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Executives

Peter D. Brown - Senior Vice President, Chief Information Officer and Investor Relations

Robert W. McHugh - Chief Financial Officer, Senior Vice President

Mathew D. Serra - Chairman of the Board, President, Chief Executive Officer

Analysts

John Shanley - Susquehanna Financial Group

Kate Mcshane - Citigroup

Jeffrey Edelman - UBS

Analyst for Virginia Genereux - Merrill Lynch

Robert Drbul - Lehman Brothers

Brad Cragin - Goldman Sachs

Foot Locker, Inc. (FL) Q4 2007 Earnings Call March 11, 2008 9:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the fourth quarter 2007 earnings release conference call. (Operator Instructions) This conference may contain forward-looking statements that reflect management’s current views of future events and financial performance. These forward-looking statements are based on many assumptions and factors, including the effects of currency fluctuation, customer preferences, economic and market conditions worldwide, and other risks and uncertainties described in the company’s press release and SEC filings. We refer you to Foot Locker Inc.’s most recently filed Form 10-K or Form 10-Q for a complete description of these factors. Any changes in such assumptions or factors could produce significantly different results and actual results may differ materially from those contained in the forward-looking statements. If you have not received yesterday’s release, it is available on the Internet at www.prnewswire.com, or www.footlocker-inc.com. Please note that this conference is being recorded.

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

Peter D. Brown

Good morning and welcome to our fourth quarter conference call. As you will note from our press release of yesterday afternoon, our fourth quarter results reflected income from continuing operations of $87 million, or $0.56 per share. Included in this net income was a non-cash impairment charge and expenses associated with closing unproductive stores totaling $15 million after tax or $0.10 per share. A $65 million, or $0.42 per share income tax benefit was also recorded to reflect unclaimed depreciation and tax loss carry-forwards that the company currently expects to realize over the next several years.

Our fourth quarter income from continuing operations excluding the 144 and closed door charges, as well as the income tax benefit, was $36 million or $0.23 per share. Bob McHugh, our Senior Vice President and Chief Financial Officer, will begin the call with a discussion of our fourth quarter financial results. Matt Serra, our Chairman and CEO, will follow with an operational review and strategic update. After our prepared remarks, we will leave time to answer your questions.

I would remind you that last year’s fourth quarter included an additional week in line with the NRS standard that contributed $18 million after tax, or $0.11 per share, to our 2006 results. Included in our press release is a reconciliation of our 13-week and 14-week fourth quarter periods of last year.

As we go through our presentation this morning, we will refer to our 2007 financial results as amounts from continuing operations before the FAS-144 charge, store closing charges, and income tax benefit. We will compare these results to our 13-week fourth quarter period of last year, which we believe will assist you in better understanding our operating results and helping your forecasting exercises.

Therefore, our fourth quarter results reflected the following: comp store sales decreased 7.8%; our gross margin rate decreased by 630 basis points, primarily reflecting higher markdowns; our SG&A expenses, excluding the impact of more favorable foreign exchange rates, were $9 million below last year; interest expense was $1 million; and our cash position at year-end was $493 million, a $23 million improvement versus last year.

I will now turn the call over to Bob McHugh.

Robert W. McHugh

Good morning. Overall, our fourth quarter results reflected a very challenging external environment. In fact, we believe that the holiday season of 2007 was one of the most difficult periods for U.S. retailers in many years. While our fourth quarter operating earnings fell short of our expectations, we are pleased with our year-end financial position, including our cash position and inventory level and aging. As a result, we believe we are well-positioned for 2008, although we are planning quite conservatively for the year and will manage our business accordingly until we see more signs of a pick-up in consumer spending.

With that said, we are off to an encouraging start to the year, the reasons for which Matt will address during his prepared remarks.

As Peter mentioned, during my prepared remarks, I will review our earnings from continuing operations before the impairment charge, store closing expenses, and the favorable income tax adjustment. I will provide some details on these amounts separately and update the expected financial impact of each on our future results.

Our financial results fell short of our expectations at the start of the quarter, primarily due to weak sales and higher than planned markdowns to meet our merchandise inventory objectives. For this most recent quarter, our 7.8% comp store sales decline fell a few points further than our expectation coming into the quarter. This sales shortfall put additional pressure on our gross margin and SG&A rates due to the fixed expenses embedded in these amounts.

Fourth quarter comparable store sales of our major divisions were as follows: our aggregate U.S. store operation decreased high-single-digits, with each business’ results closely aligned to this range; footlocker.com sales decreased mid-single-digits; our international comp store sales declined mid-single-digits, with Europe down mid-single-digits, Foot Locker Canada down low-single-digits, while Foot Locker Australia increased high-single-digits.

By month, comp store sales decreased high-single-digits in each month. Our fourth quarter gross margin rate decreased by 630 basis points from last year, reflecting a 470 basis point decline in our merchandise margin rate and a 160 basis point deleveraging of our buying and occupancy rate.

Given the challenging external environment, we increased our markdown activity, particularly in late December and the month of January to clear slower selling goods. Our objective was to end the year with our inventory levels below last year and our aging on plan to be positioned for the new year, and I am pleased to say that we met this objective.

While our fourth quarter occupancy rate increased versus last year, on a constant currency basis these costs were essentially flat versus the fourth quarter of last year. Fourth quarter SG&A expenses decreased $1 million versus last year. On a constant currency basis, our fourth quarter SG&A expenses decreased by $9 million, or 2.9% versus last year. This improvement resulted from our profit improvement process at Foot Locker, whereby we encourage our associates to identify and implement new processes to enhance sales and reduce expenses.

We were very successful with this expense process again in 2007, particularly in the area of income taxes. I am encouraged that we will be successful in containing expenses again in 2008.

Net interest expense for the fourth quarter was $1 million.

The non-cash impairment charge and store closing costs recorded during the fourth quarter totaled $15 million after tax, or $0.10 per share. Included in this charge were the current period costs related to the stores that were closed during the fourth quarter.

Our fourth quarter income tax provision reflects a net credit of $76 million; $65 million of this credit relates to a Canadian income tax valuation allowance adjustment, whereby we now believe that we will be able to realize unclaimed depreciation deductions and net operating loss carry-forwards against future Canadian profits.

Also included in our fourth quarter income tax provision was a favorable tax benefit of approximately $15 million versus what the provision would have been had the amount been recorded at our more historic 37% rate.

This favorable benefit was recorded so that our full year tax rate reflected a higher than previously anticipated percentage of our income being earned in lower tax foreign jurisdictions.

For the year, we closed a total of 274 stores versus a maximum number of closures of 300 that we guided to on our last call. Of the 26 stores that we did not close in 2007, 20 are expected to close in 2008 at an incremental cost of $0.03 per share. We expect to complete most of these closings during the first quarter.

At the end of the year, our cash position net of debt was $272 million. Our total cash and short-term investments totaled $493 million, while our long-term debt stood at $221 million. This cash position net of debt was $36 million favorable to the end of the prior year.

At the same time this improvement was realized, we also repurchased 2.3 million shares of our common stock during the year for $50 million and paid out $77 million in shareholder dividends. Our ending inventory was $22 million, or 1.7% lower than at the end of last year. On a constant currency basis, our inventory was 4% lower than last year.

We are pleased with our year-end inventory position and believe that a further reduction of our working capital can be a meaningful source of cash in 2008.

At year-end, our shareholders’ equity stood at $2.3 billion, or a book value of $14.71 per share, an amount above our current share price.

We will remain very cautious in regard to capital allocation and spending in the near-term until we see further signs that the external environment is improving.

Looking towards 2008, we currently expect our earnings for the year to be in the range of $0.65 to $0.85 per share. This is a wider range than we have historically provided and have done so given the uncertain external environment. This forecast for the year is based upon the following assumptions: comp-store sales relatively flat to last year; gross margin rate 200 to 300 basis points favorable with last year, primarily reflecting an improved markdown rate in line with historical standards; SG&A expenses on a constant-currency basis relatively flat to up slightly with last year; depreciation expense of $135 million to $140 million; interest expense of approximately $3 million; store closing costs of $8 million; and an income tax rate of approximately 35.5%, continuing to benefit from lower tax rates in international countries where we operate.

From a balance sheet perspective, we are targeting a 7% to 10% inventory reduction versus last year, which will contribute to the generation of a total of $200 million or more of positive cash flow in 2008 before dividends and any share repurchases or debt retirements.

These forecasting assumptions for 2008 reflect a conservative outlook, given the recent challenging external environment. While we have a much brighter longer term view, we believe it is prudent to remain cautious in the near-term until we see more enduring signs of an economic up-tick.

We anticipate achieving year-over-year profit gains in 2008 based on an expected favorable comparison versus those items that significantly impacted our 2000 results, namely costs associate with FAS-144 charge and store closing expenses totaled $0.52 per share in 2007; the elimination of the operating losses related to the 274 stores that we closed in 2007 is expected to benefit the year-over-year comparison by $0.06 per share; the FAS-144 write-down will reduce our depreciation expense in 2008 by approximately $0.12 per share.

We expect our mark-down rate in 2008 to be more in line with our historical trend. During 2008, our strategy of clearing slow-selling goods resulted in higher than normal mark-downs equivalent to $0.50 per share. At the same time, during 2007 we also benefited from the reduction in the income tax valuation adjustment of $0.42 per share and a lower than normal income tax rate for the year, which enhanced our 2000 EPS by approximately $0.10 per share.

Taken as a whole, these year-over-year comparisons totaled $0.68 per share and you may rightly say that we are being overly cautious and that there is an opportunity for us to generate about $1 per share of net income in 2008. We have taken a more cautious approach with our guidance in the event that the current external environment deteriorates further and consumer spending patterns and confidence remains at today’s low levels.

Therefore, we believe that the guidance that we are providing is very achievable and realistic. At the same time, if the retail environment improves later this year, we may have an opportunity to overachieve our plan and if that happens, we will update you accordingly.

We are encouraged with our first month’s results, which included a small, same-store sales increase and significantly improved gross margin rate. Longer term, our objective is to improve our profitability back to 2006 levels before stretching to a higher plateau. The timetable for getting back to this level depends on both external economic factors as well as athletic fashion trends.

Today our financial position is strong and we remain very focused on continuing to generate strong cash flow that we can both reinvest at an appropriate rate of return and/or return to our shareholders.

I will now turn the program over to Matt Serra.

Mathew D. Serra

Thank you, Bob. Good morning. The fourth quarter of 2007 was another challenging period for our company, as it was for most of the retail industry. Despite our disappointing performance, we believe that we continue to respond to the external challenges and took several strategic steps which will enhance our profitability in the future. We are encouraged that we finished the year in a strong financial position, providing the flexibility to benefit our shareholders longer term.

While the stretch of the economic climate remains uncertain, we believe we are in a strong position to capitalize when the external environment shows signs of sustainable improvement.

As we turn the page into 2008, our business is showing good signs of improvement benefiting from a fresh flow of new merchandise into our stores. As for this most recent quarter, we believe that our sales shortfall was primarily precipitated by external factors, including disappointing mall traffic.

As Bob already covered, our fourth quarter results also reflected several significant unusual charges and credits. Also included in these results were the financial impact of merchandising decisions that we took to make sure we ended the year with our merchandise inventory current and at a level below last year. Thus, even as 2007 has proven to be one of the more difficult retail environments that we’ve experienced in some time, we believe that we have positioned ourselves to emerge in a stronger competitive position.

Our U.S. stores posted a high-single-digit comp-store decline during the fourth quarter, with footwear stales decreasing mid-single-digits and apparel and accessory sales decreasing double-digits.

On the U.S. footwear side, our men’s business decreased mid-single-digits, kids decreased low-single-digits, and women’s decreased low-double-digits. Both our men’s basketball and running sales were positive with very solid gains in higher price marquee styles. Sales were also very strong at the lower price canvas category, led by various Chuck Taylor assortments.

Similar to the first nine months of the year, men’s footwear sales in the classic category continued to trend down, with the exception of premier assortments from Nike. Sales in the casual category, dominated by low [inaudible] styles, as well as boot sales, were also extremely weak.

Our average footwear selling prices in the U.S. decreased about 1% versus last year, adversely impacted by a higher markdown rate, which was more than offset by the positive shift towards selling a greater percentage of higher priced footwear. U.S. apparel sales continued to be weak, extending the trend that we’ve experienced all year. During the fourth quarter, apparel sales were weak across almost all categories, licensed, branded, and private label.

In Europe, both the footwear and apparel side of the business contributed to our comp-store sales decline, with both decreasing mid-single-digits. Similar to the U.S. business, we continue to see encouraging signs that the higher priced technical running footwear is coming back into fashion. In fact, we generated strong gains in Europe in the all-important men’s high-priced marquee running category.

We also generated solid gains in Europe from sales of men’s basketball and tennis footwear. On the negative side, we continue to be hit by steep decline in the casual category, primarily low profile styles. Fortunately, we had some visibility on this trend change and adjusted our merchandise purchases for 2008 accordingly.

Our average selling prices in Europe declined low-single-digits, reflecting the higher markdown rates that were required to liquidate some of these slower selling casual footwear styles.

Our Canadian division’s profit was in line with last year and continues to run at a very solid double-digit margin rate. A combination of strong sales per square foot, consistent markdown rates, effective inventory control, and good expense management provided a well-balanced formula for success in this market all year.

We generated our highest sales and profit percentage increases at our Asia-Pacific division. This division posted very solid results all year, on top of a strong year in 2006. The fourth quarter was particularly rewarding for this division as this division profit rate approached double-digits.

Footlocker.com sales declined low-single-digits and this division profit declined approximately $2 million during the fourth quarter. For the full year, this division posted an 11% division profit margin. We also have recently announced [Del Tima] to the post of President and CEO of footlocker.com and [Craig Gillbett] to EVP and Chief Merchandising Officer of footlocker.com.

Turning to our franchise business, we ended the year with a total of 10 stores, nine of which are operating in the Middle East and one in Korea. Plans call for our franchising partner to open another 10 stores in the Middle East during 2008.

For the full year, we opened 117 new stores, remodeled or relocated 200 stores, and closed 274 stores. The 274 store closings fell slightly short of our goal of 300 as we reached some favorable deals with our landlords to keep some stores open and other stores will be closed in early 2008.

During 2008, our current plan is to open approximately 60 stores, remodel or relocate approximately 200 stores, and close an additional 140 stores.

As Bob mentioned, we expect our store closing costs in 2008 to be about $0.03 per share for the remaining 20 stores that we identified last year for early closing. The costs associated with the remaining 120 stores that we expect to close in 2008 are expected to be minimal and absorbed in the normal course of business. Most of the closings will occur at the natural lease expiration when the store’s fixed assets are fully depreciated.

We believe that by taking a more conservative approach to inventory management in 2008 and by closing a total of some 400 stores in 2007 and 2008, we will have better positioned our company for stronger earnings and cash flow in the future.

During 2008, we will be highly focused on pursuing additional initiatives designed to enhance our base business by driving improved comp store sales and sales per square foot. We are working with our key suppliers to increase our quantities of unique, exclusive, and limited distribution marquee goods in our stores. At the same time, our goal is to rebuild our branded apparel business with our most important suppliers, Nike and Adidas, while also adding some new highly recognized names, such as Under Armour.

Another initiative that we continue to work on is the further differentiation of our store brands from one another by modifying the interior layouts and adding new fixtures to enhance the stores’ appeal.

We are also planning to increase our capital spending on freshening up our look and feel of our stores through renovations and remodels, concentrating our efforts on improved flooring, lighting, and other modifications to provide a more pleasant shopping experience.

Therefore, our near-term strategy will be focused on improving the productivity of our existing stores with an objective of returning profitability back to our peak years. We will pursue additional store growth in international areas where we’ve had proven success and new markets that hold the most promise.

Given the certain external environment, we will maintain a conservative posture with capital spending, working capital and expenses to help ensure that we have another year of strong positive cash flow. 2007 was clearly a very difficult year for Foot Locker and almost every major footwear retailer in the United States. Despite the challenges that this difficult external environment is currently creating for our entire industry, for Foot Locker this may present a longer term opportunity.

We believe that our strong brand recognition among consumers and our strong financial base will make us an even more competitive force in the industry. Thus, when the economic climate improves, we will be positioned to achieve higher levels of profitability than others.

This view is based on historical facts. We have had a very strong track record over the past 10 years and believe that we can get back on the right path in a relatively short period of time. I am confident in the abilities of our senior management team and believe that our organization stacks up well against any other in our industry. We remain very focused and committed to managing our business profitably. Our balance sheet is strong and as Bob mentioned, at year-end our book value was $14.71 per share. And our cash position of $493 million was in excess of $3 per share.

I would also like to point out that last year, even during a very rough period, we generated positive cash flow that we redeployed for our shareholders. Given our strong cash position, coupled with our improving outlook for the future, our board of directors recently increased our shareholder dividend by 20% to an annual rate of $0.60 per share.

For the first five weeks of the year, we are experiencing a positive sales trend change versus the GAAP, with our first month sales and profits exceeding our plan. As we mentioned earlier, we are planning conservatively for 2008 and have provided a wider than usual profit forecast range, given the uncertain external environment. Over the longer term, the next two to five years, we believe that our business will generate both meaningful profit growth and strong cash flow.

2008 earnings range of $0.65 to $0.85 per share that we have provided is based on the following assumptions: sales of approximately $5.4 billion, reflecting comp-store sales being relatively flat to last year; gross margin rate improvement of 200 to 300 basis points; SG&A expenses on a constant-currency basis excluding $8 million of store closing expenses, relatively flat to up to last year; depreciation expense of $135 million to $140 million; interest expense of approximately $3 million; and an income tax rate of approximately 35.5%.

While we are not providing any specific earnings guidance, we expect that our business will continue to generate both meaningful profit growth and strong cash flow over the next two- to five-year period.

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

Question-and-Answer Session

Operator

(Operator Instructions) We have our first question from John Shanley from Susquehanna Financial Group.

John Shanley - Susquehanna Financial Group

Thank you and good morning, guys. Matt, I wonder if you can give us an update on your outlook for growing your international business. International seems to be doing particularly well with what you just reported on the Asian front and I think Europe has always generated a higher operating profit margin for you. Can you give us an idea of how many stores you are planning on opening internationally and where you see the future of the international versus the domestic business going over the next couple of years?

Mathew D. Serra

Yes. We still are very focused on the European theater. We operate approximately 515 stores there and we view that market as a potential of around 800. We are hopeful that over the next several years, we’ll open somewhere between a low of 80 and a high of 150 additional doors, and obviously reaching the 800 is a four- to five-year goal.

We are in Turkey. We opened our first door there. We view that as potentially a very, very large market. We are exploring Russia and obviously the eastern European countries.

Canada, we’ve had enormous success over the last four years or so and it’s becoming quite a large business. I don’t think there’s much room for more than another 10 stores up there but it’s a very profitable market.

The same goes for Asia-Pacific. Asia-Pacific is approaching 100 doors and there’s a potential of a 10-store expansion there, but it’s surfacing as another Canada. These are markets that eight, nine years ago we were making little or no profit in and we’ve had -- we’ve more than doubled the business and are experiencing tremendous profit growth. And to your point, the margins are much richer there.

John Shanley - Susquehanna Financial Group

Are the operating margins in Europe approaching where they had historically been in the low-double-digit range?

Mathew D. Serra

Close. We’re close.

John Shanley - Susquehanna Financial Group

Okay. I have a question on the store closures. With the 400 stores that you will have closed between ’07 and ’08, does that pretty much end the number of loss stores that you have, or are there some other stores that down the road you are still going to have to face closing at some point?

Mathew D. Serra

There are always stores that we have to face for a myriad of reasons -- a new mall gets built four miles north of your current location and it becomes a parable and you have to deal with that. I don’t think store closures are going to go away but we really took, as you know, a very large swipe at dealing with the unproductive stores. So hopefully this year, as we begin to get back in a fairly decent profit model and into ’09, we will have dealt with the lion’s share of the loss stores.

And there are reasons, John, from time to time for competitive reasons that we will operate a loss store in a certain location. You know, not to surrender the volume to a competitor.

John Shanley - Susquehanna Financial Group

Okay, that’s understandable. Bob, I have two quick questions for you; are there any other potential tax benefits pending comparable to the $65 million benefit that you recorded in the fourth quarter? And secondly, I wonder if you could kind of walk us through a little bit your comment about possibly reaching earnings of north of $1. How would you possibly be able to achieve that, if you could, please?

Robert W. McHugh

The answer to the first question is no, we don’t have any plans for a comparable tax benefit like that.

Secondly, to reach the $1 really would be more margin recovery and increased sales.

John Shanley - Susquehanna Financial Group

So it’s both top line and gross margin, or operating margin?

Robert W. McHugh

Yes. As you know, John, we’ve planned very conservatively for this year and we’ve really drilled down on the inventories and have arrangements to get more inventory if we need to and it’s not out of the question.

John Shanley - Susquehanna Financial Group

Okay. Fair enough. Thank you very much. Appreciate it.

Operator

We have our next question from Kate Mcshane from Citigroup. Please go ahead.

Kate Mcshane - Citigroup

Good morning. Thank you. We were a little surprised by the amount of markdowns taken during the quarter, since inventories we thought were more in line than they had been in the past. Were there certain regions in the U.S. where you were marking down more and were these markdowns completely a result of lower-than-expected traffic, or were there some issues with what was bought for the holiday season?

Mathew D. Serra

I think you hit it, Kate, with the lower than expected traffic. You know, we have planned down low to mid-single-digits and we -- you know, they were down high-single-digits an we made a conscious decision to clear the inventory and turn it into cash and set ourselves up for ’08, and that’s the principal reason.

Kate Mcshane - Citigroup

Okay, thanks and then, in terms of your brown show strategy at the Foot Locker stores, are the same people who are buying marquee sneakers buying these brown shoes, like Geox? And if now, are you getting incremental foot traffic as a result of this offering? And how many more brands do you expect to include in the mix?

Mathew D. Serra

Well, you know, we’ve always had brown shoes in our mix and quite frankly have never really promulgated it until I guess last year when we started setting up sections of the category. Geox has turned out to be a very pleasant surprise. We have that exclusive in the mall and we don’t view the brown shoe piece as a very large piece of our business going down the road but it is an ingredient in our business and as you know, you can call Timberland whatever you want but they have a lot of brown shoes, and as that business will hopefully come back in the next year or so, we did a lot of business in that category. So we do carry brown shoes. There are a few other brown shoe lines that we are looking at but we are basically sticking with our long-term strategy of being athletic footwear and apparel store.

Kate Mcshane - Citigroup

Okay, thanks. And my final question is you mentioned the Under Armour apparel coming into some of your stores. How will it be differentiated from what Finish Line is currently selling and what Dick’s Sporting Goods is selling?

Mathew D. Serra

I’m not so sure that there’s going to be that much differentiation in the product -- that’s what you’re talking about, the product?

Kate Mcshane - Citigroup

The product.

Mathew D. Serra

You know, I think we were very late to the game with Under Armour and by the end of the year, we’ll have it in over a thousand of our stores in the U.S. and we view it as -- I view it as a big mix on our part by not getting into that business quickly. I’m hopeful that in the mall, that we’ll have much more say in presentation and a better assortment of the product.

The other big thing is the Lady Foot Locker division will have a very important presentation of Under Armour for women and you see that in the competition. I’m not sure I saw it in the company you mentioned in the mall but you don’t see much of it around and we have been getting calls for it, so it could be a very important piece of our ladies branded apparel business.

Kate Mcshane - Citigroup

Okay. Thanks very much.

Operator

We have our next question from Jeff Edelman from US Warburg.

Jeffrey Edelman - UBS

Thank you. Good morning. It’s UBS. Matt, my first question is on the inventory; I guess I would have through it would have come down further. Did it not because of the tough environment? Bob said you were happy with the quantity and level but I guess you’ve always said that in the past and the guidance of 7% to 8% lower inventory for this year, does that imply you are still lugging some stuff you don’t want to have, or does it have to do with pockets in certain areas? And then if you can provide a breakdown of U.S. versus international, please.

Mathew D. Serra

There’s several dynamics relating to that question. On a 52-week basis versus a 52 versus 53, we’re almost 8% lower than a year ago but on a GAAP basis, we reported a 4% decline in constant currency basis.

We are planning to operate 2008 with over $100 million less inventory at cost, so it’s in the $115 million range. The other dynamic that is in there is over the past two years, as the Euro has increased in value, our European and now of course Canadian too, by the way, but really the European inventories have -- it’s costing us more to carry the inventory there, in plain English. Are you following me?

Jeffrey Edelman - UBS

Yeah.

Mathew D. Serra

And I think that’s the reason why it was only 4%, but I think you are going to see now through the remainder of the year on the quarterly reports 7% to 9% or more down on inventory.

Jeffrey Edelman - UBS

Right. Okay, and then are we -- is this decline going to reflect still product lines that are no longer selling well or have you gotten rid of most of that?

Mathew D. Serra

We have -- our aging of old age inventory is as good as it’s ever been in the last 10 years around here, so we are in very good shape. You know, you always have some problematic merchandise but we have taken the sword, so to speak, to the poor performing merchandise and really cleared it out in December and in January, so we are very comfortable that the quality of the inventory is now in good shape.

Jeffrey Edelman - UBS

Okay, good and then based on that and your comments about a good start to February, is it unrealistic to assume we start to see positive EPS comparisons, Bob?

Mathew D. Serra

Oh, yeah. I mean, after last year.

Jeffrey Edelman - UBS

It’s realistic or unrealistic?

Mathew D. Serra

It’s realistic, yes.

Jeffrey Edelman - UBS

Okay, great.

Robert W. McHugh

Jeff, on your other question on inventory, at year-end our international inventory was pretty flat with last year, where in the United States it was down 5% to 6%. And that’s on a GAAP basis.

Jeffrey Edelman - UBS

Okay, so as we go forward, it’s going to be apples-to-apples on a quarterly basis as far as inventories are concerned?

Robert W. McHugh

Correct.

Jeffrey Edelman - UBS

Okay, then you will get the benefit of the absence of the losses of the closed stores right away?

Robert W. McHugh

Yes.

Jeffrey Edelman - UBS

And -- okay, I got it there. Thank you.

Operator

We have our next question from Virginia Genereux from Merrill Lynch. Please go ahead.

Analyst for Virginia Genereux - Merrill Lynch

Good morning. It’s Elizabeth for Virginia. My first question is why are you assuming flat comps for ’08? I know that you mentioned February you’ve seen positive comps, so maybe you can tell us what’s been driving that?

Mathew D. Serra

I think there’s a couple of things that have been driving it. A, we have cleaned out of a lot of bad inventory and receded a lot of fresh, new exciting receipts. That’s part of the reason. I think last year, we took a larger, greater hit in the first quarter than a few of our competitors because of our massive inventory debacle last year and I think those are the two principal reasons.

The other thing is when you close unproductive stores and funnel the inventory into your more productive stores, you obviously do better.

Analyst for Virginia Genereux - Merrill Lynch

Okay. And then my second question is can you provide the breakdown in terms of merchandise margins for U.S. and international?

Mathew D. Serra

We don’t really break that out, Elizabeth.

Analyst for Virginia Genereux - Merrill Lynch

Okay. I thought that you had broken it out quarter-to-date, or year-to-date in the past but --

Mathew D. Serra

No.

Robert W. McHugh

I don’t think we’ve ever broken our merchandise margin rates out.

Analyst for Virginia Genereux - Merrill Lynch

Were they up in Europe? I have them up year-to-date.

Mathew D. Serra

We -- good try, Elizabeth.

Analyst for Virginia Genereux - Merrill Lynch

All right. Thanks.

Operator

We have our next question from Robert Drbul from Lehman Brothers. Please go ahead.

Robert Drbul - Lehman Brothers

Good morning. I guess the first question I have for you, Matt, is can you just give us any updates in terms of on the M&A side, where your mindset is with the use of cash and how you would think about it at this point in time?

Mathew D. Serra

Well, you know, we always think about M&A and it’s always on one’s radar screen but our strategy is to right the ship this year. I’m not suggesting that if an opportunity came along, we wouldn’t look at it but we’re focused on getting the business back on track, returning cash to our shareholders and over the next couple of years, getting back to our metrics of 2006.

With that said, I’ll say it for the third time, I guess, and answer that we look at everything. It’s our job to do that.

Robert Drbul - Lehman Brothers

And can you just give us an update -- you talked about apparel trends have been tough. Where are you in terms of private label on the apparel side of it? Has that continued to increase or -- can you just give us maybe some numbers on the penetration of it?

Mathew D. Serra

Private label I think we clearly have stated is around 50% of our apparel business. We’ve done okay. We did not have an increase last year, nor did we have a big decrease. We have as an organization, and I think the market bears some -- I don’t want to use the word blame but they need to get more aggressive. We’ve embarked on two very aggressive programs with Nike and Adidas. They are being receded in the next 30 to 60 days and also with the Under Armour receipts coming in, we’ve got to get the branded apparel business back on track and I think in general, the branded apparel business in the U.S. has been -- I’m sure you’ve been reading, is not particularly good.

I think we have some unique products coming in. I don’t want to get into too much detail because a lot of them are merchandise that we worked on very closely with our suppliers and they are exclusive to us and we -- you know, we took a big hit in apparel last year, as I’m sure you know, and the licensed apparel as well.

So we’re really focused on maintaining the private label apparel and really intensely growing the branded piece of the business.

Robert Drbul - Lehman Brothers

Okay, great. And then, can you just give us an update in terms of the full year 2007, how much was Nike as a percentage of your total business?

Mathew D. Serra

It was over 50% and it will be in the 10-Q, or the K rather, in a month or so.

Robert Drbul - Lehman Brothers

Okay. Thank you very much. Good luck.

Operator

We have our next question from Brad Cragin from Goldman Sachs. Please go ahead.

Brad Cragin - Goldman Sachs

Yes, good morning. Thank you. I was wondering if you could give us a little bit more insight into the price point trends that you are seeing. It seems like you’ve got different issues in different price ranges. Specifically, can you give a sense of whether or not you are seeing any weakness at higher price points, given the economic environment?

Mathew D. Serra

No, we’re seeing actually the opposite. The high-end marquee product is working well for us. The big shortfall, and it’s been almost two years now, is the classic category and the low profile category in footwear. But our high-end Nike marquee and Adidas product and Asics in particular are doing very, very well. Obviously brand Jordan continues to be very strong and Chuck, so our average unit price is higher. And it was higher last year. In the U.S. it was slightly lower, but in Europe it was higher and that’s a result of the decline in the low profile product over there.

Brad Cragin - Goldman Sachs

How much of that is a function of mix versus price points within say that $100 and above range?

Mathew D. Serra

Well, the mix is determined -- the customers vote and they weren’t buying it, so we took a position early on where we started cutting back receipts in that category and I think I said this on my last conference call that the classic category has really been a significant reason for our performance last year. We took a major, major hit on that category.

Brad Cragin - Goldman Sachs

Do you see classics bottoming out at this point?

Mathew D. Serra

I don’t think they could go any lower.

Brad Cragin - Goldman Sachs

Okay, and then in terms of the changes you are making in your store environment with the lighting and the flooring, can you just give us a better sense as to whether this is something you guys have tested in the past and whether it’s something you see rolling out throughout the fleet in coming years?

Mathew D. Serra

Yeah, we basically have the same capital plan this year as last year. Now, a lot of that capital in the prior years was used to open new stores. We need to make sure that A, we keep our stores up to standard, which quite frankly I’m not pleased with last year, particularly in the U.S. We need to spend more money on maintaining the stores and putting in newer, fresher, and more exciting fixturing, lighting, and flooring. We embarked on the differentiation program in October. We started with Champs and we will hopefully roll out by the end of this year 70% of the program in terms of this differentiation strategy and we’ve got to make our stores look different. We are working very hard on making the merchandise look different and doing more special make-ups by division.

But you are going to -- I’m sure you -- if you’ve been in our stores, you are starting to see some presentation differences, there’s different kinds of tables going into a Champs versus a Foot Locker versus a Foot Action and there will be different types of flooring and lighting, so it’s something that’s very high on our radar and we don’t need too many more stores in America under the current brands that we operate, so we are taking a lot of the capital to more than freshen up the stores, try and create an exciting, more -- I guess exciting environment. We are changing over a lot of our music and our televisions, going to flat panel screen TVs and trying to contemporize the look of our doors.

Brad Cragin - Goldman Sachs

Okay, and just so I’m clear, you said 70% by the end of the year -- is that total company wide?

Mathew D. Serra

Yes, in the U.S.

Brad Cragin - Goldman Sachs

Okay. All right. Thank you.

Peter D. Brown

All right. We’ll conclude our call for today and I’d just like to thank everyone for their participation. Thank you.

Operator

Thank you, ladies and gentlemen. This now concludes today’s conference. Thank you for participating and you may all disconnect.

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Source: Foot Locker Q4 2007 Earnings Call Transcript
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