John A. Maurer
Restrooms, if you need, are down the hall that way to the left, just go around this way and make over that way. If you could take a moment now and make sure your phones and Blackberries are on a vibrate mode or something, we don't want a lot of ringing going on during the course of the presentation. If you need to make or take a call during the meeting or something, of course, you can go out there, but it would be preferable if you would go over closer to where the elevator is, because we had sometimes people talking right outside the doors there and it can be distracting for everybody.
We will have a Q&A session at the end of the prepared remarks. If you want to ask a question, please wait for the people with the microphone to come around, so that you can be heard clearly. Even if you can be heard by everybody in the room, the presentation is being webcast, so the people on the webcast won't be able to hear you if you don't wait for the microphone. And like I said, there will be presentation slides available -- the presentation will be available at the end of the meeting for you to take away the slides themselves. But they won't be available till the end of the meeting. So if you have to leave before you're done, then just ask me or Andy Wong, and we'll be happy to send you one hard copy in the mail.
And also want to say that this presentation, of course, is all about forward-looking statements. There'll be many 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 economic and market conditions worldwide, customer preferences and other risks and uncertainties that are more fully described in our press releases and SEC filings. For a complete description to these factors, please refer to Foot Locker, Inc.'s most recently filed Form 10-K or 10-Q. Changes in assumptions and factors could produce significantly different results and actual results may differ materially from those contained in our forward-looking statements.
So with that, please let me to introduce Ken Hicks, Chairman and Chief Executive Officer of Foot Locker, Inc.
Kenneth C. Hicks
Thank you, John. And I'd like to welcome you all here in person. And those of you on the webcast from New York to Greenwich to California. Also would like to welcome -- we have Matt McKenna, one of our directors here, along with other members of the management team. And we're looking forward to being able to tell you our story. Up on the dais with me is Dick Johnson, to my right, the Executive Vice President for Retail Stores. And then to his right is Dowe Tillema, our President and Chief Executive Officer of footlocker.com, Eastbay and CCS. To my left, Lauren Peters, our Executive Vice President and Chief Financial Officer. And to her left, Jake Jacobs, our President and Chief Executive Officer of Foot Locker, Lady Foot Locker, Kids Foot Locker and Footaction.
Today, for our agenda, we're going to cover 3 subjects. Our progress against our 2010, 2014 plan that we covered about 2 years ago in this very room. We then are going to talk about our 2012 to 2016 plan and then the goals that we've set for that new plan.
As I said about 2 years ago in this room, we set forth our vision, our strategic plan and our goals. Our vision was clear: to be the leading global retailer of athletically-inspired shoes and apparel. We had 6 major strategies with a number of actions set forth in this plan. And then we set down a group of financial goals to help us measure our success and for you to monitor our progress against our plan.
I'll go through each of the strategies in detail and some of our accomplishments. Our first strategy was to be a power merchandiser of athletic footwear and apparel with clearly-defined brand banners. Through an intensive segmentation study, we identified the different customer groups for each of our banners. We defined and differentiated the assortments for each of our banners and we were able to set forth a much clearer presentation, which allowed us to be a stronger competitor for each of the customer groups. No other of our major competitors has the ability to address the multiple customer groups that we are with the product and presentation that we're able to do. We solidified our position as the leading destination for basketball, a category that is growing in terms of performance and lifestyle acceptance.
While always an important player in running, we strengthened our brand and shoe offering in this fast-growing segment of the athletic shoe and apparel business. We also improved our position in casual footwear appropriate to each of our distinct banners. And we really began, again, to tell exciting marketing stories to drive the customers into each banner using multiple channels: TV, online, social media and print.
Our second strategy was to develop a compelling apparel assortment. We did this, because quite frankly, we weren't very good at it. And apparel's important because people shop for it more frequently, it's a great add-on sale, it is something that helps us differentiate the banner and quite frankly, it helps us sell more shoes. And our apparel assortment is much stronger, as demonstrated by the fact that we achieved year-over-year apparel growth in the teens. We partnered with our key brands to deliver improved brand apparel assortments, tailored to appeal to the target customer for each our banners. We started here because it was already positioned, we didn't have to go out and build new products. However, we have taken meaningful steps to elevate our private label apparel and early on we've had some success with our Actra Women's brand, our Champs Sports gear and our eBay for technology that we're using in many of our products. While we're still learning and developing this opportunity, we have made progress.
Our third strategy was to make our stores and Internet sites more exciting places to shop and buy. I'll start with the digital world, where we upgraded the features and functionality of our Internet and mobile sites, significantly improving the cross-channel capability of our company. We won major awards, we've been recognized by an Internet retailer magazine as the Best Mobile Optimized Site of the Top 100 Internet Site Retailers. And the Sneakerpedia website, which we launched last -- or this year, won the Golden Lion Award in the Cyber Category of the 2011 Cannes Festival for Creativity. Unfortunately, I didn't get-a-go to pick up the award. But more importantly, we're growing our Internet business about 20% this past year and see continued growth. We realigned our presentation in our stores, showing more product along the walls in order to increase productivity. We've integrated apparel assortments with footwear in order to tell compelling functionality and color stories. We're testing an exciting new format for our Champs Stores and are developing one for Foot Locker in the U.S. And in Europe, we opened our first Locker Room store in Brent Crossing, outside of London, not far from the venues of the upcoming Summer Olympic Games. We continue to expand our customer service training and measurement, which is an important part of our store environment and making it more inviting and exciting for our customers.
Our third strategy was to aggressively pursue growth opportunities. As I said earlier, we drove strong double-digit growth in our store banner Dot-Com sales. Our total direct-to-customer segment posted sales that were almost 11% of the total sales of the company in the fourth quarter, which is a new high. However, we still have an opportunity increase much further the penetration of our banner Dot-Com business and grow our Eastbay business. We accelerated our new store openings in Europe, including entering our 23rd country, Poland, at the end of last year. We operate more than 50 House of Hoops stores, including several in International markets. We've also recently rebranded the CCS stores online, in-store and in catalog, focusing on the board lifestyle, expanding the customer base, looking for an older teen customer rather than a younger teen customer. Moving away from just the, if you will, the board enthusiast, to people who are in that lifestyle. And we're working to turn around this business with both our brands and our private label.
Our fourth strategy was to increase the productivity -- I'm sorry, this strategy was to increase our productivity and this is an important part of the success of any Company. We achieved sales of $406 per gross square foot, ahead of our $400 long-term objective. We also drove improvements in such measures, as customer service, sales for payroll hour and our profit flow-through. Through a combination of improved in-store results and closing unproductive stores, we significantly reduced the number of unproductive stores in the fleet. We also have expanded things like traffic counters to provide performance measurement of traffic and conversion in our stores. And as a result, we've improved our share position and store productivity across the board.
To do this, these strategies, we need an industry-leading team and one of our important strategies was to do just that. We demonstrated our depth when we seamlessly executed the major leadership changes announced during the course of 2011 and continued with the strong performance and results that we got in the back half. We upgraded key talent management processes, such as executive development and succession planning in both field and headquarters organizations. We revamped associate selling skills training, focusing on meeting the customers' needs and not focusing on task, teaching our associates how to sell basketball and running. Above all, we developed and communicated and reinforced our company's core values. These 7 values are how we live our life every day and what we want our associates to live and work with the customers. Integrity, leadership, excellence, service, teamwork, innovation and community are all important for our success. And we work these values into all the actions that we do and we make sure that we're a company that our associates, our customers and our investors can be proud of.
So what did these 6 strategies get us? Before you, in a nutshell, you see the last couple of years and as a result of our success on the operational side, we posted very strong financial results in 2011, which was the best year in our Company's history as Foot Locker Incorporated. Comp sales were up 9.8% in 2011 and our stacked 2-year comp sales were up 15.6%. Gross margin rose 450 basis points over the last 2 years, of which 250 basis points were due to merchandise margin improvements and 200 basis points were due to leveraging our primarily-fixed occupancy cost. SG&A expenses were levered 50 basis points while we were also making significant additional investments in our marketing programs.
Our financial position strengthened, providing us the flexibility to both invest in our business and return cash to our shareholders through dividends and share repurchase. When you look at some of the performance measures such as our sales, you can see that our sales increased 4% from '09 to '10, and 11.3% from 2010 to 2011, giving us a 16% sales increase over that period. Per gross square foot, we increased 8.1% from '09 to '12, and 12.8% to '10 to '11, giving us a 22% sales per square foot increase. This performance allowed us to significantly improved the margins that we achieved, with our EBIT margin increasing by more than 500 basis points from '09 to '11, and net income margin increasing 320 basis points from '09 to '11. And this was done by improving the operation and not going back against our vendors to try to get more margin from them. We work with our vendors, to make sure that we offer great product to great value, but we did this through organic actions that we took.
Even with these results, we're less than halfway through our current plan with many key initiatives underway. For example, as a power merchandiser, we want to continue to differentiate our brand banners, step up of the marketing that we have. We've done a major review of the Women's business and we think this is a significant opportunity for us to grow. We are testing and implementing new ideas with our loyalty program and we're going to continue to develop the running and casual business. Within apparel, we're working to build a leadership position with multiple brand of athletic apparel brands and not just 1 or 2. We're going to reestablish, or we are reestablishing our private label and the exclusive offers that we have. And we're leveraging the team addition capabilities, which allows us to test and quickly respond to big ideas. Most of you are all from New York and hopefully you saw, or have seen in our stores the Lin-sanity T-shirts, that's one of the abilities that our team addition gives us is the capability to respond quickly to somebody we hope, most of us in New York, will be a long-term success, unless you're a Mets fan.
We have actions underway to make our stores and Internet sites even more exciting places to shop and buy. Developing new store formats for Foot Locker and Champs that I talked about, better building the conductivity between our channels. We've improved. They were 2 different operations, now they're coordinated and we're going to coordinate them even more, and enhance the customer engagement tools that our associates have in-store and the customers have online. And to continue to increase our leadership position that we have online and mobile shopping.
We still have growth opportunities, working towards getting our Dot-Com banners up to 10% of the brick and mortar sales. We're in the mid-single-digit range in some of our banners and we're looking for the major banners to exceed that 10% growth. Expanding our capabilities of Dot-Com internationally. We're now in Great Britain, Germany, France, Belgium and we're looking to continue to grow and expand that capability in Europe. Supporting our expansion in Europe, there's still significant opportunity there even with the challenges. It's an important, profitable business in where we are underdeveloped in a number of areas and we see the opportunity to grow there. And testing new concepts and products that make our stores great places to come in and buy.
And as a result, we're going to continue to increase the productivity of all of our assets by making sure we measure what we're looking for and what we're doing. Improving our planning & allocation capabilities so that we can be more localized and each community's Foot Locker or Footaction or Champs is their community store and they feel the connection. And to upgrade our labor scheduling system so that we are able to take care of our customers without overspending our labor dollars. In order to do that, we have to continue to build on the great team that we have. The associate selling skills, using an assessment tool for new associates coming in the stores to make sure that they have the capability to sell and work in our stores. Improving diversity, so that both our associates in the stores and the people that work in our offices understand and can relate to our customers. And really, as a part of all of this, evolve into a high-performance team and make sure that we have a culture that supports that.
When we look at our goals from the last plan that we put out 2 years ago, as I said, we've achieved many of these. The $6 billion in sales, still a ways off. We think in 2013 that's doable. Gross selling, we achieved that. EBIT, would have been nice if you guys would've all come in and bought on the holidays, we probably would have been able to make that. We missed by 1/10, but net income and ROIC, we did achieve those goals which are important to our success.
That's why we're here today. We've reestablished the company's leadership position. And we're not just the largest athletic shoe and apparel company, but now we're a strong performer. We did this by executing the core business well. And while we have much more to do in the core as I just discussed, we've also identified numerous exciting opportunities for future growth and profitability.
So one of the things that my guys hear a lot is that I live in a state of permanent dissatisfaction. So we're not just satisfied with where we are and we continually look to improve. And we're going to present a new strategic plan. It's based on the old plan, it's been working, so we're not throwing it out, but update it to take advantages of opportunities and ideas and build on the strength of our core business. So we have 6 key strategies that we're going to talk about in depth today.
First, is to create a clear customer focus to drive performance in our core athletic banners, Foot Locker, Champs, Footaction and Eastbay. Partnering with key vendors to be the leader in each banner, having the product lines and customer segments that we can focus on and drive the business. Second, making our stores and Internet sites more exciting, relevant places to shop and buy. By upgrading, updating and better connecting our channels, making our stores the place to go to buy their athletic shoes and apparel. Third, deliver exceptional growth and high potential business segments, Apparel, Kids, Women's and Teen sales and service. Each of which is $100 million plus opportunity for the company during this period. We're going to continue to aggressively pursue brand expansion, extending our key brands through digital sales and expanding geographically. Fifth, increase the productivity of all of our assets, significantly raising the bar of the goals that we've set. And sixth, continue to build on our industry-leading retail team.
We'll now discuss each of the strategies in more detail. And I know by now everybody's tired of hearing me, so let me turn it over to the people who really have done an outstanding job in achieving the plan that we have and helped to pull this plan together, and I know will be counted on to achieve the results that we're going to talk about. So, Dick.
Richard A. Johnson
Thanks, Ken. Good morning. Our first strategy is to create a clear customer focus to drive performance in our core athletic banners. This is really an extension of our polo merchandising strategy from our initial plan that we laid out to you. Maintaining the progress that we've made and now drilling down to another level. We'll do that by amplifying our brand banners to be a leader in the marketplace, becoming a power player in each of our product categories, footwear, apparel and accessories. While we're focused as a global retail organization, we will build locally relevant and compelling assortments to drive consumers in each of our marketplaces. We will target our consumers with innovative, 360 degree marketing efforts, touching our customer wherever they happen to be in any given day. I will walk you through each of these initiatives.
In order to amplify our brand banners to be the leader in each of our segments, we have to understand who our customers are. Here you can see some great examples of our customers. If you think about Foot Locker, our core proposition is that the world revolves around sneakers, it is sneaker central. The core customer here thinks about style through their sneakers. They use sneakers as their key accessory to make a statement with their crowd. They have certain must-haves and it's the latest greatest sneakers that have to be part of their wardrobe. At Footaction, we feature our customers really focused on a new urban mix. It's clean, fresh, he's well accessorized, he's bold and confident. He is the style expert amongst his group.
At Champs, our customers focus on the head-to-toe hookup. It's all about sports, it's sports-inspired, head to toe from the hat to T-shirt to shorts to sneakers. This kid is hooked up, from head to toe.
And At Eastbay, that core consumer really creates style through his performance level. The core athlete there wants what the pros wear, the colors, the high-end spikes, the compression wear, everything that the pro has on, on game day, our high school athlete wants and can get it at Eastbay.
We've strengthened our position with each of these consumers. We understand who they are, we communicated internally, constantly, we also communicated externally with our vendors, which allows unique products to be built by banner by customer.
Secondly, we will become a power player in each of our product categories. Ken mentioned earlier that we continue to maintain our leadership position in basketball. That's one of the foundations of the company. We've had the great experience expanding our core running business as well. We opened up 2 run shops in the last year -- last 1.5 years, excuse me. We've been able to take lesson from those shops and expand those into the bigger chain. It allows us to use -- to invest in other technical brands beyond our core basketball brands. We featured running brands such as Brooks, Mizuno and ASICS.
The casual business is a mix of lifestyle, on-court, off-court. It's whatever makes the kid comfortable with their jeans on. And we use all of our vendors to experience a bigger piece of the casual business as well, focusing on brands like Converse, Adidas Originals and Jordan. We also extend our casual offering through key seasonal offerings like boots and slides.
The next initiative will be to build a highly-compelling locally-relevant assortment. Again, as I spoke to earlier, we're a global retailer, but we have to create a locally-relevant assortment, whether it be the specific team relevant product assortment that you see there on the left, which is the Florida product that is featured at our Champs stores. Many of the products on that display comes from our Teen addition, quick turn facility, as Ken mentioned, where we have the ability to read and react and bring new product to market quickly. We have the unique Olive Drab assortment we featured at Footaction. They're not a traditional athletic color wave but one that, that style enthusiast at Footaction found very relevant. We also featured the slides and shorts that are relevant to each of the banners. When we build our assortments, we focus on the rights. We want to have the right product, with the right matching gear, in the right store in the right size in the right quantity at the right time, and we can do that and combine that with our store associates doing the right thing, we believe it equals success.
As we think about our customers, we know that they operate on a lot of different planes on any given day, from mobile the digital to physical. We want to make sure that we've built 360-degree marketing programs that touch all of our consumers' touch points.
Let's take a look at the screen. You can see the Hottest Month Ever, a campaign that we just wrapped up at Foot Locker. What I'd like to point out is that we touch the consumer on social media, both on Facebook and Twitter. We leveraged our in-store assets with great visual presentations. We utilized the own and shared media, such as Complex Magazine, NBA, AT&T and YouTube, to highlight some of the events going on in-store and some of the key marketing events. We've created great Striper communications, which we shared in-store with our Stripers, that they were aware of all of the releases that we plan to bring to market during the month. We focused our online and in-store presentations to be very similar. And we connect with the online bloggers, bringing one of the industry-leading bloggers into Madison Square Garden for a day, where they could see all of the great products that we were going to launch, but also have the opportunity to play basketball at Madison Square Garden. So again, all of the consumer touch points, one campaign.
We also believe it's essential to expand our loyalty program. Today, we believe it's the best in the industry, we need to improve that and make it more -- continue to make it more impactful for us and our customers.
I mentioned earlier our social media, I think it's important to point out that we have over 5 million Facebook fans and an award-winning mobile site. We know that having these sharp customer focuses is our first strategy. Now, I'm going to turn it over to Jake and Dowe to talk about the second strategy, which is making our stores and Internet sites more exciting places to shop and buy. Jake?
Thanks, Dick. Like Dick said, the second strategy is making our stores and Internet sites more exciting, relevant places to shop and buy. There are 4 key initiatives to execute the strategy. First, tell powerful product stories and clearly communicate to the customer across all our channels. Second, create dynamic products and engaging store environments. Third, implement programs to improve customer service and sales productivity. And fourth, to increase the customer engagement with compelling digital in-store experiences. And Dowe and I we'll talk you through each one of these initiatives.
So the first one, powerful product stories and clearly communicate to the customer. We're undertaking 3 actions to achieve this. More connectivity between the digital space and stores, more consistent stories, stronger messaging. As you can see on the slide, this is another example similar to the Hottest Month Ever that Dick spoke of, this was our holiday campaign called the Merry Kicksmas, which was communicated across all of our channels, both in-store with powerful visual stories and then also connected to the consumer online, so that they could experience this whenever and wherever they chose to do. The compelling presentation with better window and in-store displays, focusing on product and coordinating matching products inside of our stores, and stronger ideas and events on a more continual basis across the 12 months of the year, so we get a much better even flow of sales throughout our fiscal year.
The second piece of the equation, creating dynamic product, productive engaging store environments. We're also in the process of upgrading our visual displays inside the stores, both from a window standpoint, which is our initial touch point for our consumer in our stores, as well as when they go into the store, to tell more compelling logical stories for them when they get inside the store. And there's just a few examples of the Nike Fresh Air Wall telling a message, a connected message between the footwear and the apparel and how those stories tied together. Our Footaction graphic T message and then our Champs message with Adidas. Again, connecting the apparel components with the footwear to tell a fully-integrated story.
We're also in process of testing some new tools inside the store, such as tablets, mobile devices, so our store associates can interact in a much more meaningful way with our customers' in-store environment. As well as those initiatives, we're also in the process, like Ken mentioned, of testing some prototypes. This is as an example of the Champs prototype that Ken spoke to. And really objectives behind the prototypes were, again, was to really tell richer stories and really showcase the power merchandiser that we are in all of our key family as a business of apparel and footwear. So this test -- this prototype, as you can see, there's some significant changes in it. The apparel moved up onto the walls and all the footwear moved down into the middle of the store on these new footwear bleacher systems. Again, with an attempt to increase the productivity of our space inside of all of our boxes as well. We're also in the process of developing a similar prototype for the Foot Locker banner, which we'll open later this spring.
The third piece is to implement programs to improve our customer service and sales productivity. And Ken mentioned how important that is for us. We do have an excellent sales team in all of our locations as well as our customer service in our digital space. We've implemented new selling skill programs to improve the store customer engagement and selling skills. We've installed traffic counters to drive conversion, sales per hour and outstanding service levels. We've improved our service in our digital channel, including easy navigation, timely shipping, call-center response and customer engagement tools like Sneakerpedia. We have a new customer survey to ensure and monitor all elements of our customer interaction, and we've added a new digital hiring program to improve the quality of the associates that we hire.
I'll now turn it over to Dowe to talk about our cross-channel initiative.
All right. So thank you, Jake. As far as an online and mobile channel, we've built a pretty solid presence to increase the connection and engagements. And we were very successful in 2011. Our traffic was up 17% and we had over 225 million visitors to our various sites. In part, we drove the traffic by introducing some interesting engagement elements. For instance, on Eastbay, we have the Eastbay Athletic Resource Center, which is really a destination for athletes to find ways to improve their performance. This includes things like interviews with professional athletes like Kevin Durant. We've got videos that have exercise routines. We have articles with training tips, and a component called Close The Gap. And Close the Gap is a comparability and improvement tool, where the athlete can select the sport that he participates in. Enters his age, his grade, the position that he plays, and he enters his test results. A few new things like the 40-yard dash, the vertical jump, the bench press. And then his results are compared against a pool of other elite, high school athletes, so he can see how he matches up against other athletes from a particular skill. And then we introduced them to exercises and drills that, that athlete can use to close the gap, if you will. It works -- it's very successful, we have a lot of traffic around that component.
Maybe a long time ago, but not now. Okay. We also have other things like reviews and ratings. We have blogs and we have sweepstakes and things that are exciting and engaging that bring the customer back over and over again. In addition to that, we also host a Sneakerpedia site. Now this is a non-selling destination. It's a community. It's where sneaker enthusiasts come together and talk about all things sneakers. And we think that this kind of engagement and interactivity raises the industry and the product categories overall, through that engagement, so it's an indirect benefit. So bottom line, more traffic, more time on site, results in increased conversion.
I'll turn it back to Jake to talk about the next strategy.
Thanks, Dowe. So besides making our stores and Internet sites more exciting relevant places to shop, our third strategy is to deliver exceptional growth in high-potential business segments. Ken touched on those 4 segments: our athletic apparel business, our Kids business, expanding our Women's business, obviously to play a more significant role in all of our businesses, and then building a meaningful team services and sales aspect. And like Ken said, we feel that each one of these is north of $100 million opportunity from a high bow of standpoint. So I'll review the next steps to execute these strategies.
Develop a leadership position in the Athletic Apparel business. Growth in apparel, Ken touched on it slightly. As you can see by the slide, back in 2003, apparel was almost 31% of our entire business. We've managed over the course of the last couple of years to grow the Apparel pretty significantly, double-digit growth on the Apparel side. We've also grown our footwear, so the penetration hasn't grown as fast as we would like it to, but we still see tremendous opportunity to get that growth, that penetration up to historic levels, which would give us a significant opportunity from a financial standpoint. So we have a few strategies that we're working on...
Kenneth C. Hicks
For years. We finally figured we would put it up. But the key thing here is that it obviously we have -- we've demonstrated we can do it, we can grow it, and it doesn't have any impact on our footwear sales, but it can provide us significant growth opportunity.
So we're taking several actions to build our Apparel business, like Ken said, creating compelling apparel assortment that target each of our core banners that Dick reviewed with you. Those consumers specifically target to those consumers to drive sales and margin. Be a leader in the branded athletic apparel business with our key partners like Adidas, Nike, Jordan and Under Armour. Enhancing our private level brands and exclusive offerings in more targeted fashion. The examples, again, with our Actra label in our Women's business, our Champs sports gear product and our Champs business and then our Sneaker Freaker brand over in our European business. And then again, leveraging the team addition's capabilities that Ken spoke about, so it really drives speed to market and consumer engagement across all of our banners.
The next topic I'd like to discuss is the Kids business. And as you can see, we believe this is a $26 billion Kids market that we are significantly under-penetrated in. And the map that's on the screen gives you an idea of -- it's broken out into 4 colors. The green colors are states we feel we're well penetrated in. The yellow, the red and the orange are all opportunities states that we see significant opportunities in to increase our penetration, specifically in the KFL banner. So this gives us a sense of the geographic opportunity for Kids Foot Locker. We also have significant opportunity in Kids in our other banners by improving and enhancing our in-store environments and how we connect with our consumer across those banners.
So there's a few actions that we are taking to grow the Kids business, inside of our boxes, specifically KFL and some of these you can see on the screen, creating a more kid-centric environment. The example of the NBA Pro Zone, taking our way in a much more significant and meaningful way in the horizons business, expanding and diversifying our assortment by growing apparel and key accessory pieces, as well as continuing to diversify the footwear assortment and moving into more casual offerings and running offerings. And again, better utilization of space, inside of both KFL and our existing adult banners. And then we're also in the process of testing some Kids formats internationally as well.
We also see a tremendous opportunity in expanding our Women's business, which is the next topic. Again, as you can see on the slide, combined footwear and apparel, we see this is a $20-billion-plus business with a very significant market share opportunity for us. We recently completed an intensive study of the Women's market and are developing a strong plan to go after this business. What the study revealed for us was there was really a highly-fragmented market, as you can see by the screen. Nobody holds any significant market share across either footwear or apparel. Apparel is the key driver in this business because it produces higher frequency and it's critical to the engagement for our woman customer. Customers are motivated by fit, style, color and value, and what it's really -- what the study really told us was there was really very little satisfaction for the female consumer with the current offering in the marketplace.
So with that, we have a multistep approach of how we're going to attack this business. First, improvements to our current Lady Foot Locker stores with a focus -- increased focus on apparel, better use of color in our assortments, as you can see up on the slide, better navigation signage showcasing features and benefits, and a refocus of the selling skills of our associates to meet the female customers needs. We're also in the process of working with an outside design firm to develop and test a couple of new Women's formats here in the United States.
And with that, I'll turn it over to Dowe to speak to the team sales opportunity.
All right. Thank you, Jake. We believe that the team sales and service market is a significant growth opportunity through our Eastbay banner. Eastbay's home state of Wisconsin, we have very good penetration, which is not surprising. We also have very good penetration, though, in some of the less densely populated states. You see on the upper part of the country, in particular. We do believe, however, the biggest opportunity, and not surprisingly, is in some of the larger, more densely-populated states. And we're looking at states like California, Texas, Florida, Illinois, to name some of the key states. But that's where we see biggest opportunity for us to gain some ground. We estimate that the overall team sales market is about $2.5 billion right now. From a competitive perspective, there are some large distributors, but for the most part, it's plot-driven dealers, some large ones and a lot of small mom-and-pop type dealers, so it's relatively fragmented. And Eastbay, our share today is relatively small. We recognize that. But we have a very strong presence and a good awareness amongst the high school athletes. And the high school athlete is really going to be our focus, as well as secondarily some of the sports columns.
When we look at high school participation by sports, when you look at the main categories, there's 7 main categories which comprise almost 3/4 of all the sports from a high school participation point of view. And Eastbay has a very rich heritage of servicing these sports. In fact, that's how Eastbay got its start over 30 years ago as a team dealer. And so we have a lot of knowledge in interacting with high school athletes. Additionally, the product assortment at Eastbay is very, very strong. We have, in fact, Eastbay is known for carrying the broadest selection of team colors and team sizes that you can get anywhere. That's a key strength we'll continue to focus on. And then finally, to capitalize on the opportunity, we're doing a number of key things. Building on our existing strengths, first of all. And we have a modern distribution center, we have a very broad inventory, as I touched on a moment ago. We have a customization facility and a call center as well.
The next thing we're doing is then really developing our team sales force. We had a team sales force in Wisconsin for a long time, but we now have a foothold in some other states like California, Illinois and New York. Also, we are utilizing our truck, and our truck is really -- it's a traveling showroom, if you will, to bring product stories directly to the customer. And it also provides some pretty solid branding exposure for us as well.
Broadening our assortment is another element. We have a lot of footwear and apparel to merchandise, but some of the larger equipment items, we have not carried. For instance, in LaCrosse, we've had helmets and sticks and gloves and things like that, but not the actual goal and the netting itself, so we want to get more into those larger items and become more of a one-stop shop for our customer. Also strengthening of private label capabilities and looking for new garments and new techniques, and we'll be looking for those. And then finally providing online tools for coaches and teams, so they can make it easier to equip the participants, as well as handle schedules and activities and the things of that nature. So bottom line for this is, is we think with our name recognition of Eastbay, with the infrastructure that we have and the experience that we have, we can be very successful in team sales.
I will turn it to Dick to outline the next strategy.
Richard A. Johnson
Our first strategy is to continually -- to aggressively pursue brand expansion opportunity. We continue to believe that there many opportunities for us to grow our brand, whether it be driving digital sales, strengthening our presence in Europe, expanding into new countries either through our own store model or possibly expand a franchise opportunity. Growing our significant businesses, including the House of Hoops and CCS. Investing in technology to help us improve our performance. We'll touch in detail with all of these -- around all of these initiatives, and I'll start with Dowe talking about the digital expansion opportunity.
All right. Thank you, Dick. In 2011, we were very successful in driving digital sales through both our Internet and our mobile sites. Overall, we grew the business about 20%. And the store banners grew even at a much faster pace than that. In total, we ended up the year with digital sales being about 10% of the total business. And that does include Eastbay, by the way. Now, we feel like leading multichannel brands today really have a ratio of around 10% to the total sales. Now that's a moving target, obviously, but right now we think it's about 10%. And we're not there, as Ken touched on it earlier, we're not there yet from a store banner point of view. We're trending positively in that regard, but we have a ways to go, we're just not there, but that clearly is our goal for the time being. And we continue to work on increasing our store banner Dot-Com penetration by additional efforts to coordinate our digital team, the store teams, by enhancing our websites with customer engagement tools, focusing on seamless cross-channel experiences, expanding internationally, and making sure that our mobile sites are a very consistent experience with our main Internet sites.
And then in Eastbay, Eastbay really is a category leader already, I touched on. We're going to continue to drive Eastbay brand performance through additional features that resonate with that elite high school athlete. Some examples of some of the things we've done, primarily in store banners to drive that experience in our business. In-store, for instance, if you're in-store, we're utilizing a Champs format a -- what we call a shadow box, the wall-mounted fixture, that really draws attention to featured merchandise. And we also call out the fact that we have extended sizes and colors available in a much larger Dot-Com inventory. And those displays also include what's called a QR code. So people in the store can use their smartphones and take a picture of the QR code, and we then can take them to a product story, a product detail page or information about the product, or even some type of a video that has some engagement aspect and it can be a testimonial.
We're also doing some testing with iPad, to be able to look up inventory available in a store locations, and also to provide product information as well. Also for in-store shoppers, we offer currently a stock locator system. So if you're in a store, the store does not have a size that you want, they can go look at the stock locator mechanism and find that size that you're looking for in another store. And then depending on the proximity of it, you can either go pick it up as a customer or we could ship it directly to your home.
And then considering the online and mobile device users, we have the ability right now to be able to view inventory in every store we have. We'll be introducing in sometime in the first half of 2012 a reserve and purchase feature as well. And we have right now a good store locator mechanism, and then we also have a send-to-store option for people who order online and want to pick it up in a store, it's another convenience we offer. And one more thing, too, we also have reviews and ratings on the online and mobile sites, and that really helps customers, in advance of a visit to a store, it helps them shop when they get to a store destination.
Now Dick will talk about our growth opportunity in Europe.
Richard A. Johnson
Our second expansion initiative is growing Europe, where we have a number of significant opportunities. Our European model is profitable and we believe that we can expand our presence both in the Foot Locker door and by testing some Kids Foot Locker, and ruling out a completely new banner called the Locker Room. The map shows where we have stores and our relative penetration in those marketplaces. If you take a look, the green represents countries where we believe that we are appropriately penetrated, countries such as Italy, Portugal, Ireland. In the yellow, we've got countries where we have a store presence, but we feel like we are under-penetrated. For example, in Turkey, we've got one store. In Hungary, we've got one store. And as Ken mentioned, we just opened Poland, and we're now to 3 stores in Poland. The red countries on the map are places that we currently have no store presence at all.
We believe the opportunities for Foot Locker include reinforcing our existing position in the core markets, especially as malls are built and the retail landscape changes. We believe that we can increase our store presence in new and under-penetrated markets. We believe that we can enhance our brand through strategic remodels across Europe. We believe that we can create a strong digital business in Europe. Ken mentioned that we're online in the U.K., France, Germany, Belgium and Luxembourg. We'll go online in the Netherlands this spring. And we'll add Spain and Italy sometime in the fall of winter of this year.
You can see some examples of our core banner, Foot Locker, on the left. And the new banner that I mentioned earlier, the Locker Room, which is a performance store that we've opened up in Brent Crossing in the U.K. We'll open up 2 additional Locker Rooms to test going into the Easter season. They'll be open going for the Olympics in July and August 2012 in London. In addition, we got 2 -- currently have 2 Kids Foot Locker stores in Western Europe, one in Amsterdam and one that's featured here on the photo, and one in Rome. We plan to test 5 additional Kids Foot Lockers to support the Kids initiatives that Jake mentioned earlier, 5 more stores in 2012.
We believe that there's also an opportunity to invest strategically in new countries. Across Western Europe, we see opportunities potentially in the Baltics and in Scandinavia. We currently have franchise arrangements in South Korea and in the Middle East. We believe that there's an opportunity to enhance our franchise model to allow for growth in selected markets. It could be smaller countries or countries where we have no local customer expertise or possibly located too far from our divisional offices, but we believe that there's a great opportunity in franchises as well. We continue to explore and study other markets, but in the near term we have no plan to expand.
We have several significant businesses that we believe that can grow. Our House of Hoops that we feature, mostly in the United States but also in Western Europe, we've got over 50 doors open. We believe that, that can grow to be 100 doors or more spread across Western Europe, the United States, possibly into Canada and to Australia as well. The House of Hoops is beneficial to the entire mall when we open them. We've seen business in all of our banners grow as we open House of Hoops in various malls. We believe that the additional House of Hoops openings both in the U.S. and around the globe could be another $50 million growth opportunity for us.
You've heard CCS mentioned a couple of times this morning. We have recently repositioned CCS as of board-inspired lifestyle shop. We've moved away a bit from the core skater, more into a lifestyle environment. And we've relaunched this via catalog and digital, as well as store visuals, and we believe that the recent rebranding will help us get CCS back on track and repositioned accordingly.
As I've mentioned, we believe that there are new formats and new merchandise ideas that we can capitalize on as well. Here's another example of unique, innovative merchandising for the footwear as it appears in the Locker Room that we've recently opened in the U.K. We also believe that there are great new product ideas. Court Grip being one of the latest that we've rolled out, both at Foot Locker and at Eastbay from Mission, being a great addition to the basketball heritage that is Foot Locker. We also believe that there are great opportunities to enhance specific categories. For example, performance socks, headphones, things that matter most to our kids, we have the ability to expand with merchandise ideas.
And now I'm going to ask Lauren to speak about our fifth strategy, which is to drive productivity.
Lauren B. Peters
Thank you, Dick. Our fifth strategy calls out the fact that we remain focused on both productivity and strong return on investments, as we look to make the most of all of our assets. Our square footage, our sales force and our inventory. We will invest in technology not only to make us more efficient, but also to make us more effective. Clearly, our square footage has become more productive, it's increased sales per square foot more than 20% in the last 2 years, topping 400. But we are confident that we can realize further improvements. We are enhancing our processes and tools to better plan and measure states productivity, so that we can understand, not only how our store performs overall, but how a fixture performs, how the shelves on a wall perform. You'll see us making changes both in product and presentation to capture the opportunity. The picture here on the upper right is a good example of that. Here as Jake touched on, we're experimenting with taking the shoes off the wall, just laying them down the main drive aisle of the store, which allows us to tell power apparel stories on the wall and better showcase the shoes that hook back to the apparel.
While our recent investment in the business intelligence analytics tool is expected us to further improve our capability to plan and analyze at these detailed levels, we are also exploring new tools such as heat mapping, which is what you're seeing at the bottom of the screen. This technology lets us graphically see how much time customers spend in which sections of the store. The objective is to get more of the store red or yellow and less of it blue. Of course, we continue to aggressively address low performance stores, either lifting them to be meaningful contributors or closing them if we conclude that's the best course of action.
Our most powerful asset is our people. And we intend to further enhance their selling skills to ensure that we are truly engaging with our customers. Understanding what need brought them to us so that we can suggest great product. We know that customer focus equals better conversion. Here again, we're investing in technology with a workforce management system that will help us optimize staffing and traffic counters to measure conversion performance. We will measure and monitor not only traffic, conversion and sales per hour, but also customer service, to ensure that we are making our customers happy.
Turning to inventory, the biggest asset on our balance sheet. We remain focused on improving our turn rate, and merchandise flow opportunities are still the key elements. Both initiatives we work on collaboratively with our vendors like reductions in lead times, and those we can accomplish on our own such as improving our allocation capability. While we continue to aggressively manage product life cycles to ensure we keep our inventories fresh, we are working to improve total supply chain effectiveness, leveraging technology again to improve efficiency. Here you see an example on the left of a handheld device that makes stock keeping more efficient but also facilitates product selection when working with the customer. Those T-shirts on the right speak to our allocation opportunities. Bright colors and black backgrounds sell better in some stores than others, and being able to stare at that information out of your data to improve your initial store allocations is meaningful to both sales and margin. We are in the midst of evaluating a new allocation system that will help us get even better at this.
Know that we remain focused on profits and return on investments. We will fund high potential projects with strong expected returns, continuously monitoring our performance against our goals and rigorously maintaining our focus on management expenses. Our final productivity initiative is the technology investments we've mentioned several times this morning, intended to make us both more efficient and effective, including workforce management, business intelligence and allocation among others. It will be our people, our team, that makes all of these happen.
Richard A. Johnson
Thank you, Lauren. And so our final strategy remains the same: to build on our industry leading retail team, making sure that we attract, develop and retain the best people in retail and that we cultivate a more sales-oriented and customer-centric culture and skill set within all of our associates; and that we increase the diversity of all levels to better reflect our customer base; and ensure that we recognize and reinforce associate behaviors that support our core values.
We're going to continue to build on that best team, attracting the people, using assessment tools, talent acquisition, developing with high potential leadership development programs and making sure that we offer great training and retaining, measuring and making sure that we have great associate engagement. The past year, we had in our associate engagement, we were in the top 10%, not just in retailers but in all companies measured within the survey.
Developing that sales-oriented and customer-centric culture is important. And we have, at one point, we were worried about turning the company around. Now we turned the company around and now our focus needs to be on how we grow, by knowing and addressing the customer needs and making sure all people from the associate in the store to the senior management focused on that, and recognizing and reinforcing those behaviors that support our core values. You see in our stores, the excitement of the many young people that work there and we want to reinforce that pride and passion that they have, and that our communities, our customers and our associates are very proud of where they shop and work.
We've reviewed our 6 strategies and the key initiatives today for profit and growth. Here they are, all in one page, not necessarily meant for this presentation but for when you get presentation, everything is all on one page. It's a mix of new and existing strategies and initiatives that will build the success -- on the success that we've had. We have many opportunities and each of these is well thought out. We didn't spend millions of dollars to put on a big show. We feel that it's important you see the team and look at the track record that we have, and that we work well together. Some of these eyes, we've tested. Others we're going to -- we will test and expand and grow as we look for investment opportunities. We're not going to go out and spend all the money that we have on some idea that maybe one of us has. We're going to make sure that what we do works.
That's -- and a great example of that is a prototype that we've got for the new Champs store. We put it together, we made adjustments, we're now going to test it looking for financial capabilities that it generates -- or opportunities it generates for us. If it does as well as the prototype, that's an opportunity for us to rollout and grow. Same thing with our online and team sales. We've tested and developed and we see this as significant opportunities for growth, the things that we get excited about. It's a fantastic product with a fantastic customer base that most people would die for.
How do you get that young customer -- young male customer? We have it. They come to us. Each of our banners. And those are things that we have that nobody else can replicate. We've got the largest footprint in the world for women's athletic shoes and apparel. We have the largest footprint for kids' athletic shoes and apparel. We have a tremendous brand on the Internet with Eastbay. And we're going to continue to grow on those opportunities. And these strategies that we set forth today we feel will allow us to take the company to a next
And I feel strongly when you look around the room and you're looking for products that we have, much of which is exclusive. A significant amount of what we have is exclusive. We're the only place to go with great people. We can deliver significant goals by building on both the core business and the growth opportunities. When you look at the things that we're going to do to continue significant store-for-store growth over the next several years, we've got a pretty full ledger of actions that we're either taking or testing to develop. And many of which work, many of which we think will work, making sure that we have strong banner differentiation.
But we're strong not just in basketball but running and casual. That we have the right assortment for that customer, be they in a mall in North Dallas or in a mall in South Dallas, which are 2 different worlds apart in the same city. Making sure that we continue to invest in marketing and to drive people into our store and to create loyal customers. Making our channels more connected. And so when a person, wherever and however they shop, they're connected to their favorite Foot Locker, Champs, Footaction, Eastbay, Lady Foot Locker.
And making sure we continue to update the environment that they shop in, so that it's exciting. And the people that are there have skills so they can address their needs and issues, and they can relate to that customer and connect with them. To make our space more productive and ensuring that we utilize technology to achieve all of these things. That will drive the core.
At the same time, we have significant opportunities that we've talked about. Apparel, you saw -- we used to do 30% when we were selling cotton by the pound. Now as we grow the branded business and develop a more meaningful private label business, that is a great opportunity to help us sell more apparel but also sell more shoes.
The Kids business, again the largest footprint for kids' athletic shoes in the world, since there's no chains over in other part of the world. We're looking to take and expand that and build on that, not just in our Kids Foot Locker but within our other banners.
Women's. It's a huge market. Just our portion of it is over $20 billion, but it's very fragmented and is one in which the customer is very dissatisfied. Even some of the fast-growing chains, the customer is very dissatisfied. They look at the price and then say, that's way too expensive, or the fits wrong, or they can't get the colors that they want to go with the shoes. We have the ability to put that together, both within our own chain plus within the other banners that we have.
Team sales and service, another significant opportunity. A large business that also is very fragmented. We have probably the best name in that business for the customer, Eastbay. We have -- because of, quite frankly, Nexus, we have not aggressively pursued that. As Nexus goes off, either by law or by our decision because of the opportunity to grow, we're going to continue to expand. We've got a sales force, we have great product and we have the brand to build on this business.
Digitally, we have, again, probably the largest footprint in the industry, but we're under-penetrated. And as we better connect to the stores, we have the opportunity to grow and develop this, not just in the United States but throughout the world as we grow our sites in each of the countries in Europe, and as we look at other markets in which we have stores. We're looking to expand Europe. Definitely going through a challenging time. There is no question. And it's slow, but it's still a very profitable business. And you saw from the map that we're under-penetrated in many of those markets. And we have the opportunity to grow in those markets, in large markets like France and Germany, where we have relatively few stores compared to the population, and as the real estate market changes and malls develop.
We talked about new countries and other new ideas like House of Hoops and CCS. Those growth opportunities, coupled with the initiatives, allow us to set new goals for ourselves. We think over the course of this plan, we can achieve sales of $7.5 billion. When you look at that, and say that's a pretty good number, but it's about or less than the rate that we grew over the last 2 years. Sales per gross square footage, $500. Again, with the elements we're taking in productivity and making sure that all our stores are contributors, we feel that we can achieve this.
EBIT, earnings before interest and taxes, 11%. This is a number that we have not achieved in the past but we are -- some in our industry have and we think that it's attainable for us. That gives us a net income of 7% and a return on invested capital of 14%. And we look at it, getting our inventory turn up over 3x. These are the goals that we set for ourselves over the course of the plan. And when you look at the last 2 years, these are well within what we've done, and so we think over the next 5 years, we should be able to achieve these. And hopefully, some of you may think that they're too easy. Some of you may think that they're too aggressive. That would mean they're probably about right.
I'll now turn it over to Lauren to give you some of the specifics over the next several years of the plan.
Lauren B. Peters
So how do we get to an EBITDA of 11%? We can see here that we're looking for gross margin rate improvement of 100, 200 basis points, which would take us 33% to 34%. On the low end, that's -- leveraging the fix, on the high end, it brings in the elements that we talked about that would improve merchandise margins as it's getting what we think we can get out of productivity, and flow, and getting after the apparel opportunity. On The SG&A side, we're looking for a reduction in the rate of 100 to 200 basis points, that would take us to 20% to 21%. And again, this is controlling our expenses and realizing the productivity gains that we talked about in selling wages and levering the overhead.
Depreciation in this view would be flat at 2%, and that's based on the CapEx that continues what we've been running, about $160 million a year. That yields the EBIT of 11% and a net of 7% with a 37% tax rate that declines a bit as our International business grows and we enjoy the lower tax rates there.
Now turning to our capital structure strategy. Our objective is to maintain flexibility, to execute this plan in all financial environments. Our priorities continue to be investing in the business to drive return to shareholders, maintaining an attractive dividend, which we've just increased 9% last month, continuing the share repurchase program under our new larger authorization, also announced last month $400 million over 3 years, and maintaining a good funded status in our pension plan. Again, this plan looks for CapEx to be about $160 million, although we've talked about some things that we're trying out, new prototypes for Foot Locker and Champs, and you certainly heard about some growth strategies, and depending upon how those returns shape up in some of those tests, this would be a metric that will be unchanged.
And what are we thinking about new stores in this plan as you look at '13 and beyond. We are looking for 60 to 70 net new stores. Again when we take you through with the results last Friday for '12, we're calling for 7 stores net with 75 closures to 82 openings.
So with that, I'll turn it back to Ken to wrap up.
Kenneth C. Hicks
Thank you, Lauren. So that's our story. And we feel it's a great story. We have the capability to continue to grow and achieve even higher goals than we have in the past. We have thought through our strategies. We have actions that we are both putting in place, or have in place, and that we're testing. Some of these will require additional investments as they grow, which is one of the reasons, as Lauren said, our first priority is to provide that opportunity for growth. We've put on the back, this is our strategy, we're going to give you each of you one of the pocket cards that we're going to give all of our associates, so they have the ability to know and look, and I assume that each of you will carry it in your pocket around with you all the time as we do, to remind us of what our vision is, what we plan to do to achieve that, and the goals we've set for ourselves when we do.
With that -- we actually finished within 2 minutes -- and now open the floor to questions.
Kenneth C. Hicks
Michael Binetti - UBS Investment Bank, Research Division
Ken, Michael Binetti of UBS. Just to dive in on Lady Foot Locker, I guess, for a minute. You said on a couple of conference calls ago, we've hired and fired the customer in that chain a few times over the years. Now we've got a new survey that's telling us she feels like she's paying too much, the fits don't work, the hookups aren't there. So I guess what was different this time around that you learned from last time around that really give you confidence that now we're really focused on it? And then if I had a second question, some of the pictures that you threw up there looks like there's some very -- some premium Nike product in there, and some of the pictures look a lot like some of the things that they've tested in their own stores that have ended up turning into some of the great things they've done, like the House of Hoops or even a Track Club or a Fieldhouse. How much support can you get from a vendor like Nike that's obviously very important, and how much advice and frankly capital are they able to bring to help you improve this important part of the chain?
Kenneth C. Hicks
With regards to the Women's business. Probably the biggest and most important thing is, we start out always with shoes. And in the Women's business, you have to start out with apparel. And it's one of the reasons why for years, I've said the reason we don't show that number up there, the percentage, none of the chains look like that with a percentage penetration of apparel. We're going to have to significantly step up the level of apparel that we have in those stores. And so when you look at the store, it will look much more like an apparel store than a shoe store. And as a result, we will have a bigger offering, both of branded and private label. We will have more fits. We will be more explanatory about what the product is than we are in our current stores. And Jake right now is working on a number of tests and ideas to find out which works best. And then we will sell more shoes. We still -- you saw our share in shoes was significant. We will sell more shoes than the competition. Some of them don't even have shoes. But what will really happen is, we will be the place to go to put the whole outfit together because we will have shoes and apparel. And it'll be the reverse. I said that wrong. We will have apparel and shoes. And in the past, all of the places that you saw, they all came to us to buy shoes because we were the place with it. But what we weren't doing was driving the traffic with the apparel. And that's critical. And that's not -- one of the things as a retailer, sometimes you just go "Ah, why didn't I think of that?" That's the part that we've missed for a number of years and that we're more aggressively going at. And our 200-plus Lady Foot Locker locations allow us to do that, that nobody else has that footprint. With regard to vendor support, Nike is a terrific partner. They work with us as we developed things like the House of Hoops. As we put in -- you saw that Air Attack presentation that we now use for a couple of years. It's exclusive product for our stores. And we will work with the vendors to set up particular displays. We also work with Adidas and Reebok. You saw the Adidas display of the Olive Drab which happened to be a phenomenal color and worked very well for us in our stores. That's something that we worked with them on and we've got the Adicolor presentation in Champs. And Under Armour, we work with each of the key vendors to set those presentations up. But the important thing is, it's going to continue if you look at the new Champs format as we worked through the new Foot Locker format. It's going to look like a Champs. It's going to look like a Foot Locker. It will look like a Footaction. But we will bring elements of the vendor into our stores. And another good example of that would be our new Locker Room store in Europe. We have some great presentation from the vendors, but it's not just, here's a vendor shop within a store. It's how we put it all together.
Kate McShane - Citigroup Inc, Research Division
Kate McShane, Citi Investment Research. My question was focused more on what the next initiative is on promoting a banner? And it's stemming from the commentary that you've made about Champs over the years, where you put an increased amount focus on Champs and the double-digit comp results that you've gotten. Is there a next wave of initiative focusing on another banner in terms of marketing or changes? Obviously, you've heard about this store prototypes and things like that, but in terms of real focus on one banner like you did with Champs?
Kenneth C. Hicks
We are looking at, and we've just brought in a new agency in Foot Locker, BBDO, to help us build that brand message for Foot Locker. And we will do the same thing as we look at Kids and Ladies. So the answer to the question is, yes. We see in Champs, and Jake was instrumental down there in setting it up, and Brian has done a great job carrying it forward in making sure that we tell we're a house of brands, but we are a brand in and of ourselves. And we're going to do the same thing, as Dick said earlier, Foot Locker is really going to be that sneaker central and it's where people -- when you think of, I need some sneakers, the first thing that comes -- I've got to go to Foot Locker. When you think of, I want the best sports gear for playing, I've got to go to Eastbay. And those are the things that we're going to work for, for each of our banners.
Robert F. Ohmes - BofA Merrill Lynch, Research Division
Robby Ohmes, Bank of America Merrill Lynch. A couple of questions. On the 5-year target that you laid out for us, is there a same-store sale or something behind that? And also should we march there pretty steadily each year so that there's a similar operating margin rise each year? Is there a back loading into it or front loading? And is there more gross margin up front by [indiscernible] or sort of any color around how you -- we won't hold you to it -- but how you think it could play out in the next 5 years? And then...
Kenneth C. Hicks
Remember, this is being taped so we've got you.
Robert F. Ohmes - BofA Merrill Lynch, Research Division
And then the other question about that was, can you -- in Europe you said challenging time and it's slow, and I was just hoping get a little more elaboration on what you're seeing near term there right now.
Lauren B. Peters
[indiscernible] hit a target, we know that things rarely go in a straight line. And so we anticipate that -- I mean, when you at a look a 5-year view, and maybe 5 years is [indiscernible]. But we thought about this. Mid-single digits is the top line that I would -- the comp that I would ask you to think about. Of course, the top line gets influenced further by the net store openings that we talked about. And how does the G&A and the gross margin come across, well as I said, there's some degree that that's on than leverage. So it's going to go with comp store increases. I wouldn't tell you that it's more front loaded than back loaded.
Kenneth C. Hicks
As we start to implement and put on different things, there will be some jumps, if you will, but it is built around that mid-single digits, as Lauren said, but depending on the rollout of things like the new store format for the Champs and/or Foot Locker, time management system.
Lauren B. Peters
We'll get this year and into next year.
Kenneth C. Hicks
We're evaluating planning allocation systems, and so it be couple of years before that came on, from my experience as planning allocation systems can have significant profitability impact and sales impact. So each of them, when you put them together, they actually, to some degree level out. So you're going to see some bumps but they'll come on at different times. Some we've got going now and some we will have for the future. With regard to Europe, I said on the call that for February, Europe was down in the high singles, and part of that was weather induced but part of it is the environment. One of the ironies was that we actually were up in Greece for a month, but we only have 4 stores there. But we've seen some improvement but we anticipate seeing more as we -- you've got the Euro Cup, you have the Olympics. We also have some new products which is selling well, and as we continue to get more of that in. And we've expanded. We've got more performance coming in than we have in the past that will help. So you put those things together we anticipate, while Europe probably will not be up at the level of the United States, it will be improved. And at the same time, as I said earlier, it is still a good profitable market for us. And as the stores that we're opening because of where we're opening them, we're still seeing they're making their capital plans. So as long as we continue to see the profitability and the capital plans, and because we want to continue to invest because we know long term, this too shall pass, and we will be positioned as the strongest pan-European seller of athletic shoes and apparel.
Sam Poser - Sterne Agee & Leach Inc., Research Division
Sam Poser with Sterne AG. The net growth is 60 to 70 stores total over that time period. Just confirming that. And are you looking at any growth in the U.S. or is this all going to be all outside? It's my first question.
Kenneth C. Hicks
Sam Poser - Sterne Agee & Leach Inc., Research Division
So that is annual growth. Okay.
Kenneth C. Hicks
Yes, 60 to 70 stores. And we -- this -- should start to see stores -- positive number of stores opening in the United States after this year. And there'll be different formats as we look at Champs and we look at things like opportunity with Kids and depending on what we find with Women's. As we've been closing a lot of women's stores in markets, so quite frankly, because we had the product wrong, are actually going to be great markets for where we're going to go.
Sam Poser - Sterne Agee & Leach Inc., Research Division
And 2 more questions. Also, you talked about the brand differentiation. You've done some various differentiation, you've made good progress there. I would just love to know how far along do you really think you are there? And then also if you could talk about in more detail the localization. How much localization merchandising can you do without -- prior to putting in the new allocation systems, and some details of what you're looking for within those new allocation systems that you're working on.
Richard A. Johnson
Yes. I think in terms of differentiation, it's an ongoing process. We had all come together in the middle around a teenage basketball kid. And now when you think about the adult male banners, certainly with Foot Locker, Footaction and Champs in the U.S., we started to carve out those points difference. It's hard to give a where are we in the spectrum. I think it'll be something that we always continue to evolve. Clearly, we've got guard rails up and we'll continue to enforce those guard rails. And in terms of the localization, I think that Ken made a great point, North Dallas and South Dallas are 2 very different markets. And we've tried to homogenize things sometimes, and even with a full-blown allocation system, we have the ability to drill down a level in terms of figuring out what's the right product for the North Dallas versus South Dallas. I think that we have created the banner differentiation, it actually helps us to be a little more specific when it comes down to those allocations and getting the right product in the right store.
Kenneth C. Hicks
We're putting in place. In fact, we've just put in place, there was a meeting here last week for a business intelligence system, that will allow us to better target each of the stores and markets. So where is the line in Chicago for Champs between Sox and Cubs? Which one is heavier? And so we are in the position now to better understand. But we still have, with teams, with sizes, with colors, with the product mix between basketball, running, casual, opportunities and the system that we have, while effective is not as efficient and effective as it could be. And that's why we're evaluating new opportunities, and that's something we put in place over the next couple of years. We can do it, and we've done it, we just haven't done it as well as can be done.
John Zolidis - Buckingham Research Group Incorporated
John Zolidis, Buckingham Research. I've got 2 questions, one on the SG%A, and the second on the balance sheet. So first I was looking at the presentation that you guys gave us 2 years ago and in the presentation, you had said that benchmark studies showed that Foot Locker spent too much on SG&A. And I see that last year, SG&A per square foot grew 10% on top of the 7% increase the year before. And in the context of the guidance for next year, you're looking for almost double the SG&A leverage on 1/2 the comp. So again, last year you did 40 bps of SG&A leverage on a 10 comp. Next year you're guiding us to mid-single-digit comps and 60 bps to 80 bps of SG&A leverage. So the first question is, what elements of expenses are going to grow more slowly in 2012 to enable that incremental leverage? So that's question #1. And question #2 is on the balance sheet. You mentioned that you wanted to improve the productivity of your largest line item on the balance sheet, which is your inventory. But believe it or not, your second largest line item on the balance sheet is cash, and you've got about $850 million earning approximately 1%, that represents about 40% of your shareholders equity. So it seems like a very easy way to improve your total ROIC would be to return that cash to shareholders via incremental share repurchase. So I know I asked about this on the fourth quarter conference call, and I would love to hear why we couldn't really accelerate that share repurchase with the aim of improving our overall ROIC. So 2 questions, SG&A and balance sheet.
Lauren B. Peters
On the SG&A, as we said on the call, we are looking for 60- to 80-basis point improvement next year on a mid-single digit comp. And it's really being driven by 2 things. About half of it comes from a leverage on overheads. Specifically, we've had very strong performance in the last 2 years, performance that was above plan. So out of the G&A, we get a reduction in incentive-related costs as we plan for target level incentives based upon hitting the plan, at mid-single digits. And the other half of it is coming from continued improvement on sales per hour. So we can get a lift, a leverage on selling averages.
Kenneth C. Hicks
As you look at places where we see improvement, we continue to have -- to want to invest in marketing to build the brands. And we have a large labor force that we're not growing. And the system that Lauren just talked about will help us continue to use more efficiently, but there are wage increases and things that go along with that. With regard to the balance sheet, I guess we didn't do a good job convincing you that we have opportunities. And we believe that there are investment opportunities that, quite frankly, are not in the plan. The update and remodel of the Champs stores, the Foot Locker stores, our investment in the Women's business and while we maintain one of the highest dividends in retail, and we also have a significant share buyback plan that we have kept back, we see the opportunity to invest in our business for growth. And that growth, rather than give the money out and then have to go borrow it and pay a higher interest rate, we feel that appropriate for us to keep it. Now, what we could do, as other retailers are doing, it just saying we're going to do call without testing anything and we think this is a great idea and we're just going to go remodel the stores. We're going to go build new stores, we're going to do all this without testing. We're taking a little bit longer than other people might. We're doing what we think is thoughtful. Because if it doesn't work, we still have the opportunity to return it to you. If we go out and do it and it doesn't work, somebody else would not have the opportunity to return it to you, because we probably wouldn't be here. So we're doing it, what we think is a thoughtful matter. It might not be as fast as some would like, but hopefully those of you who've participated with us over the last couple of years have benefited from that thoughtful, very move-forward approach in growing the company. And those who do, have benefited. Those who didn't -- I'm sure all of you sitting, look back now and say, Gees, the fact that I could have bought the company for 9 bucks a share, we'd be doing okay. And guess what? I hope, within a few years, you'll be able to say, Gees, we could have bought the whole company for $30 a share, which we would have. That's our job and that's what we're working to do. And so, we will continue to make sure that we keep the company sound and safe. We will make sure that we continue to return to our share owners a good return on our dividends and provide, when appropriate, stock buyback. And we will continue to invest in the growth and future of the company, to build this company to even bigger and better things. That was clearer than I was on the call, I think.
Robert S. Drbul - Barclays Capital, Research Division
Ken, Bob Drbul, Barclays. Couple of questions for you. First, on the merchandise margin, gross margin, what are the biggest opportunities that you have on the 100 to 200 basis points of incremental gross margin, and can it come from merchandise margin? The second piece is, with the changeover in the NFL business coming, can you just maybe walk us through how you think it will impact your business throughout with the change in Reebok to Nike?
Kenneth C. Hicks
With regards to the margin, we obviously continue to have significant leverage as you look at our expense base. In particular, the rent and occupancy. You get that sales per square footage up $500, and even as greedy as the landlords -- I didn't really mean to say that. But even as the landlords, they can't keep up with that. And that provides something. But the thing that we look forward to as a significant opportunity is of the opportunity with getting the right product in the right stores and reducing markdowns. We've taken the easy step with cutting the events. We've gotten much more thoughtful with the events and as a result, our inventory is cleaner, fresher. But we still -- I was in a store in Los Angeles last week and talking to the manager. And he was talking about how much he could do if you just got the right size -- more of the right sizes because he has a very Hispanic market. Now we know that's a Hispanic store, but we still haven't gotten it as right as we should. And the same thing with stores where we have different team merchandise and things like that. So the business intelligence systems and the planning and allocation system -- which, by the way, is also not in this plan because we want to test, try and see if it works and if it works, then we'll spend the significant money to put it in place because that will pay for itself and the margins in a short time. And we feel great about Nike taking the NFL, and I'll let Dick talk about that.
Richard A. Johnson
If you look back historically, Reebok took a very fragmented NFL business and brought it all together and created a sharp point around the league. I think, 10 years on, it's time for a change, and I think that the change will be very good and it will invigorate the business across -- certainly across our Champs business, certain markets were Champs will be the preferred retailer in the mall with the NFL business and we're excited about that. I think online, Donald Hughes came out and [indiscernible] taking care of all the teams. They've got a great environment where they can host, and you can have access to all of the teams in one location. So I think having an inventory there will help us with that. So I think there will be a lot of excitement, a lot of innovation. It ought to be an interesting match, where the NFL, which is a pretty tried and true organization, and some of the innovative things that Nike brings, envision a few collisions where there will probably won't be as much innovation as we'd necessarily like to see across all the teams. But I think from a uniform perspective, I think from a lifestyle perspective, Nike will bring some of the NFL flavor into the lifestyle environment, as well, will be very positive for the league and for our licensed products in general.
Bernard Sosnick - Gilford Securities Inc., Research Division
Bernie Sosnick, Gilford Securities. I truly commend you for your division of your strategic plan, and I'm all for it with lifestyle retailing. But I would like your view, somewhat of a caveat. The athletic footwear business was always narrow. Foot Locker itself was almost homogenous in all of its banners and Nike was the leader. And now we're seeing a broadening of colors throughout the offerings generally. And what you've outlined today is a further broadening of what Foot Locker is going to be doing in terms of offering assortments. And that in itself will drive vendors to change their ways. To me, it's all very exciting, but I'm wondering if you have considered the possible risk because, after all, this is a fashion business.
Kenneth C. Hicks
Obviously, within any plan, you put the point here, you put the point here. It's not going to be necessarily a straight line, and there'll be some ups and downs and we recognize that, and that's our job is to manage through those. But what we see is the athletic shoe and apparel business, first of all, is becoming much more mainstream. There are only a few of us in here, this meeting, that are wearing athletic shoes. You go out on the street and you see what people are wearing and where that trend is going. There will be more and more people, particularly as the young people get older will fall by the -- people like me will fall by the wayside, they won't have the coats and ties, they'll be wearing sneakers all the time. Not a good time to be in the branded shoe business because that's where the industry is going. There was an article in the style section of the New York Times this past week about what's happening with sneakers and how it's becoming mainstream. New ideas like lightweight make it much more easy for the customer to wear sneakers more often. And so I see the industry, while there will be some ups and downs, as one that is on a good steady growth plane and we've got some terrific vendors to do that. We also are uniquely positioned because of each of our banners, that we can approach a different customer and/or the same customer in different mindsets. So that the guy, when he says, Okay, I need a pair of sneakers to go play basketball on Saturday, I'm going to go to Foot Locker and get the sneakers and shorts. By the way, I got a date on Saturday night, I need to look sharp. I'm going to go to Footaction and get a pair, get a set and hook up. And then I'm going to the game on Sunday and I'm going to get a jersey and some sneakers to go with that. And I want to make sure that I make the State Championship, so I'm going to buy, go on Eastbay, and buy something there. Other people within their 3,000 square feet can't do all that. And what happens is when they try, they confuse the customer. We know. We did it. And so by having that ability to address different customers and taking advantage of what is a social trend -- I doubt very seriously that if we go, if all of a sudden somebody would say to the kids, "All right. Fine. You can all now wear Oxfords." I don't care what Lady Gaga is wearing. They're wear them for what? They'll say, These ain't too comfortable. They're going to come back to sneakers. And also to T-shirts. And that's where we are. And our ability to develop those businesses, our ability to be where the customer is, you look around this room and you see the differentiation of each of the banners is the inherent strength of the company and where we look forward to the success of the company.
Bernard Sosnick - Gilford Securities Inc., Research Division
The point of my question was to get you to free think, and it was wonderful.
Kenneth C. Hicks
And by the way, the vendors are very supportive of what we're doing as we continue to grow, because they look at this as probably the best opportunity for them to show their product and showcase it against each other and grow.
Paul Trussell - Deutsche Bank AG, Research Division
Paul Trussell with Deutsche Bank. Two questions. First, what percentage of your merchandise is exclusive? And can just you discuss the recent success you've had in adding products that are only available at Foot Locker banners? And second, can you talk a little bit more about the learnings you've had from the RUN store that you've applied to the Foot Locker banners? And with that cycle still remaining strong, can you just discuss why not a rollout of a RUN-only format?
Kenneth C. Hicks
You want to take the exclusivity?
Yes. Exclusivity at the model level, generally speaking, runs around 30%, 35%. And when you get into colors, et cetera, can be farther than that. It's always a nuance with the consumer in recognizing the exclusives. And when we think about product level, we talk about our exclusives a lot. But we really believe that our most important exclusive feature, or exclusive product, is the sales associates that we have on the floor. So again, being able to talk to the customer about getting them in the right product, getting them in the product that hooks up well for them, let it be a hat, footwear, et cetera. We think that exclusives are very important to the business, but we think that having the right associates on the floor with the right information is very much an exclusive that we can leverage against some of the competition.
Kenneth C. Hicks
The RUN stores, it's a great concept and a terrific store. I don't know if those of you have been on our strong 14th Street, but it's terrific store. And some of the learnings are brands that sell. We've really learned within the brands, things like Brooks Mizuno, which shoes within their assortment work best for us. We've learned display. How to display different product together to maximize the sale and get more add-on sales. We've learned selling techniques and we've applied. And if you go up the store -- I don't know, I'm disoriented in this building, which way -- but up the Empire State store that we have, there's a great RUN presentation there and doing very well. The challenge is that -- and it's the reason why it's a very much a mom-and-pop business -- that it's a more difficult store to make the returns that we need to. That's not to say in their select -- not select markets where it's a good opportunity for us, and we just opened one in Dallas and we've got a couple more that we're looking at. But in terms of the major chain, it doesn't deliver the returns as our other store, and therefore it's not as aggressive an opportunity that we see with other businesses.
Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division
It's Christopher Svezia, Susquehanna. I have a couple of questions. I guess, first, just on apparel margins, and just apparel business overall. I guess you don't really necessarily want to grow it to a specific size in terms of percentage of business. You're just going to let it float to a certain level. Can you just talk about when you get to 2016, where that business is? From a margin perspective, do you make up that gap that you've always sort of talked about in terms of that opportunity relative to footwear and where you want that business to be? The second question is, new stores and the concepts you're doing for Champs and Foot Locker, maybe just talk about what you're looking for in terms of specific either comp lift or any metrics you can share. And if it does work, when do you start to expect that investment in terms of remodels, refreshes to kick in? The next question, just on assortment planning and labor management systems. What you haven't -- just kind of when we expect to start to see the benefits from them. I guess more specifically the next wave, when do you make a sort of go, no-go decision on that? Is that more 2013? And the last question I have is just this industry historically has had very peaks and troughs in the business, and how you think you can manage the next sort of trough environment. If you look historically how Foot Locker's performed, a lot of it is inventory management, cost in the business, certainly much better than it has been in the past. How do you think about that in the next sort of trough in the overall business environment?
Kenneth C. Hicks
We see by over the course of plan that apparel margins should pass the footwear margins for a number of reasons. One, we'll be better at the business, we hope should have a viable private label business at that point in time. And by doing a better job in planning and allocation, it helps apparel more than shoes. So we see apparel margins continuing to grow and should pass. We did not set up where we see apparel as a percent, again, because it'll vary by chain and they will come out and average up. We did show that we've had apparel at a much bigger business and people still thought of us as a footwear company. And so we can do the same thing. With regard to the new store concepts, we've got a prototype in Champs. It's worked well. We're testing 10 stores this spring. And based upon the test of those stores, we'll make a determination on how fast. If the return is huge double digits, you'll see a lot of stores being remodeled real quickly. If it just meets our return, you'll see lower. If it doesn't, then we'll pick what we go forward with. We are planning to put in place a couple of tests or prototype stores this spring in Foot Locker. And the -- the concept that -- you prototype to see if it works. Make adjustments on it. Then you test to look at the finances and see if it pays for itself. And then you roll out, and the rollout is based upon what the finances are. So some people still go straight to do, we kind of prototype, test, roll out and done, I guess, would be the thing. And that gives us some -- that we're spending the capital and being good stewards of the capital. The assortment planning and labor. Assortment planning, we're just now looking at the system. And we hopefully will have one picked out. We'll try it and test it. And it takes a couple of years before you get the full benefit. The labor management is just now being rolled out the spring, and hopefully this fall we'll start to see some benefit. And finally, industry peaks and troughs, there will be some. I think, with the systems and capabilities that we have now, we're probably better situated. That said, that there are some underlying things, and that article in the Times was interesting in that it talked about some of the underlying changes that have made -- I won't say it protected the industry because there are always ups and downs. But they've made the sneaker more mainstream. And one of those things is lightweight. They aren't as clunky. Another is color. And they -- so they could go with more things and people can express themselves more. And another is just the comfort factor. They are much more comfortable, much better shoes. And so you put those things together, that will help insulate it from just going away. But it depends. It's not so much as much as the athletic shoe business went up and down, it's things came in, crocs came in, took a hit; and flip-flops came in, it took a hit. And a person found an alternative for footwear. And what's happened is those have gone down and athletic footwear does like this and it keeps going up. It takes a little hit as those adjust and fit in, but then it picks back up on its pace.
Steven J. Kernkraut - Berman Capital Management LP
Ken, it's Steve Kernkraut, Berman Capital Management. But I wanted to drill down on the Lady Foot Locker strategy that you have. I mean, it sounds like you're going to be focused on apparel rather than footwear. So is this going to be a lululemon kind of store, or an athletic store that happens to sell shoes as well, and are you going to have high-service content and high touch, or what's the aim?
Kenneth C. Hicks
It will not be either of those 2. And we're going to look at a couple of different alternatives. We will have more focus on apparel, but we still will have a good assortment of shoes. And whether it shows 75% apparel, 25% shoes but sells 50-50 because of the price points, we're going to see. But it'll have a bigger apparel footprint than it -- significantly bigger than it does now. And we're going to try a couple of alternatives to see which is best. We still and are a house of brands. And so what we will be able to do is offer terrific branded apparel from people like Nike, Adidas, Under Armour, Reebok, as well as some good private label. And so we'll have a good mix of price points, a good mix of style and a great mix of fits. And that's what the women told us, that they haven't been able to find a place to put all those together. And one of the challenges are when you do your own private brand, so you are what you are. This allows us to have what the customer wants and to be able to flex, particularly by market because if one brand -- or one customer prefers one brand, we can adjust that in a store. And when you're a private brand, it's much more difficult to do that.
Steven J. Kernkraut - Berman Capital Management LP
Would it be more moderate price ranges?
Kenneth C. Hicks
It will not be -- it will be more the price ranges when you look at where our Men's are. If you think about it, people, I don't think, would call it moderate. But it's not lululemon prices. I mean, that's one of their challenges. And then it's -- we're not going to be down there with Kohl's and Target. We're going to be in between, which we think is a very nice place. And the survey, we did a lot of customer research, they told us that's what they want.
Michelle Tan - Goldman Sachs Group Inc., Research Division
Michelle Tan with Goldman. Can you guys talk a little bit about how you think about some of emerging markets. We've been hearing more about an increasingly sophisticated consumer in China. Nike doing more work to create kind of unique shops as opposed to just these mono-branded stores. How do you think about a longer-term Foot Locker multi-brand opportunity there?
Kenneth C. Hicks
We consider and look at emerging markets in the brick set and also in other smaller countries. The challenge is getting the economics to work, and we haven't been able to do that yet because they are so hot. But we continue to monitor. We've talked to people in some of those markets and we'll continue to look because we think there's an opportunity for multi-brand retail along with the mono-brand. The different retail environments and what we've been able to do so far when we've gone international, is adjust and adapt to that retail environment. The thing that I don't want to do is distract us from the opportunities that we have here by going after those. And so at the current time, we've focused on what we're doing well and where we have opportunities on things that we know. That said, we're keeping a close eye on it. We've visited some of these markets and we will monitor when the time is right. We will be ready.
One last question.
Eric B. Tracy - Janney Montgomery Scott LLC, Research Division
Eric Tracy with Janney. So the net new -- or I guess the new doors is a net number. Could you talk about still the opportunities of that, some of the underperforming doors, unprofitable doors, if there still is? And then second one, we know we've got price increases coming from many of the vendors. Can you just quantify what you expect that to contribute to the comp, be it in FY '12 or on your longer-term plan?
Kenneth C. Hicks
We still do have underperforming stores, and we evaluate on a constant basis whether to close or not to close. Because of lease requirements, we're not closing. We don't close the store because you have to pay out the lease. And you look and say, Okay, is it better to pay out the lease? Is it cash flow positive? And so we constantly evaluate and that's -- most of the stores that we closed, that's what they are. And we will continue to close stores. We will...
And the challenge is with what's going on with the materials and things, there's an opportunity for that to level out. But they've accepted them and part of our -- we have seen when you look at our performance, we have seen traffic increases, we've seen conversion increases and we've seen average unit retail increases. So all of them are pushing up. We don't break down the proportion that each pushes up. But right now, all of them are running ahead.
Okay. So I want to thank all of you, both in person and on the web for participating and attending. And hopefully, you are as excited as we are of the future of Foot Locker. And we think that we've got a great story, and we'll continue to work hard to take it forward. Thank you.
Thank you, ladies and gentlemen, for participating on the Foot Locker Investor Meeting and Webcast. You may now disconnect.
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