Foot Locker, Inc. (FL)

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Foot Locker, Inc. (FL)

Q3 2010 Earnings Call Transcript

November 19, 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

Kate McShane – Citi Investments

John Zolidis – Buckingham Research

Bernard Sosnick – Gilford Securities

Michael Binetti – UBS

Christopher Svezia – Susquehanna

Robert Drbul – Barclays Capital

Sam Poser – Sterne Agee

Robbie Ohmes – Bank of America

Camilo Lyon – Wedbush

Eric Tracy – FBR Capital Markets

Presentation

Operator

Good morning, ladies and gentlemen and welcome to the third 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. We're glad you could join us today to discuss our strong third quarter results. We reported yesterday that we earned $0.33 per share for the third quarter this year versus a loss of $0.04 per share last year. Included in last year's results was $0.14 per share of expense related to impairment charges. Therefore, on a non-GAAP basis, we earned $0.33 per share for the third quarter this year versus $0.10 last year.

The reconciliation of last year's GAAP results to non-GAAP adjusted amounts is included in our press release to assist you in your analysis. Our remarks this morning will be directed towards providing more color on the comparison of our 2010 GAAP results to our 2009 non-GAAP adjusted amounts.

Bob McHugh, our Executive Vice President and Chief Financial Officer will begin today's call with a financial review of our third quarter performance. Bob will also provide some guidance on our expectations for the fourth quarter. Ken Hicks, our Chairman and CEO will follow with an operational and strategic updates. We'll leave time to answer your questions after our prepared remarks.

The financial highlights for the quarter were as follows. Our comp store sales increased 8.1%. Our gross margin rate increased 320 basis points. Our SG&A expense rate improved 20 basis points. Our depreciation expense declined by $2 million. Our income tax rate declined to 29% this year from 30% last year reflecting the benefit of increased income tax audit adjustments.

Overall, we've made a lot of progress so far this year, implementing the many initiatives identified in our strategic plan. The benefits of these initiatives contributed to our strong third quarter sales and gross margin improvements, effective interest management and meaningful cash flow generation.

I'll now turn the call over to Bob McHugh.

Bob McHugh

Good morning. We are pleased with our third quarter profit results. The strong early back-to-school results that we discussed during our second quarter conference call turned out to be a good indicator of how our business would perform for the third quarter. We were especially encouraged that our comp store sales trend in our U.S. stores strengthened throughout the quarter reaching double-digit increasing for the months of September and October.

This strong sales momentum allowed us to continue our near-term strategy of reducing the number of promotional events that we run in our stores. The implementation of this strategy was the primary factor that led to our higher than expected merchandise margin rate for the quarter. Our third quarter comp store sales increase of 8.1% included an improved sales trend versus the spring season at both our U.S. and international businesses.

Third quarter comp store sales by region and segment were as follows. Our combined U.S. store operations increase high single-digits with a positive sales increase in each of our brick and mortar divisions. Our Dot Com sales increased mid to high single-digits. Foot Locker Europe increased mid to high single-digits. Foot Locker Canada increased low to mid single-digits. And Foot Locker Asia/Pacific comp store sales were essentially flat.

We had a sequential sales improvement each month with our consolidated comp store sales increasing the mid to high single-digits in August and high single-digits in September and in October. As already mentioned, our gross margin rate for the quarter, which improved by 320 basis points, was significantly higher than we expected, reflecting both a favorable merchandise margin rate and leverage on our buying and occupancy expenses; 190 basis points of this improvement related to our merchandise margin rate and 130 basis points related to our buying and occupancy expenses.

As already highlighted, the improvement in our merchandise margin rate reflected a strategic decision to reduce the level and the number of days that we run promotional events in our stores. As a result, we were able to use our markdowns more effectively with fewer more targeted events.

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