Foot Locker, Inc. (FL)

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Foot Locker, Inc. (FL)

Q1 2010 Earnings Call

May 21, 2010 9:00 am ET

Executives

Peter Brown – Senior Vice President, Chief Information Officer, Investor Relations

Bob McHugh – Executive Vice President and Chief Financial Officer

Ken Hicks – Chairman and Chief Executive Officer

Analysts

Michael Binetti – UBS

Tom Shaw – Stifel Nicolaus

Sam Poser – Sterne Agee

Kate McShane – Citi Investment Research

Tom Haggerty – Susquehanna International Group

Bernard Sosnick – Gilford Securities

John Zolidis – Buckingham Research

Robby Ohmes – BofA Merrill Lynch

Bob Drbul – Barclays Capital

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the first quarter 2010 earnings release 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 filed Form 10-K or Form 10-Q for a complete description of these factors.

Any changes in such assumptions or factors could produce significantly different results, and actual results may differ materially from those contained in the forward-looking statements. If you have not received yesterday's release, it is available on the internet at www.prnewswire.com or www.footlocker-inc.com. Please note that this conference is being recorded.

I will now turn the call over to Mr. Peter Brown, Senior Vice President, Chief Information Officer, and Investor Relations. Mr. Brown, you may begin.

Peter Brown

Good morning. As reported yesterday afternoon, our first quarter earnings were $0.34 per share this year versus $0.20 per share last year. Bob McHugh, our Executive Vice President and Chief Financial Officer, will begin the call with a discussion of our first quarter financial results. Bob will also discuss our expectations for the second quarter. Ken Hicks, our Chairman and CEO, will follow with an operational and strategic update. After our prepared remarks, we will leave time to answer your questions.

Overall, we're very encouraged by our financial results for the quarter, which included a 70% increase in our earnings per share versus the first quarter of last year. Our earnings per share increase was fueled by the following key factors: A comp store sales increase of 4.8%, a gross margin rate increase of 140 basis points, an SG&A expense rate improvement of 100 basis points, and depreciation expense that declined by $2 million.

Just as important, we produced very strong cash flow during the quarter as our total cash position net of debt was $190 million favorable to last year. I will now turn the call over to Bob McHugh.

Bob McHugh

Good morning. As Peter stated, we are very encouraged by our first quarter financial results, which exceeded our expectations going into the quarter and position us well for continuing growth in the coming year. We got off to a good start. Our financial results are particularly encouraging given that the external environment in the United States has not yet returned to pre-recession levels and consumers are still cautious about spending.

In this regard, while some economic metrics such as consumer confidence, employment, and GDP are improving slightly, these figures have not translated into a more normalized consumer spending environment in the United States. Therefore, at the same time as we are encouraged with our first quarter financial results, we believe that the best course of action for us is to remain cautious in our planning process until we see greater evidence of a sustainable economic recovery.

Overall, our first quarter comp store sales results outpaced our expectations by a significant margin at our U.S. businesses while achieving the high end of our expectations at our combined international stores.

Our better-than-expected domestic sales results were accomplished while reducing our level of promotions and special events allowing us to strategically redirect markdowns towards clearing slow-selling products. The effect of the strategic change is reflected in both the year-over-year improvement in our merchandise margin rate and inventory aging.

First quarter comparable store sales by region and segment were as follows. Our combined U.S. store operations increased mid-single digits. The best performances were our in our Lady Foot Locker, Champs, and Foot Locker divisions. Our dot-com segment increased low single digits. Europe increased mid-single digits. Foot Locker Canada increased mid-single digits. And Foot Locker Asia-Pacific decreased low double digits after increasing low double digits during last year's government stimulus fueled consumer spending environment.

By month, our results were very solid in February for the second year in a row with comp store sales increasing mid-single digits. Comp store sales increased low double digits in March as we benefited from an early spring and the Easter shift from the first week of April last year to the last week of March this year.

Conversely, reflecting trends seen across the retail sector, our comp store sales decreased low to mid-single digits in April. Taken together, our combined comp store sales in March and April were fairly comparable with the month of February. Our first quarter gross margin rate increased by 140 basis points from last year, reflecting an 80-basis-point improvement in our merchandise margin rate and 60 basis points of leverage on our primarily fixed buying and occupancy expenses.

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