]

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That's very helpful. And then just one quick question on -- you mentioned some of the launches. Sounds like you've pulled forward a little bit into January with, I think, Jordan and Nike. Is that something we should think of as now a headwind to 1Q? Or just a little bit more color around that commentary there.

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Richard A. Johnson, Foot Locker, Inc. - Chairman, President & CEO [17]

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We didn't really refer to launch as being pulled forward. Rather, most of the pull-forward is just good core product that we've been able to get our hands on. And it's something that our merchant team does really well. They read and react and work with our vendor partners. So if we have the ability to flow product in to help a quarter, we'll do that, and we'll continue to do that process. I mean this has been going on for a long time. But part of the benefit of Q4 was certainly being able to flow in some Retro ones and some Air Force 1s that would have hit normally in Q1. We'll continue to pull forward from other quarters, and we'll get the additional orders written with our vendor partners to ultimately catch up. But it's the way that our vendor team -- or our merchant team, excuse me, works with the vendors to manage their open to buy.

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Operator [18]

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Our next question will come from Paul Trussell with Deutsche Bank.

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Paul Trussell, Deutsche Bank AG, Research Division - Research Analyst [19]

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Just to touch on footwear. Nike and Jordan, clearly you had some success there. As you look out over the balance of the year, just maybe speak about your confidence in the sustainability of that pipeline. And is there a view that there can be any more better balance from your other vendor partners in terms of what they're bringing to the table to help the top line?

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Richard A. Johnson, Foot Locker, Inc. - Chairman, President & CEO [20]

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As you know, we work hard, Paul, with all of our vendor partners. And clearly, the customer votes every day, and they ultimately make the decision. But I think when we talk about some of the adidas products, the Superstan that's coming, the 50th celebration of the Superstar is exciting for all of us. Some of the PUMA products, the RS-X that we've seen, their foray into basketball, a lot of good momentum around the PUMA brand. We look at other vendor partners to continue to fill niches with our consumer that they expect to see from us. So -- but at the end of the day, the consumer votes, and our merchant team works closely with consumer data and closely with our vendor partners to get the assortment right.

So I'm not sure that balance is the right word but trying to make sure that we're satisfying the consumer demand in various silhouettes, various styles and various brands is ultimately what we're after.

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Lauren B. Peters, Foot Locker, Inc. - Executive VP & CFO [21]

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With as much of that unique to us.

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

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Yes. Great point.

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Paul Trussell, Deutsche Bank AG, Research Division - Research Analyst [23]

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So I also just wanted to touch base in more detail around your capital spending plans for the year. In that release, you all outlined the incremental investments in the power stores, also talked about elevating the core stores and some of the digital and supply chain investments. Lauren, can you give us a bit more detail of what we should see transpire this year on those fronts?

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Lauren B. Peters, Foot Locker, Inc. - Executive VP & CFO [24]

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Yes. So as both Dick and I commented on where that CapEx is going, we like what we're seeing out of the power stores. Our customers having a good experience there. We see a significant potential to take that further across the geographies and also to put some of those elements back into stores that we would consider core because our customer continues to tell us that they value a store experience, they want to be in there talking with our associates and physically experiencing the product. And so us bringing elements of that into the core store just delivers a better experience and features the product better. So that's where the CapEx is going, and we're very focused, our real estate team, on making sure that they've got a proactive view of the markets and the pipeline of locations so that we're able to execute against that plan.

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

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I think if you extend beyond the doors, the physical space, there's a lot of the work that we've done on the IS&T side has been foundational, right? Now that, that foundation is laid, the team can continue to accelerate some of the things that we've been looking at. We've got the new website platforms to roll out across the rest of Europe. We've got Xstore, our POS system. We've got a couple of trailing countries that we have to make sure that, that gets live in. We finished the retrofit of our Junction City's distribution center, and we're now about to take on a retrofit of our Camp Hill, Pennsylvania facility that will better service the consumer in the East Coast stores. So again, it's really split. I won't say evenly because we -- it's not, but it's about $150 million that we see going towards the stores. We've got the rest of it that will go to supply chain and to IS&T initiatives.

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Operator [26]

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Our next question will come from Erinn Murphy with Piper Sandler.

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Erinn Elisabeth Murphy, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [27]

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Just following up on coronavirus. Could you just talk a little bit more about if you're seeing any disruption in shipments thus far from your vendors that could potentially impact any of your first half launches? And then what about your private label? If you could just kind of unpack kind of where the factories are relative to the most impacted province in Hubei. And just kind of curious on any potential shifts there from a production perspective.

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Richard A. Johnson, Foot Locker, Inc. - Chairman, President & CEO [28]

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Well, Erinn, the first half shipments, we feel pretty confident about based on what we -- the feedback we get from our vendor partners. Not saying that there won't be any disruption, but there's nothing that I would flag and nothing that's certainly not built into our guidance at this point. That being said, this remains a very fluid situation, right? So whether the ports get impacted, whether the boats get impacted, it's always hard to say. But again, I feel pretty comfortable with the first half. The second half, as factories go back to work and capacities get ramped back up, again we'll know more each day as we go along.

From a private label perspective, our private label impact is very minimal. It's become a very, very small part of our business. And at this point, don't see any impact to the flow of the product that will be coming in during the first half of the year. So again, come tomorrow, that could all change if something changes with the World Health Organization or the CDC warnings. But that's what we know today.

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Erinn Elisabeth Murphy, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [29]

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Okay. That's helpful. And then, I guess my second question is just around -- in your prepared remarks, you talked about the continued momentum you're seeing behind Nike and particularly in the fourth quarter where you saw some of your other vendors collectively be a little bit more challenged. Can you just unpack that statement a bit? And then as you go into 2020, how do you see this dynamic playing out between Nike versus the balance of your vendors?

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Richard A. Johnson, Foot Locker, Inc. - Chairman, President & CEO [30]

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Well, again, we always have puts and takes with our consumer choosing product that we've put on our shelves. And we had some higher expectations across a couple of specific silhouettes and a couple of styles and models from vendors. The seasonal boot category, especially in the kids business where there were some tariff price increases that had an impact to the flow of -- the sales flow, was one of the places that we certainly felt a little bit of pain. I continue to believe that the consumer is ultimately in charge and makes those decisions. So as I talked about earlier, creating unique product opportunities that the consumer can find with us, working with our vendor partners to find excitement across multiple silhouettes and styles, colorways and technologies. I look at 2020 as an Olympic year, and there's a lot of heat around some of the exciting things that are coming from the Olympic year. They may not commercialize themselves in 2020. But certainly, the excitement around sneakers is going to be there, and I think it's a multi-branded excitement that we'll see heading into the Tokyo Olympics in July.

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Operator [31]

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Our next question will come from Chris Svezia with Wedbush.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [32]

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I guess just first on -- I want go to gross margin for a moment, Lauren. So the comment up 10 to 30 basis points driven largely by a merchandise margin improvement, just maybe your thoughts around that? I assume occupancy cost deleverage on that gross margin rate at low single-digit comp. Just what are some of the drivers on the merchandise margin? I think you mentioned FLX and how that could help on the merchandise margin side. Just any additional color around that would be helpful.

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Lauren B. Peters, Foot Locker, Inc. - Executive VP & CFO [33]

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Yes, additional color. So I mentioned FLX and the fact that just that program alone makes us a bit less promotional. But certainly, as we see apparel, as Dick described, some improvement as we get those assortments right. We had a bit of a step back in the margin rate on apparel over the course of 2019 that gives us potential to improve there. And just thinking that digital gives us the opportunity, as we've made improvements with our capabilities there, for us to improve the full-price selling in that channel.

Also, I would say that as we start to reap the benefits on these changes in our supply chain, you've got a product that's closer to the point that you're delivering it to your customer, which gives us opportunity relative to freight. And as we described, we did some acceleration of product into fourth quarter, and there were some additional freight costs associated with that. So you add all those things up, and we believe that we've got some opportunity to improve that rate in 2020.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [34]

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Okay. And how does RFID -- any update on that? How does that play into either store-level SG&A costs, labor costs and/or driving more full-price sales? Just where are we on that?

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Lauren B. Peters, Foot Locker, Inc. - Executive VP & CFO [35]

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Well, we're still at a place where that's -- in our European business, where, because of the dynamics of the multiple countries we're in, we do the tagging of the product ourselves, which means we're putting on RFID, it's not incremental cost to us. So therefore, we're starting to see these benefits of the technology in our Europe doors. But we don't have RFID really in -- much beyond a pilot in North America. And really, the unlock there will be our suppliers who are behind RFID. When they get to the place where they've got meaningful penetration of RFID on the product, then we should start to see the anticipated benefits in the balance of the geographies. But we really don't have that modeled into 2020 for North America.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [36]

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Okay. Got it. And then just final thing for me. I know you don't want to talk too much about quarterly trends, I get that. But I know historically, past several years, timing of tax refunds has always been sort of a factor in terms of your thought process. Are we at a point now that that's no longer an issue just given the health of the consumer backdrop? Or any color or context you can put around that factor?

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Lauren B. Peters, Foot Locker, Inc. - Executive VP & CFO [37]

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When they have -- when they've got cash in their pocket, they -- our category is really appealing. And so we keep an eye on the flow of that tax money just like you do. So our assumptions are that the flow is normal, yes.

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Operator [38]

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Our next question will come from Paul Lejuez with Citi.

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Paul Lawrence Lejuez, Citigroup Inc, Research Division - MD and Senior Analyst [39]

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Can you maybe talk a little bit about your inventory plans, what we should expect throughout the year maybe by quarter? And also, if you could share your free cash flow expectations for F '20. And then just one other, the $38 million impairment on Footaction, can you just describe what that was? Was any of that related to inventory? Or was it all an asset write-down? Those are my questions.

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Richard A. Johnson, Foot Locker, Inc. - Chairman, President & CEO [40]

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Well, from an inventory flow, we don't detail that out by quarter, certainly, Paul. But I would...

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Lauren B. Peters, Foot Locker, Inc. - Executive VP & CFO [41]

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But if you look back, we've been consistently very disciplined in ensuring that our inventory is tracking along with our sales. So we have expectations that when top line grows, inventory grows, but it grows at less than the rate of the top line growth. Therefore, we have further improvements in our turn. So that's how we think about it, coupled with making sure that it is a fresh inventory. Now we track very closely the aging of the product. Cash burn, not an item we give guidance for. But we've given you the elements that should allow you to track that CapEx at $275 million.

And then I would say on the impairment, one thing for you all to be aware of, right, is that we now have right-of-use assets on our balance sheet with the new accounting standard. So when you assess for impairment, you're also assessing that right-of-use asset, which is really about are you -- do you have a market rate lease term. Are you paying something above market if you are -- the right-of-use asset gets impaired to get you down to current market value? So that was part of the dynamic at Footaction. Inventory impairment, no, not part of that. It was PP&E and right-of-use assets.

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Operator [42]

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And this will conclude our question-and-answer session. I would like to turn the call back over to Mr. Lance for any closing remarks.

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James R. Lance, Foot Locker, Inc. - VP of Corporate Finance & IR [43]

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Thank you for joining us today. Please join us again for our next earnings call, which we anticipate will take place at 9 a.m. on Friday, May 22. The call will follow the release of our first quarter results earlier that morning. Thanks again, and goodbye.

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Operator [44]

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Thank you, ladies and gentlemen. The conference -- this concludes today's conference. Thank you for participating, and you may now disconnect.