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Executives

Peter Brown – SVP & IR

Ken Hicks – President & CEO

Robert McHugh – SVP & CFO

Analysts

John Zolidis - Buckingham Research Group

Robby Ohmes - BofA/Merrill Lynch

Chris Svezia - Susquehanna Financial

Bernard Sosnick – Gilford Securities

Sam Poser - Sterne Agee

Robert Samuels – Oppenheimer

Michael Vinetti - UBS

Bob Drbul - Barclays Capital

Tom Shaw – Stifel Nicolaus

Foot Locker, Inc. (FL) Q4 2009 Earnings Call March 4, 2010 9:00 AM ET

Operator

Good morning, ladies and gentlemen and welcome to the fourth quarter 2009 earnings release conference call. (Operator Instructions) 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 Inc. 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 Information Officer, and Investor Relations. Mr. Brown, you may begin.

Peter Brown

Good morning. Overall our fourth quarter results were in line with our expectations going into the quarter which we discussed with you during our November conference call. They reflect some encouraging signs as we enter 2010.

On a GAAP basis our net income was $0.14 per share for the fourth quarter of 2009 versus a loss of $0.81 per share last year. Included in our results were charges of $0.10 per share this year and $1.06 last year that we highlighted in our press release and excluded in a non-GAAP comparison.

As this comparison shows on a non-GAAP basis we earned $0.24 per share this year versus $0.25 per share last year. During our prepared comments, we will refer to our financial results on a non-GAAP adjusted basis to help facilitate your analysis of our financial results.

Robert McHugh, our Executive Vice President and Chief Financial Officer, will begin our prepared remarks with a review of our financial results, including the charges that we have excluded in our non-GAAP adjusted comparison. Ken Hicks, our Chairman, and Chief Executive Officer, will follow with an operational review and provide some color on current business initiatives. We will conclude the program with a question-and-answer session.

Our pre-tax income from continuing operations increased $2 million versus the same period last year. The primarily factors that contributed to this improvement were as follows. Our total sales increased 0.6%. Our gross margin rate which includes our occupancy expenses improved by 10 basis points, and our SG&A expenses in constant currency dollars declined $6 million.

Our cash flow for both the quarter and full year was also very encouraging and as a result we ended the year with our total cash position net of debt $185 million favorable to last year. I will now turn the call over to Robert McHugh.

Robert McHugh

Good morning, our fourth quarter adjusted earnings were at the high end of the range of our expectations going into the quarter and in line with the Wall Street consensus estimate. As Peter mentioned I will discuss both our quarterly results for this and last year on a non-GAAP adjusted basis, which excludes the adjustments detailed in our press release.

I will discuss each of these adjustments separately. Besides achieving our EPS target for the quarter we also had a number of other positive developments that we believe bode well for 2010. Our comp store sales improved fairly meaningfully on a sequential basis throughout the quarter.

In fact during the month of January our comp store sales increased high single-digits at our international operations and were flat at our US operations. Our merchandise margin rate for the quarter improved by 20 basis points, reflecting a lower markdown rate than last year. We remain diligent with our expense management benefiting from reductions in both our occupancy costs and SG&A expenses.

And our depreciation expense was below last year reflecting a lower asset base. All these factors taken together contributed to our $2 million pre-tax profit increase for the quarter. We also began to implement some important strategic initiatives during the fourth quarter in line with our new strategic plan that we will communicate next week.

For the fourth quarter comparable store sales by region and segment were as follows. Our combined US store operation decreased mid double-digits. Footlocker.com generated a small increase, Europe increased mid single-digits, Foot Locker Canada had a small decrease, and Foot Lock Asia Pacific decreased high single-digits.

By month comp store sales declined high single-digits in November, declined low single-digits in December, and increased low single-digits in January. We are very encouraged by the significant improvement in our sales trend in each of our US and international regions as we progressed throughout the quarter.

The sequential improvement in our sales trend continued through February with our comp store sales results up mid single-digits in both domestic and international markets, as well as out dot com business for the month. Also of note is that February is our most difficult monthly comparison versus last year.

Our fourth quarter gross margin rate improved by 10 basis points versus last year reflecting a 20 basis point improvement in our merchandise margin rate and a 10 basis point decline in our buying and occupancy rate. The improvement in our merchandise margin rate reflected a reduction in our markdown activity versus the fourth quarter of last year.

The markdown reduction is encouraging considering that we stepped up our promotional activity during the month of January to clear slow selling apparel as we began our transition to a new apparel strategy. We believe that in order for our new apparel strategy to be a success requires that we tighten our inventory aging standard.

To achieve this new aging standard at year end required that we record a $14 million inventory write-down during the fourth quarter. Our fourth quarter buying and occupancy expenses stated in constant currency dollars were $5 million below last year primarily reflecting the impact of closing 73 underproductive stores during the first three quarters of this year.

Our occupancy expenses will benefit further in 2010 from the closing of an additional 106 underperforming stores during the fourth quarter most of which were shuttered at the end of January. Fourth quarter SG&A expenses increased $6 million versus last year. The strengthening of foreign exchange rates versus the US dollar since last year effected our SG&A expense comparison negatively by $12 million.

On a constant currency basis our fourth quarter SG&A expenses decreased by $6 million. Expense reductions in store wages and other store expenses were partially offset by higher marketing expenditures, store closing costs, and pension expense. We will continue to work hard at identifying additional opportunities to reduce expenses strategically across each of our businesses.

At the same time maintaining the appearance of our stores, providing superior customer service, and investing prudently in marketing and branding strategies will not be compromised. Our fourth quarter SG&A expense rate was 22.3%, favorable to each of the first three quarters of the year.

Depreciation expense for the fourth quarter was $27 million or $6 million favorable to last year. The decrease in depreciation expense primarily reflects the asset impairment write-downs. Net interest expense for the fourth quarter was $2 million, $1 million higher than last year primarily reflecting lower interest rates on our short-term investments.

Our income tax provision for the fourth quarter was 32.8%, higher than last year’s rate of 28.6% which included an income tax adjustment so that the full year tax rate was properly reflected. Therefore while our pre-tax profit was $2 million higher than last year our net income and EPS were flat with last year and $0.01 per share lower than last year respectively reflecting the higher income tax rate and a slightly higher diluted share count.

The income statement adjustments for the fourth quarter that we have excluded from non-GAAP comparison for 2009 are as follows. A $14 million inventory write-down as I just discussed, a $5 million restructuring charge related to our Lady Foot Locker organizational change, and costs associated with corporate staff reductions, an income tax benefit of $7 million related to the inventory write-down and restructuring charge, partially offset by a $4 million tax expense related to the write-down of Canadian deferred tax benefits due to a Canadian tax law change.

Last year’s charges reflect the write-down of the value of certain underperforming assets at our US store operations in accordance with GAAP. Moving to our balance sheet our merchandise inventory position at the end of the fourth quarter was 7.4% lower than at the same time last year. On a constant currency basis our inventory was approximately 10% lower than at the end of last year and approximately 6% lower on a square foot basis.

Our cash flow for the year was very strong as we generated $468 million of positive cash flow from operations from which we invested $89 million in capital expenditures, funded $100 million to our pension fund, and paid $94 million in shareholder dividends. We made a $60 million contribution to our pension fund during the fourth quarter thereby increasing the funded status of our North American qualified plans on a GAAP basis to 87% from 72% at the end of last year.

At year end we had $589 million of cash and short-term investments and $138 million of long-term debt. Our cash position net of debt was $185 million favorable to the same time last year. As we look towards 2010 we are cautiously optimistic that our comp store sales will begin to increase as we refine our merchandise assortments and the external environment begins to improve.

As I said earlier our sales results in February are cause for cautious optimism. Regardless of these factors we will remain diligent in controlling the more controllable aspects of our business model including inventory, markdowns, operating expenses, and cash flow. With that as a prelude our outlook for the year versus our adjusted results for 2009 is as follows.

We expect our comp store sales to increase low single-digits and as I already indicated we are off to a good start based on our February results. We expect both our gross margin rate and our SG&A rates to improve slightly versus last year reflecting our more favorable inventory position, and continuing prudent expense management.

Our annual depreciation expense is expected to be approximately $10 million below 2009 depending of course on foreign exchange rates. Interest expense should be relatively flat with last year at approximately $10 million. And our income tax rate is expected to be approximately 37%. We are not providing EPS guidance for the year but do expect to produce a double-digit percentage increase.

For the full year we do not expect that foreign currency translation will have a meaningful impact on our EPS comparison with last year based on current exchange rates in Canada, Europe, Australia, and New Zealand.

Obviously that outlook could change as foreign exchange rates fluctuate during the course of the year. By quarter we expect to generate EPS increases in each of the first, third, and fourth quarters of this year with the most meaningful increase during the fall season. Our second quarter comparison to the same period last year will be our most difficult due to the expense reductions reflected in the 2009 numbers.

Looking beyond 2010 we are encouraged that we are at an inflection point for a meaningful and sustainable longer term improvement in our financial results. I will now turn the program over to Ken Hicks.

Ken Hicks

Thanks Robert, and good morning. As announced last night we will be hosting an Investor Meeting at our corporate headquarters building next Tuesday morning at 10:00 am Eastern time. The purpose of the meeting is to review our new strategic plan and highlight the financial objectives that we will work hard to achieve over the next several years.

In the meantime during today’s call my prepared comments are concentrated on discussing our fourth quarter results and the strategic to actions that we’ve already taken. I am pleased with the operational execution of our associates worldwide, which led to our improving financial performance and strong cash flow that we’ve posted for the quarter.

As already mentioned from a financial perspective we achieved what we expected to for the quarter. At the same time we also began to take some meaningful strategic steps each carefully designed to position our company better for the future. As we do this we are encouraged by our significant sales trend improvement as we progress through the quarter including a high single-digit increase at our international operations and a flat sales performance at our US operations in January.

I am also pleased to report that our sales have improved further in the month of February with mid single-digit comp store sales gains at our US, international, and dot com businesses. We also executed well from an operational standpoint. Our merchandise margin improved reflecting a lower markdown rate. Our occupancy costs were reduced as a result of closing underproductive stores and negotiating effectively with our landlords.

Our SG&A expenses were reduced by negotiating aggressively with our vendors. Our depreciation expenses were below last year due to lower fixed asset base. And we generated strong cash flow reflecting the impact of our expense initiatives, improved working capital management, and lower capital spending.

As a result we ended the year at a very strong cash position and our inventories are positioned appropriately for 2010 due to the actions we took during the fourth quarter including the steps on inventory aging. In the US our athletic footwear sales declined low single-digits, where athletic apparel and accessories declined double-digits.

We generated a small comp store gain in men’s footwear, low single-digit decline in women’s footwear and a mid single-digit decline in kid’s footwear. During the fourth quarter we began to see two important fashion trends emerge that we believe bode well for our company. First the toning category contributed to the higher sales and is breathing new life into the women’s business.

And second both men’s and women’s technical running shoes are quickly gaining momentum. We generated solid sales gains during the fourth quarter in the running category through various key styles from Nike, Asics, New Balance, and Puma. In the marquee basketball category we continued to post strong gains in Jordan Retros as well as Griffy, Kobi, and Lebron endorsed footwear.

Classic styles from Converse, Puma, and adidas sold well. As highlighted in the women’s category the biggest buzz in the industry is the strength of the toning category which has contributed to the athletic look regaining its popularity. We generate strong sales gains during the fourth quarter with the Reebok Easy Tone style and Sketchers Shape-Ups.

We also generated strong sales gains in women’s running shoes in both higher priced technical and mid priced value zones led by Asics, Nike, and New Balance. In total our average footwear selling prices in the US increased low to mid single-digits for the quarter reflecting our continuing mix shift towards higher priced footwear and a lower markdown rate.

Our apparel business in the US was very tough throughout the quarter even as we began to clear dated assortments. Clearly improving our apparel business is one of our significant sales and profit opportunities for our company and will be an important strategic objective that will be a focus for us over the next several years. We will discuss the initiatives behind this strategy next week.

Moving to our international businesses, our comp store sales in Europe increased mid single-digits during the fourth quarter in both footwear and apparel. During January our comp store sales in Europe accelerated to nearly double-digits with a strong gain across each of the major countries in which we operate.

By category, we had our strongest increases in basketball which is becoming a more significant piece of our business in Europe. We also generated some meaningful sales gains in skate styles as well as Nike, adidas, and LaCasse [Flim] Soles. Our most powerful category in Europe is running, our running sales were relatively stable during the fourth quarter. Our increase in apparel sales in Europe included branded tee’s, outerwear, and licensed apparel.

Sales at Foot Locker Canada declined slightly for the quarter but like our business increased meaningfully during the month of January. Foot Locker Canada generated a small profit increase for the quarter by managing both its markdowns and operating expenses effectively. Our Asia Pacific business had a difficult fourth quarter with the comp store sales down high single-digits and profits below the fourth quarter of last year.

Its important to note that during the fourth quarter of 2008 consumers in Australia were provided with economic stimulus checks from the government that contributed to our comp store sales increasing mid teens at this division last year. Therefore the unfavorable comparison in Asia Pacific to the fourth quarter of 2008 was due to the strength of last year’s results, not due to a slowdown in the tone of our business this year.

For the full year Foot Locker Asia Pacific posted record profits and a high single-digit division profit margin rate. The division profit of our core FootLocker.com Eastbay division was flat with last year with a slight comp store sales increase. The division profit margin rate of the core FootLocker.com Eastbay business remained very strong in the low teens.

Our sales results at CCS declined mid single-digits for the quarter. We continue to learn a great deal from our two test CCS stores that we opened earlier this year. The first in Santa Monica, California and the second in Garden State Plaza in New Jersey. Based on the results of these two stores, we decided to expand the test in 2010 adding an additional 10 stores.

We ended the year with 3,500 owned stores reflecting 38 new stores and 179 closed stores for the year. We also remodeled or relocated 188 stores this year. These projects were funded under our capital expenditure program that totaled $91 million for 2009. During 2010 we plan to open approximately 40 new stores, and close approximately 150 underperforming stores as we continue to improve the productivity of our store fleet.

Our capital expenditure plan for 2010 has been increased by approximately 20% from 2009 to a total of $110 million. This increase primarily reflects the funds required for several sales-driving technology projects including the continued rollout of a new POS system in Europe. As we enter 2010 there are encouraging signs that the external environment is beginning to emerge from the recessionary environment of the past few years.

As mentioned we’ve experienced a very meaningful sales trend improvement each month since last November with a positive comp store sales gain for the last 10 weeks. We believe the steps that we have already taken to improve our merchandise offerings have contributed to our stronger financial results.

A considerable amount of time has been devoted over the past several months by our management team to develop a new strategic plan for the company. This plan which we will communicate at our Investor Meeting next week is designed to result in a significant improvement in our financial performance beginning this year.

We will outline the company’s strategic vision, near-term tactics, long-term strategic priorities, and new financial objectives. Due to limited space attendance at the meeting is by invitation only. However the meeting will be available live at 10:00 am Eastern time, to all interested parties from our website at www.footlocker-inc.com. In addition to this we also plan to be more active meeting with the investor community this year than we have in the past.

Robert already provided some color on our expectations for 2010 and the various levers that drive our profitability. As always we will strive for operational excellence by executing effectively at all levels of our organization. We will maintain an ongoing focus on controlling the controllables such as capital expenditures, working capital, inventory, and operating expenses.

At the same we will also pursue meaningful growth opportunities. As we look to increase shareholder value over the years ahead, we are building on a strong foundation. Our organization and people are strong. Our financial position is sound, our fixed and variable costs are being reduced, our merchandise inventory is current and inline with sales, and our infrastructure is solid.

We will now be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of John Zolidis - Buckingham Research Group

John Zolidis - Buckingham Research Group

Congratulations on seeing some improving results, I want to ask a question about the mid price strategy that had been discussed on some previous calls, you did disclose that your average selling price was up and there seemed to be more interest in some of the technical running shoes, are you still trying to diversify the product assortment and add in more mid price point offerings, is that something that’s going on.

Ken Hicks

We’ll talk more about that on Tuesday but the answer is we trade from mid to marquee level shoes and we will continue to offer a meaningful assortment at all levels and we have in the past focused our mid level shoes on clearance and we will make sure that we have a consistent offering at those price points as well as maintain our position as the place for marquee shoes.

Operator

Your next question comes from the line of Robby Ohmes - BofA/Merrill Lynch

Robby Ohmes - BofA/Merrill Lynch

Just a couple of questions on your outlook on the product side as you move through this year, I guess one is if you could comment on Nike’s Fresh Air campaign that they’ve talked about a lot, what kind of role Foot Locker is expected to play in the Fresh Air campaign and does it build as you move into back to school and then maybe a follow-up question I think you called out toners and women’s running, what do you think could be the driver to get the men’s business comping positive or more positive as you move through back to school this year. Any kind of thoughts on how you’re going to drive that would be great.

Ken Hicks

We feel very good about the product line up coming, we see a number of significant introductions this year that we think will have an impact. We work very closely with Nike and we feel that we have a strong program with them on Air going forward something that we will announce later this spring. I think you’ll feel its very exciting and will keep that program strong and vibrant.

And we’ll go into back to school which as you know is an important selling period for us. On the toners we’re very enthusiastic about that business, obviously its performing well. We continue to see new product coming and the men’s product is really just now hitting and I think again there’s some new introductions this spring that will help make that a more viable business in the men’s as it is in the women’s.

Robby Ohmes - BofA/Merrill Lynch

And just to clarify some of the introductions, do you feel like you’re, the exclusives that you’re going to be getting with Nike are as strong or maybe stronger than they were last year. How does that look.

Ken Hicks

We have a tremendous relationship with Nike and I think that will continue and we will have product that will drive traffic into Foot Locker.

Operator

Your next question comes from the line of Chris Svezia - Susquehanna Financial

Chris Svezia - Susquehanna Financial

First I was wondering if you could just maybe elaborate as you saw the improving trends in February just maybe talk to what I know apparel is a long-term strategy but maybe tell us what’s going on in apparel if you saw any improvement there as well.

Ken Hicks

We really focused recently on clearing our apparel, making sure that’s it right but we’ve got some programs, we have a strong apparel business in Europe and we’re going to be bringing some of those ideas to the United States, some of the branded. We also have brought in a new team that is really positioning us well in apparel in our US stores, so I think it’s a little early to call but some of the new things that we’re doing with regard to our performance, our branded apparel will help us.

And we’re seeing the trend has improved so far this year but its still not to the level we want but as the team that we’ve got starts to kick in and more of that product hits the floor I think we’ll see a benefit from the apparel business.

Chris Svezia - Susquehanna Financial

And then on store closures for one second, as you’ve progressed over the years and you look at areas or clusters of areas where you’ve closed stores, whether multiple concepts in one mall and you’ve closed one or two of them, can you just comment on what you’ve seen on those remaining stores in those malls or in those close proximities, just in terms of the comp performance and the trends in terms of what’s happening as you’ve closed those stores in those areas.

Ken Hicks

Generally speaking what we hope for is that when you close a format in the mall that we do drive some of the business to the remaining formats in the mall. That’s always the objective and we think we see some of that. We have for the most part seen pick ups but whenever you do close a store there’s a transfer loss but what you expect to do is pick up in the expense benefits so there’s a sales impact but what you’re looking for is a positive expense and profit impact.

And we have seen that in most of the closures that we’ve had.

Chris Svezia - Susquehanna Financial

And the last question I have to what extent you can comment on this, but I visited your new run by Foot Locker store and I’m just curious in terms of maybe you want to save this for Tuesday of next week but any thoughts behind it, any color you could add, what you’ve seen. I know its been very, very early but just any thoughts behind that concept would be helpful.

Ken Hicks

Well thanks for visiting the store and hopefully you’re excited about it as we are and we know that running is a trend that is performing well. Its also a significant part of the business that stayed reasonably stable through time. We feel that as a business running is an opportunity and we have learnings both from this idea and we’ll determine whether or not it’s appropriate or not and we’ll talk more about that next week, but also we’re having learnings for the Foot Locker chain as to what shoes and ideas work and we will apply those appropriately.

Operator

Your next question comes from the line of Bernard Sosnick – Gilford Securities

Bernard Sosnick – Gilford Securities

With regard to the online business which has been sluggish I’m sure you’re going to be detailing this more during your discussions next week, but could you give us some indication as to whether or not there are technological investments that need to be made or other approaches that could help stimulate that side of the business.

Ken Hicks

We have made some significant changes in late fall to our websites and we’ve actually received some very high ratings from people who review websites and have seen a pick up in business. One of the key things to understand is our store banner websites are actually performing extremely well in the double-digit category and the Eastbay business had been tougher but its now improved and its also running positive but where we are really seeing gains are on the websites for each of our banners.

And that’s a result of changes we’ve made to the websites to make them more interactive. We’ve added ratings to our websites. We have done the widescreen, easier checkout, its faster, more product shown, easier to navigate, and since we’ve done that we’ve seen some very good results and we feel optimistic about what’s happening on dot com.

Operator

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

Sam Poser - Sterne Agee

First of all you’ve got your inventories down over the last few years to quite a degree, how much lower reasonably with the store closures and stuff do you think you can get them, let’s say from an average stock position.

Robert McHugh

We still think there’s an opportunity in inventory really through improving the turns. There would also be a benefit from closing more stores obviously when we’re going to close 150 stores but we still think the combination of both of those, we’re going to be able to make a meaningful reduction in our inventories.

Sam Poser - Sterne Agee

What is turn goal let’s say, your short-term goal.

Robert McHugh

We’re going to talk about that next week.

Sam Poser - Sterne Agee

And then can you give us both the composition and the timing of your store closing plans.

Robert McHugh

For the most part most of the store closings occur at year end which is when most of our stores have their natural lease expiration.

Sam Poser - Sterne Agee

And then the composition, the different concepts.

Robert McHugh

We’re working on those closures as we speak and quite frankly we haven’t identified all of where they will occur and over the course of the year that will develop.

Sam Poser - Sterne Agee

Is this a conservative number or is this a number that could go higher.

Robert McHugh

It could go higher, it really depends on the environment out there and the store performance and what we think we can make of the stores that are out there that have the possibility for closure.

Sam Poser - Sterne Agee

What other, besides the store closures, what other expense saving opportunities do you see.

Robert McHugh

I think one of the areas we continue to make a lot of progress in is just we do a lot of e-procurement or online auctions of the basic goods and services we buy for store supplies and other company supplies and we think there’s still opportunities there. We do still think there’s some things we could do from a productivity standpoint in terms of taking advantage of some technologies.

We also have a very rigorous profit improvement program with the company where we encourage our associates to develop ideas and we reward them for that. Some of the things we’ve done in the past year is we developed some new reporting to help our stores reduce some of their freight and we’ve also had some good progress on procurement with store fixturing as well as store hours.

People talk a lot about cutting store payroll but that’s something that’s easy to say, hard to do particularly with the size of the fleet we have and we’ve done a lot of work in that area and saved significantly without harming customer service because first and foremost that’s what our objective is, to continue to have the outstanding service that we have in the stores.

Ken Hicks

One of the things that we are investing in as part of the capital for next year is improved store scheduling and we feel that that will help us both in terms of the service that we’re able to give but also the expense management of our labor.

Sam Poser - Sterne Agee

Can you restate what you said the men’s, women’s, and kid’s businesses were in the US for the fourth quarter.

Ken Hicks

For the fourth quarter we had a small comp gain in men’s, low single-digit in women’s, decline in women’s, and a mid single-digit decline in children’s.

Sam Poser - Sterne Agee

And I would assume that Sketchers is going to get a nice part of the kick in to help your kid’s business with all those sparkly shoes for girls.

Ken Hicks

Yes, Twinkle Toes is a good program.

Operator

Your next question comes from the line of Robert Samuels – Oppenheimer

Robert Samuels – Oppenheimer

Can you just help me understand a little bit the delta between the negative 2.3 comp and the total sales number and then also can you just talk about the recently announced partnership with the NBA and how you’re thinking about differentiating the concepts from one another.

Robert McHugh

The delta between the positive and the negative was really FX.

Ken Hicks

And then the partnership with the NBA [inaudible] Champs, is really setting up a very strong position in each of our stores, each of our Champ stores to support the NBA in particular the NBA team of a particular city in each of the stores, so they’ll have a dedicated presentation and if you go into the Champ stores you’ll be able to notice with both the visual and the level of merchandise the strength of the offering for NBA apparel and accessories.

Robert Samuels – Oppenheimer

Are you planning on doing any other types of exclusive with any of the other divisions.

Ken Hicks

We are constantly working on new ideas that will help us, for example we’ve got a very strong position with Nike on the House of Hoops, and we’ve opened House of Hoops stores at the same time we have strong House of Hoops presentations in many of our Foot Locker stores. And we’re looking at other opportunities like that with different vendors.

Operator

Your next question comes from the line of Michael Vinetti - UBS

Michael Vinetti - UBS

Congratulations on a nice quarter there, I was wondering if you could help us with a little bit color on what gives you confidence in the low single-digit comp outlook for the year. Obviously we’ve seen quite a few quarters of negative comps looking backwards, and if I look at the transcripts over the past few years there’s been some instances where we’ve heard the outlook improve based on some emerging trends that you have seen, but I don’t think you’d say that the results have hit the company’s targets, or that the results that maybe you were optimistically hoping for, so I think it would really help us to get a little more color besides a few year of easy comparisons to help us get some confidence in that number.

Ken Hicks

Well a number of actions and we’ll talk about them in more detail next week but when you look at first of all we are going to trade broader. We’re stepping up our effort for example in the running category which is a category that is performing well as well as maintaining our strong position in basketball. We’ve seen a better performance with recent launches as we’ve continued to learn and understand what’s worked well with the launches of marquee shoes.

There are some exciting trends, the whole toning trend is exciting and there are some new ideas and new technologies that are coming out from a number of our vendors such as Zig from Reebok and we’ve got some new ideas coming from Nike and several of our others. The apparel business, we are working very hard so that’s not a drain on what we’re doing and we’re making a number of changes there to improve that.

Our international business continues to be strong. I’ve got to find some wood real quick and tap on that and then frankly when we, as we continue to close our poorer performing stores, that allows the rest of the fleet to move up. So those are just a few of the actions and we’ll go into more detail next week and talk about other things that we’re planning on doing that give us some optimism.

As well as the overall environment at some point its going to pick up. I’m not an economist. There are people in Washington that are a lot smarter on this than me and they have a better understanding but we are seeing in parts of the country that it is picking up. And so you say okay you’ve got all that stuff in and you’ve said that before does it really mean anything, well we’ve talked about the good start we had in February and that was our last comp plus month so we were up against a tougher month.

We had snow storms to beat the band, and we still had a good performance for the month. And because of the things that I mentioned earlier.

Michael Vinetti - UBS

It might be helpful next week if we could see maybe the delta between some of the stores you’re closing and the stores you’re keeping open as far as the run rate comps.

Ken Hicks

I can tell you that the one’s we’re closing are performing significantly worse than the one’s we’re leaving open. We won’t go public with the delta but we’re not closing our good performing stores.

Michael Vinetti - UBS

And just to hit on one point you brought up there, if you could talk a little bit about your early thoughts for the Lady Foot Locker brand specifically the trends there have been sluggish for a number of years and we’ve seen you accelerating the store closures there lately but then that’s been called out by a lot of companies as one of the positive points in the industry right now, I’m curious do you feel like you’re shrinking your exposure of that business at the right time and maybe you could just give us some color on that.

Ken Hicks

No, and again we’ll talk more about that next week but we feel the women’s business is a strong opportunity for us but its an opportunity for us both in terms of women’s Foot Locker and Foot Locker. And so the question is you close the women’s Foot Locker or consolidate it in with Foot Locker we’ve already started to see some significant benefits in our Foot Locker stores by that action and strengthening the Lady Foot Locker stores.

The expression we use is the cannons are now turned out and not in, we’re not competing with ourselves, we’re competing with the competition and we’re being much smarter about what we do with each of the banners within the mall and next week Dick Johnson is going to talk about how we’re going to differentiate that Lady Foot Locker because that is different than just the Foot Locker and I think you’ll see that we’ve got a good plan and that’s why the question was asked earlier about are you targeting store closures.

We think we’re at a good size with Lady Foot Locker overall, there will be some poorer performing stores that we will close but overall its about right for what we should be able to get us into a lot of the right places.

Michael Vinetti - UBS

Can you give us a little color on your decision about how you’re closing stores at this point or maybe how that decision has changed and how you think about the hurdle rates for the stores, maybe how that’s different than how you have closed stores in the past and how you’re looking at that.

Robert McHugh

I don’t think there’s been any change at how we decide how we close stores, it really is as we’ve said before a case by case basis. We look at first of all what causes us to look at first of all is for the most part they’re stores that are coming up for renewal or lease expiration and whether we want a renewal. So we look at that particular store, the prospects for that store in that mall, the prospects for that mall, how our other formats are performing in that mall and whether or not we think we would be better off closing it or not.

And then of course what kind of rent we would be looking at going forward in terms of the negotiation on a renewal we might be having with the landlord is a factor as well. So as I said its really a case by case and we just try to, its not objective to close a store if we can get the right kind of metrics. But we’re not changing our hurdle rates.

Ken Hicks

And so we look at that financially and then we put that together with the competitive position in that market and in that mall and with the other stores, how much of it can we capture, how are we positioned in that particular market and we put all of those elements together and probably I guess the thing that’s a little bit different is we are, as we look at those competitive factors and our positioning we’re making sure that we have the opportunity to capture the most business possible and if closing the store allows us to do that, and the economics work out, or keeping a store open we determine what’s the best and in a number of cases for example we’ve moved from one store to another location because it was a better location and closed a smaller location but wound up with a bigger Foot Locker store which is able to accommodate whatever other element we might have closed.

Operator

Your next question comes from the line of Bob Drbul - Barclays Capital

Bob Drbul - Barclays Capital

Can you talk a little bit how much is the toning category driving the comp improvement and then how sustainable do you think that trend is for the business and then on the 10 CCS stores for 2010 are those new stores or are those converted other Foot Locker owned or controlled stores that you’re converting over.

Ken Hicks

On the toning the good news is that what we’re seeing in women’s, the women’s business is fairly stable without toning because I ask that every week. I say okay what would the comp be without toning and its coming in flat to up slightly so that business has stabilized significantly without toning which gets to something that we’re also using is while toning is a business now, its driving new traffic in and we are using that to sell other parts of the business, our running, our apparel, our accessories and so people are getting to know Lady Foot Locker again or Foot Locker and we’re, its been a significant plus for us in helping to drive in traffic.

With regard to the sustainability there’s new product coming out and new ideas and I think that will help sustain it for a period of time. The long-term sustainability quite frankly will depend on what women’s behinds look like over a longer period of time, but right now I will tell you, I’ve been in a lot of stores recently watching people buy it, talking to them, understanding, they really like the product.

The number of women who have come back to buy a second or third pair of shoes is quite impressive because they feel that they’re getting some results which makes me happy. With regard to CCS what we’re doing with the 10 additional stores, they’ll be spread across the country so we’ll get a better feel for how that model works in different markets and they are for the most part new locations.

Operator

Your final question comes from the line of Tom Shaw – Stifel Nicolaus

Tom Shaw – Stifel Nicolaus

Just a little more detail maybe on February I’m curious can you just mention the weather but how much of an impact may that have been from not only a store closure type perspective but maybe how it maybe benefited the category.

Ken Hicks

I never let anybody be a weather man, I watch the evening news, and I can get the weather there so we did have some store closures, it did have an impact, but we were able to overcome that. It did not significantly impact our boot business because for the most part by February if they haven’t bought a pair of boots, they’re not going to buy them or they’re buying our clearance boots and its, we’re moving out of that, it’s the same amount of clearance as we had last year.

So boots was not a significant impact for us. We feel good, the overall tone of the business across all the different categories of business across all the divisions was good and so while weather was a bit of a negative next year we’ll look forward to picking up those days.

Tom Shaw – Stifel Nicolaus

On the gross margin guidance for kind of up slightly in 2010, can you just elaborate some of the pieces there, occupancy should continue to work in your favor, merchandise margins probably based on the initiatives you’ll discuss next week should work, what other factors are in there that may be it tones down that guidance from what we might expect.

Robert McHugh

I don’t think its toned down, we expect our margins to improve but I think we probably expect to see more improvement in the merchandise margin rate than perhaps the occupancy and buying side of that.

Tom Shaw – Stifel Nicolaus

The 40 new stores, a quarter of those are going to be CCS what should we expect the bulk of the remainder of that international.

Ken Hicks

Yes, and we’ll talk more about that next week.

Peter Brown

I just want to thank everybody for their participation today and we look forward to telling you more next week. Thank you.

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Source: Foot Locker, Inc. Q4 2009 Earnings Call Transcript
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