Foot Locker, Inc. (FL)

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Foot Locker (FL)

Q4 2010 Earnings Call

March 03, 2011 9:00 am ET

Executives

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

Peter Brown - Chief Information & Investor Relations Officer and Senior Vice President

Robert McHugh - Chief Financial Officer, Executive Vice President and Member of Retirement Plan Committee

Analysts

Eric Tracy - FBR Capital Markets & Co.

Robert Drbul - Barclays Capital

Kate McShane - Citigroup Inc

Michelle Tan - Goldman Sachs Group Inc.

Sam Poser - Sterne Agee & Leach Inc.

John Zolidis - Buckingham Research Group, Inc.

Robert Ohmes - BofA Merrill Lynch

Christopher Svezia - Susquehanna Financial Group, LLLP

Presentation

Operator

Good morning, ladies and gentlemen. And welcome to the [Foot Locker, Inc.] Fourth Quarter 2010 Earnings Release Conference Call. [Operator Instructions] 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 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 Mr. Peter Brown, Senior Vice President, Chief information Officer and Investor Relations. Mr. Brown, you may begin.

Peter Brown

Good morning. We are pleased with our fourth quarter results, which represents the fourth consecutive quarter of sales and profit increases versus the corresponding periods of the prior year. On a GAAP basis, our net income was $0.36 per share for the fourth quarter of 2010 versus $0.14 per share last year. Our results included net charges of $0.03 per share this year and $0.10 per share last year that we've excluded in the non-GAAP comparison that is included in yesterday's press release. This non-GAAP comparison shows an earnings increase of 63% to $0.39 per share this year versus $0.24 per share last year. During our prepared comments this morning, we will refer to our financial results on a non-GAAP adjusted basis to help facilitate your analysis of our financial results.

Bob McHugh, our Executive Vice President and Chief Financial Officer, will begin our prepared remarks with a review of our financial results, including the charges that we've excluded in our non-GAAP adjusted comparison. Ken Hicks, our Chairman and Chief Executive Officer, will follow with an operational review and provide an update on our long-term strategic initiatives. We will conclude the call with a question-and-answer session.

The highlights of our fourth quarter performance include the following: comp store sales increased 7.3%; gross margin rate improved by 210 basis points; and our SG&A expense rate improved by 50 basis points. These factors contributed to our 63% increase in adjusted earnings per share.

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

Robert McHugh

Good morning. As Peter mentioned, I will discuss our quarterly results for this year and last year on a non-GAAP basis, which includes the adjustments detailed in our press release.

The fourth quarter adjusted results were higher than our expectations going into the quarter and slightly above the Wall Street consensus estimate due to three key factors. Comp store sales remained strong throughout most of the quarter, while softening in the U.S. during the last half of January, which coincides with a seasonal low point in terms of customer demand. This sales trend change included the effect of our strategic decision not to anniversary two promotional events that we ran in late January last year in the U.S. Overall, by month, comp store sales increased high single-digits in November and December and increased mid-single-digits in January. Ken will provide some additional color on our fourth quarter sales results, which included a strong acceleration of our U.S. apparel business.

Two other key factors that contributed to the significantly improved results were our strong gross margin rate increase and effective operating expense management. For the fourth quarter, comp store sales by region and segment were as follows: our combined U.S. store operation increased high mid-single-digits; footlocker.com generated a double-digit sales increase; Foot Locker Europe increased mid-single-digits; Foot Locker Canada increased mid-single-digits; and Foot Locker Asia/Pacific increased low single-digits.

Our fourth quarter gross margin rate on a GAAP basis increased by 320 basis points versus last year. On a non-GAAP basis, excluding the $14 million inventory write-down that we recorded last year, our gross margin rate increased by 210 basis points. This gross margin rate increase reflected a 120 basis point improvement in our merchandise margin rate, including increases in both footwear and apparel, and a 90 basis point improvement in our buying and occupancy rate. Our efforts to right size the quantity and improve the quality of our inventory over the past several quarters have led to a meaningful increase in our sales and merchandise margin rate.

Improved inventory management has allowed us to take strategic steps, such as reducing our store promotional events and clearance activity, while also fostering programs that have resulted in lower inventory shrinkage. Our fourth quarter buying and occupancy expenses dating constant currency dollars were essentially flat with last year. Therefore, with our solid sales increase, we achieved 90 basis points of leverage in our gross margin rate.

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