Foot Locker, Inc. (FL)

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Foot Locker, Inc. (FL)

Q2 2010 Earnings Call Transcript

August 20, 2010 9:00 am ET

Executives

Peter Brown – SVP, Chief Information Officer and IR

Bob McHugh – EVP and CFO

Ken Hicks – Chairman, President and CEO

Analysts

Chris Svezia – Susquehanna

Bob Drbul – Barclays Capital

Robbie Ohmes – Bank of America

Sam Poser – Sterne Agee

Robert Samuels – Phoenix Partners

Bernard Sosnick – Gilford Securities

John Zolidis – Buckingham Research

Kate McShane – Citi Investment Research

Presentation

Operator

Good morning, ladies and gentlemen and welcome to the second 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 assumptions or factors could produce significantly different results and actual results may differ materially from these 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 second quarter earnings were $0.04 per share this year versus breakeven last year.

Bob McHugh, our Executive Vice President and Chief Financial Officer, will begin the call with a discussion of what contributed to our second quarter performance. Bob will also provide some direction on our expectations for the third quarter. Ken Hicks, our Chairman and Chief Executive Officer, will follow with an operational and strategic update. We will leave time to answer your questions after our prepared remarks.

The financial highlights for the quarter were as follows. Our comp store sales increased 2.5%. Our gross margin rate increased 230 basis points. Our SG&A expenses increased by $16 million versus the second quarter of last year. Our depreciation expense declined by $2 million.

Overall, we exceeded our earnings per share direction for the quarter by producing a significantly improved merchandise margin rate versus the second quarter of last year, while our sales and operating expenses were in line with our expectations. We also produced strong cash flow during the quarter that we are beginning to more actively deploy for the benefit of our shareholders.

I will now turn the call over to Bob McHugh, who will provide more discussion on these factors.

Bob McHugh

Good morning. As Peter commented, our second quarter profit [ph] results exceeded what our expectations were going into the quarter.

We finished our spring season with a good month of July and are cautiously optimistic for the fall season given the early sales reads we are getting from those states that are currently in their back-to-school seasons. These signs are promising for us, especially given that mall traffic and consumer spending in the U.S. remain subdued due to high unemployment and low consumer confidence.

Due to the continuing uncertain external environment, we will remain cautious in our planning process until we see evidence of a sustainable economic recovery. Our second quarter comp store sales increase of 2.5% included gains in both the U.S. and international markets, which were in line with our expectations going into the quarter.

At our domestic businesses, we continue to focus our efforts on driving higher profitability by strategically reducing the number of major promotional events that we run in our stores. Following this strategy has resulted in the generation of a strong merchandise margin rate improvement and an increase in our gross margin dollars. At the same time, we remain very diligent in clearing slow-selling products on a timely basis and in season. Our inventory aging continued to improve versus the same time last year, which helps position us well for the third quarter.

Second quarter sales by region and segment were as follows. Comp stores sales at our combined U.S. store operations increased at a rate slightly higher than our overall 2.5% consolidated increase. Our dot-com segment sales increased in line with our consolidated performance. Foot Locker Europe's comp stores sales increase was similar to our domestic increase, slightly higher than our 2.5% consolidated rate. Foot Locker Canada comp stores sales declined very low-single digits and Foot Locker Asia Pacific decreased mid-single digits after increasing high-single digits during last year's government stimulus-fueled environment.

Our comp store sales gains were fairly consistent during each month of the quarter. As already mentioned, the year-over-year improvement in our gross margin rate was the most significant factor that contributed to our improved second quarter financial performance.

Of the 230-basis point increase in our gross margin rate versus last year, 210 basis points related to our merchandise margin rate, while 20 basis points related to our primarily fixed buying and occupancy expenses. The improvement in our merchandise margin rate reflected lower markdowns, reduced inventory shortages and a favorable mix shift towards higher-margin apparel. Our second quarter buying and occupancy expenses were $3 million below last year.

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