Foot Locker, Inc. (FL)

FL 
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Foot Locker (FL)

Q1 2011 Earnings Call

May 20, 2011 9:00 am ET

Executives

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

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

John Maurer - Vice President, Investor Relations Officer and Treasurer

Analysts

Bernard Sosnick - Gilford Securities Inc.

Eric Tracy - FBR Capital Markets & Co.

Robert Drbul - Barclays Capital

Michelle Tan - Goldman Sachs Group Inc.

Kate McShane - Citigroup Inc

Sam Poser - Sterne Agee & Leach Inc.

Robert Ohmes - BofA Merrill Lynch

John Zolidis - Buckingham Research Group, Inc.

Michael Binetti - UBS Investment Bank

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the First Quarter 2011 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. John Maurer, Vice President, Treasurer and Investor Relations. Mr. Maurer, you may begin.

John Maurer

Thank you, and good morning. Welcome to Foot Locker's First Quarter 2011 Earnings Release Conference Call. As we highlighted in our press release yesterday afternoon, we earned $0.60 per share in the first quarter. Our highest first quarter earnings since we became Foot Locker, Inc. almost a decade ago. This result represents an increase of 76% compared to the $0.34 a share earned in the first quarter last year. We noted in our release that these earnings were driven by a 12.8% comp sales gain, a gross margin rate improvement of 200 basis points and a decrease in our SG&A expense rate of 140 basis points.

Our prepared remarks will begin with Bob McHugh, Executive Vice President and Chief Financial Officer, who will provide more details of our first quarter financial results. Bob will also address the extent to which our first quarter results have affected our outlook for the rest of 2011. Ken Hicks, our Chairman and CEO will then follow with an update on our progress and executing our strategic plan. Bob, the floor is yours.

Robert McHugh

Thank you, and good morning. We are very pleased with the earnings of $0.60 per share that we generated in the first quarter, which significantly exceeded our expectations going into the quarter. We have momentum across all major product categories and regions where we operate, and we feel that we are positioned well to continue providing our customers with the exciting new products they want.

Ken and I will talk this morning about many of the elements of our business that have generated our recent strong results. However, I would like to mention at the outset that we still intend to be cautious in how we plan for the balance of the year. In brief, there are many risks in the external environment such as rising retail and commodity prices, stubbornly high unemployment, slow economic growth here and abroad and geopolitical uncertainties. We feel well prepared to capitalize on the positive factors contributing to our current success, but we also remain vigilant for these external factors, which could affect the pace of business, not just for us, but in the general economy as well.

Turning to our first quarter results. As John mentioned, we achieved a 12.8% comp store sales increase, which certainly exceeded our expectations at the start of the year and the outlook we gave you in early March. This significant breakout on the top line encourages us that our key strategic initiatives are working.

This year, February got us off to a good start, with low double digit comps, which was the third year in a row of solid gains in that month. We and our vendor partners have done an excellent job of creating a lot of excitement in the month of February for the consumer of athletic footwear and apparel, which Ken will discuss a bit more later.

With the shift of Easter from March to April, we were somewhat concerned about March comps, but they came in at a high single digits, which in turn led to a very strong April for us, with comps exceeding 20%. For the quarter, our international divisions matched our initial outlook by producing a mid-single digit comp increase.

Foot Locker Europe, our largest international division was the strongest performer while Foot Locker Canada struggled a bit with the anniversary of last year's Vancouver Olympics and a much later arrival of spring in Canada this year compared to a year ago.

Thus, the engine that really drove our strong comps was clearly our U.S. business. Our total domestic store business posted overall comps in the teens for the quarter, despite the slight drag caused by the year-over-year decline in the Toning business. And the good news is that Toning becomes even less of a drag as we go through Q2.

Our Direct-to-Customers segment, which includes Eastbay topped 20% comps for the quarter. Our store banner dot-com sites had especially strong comps. First quarter footwear comps were up double digits in the U.S. The positive footwear comps included gains in Men's, Kids' and even Women's as gains in other categories of women's footwear, especially lightweight running more than offset the drag I mentioned from the Toning category.

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