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Foot Locker, Inc. (NYSE:FL)

Q4 2013 Results Earnings Conference Call

March 07, 2013, 09:00 AM ET

Executives

John A. Maurer - Vice President of Investor Relations and Treasurer

Lauren B. Peters - Chief Financial Officer and Executive Vice President

Richard A. Johnson - Chief Operating Officer and Executive Vice President

Kenneth C. Hicks - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Analysts

Michael Binetti - UBS Investment Bank

Robert F. Ohmes - Bank of America, Merrill Lynch

Christopher Svezia - Susquehanna Financial Group

Kate McShane - Citi Research

Sam Poser - Sterne Agee & Leach Inc.

Matthew Boss - JPMorgan

Matthew McClintock - Barclays Capital

Eric Tracy - Janney Capital Markets

Seth Sigman - Credit Suisse AG

Paul Trussell - Deutsche Bank AG

Taposh Bari - Goldman Sachs Group Inc.

Bernard Sosnick - Gilford Securities Inc.

Operator

Good morning, ladies and gentlemen, and welcome to Foot Locker's Fourth Quarter and Full Year 2013 Financial Results Conference Call. (Operator Instructions) Later we will conduct a question-and-answer session. This conference call may contain forward-looking statements that reflect management's current views of future events and financial performance.

These forward-looking statements are based on many assumptions and factors, including the effects of currency fluctuations, customer preferences, economic and market conditions worldwide, and other risks and uncertainties described in the company's press release and SEC filings.

We refer you to the Foot Locker, Incorporated's most recently filed Form 10-K or Form 10-Q for a complete description of these factors. Any changes in such assumptions or factors could produce significantly different results, and actual results may differ materially from those contained in the forward-looking statements.

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

I will now turn the call over to Mr. John Maurer, Vice President, Treasurer and Investor Relations. Mr. Maurer, you may begin.

John A. Maurer

Thank you and good morning everyone. Welcome to Foot Locker, Inc.'s fourth quarter and full year 2013 earnings conference call.

We’re pleased to have announced this morning record financial performance for both the quarter and the year. In the fourth quarter, we earned net income of $121 million or $.81 per share, an increase of 19% bringing our full year earnings to $429 million or $2.85 per share. These full year earnings compared to the $2.58 per share generated in 2012.

On a non-GAAP basis, we earned $0.82 per share in the fourth quarter, a 28% increase over last year's 13-week non-GAAP earnings of $0.64 per share. For the full year on a non-GAAP basis, we achieved a 16% increase in earnings per share to $2.87 from $2.47 a year ago.

As we describe changes in quarterly or annual ratios and margins during this call, we will be referring to non-GAAP results that also exclude the extra week in 2012. Since in our view, this approach provides the most useful basis of comparison.

In this morning's press release, we have included a GAAP to non-GAAP reconciliation and in the 8-K filed this morning, there's a detailed calculation of our non-GAAP performance measurements.

Here with me this morning to provide the details are Lauren Peters, Executive Vice President and Chief Financial Officer, Dick Johnson, Executive Vice President and Chief Operating Officer, and Ken Hicks, Chairman and Chief Executive Officer.

We have a lot of ground to cover this morning, so I'll hand it right over to you Lauren.

Lauren B. Peters

We sure do, John. Thank you, and let me thank all of you who have joined us this morning to cover the details of a Foot Locker’s 2013 results and to hear about our current view of 2014.

Noted in our press release this morning, the fourth quarter of 2013 was another strong performance by our company. Our best fourth quarter as an athletic company. We achieved a solid of 5.3% comparable sales gain and a 9.7% of total sales gain, lifted by our comps and $70 million of sales by Runners Point Group.

The fourth quarter sales results brought our full year total sales to $6.5 billion, another record for us and 6.6% increase over the last year's 52-week results of $6.1 billion.

Most of the broad trends we saw throughout the year continued in Q4. For example, our strongest segment was our direct-to-customer business, which generated a 13% comparable sales increase.

Within that segment, Eastbay was up low single-digits. CCS was down high teens, and our store banner.com sites were up, again more than 40%. In fact, our store banner.com sales were up more than 40% for the year overall, a second consecutive year at that level, and a third consecutive year with at least a 30% increase.

Within the store segment, we produced sales gains in every region in which we operate. In the U.S., our improvements were led again by our children's business, with Kids Foot Locker itself up low double-digits in the quarter.

Foot Locker in the U.S. also posted a strong result, up high single-digits. Footaction was up low singles, while Champs Sports and Lady Foot Locker were down slightly.

Internationally, our Foot Locker Asia-Pacific business had a terrific quarter, generating a low double-digit sales gain, while our businesses in Europe and Canada were up mid-single-digits.

Comparable sales were positive throughout the quarter. With November up low single-digits, December, the month you really want to hit the ball as far as you can, was up high single. And January was up in the mid-single-digits.

By category of business, footwear was the driver of our success in the quarter, with a gain in the mid-single. Average selling prices and unit sales were both up.

Basketball was definitely the strongest component of footwear, with many divisions posting double-digit gains. In the U.S., running was down a bit which is not too much of a surprise given the challenging winter weather much of the country experienced during the quarter.

Internationally, where the weather was relatively mild, we had solid gains in both running and basketball. Apparel and accessories sales were down mid-single-digits.

Average selling prices were up a tick, but unit volume was down. We continued to transition our assortment towards the more premium offering. Dick will talk more about apparels in a few minutes.

Turning now to the rest of the income statement, our gross margin ticked up 10 basis points in the quarter to 32.5%. For the full year, our gross margin rate was flat at its record high levels of 32.8%. The familiar pattern of fixed cost leverage offset partially by a lower initial market break was evident in the fourth quarter.

Unlike most of the year, however, in Q4, we did increase markdowns slightly higher than last year in order to ensure that our inventory position remained fresh going into 2014. We believe that strategy worked well as inventory at year end was up just 4.5% over last year, compared to the 9.7% sales increase I mentioned at the beginning of my remarks.

Using constant currencies and excluding Runners Point, our inventory was up just 1.3% and it was actually down slightly on a gross per square foot basis.

Footwear margins improved about 20 basis points while apparel margins fell in the quarter. The story was much the same for the full year. So in total, apparel penetration fell back slightly to 23.1% in 2013. And apparel margins still have yet to catch and surpass footwear margins.

We continue to believe doing so it's possible, but it will clearly take time and a lot of hard work. What we believe our margin and inventory business was strong, it was our expense management that as CFO, I was particularly proud of.

Our SG&A rate improved 110 basis points, 20.3% in the quarter and for the full year; we came in at a record low 20.4%, down 60 basis points from 2012’s rate.

Topline growth coupled with diligent expense management is a powerful combination. I’d like to thank our many team members responsible for that accomplishment for a job well done.

In Q4, our store wages, the biggest component of SG&A declined almost 20 basis points as a percent of sales, due to both a very strong performance by our store operations teams and to various technology tools we have implemented over the last year or so in order to improve our hiring and labor scheduling processes.

We also reduced our marketing expenses compared to a year ago, although we were still able to develop some very memorable marketing campaigns such as the All is Right campaign during the root Week of Greatness, which produced more than 1 billion -- billion with a B impressions over the course of the quarter. It was quite remarkable.

Our depreciation and amortization came in at $36 million for the quarter, 2% sales, and in line with our expectations.

Our tax rate came in below last year due primarily to the ongoing effect of certain recently implemented tax planning initiatives, which received a particular Boost in the fourth quarter due to a favorable development in our foreign tax position.

In fact these initiatives should enable us to achieve a somewhat lower tax rate going forward which I’ll describe a little bit later when I provide our outlook for 2014.

The bottom-line was a very healthy non-GAAP net income result in the fourth quarter of $122 million, an impressive increase of 26% over Q4 2012. Our non-GAAP net income of $432 million for the full year was solid 14% increase over last year's record performance.

On an earnings per share basis, we improved 28% in the quarter, $0.64 to $0.82 with the additional increase coming from the reduction in our outstanding shares.

As noted in our press release, we repurchased almost 1.6 million shares of our common stock in the fourth quarter at a cost of $63 million. That's brought our full year repurchase program to 6.4 million shares at a cost of $229 million, up appreciably from the $129 million we spent in 2012.

In addition to this significant return of cash to shareholders. We also paid $118 million of dividends during 2013. Last month we announced that our Board had authorized a 10% increase to our current quarterly dividend rate to $0.22. This is the fourth consecutive year with a meaningful dividend increase.

Overall in 2013, we returned $348 million of cash to shareholders in the form of dividends and share buybacks. This amount represents more than 80% of our net income for the year. We also finished 2013 having spent $206 million in capital to invest in a variety of stores, digital, technology, and infrastructure projects.

I’ll let Dick cover the details of the program in a moment, but suffice it to say, that even with funding all these initiatives plus the acquisition of Runners Point, we ended the year in strong financial position with $728 million of cash net of balance sheet debt.

We ended the year with 3,473 stores, an increase of 138 from the beginning of the year. Excluding Runners Point Group, our store-based decreased by 55 stores. That's the biggest decrease coming at Lady Foot Locker, Foot Locker in the U.S., and CCS where we closed all 22 of our CCS retail stores. The primary increases were in a Kids Foot Locker and in Foot Locker Europe.

Let me now turn the call over to Dick to add more color to the strong results. Before we get to your questions, I’ll jump back into discuss our annual and quarterly expectations for 2014. Dick?

Richard A. Johnson

Thanks, Lauren. I want to start by expressing my gratitude to everyone on the team at Foot Locker for doing so much of to make this past year such a success. There were so many important contributions all around the globe that there's just not enough time to do justice to any of them -- to all of them, but rest assured, your efforts are truly appreciated.

For the fourth quarter, I’ll touch on some of the key product themes that drove the business. I started off last quarter highlighting the strength of the Jordan brand and sure enough that brand continued it's very strong performance in all of our markets around the globe. Jordan Retro, Classic, and Performance shoes also sold well as did Jordan Tees, Fleece, Shorts and Socks.

Lauren mentioned that basketball was the strongest category in Q4 and so in addition to Jordan; we drove very solid sales results in the signature products. Innovative styles of LeBron, Kobe, and KD Footwear performed very well, along with Foamposits and certain other marquee player shoes.

Running was down slightly in the U.S., but within the category, we saw continued strength in Performance Running. For example, the relatively new SpringBlade program from Adidas sold well as did the well-established Nike Free.

Among the lifestyle running silhouettes, the Roshe Run from Nike has shown a lot of life, both in the U.S. and in Europe.

Lauren mentioned that Running was up in Europe and in addition to the Roshe, several Air Max style sold well.

Boots were a popular footwear choice in the quarter, especially Timberland and Nike. This was primarily a style choice because Timberland boots along with accessories such as knit caps sold in warm weather markets in the U.S. just as well as they did where it snowed.

Apparel sales were down a bit in the quarter. Jordan apparel was certainly an exception as the hook-up graphic in logo tees and fleece in particular sold very well. The apparel that hooked to the marquee player shoes also sold through at good rates.

It was primarily the more lifestyle-driven apparel that posted declines. There was a lot of pretty intense promotional competition in the mall for that customer during the quarter.

While there was definitely a place for some of the less athletic apparel in our banners, overall we will continue to focus on a more premium performance-based brand of assortment, which we believe is what our customers expect us to deliver.

On the accessories front, our Performance Sock business continues to expand as does the Backpack business which also tilts towards the premium end of the price spectrum, with fashion hooks to the key issues and apparel in our stores.

Turning to our 2014 capital program, we’re targeting a total of approximately $220 million. We continue to generate strong sales lifts from most of the remodel formats we began rolling out in 2013. We have many different types of projects with very different amounts of capital spent per project. So, the lift required to justify the expenditure is also very different.

This is one of the reasons we’ve not given a single number in terms of the sales lift from the remodels, but we watch carefully the financial performance of each and every project relative to our hurdle rates, and make adjustments to future projects accordingly.

In 2014, we expect to continue to remodel programs in Foot Locker and Champs Sports and expect to have touched at least 20% of the domestic Foot Locker and 30% of the Champs stores by the end of the year.

The basic reformatting of the Kids Foot Locker is already complete, but we do have a Nike Fly Zone shop in KFL that we’re testing more of in 2014. We opened two new Footaction prototype stores in 2013 and based on their initial success, we plan to expand that test in 2014.

We’re also very excited about the potential for new Jordan Flight 23 shops in Footaction. We have one prototype store now and we believe that this type of shop-in-shop will provide a real lift too many of the stores we have in the fleet.

We have allocated capital to both SIX:02 and Lady Foot Locker in 2014. First for SIX:02, we’re continuing to build the brand and refine our model during the current test phase. The stores are doing well, but we need to continue reading our results, making layout and assortment adjustments, at least to the spring selling season before finalizing our rollout strategy. We will keep learning in order to maximize the potential of the SIX:02 banner.

For Lady Foot Locker, 2013 was a year of assortment transition, shifting out of lifestyle businesses and into fitness and performance. We’re rolling out our Bridgewater format in many of our existing Lady Foot Locker stores this year.

Based on successful tests, our Bridgewater format is essentially a smaller scale version of the parks format.

You may recall that we have 19 parks format stores where we have adjusted the look of the store and the assortment to be performance-oriented like SIX:02, but still with the Lady Foot Locker name above the door.

Bridgewater is the new format which we’re using which can be applied to a variety of store layouts including some of the smaller Lady Foot Locker stores that can't accommodate full performance apparel assortments of the larger stores.

In Champs Sports and Foot Locker, we have two different billion-dollar men's businesses in the U.S. and ultimately, we see no reason why we can't have $1 billion women's business also.

Finally, let me touch on our European business. Overall, Europe produced a mid-single-digit comparable sales gain and improved profit contribution. As you might expect, some of these countries were stronger than others and one of the strongest countries was Germany, where we also added significantly to our business in 2013 by acquiring the Runners Point Group.

Runners Point Group generated a small profit in Q4 and was slightly accretive for the period in 2013 that we owned the business. We’re satisfied with that initial result, and look forward to realizing the benefits from a number of merchandising, market segmentation, and operational improvements that we have started to make there.

With our heritage in running, Runners Point's biggest selling season is in the spring, and we haven't owned the business during that period yet. We fully expect Runners Point Group to be profitable in 2014, and the accretion should grow over the time as we develop the business and implement strategies to improve our financial and operation performance.

I'll hand the ball off to Ken now to add his perspective on the business.

Kenneth C. Hicks

Thank you very much, Dick. Let me echo your thanks to the entire Foot Locker team that delivered these exceptionally strong results. During the last few years the team has built strong momentum in our overall performance. As a result, a diligently executing the many initiatives that support our strategic priorities we have delivered a growing number of strengths and opportunities upon which we can continue to build as we strive to reach our long range goals.

We have substantially diversified many aspects of our business in recent years. First, we have a very strong men's business and now our children's business is quite robust too. We also have a very solid strategy for the women's business to bring it up to the productivity level of the rest of the company.

We recognized that we could not accomplish that goal with the layout and size of the stores and the merchandise assortments in most of our existing Lady Foot Locker fleet. So we are undergoing a major transformation of the women's business that Dick described.

Second, our position in basketball is very strong, and we have also strengthened our running and casual footwear offerings as well as our apparel assortments. This has given us a better merchandise balance than before.

Third, we have clearly dedifferentiated our banners, enabling each of them to focus on a particular customer set whether it's on the performance end of this spectrum, such as Foot Locker, Eastbay, Runners Point and SIX:02; or the lifestyle end, such as Footaction, Sidestep and CCS. Meanwhile, Champs Sports is able to effectively serve customers across a broad athletic spectrum.

Fourth, we are no longer just a U.S.-focused company with a modest international presence. We are now a large global company. Including our franchise partners we operate well over a 1,000 stores in 29 countries outside the U.S., and along with our international and local country digital sites, we're approaching $2 billion in international sales.

And finally, we're not just a bricks and mortar business. We have a strong, fast growing collection of digital sites both in the U.S. and abroad. And we've grown our digital sales to be more than 10% of our total sales.

All of these strengths have provided us with an exciting number of opportunities to drive our business forward in the coming years. Fortunately, some of these opportunities are having an impact now and we expect that they will continue to do so over the relatively near-term, which I define is the next -- into the next year.

These include; first, our children's business across not just kids Foot Locker where sales increased at a mid-teen pace in 2013, but across all of our banners, channels and geographies.

Second, growth in Europe where we have seen recovery in most of our markets, and where Germany given the Runners Point acquisition is now our largest market. In the near-term, we'll focus on customer segmentation inside Germany and expansion of the Foot Locker banner in markets where we believe we are under-penetrated.

Third, improvements in our running and apparel business, both of these categories are strong, but growth slowed in 2013. Looking ahead, we have a promising pipeline of premium running products from many vendors including Nike, adidas, ASICS, Under Armour, Mizuno, New Balance and Puma.

Fourth, continued expansion of specialized presentations in our stores in partnership with our vendors. With Nike these include the House of Hoops, Yardline, Kids Fly Zone and Jordan Flight 23 shops. With adidas we have the Adi collective and original shops. And we've recently opened our first two Puma performance labs.

Fifth, we will continue to enhance the connectivity between our store banners and our banner ecommerce sites. We're stepping up our investment to make these sites more engaging, entertaining and shopper-friendly.

Finally, we use technology to improve our customer service, inventory effectiveness and productivity of our sales associates.

In the intermediate term of say two to three years, we have additional opportunities to build on our momentum. Examples include the cumulative sales lift of our store remodel programs as we start to hit critical mass, the potential expansion of the Runners Point and Sidestep banners outside their current markets, investing in technology, the most prominent example of which is the new merchandise allocation system we intend to roll out later this year. And the development of a more meaningful team sales and services business.

And Dick spoke about what is perhaps our biggest single long-term opportunity, the women's business. Between the promising SIX:02 banner and the merchandise assortment changes we're making to Lady Foot Locker, we believe we can create a large profitable women's business.

That's a lot of opportunities to seize upon, and not all of them will develop exactly how and when we've envisioned. But the breadth of promising growth and profit opportunities have just listed make for a very exciting future for Foot Locker not just this year, but I believe for many years to come.

Now, before we get to your questions, let me hand the call back to Lauren to talk more about the specifics of how we're planning 2014 and all the news that you've been waiting to hear. Lauren?

Lauren B. Peters

Thanks Ken. As we mentioned in the press release this morning, we are planning for a mid-single-digit comparable sales gain and a double-digit percentage EPS increase during 2014. Many of the themes from 2013 we expect to carry over into 2014 with one notable exception which is thankfully we don't have to worry about significant quarterly sales shift caused by that extra week in 2012.

So, in fact, we are planning for mid-single-digit comp sales gains in each quarter. Until July, remember, we will have incremental sales from Runners Point Group at which point their sales and expenses will be in both periods. RPG sales will be in our consolidated comp numbers starting in October.

On the gross margin front, we expect to experience some ongoing initial market pressure, but we believe we can continue to improve our markdown rates to hold merchandise margin relatively steady in 2014, and we should pick up leverage of our fixed cost to generate an overall gross margin gain of about 30 basis points to 50 basis points.

We should also lever the six elements of SG&A to produce a 20 basis point to 30 basis points improvements in our SG&A expense rate. We are currently planning for depreciation and amortization expense to increase to a range of $145 million to $150 million this year. Our interest expense we see being flat with last year at around $5 million.

Meanwhile, as I alluded to you before, our tax team has done a terrific job implementing various tax planning initiatives. And going forward into 2014, we are now expecting a 36.5% effective tax rate, down from our prior expectation of 37%.

We're planning for a $220 million capital expenditure program in 2014. We're anticipating of 16 new stores and we'll likely close about 100. We'll spend about the same amount this year on store remodels. At about 300 the number of projects in 2014 will be close to the number that the team executed last year.

The balance of the capital program will be spent on our technology initiatives, our digital sites, our logistics and other facilities, and our regular store maintenance requirements. We have $371 million left on our share repurchase program, which, as you have seen, we were active in executing during the period of 2013. We expect this share count to continue decreasing as we execute this program.

We intend to be disciplined with our inventory growth in 2014 with the goal of ensuring that inventory increases had no more than half the rate of sales growth. That inventory discipline has served us and the entire industry well in the recent years.

It also set us up for a solid start to 2014, and in fact, our comparable sales are up low-double-digits so far in the first quarter through yesterday. That said, there's still a long, long way to go on the quarter and the year, so we're going to stay focused on executing our initiatives.

In the meeting earlier this week, Ken said something about it being good to score a touchdown on the first possession of the game. It's certainly better than snapping the ball into the end zone for a safety, but it doesn't mean we're going to win the game if the team doesn't keep playing as fast.

So without better good news, let's get to your questions now. And John has just informed me that we have so many people in the queue to ask questions that we may not be able to get to everyone on this call. If you will all keep to just one question each, we'll get to as many of you as we can. Operator?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Michael Binetti from UBS. Please go ahead.

Michael Binetti - UBS Investment Bank

Hey, good morning guys. Congrats on a great quarter.

Kenneth C. Hicks

Thanks Michael.

Michael Binetti - UBS Investment Bank

Lauren, one quick question. Could you just clarify the merchandise margins versus the volume occupancy in the fourth quarter for us? I apologies if I missed that in comments.

Lauren B. Peters

Yeah. We picked up in the fourth quarter 10 basis points improvement. So we got some leverage out of the occupancy. We gave it bit back in gross margins and that's about 10 improvement.

Richard A. Johnson

That's based on the 13-week to 13-week comparison.

Michael Binetti - UBS Investment Bank

Okay. You're not breaking out both components, so.

Lauren B. Peters

No.

Michael Binetti - UBS Investment Bank

Okay. Can we just back up a minute and chat a little about Champs Sports. I think the -- you've said there've been the comps of Champs were negative in the quarter, I think they were as well in the third quarter. I know that that's been a focus of the remodeling program in that. I think the stores come out of the comp base as they remodel, perhaps that's what it is. But if you could just give us a little bit of the components behind what you're seeing at Champs and maybe their trajectory for that chain here this year. Thank you.

Richard A. Johnson

Yeah. The stores don't come out of the comp mix when we remodel and expand. But one of the things we talked about was the apparel being down slightly in the quarter. And you know that Champs is a great license product business and the teams that we have in the playoffs both professionally and in the college ranks were not the same level -- not at the same level of sales as the year prior. So we combine that with a few late remodels and I think that explains. We believe that by the end of '14 we'll touch 30% of the chain, so we think that will be a critical mass there with the remodels on the Champs fleet.

Michael Binetti - UBS Investment Bank

Can I just ask you, do you think -- do you expect the Champs business to be positive in 2014?

Richard A. Johnson

Yes.

Michael Binetti - UBS Investment Bank

Thank you. Have a great day.

Richard A. Johnson

Thanks.

Kenneth C. Hicks

Thanks Michael.

Operator

Our next question comes from Roby Ohmes from Bank of America.

Robert F. Ohmes - Bank of America, Merrill Lynch

Hi. Good morning, everybody.

Lauren B. Peters

Good morning.

Kenneth C. Hicks

Hi Roby.

Robert F. Ohmes - Bank of America, Merrill Lynch

Hi. Couple of questions. The first one is just on the complement you're seeing now quarter-to-date, could you talk about what may -- what is driving that? And then, the sort of confidence in maintaining mid-single-digit comps through 2014. Ken or Dick, could you talk about the spring pipeline, about key exclusives that you may have, and then what sort of the apparel approach or assumption in maintaining those mid-single-digit comps. And then I have a follow-up. Thanks.

Richard A. Johnson

Yeah. February obviously is an important basketball month. So we feel good about where February end and obviously in where we are quarter-to-date. We think the pipeline, as Ken mentioned I think in his comments from the Running perspective, we've got great Running silhouettes coming from many, many vendors along with great basketball performance product. And we have extended the basketball season certainly beyond the traditional season. So we're fairly optimistic.

And on the apparel front, obviously, we continue to make changes to more performance-based assortment in many of our banners. We see great opportunities with Under Armour apparels, with Nike apparel. So I think that we've got a pretty good confidence level albeit the mid-single-digit number is achievable.

Robert F. Ohmes - Bank of America, Merrill Lynch

And the other question I have was on Europe. Could you remind us roughly where the operating margin of Europe has been, and where do you think you could take it to over the next couple of years if you're successful with Runners Point and some of the initiatives you have going on over there.

Lauren B. Peters

The operating margins have improved both in the U.S. and internationally. And we think that we still have a plane opportunity in both. It's a bit less promotional environment in Europe, so that certainly helps. But remember, that we've been adding stores in Europe, so you don't get the full flow-through that you do when you are just talking about comps.

Robert F. Ohmes - Bank of America, Merrill Lynch

Great. Thanks very much.

Kenneth C. Hicks

Thanks Roby.

Operator

Our next question comes from Chris Svezia from Susquehanna Financial.

Christopher Svezia - Susquehanna Financial Group

Good morning, everyone. Great job on the quarter.

Kenneth C. Hicks

Thanks Chris.

Christopher Svezia - Susquehanna Financial Group

Sure. I guess one of my big questions is, when you -- I know you're not going to update sort of your long-term targets, but if you kind of back into some of the assumptions here, you're getting pretty close to your 11% EBIT margin in 2014, just any thoughts about really where you think this business can go to and any thoughts about how we should we think about that as we move forward. Obviously, it seems like there's opportunity for that to go higher, just some thoughts around that.

Kenneth C. Hicks

Yeah. Chris, we do believe based upon what I've talked about number of times, the continued leverage that we get with productivity. And I think one of the things that -- product stuff that we've done is to increase productivity of all of our assets, our real estate, our people and our inventory.

We think that as we continue to get things right in apparel and I continue to improve there and develop a stronger business there, continue to improve in women's and develop that business. We're seeing -- we're putting shoots on the new formats that we talked about plus the women's business in the other banners improving there, and the new allocation system that we're putting in, all will help us continue to drive the overall profitability. And obviously, it’s not -- it can't be infinite, but we think we still have upside there.

Christopher Svezia - Susquehanna Financial Group

Okay. Thanks. And just on the apparel. I'm just curious, any color between private label and the branded side. And I guess as you think about 2014, do you think there's opportunity to actually comp positive in apparel as you think about the product pipeline, what you're doing?

Kenneth C. Hicks

Yeah. We definitely believe that we can improve our apparel business. We continue to -- on our private label -- hold down the commodity elements and build ideas. We've got women's brand that's doing well, called Acura. We've got a brand in Europe called Sneaker Freak that's doing well. So our Champs Sports gear has done well.

So we've got the ability to develop a better element in our private label. The transition is a bit of a challenge as you pull something down and build something up. You can pull down faster than you can build up. We also believe that continued development of the premium apparel and how we show that and what we show is becoming more important. So our plans for this year are positive apparel.

Christopher Svezia - Susquehanna Financial Group

Okay. Sounds great. All the best to you guys in '14. Thank you.

Kenneth C. Hicks

Thanks Chris.

Operator

Our next question comes from Kate McShane from Citi Research. Please go ahead.

Kate McShane - Citi Research

Good morning. My question is on Runners Point. You mentioned that it came in at a slight profit during the quarter. Do you have an alternate goal for the profitability of that banner?

Lauren B. Peters

I couldn't run the process that we do in most of our European business.

Kate McShane - Citi Research

And if there any -- I know you've been very happy with their ecommerce platform, is there any chance that it could be more profitable because of that?

Richard A. Johnson

That's one of the reasons why we -- Kate, why we think it could be more profitable. They've got the strong Tredex business. But they're a slightly different model. They have a smaller store. They replenish more frequently. And we actually think there's some things that we can learn because we have smaller stores in Europe than we do in the states from them on some of those supply chain elements, as well as they can learn from us on things like the allocation and distribution of products.

So we believe that there is an opportunity for continued profitability improvement. And as Lauren said, there's not a governor on it that would say it couldn't get to the level of the rest of the company. They were a profitable company when we bought them. But as we work and continue to leverage both the corporate office that we have there plus the real estate, inventory and people, we feel very good about Runners Point.

Kate McShane - Citi Research

Thank you.

Richard A. Johnson

Thanks Kate.

Operator

Our next question comes from Sam Poser from Sterne Agee. Please go ahead.

Sam Poser - Sterne Agee & Leach Inc.

Good morning. Thank you for taking my question. More questions about the store remodels. Can you give us on like clearly you got some significant lift over on kids, can you talk to me about with Champs may be the differential between the overall underperformance, and those particular stores that have been done in the quarter or last year because you did -- you were little negative there. Were the other -- were the redoes up?

Richard A. Johnson

Yeah. The remodels are up. We don't really break the chain apart and see how many in details, but you know, as I said in my comments, we monitor all the performance of all the remodeled stores and they are meet -- they meet our hurdles. We make adjustments along the way. So I think getting to critical mass with the Champs stores having 30% of them remodeled by the end of the year, will all quite positive in the Champs business.

Kenneth C. Hicks

We wouldn't be going forward with them, Sam, if we -- if they weren't performing well and performing better. And obviously, one of the things that it does, it allows us to better show the apparel which is a stronger business with them with the shoes, and so we've gotten good reaction from the customers on the new format.

Sam Poser - Sterne Agee & Leach Inc.

Thank you. And then just real quick and a follow-up…

Kenneth C. Hicks

The one other thing to keep in mind, the kid's and about remodels, the kid's stores will probably the easiest and most straightforward. And almost all of our kid's stores have been reconfigured. They're not really a remodel, but reconfigured. So one of the things that has helped the kid's business is that we've had that reconfiguring in all the chain. And the others are -- it's more of a process than it was in kid's.

Sam Poser - Sterne Agee & Leach Inc.

Thank you. And then just real quick on Runners Point Group. Can you talk about what kind of, I mean, what kind of accretion that you're thinking -- that you think you'll get this year from it? And how you think what kind of accretion you're going to get from that? And what kind of sales growth you're going to get from it as well?

Lauren B. Peters

As you know, we don't breakout divisions individually, but we do feel great about what Runners Point will contribute this year. As Dick mentioned, spring is what they're running that is very important to them.

Sam Poser - Sterne Agee & Leach Inc.

Thank you guys very much, and good luck.

Kenneth C. Hicks

Okay. Thanks Sam.

Operator

Our next question comes from Matthew Boss from JPMorgan. Please go ahead.

Matthew Boss - JPMorgan

Hi. Congrats on a nice quarter and especially quarter-to-date in this environment. Can you talk about…?

Kenneth C. Hicks

Thanks.

Matthew Boss - JPMorgan

No problem. Can you talk about the business intelligence system, the localization initiative and kind of how this -- when this is rolling out and the opportunity here over a multi-year period?

Richard A. Johnson

Yeah. We've got BI in place right now. And I think that our merchants are doing a great job of understanding the market basket, what's been sold together, how the transactions are being put together in the stores. So that's something that from the localization point of view, we're already doing and working on.

I think Ken and Lauren and I have all mentioned, the merchandise allocation system, which is a much more detailed, much more in-depth process and initiative that we'll test this year and we'll be in a position to roll out completely in 2015, so.

Kenneth C. Hicks

The advantage that that gives us, quite frankly, is it will allow us better utilize the BI information that we have. Right now, we're getting BI information and we're inputting in our current systems, but we feel the new allocation system will allow us to better utilize the localized information in terms of product, sizes, quantities things like that.

Lauren B. Peters

It will really help us take assortment planning to the next level. Of course, because that's our planning impact that bears fruit go forward.

Matthew Boss - JPMorgan

Great. And then can you…

Lauren B. Peters

We're excited about BI that -- really that information has let us beyond products, so we're starting to see how it might be used to help us with operations and some other things.

Matthew Boss - JPMorgan

Great. And then can you just touch on what the basis for the acceleration quarter-to-date? And do you think there's some pent-up demand on the Running side, given the weather that we have had as we head into the spring here?

Richard A. Johnson

Well, we certainly -- basketball is a big deal in February with the All-Star game and all of the events and the launches that happened in February. So that's certainly been one of the things that driven the quarter.

And our general belief in the U.S. is, yes, there's probably some pent-up demand on the running side. But given number -- as Ken mentioned, we're a stronger global business at this point and the winter has not been as difficult in many of markets in Europe, so running business was actually up in Europe for the quarter.

So in U.S., so yeah, we see some pent-up demand. We believe that there will be someone winter break -- inevitably break. We see some good things.

Matthew Boss - JPMorgan

Congrats. Best of luck.

Kenneth C. Hicks

Okay. Thanks Matthew.

Operator

Our next question comes from Matthew McClintock from Barclays. Please go ahead.

Matthew McClintock - Barclays Capital

Hi. Good morning, and congrats to the entire Foot Locker team for a great quarter.

Kenneth C. Hicks

Thank you, Matt.

Matthew McClintock - Barclays Capital

Just I was actually -- wondering if you could update us on your thoughts about expansion. That expansion this year looks like another year of net store closures. And as you think about the comments earlier on may be taking Runners Point Group outside of its core markets, how do we think about that longer term just in general. Thanks.

Kenneth C. Hicks

One of the things, and it's little deceptive in terms of expansion. Because when you look at expansion, as we are closing some of our less productive stores, one of the things that we're doing is we're adding too.

We've got now well over 100 House of Hoops that makes our -- make our stores bigger, things like adding the collective or the Puma labs or the Kid's Fly Zone. Those are where we are taking more square footage, but cutting down on a number of locations, and helping our overall productivity both in terms of space.

So I think several years ago I was thinking, okay, you got to grow stores. We have a couple of things going on both in terms -- or first in terms of just the overall productivity that we're able to drive out of one location.

The second is the addition which causes larger stores with regard to the new concepts that we're putting in the stores. And the third is the growth of dotcom, and the ability for that to help -- to make us more productive not only online, but in our stores.

So I think what we're going to see is kind of a holding pattern around a level of stores, but a much more productive. We finished the year $460 a foot to four years ago we were doing $320 a foot. So that's over in three, four years, a third improvement in the productivity.

With regard to Runners Point, we want to get to know that business a little bit better, but we believe that based upon the success that we've had with them, based upon some testing we're doing by focusing their formats, we have the ability to expand the Runners Points stores and the Sidestep stores into other markets.

And the interesting thing about that is there's some markets, Italy, for example, that probably would be more receptive of Sidestep, and there are other markets such as Scandinavia or Holland that would be more receptive of Runners Point. Don't see that many Italians out running a lot, but they do want to look good.

And so, we think that -- and that's why we put it in that the mid timeframe as an opportunity that we can start expanding those chains into other markets than just greater Germany.

Matthew McClintock - Barclays Capital

I appreciate the color, Ken.

Kenneth C. Hicks

Okay. Thanks Matt.

Operator

Our next question comes from Eric Tracy from Janney Capital Markets. Please go ahead.

Eric Tracy - Janney Capital Markets

Hi guys. Good morning. I'll add my congrats on great execution.

Kenneth C. Hicks

Thanks Eric.

Eric Tracy - Janney Capital Markets

If I could just on the digital business, Ken, I mean now greater than 10% of the mix, may be just kind of update us again on strategy? Is there optimal sort of size of that business that you're thinking about? Earlier we saw somewhat of an inflection this holiday season in retail in general in terms of sort of migration to online. Really just sort of an update there from a banner perspective and the opportunity that you have going forward.

Kenneth C. Hicks

Yeah our -- first of all, I think this last holiday was a little deceptive, because three weekends in a row before Christmas we have a big chunk of the country cut off from shopping has an impact, plus the industry didn't help itself with the mis-deliveries. That said, it's going to continue to grow and we're prepared for it. And we're doing a number of things.

One, we're updating our sites and what's on our sites and how they work. We've really -- I think, when you look at some of the new sites, you look at the new SIX:02 sites, look at our new Footaction sites, they are different and they behave differently than each other. We show more hook-ups and outfits on the Footaction site. You can go to SIX:02 and do intelligent search.

So we continue to update and upgrade that. We're looking at how we can bring more of that to the store and connect it to the store. We've added buy online ship to store, buy online purchase pick up in store. You can order in the store something that they don't have in their inventory and have it shipped to you.

So we've got a whole bunch of things that we're doing to connect the stores and the Internet. We are looking at things that we can do to connect even more and we're going to test something -- we're not ready to announce it yet -- but we're looking at a new idea that we'll test sometime hopefully this summer, but there is a significant opportunity to continue to grow and develop the dotcom business; and not necessarily at the expense of the store if we put them together.

Because the most used sites on our websites happen to be store-connected, store locator, inventory, things like that. And we're going to make sure that we are able to give our associates something so they are better connected. We are using handheld devices and all-in-one devices in the store. So we're using technology as an opportunity. It will grow.

What the peak is, as I told everybody, you set a goal of 10%. Now the 10%, by the way, is the banner.com, and we're not there yet. We did have a banner pass the 10%, but we've got to get all the banners up over it.

And as we do hear and I was alluded to earlier, when we get that goal we'll set a new one. And we'll move beyond. I think there is some limit. What that limit is, is it 20%, is it 30%, is it 40%, I don't know yet, but…

Lauren B. Peters

The customer will tell us.

Kenneth C. Hicks

But customer will tell us because we're going to be able to grow both ways. What we want to do is give the customer the product the way they want it.

Eric Tracy - Janney Capital Markets

That's perfect. Thank you. And then just real quick for Lauren. As we think about the gross margin next year, leverage on occupancy that may be a little bit maintained on that [IMU]. As we think about that relative to opportunities to mix of price.

And I know there's a certain segments of the business that are perhaps dragging on that, but we also know -- Nike in particular, is just starting to catch and push him pricing particularly within basketball. So, is there an opportunity there as you think about the pipeline for the year and is some opportunity for upside on that I am you if in fact you take some pricing?

Richard A. Johnson

Yeah, I think we continue to work with the merchants and try to figure out where the price sensitivity is. There's a lot of categories where there may be a little bit of upside, but we continue to face some pressures and I think I don't see it being significantly different in 2014 than it was in 2013.

Eric Tracy - Janney Capital Markets

Okay, great. I appreciate it guys. Best of luck.

Lauren B. Peters

But, that's really why are we staying very focused on what are our other opportunities to improve that merchandise margin and there are other things that we can do. We work internally and very collaboratively with our vendors in figuring out how to flow the product better and the allocation system is owing to help us make sure that we've got a right place right time. All of those things come together to help us do more business at full price and that gives us some room there on that margin.

Kenneth C. Hicks

Yeah, we believe and we work closely with our vendors to make sure that we get the best [IMU] and margin possible, but our focus is not -- we're not like the United Nations. Our focus isn't based upon negotiating with other people. Our focus is on what we can do.

We will negotiate with the vendors to try to get as much as we can and they work with us because we want us to be strong too. But at the same time, we’re going to focus on what we can do and so that's why the things you hear us talk about and the number you hear us talk about our what we believe we can do.

Eric Tracy - Janney Capital Markets

That's really helpful. Thanks, guys. I appreciate it.

Kenneth C. Hicks

Okay. Thanks Eric.

Operator

Our next question comes from Seth Sigman from Credit Suisse. Please go ahead.

Seth Sigman - Credit Suisse AG

Okay. Thanks. If I can just follow-up on the remodel work that you guys have done. It sounds like you’re pleased with the improvement in sales that you’re seeing in some of your stores. Just trying to dig in a little bit further where that improvement is actually coming from. Do have a sense of -- are you getting better traffic in those locations maybe some incremental customers? Or are you seeing better conversion, more attachments with the apparel assortment? Just trying to get a better picture of what's going on there.

Richard A. Johnson

All of the above. I mean I think when we remodel store; it adds some excitement to the mall. So, we see traffic come up. I think the ability to hook up and show through adjacent product the footwear and apparel hooks or accessory hooks has improved in all of the formats that we’re rolling out.

And I think that that ability to hook up changes our conversion in those stores. So, I think that all of those levers work and I think the reasons that we've gone through the remodels are to do just that, to increase the flow of traffic, to make the floor more productive, to allow us to convert and hook up with a big investment going out the doors.

Kenneth C. Hicks

One of the things that happens in the retailers is sometimes -- you say well I want to change the format and do something. And normally in my life when the retailer does that, it's nice but you don't see the impact.

I give Dick and his team a lot of credit because we’re seeing the impact from these remodels and as we said we got criteria, they are meeting and exceeding the criteria, so it's a good thing.

Seth Sigman - Credit Suisse AG

Okay, got it. And it sounds like apparel is a big piece there. Is there any way to quantify the apparel penetration in those stores versus the non-remodel stores or the company average, something along those lines?

Kenneth C. Hicks

Yeah, there is. But we don't disclose it.

Seth Sigman - Credit Suisse AG

Okay.

Kenneth C. Hicks

We monitor it very closely.

Seth Sigman - Credit Suisse AG

Okay, got it.

Kenneth C. Hicks

But, if you look at the stores, one of the things that stands out more is that we got a better balance between apparel and footwear.

Seth Sigman - Credit Suisse AG

Sure. One other driver that you mentioned was the development of a more meaningful team sales and service business.

Kenneth C. Hicks

Yes.

Seth Sigman - Credit Suisse AG

Haven't really talked about that much recently. I mean where is that business today? What's the opportunity there?

Kenneth C. Hicks

We -- it's a $2 billion business. All the players are pretty small. We had significant growth with the business this past year. We see the opportunity. We're in 11 states and we're going to continue to build those 11. We're going to continue to slowly add more. We're going to figure out how we can better hook the Eastbay and team sales, so I feel very good about it.

This business should be well over $100 million business and that's what we're working towards. We're professionalizing something that is kind of not very professional out there, but it's a big business.

Seth Sigman - Credit Suisse AG

All right. Thanks for the color.

Kenneth C. Hicks

Okay. Thanks Seth.

Operator

Our next question comes from Paul Trussell from Deutsche Bank. Please go ahead.

Paul Trussell - Deutsche Bank AG

Good morning, guys.

Kenneth C. Hicks

Hi Paul.

Paul Trussell - Deutsche Bank AG

I wanted to just go back to the conversation around the women's business. $1 billion is a big number. If you can just drill down a little bit more on what we should expect from the SIX:02 format as you continue to test that this year. What we think about how to drive growth in Lady Foot Locker long-term and is there any other avenues to reach that target outside of just these two formats?

Kenneth C. Hicks

Well, we have three elements in our women's business. First is the Lady Foot Locker, which is our biggest direct women's business and the thing that we know is apparel is a more important part and we’re through the new Bridgewater format which is basically a less expensive version of parks.

We are able to get a nice pickup with the apparel by putting more apparel and what the assortment is, and we feel very good about where we are with that and we will roll that out -- we’re starting to roll that out this year and we will have a number of stores that we'll be putting in place.

Second, part of it is SIX:02. We’re pleased with where we are in SIX:02, but we know we still -- there's still some tweaks and improvements. So, we’re modifying the stores we have. We've got a few more stores we're going to be opening up this year and we would hope by the end of this year, we'll have a pretty good feel and that's something that we can move on and rollout.

And then the third element are the women's shoes and all of our other banners. And that is a sizable business. And we are better defined what Foot Locker women's is. What Champs Sports women's is.

And as we do that, between our female banners, which are very performance-driven, Foot Locker, which will be more fashion, Champs, which will be a mix of fashion and performance, we'll have a very strong business. And it's a $40 billion plus business at our level; I’m not including the discount level, $40 billion plus business.

There's not a player that really has the heart and mind of that women. We’re going to work to do that and we've got a team I think that's dedicated to that and we’re pushing on it pretty hard.

Richard A. Johnson

We've got women's opportunities around the globe as well. We’ve got a lot of women's shoes in Europe, Canada, Australia, New Zealand and when you think about Runners Point, half of the people are runner women. So, again, great assortment opportunities around the globe as well as in the U.S.

Kenneth C. Hicks

Good call.

Paul Trussell - Deutsche Bank AG

And just a quick follow-up since you mentioned those other countries, Dick, there's been no conversation about further international expansion. Obviously, I understand you have RPG still hasn't even been a year yet and you can roll out that format into other countries. But is there any thought process about further global expansion, particularly some of the bigger emerging market countries out there, like Brazil and China? Thanks.

Kenneth C. Hicks

We constantly look and evaluate and determine where we think -- if we could develop a meaningful and profitable business. I think that talking to people in our business, they said the last year -- who would have thought our two most developing countries are North America and Western Europe?

Some of the developing countries are having some significant challenges now. And we will evaluate and look and see when the right time is. But right now, we've got tremendous opportunities where we are.

Lauren B. Peters

And we insist on meeting our hurdle rates no matter where they are in the globe. So, we have to be confident that we’ll do that.

Paul Trussell - Deutsche Bank AG

Okay. Thank you.

Kenneth C. Hicks

Thanks Paul.

Operator

Our next question comes from Taposh Bari from Goldman Sachs. Please go ahead.

Taposh Bari - Goldman Sachs Group Inc.

Hey, good morning. Great year.

Kenneth C. Hicks

Thanks Taposh.

Taposh Bari - Goldman Sachs Group Inc.

I wanted to just kind of dig more into this disparity between running and basketball. I get that the weather is obviously unfavorable for running, but I guess -- what percentage of your customers actually using this product for end use. And I guess the reason why I'm asking is there's obviously a very easy excuse for the running business, but is it really all weather? Is there an ASP thing going on there? Is fashion playing a role?

Kenneth C. Hicks

No, I mean, let's face it. The majority of our shoes are not used for performance. But we had -- there's been tremendous development between Kobe's KD’s, LeBron’s, Jordan that have really helped basketball.

We’re seeing this spring a plethora of running -- that will help running. So, there's new product. You've got the new Boost. You’ve got new Flies coming out. You've got the new shoes from Under Armour. There's a lot of new product coming that I feel will help running.

So, yes, the weather did have an impact, but it was the newness. There's some fashion. In fact, you look at some of the basketball shoes; they have a tendency to look like more like running shoes. But I think that the new idea is yeah, I’m looking at some shoes here. Some KD’s that John’s wearing, they look like running shoes.

But what I think is that this will balance out and we sell through all of our channels we sell as many running shoes as anybody else out there. In fact, we got a stronger position with some great brands and we will continue to be a leader there.

Taposh Bari - Goldman Sachs Group Inc.

And what about this idea -- I know that women's wear daily article a couple weeks ago about white shoes making a comeback. I think, Dick you are actually quoted in that article. Is that a big deal or is that small and what does it actually mean for your business?

Richard A. Johnson

Well, quick, casual -- white-on-white, black-on-black shoes are -- there always a base business. They ebb and flow and when you look at things like Air Force One, K-Swiss shoes, they have their moments. And right now it feels like we're running into one of those moments. So, as Ken talks about the legs on our stool, one of those legs is casual footwear and certainly, the clean white plays into the casual footwear line.

Taposh Bari - Goldman Sachs Group Inc.

Okay, great. All the best.

Kenneth C. Hicks

Okay. Thanks Taposh.

John A. Maurer

We have time for one more question.

Operator

Absolutely. Our final question comes from Bernard Sosnick from Gilford Securities. Please go ahead.

Bernard Sosnick - Gilford Securities Inc.

Yes. Thank you very much, and my congratulations as well.

Kenneth C. Hicks

Thanks Bernie.

Bernard Sosnick - Gilford Securities Inc.

Ken with regard to the banners and digital, could you go over a little bit of the experience in developing those banners digitally, because that was a little bit late in coming relative to the digital cycle. How far along are you -- you said you've made it major differentiations among banners. What can we expect over the next few years?

Kenneth C. Hicks

Well, first of all, we really didn't get into the digital business -- push the digital banners until a couple of years ago. We were focused on Eastbay and [Dow] and his team I think are doing a much better job balancing that, still pushing Eastbay, but also developing the digital banners and when you look at footlocker.com, champssports.com, and connecting them with the stores.

So, we now are much more coordinated in what we do with the stores and dotcom. It used to be if they had the same shoe, up, go buy a lottery ticket that day because that was pure luck. Now they are talking constantly.

I've talked about the connection with by online chip to store, buy online purchase in the store, the inventory lookup, that using our stock locator. So, the connection and giving -- I was just down at our team weeks for both Foot Locker and Champs and the field leadership there -- and they were talking about -- do you know how many shoes you have in your inventory in your store? And they would say -- I have got X. You have got 250,000 SKUs.

And they go wow -- because you have got that stock locator and we’re seeing much more of that. We’ve updated a couple of the sites. We have more to update. We will continue to improve and adapt. We will continue to put more technology the store.

So, I would say we’re still in the early innings. I feel that we're as far along as anybody else is. We probably don't toot our horn as much as other people, but we’re as strong as I think anybody is out there in the capabilities that is meaningful and important to the customer.

Bernard Sosnick - Gilford Securities Inc.

Thank you very much. And just a wonderful job. Congratulations on what you have accomplished.

Kenneth C. Hicks

Thanks Bernie. And thanks everybody for the call.

John A. Maurer

Yes. Thank you for participating on the call today. We look forward to giving you an update on our next call which is tentatively scheduled for May 3rd. Thank you very much.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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