Foot Locker's (FL) CEO Richard Johnson on Q1 2016 Results - Earnings Call Transcript

| About: Foot Locker, (FL)

Foot Locker, Inc. (NYSE:FL)

Q1 2016 Earnings Conference Call

May 20, 2016 09:00 AM ET

Executives

John Maurer - VP, Treasurer and Investor Relations

Lauren Peters - EVP and CFO

Richard Johnson - President and CEO

Analysts

Michael Binetti - UBS

Camilo Lyon - Canaccord Genuity

Christopher Svezia - Susquehanna International Group

Matthew Boss - JPMorgan

Tom Nikic - Wells Fargo Securities

Jay Sole - Morgan Stanley

Christof Fischer - Piper Jaffray

Robbie Ohmes - Bank of America Merrill Lynch

Kate McShane - Citigroup

Scott Krasik - Buckingham Research Group

Sam Poser - Sterne Agee

Paul Trussell - Deutsche Bank

Operator

Good morning, ladies and gentlemen, and welcome to the Foot Locker's First Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. 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 Foot Locker'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’d now like turn the call over to John Maurer, Vice President, Treasurer and Investor Relations. Mr. Maurer, you may begin.

John Maurer

Thank you, Carlos, and good morning, everyone to Foot Locker, Inc.'s earnings conference call for the first quarter of 2016. Thank you for joining us today for the first earnings call from our brand new offices at 330 West 34th Street. It’s been an exciting transition in the last few weeks.

We reported in this morning's press release that the Company achieved record net income of $191 million in the quarter, up from $184 million in the first quarter last year. On a per-share basis Foot Locker earned $1.39 this year, an 8% increase compared with a $1.29 earned in the same period in 2015. It was the highest quarterly net income and EPS result in the Company’s history a significant achievement especially in today's challenging retail environment.

We achieved a comparable sales gain of 2.9% in the quarter. Although this result was a shade below the range of our expectation going into the quarter for a mid single-digit increase, these sales and profits do represent the 25th consecutive quarter of meaningful growth for Foot Locker.

In order to leave as much time as possible for your questions, let me hand the call straightaway to Lauren Peters, Executive Vice President and Chief Financial Officer to review the results of the quarter in more detail. She will be followed by Dick Johnson, President and Chief Executive Officer and newly elected Chairman of the Board to provide product and trend highlights. Lauren?

Lauren Peters

Thank you, John. Good morning to all of you. The first quarter was our best ever. So we’re definitely proud of a very strong result the team produced. That said, we have set the bar even higher than we achieved. So let’s dig in to what worked well and where we fell a bit short.

First, the cadence of our comparable sales was fairly steady during the quarter with the gain landing, as expected, in the mid single-digit range in February. While it was up low single digits in March and April, short of our mid single-digit plans gain. The strong diversity of our assortment and the leadership positions we have in many product categories enabled us to post that 2.9% comp gain despite basketball footwear being down mid single-digit.

In fact, total Company footwear comps were up mid single digits in the quarter with strength in lifestyle running and classic style more than offsetting the decline in basketball shoe sales. Apparel posted a low single-digit gain, while accessories were down high single-digit, primarily the result of the challenging trend in socks.

Proving that with the right product, basketball still performs very well, our strongest division this quarter was Foot Locker Canada, with a comparable sales gain in the high teens. This result was fueled by a strong double-digit gain in basketball footwear. Although the gain was initially propelled by the All-Star game in Toronto this year, Canada’s strong double-digit performance was sustained throughout the quarter and there were meaningful sales gains across the country, not just in Toronto.

Our next strongest store division was Foot Locker Europe, which turned in a high single-digit comparable sales gain on top of last year’s double-digit gain. On the other side of the ledger, Runners Point and Sidestep continue to face assortment challenges with sales in both banners down double-digit from a year-ago.

To round out our international division, Foot Locker Asia-Pacific continued it’s high-level of performance turning in a strong mid single-digit sales gain on top of last year’s gain in the teens.

Turning to our U.S store division, Champs Sports led the way with a mid single-digit comparable sales increase, Foot Locker, Kids Foot Locker and our women's division Lady Foot Locker SIX:02 were each up low single-digit.

Footaction posted a comp loss in the high single-digit. There were two primary elements for Footaction’s underperformance in the quarter. First, it has a relatively high penetration at basketball compared to other banners and second, it doesn't offer women's footwear which has been quite a strong contributor to our other banners recently.

In fact for the quarter, women’s comparable footwear sales were up mid single digits, while our sales of kids footwear across the banners that sell children’s product was even stronger, up high single-digit. Sales of men's footwear were down slightly.

Direct-to-customer segment turned in a solid performance with an overall comparable sales gain of 7.3%. Sales of our store banner.com businesses including both domestic and international banners increased more than 20% on top of last year’s almost 40% increase. Eastbay on the other hand declined mid single-digit. The story at Eastbay, which caters to the elite high school athlete remain similar to last quarter, with core performance shoes and apparel trending down relative to the casual assortments in which our store banner site have a stronger position.

Our gross margin rate was flat in the quarter with 30 basis points of merchandise margin improvement offset by slight occupancy to leverage at higher shipping and handling expense. We noted on our previous call, we need to comp at least in the low end of mid-single to leverage occupancy and we fell just short of that for the quarter.

The uptick in merchandised margin was fairly consistent across footwear, apparel, and accessories, driven by lower markdown. As expected, our SG&A rate de-levered slightly to 18.2% of sales in the first quarter, largely due to incurring almost $4 million of expenses related to the new and to our exciting new office space. Without the move costs, our SG&A rate would have held flat at 18%. Thanks to the excellent work of our expense management team.

Depreciation expense increased to $39 million from $35 million in Q1, reflecting the Company’s ongoing investments in enhancing and aligning the customer experience across all of our channel, stores, digital, mobile, and social media.

Our first quarter tax rate was 36% slightly below our expected run rate of 36.5%. Relative to plan, our mix of income in the quarter came proportionately more from Europe where our tax rate is lower than in the U.S.

The record net income we reported for the quarter also led to strong cash flow and we finished the quarter with $1,062 million in cash. The first quarter typically represents our peak cash position with balances subsequently declining until we reach the year-end holiday selling period.

Over time the proportion of our cash held overseas has grown relative to cash in the U.S and just this week we closed on a new $400 million credit facility up from $200 million before. The new expanded facility allows us to maintain our liquidity in the U.S., while continuing to invest in our U.S store fleet and our digital and mobile platform, as well as actively repurchasing shares, funding our dividend program, and being prepared for other opportunities or challenges.

During the first quarter, we repurchased 1.37 million shares for $87.8 million. We spent approximately $65 million of capital as we continue to track towards our planned expenditures this year of $297 million. An important part of our capital spending this year is to elevate two of our flagship stores in Midtown, Manhattan. Both the 34th Street store below our former office and the Foot Locker store in Times Square closed during the first quarter.

Our exciting new Times Square store will not open until the holiday. The 34th Street store is slated to reopen for back-to-school, but it will be closed during all of Q2 and the lost sales from that high-volume store are enough to reduce our overall comps, a few ticks in the current quarter.

Inventory increased 2.1% at the end of Q1, slightly above our target given the 3.9% sales increase on a constant currency basis. Our inventory remains fresh and productive with turns continuing to tick up towards our long-range goal. Most importantly, we believe our inventory position supports the mid single-digit sales gain, with primarily full price selling that we continue to plan for over the balance of the year.

We continue to believe we can achieve a mid single-digit comp for the full-year, as well as double-digit EPS growth with 10 to 30 basis points of gross margin improvement. We believe that this performance is also achievable in each of the remaining quarters including this one.

As we expected, comp sales are running down month to date, but we’re once again on the negative side of a very significant launch shift. One of the more powerful Jordan releases of this entire year is coming next weekend, whereas last year a similarly strong Jordan release had already happened by this time in the month.

Over such a short period as three weeks the impact of this launch definitely has the potential to lift our May comp well into positive territory. That said, Q2 is already the lowest volume quarter of the year, and this year we have two of our very top stores closed. So SG&A leverage will again be a challenge in the quarter.

As always, we will manage the business tightly not just SG&A, but also inventory and occupancy to maximize our profits this quarter and position ourselves for a strong second half of the year.

Let me hand the call to Dick now to cover the product highlights in more depth and discuss how we see the industry and our business shaping up over the balance of the year.

Richard Johnson

Thank you, Lauren, and good morning, everyone. I want to start my remarks today by thanking everyone on the Foot Locker Incorporated team for producing our best, most profitable quarter ever.

As you could tell from Lauren’s remarks there was a lot going on this quarter, with some fast-moving product category shifts, big events like the All-Star game in Toronto, the temporary closure of two of our biggest volume stores here in Midtown, Manhattan, and of course packing everyone up and moving into our brand new offices, although you may hear on the background that we brought some of the sirens with us. With all that, we maintained our focus on execution and produced our strongest quarterly results ever and added another quarter to our streak of consecutive quarters of meaningful sales and profit increases.

My sincere thanks to all the associates at Foot Locker who made it possible. It is only because of the diligent work of the last several years to build and strengthen the diversity of our business in terms of product categories, geographies, families of business and channels that we were able to post a solid comparable sales gain for the quarter in the phase of a mid single-digit decline in basketball.

Although we had planned basketball to be off, the category ended up a bit softer than we had expected, which is the primary reason our quarterly comp gain came in somewhat below our guidance. The basketball business like all our other categories, thrives on newness and innovation and where that was apparent our basketball remains -- basketball business remain strong.

The Jordan brand continues to innovate and produce excellent results with a sports foresight of that brand giving the biggest dollar gains. In fact John here has finally put away his low profile Kobe’s for a cool care of Jordan Horizon’s he brought back from our House of Hoops store in London.

The casual portion of basketball outside of Jordan was also strong, led by models such as Superstars by adi, as well as Foamposites and Air force 1’s from Nike. It was the signature side of the basketball business that saw the biggest decline. Although even here we saw important elements of excitement. For example, the Stephen Curry shoes from Under Armour and the Kyrie Irving shoes from Nike, both posted big gains.

Meanwhile Kobe sales hung in pretty well in the quarter, likely influenced by the buzz around his retirement. The primary losses came in LeBron and KD products, a challenge which we’ve been addressing with our partners at Nike. Between Nike resetting the price value relationship of many of its shoes and focusing their incredible innovation engine, along with the strength of Under Armour and potential momentum at adidas, we’re confident that by the back half of the year there will be in place all the elements of a more robust, diverse signature basketball business.

In the meantime, our leadership positions in footwear categories other than signature basketball enabled us to successfully pivot much of our inventory position into these areas in Q1. Lifestyle running footwear was an especially good business in the quarter with the Roshe and Huarache styles from Nike and ZX Flux from Adi, continuing to be popular sellers.

Category heat and newness was driven by the Nomad and Boost products from Adidas. The Stan Smith Shoe from adidas is another perfect example of a leadership position we have in area other than basketball, in this case Classic Court shoes. This leading position can be seen in the depth of our buys and in the variety of different model executions we sell, quite a few of which are exclusive.

We enjoy a significant number of special makeup styles not just in Stan Smith’s, but also in Superstars, PUMA Suede and various other casual yet premium products. In retrospect, demand for this special product outstrip supply, giving us confidence and the emphasis of our merchandised position over the next several months.

The very strong adi original’s business is also an excellent example of the advantage of our global footprint. Since the trend started in Europe where our merchants recognize the excitement early and share their initial success with our U.S teams before it exploded into a worldwide phenomenon.

Even with the partial shift out of signature basketball, our customers still expect to find and are finding premium sneakers in our stores and on our digital sites, sneakers for which they are willing to pay premium prices. This led to higher footwear units and average selling prices in the quarter with both up low single-digits.

On the apparel side, ASPs were up even more, in the mid single-digit range driven primarily by lower markdowns. Although apparel units were down low single digits, for the most part I describe our men's apparel business as improving, especially in Europe.

Overall, profitability is up both in dollars and rate which as I said last quarter, is a great place to start. We are still working on driving more apparel volume in each of our banners and the investment in our store remodel programs continues to be an important element of our strategy to elevate the storytelling around the premium special products, our vendors are beginning to deliver.

On the women's side, apparel comps were down, as the Lady Foot Locker and especially the SIX:02 customer has almost completely shifted off athletic performance silhouettes into athletic lifestyle. Adi, Nike, and Puma, all have some exciting celebrity driven assortments, but the quantities weren’t enough to offset the decline in the sales of performance products from a year-ago. Meanwhile the overall women's business is being driven by footwear, were the Superstars, Stan Smith and Nike Casual Running trends are even stronger for her, than they’re for the men.

Another clear indication of the ongoing strength of the sneaker trend is that traffic was positive in the quarter, up low single digits both in the U.S and overall. Fortunately, kids still love to touch, feel, and try on sneakers and they love to compare and shop together for the latest and greatest athletic footwear and apparel.

Two exceptions to the good traffic trends though were Runners Point and Sidestep, in Germany, where traffic was down double-digits. Even for the Foot Locker banner in Europe, Germany was the most difficult of the large countries and German retail in general has been a bit tough lately. That said, we’ve plenty of opportunity to improve the performance in Runners Point and Sidestep and it starts with driving more traffic through a combination of more elevated in-store experience, targeted marketing, and most importantly improved and better diversified product assortments.

We've done a lot of work to better define the core customers of these two banners. And the results have helped us in the discussions with our vendors to create the sort of special focused assortments that really motivate these customers. At this point, there hasn’t been enough product depth to stem the comp declines, but our inventory position remain sufficiently clean to enable us, we believe to get these banners back on track as the year progresses.

Turning to our digital business, the growth in our store banners.com continues to be strong, although not at the same pace as a year-ago. We continue to invest in the technological infrastructure behind our digital sites and enrich the content on the customer facing side. Perhaps most importantly, we’re rethinking our approach to our channels.

As Pawan Verma, our Chief Information Officer recently described the concept of the channel doesn't really exist for our customers, only the relationships they have with our brands. Thus, our capital spending is now more consistently based on strengthening that relationship across all of our sales channels. A good example of the return on that investment can be seen in our expanding BOSS sales, buy online, ship from store. Already available across our domestic banners, we rolled it out in the U.K. in the first quarter and plan to expand it on to the European continent in future quarters.

The softest part of our digital business right now is Eastbay, which as Lauren described is really focused on the serious high school athlete. The shift to casual and lifestyle of silhouettes and a slightly declining rate of youth participation in certain sports such as football have hindered Eastbay’s top line recently. While Eastbay’s merchants are shifting a portion of their assortments more in the direction of lifestyle, we intend to keep true to the performance heritage and identity of the Eastbay banner.

We are working to enhance our current customer’s digital experience, and increase brand awareness at younger ages. The goal is to expand the pipeline of kids who know and love the Eastbay brand as they pursue their passion for sports. Examples of success already include the growth in our training in girl’s volleyball businesses.

Before I turn the call over for your questions, I just want to reiterate how proud I’m with the record-setting performance of our team this quarter. We challenge ourselves everyday to be a high-performing organization. Sometimes circumstances don’t allow us to clear the bar by as much as we’d like to. But with the long-term trends towards casualization and active lifestyles firmly intact, the athletic footwear and apparel industry has an exciting space to be in.

We’ve got a great team of associates and a great line-up of vendor partners, and together we’ve many tremendous opportunities to grow and improve Foot Locker’s business as we work to achieve the long-term goals we outlined last year.

Carlos, let’s please open-up the call for questions now.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Michael Binetti from UBS is on the line with a question.

Michael Binetti

Hey, good morning guys. I was wondering if I could get a little help understanding the path to mid single-digit same-store sales in the second quarter, just to help us out with our model. I know Lauren, thanks for the detail on the current quarter trends and the launches coming up. But is it -- could you help us think a little bit about the composition of the launches to the quarter and the inventory you have on hand, it sounds like some of the signature basketball areas have been struggling. Is that inventory changing over as near-term as it would -- it seem like it would need to be get you to them at single-digit confidently in the first -- in the second quarter?

Richard Johnson

You know Michael thanks for the question. We’ve got -- we are on wrong side of the launch as Lauren called out with the big Jordan launch that happened last year -- last weekend coming up Memorial Day weekend this year. Normally we wouldn't talk about that so much except three weeks into the quarter, it certainly has a -- makes a difference on the trend. Our team’s done a real good job of shifting the inventory into some of the casual businesses that we talked about in our prepared remarks and the launch cadence for the rest of the quarter lines up really favorably for us. So, certainly the mid single-digits that Lauren talked about and I talked about in our comments are attainable in the quarter Michael.

Michael Binetti

Okay. And then, can you just talk about some of the -- on the other businesses that you gave us an update on that were, I guess, some of the potential for the margin opportunity as we look through the year in women's and apparel. And I guess, maybe some updated thoughts on Runners Point as far as how much those can contribute to what we would back into as a margin improvement to get to the double-digit earnings growth this year, any kind of trends you’re seeing there that would be helpful to that story. Thanks.

Richard Johnson

I think we [talked] [ph] to the women's business a bit, the apparel business there is shifting and that it’s still very much an active lifestyle, athletically inspired lifestyle apparel. She is a very discerning shopper. She expects the performance characteristics to be built in, but she's also looking forward to be very fashionable. We’ve seen success with some of the Rihanna product that's launched, that asset driven model with great-looking product that she can use in the gym or in her active lifestyle is really helping drive that business and we’re shifting - we’re up against big performance silhouettes from last year, bigger numbers so as she changes and our inventory changes with her, that will certainly be a contributor.

Apparel in general as I said is getting better. The Europe team is leading that effort. Their apparel business was up nicely, apparels getting better at Champs and the Kids Foot Locker and solidifying its position at Foot Locker. So we’ve got certainly some upside on the apparel front. The categories that we mentioned, some of the classic sneakers, some of the Lifestyle Running shoes, again our inventory is shifting appropriately, so we see great opportunity there. Our inventory is clean and fresh, so we will be able to manage our markdowns through the quarters and so that really is what’s going to improve sales and the margin opportunity, Michael. As far as Runners Point, we’ve got a traffic issue there. Retail in Germany has been a little bit tough for all of our banners including -- actually all of the segment, but I think as I talked about we've done the deep dive on our customers in the Runners Point and Sidestep doors. We continue to shift the inventory there. Get the inventory properly positioned and it goes back to firing customers when we took out the vulcanized product in the boots and relaunching, if you will, a running only shop on a high street with runners point making sure that we get all of the inventory right. So, the effort in the short-term is to drive traffic. Once they get in the store, we’re able to convert them, because we’ve got a great sales force and a great team on the store floor there. But again, we’ve got to get some traffic in the doors.

Michael Binetti

Thanks a lot guys.

Richard Johnson

Thanks, Michael.

Operator

Our next question comes from the line of Camilo Lyon from Canaccord Genuity. Please go ahead.

Camilo Lyon

Thanks. Good morning, guys. I just wanted to get a little more into the commentary about the improvement or the expected improvement in the back half of signature product. Could you just talk a little bit about what you are seeing from the product that gives you that comfort that there will be a resurgence in demand as opposed to just more of a continuation of the shift out of that particular style of basketball product?

Richard Johnson

Sure. I think there is going to be a bit of a reset on the price value equation with a couple of the big players. The new KD shoe is out in a couple of weeks, so we will get a first -- a first pass at that. The Curry shoe, they continue to be strong and we’ve got the Olympics which drives innovation across a lot of things that we will see in the back half come to a commercial -- to be commercialized in the back half. So, I think the consumer as we’ve shown in specific shoes, the consumer in Canada certainly didn’t have any issues around signature basketballs that led into the All-Star game. So when there is excitement around the product, when there is innovation around the product and when the price value relationship is right for the kid, the category is fine and we expect that in the back half with some of the things we’ve seen coming down the product pipeline. So, again the kid is very discerning and signature basketball is one of his choices. But the strength that we’ve added to our portfolio across the casual sneakers, the boost product from adidas, there is tremendous opportunity in all of our categories and that's why the work we’ve done over the last few years to really build this portfolio of businesses, allows us to absorb a little bit of a body blow on the signature basketball side and still drive a successful winning business.

Camilo Lyon

That’s great. I guess, the follow-up to that is, your comment on more price value, is that -- are we to infer that that refers to lower ASPs? And if that is the case, how do you combat that downward pressure on ASPs to continue to drive overall ASP growth?

Richard Johnson

Well, we just did it in the first quarter. We took a basketball category that was down mid single-digits driven by a drop in signature basketball and our ASPs and units were both up. So, ASPs are a very complex model across our portfolio banners, categories, genders etcetera. So we work very confident that we will be able to continue to drive ASP growth even with a slight modification of pricing in signature basketball.

Camilo Lyon

Great. And then, just a final question, just more of a longer-term question in how you view Nike stepped-up focus on their own dot-com business and how that impacts your business over the long-term. If you could you just articulate how that relationship is unfolding and those discussions are being -- kind of are unfolding with from your perspective, with them.

Richard Johnson

Well, I think we all win when there is an integrated marketplace, they continue to invest in our businesses, they continue to provide great product in our stores. Their product engine continues to remain strong and the relationship continues to remain strong. We know that they’re going to sell DTC both digitally and through some stores. At the same time, we’re working hard with them to make sure that the consumer has all sorts of choices to shop for their product. Our storytelling inside our stores is representative of how we want to represent their brand and how they like to see their brand represented. So as they grow their DTC, their brand grows in totality in the marketplaces and frankly we see it as a positive, the more integrated the marketplace is, the stronger we’re, the stronger the brands are that we sell.

Lauren Peters

We look at their long-term goals and our long-term goals and they’re not inconsistent. They both support one another.

Richard Johnson

Exactly.

Camilo Lyon

Got it. Good luck, guys. All the best. Thank you.

Richard Johnson

Thanks, Camilo.

Operator

Our next question comes from the line of Christopher Svezia with Susquehanna Financial Group. Please go ahead.

Christopher Svezia

Thanks for taking my question. Good morning. I was just wondering, maybe you can clarify just for May what impact the New York store closings are having? And, I guess, more explicitly, are you trending something like down low single digits so far in May and are you expecting it to be up low single digits when everything is set and done, once you get the Jordan, I think the Retro 12 into the comp number for May?

Richard Johnson

We won’t dig into the specifics of the two stores in Midtown Manhattan. Obviously, that’s pretty proprietary information Chris, but they certainly are having an impact and we are looking forward to the opening of two significant flagships here in Midtown Manhattan and we will manage the business through their closures obviously. As Lauren called out in her comments, we are running down for the month as we expected. But we will shift to being comp positive certainly as we get through the soup launch over Memorial Day. So, the nuances of low mid singles, mid-mid singles -- up mid singles, that’s you will have to make your model work. We can’t give you a lot more details on that Chris.

Christopher Svezia

Okay. And Lauren, for you, just more specifically, as you think about gross margin and SG&A as we go through the year, just any nuances between them as we think about the quarterlies? And I think gross margin you set up 10 to 30 on the year, any thoughts about the SG&A leverage as we think about the year?

Lauren Peters

Yes, again we still think that SG&A for full-year intend to 30 basis point range with mid single-digit comps is achievable. And that’s the range. As we called out, first quarter we have the uniqueness of headquarter move and the comp came in at the low single-digit. This quarter with that being relatively lower volume quarter that makes the leverage a bit challenging on SG&A this quarter, but again 10 to 30 for full-year.

Christopher Svezia

Okay. And final question, just as it relates to basketball, is it fair to say that as you go through the second quarter you probably face the -- potentially the easiest comparison as you go through in non-signature basketball, so, LeBron, KD, Nike branded basketball relative to last year? It seemed like last year it declined or started to decline pretty precipitously. Does the comparison start to ease as the product and price value starts to improve as you go through the year? Is that a fair characterization?

Richard Johnson

Yes, I mean, that’s what the industry numbers would tell you, Chris and we’re reflective of that. I mean, the signatures, again I always hate to focus on one small, one segment of our business, but you’re right. The comparisons get a bit easier as we go through the middle part of the year and we will see some of the changes that we talked about positively impacting the signature product during that time period, so yes.

Christopher Svezia

Okay. Thank you. All the best to you. Thanks.

Richard Johnson

Thanks, Chris.

Operator

Our next question comes from the line of Matthew Boss, JPMorgan. Please go ahead.

Matthew Boss

Thanks. So, double-digit earnings on mid single-digit same-store sales reiterated for the year. Dick, I guess my question, is double-digit earnings possible at a low single-digit comp, if that were the backdrop multiyear. Just any color on P&L flexibility would be helpful?

Richard Johnson

Yes, our team does a really good job of managing expenses and I think the leverage that we get obviously changes with low single-digit, but over time I don’t think there's a limiter. Certainly we’ve to gain, but I’d defer a little bit to Lauren.

Lauren Peters

Again on a occupancy side of it, we need lower end of mid single. We’ve been investing in some significant properties and with that comes some higher rent. But over the long-term that -- those drive some really significant volumes, which lets you get that leverage again. But for our near-term, low end of mid singles is where we get the lever.

Matthew Boss

Okay. And then, if we just -- if we built your full-year mid single-digit comp bottoms up, it sounds like the best way to think about it is basketball improves from the first quarter trend. But just what’s the best way to think about basketball versus running versus what we saw in the first quarter? And then, Lauren, just any help on the quarterly cadence of total Company comps in 2Q versus the back half, I think would really help for our models.

Richard Johnson

Yes, as I just said, I think basketball Q1 was probably the toughest comparer for the year and gets marginally better as we go through the middle part and back half. So, again the money has shifted, our category managers have done a good job of moving money into casual product and the lifestyle running. So, they manage an entire portfolio and they’re able to move out of basketball, what they should move out of basketball and into our categories. So, again I think basketball does improve from Q1 going forward. There is a lot of excitement that it’s going to come in the back half of the year. So, that the cadence of comps, we haven’t really gotten into specific quarters, but …

Lauren Peters

But, I want to make sure, I understand the question and are you asking for us to further define mid by quarter?

Matthew Boss

So, would 2Q be a -- is 2Q a low single-digit comp and the back half is high single or is it mid single-digit comps all three quarters of the year?

Lauren Peters

Oh, okay. So, yes I will reiterate what we said, mid single-digit by quarter, including this quarter.

Matthew Boss

Okay, great. Best of luck.

Lauren Peters

Thank you.

Richard Johnson

Thanks, Matt.

Operator

Tom Nikic, Wells Fargo has the next question. Please go ahead.

Tom Nikic

Hi, guys. Thanks for taking my question.

Richard Johnson

Hi, Tom.

Tom Nikic

So not to harp on Q2 too much, but -- so you gave a little detail about being negative thus far, but there is the timing shifts that helped May. Is there anything we should think about from the launch calendar perspective in June and July that would really sort of help the business get back on the mid single-digit trend and, I guess, maybe into August as we think about the call three months from today?

Richard Johnson

Well, as I said Tom, once we get to the launch on Memorial Day, we like the launch cadence for the rest of the quarter and we align up well, they’re not always date for day matches, but across the rest of the quarter we like the launch position that we’ve got and again launch is only one part of the business. So, I hate to fixate too much on it, but we look -- the only reason we really bring it up is that three weeks into a quarter, a significant launch looks different than it does 13 weeks into the quarter. So, we’re -- I’m comfortable with where the launch calendar is and our launch sequencing for the remainder of the second quarter and as we get into back-to-school season.

Tom Nikic

Okay, great. And just a quick follow-up. So, obviously basketball has been weighing on the business, but you’ve done a lot of work over the last couple of years to diversify the assortment, and not being a, quote-unquote, one-legged stool. Is there any color you can provide as far as the size of basketball relative to your total footwear business? And if basketball should sort of remain weakish, do you feel like you’ve levers to pull in running and casual to keep hitting the mid single-digit guide for the year? Thanks.

Richard Johnson

We won’t breakout the percentage of basketball to the total, but yes we believe we’ve levers to pull in casual, in running, lifestyle etcetera, so …

Lauren Peters

And I’m going to reiterate, we did that in Q1, mid single-digit footwear comps.

Tom Nikic

All right. Great. Thanks very much. And best of luck for the rest of the year.

Richard Johnson

Thanks, Tom.

Operator

Next question comes from the line of Jay Sole, Morgan Stanley. Please go ahead.

Jay Sole

Hi, good morning.

Richard Johnson

Hi, Jay.

Jay Sole

You -- hi, you mentioned rapidly shifting product category preferences. Can you talk about of these shifts which do you see as kind of permanent and which kind of are more temporary?

Richard Johnson

With our core consumer, Jay, I wouldn’t call any of them permanent. I mean, our consumer’s going to buy the coolest shoe they can find, they’re going to buy the shoe that sends the message that they want to send. So again, to think that there is a permanent shift from one category to another category, we certainly don’t look at the business like that. Our team is constantly evaluating where we believe the consumer will be, we’re working with our vendor partners to create great product and there is just is nothing in our business, that’s permanent. So, I think you need to understand the flexibility that our consumer has and they’re ultimately in control of a product decision.

Lauren Peters

Right. I would say what is enduring is that they’re well above sneaker.

Richard Johnson

Yes, absolutely.

Lauren Peters

We certainly saw it in the traffic and their appetite for some really great looking styles across the categories.

Jay Sole

Maybe if I can follow-up with this, to the NBA playoffs matter, you mentioned LeBron James and Kevin Durant are some signature shoes that haven’t done as well. Those players are still in the playoffs playing at the top of their game. If those players continue to be successful, maybe win the NBA championship, does that matter?

Richard Johnson

What matters is that there is excitement around things that drive sneakers, right. Whether Kyrie and LeBron win or Steph Curry wins, certainly that the more positive news about that or Russell Westbrook and KD in Oklahoma City. I don’t know that there is a direct correlation to them winning the championship and us selling more sneakers other than it creates great momentum and great energy around whatever the sneaker is that that’s selling next. So, it matters just like the Olympics matter and that there is excitement around sport, athletics. People’s consciousness around sport goes up. They attach that sometimes with sneakers and we win. But we root for them all equally, Jay, just to be clear.

Jay Sole

Understood. And then, maybe one last one, just in terms of the shifts that consumers are undergoing, you didn’t mention maybe channel shifts. I mean, you talked about it within your business, but there has been a lot of talk in retail about the shift toward kind of big online pure-play competitors. Is that something that’s kind of impacting your business in any way? Can you just talk about that aspect of it?

Richard Johnson

I don’t necessarily think that the big pure-play so much, that the product that we’ve is unique. The consumer as they displayed in Q1 loves to come into our stores. They like to feel the shoes, see the shoes, talk about the shoes with our associates. And we want to be able to service the customer regardless of where they want to shop today or where they want to engage with us. I think Pawan did a great job with an op ed piece for Shoptalk that really talked about channels not existing, only the relationship. And we’re trying to deepen that relationship with our consumer across all of the channels, so that the first thing to think about when they think about sneakers is Foot Locker.

Lauren Peters

They interact with our brand across all the channels, all the opportunities to access our brand. So that’s what we’re focused on is giving them a great, consistent experience across all of those channels.

Jay Sole

Okay, got it. Thank you so much.

Richard Johnson

Thanks, Jay.

Operator

Our next question comes from the line of Erinn Murphy with Piper Jaffray. Please go ahead.

Christof Fischer

Hey, good morning. This is Christof Fischer on for Erinn. So, I was wondering with the closing of a number of sports retailers in the U.S., what type of opportunity does this give you this year, or maybe longer term to pursue some market share? And is there any benefit that you could reap from any channel inventory that's being sold at off-price? Thanks.

Richard Johnson

Well, the direct impact is probably less apparent to us than it is to some of the other sporting goods big box guys with the people that are closing down, they will likely see some benefits once they get through some of this sale product and some of the liquidation that’s going on. I think there is great opportunity for our Eastbay brand as these destinations for team sports products and cleated product and baseball bats and gloves etcetera, dry up a little bit in the marketplace that plays right into our direct connection with that consumer through Eastbay. Most of the product that’s being liquidated would not mirror a product that’s in our store. It’s in a different distribution level. It’s a different segmentation level for most of our vendors. So, while we will see some pickup undoubtedly of people that are looking for sneakers, I think there is probably more of an impact other places in the broader sporting goods industry.

Christof Fischer

Okay, great. Thanks. And then as a quick follow-up, with the new overtime ruling, does this impact you guys? And is this something that you guys have talked about internally yet?

Richard Johnson

Sure. We talked about it since the draft rule started to be circulated and I think it will impact everybody that runs a business. So, we’ve to make some decisions. We’ve to look at our work force in depth and figure out what the right way to handle these new rules are. So, we will manage this change in rules just the way we manage them all and we’ve got a team that’s focused on it, working on it. The -- yes, the only surprise is that it's going to happen a little bit sooner than we may have expected, but our team will react to that -- respond accordingly.

Christof Fischer

Okay. Got it. Thank you very much.

Richard Johnson

Thanks.

Operator

Our next question comes from the line of Robbie Ohmes with Bank of America Merrill Lynch. Please go ahead.

Robbie Ohmes

Oh, hi. Thanks for taking my question. Dick, actually it’s going to be three questions. The first, obviously you guys keep calling out the Steph Curry shoe, is there any other initiatives with Under Armour maybe on the apparel side, even as you head into back-to-school in fall? Is there anything you can do to build on that momentum or is it still just isolated to it being a signature shoe phenomenon? And second question would be Olympics, anything launching with Nike or anything that could drive some momentum in the back-to-school? And the third is just multiple pair purchases. Can you give us an update on trending of multiple pair purchases? Is that still on the rise as part of this shift towards non-technical? And I will repeat them if you forgot some of them, but thanks.

Richard Johnson

Thanks, Robbie. Just -- certainly we’ve got strong Steph Curry business as we called out and I’m excited to relive the fact that we’ve opened our second UA Armory at Champs Sports down in the Galleria, in Dallas. So as we continue to develop our relationships with Under Armour, obviously we want to be better in the apparel business with them, they want to be better in the apparel business in the mall. So we continue to work at that. There are constant initiatives that we’re working on both on the footwear side and the apparel side with them. So, we’ve a great deal of optimism around the brand and the brand is more than Steph Curry. That gets all of the highlights and all of the press right now, but they’re certainly more depth to it than that. On the Olympics front, there certainly is some technology that we will see in the Olympics that will be commercialized later in the year. Those launches that coincide with that from the athletes and the players. There is benefit across all sorts of categories from our track and field business up at Eastbay to signature basketball that will have some Olympics silhouettes that certainly get launched through to some apparel technologies that we will see from a lot of the brands that come out. And I’m going to turn to Lauren on the multi pair question. She is able to take a quick look.

Lauren Peters

Yes, the dynamic really remains, but average ticket is going up and we had more transaction averaging as retails going up, but units per transaction, not an increase.

Robbie Ohmes

Got it. That’s very helpful. Thanks so much.

Richard Johnson

Okay, Robbie. Thank you.

Operator

Next question comes from the line of Kate McShane from Citigroup. Please go ahead.

Kate McShane

Hi. Good morning. Thanks for taking my questions.

Richard Johnson

Good morning.

Kate McShane

With regards to the women’s business, I think you sounded a little bit more positive on footwear versus apparel. Is that due to just the mix of product? And when do you expect apparel to improve or inflect for women?

Richard Johnson

Yes, certainly at this moment Kate, it’s certainly across Q1, it was -- our women’s business was led by footwear certainly. We part of the excitement around our two new flagship stores in Midtown is that each of those will have a SIX:02 space and it’s we will really get a chance to test and push some limits on the apparel front and as we move from pure performance silhouettes into more active lifestyle silhouette, I see the apparel position and those silhouettes improving as we get later in Q2 and into the back half. But probably the most exciting thing in our women’s business is the two new flagships that will be close to us. We will be able to really take some leadership positions in some key apparel opportunities.

Kate McShane

Okay. And then my second question is the ticket and traffic trends that you cited sound very encouraging. I wondered if you could give any more detail on how much ticket pressure there was from basketball and if it was offset by other categories, or if the pressure maybe wasn’t as big necessarily in basketball as some people feared?

Richard Johnson

Well, it’s probably not a ticket question as much as it is an ASP question Kate on basketball. And clearly we drove a lift in ASP, so there is a mix that happened with premium signature basketball down mid single-digits able to be offset from an ASP point of view and the other categories. So …

John Maurer

Including these Jordan Horizon’s, they were not cheap, these are premium shoes that are at the same relative price point as signature basketball shoe.

Richard Johnson

So, that there -- I can’t compliment our team enough in a way that they’re able to manage a very complex ASP and add on sale sort of environment. So again, I think the question is more around ASP than multi unit sales on a ticket.

Kate McShane

Okay, great. Thank you.

Richard Johnson

Thanks, Kate.

Operator

Next question comes from the line of Scott Krasik from Buckingham Research. Please go ahead.

Scott Krasik

Yes, hi. Thanks for taking my question. A couple, so first a comment around the revolver, Lauren. Are you suggesting that you will actually be dipping into it and we should plan for that over the course of the year relative to last year? And then, just all the moving parts collectively, how much was your international comp up all together? And then just lastly, Dick, thoughts around allocations for the launch product, is it getting to be too much, would you rather have more of a scarcity factor, sellouts to drive demand? Thanks.

Lauren Peters

So, on the credit facility, no, no intention to dip into it. The former facility was in place through the beginning of next year, but we saw the opportunity to get into the new facility a little bit earlier and with that we took the opportunity to expand the amount. It just gives us flexibility and the time was right to do it.

Richard Johnson

Our international comps were up mid single-digits in the quarter, Scott. And then in terms of the allocations, we absolutely believe in the asset led scarcity model. So the brands do a good job I believe in controlling the quantities that enter the marketplace and we work with them to get the right quantities. So, there is a lot of excitement around sneakers and some of the heritage sneakers, some of the OG colorways etcetera really drive heat in the marketplace and its an important piece of the business, but again I -- we work close with our vendors to make sure that the scarcity model continues to contribute to our success.

Scott Krasik

And then just the Memorial Day launch calendar, is the Curry playoff shoe, is that as meaningful as the Jordan or is that as meaningful relative to other launches? Thanks.

Richard Johnson

Well all the launches have some meaning, Scott. I think when you get a shoe like the flu game shoe that launches, that’s -- it doesn’t happen often. It is special. I don’t think Lauren is going to buy a pair, but it is special. Just the Curry launch is special, I mean the MVP, the championship whatever units they launch across the year. So I’m not going to really compare the relative strength. That’s for the consumer to ultimately decide. But both of those launches are important to us.

Scott Krasik

Okay. Thanks. Good luck.

Richard Johnson

Thanks, Scott.

Operator

Next question comes from the line of Sam Poser from Sterne Agee CRT. Please go ahead.

Sam Poser

Good morning. Thank you so much for taking my questions. I just got a couple. Number one, is this really -- is this a basketball problem with the signature basketball or is this just a specific item problem where those shoes that happen to be signature basketball shoes aren’t as sought after as they were some time ago, while the Roshe and the tubular and various other things are just more sought after than they were a year-ago?

Richard Johnson

Well, I think as I said in my comments, Sam, we saw a great up take in the Kyrie Irving shoe and the Steph Curry shoe big significant signature product. The challenge that we faced was really around the two athletes, LeBron and KD were the kid just didn’t see the price value relationship in those offerings in the quarter that they’ve seen in the past. So, I think the kid is multifaceted. Our core consumer changes their preferences sometimes multiple times during a day. So, I think that they certainly are after things like the Roshe and the Boost product and the Huarache, the Presto from Nike and all sorts of great products. So, it’s a price value relationship around a couple of key athlete shoes that I think is being addressed appropriately going forward.

Sam Poser

Okay. Thank you. And then, secondly, I mean, given the progress or what progress you are making, with SIX:02 and I guess, I’m going to ask the same thing about the Runners Point and Sidestep businesses, do you foresee that you are going to be rolling those out next year? How do you foresee the store opening plans for both as we look ahead based on the progress you are making right now?

Richard Johnson

Well as we talked about Sam, SIX:02 we took a little bit of a slower track this year just because we got these two big flagship stores that will be very important to the SIX:02 brand, as well as it is relaunching and updating the six:02.com site, which is really important when you only have 30 doors, it is important that your dot-com or your digital site really represents that brand well. So, that that’s what 2016 is about and we expect to continue to accelerate the rollout as we get into 2017 with SIX:02. Runners Point and Sidestep, we detailed a little bit about where the challenges are. The rollout there will probably take a little bit slower track until we’re confident that we’ve got the assortment right and that running store specifically around Runners Point are the right formula on the high street in Western Europe. So, we opened in Vienna last year, so as we take Runners Point slowly out of Germany, we will measure the results there. Sites that we’ve got some work going on in terms of store format, we just have to get those things right. We take a pretty pragmatic approach to build a prototype, see the results of the prototype, test it, tweak it, evaluate it again before we go into a full-blown rollout. That hasn't changed nor will change as we go forward. We invest -- we are going to spend $297 million this year. We want to be confident that we’re going to get the right ROIC on those investments.

Sam Poser

Thank you very much. Good luck.

Richard Johnson

Thanks, Sam.

Lauren Peters

Thanks, Sam.

John Maurer

Carlos, I think we’ve got time for just one more question.

Operator

All right, sir. Our last question comes from the line of Paul Trussell with Deutsche Bank Research. Please go ahead.

Paul Trussell

Thanks. Good morning, guys.

Richard Johnson

Good morning, Paul.

Paul Trussell

Hey, Dick. So you all have certainly emphasized the diversification of the mix today, with the footwear business still being up mid single digits despite basketball being down. But perhaps you can just give us a little bit of color on overall demand, if your outlook has changed at all on the sneaker business, just given that trend line did decelerate a bit from what you produced last year, and whether there were any other factors in the quarter that you think impacted those results, or was it just specifically the deceleration in signature basketball?

Richard Johnson

I will take the question, Paul. I think you might have directed it to Lauren, but we’re as optimistic, if not more optimistic about the sneaker culture, the casualization of the world than we’ve ever been. Again, we managed through if we would have been on this call 18 months ago, and had a business where signature basketball was down or basketball was down mid single-digit, we would not have had positive results. Our business wasn’t strong on the other legs as strong on the other legs of the stool, but the team has strengthened across all of those legs and able to drive a comp gain in a very difficult retail environment with the bears out there saying that we’re simply a basketball brand and we can’t survive if basketball struggles. I think we’ve proved that wrong in this quarter.

Lauren Peters

Maybe that’s testimony to how close our organization is to their customer to understand their product preferences and make sure that we’re really bringing them the cool stuff. And I’d point to the fact that we had traffic growth in the quarter as indicating how strong that customer is feeling about the category.

Paul Trussell

And then just lastly, I think that it would be helpful if you can give some context on how you think the basketball category trend line may be as we exit 2016 and maybe get through some of these near-term hurdles. And then on the other side, from a category standpoint, do you get similar exclusives from Nike on the running and casual side as you do in basketball? And then is adidas and Under Armour putting out enough inventory in the marketplace to keep up with demand on their new launches?

Richard Johnson

There is a whole bunch of questions in one there, Paul. So, we think that the basketball trend line improves, but we also think that the customer is very flexible in their foot covering choices, their sneaker choices these days. So, wherever there is a cool sneaker, they’re going to find it at Foot Locker and they’re going to choose the category. They don’t -- it’s little bit like them not thinking about channels, they don’t really think about categories that much. They think about coolness. And if the sneakers got the cool factor for whatever they want to do, that’s the sneaker that they will buy. So, again, we see strength, we’ve certain level of exclusives across all categories, but the -- one of the real advantages we’ve got and we called it out in our prepared remarks is that we see things happening all around the globe. So, our European business maybe on something quicker than our U.S business or quicker than our vendor partners bring it to the U.S marketplace. Its one of the things that happened with this great turn that we’ve seen with adidas. Our European team called it out, our U.S team was able to get on some of the sneakers sooner than we probably would have had we not had that European business. So, again the strength of the portfolio goes cross categories, it goes across geographies, it goes across contact points with the consumer. And I guess, your last question on is there enough of the hot product in the marketplace? There is never enough of the hot product in the marketplace and that’s what the scarcity model is all about. So, we see -- I mean, you all saw the adidas results, you see the Under Armour results, that they’re having success, but we want some more of their key products, absolutely. But again the scarcity model is what fuels our sneaker industry. So, again, my hats off to all of our suppliers as they’ve manage the marketplaces that we do business in.

Paul Trussell

Thanks and good luck.

Richard Johnson

All right. Thanks, Paul.

Lauren Peters

Thanks, Paul.

John Maurer

Thanks, everybody for your great questions today. If we didn’t get your question or you have a follow-up, I will be back in my desk in a few minutes. Meanwhile, thanks again for your participation. Please join us on our next call which we anticipate will take place at 9 on Friday August 19, following the release of our second quarter results earlier that morning. Thanks again and good bye.

Operator

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

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