Foot Locker, Inc. Q3 2008 (Qtr End 11/01/08) Earnings Call Transcript

| About: Foot Locker, (FL)

Foot Locker, Inc. (NYSE:FL)

Q3 2008 Earnings Call

November 21, 2008 9:00 am ET


Peter Brown - SVP, CIO & IR

Robert McHugh – SVR & CFO

Mathew Serra – President & CEO


Robert Drbul – Barclays Capital

Robert Ohmes - Merrill Lynch

John Zolydis - Buckingham Research

Kate McShane - Citigroup

John Shanley - Susquehanna Financial Group

Sam Poser – Sterne, Agee

Omar Saad - Credit Suisse


Good morning, ladies and gentlemen, and welcome to the third quarter 2008 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 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, or Please note that this conference is being recorded.

I’ll 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 and welcome to our third quarter conference call. I’ll begin the call this morning with some introductory comments. Afterwards, Robert McHugh, our Senior Vice President and Chief Financial Officer, will discuss our third quarter financial results and provide some guidance for the balance of this year.

Mathew Serra, our Chairman, and CEO will follow with some commentary regarding our business operations. After our prepared remarks we will be happy to answer your questions.

Our third quarter earnings per share on a GAAP basis were $0.16 per share. Included in this amount was a $0.02 per share impairment charge related to a short-term investment. Our net income before this charge was $0.18 per share.

Our earnings fell short of the range that we expected to earn at the beginning of the third quarter primarily due to our US businesses experiencing a sales slowdown during the months of September and October. This slowdown was somewhat offset by the strengthening of our business in international markets including key countries in Europe, that continue to generate positive sales gains.

In total our third quarter financial results reflected the following. Comp store sales decreased 1.7%, our gross margin rate decreased by 100 basis points, our SG&A expenses decreased $2 million, depreciation declined $13 million, our merchandise inventories decreased $214 million or by 14.5%, and our cash position net of debt was $272 million, a $174 million improvement from the same time last year.

I will now turn the call over to Robert McHugh.

Robert McHugh

Good morning, as Peter mentioned our earnings per share for our third fiscal quarter were below our expectations going into the quarter. On a GAAP basis our 2008 third quarter earnings of $0.16 per share compares to a net loss last year of $0.22 per share.

Our 2008 results included a $3 million impairment charge after-tax or $0.02 per share while our 2007 results included an impairment charge and store closing expenses totaling $66 million after-tax or $0.43 per share.

Therefore on a non-GAAP basis we earned $0.18 this year versus $0.21 per share last year. Our third quarter earnings per share reflected a comp store sales decline in September and October and a 100 basis point decline in our gross margin rate.

On the positive side we are very pleased with the strength of our balance sheet at the end of the quarter. We believe that we are positioned appropriately for the fourth quarter given the challenging external environment in which we operate and the uncertainty in the marketplace that may continue over the next several months.

At the end of the third quarter our merchandise inventory was $214 million or 14.5% below the same period of last year. On a selling square foot basis, our merchandise inventory is approximately 10% lower then last year.

We ended the quarter with $400 million of cash and short-term investments and $128 million of balance sheet debt. This represents a $174 million improvement in our cash position net of debt versus the same time last year.

Our strengthening financial position allowed us to complete after quarter-end the $103 million cash acquisition of CCS using positive cash flow from our operations. Third quarter comparable store sales of our major divisions were as follows.

Our combined US store operation decreased low single-digits, sales increased low single-digits, Europe declined low single-digits, Foot Locker Canada increased low single-digits, and Foot Locker Asia Pacific increased almost double-digits.

By month comp store sales increased low single-digits in August, declined low single-digits in September, and declined mid single-digits in October. In the US we had a low single-digit comp store sales gain in August, followed by mid single-digit comp sales declines in both September and October.

Conversely in Europe, we had a high single-digit comp store sales decline in August, followed by a combined low single-digit comp increase in September and October. As Peter already mentioned our third quarter gross margin rate decreased by 100 basis points from last year, 50 basis points of this decrease reflected a lower merchandise margin rate and the remaining 50 basis point decline due to a higher buying and occupancy rate.

Our merchandise margin rate for the third quarter was somewhat below our expectation but not far off our historical third quarter rate. Keep in mind that our merchandise margin rate for the third quarter last year was 10 basis points stronger then in 2006.

Our third quarter markdown rate was also inline with historical results for comparable periods. Our buying and occupancy costs for the third quarter stated in constant currency dollars were relatively flat with last year. Therefore the 50 basis point increase in the buying and occupancy rate reflected deleveraging due to the comp store sales decline.

Our opportunity to improve our full year-over-year gross margin rate was partially realized during the second quarter with a further improvement expected during the fourth quarter of up to 300 basis points.

Last year’s rate in the fourth quarter reflected heavy markdowns that we took to clear slow selling goods. Third quarter SG&A expenses decreased $2 million versus last year. On a constant currency basis our third quarter SG&A expenses were essentially unchanged versus last year and inline with our objective.

We expect to repeat this expense performance again during the fourth quarter with our total SG&A expenses stated in constant currency dollars to be flat with last year. Depreciation expense for the third quarter was $32 million, a $13 million decrease versus the same period last year.

We expect our depreciation expense for the fourth quarter to be $32 million to $33 million relatively flat to slightly lower then last year. During the fourth quarter we will anniversary against the asset impairment write-downs recorded last year that created the favorable depreciation expense comparisons that we have benefited our results during the first nine months of this year.

Net interest expense for the third quarter is $1 million. Lower interest rates on our short-term investments were somewhat offset by the elimination of the interest expense on the $88 million debt that was repaid earlier this year.

The $5 million of other income includes mark-to-market gains on foreign currency contracts that were executed to hedge our divisional earnings in our international operations. Option contracts remain in place for the fourth quarter and provide a hedge for a significant portion of our European earnings.

Our guidance for the year is based on a fourth quarter rate of 1.29 Euros to the US dollar which these hedges should enable us to attain despite fluctuations in the Euro. As a point of comparison the average exchange rate last year was 1.47 Euros to the dollar. While the exchange rate comparison is unfavorable we believe that our European operation has an opportunity to generate a profit increase for the fourth quarter.

The $3 million impairment charge relates to writing down the value of a $75 million short-term investment and the AAA rated reserve international liquidity fund which held Lehman Brothers securities. During the third quarter we requested a full redemption from this fund when the fund was trading at its stated $1 net asset value per share.

Subsequent to our request redemptions for the fund were suspended pending a review by a court. We believe that a redemption request will be honored at the $1 price based on public statements from the management of the reserve fund.

Partial distributions from other reserve funds that have also suspended redemptions suggest that we may receive a partial distribution before calendar year end with the remaining cash distributions expected during subsequent months in 2009.

Our third quarter income tax rate was 35.1% inline with our expectation going into the quarter. Our current expectation for the fourth quarter is that our effective income tax rate will be 35.5%. As already mentioned our cash position net of debt was $272 million, a $174 million improvement versus the end of the same period last year.

Our cash and short-term investments totaled $400 million while our long-term debt stood at $128 million. In early November we spent $103 million of our cash for CCS, an investment that we expect will be very beneficial to our company as we look to expand our business in the action sports categories.

Our merchandise inventory position of $1.3 billion at the end of the third quarter was $214 million or 14.5% lower then at the same time last year. On a constant currency basis our inventory was 11.2% lower then last year. Inventory in our US stores were down approximately 13% while down approximately 3% internationally.

As we have previously discussed, this planned inventory reduction is inline with the strategic initiative designed to reduce our inventory per store and increase our inventory turnover over time. This significant inventory decrease improves our position for the fourth quarter allowing our stores to receive a significant amount of new goods coinciding with the all-important holiday selling season.

At year-end we expect that our year-over-year inventory position will decrease by approximately $100 million. We are not planning for our inventories to be down as much at year-end as we ended the third quarter. This is by design for the following three key reasons.

First on January 31st, the last day of our fiscal year, Under Armor will be releasing its new running shoe that we think will add a lot of excitement to our stores. Second, February is a very important selling month for our company particularly with the NBA All Star game and Super Bowl, early to mid-month.

It is important that we have a fresh flow of goods into our stores to begin this new season. And third, the inventory associated with owning CCS will be included in our balance sheet this year.

At quarter-end our shareholders equity stood at $2.2 billion a book value of approximately $14.00 per share significantly above our current share price. As stated in our press release we currently expect our full year 2008 earnings excluding all impairment charges to be in a range of $0.50 to $0.63 per share.

We have lowered our guidance from that provided in August to reflect the slowdown in our US business during September and October and to take a more conservative approach to the fourth quarter.

The underlying key assumptions for the full year are as follows. Comp store sales down low to mid-single-digits, gross margin rate 175 to 200 basis points favorable with last year, SG&A expenses on a constant currency basis relatively flat with last year, depreciation expense of about $130 million, interest expense of approximately $5 million, pre-tax store closing costs of $6 million, and an income tax rate excluding the impact of the first quarter impairment charge of approximately 35.5%.

We believe that the most significant risks to our forecast relates to comp store sales in our US business during the fourth quarter. Assuming we achieve our gross margin rate objective the high end of our earnings forecast assumes total company comp store sales decrease in the low single-digit range for the fourth quarter.

The low end of our earnings forecast assumes a further deterioration of the external environment such that we would experience a high single-digit sales decline during the fourth quarter. We also expect to generate up to $200 million of positive cash flow in 2008 before dividends, debt retirements, and the acquisition of CCS.

In summary we recognize that we are in unchartered territory in regards to the external environment. This uncertainty makes providing earnings guidance even more challenging then during more stable environments. Our intent is to provide guidance that is both realistic in the current environment and still achievable if consumer spending continues to slow during the fourth quarter.

On a more positive note we feel we are positioned correctly for these uncertain times with our financial position strong and our merchandise inventory lower then the last couple of years. We continue to expect to generate a meaningful profit improvement in 2008 and to generate a significant amount of positive cash flow from operations.

I will now turn the program over to Mathew Serra.

Mathew Serra

Thank you Robert, good morning. Overall our third quarter results were effected by weakening consumer confidence, resulting in overall retail sales in the US that slowed precipitously during the months of September and October.

Our sales in the US also slowed during the final two months of the quarter, although not to the same extent as many other retailers. As a result our third quarter earnings per share fell below our initial expectations.

This was disappointing especially since our August results were very encouraging as sales and earnings results in the US above planned. As Robert mentioned the retail industry is currently in unchartered territory with consumer confidence reaching new lows.

The consumer has been hit hard by the severe stock market decline which combined with fears of rising unemployment have dimmed the outlook for all retailers in the near-term. Estimates of mall traffic in the US indicate declines of 10% or higher.

Our earnings guidance takes into consideration this very challenging external environment in the US. We are hopeful that the nature of our business is such that we can withstand these very challenging times well as most.

Our diversification in international markets is currently helping to compensate for the consumer slowdown in the US. As sales slowed in the US in September we benefited from a significant sales trend improvement in Europe. Our sales in several key markets in Europe began to comp positively in early September, a trend that has continued into November.

Although we are cautious regarding the external outlook in this market, we are very encouraged that our European business may be at a crossroads with good opportunity to begin to more consistently post improved financial results.

Our businesses in Canada and Asia Pacific were also encouraging as each performed well throughout the quarter and generated solid sales and profit increases. In total our sales fell 2% to 3% below our expectation at the beginning of the quarter and our merchandise margin rate was about 60 basis points below our plan.

Looking towards the fourth quarter on a non-GAAP basis we believe that our company has an opportunity to meet or exceed last year’s results. On a GAAP basis we earned $0.51 per share during the fourth quarter of last year from continuing operations which included an impairment charge and store expense of $0.10 per share and income tax valuation adjusted benefit of $0.42 per share.

On a non-GAAP basis we earned $0.19 per share during the fourth quarter of last year. To reach our forecasted full year earnings of $0.50 to $0.63 excluding impairment charges will require that we earn $0.09 to $0.22 per share during the fourth quarter.

We believe that we can achieve the higher end of the guidance in our comp store sales for the fourth quarter are similar to the trend of the third quarter. If the retail environment deteriorates during the fourth quarter and our comp store sales decline high single-digits our results will be towards the lower end of the range.

Our total US stores generated a low single-digit comp store sales decrease during the third quarter. Our footwear sales increased very low single-digits while apparel and accessory sales declined low single-digits.

On average selling prices they increased mid single-digits in both footwear and apparel during the third quarter. On the footwear side we are benefiting from selling a higher percentage of higher priced Marquis footwear, a trend that we expect will continue through the fourth quarter.

On the apparel side our average unit prices also increasing and we began to re-grow the branded piece of our business. Our men’s and kid’s footwear businesses both had sold gains during the quarter while our women’s sales continue be soft with high single-digit declines.

Sales of our men’s basketball shoes were very strong during the quarter particularly in the higher priced Marquis Jordan styles. Again this is a trend that we have enjoyed all year and see continuing through the fourth quarter.

Sales in the men’s running categories increased in the low single-digit area led by Nike Shox, adidas Bounce, and ASICS Performance shoes. In classic category we generated strong gains in some specific Nike and adidas styles with sales declines in other basic products.

We also generated men’s footwear sales increases in the canvas and boot categories. As mentioned our US apparel sales continued to be weak during the third quarter. We generated some strong gains in some of our branded categories while we continued to experience declines in the men’s private label, licensed, and women’s categories.

As we have discussed during our prior conference calls we are in the process of realigning our apparel purchases by adding some new branded products from vendors such as Under Armor and TapouT.

We are still in the early innings as we evolve in this process. Therefore I would expect that the apparel sales in the US will continue to be soft during the fourth quarter. Our international business was very encouraging during the quarter led by a manager of that business Ron [Cawls].

Our Asia Pacific division had a very solid quarter with the high single-digit comp store sales increase and a strong division profit increase. Our management team in Australia led by [Lou Kimble] are turning in a very strong performance for the year.

Our Canadian division also produced a strong quarter including a low single-digit comp store sales gain and a solid division profit increase. I would like to acknowledge the good work done by our management team in Canada led by [Brian Milburne].

In Europe as already mentioned we have seen a significant improvement in our business beginning in the month of September. This improvement coincided with some new marketing campaigns that were undertaken with both Nike and adidas.

Our footwear sales trend in Europe improved during the quarter to the point where we are currently experiencing sales gains. Our average selling prices increased mid single-digits as similar to the US we are selling a higher percentage of Marquis footwear.

In Europe Marquis running footwear is the big driver of our business. We also continue to operate this business effectively by minimizing our markdown levels. The biggest improvement in our European operation came in the apparel and accessory side of the business.

We saw this trend begin to develop during the second quarter and then really took hold in September. In total our apparel business in Europe increased over 20% during the quarter with almost all categories contributing to the increase.

Sales at our direct to customer business, increased low single-digits. We expect this division to generate a strong double-digit division profit rate during the fourth quarter. The most exciting news effecting is our recent acquisition of CCS. is expected to be able to contribute meaningfully to CCS’s profitability by integrating most of CCS’s operational needs within their well-run and solid infrastructure. CCS is the leading retailer in the US that sells skateboard footwear, apparel, and accessories, through the internet and catalogues.

Through this acquisition we acquired a strong management team that have strong relationships and proven experience in merchandising the action and extreme sports product categories.

Our plan is for the CCS team to continue to manage the CCS business and report to [inaudible] our CEO at thereby enhancing our ability to gain the full operating efficiencies of our existing direct to customer business.

We expect that this acquisition will be accretive to our company during 2009. For the first nine months of the year we have opened 58 new stores and remodeled or relocated 194 stores. Additionally we have enhanced the look and feel of an additional 200 stores in the US this year with new flooring and lighting while adding new fixtures and other modifications to 2,000 stores.

We closed 129 stores during the first nine months of the year as we continued to pare down those stores that are a drain on our profits especially those that are cash flow negative. These programs are inline with our current strategic focus to improve productivity of our base business.

In this regard we also continue to be very focused on inventory management reducing absolute levels and increasing our inventory turnover will continue to be a focus in 2009.

Obviously this goal needs to be carefully balanced against insuring that our stores continue to receive a fresh flow of new goods. In closing we plan to remain very conservative in how we plan our business in the near-term until we see enduring signs of improvement in the external environment.

It is expected that the consumer will remain very cautious during these uncertain times which will have a greater impact on some retailers then others. While we expect that our businesses will be impacted negatively by the external environment we are cautiously optimistic that we will fare better then many others in retail.

I would like to highlight that our financial position is very strong. The fashion cycle favoring higher priced technical footwear is what we do best. Our diversification in international markets is currently benefiting our results. The turnaround in Europe is especially encouraging and our inventories are in good shape which enables a strong flow of new goods to our stores during the fourth quarter.

Our financial results for the first nine months of the year are within the range of our expectations going into the year. While these are all positive factors for our business we have reduced our expectations for the fourth quarter given the increasing external challenges that may be ahead.

We will now be happy to answer your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Robert Drbul – Barclays Capital

Robert Drbul – Barclays Capital

On the European trends can you elaborate a little bit more why you believe we’re at a crossroads in Europe and how you expect Europe to stay out of the macro headwinds that those areas are facing versus what we’re seeing here in the US?

Mathew Serra

Beginning in September, actually the first week of September, we began to see some very strong sales increases in our larger markets in Europe. And that’s a byproduct of several things. First, the apparel business experiencing a much needed turnaround and in Europe the apparel business is a much greater percentage to total then it is here in the US.

So we’re selling branded apparel extremely well in Europe. I think the other ingredient is we’re beginning to see competition drop out in Europe in some of those markets. There are some competitors that are closing stores and down scaling their operations and the promotional environment in Europe has relaxed dramatically.

Our footwear while we’re not comping positively, we’re down to very low single-digits and lately on many days comping positively. So the combination of those factors is what’s driving that business over there.

Now we also have a trend now, its close to three full months, and our profits during the third quarter in Europe were very, very good and they continued to flow good into the month of November. So with that said we’re very encouraged with the current trend.

Robert Drbul – Barclays Capital

You mentioned the upcoming Under Armor launch that you’re excited about I think at the end of January, are there any other launches domestically that you’re excited about, that you’re looking forward to from a business perspective?

Mathew Serra

There’s a tremendous amount of Jordan launches in the fourth quarter. We have more product then we had last year. That’s a given, that product will continue to sell well. Our Nike Shox business continues to be very, very strong and one dynamic that came into the system in the last I want to say month or so, is the six-inch boot from Timberland has come back very strong and that’s a big ticket out the door sale at $145.

So there are some encouraging signs there.

Robert Drbul – Barclays Capital

Has the overall environment provided any product opportunities from vendors that you hadn’t anticipated for or planned on?

Mathew Serra

In terms of off price?

Robert Drbul – Barclays Capital

Have you gotten product that you didn’t think you were going to get or have you gotten bigger allocations on product, have there been any vendors that have given you better deals or more then you anticipated?

Mathew Serra

I would say we always get our fair share of what’s out there but I think the market is being very cooperative in this environment and I believe they know they need to be. The one vendor I failed to mention that is doing extremely well is adidas with their originals products. We have shops in between Foot Locker and Champs in the US I think we’re up to about 850 doors so we’re getting I think very good cooperation from our suppliers.


Your next question comes from the line of Robert Ohmes - Merrill Lynch

Robert Ohmes - Merrill Lynch

On the branded apparel piece where you’re starting to re-increase that business I think a lot of people feel like higher price point branded apparel like increasing that into the tough consumer environment is a little counter-intuitive. Can you speak to that, as to why that business might be healthy enough to start to re-grow again as you move through the fourth quarter and into next year. Secondarily I was hoping you could just speak a little more about you anticipate the US promotional environment is going to be like in the fourth quarter. I know you said its relaxing in Europe and some people are maybe going away, what do you envision happening in the fourth quarter and into the first half of next year in terms of competition in the US.

Mathew Serra

The apparel increases I was referring to, the branded apparel, was in Europe where we are experiencing very strong gains. In the US we’ve reengaged with a lot of apparel lines, put in Under Armor, TapouT, they’re doing very well, and we’ve added back in some important programs from Nike and adidas.

The US is still down in apparel, in all apparel, not only branded apparel, private label apparel and the like.

The increase is coming internationally but particularly in Europe on apparel. In terms of the promotional environment to this point in our zone other then the people that normally promote heavily we have not seen people stepping in the gas aggressively. Will that happen? My sense is it probably will and it will probably lag into the first half of next year.

Robert Ohmes - Merrill Lynch

In the range of the guidance you’re giving, you mentioned the sales variability, but how much of that is gross margin variability on what you think the promo environment is going to be like.

Mathew Serra

In our company, I don’t think we’re going to be impacted dramatically on our gross margin forecast because last year was the fourth quarter was the period where we really cleaned out the excess inventory so we’re looking for a pretty good increase in the fourth quarter.


Your next question comes from the line of John Zolydis - Buckingham Research

John Zolydis - Buckingham Research

On the dividend under what circumstances would you think that it would make sense to cancel or reduce the dividend to improve the firm’s financial position?

Mathew Serra

We currently are in a very strong financial position. Our cash flows through the fourth quarter and our planned cash flows for next year give us great confidence that we will have absolutely no issues with the dividend.

John Zolydis - Buckingham Research

Looking at the growth in SG&A dollars excluding items year-to-date compared to sales growth it has been faster and certainly currency has been a part of that especially in the first half of the year, but looking forward into 2009 can you talk about what strategies the company is considering to improve its profitability in 2009 especially with respect to SG&A?

Robert McHugh

We consistently and continuously look at our SG&A and we always have. I think the one thing we always look for is in productivity improvements. We continuously flex the wages for instance with the level of sales but you have to be careful too because we don’t want to impact the quality of customer service in the stores.

So in terms of the corporate areas we always challenge ourselves to have better pricing. We do a lot of competitive bidding of services and goods that we buy. We have continued to rework some of our internal processes but that’s something we’ve always done and will continue to do that into next year.

But again we have to balance that with not impacting the quality of the customer service in the stores.


Your next question comes from the line of Kate McShane - Citigroup

Kate McShane - Citigroup

Can you just repeat how much markdown [break in audio] certain broad concepts or certain regions where maybe you were more promotional then other regions?

Mathew Serra

Not really, no I think our markdowns were lower then the previous year. Regionally we didn’t take any action that would be different then what we did nationally in the US.

Kate McShane - Citigroup

So the lower merchandise margins are more from mix?

Mathew Serra

Yes, the real, the bottom line is that we receipted a lot less and our private label business has not been particularly good this year because that’s basically all apparel and that’s very high margin. We receipted more higher Marquis footwear during the quarter and I think it’s a mix issue. And we don’t expect to repeat that in the fourth quarter the way that the current plans lie.

Kate McShane - Citigroup

Okay so just to clarify so the Marquis product is a higher margin product, or lower margin product and you expect to sell more—

Mathew Serra

Its generally a higher margin product but it effects the mix in the markup when you receipt it then you have to sell it.

Kate McShane - Citigroup

Are you planning any more store closures for 2009?

Mathew Serra

We’ll discuss 2009 on the fourth quarter call but we’re always opening and closing stores.


Your next question comes from the line of John Shanley - Susquehanna Financial Group

John Shanley - Susquehanna Financial Group

On the real estate front, regarding renewals, can you remind us how many you typically do in a year and have landlords I guess in this environment become a little more flexible regarding your occupancy rates and those renewal terms when they come up.

Mathew Serra

There is a more cooperative spirit out there in the real estate industry.

John Shanley - Susquehanna Financial Group

On the Marquis business, it has grown noticeably in the US, I think in the past you’ve talked about it being roughly 33% or so of the US footwear business and it seems like based on what you’re talking about you expect that to continue to grow, is that in particular I guess with Nike, and when you look at footwear pricing is it, are the increases in pricing, it is across the board or is it in strictly just the Marquis end of the business?

Mathew Serra

Its across the board and its not just Nike. Don’t forget you’ve got adidas Bounce which is a very big program and we sell a lot of high-end ASICS products in our stores. So the Marquis business continues to grow. I think we’ve always said its 33% or more and it is growing in our company.

John Shanley - Susquehanna Financial Group

As you look to spring and your open to buy commitment for product and inventory can you just maybe talk briefly how you’re looking at that based upon your current inventory position and obviously how you’re looking at business going into the fourth quarter, just any thoughts about how you’re looking at spring and your open to buy commitments.

Mathew Serra

Well we’re planning very conservatively. We believe that spring will continue to be challenging and our posture is to be very, very careful and monitor it week-by-week and we have it built into our models to be very conservative and if we need more product we know we’ll be able to get it.

John Shanley - Susquehanna Financial Group

You’ve talked in the past maybe a little bit more on a regional basis in terms of what’s going on in the UK versus Italy and France, etc. I wonder if you could add a little color there and in the past you’ve talked about that business I think being close to or above a double-digit operating margin business, is what you’re seeing potentially lay the groundwork to return to those levels in 2009 or is that further out?

Mathew Serra

Potentially. We’ve been doing real well for three full months now so if it were to continue it would be an opportunity to certainly get to the high single-digits and scratch the low end of double-digit.

John Shanley - Susquehanna Financial Group

And anything on the geographic differences by any chance?

Mathew Serra

For competitive reasons I really don’t want to go there.


Your next question comes from the line of Sam Poser – Sterne, Agee

Sam Poser – Sterne, Agee

Can you give us a real quick little cleanup question, its $5 million of other income below the line, can you just discuss what that was.

Robert McHugh

That was FX on currency hedges.

Sam Poser – Sterne, Agee

Are you seeing a change in the demand for athletic fashion, athletic Marquis product being offset by the, like if it was apples-to-apples on last year’s economy do you think business would be significantly better because the demand for that type of product has improved but its being held back from more of a macro sense right now in that improvement of overall offerings and so on and so forth.

Mathew Serra

I think that’s a fair statement.

Sam Poser – Sterne, Agee

And when you look into 2009, with your inventories down well below what you initially guided to and it looks like you’re on target to hit the number at the end of the year, how much margin help do you think you’re going to get next year just being able to be a little more nimble and be able to turn even with potentially weak sales be able to turn the product much more quickly.

Mathew Serra

As I believe I said, our vendor partners are cooperating with us. I think they’re having some difficulties and I think everybody is going to clearly work together in this environment and this too shall pass, its just a question of how long and how prolonged this economy is going to be like this. But our vendor partners are working very closely with us.

One very important aspect is that we’re getting a lot more product on quick response which is helping our turnovers so that’s something that’s not new to the industry but we’re getting more then we’ve ever had before.

Sam Poser – Sterne, Agee

You had mentioned that you’re planning very conservatively however if things do improve you feel like you’ll be able to get the product that you need, is the risk now being assumed more by your vendor partners on those key items that may not be automatic replenishment products?

Mathew Serra

I think it’s a shared risk but we are planning very conservatively.


Your final question comes from the line of Omar Saad - Credit Suisse

Omar Saad - Credit Suisse

One technical question, can you help us understand on the currency side, the impact on margins and profitability as opposed to just the top line, how does that work in your international business, obviously as the dollar strengthens it hurts the top line as you repatriate those revenues but how should we think about the margin impact on your international businesses as the dollar continues to strengthen?

Robert McHugh

I think as the dollar continues to strengthen obviously the conversion of those earnings into US dollars is at a lower rate so its not going to effect the margin rates over there, it’s a function of the translation, whatever the rates are at that time.

As you can see in this quarter we do actively engage in hedging our foreign earnings and the question is how much does it change from where it is today.

Peter Brown

Most of our purchasing in the US is all US dollars, most of our purchasing in Europe is based on the Euro or the pound Sterling so most of it is all done in local currency. The real exposure that we have then is just translating the entire income statement into US dollars.

Omar Saad - Credit Suisse

If you could, could you talk a bit more about the Under Armor launch in the spring and its kind of been well documented what that brand has done for other sporting good channels and the benefits its provided, how do you see the product fitting in with your customer into the store, how do you view the brand generally, and the different product offerings they have and will continue to grow into your store base and the kind of impact you think it could have.

Mathew Serra

First of all we’ve got the apparel now in a significant amount of our doors throughout our divisions. And we’re doing well with it. We believe that the launch of the running products which is the last day of the fiscal year we think is going to be a very important launch in the business.

We have had the cross training shoes in our internet operation, we’ve done very, very well with them. So clearly the brand is resonating with the consumer. We have a very large running business as you know and we believe that the product is priced extremely well, basically $85 to $100 and that its styled well and its an opportunity for some new news in the footwear piece of our business.

So we’re very excited and we think potentially can be a very big business.

Omar Saad - Credit Suisse

How many doors is it going to start out in and how do you expect it to unfold over time.

Mathew Serra

I think for competitive reasons we’re not going to give that out but we will have a significant amount of merchandise from Under Armor for the launch.

Peter Brown

That concludes our call for today. Thank everyone for participating.

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