Footlocker, Inc. Q4 2008 Earnings Call Transcript

Mar. 5.09 | About: Foot Locker, (FL)

Footlocker, Inc. (NYSE:FL)

Q4 2008 Earnings Call

March 5, 2009 9:00 am ET


Peter Brown – Senior Vice President, Chief Information Officer, Investor Relations

Robert McHugh – Senior Vice President, Chief Financial Officer

Matthew Serra – Chairman, Chief Executive Officer


Robert Drbul – Barclays Capital

Robert Ohmes – BAS-ML

John Zolydis – Buckingham Research

Kate McShane – Citigroup

[Chris Veya – Susquehanna Financial]

Sam Poser – Stern Agee


Welcome to the fourth quarter 2008 earnings release conference call. (Operator Instructions) This conference call may contain forward-looking statements that reflect management's current view 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 Footlocker 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 product significantly 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 not 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.

Peter Brown

Good morning and welcome to our fourth quarter conference call. As we reported, our fourth quarter GAAP results reflected a net loss from continuing operations of $125 million or $0.82 per share and included non cash impairment charges and store closing expenses of $1.06 per share.

On an adjusted non-GAAP basis, our income from continuing operations before the impairment charges and store closing expenses was $0.24 per share, a 60% improvement versus our adjusted non-GAAP earnings from last year. Our adjusted non-GAAP financial results were above both our expectations for the quarter and the consensus Wall Street estimates of $0.17 per share.

To assist you in your analysis, we have included in our press release a reconciliation of our fourth quarter and full year results on a GAAP basis to an adjusted non-GAAP basis for both 2008 and 2007.

Overall, our fourth quarter adjusted results reflected the following; comp store sales decreased 7.3%. Our gross margin rate increased by 330 basis points. Our SG&A expenses were $22 million below last year. Interest expense was $1 million, in line with last year and our cash position at year end was $408 million.

Bob McHugh, our Senior Vice President and Chief Financial Officer will begin the call with a discussion of our fourth quarter financial results and Matt Serra, our Chairman and CEO will follow with an operational review of the fourth quarter and discuss our overall strategic priorities for 2009.

After our prepared remarks we will leave time to answer your questions. I'll now turn the call over to Bob McHugh.

Robert McHugh

Good morning. During my prepared remarks, I will discuss our earnings from continuing operations on an adjusted non-GAAP basis by excluding the non cash impairment charges, store closing expenses and last year's income tax valuation adjustment. I will discuss each of these charges separately.

As everyone is well aware, the external business climate during the fourth quarter was very challenging. Fortunately, we anticipated that consumer spending would continue to slow and we planned our business strategy accordingly.

The actions we took included reducing our inventory levels and decreasing our operating expenses. By moving quickly we were able to protect our operating profits and keep ourselves financially and operationally strong. Thus, even though the sales environment was difficult, we still achieved our merchandise inventory reduction objective for the year.

By ending the year in a strong cash and liquidity position, and with our inventory $164 million lower than last year, we believe that we are positioned correctly for 2009, a year that will likely bring new opportunities and challenges.

Given the uncertain state of the global economy, we are again planning for our business quite conservatively for 2009 and have taken three key measures to help boost profits, promote strong cash flow and protect our balance sheet. We have lowered our capital spending program, reduced our operating expenses and we have planned our merchandise inventory purchases cautiously.

These challenging times require that we take these additional steps to support our capital expenditure program and continue to pay our shareholder dividend from positive cash flow from operations. Matt will provide some of the details behind each of these initiatives during his comments.

Our fourth quarter comp store sales decline of 7.3% was within our range of expectation and the guidance that we provided on our third quarter conference call. It was our belief that the difficult external environment would continue to contribute to a decline in mall traffic and to lower overall consumer spending.

We made a strategic decision not to chase sales with increased store promotions. In fact, we were far less promotional this year than we were during the fourth quarter of last year. We also did not need to be as promotional this year due to our much improved inventory position. We believe that this decision to pull back on our promotional stance was the primary contributing factor that led to our increased fourth quarter profits.

Fourth quarter comp store sales of our major divisions were as follows: our aggregate U.S. stores decreased low double digits, sales excluding the benefit of CCS sales decreased mid single digits, our international comp store sales increased high single digits, with Europe increasing mid single digits, Footlocker Canada up low single digits and Footlocker Asia Pacific increasing mid teens. By month, comp store sales decreased mid single digits in November and December and high single digits in January.

Sales trends throughout the quarter were challenging in our U.S. stores. At the same time, sales at our international divisions were encouraging.

Our fourth quarter gross margin rate increased by 330 basis points from last year reflecting a 400 basis point increase in our merchandise margin rate and a 70 basis point deleveraging our buying and occupancy rate. Our domestic merchandise margin rate increased 490 basis points while our international merchandise margin rate increased 108 basis points. Our significantly reduced mark down rate was the primary factor that contributed to our much higher bottom line profit.

Our fourth quarter buying and occupancy costs on a constant currency basis were slightly below the fourth quarter of last year and slightly favorable to our expectations.

I'm also pleased with our fourth quarter operating expense performance. Fourth quarter SG&A expenses were $22 million lower than last year. As a percentage of sales, SG&A expenses increased 100 basis points reflecting the deleveraging caused by our comp store sales decline.

Clearly, our well established profit improvement process at Footlocker whereby we encourage our associates to identify and implement cost reduction initiatives continues to be very rewarding for our company. We were very successful with this process again in 2008, benefiting from initiatives in all areas of our company including store operations, logistics, information systems and technology, risk management and finance.

Net interest expense for the fourth quarter was $1 million, in line with last year.

The non cash impairment charges and store closing costs totaled $1.06 per share during the fourth quarter this year compared with $0.10 per share recorded during the same period last year. The details of both this and last year's impairment charges, store closing costs and income valuation allowance adjustment are detailed in a schedule attached to yesterday's press release.

Both year's non cash impairment charges were recorded to write down the value of certain under performing assets at our U.S. store operations in accordance with FAS-144 which defines the accounting for the impairment of long lived assets.

Also included in this year's amount is an impairment charge to write down a portion of our good will in accordance with FAS-142. Our 2008 impairment charges primarily reflect the expected negative impact that the deteriorating external retail environment will have on the value of our U.S. businesses.

Our accounting policy as it relates to FAS-144 as well as 142 and the details of these charges will be outlined in our annual report Form 10-K.

In comparing our 2008 and 2007 fourth quarters, please note that the 2007 results reflect an income tax valuation allowance of $0.40 per share related to Canadian income taxes.

Our 2007 income tax expense also reflects the $9 million adjustment from that previously reported to correct income tax expense calculation errors that we discovered as we were preparing this year's financial statements.

Our fourth quarter effective tax rates on a non-GAAP basis after adjusting for impairment and store closing costs in both years and the income tax correction and valuation adjustment last year was 32% in 2008 versus 27% in 2007.

At the end of the year, our cash position netted $266 million. Our total cash and short term investments totaled $408 million while our long term debt stood at $142 million. We generated approximately $200 million of free cash flow for the year, in line with our expectation at the beginning of the year.

We utilized $93 million of this positive cash flow to fund our cash dividend and $103 million to purchase CCS. Our ending inventory was $164 million or 12.8% lower than at the end of last year. Excluding the additional inventory associated with our purchase of CCS, our inventory was approximately 13% lower than last year.

On a constant currency basis, and excluding the additional inventory associated with our CCS purchase, our inventory was approximately 10% lower than last year. Therefore, we achieved the year end merchandise inventory reduction objective that we established for the year. We believe that we have an opportunity to further optimize our working capital investment for 2009.

The impact of the challenging external environment on overall consumer spending is very unclear. Therefore, we have decided that we will not be providing earnings guidance for 2009 because the effect of these external factors on our comp store sales results and earnings per share are difficult to predict. We are far more confident in forecasting the more controllable factors in our earnings plan such as our gross margin rate and expense structure.

We believe that we have a very good opportunity to maintain or potentially improve our merchandise margin rate in 2009 from that reported last year. As mentioned, our inventory levels are down significantly from a year ago and our merchandise aging is in very good shape.

We have already taken several actions to reduce our operating expenses for 2009. As we go through this year, we will flex our variable expenses with the sales and continue to look for additional opportunities to reduce our fixed costs.

We expect that our depreciation expense for the year will be in the range of $112 million to $116 million. This is a decrease from 2008 reflecting the impact of lower capital expenditures, the 2008 impairment charges and current foreign exchange rates.

Interest expenses are expected to be in the range of $6 million to $8 million, higher than 2008 due to the lower investment rates.

Our effective tax rate for the year is expected to be 36% to 37%, largely dependent on our mix of income in the U.S. versus international.

While we are taking a cautious and conservative stance for the near term, we believe that our company's earnings prospects long term remain positive. Once the global economy returns to more normal levels, we expect that our earnings will begin to rebound to more historic levels. In the meantime, we will remain focused on maintaining a strong financial position and generating strong cash flow that can provide attractive shareholder returns.

I will now turn the program over to Matt Serra.

Matthew Serra

Good morning. I want to reinforce what Peter and Bob just covered, and I will make a few comments about our key corporate strategic objectives for 2009.

Overall, we achieved most of the financial objectives that we established for ourselves at the beginning of the year for both the fourth quarter and for the full year.

Fortunately we began the year planning the year conservatively and subsequently adjusted our business when we recognize that consumer spending was contracting. As a result, we effectively minimized the negative impact of the rapidly deteriorating external environment on our financial results and turned in a good operating earnings performance.

While our sales results for the quarter were towards the low end of our guidance, we generated a strong gross margin rate improvement versus the prior year. We managed our expense structure effectively by reducing operating costs aggressively. We also generated strong positive cash flow by reducing our working capital requirements.

These actions allowed us to finish the year in a strong financial position providing the flexibility to benefit our shareholders longer term. Clearly, we are still operating in a global retail recession. We are determined however, to maintain our financial strength so that when the strength of the economic climate improves, we will emerge in a strong competitive position.

In the U.S. our combined stores posted a low double digit comp store decline during the quarter, negatively affected by two key external factors; declining mall traffic and lower consumer spending.

Footwear sales decreased mid single digits and apparel sales and accessories sales decreased high teens. Our men's footwear business declined mid single digits and both our women's and kids' footwear business declined double digits. Our men's basketball, premium classic and canvas categories were strong but we had declines in most other categories including running. Our men's footwear business continued to show strength in the higher price point performance categories.

Our average footwear selling prices in the U.S. increased double digits versus last year for two key reasons; last year's average selling prices reflected a much higher mark down rate when we were clearing a large amount of slow selling goods. Additionally, we benefited this year from a positive mix shift towards selling a greater percentage of higher priced footwear.

U.S. apparel sales continued to be weak extending a poor athletic apparel trend that we have experienced for the last two years. During the fourth quarter, apparel sales were weak across almost all licensed branded and private label assortments. We have had success with some new branded offering from new vendors such as Tapout and Under Armour but these programs were not large enough to offset the sales declines in licensed and private label products.

In Europe, we're very pleased with the sales improvement that took place in the fourth quarter. Footlocker Europe generated a solid sales increase in both footwear and a strong increase in apparel for the quarter. In Europe we benefited from solid gains in higher priced technical running footwear.

On the negative side, we continued to experience declines in the low profile casual category. Sales in this category continue to be a smaller percentage of our business. Therefore, the sales declines in this category are becoming a less significant issue to our overall business results.

Our average selling prices in Europe increased low to mid single digits while our unit sales were fairly flat. Footlocker Europe generated a very strong profit increase for the quarter with a division profit margin rate back in the double digits.

Our Canadian division's profits were in line with plans for the quarter and continue to run at a very solid double digit division margin rate. For the year, Footlocker Canada generated a solid profit increase and improved slightly on its double digit division profit margin rate.

We generated our highest year over year sales and profit percentage in our Asia Pacific division for the second year in a row. I am pleased to say that this division broke into the double digit division profit rate for the first time in its history during the fourth quarter. Under the leadership of Lou Kimball, its managing director, the division profits for Footlocker Asia Pacific has doubled during the past two years and is beginning to make a meaningful contribution to our company's results.

Sales on our direct to customer business increased 14.5% in the quarter reflecting a mid single digit decline in the e-space business and the positive impact of adding CCS business to its portfolio. We're encouraged that the CCS business was accretive to our earnings during the fourth quarter and generated a double digit profit margin rate. For the full year, our direct to customer business generated an 11% division profit margin rate.

Turning to our franchise operation, we ended the year with a total of 17 stores in the Middle East and Korea, an increase of eight stores from what we operated at the beginning of the year. In total, we opened 64 new stores, remodeled or relocated 230 stores and closed 225 stores during the year.

During 2009 we will remain focused on implementing programs designed to maintain a strong financial structure and improve the competitive position in each of our operating divisions. A key strategic initiatives in 2009 are as follows.

First, take the steps necessary to help ensure that we continue to generate strong cash flow and redeploy that cash carefully for the benefit of our shareholders.

Second, maintain a disciplined approach to inventory management keeping our aging current and improving inventory turns.

Third, continue to work aggressively to reduce operating expenses by flexing our costs in line with sales and implementing new initiatives.

Fourth, capitalize on improving sales and profits in Europe and focus our growth initiatives in international markets where we earn our highest returns.

Fifth, improve the appearance of our store base through well targeted remodeling and renovation programs.

Sixth, build athletic power business in both branded and private label segments.

Finally, capitalize on our recent acquisition of CCS and expand our footwear offerings in the rapidly growing skate category.

Given the current state of the external environment, we are taking a conservative approach to our business planning to help ensure that we continue to generate strong cash flow and maintain a strong financial position. Therefore, we've reduced our capital expenditure program for 2009 by approximately 30% from last year to $100 million this year.

We will continue to manage our merchandise inventory tightly, purchasing conservatively to ensure that there is an appropriate balance between merchandise flow and sales. We will continue to monitor our merchandise inventory aging closely and take actions in this regard to slow selling goods on a very timely basis.

Given the state of the external environment, we have challenged our organization to be even more aggressive than in the past in identifying new opportunities to cut expenses. We have already taken several actions to right size our expenses to match our lower sales base.

I also expect that we will identify many more expenses saving opportunities during the course of the year through our well established profit improvement program. We continue to focus our capital spending this year on store remodels, store relocations to more favorable locations in the mall, and systems technology projects designed to enhance customer services.

During 2009 our current plan is to open 25 to 40 new stores and to remodel or relocate up to 150 stores. We will work closely with our landlords to identify opportunities that are mutually beneficial to improve our profitability.

As mentioned earlier, we are very encouraged with the operating results of each of our international divisions. Long term we believe that we have an opportunity to benefit from a turn around in Europe and continue to build on our progress in Canada and Asia Pacific.

While we have temporarily reduced our capital spending program and store openings, we are active in the European market place identifying new locations so that we can more aggressively resume our store growth in Europe once the external environment improves.

Our apparel sales in the U.S. has been a soft spot for us for a few years. As we have already done in Europe, our objective is to turn the challenging apparel segment into a significant opportunity in the U.S. To accomplish this objective, we are in the process of remerchandising our apparel assortments with the following key objectives; work with the most important suppliers like Adidas to provide more exciting branded products, intensify offering from Under Armour and introduce apparel from this very important supplier to more of our stores, expand our assortments with new and emerging brands such as Tapout.

Additionally, we believe that we have a significant opportunity to improve sales by reworking our assortments of our private label offerings. Finally, we believe that we have a very meaningful opportunity in 2009 to enhance our business by expanding further in the action sports categories.

Our purchase of CCS was a significant step in capitalizing on this opportunity. Our fourth quarter profit from CCS was in line with our expectation. This business is now fully integrated with our infrastructure which will allow us to capitalize on many operating synergies.

Our new CCS website was successfully launched last month. We will continue to make enhancements to all of our websites to keep pace with customer service requirements. CCS has an opportunity to generate double digit operating profit margins during 2009, in line with those of

Additionally, we will continue to pursue opportunities to expand our skate business in the bricks and mortar segment of our business.

In summary, we are encouraged by our fourth quarter financial results. During the quarter, we effectively offset our comp store declines through significantly lower mark downs and effective expense management.

The current external environment remains uncertain which makes forecasting our sales extremely difficult. While we are not providing any specific earnings per share guidance, we believe that we are well positioned for the future. We have a well known brand, a strong balance sheet and operationally, a very clean inventory position.

Thus, despite the challenges that may lie ahead, we have good opportunities to improve our merchandise margins and build market share. Most importantly, we will remain focused on generating strong cash flow and maintaining a very strong balance sheet. We believe it is important to our shareholders that we maintain our quarterly dividend payments. Therefore, we plan to manage our business with that objective in mind.

I will now be happy to answer your questions.

Question-and-Answer Session


(Operator Instructions) Your first call comes from Robert Drbul – Barclays Capital.

Robert Drbul – Barclays Capital

On the European trends, can you elaborate in terms of what you think is driving the solid performance there and sort of how sustainable those trends are for you?

Matthew Serra

We have seen a resurgence in the athletic fashion footwear trend, particularly running which is basically the lion's share of the business over there. Also in concert with that, our apparel business where we've intensified our key suppliers both Nike and Adidas have been performing extremely well and we continue to do well with it, and we believe that a trend is emerging in the athletic, pure athletic functional piece of the business.

Robert Drbul – Barclays Capital

When you look at the inventory situation and the overall business, you talked about opportunities still for working capital improvement, what areas do you feel like you have the most work to do in the inventory position as it stands today?

Matthew Serra

We reduced our inventories significantly and we think that there's more opportunity to continue to reduce inventories, certainly not as dramatically as last year. One of the dynamics you have to take in to the equation of inventory per store is the amount of price increases that we've experienced over the last several years.

I would say in general, over a three year period the cost in retail services are essentially up 30% plus, so we're trying to get more merchandise on replenishment. A vendor like CCS which is growing with us rapidly basically has everything on replenishment, and it's growing with us worldwide, not just in the U.S. So those are the opportunities. But I don't see like a 10% opportunity in reducing inventory in there.

We've also taken steps in our private label where we have the ability in certain items to replenish it now instead of brining in huge quantities offshore. We're doing a lot of it in Central America now so it really, here and just a replenishment kind of a lock and stock system where we don't own the inventory until we take it.

Robert Drbul – Barclays Capital

Can you comment on either European trends or the trends in the U.S. since your fiscal year ended, so February and thus far in March?

Matthew Serra

February we got off to a very good start. As a corporation we were up low single digits. The U.S. business was up close to mid single digits and Europe was down low single digits. So we're really focusing on inventory control and margin management and when we don't have all the excess inventory laying around, it's a much easier task to delivery profits.


Your next question comes from Robert Ohmes – BAS-ML.

Robert Ohmes – BAS-ML

I know the running shoe from Under Armour didn't hit until January 31, so it really wasn't a factor in the fourth quarter, but can you comment on how that launch has gone for you and where you see the Under Armour footwear business playing out for you as you move through this year. And then you spoke about the big ASP jumps that you've seen. You're anniversaring that now and you're looking at flat margins. Can you speak to the ASP outlook for '09? And then finally, I didn't hear if you mentioned targeted store closing for this year. If you could reiterate that and just discuss your store performance A versus B versus C malls in this current environment.

Matthew Serra

Under Armour its meeting our expectations. It's off to a very good start for us. Clearly the market needs some new product and this is a new important line. There's a couple of very key styles in there. The Spector which is a $90 shoe that did extremely well for us in both Footlocker and Champs. Some of the trail shoes too, the Chimera which is off to a strong start for us. We hope that Under Armour will continue to be an important opportunity for our company going forward.

With regard to store closing, we closed a lot of stores the last couple of years and we have on the horizon potentially 100 stores to close. We may or not close them due to negotiations with our valued landlords who are cooperating with us and working very, very closely. So we really don't have that figure at this point in time.

I would tell you that our goal is to hopefully save as many as possible and not have a tremendous amount of store closures this year.

The A malls always do better. What we're really experiencing is, don't forget we have a lot of street locations so the mall traffic is down dramatically. The urban business is good and the street location is good. I think one of the big expense initiatives we're taking and I really commend the mall developers for initiating it, but we're beginning to reduce some hours which is a big play for us when you operate in the U.S. with 3,000 some odd stores, just cutting strategically some non productive hours really is a big play for us and it really helps us on the expense line in the millions of dollars. So that's where we stand on the closures.

Our margins are good. We've cleaned up the inventory. We're in very good shape and we expect to keep it that way. We fell off the reservation for awhile, and we're back to responsible levels and we're hopeful that we'll never get in a position we got into in '07.

Robert Ohmes – BAS-ML

In terms of, you've done a great job with inventory, but just in terms of I know you're not giving guidance on '09 but how we should think about, how you are thinking about ASP trends for 2009.

Matthew Serra

I think they'll probably continue to be up because of the price points we're selling.


Your next question comes from John Zolydis – Buckingham Research.

[John Zolydis – Buckingham Research]

A clarification on your comment about the occupancy costs being slightly below last year on a constant currency basis. That's total dollars, right?

Matthew Serra


John Zolydis – Buckingham Research

Obviously sales are below last year as well. Was your occupancy cost on a per square foot basis up for the year?

Matthew Serra

I think the better way to think of it is, leases are put into place each time they come up for renewal and there are increases in the existing leases we have which are somewhat offset by some of the more recent experience we had. So while we've closed a lot of stores, you still have the impact of the increasing built into the leases we have.

So I guess the point I'm trying to make is that the rate of growth of that increase is beginning to slow. That's why we made the comment that we did.

[John Zolydis – Buckingham Research

You talked about at some point in the future of getting back to the historical levels of profitability that the company enjoyed in the past, and I was wondering if you could give us a little bit more of a path of how that could occur in the context of lease expenses being elevated relative to three to four years ago. Your SG&A expense is still being much higher.

Then I was also a little bit confused by your comment on product cost being up 30% over the last three years. So given all these changes in the cost structure of your business, what would have to occur to get back to historical levels of profitability?

Matthew Serra

Clearly somewhere down the road you have to begin to build the top line sales and we're beginning to experience that. When you look back at the historical results, we had exceptional results in Europe for about a six year period, and Europe had hit the wall. That's coming back extremely aggressively. So that will be a big component in building not only margin but sales, and don't forget as your sales go up your occupancy goes down.

The other key initiative, and it's happening, I don't think I mentioned it on the call, the big Footlocker, Foot Action Kids division which is I believe you all know is operated as one division, that is performing extremely well. That's almost close to half of our business. As that engine begins to perform, and last year while the sales weren't great, their margins, their division margins which we call them division margins, they're operating margins were extremely strong.

That division in the month of February came back with strong mid single digit comp gains and a very, very strong gross margin and bottom line. And really, that's the way as you get these; if we continue to drive the big Footlocker, Footaction Kids business and the Europe divisions, those two divisions represent a tremendous amount of our profit.


Your next question comes from Kate McShane - Citigroup.

Kate McShane – Citigroup

Adidas spoke about their business yesterday when they reported about getting more promotional in 2009. Should we expect more in store promotions in '09 or should we expect similar levels, and do you think you need to be promotional in order to improve comp store sales trends or are your customers taking a look at your product and think there's enough value conveyed in your product without having to discount?

Matthew Serra

When we have been successful, we have always really principally been selling the high end exciting merchandise and that's what has drove our business in the past. We're seeing a trend that's very similar to that. With that said, in our divisions in the U.S., we've set up what's called a value zone and that's in the Lockers division and also Champs has a form of it where there's a fairly good presentation of $49.99 to $69.99 product that is essentially purchased off price to satisfy that value customers.

We don't want that to become the lion's share of our business or more than 10% to 12% of our business so we want to get away from, and we have been for over a full year, store wide promotions. We've got to focus on profit, liquidity. We're continuing to manage that balance sheet and then as the fashion trend continues to move forward with the athletic products, we're very hopeful that we'll get back to historical levels in several years.

Kate McShane – Citigroup

You had mentioned in a previous question that February started off strong in the U.S. Was this more traffic or ticket and other than the Under Armour running shoe was there any new product offerings bringing people to the store, and do you expect any launches over the next couple of months to be big traffic drivers?

Matthew Serra

As you know, I assume you know, we have Kobe Bryant is exclusive in the mall basically and we had exceptional results on a couple of his shoes. Our basketball business was off the charts in the U.S. so we have close to a billion dollar business in basketball, and basically most of it is in the U.S.

Jordan products continue to do extremely well, and basically all the Nike different basketball merchandise. There are a lot of launches. Quite frankly, there may be too many launches, because that slows down our inventory turn, by the way. Over the last three to four years, there's been many launches to the system, and many times you have to get that inventory in your stores because it comes in our mixed loads on containers.

You have to have that inventory in your stores two to three weeks before you get to sell it. So in Europe, we don't launch anything. It comes in, it goes out. So while launches are important, we have to create a delicate balance of what we're launching and when the merchandise comes in jut put it out and sell it.


Your next question comes from [Chris Veya – Susquehanna Financial]

[Chris Veya – Susquehanna Financial]

Just to focus in on the SG&A reduction you saw in the fourth quarter and Matt, you outlined several initiatives as you look at the SG&A line and the cost structure for Footlocker as you go into '09, whether it's logistics and IT and store operations and store payroll, do you see an environment whereby SG&A dollars could actually fall in 2009 relative to what you saw in 2008?

Matthew Serra

Yes. There's key initiatives, and Bob will expand on them but reducing store wages to align the staff with sales trends is a very big play for us. Strategically reducing store hours to accommodate the current customer traffic trends, continuing to reduce travel, we put in many, many years ago a video conferencing system and we have cut back dramatically on travel and never had much entertainment, we're watching the nickels and the dimes, and continuing to work with our landlords to improve our occupancy expense.

Those are the big plays, and Bob has a lot of details.

Robert McHugh

The other thing in terms of productivity enhancements in the IT area and we continually work on the cost of delivering our IT services, things like utilities and part of it is a green initiative to consumer less energy. That obviously saves money. Putting some devices in some of the locations we have to better monitor and control the usage. We continuously use an online auction process to buy many of our goods and services, and that continues to pay big dividends, and I really think that's where we see a big opportunity.

We've had some very good auctions lately. We buy a lot of goods and services and so consequently we're getting some pretty good pricing on some of the rebids of things we buy on a continuous basis. And a lot of it is just productivity enhancements as well. Logistics continue to work the logistics and freight costs and how we deliver logistics in terms of the use of technology and systems.

And then holding on to more of what we have in terms of being very focuses on shrink and monitoring store theft and that sort of thing. We've had a lot of success in the last year and what we call holding on to more of what we do get. So it's a combination of all those things together, we think we'll have some good savings.

[Chris Veya – Susquehanna Financial]

A follow up to that statement of SG&A expenses possibly being down, I know February is a small month here and you're seeing positive trends in U.S. business but assuming that possibly trends continue to hold to some degree or not as negative as maybe some initially anticipate, in other words you start have to fund your business, in your business do you still see an opportunity for SG&A to fall year over year in 2009?

Robert McHugh

Yes, I think that's a possibility. The other thing I would add though is February is not a slow month for us. It's one of the biggest months of the year because of the basketball activity. So it's one of the top four months in volume.

[Chris Veya – Susquehanna Financial]

When you look to Europe and for clarification here, the trends that you're seeing there and the improvement coming though third quarter into fourth quarter, and if you kind of extrapolate what a lot of the brands have been talking about, about the challenges that they're seeing in Europe, the U.K. and on the mainland, could you talk about how you continue to be somewhat confident in the improvement you're seeing in Europe relative to how the brands are talking about inventory reductions and promotional cadence etc. Can you talk about that what you are doing differently relative to what the brands are talking about.

Matthew Serra

We've seen less promoting in Europe with the exception of the U.K. Now we do not have a big business in the U.K. and quite frankly, we're going to be very careful with regard to expansion in the U.K.

The Latin countries, Italy, Spain and France, very, very fashionable countries. We're seeing our exclusive product come back which is very high end. Its 150 Euro's, depending on the style to 160 Euro's and a lot of the air product come back dramatically over there. So we're feeling pretty good about Europe.

The other important dynamic in Europe is the big ticket apparel business where the track suit is coming back as a fashion item, and we've had tremendous success on those products over there. So it's too early in the game to declare victory because you all know that we have never seen an environment like this, and one month and Europe's success for five months in '08 does not make a total turn around.

But there's trends. So when the trends go down, they go down. When the trends move up, they generally continue to move up. I think another dynamic in Europe in particular is the independence of, we've seen a significant amount of the independent's go away over there because they just can't operate. They don't have the cash flow to sustain sales declines.

If you read the reports recently the last couple of weeks, you've seen in the U.K. JJB has got it's challenges and then Go Sport and Courier in France are struggling, losing a great deal of money. I haven't been over for awhile, but Ron Holds who directs our European operation the Vic Johnson, who's the CEO over there are telling me that they're seeing a lot of old inventory in the stores. They're having buy problems and big sales drops.

So we're having the opposite results. We're fresh. We're clean. I think the stores look very, very good over there Vic Johnson is the fellow that ran our internet operations for a long time has really jumped in there and done a terrific job with the help of Ron who handles our international and now Champs.


Your next question comes from Sam Poser – Stern Agee.

Sam Poser – Stern Agee

I wanted to follow up on something Bob said earlier in his prepared remarks hinting that despite your not giving guidance that you sort of seemed to imply that 2009 could be more profitable than 2008. Did I hear that correctly?

Robert McHugh

I don't think we said that. That would certainly be an objective. We always like to make more money than the previous year. I think it's a little too early in the game to confirm that, but perhaps on our next conference call we'll feel more sanguine about what's going to develop this year.

Sam Poser – Stern Agee

To follow up on the question about SG&A, you saved $22 million in the quarter. How much of that can repeat in the coming quarters? Could we put $10 million to $15 million a quarter in actual dollar savings do you think in SG&A?

Robert McHugh

No. There are opportunities to save but not of that magnitude. That's a big number.

Sam Poser – Stern Agee

When you say $22 million, that's a bigger number.

Matthew Serra

That was one quarter and we had some issues from the prior year. We went up against a disaster. A lot of the improvement that we experienced in 2008 was up against a horrific 2007. On an as adjusted basis, we made $0.67 against $0.35. I remind you for a number of years we were hovering around $1.50, $1.60 and that's our goal over the next several years considering the external factors that we have to deal with.

The only thing I feel good about is I'm seeing a very positive trend in athletic footwear, which quite frankly we haven't seen for several years. A lot of the products have shifted toward lifestyle and skate, and we're seeing this high end product really come back and it's representing well over 35% to 36% of our business, and that's kind of the way it was in the old days.

So it's very encouraging. And then you've got a new supplier like Under Armour coming on and we're very pleased with that product, working closely with Kevin and his team to do some exciting things in there. And also the Under Armour apparel; we're rolling that our into a lot more doors this spring. I think we're going from 800 in the U.S. 830 doors to almost 1,300 doors, so we're getting some traction there.

Sam Poser – Stern Agee

How many doors is the footwear in and are you working on special make ups with them with Under Armour at this time?

Matthew Serra

You'll probably get me in trouble if I answer that question.

Sam Poser – Stern Agee

How many doors is the footwear in right now?

Matthew Serra

The footwear is going to be in April, 830 stores. It's going to be in 1,250 doors in April in the U.S.

Sam Poser – Stern Agee

Are you looking for international expansion there as well?

Matthew Serra

Yes, we are. And they do not have a big international business, but they're working very closely with our international team to get the, not to reinvent the wheel, but to get the right type merchandise for particularly the European market, so we're very excited about the prospect for Under Armour.

Sam Poser – Stern Agee

To what degree do you think you can bring your average inventory down on a year over year basis in 2009?

Matthew Serra

It's hard to tell. Our goal is to bring it down, but I did mention there were two dynamics in there. One is the average price that's gone way, way up in footwear and apparel to a degree, but in footwear which is basically the lion's share of our business, and the amount of launches that kind of inhibit us from having, we're working on it by the way, but inhibit us from having the turns we had five, six years ago.

It seems like everything now is a launch, and my personal point of view is, unless it's really a special retro Jordon, just put the inventory out and sell it when it hits the stores.

Sam Poser – Stern Agee

Are you working with the vendors to try to get launch dates later in the month so you don't have to deal with loading them up at the end of a month kind of thing?

Matthew Serra

We're working to cut back in general a lot of launches because it does really load up on inventory, and it's easy to say and hard to do. And you were in the business so you know that you have a lot of mixed loads coming over from Asia, so if you have a launch shoe with a shoe that you're expecting to get in right away, the way the system works is you really don't have the ability to target exactly what's coming over when you need it exactly.

I know we've got all these stores in the U.S. and we have a west coast core stock system and our big D.C. and Kansas. It's easy to say and hard to do, but I'm determined to work closely with our key individual suppliers and reduce the amount of launch products.

Robert McHugh

We're working very hard on reducing the inventory and I think we're going to have some success there, and we're committed to really maintaining a very, very powerful balance sheet. I think that's the order of the day, being in a very strong liquid position and we find ourselves fortunately almost $410 million in cash, and in looking at our cash balances through the remainder of the year, planning very conservatively, we feel very good about that piece of the business.

Matthew Serra

Okay, that wraps it up for today. I'd like to just thank everybody for your ongoing support. Thank you.

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