Foot Locker F2Q08 (Qtr End 8/2/08) Earnings Call Transcript

Aug.22.08 | About: Foot Locker, (FL)

Foot Locker, Inc. (NYSE:FL)

F2Q08 Earnings Call

August 22, 2008 9:00 am ET

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

Robert Drbul - Lehman Brothers

Robert Ohmes - Merrill Lynch

David Turner - BB&T Capital Markets

Omar Saad - Credit Suisse

Analyst for John Zolydis - Buckingham Research

Operator

Good morning, ladies and gentlemen, and welcome to the second quarter 2008 earnings release conference call. (Operator Instructions)

This conference call may contain forward-looking statements that reflect management’s current views of future events and financial performance. These forward-looking statements are based on many assumptions and factors, including the effects of currency fluctuations, customer preferences, economic and market conditions worldwide, and other risks and uncertainties described in the company’s press releases 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 conference call to discuss our second quarter financial results. Last evening, we released our second quarter results, which included a sales increase of 1.5% and net income of $0.11 per share. In keeping with our standard practice, Bob McHugh, our Senior Vice President and Chief Financial Officer, will begin the call with a discussion of our 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.

Overall, our total sales for the period were in line with our expectations going into the quarter. This is very encouraging considering that our sales results were generated at a promotional level that was lower than planned. Consequently, our gross margin rate and earnings per share reached the high-end of our expectations.

More specifically, our second quarter financial results reflected the following: total sales increased 1.5%; our gross margin rate increased by 420 basis points, reflecting lower markdowns and a 20 basis point increase in our tenancy rate; our SG&A expenses on a constant currency basis were up slightly versus last year; store closing expenses were $1 million; depreciation expense declined by $11 million; and our total cash position net of debt was $173 million favorable to the same time last year.

I will now turn the call over to Bob McHugh.

Robert W. McHugh

Good morning. As Peter mentioned, our financial results for our second fiscal quarter were at the high-end of our expectations going into the quarter. We are encouraged that we have essentially achieved or exceeded the key financial metrics that we set out to accomplish at the beginning of the quarter. As we have discussed on previous conference calls, a key objective for our company is to get back to our peak earnings that we achieved in 2005 and 2006, recognizing that it may take us some time to get there.

On a GAAP basis, our 2008 second quarter earnings of $0.11 per share exceeded both the $0.12 loss of 2007 and the $0.09 profit of 2006.

Our 2006 results on a non-GAAP basis, excluding the $0.07 non-cash impairment charge recorded in 2006 were $0.16 per share.

Therefore, while we are encouraged that we are on the right track, we still have some work to do to get back to our core earnings of 2006.

Our earnings are also encouraging given the challenging external environment in which we operated, particularly as it relates to consumer confidence and spending. Another positive development was the strengthening of our financial position during the quarter. As previously reported, we completed a new three-year $175 million revolving credit facility with our bank group during the second quarter. This agreement includes a provision that would allow us to increase the size of the facility by $100 million for a total of $275 million under certain circumstances.

Concurrently with the signing of this new agreement, we repaid the remaining $88 million balance of our term loan during the quarter.

We ended the quarter with $431 million of cash and cash equivalents and $125 million of balance sheet debt. Second quarter comparable store sales of our major divisions were as follows: our combined U.S. store operation increased low-single-digits; footlocker.com sales increased high single digits; on the international front, Europe declined mid-single-digits; Foot Locker Canada increased mid-single-digits; and Foot Locker Asia-Pacific increased high-single-digits.

By month, comp store sales increased very low-single-digits in May and June and decreased low- to mid-single-digits in July.

By week, our sales comparisons versus last year were very uneven, fluctuating in line with the level of last year’s promotional activity when we were aggressively liquidating slow selling goods. In particular, our comp store sales slowed in late June and most of July when we were the most aggressive in clearing slow-selling goods last year.

Our second quarter gross margin rate increased by 420 basis points from last year, primarily reflecting the improvement in our merchandise margin rate.

Our tenancy rate, which is the other major component of our gross margin, increased 20 basis points versus last year. The improved merchandise margin rate comparison primarily reflected a significantly improved markdown rate versus last year.

I am encouraged to say that we also operated our business at a significantly lower markdown rate than we did in 2006. Our tenancy costs for the second quarter, stated in constant currency dollars, were slightly lower than last year.

Second quarter SG&A expenses increased $13 million versus last year. On a constant currency basis, our second quarter SG&A expenses were up approximately 1% versus last year.

We achieved this good performance despite some additional expense dollars that we spent in our stores to improve our customer shopping experience. More specifically, in line with a near-term strategic priority of putting more focus on our existing stores, we incurred additional expenses versus last year on visual merchandising and store maintenance.

Depreciation expense for the second quarter declined by $11 million versus the same period last year. We expect our depreciation expense to run at approximately $34 million to $35 million for each of the next two quarters. This will result in a similar favorable comparison during the third quarter of this year and be relatively flat to last year during the fourth quarter.

The year-to-date and expected third quarter decrease in depreciation expense reflects the asset impairment write-downs recorded last year in accordance with FAS-144.

Net interest expense for the second quarter was $2 million. Lower rates on our short-term investments were somewhat offset by the elimination of the interest expense on the $88 million debt that was repaid during the quarter.

The $1 million of store closing expenses recorded during the second quarter were in line with a program that we initiated last year, primarily to accelerate the closing of cash flow negative stores.

Four store settlements were included in our second quarter financial results. The closing expenses related to three additional stores are expected for the fall season under this program at an estimated pretax cost of $1 million or less than $0.01 per share.

Our second quarter income tax rate was 36.8%, a little higher than we expect for the fall season when our percentage of profits in lower tax jurisdictions will be more meaningful.

At the end of the second quarter, our cash position net of debt was $306 million, a $173 million improvement versus the end of the same period last year. Our cash totaled $431 million, while our long-term debt stood at $125 million. Both amounts reflect the repayment of the $88 million term loan and purchase of [$5 million] of our 8.5% debentures during the second quarter.

Our merchandise inventory position of $1.4 billion at the end of the second quarter was $51 million, or 3.5% lower than at the same time last year. On a constant currency basis, our inventory was 5.4% lower than last year and almost 10% lower than we were at the end of the second quarter two years ago. This inventory reduction is in line with a strategic initiative designed to reduce our inventory per store and increase our inventory turnover over time.

With the end of the second quarter coinciding with the beginning of the back to school period, we did not decrease our inventory position as much as we planned for at the end of our third and fourth fiscal quarters.

By year-end, we continue to expect that our year-over-year inventory position on a constant currency basis will decrease by approximately 7% to 10%, or by approximately $100 million.

At quarter end, our shareholders equity stood at $2.3 billion, a book value of $14.59 per share.

As stated in our press release, we currently expect our 2008 earnings, excluding the impairment charge that was recorded during the first quarter, to be in the range of $0.70 to $0.85 per share. This lower end range is $0.05 per share higher than our initial guidance for the year, reflecting the fact that we over-achieved our earnings expectations for the first half of the year.

Given the uncertain external environment, we believe that it is prudent to remain cautious in how we plan and to operate our business for the second half of the year. Our earnings guidance reflects this cautious outlook and thus we have not increased the higher end of our guidance.

The underlying key assumptions that this forecast is based also remain consistent with our previous guidance. Comp stores relatively flat to down low-single-digits. Gross margin rate is 200 to 300 basis points favorable with last year. SG&A expenses on a constant currency basis, relatively flat with last year. Depreciation expense of about $135 million. Interest expense of approximately $4 million. Pretax store closing costs of $7 million, and an income tax rate excluding the impact of the first quarter impairment charge of approximately 35.5%.

We also continue to expect to generate a total of $200 million or more of positive cash flow in 2008, before dividends, debt retirements, and any share repurchases.

In summary, we believe we are currently on track to deliver and potentially exceed our financial plan for the year, representing a meaningful profit improvement versus last year and to generate positive cash flow to enhance shareholder value.

I will now turn the program over to Matt Serra.

Mathew D. Serra

Thank you, Bob. Good morning. In a quick snapshot, our second quarter sales and expenses were essentially in line with our expectation going into the quarter, while we overachieved our earnings plan through a stronger-than-expected gross margin rate. This gross margin rate benefit reflected primarily lower-than-planned markdown activity as our inventory was better positioned than at the same time last year.

Our second quarter financial results are very encouraging, especially considering the challenging external environment that has been particularly difficult for mall-based specialty retailers.

Higher food and oil prices, declining real estate values, volatile financial markets and higher unemployment all continued to pressure the consumer during the second quarter of this year, leading to lower spending at the retail level.

A positive external factor is that inventory levels in the athletic industry appear to be lower and cleaner than last year, as many of our competitors have also focused more effort on inventory management, given the current external environment.

We are also encouraged by the strength of our marquee footwear business in both the categories of basketball and running. We believe that this trend in the marketplace bodes well for our company over the next several quarters as these categories are the core and strength of our business.

Again, our second quarter earnings were favorable to our expectation as our gross margin rates bounce back to more historical levels.

Looking towards the fall season, we believe that our company has an opportunity to achieve a meaningful profit improvement over last year. To reach our forecasted full year earnings of $0.70 to $0.85, which excludes the first quarter impairment charge, would require that we earn $0.47 to $0.62 per share for the fall season. During the fall season last year, our income from continuing operations was $0.29 on a GAAP basis. Excluding the impairment and store closing expenses, as well as income valuation adjustments, we earned $0.40 per share during the fall season last year. Therefore, for comparison purposes, on an adjusted basis we are looking for a $0.07 to $0.22 per share improvement during the second quarter of this year -- second half of this year, sorry.

This view is supported by several factors that we believe will enhance our profitability, including the following: a weekly flow of new basketball and running shoes, particularly in higher priced marquee styles, a category that the consumer often looks to buy in our stores first; new assortments of branded apparel from existing vendors such as Nike and Adidas, as well as new suppliers such as Under Armor and tap out.

The closing over the past year of under-productive stores reduces the drag on our remaining store fleet. Additionally, our depreciation expense is expected to be approximately $10 million favorable to last year for the third quarter and flat with last year in the fourth quarter.

The second quarter turnaround of our U.S. store division is very encouraging. Collectively, they generated a small comp-store sales increase during the second quarter and a very meaningful profit increase. These results reflect the solid sales trend improvement versus the first quarter of this year and a similar merchandise margin rate.

We believe that our U.S. business will continue to benefit from the recent trend resurgence back to its higher price technical footwear. Our total U.S. stores generated a sales trend improvement versus the first quarter of this year in both footwear and apparel. Sales of men’s footwear showed the biggest improvement. Versus the second quarter of last year, footwear increased mid-single-digits while apparel sales continue to be negative.

Sales in both our men’s and kid’s footwear businesses increased mid-single-digits while our women’s sales decreased mid-single-digits.

Men’s basketball and running shoes sales in higher priced marquee styles remained the highlight, continuing a trend that we saw developing during the second half of last year.

Sales in the lower priced canvas category, led by various Converse Chuck Taylor assortments, as well as various assortments of sandals, also remained very strong.

We believe is it more relevant to compare our average footwear selling prices and units sold in the U.S. this year to our results from two years ago when our business was more normalized and not reflective of the high markdown rates of 2007. Thus, our second quarter average selling prices in the U.S. were approximately 10% higher than two years ago, while our units sold and comp stores were relatively flat. These results are reflective of the mix shift towards selling a greater percentage of higher priced footwear.

Our U.S. apparel sales continue to be weak across most categories. We have seen some encouraging signs in our Champs division with solid sell-through of new styles, new supplies in the mixed martial arts category.

We have also recently added Under Armor to the mix, which we plan to expand to 800 stores by the end of the year. Our international business was mixed, with strong results at our Asia-Pacific and Canadian divisions, with business in Europe remaining challenging.

Our Asia-Pacific division had a very solid quarter with a high-single-digit comp store sales increase and division profit above plan. Our Canadian division also produced a mid-single-digit comp store sales gain and a double-digit division profit increase for the quarter.

In Europe, our footwear sales were mixed. Similar to the U.S., we generated solid gains in higher priced technical running footwear in the men’s segment but were impacted negatively by weak sales in the men’s and women’s fashion categories.

Our apparel and accessories business in Europe has shown signs of improvement, with second quarter sales nearly flat with last year as we generated solid gains in men’s branded outerwear, hats, and bags.

While sales comparisons continue to be very challenging in Europe, this division remains one of our highest performing businesses in terms of overall profit and division margin rates, benefiting from higher sales per square foot at lower markdown rates.

Our near-term operating strategy in Europe remains unchanged. We plan to carefully manage our inventories and use markdowns selectively to keep our aging in line with company standards.

Sales at footlocker.com East Bay increased 10% whilst division profit increased 33%. Footlocker.com East Bay continues to be one of the best run and most efficient businesses in the direct-to-customer retail segment and contributes meaningfully to our company’s profitability. For the first six months of the year, we have opened 40 new stores and remodeled or relocated 162 stores. We enhanced the look and feel of an additional 200 stores in the U.S. this year with the flooring and lighting program, while adding new fixtures and other modifications to 1,500 stores.

An important by-product of these interior layout modifications and new merchandising initiatives is a further differentiation of our store brands from one another.

We closed 97 stores during the first half of the year, of which 17 stores were part of a program initiated last year to accelerate the closing of unproductive stores.

As outlined on our recent conference calls, given the uncertain external environment, our strategic focus for 2008 is on improving the productivity of our base business. In this regard, we continue to implement several strategies which we believe will contribute to our improving financial results.

We are carefully reducing our inventory levels and increase our inventory turnover over time, and in a disciplined approach to ensure that our stores continue to receive a fresh flow of marquee goods.

Our goal for year-end remains unchanged. Our objective is to reduce our year-end cost inventories stated in local currency by approximately $100 million versus last year. Achieving this goal would translate into a cost inventory per store reduction stated in constant currency dollars of approximately 5% and a like reduction in inventory per square foot.

Our purchases for the fall season are highly focused on unique, exclusive, and limited distribution marquee footwear, with planned reductions and styles in other categories that are currently out of fashion.

We also believe we have a meaningful opportunity to rebuild our branded apparel business with both existing suppliers Nike and Adidas, while expanding recently tested apparel from Under Armor, Tap Out, and other emerging brands in more of our stores.

We believe these near-term strategies are important first steps in returning our business back to profitability of our peak years.

In closing, we plan to remain conservative in how we manage our business. While we are encouraged with our own results, the consumer remains very cautious, which makes us pause and plan very conservatively.

The recent fashion trend back towards a higher priced technical footwear is encouraging and plays well into our sweet spot of the market. Our apparel business has been especially tough over the past several quarters but on the bright side, we believe this represents an opportunity to post improved results going forward, as we add new assortments from both well-known and emerging vendors. We are off to a good start for the year with our first half pretax profit excluding any impairment charge related to the disposed business and store closing charges having increased by $40 million or $0.26 per share versus the same period last year.

Our balance sheet is strong and our cash position net of debt was $173 million favorable to this time last year.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from John Shanley from Susquehanna.

John Shanley - Susquehanna Financial Group

Thank you and good morning, everybody. Matt, since you are placing such great emphasis on the growth of the marquee business in Foot Locker, particularly in the domestic component of the company’s operation, can you give us an idea of what percentage of the domestic footwear sales are now generate by marquee product? And are the margins for the marquee line comparable to or better than the rest of the footwear selections?

Mathew D. Serra

John, it’s well over 33% of the footwear sales, and the margins are very rich. It’s a regular priced business and we’ve had tremendous success with it in the past and it looks like it is coming back to the same type of metrics that we enjoyed in previous years.

John Shanley - Susquehanna Financial Group

You mentioned it’s comparable to what you were doing in 2006 -- should we model off of 2006 in terms of the results to get an idea of what the company is likely to produce in fiscal ’08?

Mathew D. Serra

I think that in the current environment, to use that model, which was a pretty good year for us, might be a little ambitious. You know, we made $1.60 a share in 2006. You know, our intent is to, as I said at the beginning of the year, is to right the ship this year, get it back on track and our goal is obviously to get back to 2006 and hopefully beyond. And I think that will take some time. How much time that is, I don’t think I have a crystal ball but we are coming back in I think a responsible and measured fashion.

John Shanley - Susquehanna Financial Group

That sounds great. You did a nice job in terms of reducing the inventory levels. Were the inventory reductions pretty much across the board in terms of most of the company’s retail concepts, or were they heavily focused on certain operations? And I’m particularly interested in were the inventory levels in Europe reduced meaningfully during the quarter?

Mathew D. Serra

The inventory levels were reduced aggressively in the U.S., John. We never really had an inventory issue in Europe in the past. And when you get into Europe, it’s really marquee product is the lion’s share of the business over there. So again, our -- for the use of no other word, our big problem last year in inventory was principally here in the U.S., and we have not had an inventory issue in Europe. It’s down, actually, this year on a per-store basis but we’ve never really had an issue over there. It was here in the U.S. and that’s where we took the very heavy markdowns last year.

John Shanley - Susquehanna Financial Group

Again, were the reductions pretty much across most of the U.S. operations -- Foot Locker, Foot Action, and so on?

Mathew D. Serra

Principally in the big Foot Locker division, Foot Action, Champs to a degree. Kid’s, our business is very strong and we -- you know, we had a little bit of an inventory problem last year but not as big as in some of the other divisions, and Lady was fairly well-controlled last year.

John Shanley - Susquehanna Financial Group

Great. Concerning Europe again, you mentioned the business is still very profitable there. Are the operating margins that were in the second quarter comparable to what was generated in the second quarter of last year, or had they trailed off a bit?

Mathew D. Serra

Trailed off a bit, trailed off a bit.

John Shanley - Susquehanna Financial Group

And do you think there is going to be any improvement in the back half of the year in Europe?

Mathew D. Serra

We are approaching Europe very conservatively. I think it continues to be pretty tough over there. All the public releases we see and what we hear, the market is very tough. The good news is that the way our Internet footlocker.com division is performing, any profit shortfall that we have in Europe in absolute dollars, a lot of it will be offset by the tremendous improvement at dot.com.

John Shanley - Susquehanna Financial Group

I see.

Mathew D. Serra

So we’re not getting -- John, we’re not getting into the promotional fray over there. We are going to run the business the way we’ve been running it. We have taken a pause on the expansion until things come back and trying to operate it as profitably as possible.

And really, with a tremendous focus on introducing a marquee product, we just introduced Tuned Air 10, which is doing extremely well. We have an exclusive over there and it’s reminiscent of when we originally introduced Tuned Air -- not with the same velocity but it’s creating a lot of interest and buzz. We’ve got a big TV campaign beginning next week in Europe for back to school, so we are expecting that shoe to really be a barn burner over there.

John Shanley - Susquehanna Financial Group

That’s great to hear. Last question I have is how is the company likely to utilize the strong cash position that you just reported? Are we likely to see dividend increases or share buy-backs or other ways of putting that cash to use?

Mathew D. Serra

Well, we are always looking for ways to reward and enrich our shareholders. We recently increased our dividend by 20% and we will continue to focus on dividends as appropriate.

I think during this environment, we are paying a lot of attention -- I’m not suggesting we haven’t in the past -- but we really want to be in a very strong financial position with a strong focus on balance sheet management. And Bob and his team have done a very strong job in making that happen, as well as the merchants in controlling the inventories. And I think until we get through the current business environment and into the future, I think we learned our lesson the hard way but there’s a lot of inventory that we don’t need around here. So we are editing very, very aggressively our purchases and really putting a very heavy focus on managing that balance sheet and making sure that we have a liquidity position that is fail safe.

John Shanley - Susquehanna Financial Group

That sounds super. Congratulations on a good quarter and keep up the good work.

Operator

Our next question is from Bob Drbul from Lehman Brothers.

Robert Drbul - Lehman Brothers

Thanks. Good morning. I guess the two questions that I have, the first one is Matt, on the apparel business overall, can you just give us an idea in terms of the newness, you know, what’s going to change in the apparel business besides -- you know, from the branded apparel guys, what you think will change the market there and sort of on the average prices of what you have sold a year ago or two years ago on apparel, what sort of increases do you expect on the branded apparel with both existing vendors and some of the new vendors?

Mathew D. Serra

Firstly, this mixed martial arts apparel is a very hot category and we have exclusively in the mall Tap Out, which is a very fast growing business, which started at Champs almost a year ago and they are doing a terrific job with it. It is not in Foot Locker and it is being rolled out I believe to all the Foot Locker doors, so that is a big play and that can be a very, very big, branded business. There’s also some tertiary brands getting into that mixed martial arts that we are carrying.

When you look at Nike and Adidas, in the past couple of years I think it’s a tale of the chicken or the egg. You know, business was a little soft and we backed off too much. We have increased our purchases with both those key suppliers for the fall season and if you go to our stores today, you will see a lot of the product -- track suits are coming back and that’s good news, because that’s a high ticket item. The originals package from Adidas is also very, very strong and we are rolling that out into a lot of doors and also in Europe, it’s doing very well in Europe. But that is a very high ticket item and doing well.

As far as average price, our average prices are up in apparel. We are trying and successfully implementing a program by which we are selling less of the promotional t-shirts that worked extremely well for about six, seven years and I think customers are tired of it, we’re tired of it, and we are getting into more high price points in the t-shirt category. And t-shirts are a very big business obviously in a company like ours.

So our average unit retail is up significantly in apparel this year versus last year.

Robert Drbul - Lehman Brothers

Great, and then just my last --

Mathew D. Serra

It’s double-digit up.

Robert Drbul - Lehman Brothers

My last question is just can you just talk about August in terms of the trends that you have seen in August thus far? August is off to a good start. The U.S. is about even, as of today an we expect it to be ahead by Sunday after this weekend’s launch. There’s a big Jordan package and a Pippin package and some strong Air Force One program’s this weekend, so U.S. is off to a good start. Europe is basically in the same mode. Our Internet business is strong and the other two divisions, Canada and Asia-Pacific, are performing okay.

In terms of merchandise trends, for us it remains on the high-end with marquee product, unusual product but it is different by market. You know, if you get up into Canada, we are still selling a lot of European merchandise, particularly in the Quebec market, still selling a lot of low profile product up there, from Adidas and Puma, where in the U.S. it is not doing well at all.

Those are the big headlines in trends.

Robert Drbul - Lehman Brothers

Great. Thank you very much.

Operator

Your next question comes from Robert Ohmes of Merrill Lynch.

Robert Ohmes - Merrill Lynch

Just actually a few follow-up questions -- first one, just a follow-up on Bob’s question. Matt, can you -- as you look into August, September, and October, can you actually give us maybe a little more detail on the product launch schedule? I think the Hyper Dunk program related to the Olympics was I think an August program for you guys. Can you comment on how well that went and if there’s any carry-through into September and October related to that?

And then as you look at the Jordan launch schedule, is August going to be the biggest month or is it September or October? And then maybe even carry us through -- how does the backlog coming out of Nike on marquee look to you guys right through December of this year?

And then related to that on the apparel side, I haven’t heard any comments in a while on the licensed apparel business. I was just curious if that’s still an absolutely dead business or you are seeing any sort of signs of life there. Thanks.

Mathew D. Serra

Licensed continues to be challenging. It’s been tough now for a couple, three years. The Kobe Hyper Dunk, which we have exclusive, has done extremely well. That’s I believe a $110 shoe. It’s been a barn-burner for us. We’ve done extremely well and as you know, he’s become a superstar at the Olympics, which is really helping that product.

We have considerably more marquee high-end product and launch product from Nike for the fall season, particularly in basketball. Our basketball business, while if you look at the data that is around, is not particularly good. Our basketball business is on the moon. We are in many divisions running double-digit increases in our basketball -- you know, particularly obviously here in the U.S., where we have a huge basketball business.

So we are pretty well set for the fall season with the high-end marquee product and launch product. There is a shift where we -- from September into August on a Jordan launch, so one came out of September and went into this weekend, so I think as you look around, particularly I know a lot of you do go out and shop the stores this weekend, you will see a lot of product being sold and I don’t remember, I think it’s the second or third weekend of September where there is not a comparable Jordan launch this year.

But apples-to-apples, we’ve got a lot more product. Did I get them all, Rob? I think there was something else.

Robert Ohmes - Merrill Lynch

You got it all but one last follow-up question -- anything going on in the women’s side that could get women’s footwear comps to turn positive this fall?

Mathew D. Serra

We’re having a tough time in women’s product. It’s universal. It’s not in any particular division. It’s worldwide. It is tough. I think clearly it’s a fashion trend and it has been troubling for around a year now, where our women’s business has been really challenging. It’s not a disaster but it’s not good.

Robert Ohmes - Merrill Lynch

Great. Thank you very much, Matt.

Operator

Your next question comes from David Turner from BB&T Capital Markets.

David Turner - BB&T Capital Markets

I was most curious about pricing, particularly as it relates to a lot of inflationary anecdotes circulating. You had mentioned 10% versus two years ago. Your gross margin performance this quarter would suggest that you are not really getting hurt by any inflationary pressures, so I guess if you are not getting hurt, what are you seeing or what are you doing differently? And if you are -- or are you just passing it through? I guess if you could just -- is that an issue or have you been able to avoid it thus far?

Mathew D. Serra

The same question came up on the last conference call last quarter. We have not experienced any resistance to the price increases. Our lock-ups remain the same on that product. If our supplier increases their prices, we have had no difficulty in selling the product at the higher price.

I don’t think the increases are egregious. I think they are reasonable. Their costs obviously are going up over there where the product is being manufactured. But if you hit them with the right product, the kids respond and they are responding to a lot of exciting merchandise.

And quite frankly, in a long time, I don’t think I’ve seen this much exciting marquee product in the market. In my judgment, it’s probably been four to six years since I’ve seen this much hype and excitement around new and innovative merchandise. So that bodes well for us because that’s where we trade and do a lot of business and I think I stated publicly several times, we have almost a $1 billion basketball business worldwide, most of it here in the United States. That’s all products, including apparel and accessories but the lion’s share of it is footwear and that business is doing extremely well. And I anticipate the remainder of the year that basketball, as well as running but basketball in particular will be a key driver.

Our House of Hoops store is performing extremely well. We have three to four additional ones opening this fall and as you know, House of Hoops exists in all Foot Locker stores, all 1,250. We have a segmented section on the wall and it’s doing very well.

David Turner - BB&T Capital Markets

And I guess just to drill down a little bit more, this was -- the pricing was independent of the stimulus checks. I mean, you didn’t see a big spike in May and June and then the pricing has come back down since -- it’s been relatively constant throughout the month, I guess, the pricing, anyway?

Mathew D. Serra

Essentially, yeah. July was a little softer than the previous two months but you know, there’s no stimulus checks now and business is okay.

David Turner - BB&T Capital Markets

Okay, and then just the last, or to close out, for me, anyways -- I think Bob had mentioned inventory cuts in the 7% to 10% range for the back half of the year. I was wondering if that’s going to eat into your ability to comp. You know, my guess is that you are going to sacrifice some units given that, but given how strong the marquee is, you are still going to be able to get to a guided level without much heavy lifting -- is that a fair scenario?

Mathew D. Serra

We, over a two-year period, 2006 in particular, built up our inventories in the U.S. too much. We didn’t need a lot of that inventory and as I’ve said, we’ve learned our lesson. We are on plan for the end of this current quarter and we are expecting our inventory levels at the end of the third quarter to be down 10% to 11% from last year. The reason being is we wanted to set ourselves up for a very strong back to school and I don’t think the inventory levels will be an issue.

We may at the end of the fiscal year add some inventory into that and that now, we are going to be a very big part obviously of the Under Armor running shoe launch, and they are launching that on January 31st. So we are going to have to bring those receipts in at the end of January and it’s a lot of inventory, so it may have an effect of a couple of percent on our ending inventory. But it’s all new fresh product and we are in the throes of finalizing the orders, the purchase orders on that.

David Turner - BB&T Capital Markets

Okay, but I guess you’re not -- it’s not cutting into your ability to drive sale -- I mean, this is a -- not cutting into muscle, I guess.

Mathew D. Serra

No, no.

David Turner - BB&T Capital Markets

Okay. Thank you.

Operator

(Operator Instructions) Our next question is from Omar Saad from Credit Suisse.

Omar Saad - Credit Suisse

Thanks. Good morning. Congratulations on the nice quarter, especially the impressive gross margin improvement. That has to be very satisfying, I imagine. Matt, I just wanted to get an update on the foreclosures, where you stand in terms of your store base. I know it sounds like you are kind of standing still a little bit in Europe and waiting to see how things shake out. How do you feel about the locations here in the U.S.? Are you where you want to be, or do you kind of continue to trim and prune I guess over the coming quarters?

Mathew D. Serra

Last year we closed over 300 stores worldwide and this year, the plan is to close 140. We’re going to exceed that because we made a decision to get out of some more unproductive stores. And this is not a situation where we are going to have to buy out the leases or anything but we are going to probably close 30 to 40 more than we had originally planned because we are looking at the store base in that. We really want to be headed towards -- you know, you will never have a total fleet this size, where every single store is totally productive. It just doesn’t work that way but we expect to end the year with about 70, 80 stores less than last year. So the store closing program is on track and we are very comfortable with it and we feel real good about what we did last year and what we are doing this year.

As you know, we are spending a lot of money on renovation, particularly in the mother ship, Foot Locker. We have renovated our flagship here at 34th Street and we now have worldwide, close to 300 stores that have the look and feel of the store here and our strategy is to implement another 500, hopefully 600 renovations of the same caliber next year to really get us update and current and really looking exciting again.

Omar Saad - Credit Suisse

Great. Thank you. And then, a quick question on the Olympics and -- are you seeing an impact? Do you expect an impact in the market here or in Europe? What are your thoughts on kind of China as a market opportunity?

Mathew D. Serra

We’ve always had a little bit of a lift from the Olympics but I don’t think it’s going to change our lives, so to speak. We’ve gone -- I’ve been here now for several Olympics and we get a slight lift but it’s not material. And what was the question on China?

Omar Saad - Credit Suisse

Yeah, I mean, obviously there’s a lot of passion for sports and basketball in particular in China. Just curious what your thoughts are on that as a market opportunity.

Mathew D. Serra

Well, obviously it’s a big market and it’s something that -- you know, I made a trip a couple of years ago over there and hadn’t been there in a long time. There’s a lot going on and it’s clearly on our radar.

Omar Saad - Credit Suisse

Great. Thank you.

Peter D. Brown

I think we have time for one last question.

Operator

Your next question comes from John [Zolydis] from Buckingham Research.

Analyst for John Zolydis - Buckingham Research

Good morning. This is Jody on behalf of John. I just have two quick questions -- what was the impact of currency on the sales?

Mathew D. Serra

It was about 2%, I believe.

Analyst for John Zolydis - Buckingham Research

Okay, and second question is about the rent -- are you seeing more favorable terms for the landlords for lease renewals?

Mathew D. Serra

The answer is yes. I never thought that I would be able to say that but they are obviously, you know, with the current economic conditions out there, we are beginning to get some more favorable arrangements.

Analyst for John Zolydis - Buckingham Research

Okay, and the second question is how much do you think that rent per square foot will be going up in 2008 and 2009?

Mathew D. Serra

It won’t.

Analyst for John Zolydis - Buckingham Research

Okay, so you think that it will be flat?

Mathew D. Serra

We are expecting it to be flat, yeah.

Analyst for John Zolydis - Buckingham Research

Okay. Thank you very much.

Robert W. McHugh

Jody, just to clarify the impact of FX on sales, it was closer to 3%.

Analyst for John Zolydis - Buckingham Research

Closer to 3%? Okay, sounds great. Thank you.

Mathew D. Serra

All right, well, thanks, everyone, for participating today.

Operator

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

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