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Foot Locker Inc. (NYSE:FL)

Q2 2009 Earnings Call

August 21, 2009 9:00 am ET

Executives

Bob McHugh - Executive Vice President & Chief Financial Officer

Matt Serra - Chairman of the Board

Ken Hicks - President, Chief Executive Officer

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

Analysts

Chris Svezia - Susquehanna Financial

Bob Drbul - Barclays Capital

Sam Poser - Sterne Agee

Robby Ohmes - Bank of America/Merrill Lynch & Co

Bernard Sosnick - Gilford

Kate McShane - CN Investments Research Group

John Zolidis - Buckingham Research Group

Operator

Good morning, ladies and gentlemen and welcome to the second quarter 2009 earnings release conference call. At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session.

This conference may contain forward-looking statements that reflect management’s current views on 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’s Incorporated most recently filed Form 10-K or Form 10-Q for a complete description of these factors. Any changes in such assumptions or factors could produce significantly different results and actual results may differ materially from those contained in the forward-looking statements.

If you have not received yesterday’s release, it is available on the internet at www.prnewswire.com or www.footlocker-inc.com. Please note that this conference is being recorded.

I will now turn the call over to Mr. Peter Brown, Senior Vice President, Chief Financial Officer and Investor Relations. Mr. Brown, you may begin.

Peter Brown

Good morning. After the market closed yesterday afternoon we reported a breakeven performance, the second quarter of 2009 versus the net profit of a $0.11 per share last year. For the first six months of the year our net income is $0.20 per share, versus $0.13 per share last year. Included in our prior year results with a non-cash impairment charge and store closing expenses totaling $0.12 per share which was recorded during last year’s first quarter.

Thus, last year’s net income for the first six months of the year excluding those items was $0.25 per share. A reconciliation of our GAAP results to the non-GAAP adjusted amounts is included in our press release assist in your analysis of our results from ongoing operations.

Bob McHugh, our Executive Vice President and Chief Financial Officer, will begin our prepared remarks with a discussion of our financial results. Matt Serra, our Chairman of the Board, will follow with an operational review and strategic update.

We also have with us today Ken Hicks who joined our company just this week as President and CEO, replacing Matt Serra in that capacity. Ken will also make a few comments this morning. As always we will conclude the program with the question-and-answer session.

Overall, we expected the second quarter of this year to be very challenging from a sales standpoint and it was. Our second quarter comp store sales decreased 12.1%. Our gross margin rate decreased 220 basis points, primarily reflecting the impact of the sales decline on our buying and occupancy rate.

Partially offsetting the sales decline, was a $47 million reduction in our SG&A expenses and $5 million reduction in our depreciation expense. Our balance sheet remains strong with the total cash and short term investment position of $415 million.

I will now turn the call over to Bob McHugh.

Bob McHugh

Good morning. Overall, our second quarter earnings primarily reflected the underperformance of our top line sales. I would characterize the short fall as more macro in nature rather than any product specific issues. The good job we did managing our markdowns and achieving significant reductions in our occupancy, SG&A and depreciation expenses help to protect our bottom line results.

We believe that the steps that we are taking today in terms of cost reductions and strengthening our financial position, will contribute to higher earnings opportunity for our company in the future, when consumer spending returns to more normalized levels.

The overall decline in consumer spending was the primary factor that led to our weak sales performance in the United States. In addition, during our first quarter conference call, which was held in late May, we highlighted three specific factors that would affect our second quarter sales.

We stated that our sales trend in the U.S. began to slow during April, and continued through the first three weeks of our second quarter. We discussed that our second quarter sales comparison with last year would be impacted negatively by the stimulus checks that the government provided during May, June and early July of 2008; and thirdly, we pointed out that our second quarter sales comparisons would be effective by a calendar change enacted by several states in the U.S. that shifted tax free shopping weeks that occurred in July of last year into August of this year.

Our European, Canadian and Asia Pacific businesses faired much better during the second quarter than their U.S. counterparts. In total, our international sales were inline with last year.

Second quarter comparable-stores sales by region and segment were as follows; our combined U.S. store operation decreased in the mid to high teens, Foot Locker.com declined low double digits, Europe decreased low singled digits, Foot Locker Canada decreased low single digits, and Foot Locker Asia Pacific continued its strong performance up single digits. By month, comp-store sales declined low double digits in May and mid-teens in June and July.

As we look towards the third quarter of this year, our current sales trend in the U.S. remains negative, reflecting both the benefit from the tax free holiday shifts into August and the negative impact of the later back-to-school season taking place in many states.

I would also note that our comparisons to last year become somewhat easier as we go through the quarter. Last year we had a low single digit comp-store sales gain in August, followed by a low single digit sales decline in September and a mid-single digit sales decline in October.

Our second quarter gross margin rate decreased by 220 basis points from last year, reflecting a 30 basis point decline in our merchandise margin rate and a 190 basis point decline in our buying and occupancy rate.

During the quarter, we continued to make a concerted effort to reduce the promotional cadence in our U.S. stores. At the same time, we remained focused on reducing our merchandise inventory levels and maintaining the quality of our assortments within our internal aging standards.

We were successful in reducing our total markdowns below both our planned levels and that of last, but not quite enough to result an improvement in merchandise margin rate. We were successful however, in reducing our merchandise inventory level by 8.4% from the same time last year and we ended the quarter with our aging favorable to our internal standards.

Our second quarter buying and occupancy expenses were $30 million below last year, reflecting the accomplishments of our real estate department and negotiating some new favorable occupancy deals. We believe that the current challenging economic environment will likely provide additional opportunities for us to reduce our occupancy expense and certain markets in the U.S.

Second quarter SG&A expenses decreased $47 million versus last year. On a constant currency basis, our second quarter SG&A expenses decreased by $37 million. Flexing associate hours in our stores to be inline with sales trends continues to be the most significant variable expense opportunity in this environment.

We are also working very hard in implementing many other cost savings initiatives across all expense areas that we believe we’ll lower our cost structure for the balance of this year and beyond. We continued to gain a lost of traction by being aggressive and negotiating prices for all of expense categories, using our mind bidding techniques to secure the best deals available.

We are finding that many of our incumbent suppliers are being much more aggressive in their pricing structures, to insure that they retain our business. Examples where, we were finding cost reduction opportunities include travel and entertainment, freight, marketing, supplies and technology.

Depreciation expense for the second quarter was $28 million or $5 million favorable to last year. The decrease in depreciation expense primarily reflects the assets impairment rate downs last year and accordance with FAS 144. Net interest expense for the second quarter was $3 million, $1 million higher than last year, primarily reflecting lower interest rates on our short term investments.

With regarded to income taxes, please note as you refine your models for the third quarter of this year, we expect to record a one time non-cash income tax expense of approximately $4 million to $5 million. This charge is expected to be recorded to reflect the impact of a reduction in Canadian provincial income tax rates beginning in 2012, on our deferred income tax benefits related to Canadian tax depreciation and operating loss carry forwards. While the change in Canadian tax rates results in an additional income tax expense in 2009, we expect this change will have a favorable effect in 2012 and beyond.

Moving to our balance sheet, our merchandise inventory position at the end of the second quarter was $117 million or 8.4% lower than at the same time last year. Over the past two years, we have reduced our merchandise inventory by $168 million or 11.6%. On a constant currency basis, our inventory was 11.2% lower than two years ago. Our financial position remains strong with $415 million of cash and short term investments and just $138 million of long term debt.

Again the second quarter of 2009 was very challenging from the sales standpoint. Even more sudden, we anticipated going in to the quarter. Consumers spending in United States remains down and we expect that the consumer will continue to be very cautious with their discretionary spending.

To offset those external pressures, it requires that we’ll be even more aggressive with our expense management and continue to control our merchandize inventory tightly to minimize markdown activity. We believe that the many steps that we are taking this year will improve our competitive situation and position our company for stronger earnings growth when the economic environment improves.

In summary, the key components of our near term strategy are as follows. Reduce our expense base aggressively. Manage our inventory levels lower inline with sales. Generate positive cash flow and strengthen our financial position.

Before I conclude my portion of today’s program, I‘d like to acknowledge the contribution of Matt Serra, who is participating in his 35 consecutive quarterly conference call. Under Matt’s leadership Foot Locker has accomplished a great deal over the past of 11 years. The Foot Locker that Matt passes along to our new President and CEO, Ken Hicks, is a company that is financially strong and well positioned in the marketplace.

As you know, Matt will continue to services the company’s Chairman of the Board through January 2010, coinciding with his retirement. Matt, on behalf of the senior management team with Foot Locker, we’d like to thank you for your help, leadership and many accomplishments during your time at Foot Locker.

I will now turn the program over to Matt Serra.

Matt Serra

Good morning and thank you Bob. As my first item of business this morning, I would like to formally introduce Ken Hicks as Foot Locker’s, new President and Chief Executive Officer, replacing me in that capacity as of this past Monday. I have known Ken for many years having worked them at [Bay] company from the late 80s.

To the background, from both an academic and business experience standpoint he’s an excellent fit our company and I couldn’t be more pleased that he is joining our company. As Bob mentioned, our future plans include remaining with company through the end of January as Chairman of the Board, and I look forward to working with Ken and the management team to ensure smooth transition.

Ken’s, hands on experience in strategic planning, operations and merchandizing, as well as his stronger appreciation of finance has served Foot Locker as well.

Before I get into the operational details of this latest quarter, I’ll turn the call over to Ken for a few brief comments. Ken.

Ken Hicks

Good morning and thank you Matt for the nice introductions. I’m happy to have the opportunity to lead Foot Locker. While the near term economic situation continues to present challenges for all retailers, I believe the longer term opportunities for Foot Locker are very exciting.

As most of you know, Foot Locker has many strings that distinguish the company in the athletic retail industry, including strong brand recognition, leadership position in the global marketplace, success in multiple channels of distribution, well established supply chain in systems and experience deep management team, and a strong financial position.

These strengths are due in large measure to the leadership that Matt has provided over the past decade. From this solid base and support, I believe we can build increase shareholder value over the coming years.

During the ensuing, weeks and months of this year I planned to spend most of my time helping to guide the company through the fall season, while at the same time working with the team and developing the companies longer term strategic plan. Once I’ve had an opportunity to settle in, I look forward to meeting with you to ensure that we maintain the appropriate level of communication with the investor community.

I will now turn the program back over to Matt.

Matt Serra

As expected, the difficult external environment, as well as some specific comparisons with the prior year presented many sales challenges for us during the second quarter of 2009. While we certainly do not produce the proper result during a quarter that we would have light, we are encouraged that we emerge from the quarter position properly for the fall season.

Following up on some of Bob’s commentary during the quarter, we accomplish the following. We’ve reduced our merchandize inventory by 8.4% from the prior year. We ended the quarter with our merchandize aging favorable to our internal aging standards. We’ve reduced our SG&A expense by $47 million from the prior year, and very importantly our cash position was strong, ending the quarter with $415 million of cash and short term investments.

Business trends continue to be most difficult in the United States. In fact we experienced double digit comp store sales declines in both athletic footwear and athletic apparel. With sales weakness in the U.S. was fairly consistent across most areas of the country, in Urban and Suburban areas, as well as inside and outside the mall.

Sales with higher price marquee basketball shoes continue to be the dominate category in our men’s and kits footwear business. We continued to generate strong sales of join of Jordan Retro’s, Nike basketball shoes, endorsed by Lebron and Kobe brand, as well as new Nike Hyperdunk styles, in the technical running category, Nike Air Mac 90s, Asics, Puma were the highlight.

We also continued to have success in the lifestyle category, which is dominated by footwear with vulcanized soles. This is developing rapidly in the global marketplace. This vulcanized look comes in a number of brands in styles with Nike the dealers Puma and Converse offering the most exciting products in this category.

Premium classics from Nike also continued to be strong, with gains in prestige, dunks, and blazers leading the way. Our average footwear selling prices in the U.S. increased low to mid single digits, reflecting that continued mix shift towards higher price footwear.

Our apparel business in U.S. continued to be tough, even as we continue to gain some traction from the introduction of some new branded assortments. Clearly we believe and improving our apparel business overtime will prove out to be significantly important to the profitability of our company.

I believe that Ken’s prior experience and success in this area will be very instrumental to Foot Locker and capitalizing on this opportunity, as already mentioned our international sales out performed our domestic results by a good margin. Our sales and profit in each of the three regions, in which we operate Canada, Europe and Asia Pacific were closer inline with our expectations.

Our Asia Pacific division, which operates 93 stores in Australia, New Zealand once again this quarter, produced our strongest quarter-over-quarter results. For the quarter, this division produced the high single digit comp store sales increase in a high single digit profit margin. Based on the recent sales trend, Foot Locker Asia Pacific division margin for the full year could approach double digits.

Foot Locker Canada also produced the strong profit margin for the second quarter. Our sales slipped somewhat during the quarter, this 130 store chain continued its record during the second quarter of producing a double digit profit margin. Foot Locker Europe was almost profitable division during the second quarter in terms of the total division income.

We entered the quarter with 514 Foot Locker stores in Europe, and plan to continue to proceed with the store expansion program in this region. In Europe, we generated very solid apparel sales gains during the second quarter, with increases across each of our private label, branded and license categories.

Our footwear sales in total were down a little. We generated a sales gain in women’s footwear, as well as some key men’s departments, including basketball and court shoes. Our Direct-To-Customers comp store sales gains decreased to low double digits for the quarter. Total sales however, including our newly acquired CCS business increased low single digits.

The internet piece of this business continues to grow, and has reached 85% of this business versus 82% last year. Division profit of this division decreased from the prior year reflecting the sales decline. The division profit margin rate of the core Footlocker.com Eastbay business remains very healthy in the high digital margin area.

Second quarter sales of CCS continued to run behind our initial expectations, similar to that of other Direct-To-Customers businesses. Therefore, we believe this underperformance is due primarily to lower customer traffic, and a contraction in consumer spending that is widespread across most of retail.

On a positive note, we continue to be very encouraged with the sales results at two test CCS stores that we opened this year. These test stores are located strategically in Santa Monica, California and Garden State Plaza in New Jersey. Based on the initial success of these two stores, we are planning to expand this test in 2010.

Additionally, during the first week of August, we launched a new, much improved website for CCS. The look of the site is much improved and includes improved features such as skateboard builder, wish list, wide mode, and additional product of detail.

We ended the quarter with 3,615 own stores, reflecting 26 new stores, 52 closed stores for this year. We have also remodeled and relocated 89 stores so far this year. Given the uncertain and very challenging external environment, we will continue to take a very conservative approach in managing our business for the balance of the year.

Our capital expenditure program remains targeted to a range of $100 million to $110 million for the year, providing the funds to open up to 40 new stores and to remodel or relocate up to 150 existing stores.

We’re closely monitoring our merchandise inventory purchases as we continue to work with our inventory levels to lower them overtime. Just as important, we plan to continue to be even more aggressive with our expense management, always looking to get better pricing and finding more efficient ways in that business.

Our sales comparisons were challenging during the second quarter, I believe that we maintained a competitive position. At the same time the strategic actions that we undertook during the quarter positions us better for the future, and consumer spending returns to more normalized levels.

Our financial position is sound. Our fixed and variable course is being reduced. Our merchandise inventory is current and our infrastructure is growing. We lost some ground from an earnings standpoint during the second quarter, after over performing during the first quarter. We hope to get back on track during the third quarter and to see us strong in the fourth quarter, when our sales comparisons become much easier.

With the change in command at Foot Locker, this will be the last conference call in which I plan to participate. For the past 11 years at Foot Locker I’ve presented many challenges and opportunities. I believe that we have met most of the challenging and capitalized on many of the opportunities due to the strength, experience and dedication of our people throughout the organization. Clearly these are unprecedented times for retailers. I am confident however, that the best days for Foot Locker lie ahead.

We will now be happy to answer your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Chris Svezia - Susquehanna Financial.

Chris Svezia - Susquehanna Financial

A couple of questions; I guess first, Matt can you just maybe add a little bit of color in terms of the sort of early trends that you’re seeing on back-to-school? You mention that they are currently trending negative.

I was wondering if you can maybe talk about, is there any specific geographic differences, whether those markets that have turned and have gone back-to-school, already what you’re seeing versus those markets that have not, and any color in and around that will be helpful.

Matt Serra

Yes. This is going to be a tricky back-to-school season, because there are more changes quite frankly than I’ve ever seen. The markets that have gone with the back-to-school cycle, are running down mid-to-low single digits and in some cases are running increases.

There’s a huge shift with Florida, they started this week and our divisions are beginning to well down there. There was a shift in Texas with the tax holiday which begins today. So I believe a week back shift from last year, and we started comping without the tax shift, possibly the last day or two.

We do 25% of the big Foot Locker business in the Northeast market, and basically in the low 20s in the rest of the U.S. divisions. That is also pushed back because of Labor Day shift. So it’s going to be pretty difficult to get as a succinct read on how we’re really doing until like next week at this time. I think we’re going to perform better than we have been performing in the last quarter, that’s what the indications appear to be pointing towards.

Chris Svezia - Susquehanna Financial

Then just on the inventory, you continue to see nice reductions there. I guess, could you just talk about, are you continuing to cut your receipts and your buys working on what’s working and what’s not?

You made the observation about managing inventory relative to sales; are you looking maybe to get a little more promotional drive traffic, or are you still looking to hold the line as you go in the third quarter? Maybe any color between U.S. inventory versus what’s going on in Europe in terms of the inventory position?

Matt Serra

We’ve always had a very large business in Marquee footwear being $100 and above. It continues to drive our business, makes us different from a lot of our competition. With that said, the environment is changing and I think we have to walk and chew gum at the same time.

I think Ken, who is very converse in popular price footwear as we are, will lead the team to make some decisions, where I think we have to compete a little more in that popular priced zone. Quite honestly, the last year and a half we avoided that zone, and I think we need to step up to the play a little more aggressively, by hopefully buying it off price not taking it out of our height.

Chris Svezia - Susquehanna Financial

Yes, that was the next question I was going to ask. When you talk to vendors, is there the availability of product at attractive margins, where you can also be offset the hit on year end, getting maybe more promotional or as you’re saying, kind of walk and chew gum with everyone else, is that fair?

Matt Serra

There’s merchandise around. I think we have got to make a conscious decision to go after it, and the customers have voted. You see what’s going on in the high end market; it is very, very tough out there and the high end market in athletic footwear is not much different.

Certainly a different customer, but it’s very pricy and we got really high unemployment right now and I think people are looking for value and we have to play, and to what degree we’re going to play, to kind of make that decision, but I think we need to play in that arena.

Chris Svezia - Susquehanna Financial

Matt just to follow, just the inventory between the U.S. and Europe, is there any difference between the two of them?

Matt Serra

Europe is a totally different business, totally non-promotional. I mean, they have their regulated semi annual sales in many of the countries and we continue to sell a lot of very high price footwear over there, and we continue to sell a lot of low profile fashion footwear over there, which you really don’t see much of that product in the U.S. any longer. Actually in all our international divisions, the low profile merchandise still is a very important piece of the business.

Operator

Your next question comes from Bob Drbul - Barclays Capital.

Bob Drbul - Barclays Capital

Ken I was wondering if you could maybe start, and then if you could maybe elaborate on maybe couple of your top goals as you look at the business?

Matt Serra

Ken is not going to speak to that at this timeframe. Ken started five days ago and on his next conference call, he’s not going to articulate his strategy for the company. He will give an outline of what he views as some near term opportunities, but I think it would be a little unfair to ask Ken to give you a rundown of all his great ideas, which he’s going formulate over the next year or so.

Bob Drbul - Barclays Capital

Matt, when you look I guess from the business perspective over the next sort of three to six months, can you talk a little bit about the product that you think might be sort of driving traffic or what you’re most excited about, whether on the footwear side or on the apparel side?

Matt Serra

We’re not too excited about apparel. We really had a tough, tough time; that’s a harder reason for the slight margin decline. Our private label business has been up dramatically and I think Ken will bring a lot to the party, new private label ideas.

Ken Hicks

I’m trying to be as honest as I can. I think it’s going to be very, very challenging over the next six months. With that said, we’ve got a rock solid balance sheet, a very, very focus stringent expense structure, and we’re going to continue to work very hard on our real estate transactions, and we’re going to stick with our game plan. We want to sell a lot of exiting new marquee footwear.

We’ve got some additions for the fourth quarter; Kobe and key selling items and Kobe basically is exclusive with us in the mall and we think that that’s going to be a major plus. Obviously we have tones of special color ups and new uppers going in. Very importantly the Nike’s Fly Wires are a very exciting program. No matter what that upper goes on, it seems to do well.

In Europe we’ve added into 165 stores skate product. It’s off to a very, very good start and we’re going to be working on getting more aggressively into that business, and I don’t think we’re going to see a full presentation of it for probably close to 10 to 12 months, but we think we need to play somewhat in that arena.

We’ve got our CCS business and we’ve tested two stores, they’re doing nicely, and we’re going to take it slow for a while, but as they continue to perform the way they are currently performing, that could be a meaningful division in a couple or three years down the road here.

Bob Drbul - Barclays Capital

When you talk about how tough the environment is, kind of including the apparel, but overall can you just talk about your ability to sort of coupe with a higher level of promotional activity in the competitive environment with many of the guys that your are facing, and sort of what your game plan is as you look at this type of a sales environment for the next six months.

Matt Serra

Well we’re going to have to play a little in there, and buy a little more of price or maybe a lot more of price. We never subscribed to the strategy of having the lowest prices, that’s a formula for going out of business. Anybody that ever tells you, you have to have the lowest price is not the winner at the end.

At the end of the day you have to have the right merchandize and that’s the key, but you have a very valid point. You see some of the successes that are going and there’s a few examples, but they are price driven in many cases and we’re not going to sit back and not play in that arena. It’s to what degree we decide to step our toes in the water.

Operator

Your next question comes from Sam Poser - Sterne Agee

Sam Poser - Sterne Agee

A question on SG&A; the reduction of $47 million, can you break that out on how much of that was on variable costs versus fixed cost items, number one?

Bob McHugh

Yes, I would say that probably the majority of that was variable, with I mean maybe 80:20 on variable versus fixed.

Sam Poser - Sterne Agee

Then how should we look at that on a year-over-year reduction going forward for the balance of the year?

Matt Serra

We’re going to remain vigilant on the expense reductions. Having said that, we may not be as aggressive on store wages and that will greatly depend on the sales environment, because as we said, that’s our number one lever in terms of how to flex in this environment, but we’re going to continue to be vigilant.

There is a tougher comparison for the fourth quarter, because last year we really started to get out of the store wages based on the drop of business in the fourth quarter of last year. So, that will be a tougher comparison.

Sam Poser - Sterne Agee

Could we expect to see another $40 million in the third quarter?

Matt Serra

We’re working on it.

Ken Hicks

We’re not going to give any guidance on it.

Matt Serra

We’re not going to give any guidance on it, but it is clearly our focus to reduce expenses prudently and aggressively. We don’t want to get draconian, we want to keep the stores looking fresh and exciting.

To answer your question, I mean we cut off more than that, but then we start cutting lighting in the stores and staffs where its bone levels, and cut the housekeeping and what not and we’ve managed and Bob and his team have done an outstanding job in really controlling the controllable, which is something that we take great pride in.

Whether it’s going to be another $40 million, we’re not prepared to say that at this point, but I would tell you that we think it will be significant.

Ken Hicks

Keep in mind the FX comparison is different in Q3 and Q4, versus what you saw in Q2. When you look at the current rates versus last year, they are much more in line, whereas we had a $10 million gap between the absolute and constant currency differences.

Sam Poser - Sterne Agee

Then on the merchandise margins, can you breakout how the merchandise margins were again for the quarter? I think you mentioned it, I might have missed it.

Matt Serra

The merchandise margins were not down that much; 30 basis points. A lot of that had to do with our private label in particular, not only the receipt, but the sales of the private label being down so much. Our markup, we did not have the markdown problem.

It was principally markup and when you have a big private label business like we have here, which is basically close to half our apparel business and start experiencing those kinds of declines, and then taking the precautionary measures of not bringing in that much inventory, it can affect your mix.

Sam Poser - Sterne Agee

One last question, this is the follow-up on the current trends. Given the easier comparisons, given your inventories down 8% right now, you mentioned that the quarter is still tough so far. Can you give some idea of where it’s running in the first two, almost three weeks right now?

Bob McHugh

It’s running better than the last quarter and I think my initial comments, it’s too premature because of all these shifts Sam, a lot of shifts and you’re going to have to really take a look at the end of next week. We’re hopeful that it’s going to be an improvement.

Sam Poser - Sterne Agee

When you look at your 8.4% inventory decline, could we hazard the guess that you’re planning your business for the balance for the year or for the next quarter inline with that inventory level?

Matt Serra

We hope we’re going to do a little better than that, we hope.

Operator

Your next question comes from Robby Ohmes - Bank of America/Merrill Lynch & Co.

Robby Ohmes - Bank of America/Merrill Lynch & Co

Just a few follow-up questions, I might have missed it. Can you give us the traffic ticket breakout on comps for the second quarter, and then it’s a follow-up to that Matt. Just helping us picture sort of what’s going on in your stores, could you sort of give us actually two things here; your outlook for ASPs for the rest of this year.

Then within your store, maybe a little more color around which price points performed the worst in the second quarter? So for example, was Shox a little disappointing? That product was taken under $100. If you could just sort of help us understand where the weakness was in comps that would be great? Thanks.

Matt Serra

Our average unit prices are up low to mid single digits by division. Obviously, selling less product is a lot less traffic in the stores, and until that economy turns around and we get these malls trafficked again, I think you’ll continue to experience that.

We are hopeful that and even if we add a certain amount of valued shoes, I still think our average out the door will be higher than the previous year. In Europe it’s totally difference a bag there, because the average price over there is really high, and the marquee business is huge. A totally different business, they don’t sell that much basketball, a lot of high end running.

Robby Ohmes - Bank of America/Merrill Lynch & Co

Can you actually give us a traffic number for the comp? Traffic ticket breakout on the comp, was it six-in-six to get to the minus 12 or…?

Matt Serra

In that range.

Operator

Your next question comes from Bernard Sosnick - Gilford.

Bernard Sosnick - Gilford

Matt with regard to footwear sales, I’m not sure I got the information correctly. Could you review for us how footwear sales spared in the second quarter by men’s, women’s and kids?

Matt Serra

Women’s continues to be the toughest area. Men’s basketball is the strongest, followed by running, and we had an incredible first kids business, I mean a staggering increase and the second quarter it dropped off. So in the pecking order, that’s the way the footwear business ran. Women’s business with the exception of Europe in general, it was tough throughout all divisions.

Bernard Sosnick - Gilford

I take it then that footwear was down across all three women’s, men’s and kids. How did the launches of Nike product go from November through July and internally August?

Matt Serra

Back to November, you mean talking about the last quarter. Do you want to go back to November of last year?

Bernard Sosnick - Gilford

Actually, I’m thinking about June being a pivotal month, perhaps in terms of the turn in the business. It slowed in April and in May. Could you just give me a progression of Nike launches over the period, say since April through early August?

Bob McHugh

As you know, they are very, very important to us. It’s been a mixed bag; most of them are pretty successful, but when we get an unsuccessful one, it’s obviously very costly. If you go historically back to what happened last year, we were doing pretty good up until late November, December and January, and then we came out of the box in the first quarter, and all our launches in the first quarter I believe were highly successful. In the second quarter, some of the launches slowed down significantly.

Bernard Sosnick - Gilford

The other point that I’m wondering about is, that the average selling price moved up a bit, overall sales were down. It suggests that your low price shoes got hit much harder in terms of sales decreases than the higher price shoes, and that maybe one of the reasons that you’re talking about being more aggressive in the future at the low end. Could you give us a little bit of background on what’s been happening at the moderate lower price points?

Matt Serra

I think it’s a self fulfilling prophecy. I don’t think we bought enough of the moderate priced product. I think if you don’t have sufficient amount of product to offer the consumer, you’re not going to sell it. So in my view, I think we need to step on the gas a little in that zone and do it profitably from an off-price method, not just take it out of our height.

We always had very successful two for 89 programs around here, that kind of dissipated a couple of years ago. We had the merger of Reebok with Adidas and we had a huge, huge business in that white shoe product, as well as with K-Swiss and that those heavy sole, whatever you want to call them; tennis shoes, shopping shoes, I think some of our competitors have taken that business from us and that we need to be a little more aggressive in that area. Actually, I take it back; we need to be a lot more aggressive.

Bernard Sosnick - Gilford

I understand that Ken, you’re not ready to talk about anything with regard to your post employment at Foot Locker, but could we hypothetically do a pre-employment interview and ask you, with your background at Tyler Shoe Stores and then going to Penny, what you might have learned at Penny, that you could have applied at Tyler Shoe to help improve that business?

Ken Hicks

Really, I don’t want to be rude, but I think on the next call, Ken will be prepared to articulate some very, very key ideas and not his full strategy, but some key ideas.

Bernard Sosnick - Gilford

Actually you told us in advance, what you though the position would be, just wanted to try. Thank you.

Peter Brown

Before we take the next question, I just want to make a clarification to one of Robby’s questions. I’m not sure that we understood it properly, but our average selling prices for the quarter overall were up low single digits, then obviously the math and the peerage was down mid teens. I just wanted to make that clarification.

Operator

Your next question comes from Kate McShane - CN Investments Research Group.

Kate McShane - CN Investments Research Group

I was wondering if you could tell us, how much exclusive product you currently have in your store that’s exclusive in the mall, and how much this could increase over the next six to twelve months?

Bob McHugh

We generally run around 60% exclusive product in footwear, and the lion’s share of that are exclusive uppers, where there will be a key shoe from one of our value suppliers, that we work on special color ups and obviously special uppers to make them exclusive, and that’s been an ongoing number, 60% basically since I’m with the company.

Kate McShane - CN Investments Research Group

Then a question about apparel; we think it’s tougher this quarter in apparel, partially because you started to lap the mix change of when you went towards more branded apparel, and were the merchandise margins down on branded apparel in U.S. as well?

Matt Serra

Yes, I think we need to have branded apparel. We’re in athletic footwear and apparel chain and we entered into some significant programs with Nike, Adidas in the states. We’re doing extremely well with apparel in Europe, and much better in our international operations, and I think that we really need to intensify our efforts in going after that product.

I see certain change in competitors where they just can take it all out, and we added Under Armour since two years ago. It’s performed nicely for us, a lot of out doors. While the margins maybe down, it’s an integral part of the business and we got to continue to focus on it.

Quite frankly, the private label piece of our business, I think we need a real refresh in there. We’ve been doing the same items for a very long time, which quite frankly for five, six years, we had enormous growth and I think they’ve run their course. So we’ve got to come out with some new power items, where we saw millions of units, tremendous unit output on some key items.

I think we’ve been a little tardy in getting to that piece of the business and I know Ken and I mean this sincerely, has a tremendous background in private label as I use to, but I think coming in with a fresh eye, he’ll be looking at airing some of things that he knows that are very important out there now in the general merchandise area.

As an example, when I joined the company after a year or year and a half, we put in the infamous five for 20 t-shirts, but it was a 40 million unit program and we did well at that for six years and customers, I guess they bought $20 million of them and $200 million of them, so we need some new items.

Operator

Your next question comes from John Zolidis - Buckingham Research Group.

John Zolidis - Buckingham Research Group

I was just wondering if you can comment on specific initiatives that you might be doing to help drive the top line. I guess we can all appreciate that the macro environment is difficult, but we’re looking at I guess several years of difficult top line. So anything specifically that you can comment on that you’re doing differently or new, that can help the trend against those easier comparisons in the second half of the year. Thank you.

Matt Serra

As I said earlier, in Europe we’ve gotten into the skate business in a significant amount of doors. We think that’s going to be helpful there. I think in the second half of the year, that we’re going to have to review our pasture on moderate priced footwear. I think we need to play in that arena without over distorting it. Quite frankly over the last was two and a half years, we made a conscious decision top line, to close a lot of unproductive stores, and that’s a significant amount of our sales decline.

John Zolidis - Buckingham Research Group

Okay. Just a follow-up on that; I mean looking at the second quarter, ASP is actually up. It seems like you have more of a traffic problem than evidence that customers are shifting to moderate price points. Are you seeing within your store a greater potency for people to buy moderate placements; why do you think that’s the answer, can you just expand on that a little bit.

Matt Serra

I don’t think that’s the only answer, I think that is one of the answers. I think everybody’s seeing a lot less traffic in the stores, and that as long as this economy is in this mindset, I think the companies that are controlling the controllables and managing the balance sheets will be survivors, and then when the sales come back, we’ll get more than our fair share and a lot of great merchants in this company, and we really know how to leverage up.

We are experiencing some nice movement in our real estate area and we’ll get some nice leverage from that over the next several years, and when sales come back I think we’ll have the flow-throughs and get back to historical levels.

Peter Brown

Okay we’ll thank you everyone for participating.

Operator

Thank you ladies and gentlemen. This concludes today’s conference. We thank you for participating. You may now disconnect.

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Source: Foot Locker Inc. Q2 2009 Earnings Call Transcript
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