Foot Locker Inc FL
Q1 2013 Earnings Call Transcript
Transcript Call Date 05/24/2013

Operator: Good morning ladies and gentlemen, and welcome to the Foot Locker's First Quarter 2013 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

This conference call may contain forward-looking statements that reflect management's current views of future events and financial performance. These forward-looking statements are based on many assumptions and factors, including the effects of currency fluctuations, customer preferences, economic and market conditions worldwide, and other risks and uncertainties described in the Company's press releases and SEC filings.

We refer you to Foot Locker Inc.'s most recently Form 10-K or Form 10-Q for a complete description of these factors. Any changes in such assumptions or factors could produce significantly different results and actual results may differ materially from those contained in the forward-looking statements.

If you have not received today's release, it is available on the Internet at or Please note that this conference is being recorded.

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

John A. Maurer - VP, Treasurer and IR: Thank you and welcome to Foot Locker Inc.'s first quarter 2013 earnings conference call. Earlier this morning we reported first quarter net income of $138 million or $0.90 per share. These results include approximately 1 million of transaction cost related to our pending acquisition of Runners Point Group, which we announced earlier in the month. Our first quarter EPS on a non-GAAP basis, excluding this cost was $0.91 per share. This resulted as an increase of almost 10% over the $0.83 per share that Foot Locker earned in the first quarter of 2012 and represents the highest quarterly profit that company has ever achieved as Foot Locker, Inc.

Our prepared remarks will begin this morning with Lauren Peter, Executive Vice President and Chief Financial Officer, who will review our first quarter financial result in more detail. After Lauren, Dick Johnson, our Executive Vice President and Chief Operating Officer will provide an update on several of our key initiatives and comment on the pending Runners Point Group acquisition; Ken Hicks, our Chairman and CEO will then provide additional insight into our business strategies and major trends we are seeing in the athletic industry.

In order to have plenty of time for your questions after our prepared remarks, let me turn the call right over to you, Lauren.

Lauren B. Peters - EVP and CFO: Thank you, John, and good morning to you all. We are quite pleased with the strong start to 2013 that we reported this morning. Our non-GAAP earnings of $0.91 per share represents a solid improvement over the first quarter result we posted in 2012, especially in light of the relatively slow start in February, we told you about on our previous call and the sales shift related to the 53rd week last year, both of which challenged our leverage opportunities.

Reviewing the results in detail, we reported a 5.2% comparable sales increase in the first quarter with a 3.8% comp increase in our stores and an increase in our direct-to-customer segment of 18.2%. Our total reported sales increased 3.8%. We operated slightly fewer stores this year compared to last, but the primary driver of the 1.4% difference between our comp result of plus 5.2% and the total sales increase of 3.8% is up 53rd week sales shift, I just mentioned.

This difference equates to the $20 million shift in Q1 that I mentioned during our call in March. Recall also that our sales both comp in total are impacted as we temporarily shut stores where some of the major remodels we are currently undertaking. Dick will touch on this during his remarks.

We noted on our previous call that February's comp gain was in the low-single-digit. Largest comp gain rose to mid-single-digits despite losing a full day of sales compared to 2012 because of the Easter shift and April came in at high-single-digits. The April result was encouraging given that all of the Easter selling shifted into March and the weather remained stubbornly cold in many of our markets, here and abroad during the first quarter.

Our domestic store divisions posted a mid-single digit comp sales gain led by Kids Foot Locker, which was up almost 20%. Also within that overall comp sales gain was a high-single digit comp decline at Lady Foot Locker, which Dick will address during his remarks.

Foot Locker Europe and Foot Locker Canada posted low single-digit comp gains, while Foot Locker Asia-Pacific came in within mid-single digit comp gain. Within the 18.2% comp gain in our direct-to-customer business Eastbay was up low double digits. Our businesses continued their very strong performance with sales up almost 50%, while was down high single-digits.

Turning to families of business; footwear had a solid mid-single digit comp gain with children's footwear up double-digits and men's footwear up high single-digits, while women's footwear was down mid-single digits. Apparel was up in the quarter as well, although not as much overall as footwear. In the U.S., we continued our momentum in building our Apparel business with a mid-single digit increase, led by especially strong digital sales. In that channel, apparel was up double digits in men's, women's and kids. Internationally however apparel sales were down, although I should add that our international apparel margins were higher compared to the year before, especially in Europe. As we mentioned at this time last year, some of those sales in Europe a year ago were markdown driven strategically executed to keep our inventory fresh.

With that segue into gross margin; let me say that we were pleased to be able to produce a strong margin rate of 34.2% in the first quarter, an increase of 20 basis points. We gained 20 basis points in merchandise margin and another 10 basis points in leverage of our fixed costs. We gave back 10 basis points related to lower shipping and handling revenue. In addition to the 10 basis points of leverage we picked up in gross margin, we delivered 20 basis point of leverage in SG&A as we did a solid job flowing incremental sales dollars to the bottom line. We continue to drive productivity increases in our key internal metrics; such as sales per square foot and sales per payroll hour. Our 19.2% expense rate in the quarter is the best that have ever been as an athletic company.

As John mentioned, included in SG&A this quarter is approximately 1 million in transaction costs related to the Runners Point acquisition. Please note that there was also $1 million expense related to Runners Point, included in SG&A in the fourth quarter last year which we have not previously called out. One line item that has increased is depreciation, which increased 2 million to 31 million. This increase relates to the higher levels of capital spending undertaken in the last couple of years. A charge that did not occur in the first quarter that we indicated on our previous call was likely to happen relates to the closing of the 22 CCS stores. Due the timing of liquidating inventory and converting many of the stores to other formats those stores have not yet closed. However, the plan is now firm to close or convert them in early June. As a consequence, the $0.01 a share charge related to severance and exiting leases will be incurred in the second quarter.

On the previous call, we steadily intended to close 88 stores in 2013 along opening 73 new stores. The 88 figure did not include the 22 CCS stores. So, total plant closures for the year are 110. Similarly, the estimate of opening 73 stores did not include conversions of CCS stores into other formats. So, our current estimate of new store openings for 2013 is now 86. So far in 2013, we are largely on plan with both openings and closures, finishing the quarter with 3,321 stores, down 14 from the end of last year.

Foot Locker Europe continues open new stores and now operates approximately 600 doors. In the U.S., the biggest store count change continues to come out of Lady Foot Locker, which closed 21 doors in the first quarter. We will continue to work with our landlords to close underperforming stores throughout the year to improve the overall productivity of our fleet.

Turning back to Q1 results, our tax rate came in at 36.1%, slightly better than the 36.4% rate last year as we settled certain tax audits that allowed us to release some of our related taxes reserves. The overall result for the quarter was non-GAAP net income of $139 million, the highest level of earnings in any quarter, not just the first quarter in our history as an athletic company. The result which we the entire team at Foot Locker are, of course, very proud of.

Moving on now to the balance sheet; we ended the quarter with $1.1 billion of cash and short-term investments, an increase of $196 million from the end of Q1 last year. Our first quarter typically represents a peak in cash flow generation. The cash balance is subsequently declining until we get to the year-end holidays. This year of course we will awfully use some of our existing offshore cash to purchase Runners Point Group. As we noted in our release about Runners Point Group, we did not repurchase any shares in the first quarter due to the ongoing negotiations related to that transaction. However, we intend to start the $600 million program in Q2. We did just recently pay our $0.20 dividend, which represents an 11% increase over the previous dividend rate, and we are well underway in executing the elevated capital spending program that we detailed on our previous call.

Focusing now on inventory; it increased 2%, while total sales increased 3.8%. Our inventory remains fresh and productive. We believe it is well positioned to support the mid-single digit sales gains we continue to plan for the rest of the year. In fact, excluding Runners Point, which Dick will comment on in more depth in a moment, our outlook for the rest of 2013 remains largely unchanged from what I described in our previous call. Keep in mind that we continue to base our year-over-year comparisons on our 2012 non-GAAP results excluding the 53rd week. Earnings on that basis were $2.47 per share in 2012.

To review, we expect modest improvement in gross margin, 20 basis points to 30 basis points, driven mainly by leverage from higher sales, but with the opportunity for some gains in merchandise margin as well. We also believe, we can lever higher sales to produce a lower SG&A rate for full year 2013, with the second quarter having the best opportunity for gains due to the 53rd week sales shift and the third quarter being the most challenged. Our estimate of depreciation in 2013 is now $126 million, up slightly from the $122 million I mentioned on the last call. The full year tax rate is estimated to come in slightly below 37%, excluding any additional audit settlements that may occur.

Let me now turn the call over to Dick Johnson to review the progress of some of our key initiatives, including the pending acquisition of Runners Point Group.

Richard A. Johnson - EVP and COO: Thanks, Lauren, and good morning. Let me start with Runners Point. We are all very excited about this opportunity to acquire a profitable, fast-growing athletic business in a strong market. The Runners Point Group operates multiple banners, the most significant of which are Runners Point and Sidestep, and we believe we can help the current management team segment the market for the different banners we will have in Germany and adjacent countries, just as we have done successfully in North America. Over time we will also begin providing them with world-class operational support to help them pursue their growth strategy.

Once we close on the transaction and can really get in there and analyze relative productivity on a store-by-store basis, we may adjust the banner profile, perhaps changing some Foot Locker stores to Runners Point or Sidestep stores or vice versa.

We certainly appreciate the unique brand value their banners have built up in their markets, so we intend to operate multiple banners in many German markets, just as we do with Foot Locker, Champs Sports and Footaction in the United States today. Down the road, we also plan to explore the potential for banner growth in other European markets outside Germany. For the consolidated Runners Point Group, comp sales grew almost 9% in calendar year 2012, led by a 63% gain in digital sales by Tredex, their e-commerce subsidiary. Tredex accounted for more than 10% of RPG's overall sales of EUR197 million in 2012. That 10% figure for digital sales as a percent of total sales is a goal we have for our own digital businesses. We have ways to go towards our goal, especially in Europe.

Due to comp gains as well as store count growth, RPG sales in total increased about 18% for the year. The acquisition will solidify our position in Germany, and once the transaction closes, Germany will become our leading European market surpassing Italy. As I said at the beginning of my remarks, RPG has been profitable, and we expect it to remain so as we added to our already profitable European portfolio. Thus, we believe the acquisition should be slightly accretive in 2013 excluding transaction and integration costs. Just how accretive it will be depends on many factors, not least of which is how long merger control review takes before we can actually close the transaction.

Let me turn now to providing you with updates on some of the initiatives of our existing business. As Lauren mentioned, we are on track with our elevated 2013 capital spending program of $220 million. We've already completed almost as many major remodel projects this year as we did during all of last year, and during this current period between Easter and back-to-school, the pace has picked up even further.

Our real estate team is doing a great job coordinating all the projects and figuring out how to roll out the new formats even more efficiently and quickly. So far, knock on wood, everything is going smoothly on the construction front and the performance of the completed projects continues to more than meet our hurdle rates. One of our highest potential growth segments remains the opportunity to expand women's footwear and apparel to play a more significant role across all of our banners and channels. Currently though our women's business remains a work-in-progress.

Our Lady Foot Locker and SIX-02 banners are continuing their efforts to attract the athletically active woman in her 20s and 30s who is interested in style, fit, and performance. The younger school age customer, who is more interested in fashion, is still finding her way to our other banners, such as Foot Locker and Champs Sports. But unlike the fourth quarter when our women’s sales in these other banners were up enough to offset the decline in Lady Foot Locker, in Q1 this was not the case.

One positive is that our margin rates in both women's footwear and apparel are higher than a year ago, as we have gotten more of the right merchandise and the right stores to serve our various female customers. Another positive is that our remodeled Lady Foot Locker doors and larger SIX-02 doors are significantly outperforming the rest of the Lady Foot Locker chain.

It encourages us that we are in the right track. However, we have many lessons to apply and many detailed aspects of the business to improve before we can tell you that we have found a sustainable profitable formula that will determine our go forward strategy for Lady Foot Locker and SIX-02. We're still deep in the testing mode and we're going to get the business right before committing a lot of capital to it.

One area we are currently initiating with cover off the ball is our kids business. As Lauren mentioned, it is the fastest growing family of business with footwear up low double digits and apparel up a lot more than that. We have created a more kid-friendly environment in our kids' Foot Locker stores with the Pro Zone and (hero size) footprints to help entertain our young customers. We are expanding and diversifying our kids' assortment, in particular, by emphasizing branded apparel and accessories and are offering more casual and running footwear style for kids. For example, we have a Crayola-inspired assortment from Converse made just for kids at the same time our vendors are continuing to provide more and more innovative takedowns of the adult hero shoes. We expect that we will have remodeled over 20% of the kids' Foot Locker fleet by the end of the year to take advantage of the momentum we see in this business.

With that update of some of our most important initiatives let me hand it over to Ken to provide more color on our company and the athletic industry.

Kenneth C. Hicks - Chairman, President and CEO: Thanks, Dick and good morning, everyone. I appreciate you all participating on our call this morning. Let me echo Lauren's comment early on and say how proud I am of the entire team of Foot Locker for setting yet another earnings record this quarter. Almost exactly one year ago I said it is in every quarter that I can say we achieved the highest level of net income and EPS in the history of our business as an athletic company, but now I wouldn't mind making a habit of it.

Let me say thank you again to all of our associates who built us momentum that made this result possible. We have a lot of strong teammates helping us, including our outstanding brand partners. Without great teamwork and excellent performance across our entire company and with our vendors and suppliers record results like these just don't happen. It takes a balanced team effort to win a championship, and that's how we look at what we are trying to do here. Not just win a game or a series but build a team that wins on a consistent basis. Even champions run into difficult stretches, the air pocket of lower sales we experienced in the second half of January and early February dissipated somewhat, and as Lauren mentioned, our comp cadence improved significantly as the months of Q1 progressed.

Sales this quarter are similarly off to a bit of a slow start with comps in May running about flat so far. Store comps are down slightly, offset by gain in our direct sales. I'm sure you all know that it would be unwise to put too much weight on sales over period of just a few weeks' weather, holiday shifts, store remodels, and of course different launch cadences can cause deviations from the longer term trend. We believe the current comp rate will improve over the remainder of the quarter, and as Lauren said, over the balance of the year we still expect to drive a mid-single digit comp gain.

Turning back to what drove our record results in Q1, basketball continued to be the biggest driver of our business in the first quarter with Jordan both retro and lifestyle product, particularly strong; the marquee player shoes such as LeBron, KD and Kobe are also selling well.

The running business in the U.S. was up in the quarter as well led by Nike Free and our technical vendors such as ASICS, Brooks and Mizuno. Running continues to trend off in some European markets as many of our customers there are shifting to more basketball silhouettes, especially Jordan. As temperatures have risen recently in our major markets around the world, the running business is improving, which is good to see especially since it's not pulling away from our basketball business.

The lifestyle footwear business led by various adidas and Nike styles continues to perform well for us. Although the cross training business that featured Griffey and Nomo last year was down in the quarter. Some product releases in that category were pushed back into Q2 this year. So, we're optimistic that this business will pick-up as a better assortment get into our stores and into our online sites. Overall, we're pleased with the performance of all of the legs of our stool, basketball, running, lifestyle footwear, and apparel. The Nike Jordan, adidas and Under Armour brands led the way in apparel with fleece and tees doing well. Graphic and Attitude tees from our team addition facility performed well throughout our banners. The color hookups of tees and shorts with the hottest shoes continued to excite our customers with one of the best examples being the Jordan Grey package that launched at the end of the quarter.

Increases in apparel sales have been substantially exceeding footwear sales increases in the past couple of years as we improve the assortments in each of the banners and told much stronger brand and color stories. In the first quarter of this year, the two categories increased close to the same pace. As a result, our apparel penetration was at about the same level year-over-year. We believe apparel sales were impacted more than footwear by the cold weather in the first quarter of this year compared to last. Long-term however, we still believe we have the ability to drive apparel penetration close to the 30% level it was back a decade ago.

Within accessories, certainly one highlight continues to be performance socks from Nike, adidas and Jordan. Sales of which increased well into the double digits, as innovation from the vendors remains very strong. In addition to the improved productivity from store remodels that Dick talked about, we're continuing to build our technological capabilities in our stores in our digital business and in our support functions. Our industry-leading capabilities in these areas remain, I believe, one of our underappreciated strengths; first, we continue to invest in technologies to make our inventory down to the very last unit available to our customers anywhere they come to see us whether online, mobile or in-store. This is a fairly complex proposition for a multi-branded company such as ours where we need to maintain flexibility as well as maintain separate identities for each banner with our customers. This year, for example, our websites will show a product as long as it exists anywhere in our company in a warehouse or in a store. Customers can then buy online and if they choose reserve in-store. Similarly, in our stores customers and our associates will be able to check on the availability of an item wherever it may be and we will be able to ship it to their home or to the store of their choice.

Second, while the real estate and store construction teams are out creating exciting places for our customers to shop and buy our system teams are working with their business partners developing best-in-class tools to help us do a better job buying and allocating product, hire the best retail talent, schedule hours efficiently, provide our associates with the best opportunity to maximize their success with the customer and optimize our warehouse and logistics processes among other initiatives.

We are just beginning to realize the benefits from some of the technologies we've already invested in such as our business intelligence tool and in-store handheld scanners and these benefits should build over time, especially when combined with the systems we haven't even yet implemented such as our new allocation system.

Finally, I want to touch on the Runners Point acquisition again. We are getting a profitable business with the strong leadership team out of the gate and it is certainly digestible from a size perspective. It's not a business that's broken, that we are going to need to fix which is a bit of what we are dealing with in Lady Foot Locker business. Once we own Runners Point, we will go through the same disciplined process, we do with any investment opportunity and test any major changes to the product assortments in the different banners or any expansion opportunities we see before going into them full speed.

We are excited about the transaction and look forward to welcoming to Runners Point team as they join our Foot Locker team. Together, we look forward to wining more championships in the years ahead.

Thank you. We'll be happy to take your questions now. Please go ahead, operator.

Transcript Call Date 05/24/2013

Operator: Matt McClintock, Barclays.

Matthew McClintock - Barclays: Ken, a lot of good commentary on the apparel piece of the business this quarter, and it really seems like team addition’s been great for you. I was wondering if you could maybe talk more on the private-label part of the apparel business and specifically, when we think about this business longer term to get the business to where you want it to go, what are some the building blocks that you still need to put in place to achieve your vision for that business?

Richard A. Johnson - EVP and COO: What we – we believe private label apparel gives us an opportunity to fill voids that are not provided by the brands. We're going to be primarily a branded apparel retailer, but we – there are voids that we use private label and continuing to build on them, such as the cargo shorts business, very strong business for us, some t-shirts. We also have the ability to develop brands, such as what we've done with Sneaker Freak in Europe and Actra with women's business. So, what we continue to do is evolve that business from a very promotional business that it used to be and use it to fill voids where we believe there are significant opportunities. And that may involve brands or it may involve just using the private label as we do in shorts and fleece.

Matthew McClintock - Barclays: Thank you, and if I can actually get one more question in just real fast. Runners Point, the e-commerce opportunity seems pretty large in Europe. And I was just wondering if you could maybe think – discuss a little bit more how you view their business in Europe, the positioning and the potential to take that banner – that e-commerce banner to the rest of Europe?

Richard A. Johnson - EVP and COO: We believe Runners Point Tredex operation, first of all, is best-of-class. It, obviously, is a significant part of their business. They have significant capabilities that will allow us to further develop our new dotcom capability. We just started rolling out in most of the countries in Europe within the past year. They've been in place for several years. They also have a very good understanding, for example, of payment terms in Europe and Germany. There are six different ways that you can pay in Germany. We don't even have the capability for all of those within our current (Foot Locker.Germany) operation. This will give us that capability to better serve the customer, to have better processing capabilities, and expand to the other parts of our operations. So, you are correct in picking up that Tredex is one of the important parts of the acquisition and one that we are very excited about using not only in Europe, but some of the ideas and things they do and bring that back to the States to further strengthen our good dotcom position here.

Operator: Paul Trussell, Deutsche Bank.

Paul Trussell - Deutsche Bank: Wanted to start-off in SG&A, Ken or Lauren, could you just speak to the flexibility that you have in the scenario where comps for the balance of the year do fall short of your mid-single-digit view? If comps are only up, for example, low-single-digit, do you have enough flexibility or would you be able to maybe moderate your plans for investments or remodels that you could still leverage or how should we think about that?

Kenneth C. Hicks - Chairman, President and CEO: We have said all along, Paul, that we can leverage low-single-digit comps. We do have flexibility as we see the trends to make adjustments and there are number of different things that we can adjust ranging from store labor to what we're doing in terms of receipts and resulting markdowns to marketing. So, we have flexibility. One of the issues we had at the end of January was, as you know, not just for us, but for all of retail, the precipitous drop the last two weeks of January. It's more difficult to adjust, but we feel we have the flexibility to adjust and work very hard to control our expenses. We are very proud. We have the lowest expense rate in our history this last quarter, and it's something that Lauren does an outstanding – and her team do an outstanding job monitoring. That said, we still believe looking at the product that's out there and the things that we have coming that we are going to achieve mid-single-digit sales growth. Lauren, I don't know if you have any?

Lauren B. Peters - EVP and CFO: No, I think you covered that. We remain focused on profitability and keep close eye on the top line and we adjust where we can as that moves.

Paul Trussell - Deutsche Bank: In 1 May commentary that you made, there are some changes in the release calendar this month. I know that the Retro Jordan products, for example, are coming out tomorrow versus coming out a week earlier last year. How meaningful do you think that is to the flat comp and deceleration from April, and what are the other kind of factors that you think may have driven this slowdown?

Richard A. Johnson - EVP and COO: Well, there is no question that just as in the department store industry, the shift of a sale one way or the other, the shift of a release for us has an impact, and particularly when it's a significant shoe, because you're talking a few million dollars here, few million dollars there, make a big difference in what the comps are. The other thing – and it's not an excuse for lack of sales, it's an excuse for the – or it's a reality of a shift of sales, because we believe the customers will buy apparel when the weather is right. It's been cooler. We did a very good job getting out of fleece in the spring season. So we don't have a lot of fleece. But we got a lot of t-shirts and shorts. People aren't quite wearing them. You're in New York today and you know that the high today and tomorrow is going to be in the low 60s; in Europe, it's been in the 50s. That doesn't – I'm not putting that as an excuse why we haven't sale. What I'm saying is, it's a reason why the sales have shifted somewhat. And we expect to get those sales back, and we're in good shape. And where we have seen the weather warm up, such as places like Vegas where it's in the 90s, the customers are out there and they're buying the product. So, we know the product is right. It's just getting the conditions right and we anticipate picking up.

Paul Trussell - Deutsche Bank: Just one last one quickly. Ken, could you just speak to the overall women's footwear trends across the industry, so we can understand what the spread is overall versus the business you are seeing in Lady's Foot Locker because if they're not shopping there, where do you think that that customer is primarily purchasing their athletic goods? And you also spoke about the larger Lady Foot Locker stores outperforming. What is the composition of large versus smaller Lady Foot Locker?

Kenneth C. Hicks - Chairman, President and CEO: Couple of things. One, there is two basic things that we are seeing going on in the women's business; one is that the performance business things like running and training shoes are doing well for us. There are some fashion elements that are doing well like the wedges and athletic shoes from Nike and Reebok, adidas and those are two different customers. What we've done in our business is we shifted Lady Foot Locker to a more performance customer. By doing that we fire the customer that was there who was primarily a fashion customer. We are now sending her to our Foot Locker and Champs stores and they are coming and up until this quarter they bought – our business in those stores was actually up compared to the Lady Foot Locker stores and remember we said, historic – for the up until this quarter again our women's business overall was up, it was the Lady Foot Locker business that was down. This quarter, I think that one of the things that happened as we probably didn't have enough of the fashion in Foot Locker to satisfy that fashion customer and that's something that we are working feverishly to address. In this larger stores and the re-skinned Lady Foot Locker stores, we have made a major effort for the new customer to find and see what we are and we are starting to see that customers finding us and coming in. In the basic Lady Foot Locker stores, it's a little more difficult because we don't have the room and haven't shown the apparel which is really the signal to that customer that this store is more performance-oriented. The good news is we are seeing where we've put the apparel in a significant way in those re-skinned stores and in our SIX-02 stores. They are starting to perform better and we -- that that shows that we're on the right track. We've got to make adjustments to that sort because we are finding the customer is buying the product differently than we had initially thought they would buy, but we are making that transition. I would say that right now in the women's business, they aren't exactly -- in the fashion side, they are not moving as aggressively as they had been in the past, they are probably moving into other shoes, but I think as we get the right shoes, we will be positioned well.

Lauren B. Peters - EVP and CFO: Paul, you asked about the count of larger SIX-02. There are three of those. And we've got 14 of what we call re-skinned Lady Foot Locker, so that's a 17 doors 282.

Operator: Chris Svezia, Susquehanna Financial.

Chris Svezia - Susquehanna Financial Group: I was just wondering if maybe you could give us the traffic and ticket in the first quarter.

Lauren B. Peters - EVP and CFO: Yeah. Certainly, ASPs were part of the story, they were strong, up in footwear, up further in apparel, traffic down a bit, down a bit.

Chris Svezia - Susquehanna Financial Group: Then just I'm curious to know in the May trends, is there any -- can you give any color between what's happening internationally or Europe versus the domestic operation in that maybe thought process?

Richard A. Johnson - EVP and COO: The business in total is a little bit healthier in Europe right now. We've seen some bounce back, Ken referred to some of the temperature challenges. But again I think the product in both markets is right. So as we push through into -- get closer to summer I think that both businesses are in good shape.

Kenneth C. Hicks - Chairman, President and CEO: Europe business Chris is actually brick and mortar one of our better businesses right now. Team is doing is a good job, responding to what the customer wants. And you heard Dick's comment about Runners Point, who is primarily in Germany, which is the strongest economy and one of the things that we're going to take advantage of by having to be a largest country is the deal closes.

Chris Svezia - Susquehanna Financial Group: Just to clarify. I know a lot of people are going to be concerned about the comp to date trend line, but as we've seen in the past and the product is relevant, the customer does come into your stores and shop. I guess give us some just points as to why you feel so confident that you're going to return back to mid-single digits, obviously the calendar shift has some impact. But I just want to maybe go little elaborate about that, about your comfort level. So that earlier in the first quarter when that happened, probably going to see it again, but just give investors some comfort.

Richard A. Johnson - EVP and COO: Chris, I think that when you look at the business, the advantage that we have obviously is we've seen the product coming. And we also know what's selling and what's not selling. There are number of different things. One, some of the big ideas that are coming more Flyknit's from Nike, more Boost from adidas. The Spring Blade from adidas is going to be a big hit coming. The colors that we've got in the store and that we got coming are selling extremely well, more technical performance. The launches that we have coming up we've got a nice line-up of launches coming, all of those things in the shoe business. The second thing is that in the past our apparel significantly outpaced our shoe business. This quarter it didn't and we are positioned well with apparel. We get a little bit of break where people will start wearing the shorts and more of the t-shirts we have because we don't have the fleece to sell them. When we did have the fleece, the last couple of quarters, we did very well with it. But we sold out of it, we did what was supposed to do, we are clean. We go for the expected weather. We don't try to say it should be this or it should be that, we always want us to be what's expected. That will help because then our apparel business will pick up. So, there are number of things that I look at in shoes and look at in apparel to give me optimism about this quarter and quite frankly for the rest of the year. You guys know us well enough to know that we are not going to step out and promise the world. We are going to say, pretty sure of what we can deliver. We feel good about the mid-single-digits if things work out better, things work out better, but unlike what some people like things and actually mean something else, when we say what we say, we mean it.

Operator: Kate McShane, Citi.

Kate McShane - Citi: Just with all the initiatives that you have in place, I was wondering if you could walk us through where you'll be with each of your remodels for each banner this year, so what percentage you'll be through and can you talk about how much of a comp lift you get after you remodel the store?

Richard A. Johnson - EVP and COO: I'll take you through, Kate, from Kids Foot Locker numbers I mentioned. We will be over 20% of those doors would have been touched. We'll be around the 10% level on the Foot Locker chain and we'll be closer to 15% on the Champs chain. No, we haven't talked about the comp lift that we get after those remodels. They continue to meet the hurdles that we've got from a capital perspective, but we haven't commented on the comp performance.

Kenneth C. Hicks - Chairman, President and CEO: We have our hurdle rates, and as Dick said in his call, all of the remodels were projected to exceed those hurdle rates.

Lauren B. Peters - EVP and CFO: Which are 11% ROIC, 13% IRR.

Kenneth C. Hicks - Chairman, President and CEO: They are exceeding that exceed, is what Dick said in his comments, and so, we're – right now, we're happy with the results of the remodels. The challenge that we had this past quarter was particularly for the Champs stores. They are closed for several weeks to do the remodel, and we didn't have any stores that have been remodeled that we're providing the additional growth to make up for the ones that were closed, when you close a number of stores for several weeks that has an impact. But what will start happening now is the ones that have been remodeled will help offset for the ones that are closed as we start to move through this process that was the way we had planned it. But the first batch we didn't have that, the benefit.

Kate McShane - Citi: Then, my second question was just your commentary on Apparel in Europe that it was a little bit weaker. Can you remind us what the mix of apparel and footwear is in Europe compared to that of the U.S.?

Richard A. Johnson - EVP and COO: We have not set the percent – totally in the U.S., or across the Company, where it's about 24%. But Europe has a higher percentage of apparel penetration than the rest of the Company, and it's been more challenging there, and we continue to make adjustments to improve that.

Operator: Eric Tracy, Janney Capital Markets.

Eric Tracy - Janney Capital Markets: I guess, Ken for you. As we think about the strength in the kids business, one just sort of speak to -- again, what exactly is driving that? Is that in any way an indication again just – I hate to use the word cycle, but as we go through the innovation pipeline that's occurred over the last couple years on the men's side of the business and perhaps the trickle-down to now the kids business. Maybe just frame for us how we should be thinking about that process?

Kenneth C. Hicks - Chairman, President and CEO: Again, we have the cycle of trend, I don't think this is necessarily a cycle. I think this is a trend that's here. Those people with kids know, their kids aren't wearing any brown shoes. They're all wearing sneakers all the time. And so that opens up the opportunity for us. We are the place to go for quality kid sneakers. There is not another place that has the assortment that we do either in our kids' stores or in our kids' assortments in all of our other banners. And what we are seeing there is the brands are doing an excellent job in; one, making sure that they have kid-friendly fun shoes and we're seeing a lot of those. Dick mentioned the Crayola line from Converse, for example. But also the takedowns, there is a huge, you know, I want to look like daddy or I want to look like big brother business and I want to wear what my hero is wearing. So, we are seeing significant takedown business. Then at the bigger sizes there is a fair bit of performance and women who are buying those shoes – young women or men for that matter with small feet. So, it's really the brands doing a great job adjusting or recognizing this trend, for example, you know Nike just appointed a new person to run their kids initiative, it's one of the leaders in the company because they recognize it and other people are doing the same thing that this is a – there is not a vendor we deal with that doesn't recognize this as a significant opportunity and we're benefiting.

Lauren B. Peters - EVP and CFO: I will tell you our team has also done a really good job of adding apparel to those stores, and when you get a strong apparel offering, it help those shoes.

Kenneth C. Hicks - Chairman, President and CEO: If you look at the new remodeled kids stores what we've done in the remodel is really make a major apparel play and as again Dick said that apparel is up significantly more than the shoes and the stores that haven't been remodeled yet we've taken steps to put more apparel in until we get around to the remodel. So, there are number of things happening. The other thing in the accessory area, we put in hats and more socks. So, this is something that to some degree have been a neglected business, it's really now just getting the attention, and I see it continuing for quite some time.

Eric Tracy - Janney Capital Markets: Then, I guess, my second question you guys have done a great job of managing inventories maybe speak to the competitive landscape in the mall. Obviously, when your key competitors they are doing a partnership with the department store, just the sort of the view of the landscape and any potential threat of cannibalization or too much product in the mall, it gives a segmentation rate and at the end of the day, whoever has got the best product is going to take share, but maybe just thoughts on the developments in the mall?

Kenneth C. Hicks - Chairman, President and CEO: I think here the brands have done a very good job making sure that they manage their brands well, and they will continue to do that, make sure that they don't damage the brands by putting the product in the wrong places or letting the product get ahead of the market too much. That said, we have to keep an eye on what's going on there. We believe that the customer who is buying in our stores and stores like ours will continue to do that. Somebody else maybe cannibalizing their our own business by expanding the outlets they have, I'm not sure that will necessarily impact us because of the product that they're talking about. But we will definitely keep an eye on it. I think our history has shown that Dick and Lauren together have done a very good job managing those inventories and keeping them in line with the business.

Eric Tracy - Janney Capital Markets: Then, just my last question regarding the Runners Point acquisition. Looks like at least on the price basis it's got a really nice deal here and given the comps, given the growth opportunities you mentioned it's a profitable business and expect to be accretive. Is there any way to get a little bit more color on the operating margin structure of that business relative to Foot Locker, and I guess some of the opportunities?

Kenneth C. Hicks - Chairman, President and CEO: I give Dick, Lauren, Gary Bahler, our General Counsel, Lew Kimble and all the people involved on the negotiation doing a hell of a good job negotiating when you look at what we got for the price. That said, it's a -- we are going through a legal process in Germany and we don't own them yet. And so it's a little difficult for – not a little difficult, it's – we can't comment a lot on the details.

Operator: Omar Saad, ISI Group.

Omar Saad - ISI Group: I was hoping you could elaborate a little bit on the gross margin line kind of the differential between occupancy leverage and merch margin. It looks like they both contributed a little bit this quarter, but it sounds like more of the gross margin gains in the future seem like they are going to be coming from leverage rather than merch margin. Can you talk about the merch margin dynamics there and what's changing? Obviously, you've done a great job on that front the last two years and have seen huge gains, but are we kind of getting towards the end of the road there, or is there still opportunity on the merch margin side?

Lauren B. Peters - EVP and CFO: Let me reiterate what we saw in the first quarter, and it was 20 basis points in our margin, overall. We had 20 basis point improvement in the merchandise margin. We got 10 basis points leverage out of the fixed cost, and we gave back 10 basis points in lower shipping and handling revenue. So, yes, we do on a mid-single-digit we get leverage opportunity out of the margin, and as we've said, we continue to think that that's what the balance of the year looks like on the top line, so we would expect leverage. But that shipping and handling revenue doesn't go away that pressure point, and we have got continued pressure point out of lower IMU, although that's certainly at lower levels of pressure than what we've seen last year. But we do still have opportunity in underlying merchandise margin. We are making investments in systems that help us do better job of allocating the product, and the better we are at allocating into the right place the first time around, the more full priced selling you get, so that helps merchandise margins. We have said more than once that long term we really feel very good about the opportunity for apparel to become a higher percentage of our business and that one day, the margins in apparel should outpace the footwear margins. What we've been doing for the last couple of years is lower promotional levels overall have meant that gross margin in footwear has been improving at the same time that apparel, so they haven't consistently crossed yet with apparel over footwear. So, I guess what I'd tell you is that merchandise margin opportunity, the fruit’s higher up in the tree, but it's still there and we think we can get it.

Operator: Sam Poser, Sterne Agee.

Sam Poser - Sterne Agee: When do you foresee the RPG deal closing?

Lauren B. Peters - EVP and CFO: It should be – there is – it's dependent on when merger control review completes, but it should be this summer, July, August.

Sam Poser - Sterne Agee: Then can you give us – like you said you're running flat for the month of May, can you tell us sort of what the shifted comp would have been? How we should think about the shifted comp by quarter or for the month of May from last year, so what you're up against, but on the same calendar?

Richard A. Johnson - EVP and COO: We've done the quarter, but we haven't done the month.

Sam Poser - Sterne Agee: So, could you give us what the shifted quarter would – what the shift in Q2 and Q3 look like?

Lauren B. Peters - EVP and CFO: So, again, we'd go back to the guidance that we gave, what this 53rd week shift is all about. For the second quarter, we pick up a strong week of August, drop off a week of May. So, that's worth about $40 million historically of sales moving into second quarter.

Sam Poser - Sterne Agee: But that doesn't affect the comp; that affects the sales. So, you see what I am saying? So the point is that you had a – whatever the comp was last year, you had a good comp in Q2 last year, but that comp is on a different calendar. So my question is, is what – you ran a (9.8) comp last year for the quarter starting on April 29 and going through July 28. This year it's a week later. So, on a shifted basis, what is the actual comp for those weeks that you are up against? Does that make sense? I understand the $40 million move. I am trying to figure out what the comp – what the actual comp you are up against is because – is it a more difficult comp in Q3 than it is in (indiscernible) that it is in Q3 and so on, so we make sure we…

Richard A. Johnson - EVP and COO: It is a more difficult comp in Q3 than Q2.

Sam Poser - Sterne Agee: In Q3 than Q2?

Richard A. Johnson - EVP and COO: Q3 is our most challenged quarter this year.

Lauren B. Peters - EVP and CFO: So, it's a bit stronger on a shifted basis what that comp would have been last year. But we still think mid-single digits and that's true by quarter.

Sam Poser - Sterne Agee: So you think the variance won't be that great, but you do have a little more opportunity in Q4 because of that – the horrible last 10 days?

Richard A. Johnson - EVP and COO: Yeah. So what happens, you have the shift of the money, but the shift of the comp is comparable.

Sam Poser - Sterne Agee: Then one last thing, Dick, how many stores by banner have you touched year-to-date so far in the remodels?

Richard A. Johnson - EVP and COO: We haven't gotten into the specific numbers by banners, Sam, because projects start and finish…

Sam Poser - Sterne Agee: How many are done? How many are completed, I guess?

Lauren B. Peters - EVP and CFO: We completed 64 remods in the first quarter. We will do a chunk more in the second quarter. We reached a peak in the third quarter, but again, not all remods are the same for closure time, if you will.

Sam Poser - Sterne Agee: That's why I want to see how many are done by banner, so we can sort of get an idea. We know how many you are doing, this will give an idea…?

Kenneth C. Hicks - Chairman, President and CEO: First quarter is our second light – the fourth quarter is our lightest by far. The second quarter is second lightest, the heaviest is completed in the third quarter and the second quarter is the second heaviest. The challenge, as Dick said, particularly with Champs as some carryover from quarter-to-quarter.

Sam Poser - Sterne Agee: And next year assuming these work that number will go higher, theoretically?

Kenneth C. Hicks - Chairman, President and CEO: We would anticipate continuing the process. And if our ability is to do more we would do more. We want to see what our ability is, it is one of the reasons we got what we got.

Operator: Camilo Lyon, Canaccord Genuity.

Camilo Lyon - Canaccord Genuity: So, just to follow-up on the last question. I think we are all trying to get a handle on this just to understand what the main driver was between the April comp sort of high single digits versus the flat comp in May and maybe to highlight some of the moving parts around that because it seems like you've had some good product, it's unfavorable understanding that apparel has not been given the weather. Just if you could help us understand that the differences between what's product related, what's been weather-related, what's remodel related? I think that'd be incredibly useful.

Richard A. Johnson - EVP and COO: It is all of the elements impact, and for us to say that it's a little bit of this, a little bit of that is very difficult. All of the elements impacted. May is the lowest month in the first half of the year. It's our smallest month of the first half of the year. And it has started off slower for all of the reasons that you just said and other things. We're fortunate. We had a strong April when looking at pipelines, the things we have coming, we feel confident that where we will be in the -- able to recover from the -- because May remember, February when we talked last time that was our best the biggest month in the first half of the year, and we were recovered from that because as we said we saw the product and we knew what we had coming. It's a balance. It's one of the reasons why retailers are hesitant to give weekly or monthly results because things move for a variety of reasons, and you look at, we look at over a period of time, and you can't get too excited about a day, a big day up or a big day down. You have to look at it over the longer term, and we feel as we've said on the call that we've got the tools and ammunition to make sure that we're going to deliver our guidance of mid-single digit comps.

Camilo Lyon - Canaccord Genuity: Are there regional differences in some of your stores that would explain away some of those – the volatility trends that you just described, so in other words trying to pinpoint some of the more things that are relevant to the business.

Richard A. Johnson - EVP and COO: As I said earlier that where the weather is warmer we are performing somewhat better because we're getting some better results with some of the apparel. But there are other conditions that impact that too like what the economy may be or a basketball team winning or losing. So it's difficult to say this one thing impacted the business. I'm not trying to be difficult with you. I'm just saying that on a theoretical basis you can go back and edit out, but on an actual basis it's everything in the racks. So, we look at what we've got coming, we've looked at what we've done, we feel that the customer for the first couple of weeks have made and just all of a sudden quick buying. They do not call each other and say we're not going to buy. There were other things that we did and that happened externally that impacted that, but they will come back.

Camilo Lyon - Canaccord Genuity: Then just to think about the quarter progression on the comps. If you are thinking mid-single-digits for the year, is there some sort of lumpiness between Q2 and Q4 that we should be contemplating or is that – should we expect that to be fairly linear?

Lauren B. Peters - EVP and CFO: It is fairly linear.

Operator: Taposh Bari, Goldman Sachs.

Taposh Bari - Goldman Sachs: Can I give you break on the comp question and (ask, if curious), the flow-through. Past couple of years you guys have (indiscernible) us with 30% to 40% rates of flow-through yet this past six months have been a little bit more challenged 19% in the fourth quarter, 23% this quarter. It sounds like there are some unique events taking place there, I guess; a, is that fair and; b, assuming that you do deliver on the mid-single-digit which it sounds like you should be able to how do we think about the rate of flow through going forward?

Lauren B. Peters - EVP and CFO: I have this correct (indiscernible) first quarter is 27% flow through and, yeah, certainly better than Q4 is where we've described what happened in Q4 where it dropped off at the end and it drops off right at the end somewhat limited and what you can pull back.

Kenneth C. Hicks - Chairman, President and CEO: We also in the fourth quarter, as Lauren said, we had the charge which we did not call out because we were negotiating and doing the Runners Point. But the first quarter was – or the fourth quarter was…

Lauren B. Peters - EVP and CFO: First quarter we had margin rate expansion, expanding both on gross margin and our SG&A at 27%.

Richard A. Johnson - EVP and COO: Despite the 53rd week shift is limited.

Lauren B. Peters - EVP and CFO: But we remain very focused on flow through and incremental though we can leverage at low-single-digits and we do well on anything above that.

Taposh Bari - Goldman Sachs: I guess, maybe ask another way, the $20 million worth of sales that you lost in the first quarter. How meaningful do you think that would have been to EPS?

Lauren B. Peters - EVP and CFO: You can do the math off of $20 million, but – as an objective, sales above plan we are trying to hit a 35% flow-through rate.

Kenneth C. Hicks - Chairman, President and CEO: We delivered the sales expectations and beat the earnings expectations that we are out there. Now, if there were – some that were out there that weren't out public, I can't – I have difficulty knowing what that is, but we feel that particularly looking at the competitive set that has recently reported our sales and earnings are above those, and that something the team feels, it's a good accomplishment. There is something – was it as good as what we would have liked? No, we are never satisfied, but it's…

Lauren B. Peters - EVP and CFO: We are very focused on productivity, which is the reason that we continue to look at underperforming stores. Our desire is to get those performing, so they remain part of the fleet. But we do what we need to do. That does when you close an underperforming location that lifts our productivity rate overall. We are focused on sales per square foot. We are focused on sales per payroll hour and factored investing in systems that help us do a really good job of getting selling hours on the floor right and matching those up to peak periods that improves that productivity further as well. We do remain focused on that and improving the rate.

Operator: Michael Binetti, UBS.

Michael Binetti - UBS: Is there something structurally different on the buying and occupancy line here. If I just look back through the model, it seems like you potentially in the past were getting a little higher leverage from the 5 comp?

Lauren B. Peters - EVP and CFO: Well, the increasing occupancy remains a dynamic. So as we commit to projects you're putting capital into doors where we have extended lease life, so that adds occupancy dollars.

Richard A. Johnson - EVP and COO: It adds occupancy. The other thing Michael I think that couple of years ago when we were close – when we had more non-productive stores to close.

Lauren B. Peters - EVP and CFO: Yeah, that's also a factor.

Richard A. Johnson - EVP and COO: We obviously benefitted more. Now as more stores are more productive it becomes more challenging. That said we still have stores to close as demonstrated by the fact we're going to close over a 100 stores this year and all of those stores when we close them will improve our productivity and performance.

Michael Binetti - UBS: I know we've beat this to death, but I want to just ask one question on modeling for a second here. Can you just (indiscernible) clarifying some of the comments you made on the math around the store you had offline as you started the remodels in the quarter? Those stores in the math come out of the comp base for a period, and then how that impacts the comp sales numbers as they come back in if so. In particular I'm looking at – I think you said more in the peak of the remodels would be in the third quarter, and then I think Ken you said that was also your toughest comparison of the quarter, so I want to make sure we get the cadence correct.

Kenneth C. Hicks - Chairman, President and CEO: The store is in the comp the whole time, even the close period, so we're – for the weeks that it's closed. And the thing that happens in the first quarter that as we go along will be different is that in the first quarter, we didn't have any stores that we remodeled in the fourth quarter of the prior year that have the higher than average pickup. So, what happens is you develop a layering unclosed, but I've got some stores that remodeled, that will help cover those closed doors, and as you go through and get that layering, the impact of the stores that are closed gets less. And that's why quite frankly, we haven't made a big deal of it because over time, it should -- it will work out to be neutral. In the first quarter more of an impact because we didn't have some higher performing stores to offset the ones that were closed. It's a part of what we're doing and when we did the -- we do the analysis for the remodels, we understand and recognize, we count the downtime and we recognize what that is in and that's in the returns that we have to come up with. So, it's an anomaly for the first couple of quarters until we get a number that are delivering at that higher rate and they will offset the ones that are closed to some degree.

Michael Binetti - UBS: Now, it's closed one…

Kenneth C. Hicks - Chairman, President and CEO: There is also another reason why we -- people so why don't you just remodel the whole chain at once. People would probably question us shutting down 400, 500 stores for six weeks in a year.

Michael Binetti - UBS: You might have a two-week period that you are not flat for God sake. So, if I could just close with one little step back on Lady Foot Locker here. You've been through a few soul-searching periods with that change since you've been there. It sounds like you're still hustling to crack the code, but all the while you've been reducing the store count into that. How do you think about managing that dynamic from here where we are today at this point? Have any kind of confidence as you've mentioned some of the re-opened stores have been better that longer term you can slow down the door closures?

Richard A. Johnson - EVP and COO: Yeah, I think what we are seeing and what will happen, and one of the reasons why not exactly fighting the store closures is the stores that we're closing aren't the right size going forward, they are shoe-driven stores and they are smaller stores. They don't have enough space for apparel. That we know is the real key to this business, and so, we're going to have to switch over anyway on many of those stores. There are some we won't, as we said with the re-skinned stores. But we're going to have to close those doors and put up a new – get a new space anyway. So, closing it now – excuse me if it's not delivering effectively isn't necessarily a bad thing. The important thing is that we're learning all about what selling space allocation the brands that work, the type of product and…

Lauren B. Peters - EVP and CFO: What sells with what, present a collection.

Richard A. Johnson - EVP and COO: Presentation. The selling skills required. We are learning a tremendous amount. And the good news that we've got is that we're seeing a light at the end of the tunnel. People look and say, geez, why haven't you got it yet? I don't think, I could be wrong, but I don't think lululemon had 150 stores eight months after they opened, and it takes a while to get it right. We are going to get it right, and then we're going to expand it and we can move aggressively. We've got the capability to move aggressively and I guarantee the landlords are very interested in their succeeding because they see this as a void in the market. The vendors are very interested in growing this aggressively and this is something -- when we look at kids now and the performance of kids, two or three years from now we're going to be talking about women's the same way and the performance of women's, and that's what we're looking at is getting that right so we have the next level of significant growth opportunity that we can move forward on. And layer that on, and so it just doesn't, well -- we're talking about is this is a kids cycle or not a kids cycle, it's women's cycles. We've built a layer of merchandising, a layer of business that will go on and we'll be able to build on for the long-term.

John A. Maurer - VP, Treasurer and IR: That's all we have time for. Thank you for participating on the call today and we look forward to having you join us on our next call, which we anticipate will take place at 9.00 am on Friday, August 32 following the release of our second quarter and year-to-date earnings earlier that morning. Thanks again and good bye.

Operator: Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.