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Foot Locker (FL)
Q2 2011 Earnings Call
August 19, 2011 9:00 am ET
Kenneth Hicks - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Member of Retirement Plan Committee
Lauren Peters - Chief Financial officer and Executive Vice President
John Maurer - Vice President, Treasurer And Head Of Investor Relations
Bernard Sosnick - Gilford Securities Inc.
Eric Tracy - FBR Capital Markets & Co.
Taposh Bari - Jefferies & Company, Inc.
Robert Drbul - Barclays Capital
Robert Samuels - WJB Capital Group, Inc.
Michelle Tan - Goldman Sachs Group Inc.
Kate McShane - Citigroup Inc
Sam Poser - Sterne Agee & Leach Inc.
John Zolidis - Buckingham Research Group, Inc.
Michael Binetti - UBS Investment Bank
Robert Ohmes - BofA Merrill Lynch
Christopher Svezia - Susquehanna Financial Group, LLLP
Previous Statements by FL
» Foot Locker's CEO Discusses Q1 2011 Results - Earnings Call Transcript
» Foot Locker's CEO Discusses Q4 2010 Results - Earnings Call Transcript
» Foot Locker, Inc. Q1 2010 Earnings Call Transcript
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.
Thank you. Good morning, and welcome to Foot Locker's Second Quarter 2011 Earnings Release Conference Call. Our prepared remarks today will begin with Lauren Peters, who on July 1 was appointed Executive Vice President and Chief Financial Officer. Lauren will provide details about our second quarter financial results and update our outlook for the rest of 2011. Ken Hicks, our Chairman and CEO will then follow with an overview of our progress and executing our strategic plan, including how we intend to address some of the near-term challenges we face in the athletic industry and the economy generally. After these prepared remarks, we will have time to answer your questions. Welcome, Lauren.
Thank you, John, and good morning. I am very pleased to be here for my first Foot Locker earnings release conference call. Of course, being able to report earnings of $0.24 per share, 6x higher than the earnings we generated in the second quarter last year was an excellent way to start. The momentum we gained in the first quarter, which was consistent across all major product categories and regions carried on through the second quarter.
During our previous call in May, Bob McHugh mentioned that we will be planning the rest of 2011 cautiously. But then we also felt well prepared to capitalize on the positive factors contributing to our first quarter success, and capitalizing on those factors is just what we did again in the second quarter.
We achieved an 11.8% comp store sales increase, continuing a strong top line sales that we demonstrated in the first quarter. Total sales increased 16.3%, when factoring in the impact of foreign currency, and increased 11.7% on a constant currency basis. We posted low double digit comp gains in both May and June, while July came in at high single digits. We chose not to anniversary a couple of promotional events on July, so although comp sales were not double digits that month, demand was stable throughout the quarter.
Margins were significantly better, not just in July but throughout the quarter. Encouragingly, all of our divisions posted a comp gain in July. Geographically, the second quarter unfolded very much as the first did, with our International divisions matching our expectation by producing a mid-single digit comp increase. Foot Locker Europe, our largest international division was the strongest performer followed by Foot Locker Canada. The U.S. businesses were again the star performers of the quarter. Our total domestic store businesses posted overall comps in the low teens, while our Direct to Customer segment which includes Eastbay tops 20% comps for the second consecutive quarter.
Within the Direct to Customer segment, our store banner dot-com site continues to deliver our strongest comparison. Among the store divisions, the sales gains later for the quarter was Champs. However, all our divisions posted a comp in the quarter with the exception of Lady Foot Locker.
Early in the quarter, Lady Foot Locker was up against significant toning business from a year ago. Our second quarter comps were broadly based across our divisions, and were strong across all families of business as footwear, apparel and accessory comps were all up double digits. Unit sales and average selling prices were both up again in the second quarter.
Within overall footwear, Men's and Kids' posted double-digit comps. Over all Women's comps were up mid single-digit, a certain categories of Women's footwear, especially technical and lightweight running continue to more than offset the last remaining headwinds from the toning category. Last quarter, we highlighted the acceleration of our apparel business, and that trend continued in the second quarter with overall apparel comps in the teens and in the high teens in the U.S.
Our customers continue to respond favorably to the improved and fresh apparel assortments we offer in each of our banners. Our gross margin rate increased by 260 basis points compared to the 200 basis point improvement we achieved in Q1. The gross margin story in the second quarter was much the same as in the first quarter. We effectively leveraged our predominantly fixed buying and occupancy expenses. This leverage added 170 basis points to our overall margin rate.
Merchandise margin contributed 90 basis points of the gross margin improvement in the current quarter, above the outlook of 40 to 60 basis points we provided in May. The improvement in merchandise margin comes primarily from better merchandise flow, which is allowing us to continue reducing our markdown rate especially on footwear.