Foot Locker, Inc. (FL)

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Foot Locker (FL)

Q3 2012 Earnings Call

November 16, 2012 9:00 am ET

Executives

John A. Maurer - Vice President, Treasurer And Head Of Investor Relations

Lauren B. Peters - Chief Financial Officer, Executive Vice President and Member of Retirement Plan Committee

Kenneth C. Hicks - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Member of Retirement Plan Committee

Analysts

Paul Trussell - Deutsche Bank AG, Research Division

Omar Saad - ISI Group Inc., Research Division

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Stephen Glagola - Barclays Capital, Research Division

Sam Poser - Sterne Agee & Leach Inc., Research Division

Michael Binetti - UBS Investment Bank, Research Division

John Zolidis - The Buckingham Research Group Incorporated

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

Camilo R. Lyon - Canaccord Genuity, Research Division

Bernard Sosnick - Gilford Securities Inc., Research Division

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Third Quarter 2012 Earnings Release Conference Call. [Operator Instructions] 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 risk and uncertainties described in the company's press release 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 John Maurer, Vice President, Treasurer and Investor Relations. Mr. Maurer, you may begin.

John A. Maurer

Thank you, and good morning, everyone. We're happy that you could join us this morning to discuss Foot Locker, Inc.'s results for the third quarter of 2012. Earlier this morning, we reported that Foot Locker had record earnings of $106 million or $0.69 per share, a 60% increase over the $0.43 per share that we earned in Q3 last year. As noted in the release, these GAAP results benefited from a $9 million tax adjustment. Without this benefit, which added $0.06 to the results, non-GAAP earnings were $0.63 per share, an increase of 47% over last year. This very strong profit result, another record for our company, brings year-to-date earnings on a GAAP basis to $293 million or $1.90 per share, a 50% increase over the same 39-week period last year.

I'm joined this morning by our Executive Vice President and Chief Financial Officer, Lauren Peters, who will begin with a summary of our third quarter and year-to-date financial results. She will also update our outlook for the rest of the year. Ken Hicks, Foot Locker, Inc.'s Chairman and CEO, will then review our progress on several of the key initiatives that the management team outlined in our long-range plan earlier this year. Ken and Lauren will hit the highlights for all of our banners and all regions of our global operations, and we'll leave time for your questions afterwards.

I'll turn it over to you now, Lauren.

Lauren B. Peters

Thank you, John, and good morning to you all. We truly appreciate your interest in Foot Locker. After reporting comp sales gains for the first 2 quarters that were very strong but which fell just shy of 10%, we were very pleased to report this morning that we not only sustained top line momentum in the third quarter, we are able to call out a double-digit quarterly comp store sales gain. Our 10.2% comp store sales gain in Q3 brings our year-to-date gain to a very strong 9.9%.

We continue to execute well in terms of translating those top line gains into record bottom line results. The non-GAAP earnings of $0.63 per share that John mentioned was the highest level of Q3 earnings in our history as an athletic company. Our year-to-date EBIT margin flow-through, in other words, the increase in year-to-date EBIT divided by the year-to-date increase in sales, is almost 40%, indicative of solid expense management even as we invest in programs to drive traffic and increase productivity and as we tapped many exciting new ideas for our stores and Internet sites.

To focus on the top line first. Our domestic stores collectively comped up in the low-double digits in the quarter. The only division with a comp store loss was Lady Foot Locker, which Ken will touch on during his remarks. The best performer was once again Kids Foot Locker, with a gain topping 20%. Champs Sports, domestic Foot Locker and Footaction all had double-digit comp gains for the quarter. The gain at Champs was especially impressive coming on top of a similar double-digit gain last year for a 2-year stacked gain of approximately 30%.

Foot Locker Europe finished with an essentially flat comp for the period. As we noted on our last call, Foot Locker Europe started the quarter on a positive note in August and sustained that low-single digit gain performance through much of September. However, after the customer had kept their appointment with us during the important back-to-school selling period, October softened somewhat, giving us a flat comp sales performance for the quarter. Ken will also touch on our European initiatives a bit later in the call. Our other international divisions performed well, with Foot Locker Canada posting a high-single digit gain, and Foot Locker Asia/Pacific coming in with a mid-single digit increase.

Sales in our Direct-to-Customer businesses were up 18.3% overall, with our athletic banner Dot-Coms up almost 50% in the aggregate. Included in the overall gain was a high-single digit comp decline at CCS.com, which continues to redefine its place in the very promotional skate category. Excluding CCS, the 2-year stacked comp results of our digital business continued to exceed 40%.

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