FL
#Thank you, <UNK>
Good morning to all of you and thank you for your interest in Foot Locker
As <UNK> mentioned, third quarter comparable sales declined 3.7%, within the down 3% to 4% guidance we provided on our prior call and, as expected, an improvement over the decline we experienced in the second quarter
Our comp was negatively affected by hurricanes Harvey, Irma, and Maria
Overall, we had almost 450 stores closed at some point during the third quarter, as a result of these storms
Although for the most part, sales recovered in Texas and Florida within the quarter
The primary impact on us was actually from Hurricane Maria, which shut down all 56 of our stores in Puerto Rico and the Virgin Islands
And most of these stores remain closed for a month or more after that devastating storm hit in mid-September
Our thoughts are with the people in the Caribbean and elsewhere, including hundreds of our own associates who are continuing to cope bravely with the devastation left behind by this season's hurricanes
We estimate that the net sales loss primarily due to Maria, lowered our overall comp by 20 basis points to 40 basis points
The hurricanes also led to significant inventory losses which I'll get to when I talk about SG&A
In terms of Cadence, comp results were steady throughout the period, with results in August, September, and October all within the quarterly guidance
Let's now review the details of our performance starting with our families of business
As expected, Footwear remains challenged and decreased mid single-digits
Apparel, on the other hand, was strong, producing a mid single-digit comparable sales gain, with increases across men's, women's and kids
Accessories, such as socks and hats, comps down double digits
Within Footwear, sales of men's shoes were down low single-digits; kids decreased mid single-digits; and women's posted a double digit decline
Running remains the strongest category in men's footwear, finishing with a high single-digit comp gain, which was driven by VaporMax, Tuned Air [Air Tuned] and Air Max 97 from Nike and, NMD, Tubular Shadow, EQT, and Ultra Boost from Adidas
Although the men's basketball category decreased mid single-digits, this trend improvement over the double digit decline in Q2 was driven by stronger sell-throughs of select Jordan Retro releases compared to Q2 and other casual basketball styles such as Air Force 1s from Nike
Finally, within men's, casual styles posted a double digit drop, as strong demand for Vans, especially old school and skate high styles, was more than offset by a decline in Converse and a slower start to our Timberland business compared to last year
Decline in children's footwear sales was driven by the shifts away from signature basketball and casual court style
However, the overall downtrend in the kids business did improve versus Q2, due to the higher sell-throughs for the Jordan Retro releases I just mentioned, a solid running category led by Tubular Shadow and Xplorer, and positive results for the LeBron 15, and LeBron Soldier
On top of the ongoing slow sell throughs of Superstars and Stan Smiths, trends in our women's footwear softened further during the quarter, due to a lack of new on trend offerings to offset last year's strong demand for PUMA Fenty styles
The weaker footwear sales had the biggest impact at SIX:02 and led to a double digit comp decline for that banner
Turning to our apparel business, we were quite pleased that it was up mid single-digits with strong gains across most of our geographies and banners
Branded fleece and wind wear assortments from Nike, Adidas and Champion were the key on trend items during the quarter
Our branded T-shirt business also had a strong quarter
Overall, ASPs in apparel were up high single-digits, reflecting the more premium assortments in our inventory, while units were down low single-digits
Our children's apparel business was up high single-digits
Men's apparel posted a solid mid single-digit gain, while women's was up double digits, however, the gain in women's apparel was largely mark-down driven
Breaking out the comparable sales results by segment, direct-to-customer posted a 6.1% increase, while our stores were down 5.1%
Starting with the direct-to-customer segment, Eastbay generated a high single-digit top line increase
Our store banner dot-com businesses in the U.S
and Europe were both up mid single-digits, while our digital sales in Canada increased at a strong double-digit rate
Overall, direct-to-customer sales increased to 13.8% of total sales, up from 12.8% a year ago
Within our store divisions, Foot Locker Canada and Footaction posted solid results, both generating low single-digit comp increases, led by double digit gains in apparel and mid single-digit gains in men's footwear
The other store divisions posted comparable sales decline
In the U.S
, Foot Locker was down low single-digits, while Kids Foot Locker and Champs Sports were each down mid single-digits
Overall, traffic at our U.S
stores declined mid single-digits
Internationally, traffic also declined mid single-digits
Comparable sales at Foot Locker Asia Pacific and Sidestep were down mid singles, while Foot Locker Europe and Runners Point were both down low double-digits
Sales at Foot Locker Europe, which has a relatively high penetration of Adidas, were pressured by further declines of Superstars and Stan Smiths, and lower than expected sell-throughs of some other Adidas styles
Moving on to the rest of the income statement, gross margin decreased 290 basis points to 31% of sales
The lower rate was driven by a 190 basis point decrease in our merchandise margin, a 10 basis point increase in shipping expense, and 90 basis points of deleverage on our occupancy and buyers compensation expenses
The lower merchandise rate, both year over year and compared to last quarter's guidance, was the result of higher markdowns, both in store and online
The higher markdowns reflect our ongoing efforts to drive traffic and clear slow-moving inventory in the current promotional retail environment
Despite this even greater than anticipated markdown pressure, average selling prices in footwear were actually up low single-digits, while units were down high single-digits
Our SG&A expense rate rose in the quarter by 30 basis points to 19.7% of sales
Included in SG&A were $7 million of hurricane-related expenses, including lost inventory, damage to fixed assets, and repair and maintenance expenses
Although we did not adjust our non-GAAP results for these costs, which total about $0.03 per share, SG&A would have levered by 10 basis points during the quarter, had these hopefully one-time costs not been incurred
The expense rate performance was driven by the team's consistently strong expense management, which helped offset some of the pressures from minimum wage increases and higher health care costs
The $13 million reduction in force and reorganization charge that <UNK> mentioned was part of an overall strategy to address the challenges we are facing in today's fast-changing retail environment
The vast majority of the charge relates to severance
The changes, while difficult, position us to create a more agile, flexible organization that will concentrate on those strategies that we believe will most effectively drive our long-term earnings growth
Dick will comment further about these initiatives in a few minutes
Depreciation expense increased to $44 million from $40 million in the prior year
The increase reflects the investments we have made and continue to make in our store fleet, digital capabilities, and logistics network
On a GAAP basis, our tax rate came in at 34.7%, 380 basis points higher than last year
As you may recall, the lower rate in the third quarter last year reflected the benefit from an intellectual property valuation reassessment in Europe
On a non-GAAP basis, our tax rate was 34.8%
Inventory ended the quarter down 3.4% from a year ago compared to an overall sales decrease of 0.8%
On a constant currency basis, inventory decreased 4.9% compared to a 2.3% total sales decrease
Our proactive markdown actions during the quarter helped ensure that we are headed into the holidays with the ability to flow in good quantities of our improving product assortments
We ended the quarter with $890 million of cash and cash equivalents, an increase of $25 million from the end of Q3 last year
We mentioned on our last call that we and our board are fully confident in the ability of our business to reaccelerate over time, and that we would consider a full range of share repurchase alternative
Given that, and in light of the value we saw in the price of the company's stock, we significantly accelerated our buyback program, spending $304 million to repurchase 8.7 million shares during the quarter
In addition, we returned $38 million to our shareholders through our quarterly dividends
In total, we have returned $482 million to shareholders year-to-date
Capital expenditures in the quarter were $54 million, bringing our total through the first nine months of the year to $204 million
We are on track to spend almost all of the $277 million we planned for 2017. Turning to real estate
We ended the third quarter with 3,349 company-owned stores, a decrease of 10 from the end of the second quarter
For the year, we currently expect to close 150 stores, up from the 135 we mentioned on the last call
We'll open about 90 stores and relocate or remodel 180 stores
Before I turn the call over to Dick, let me make some comments about how we see Q4 unfolding
We now expect comparable sales to decline 2% to 4%, slightly better than the previous guidance of down 3% to 4%
Gross margin is likely to decrease 220 basis points to 240 basis points in Q4 on a 13-week basis
This decline is steeper than our guidance in August due to the anticipated need to maintain relatively high markdowns in Q4 to move through slow-moving inventory to position ourselves for a stronger 2018. SG&A is likely to increase by 60 basis points to 80 basis points as a rate of sales
This is improved from the guidance we gave on the last call due in large measure to the recent reduction in force I mentioned, and a timing shift of certain projects into early 2018. In total, EPS is likely to decrease between 15% to 25% in the fourth quarter
Please remember that this guidance does not include the 53rd week, which we still estimate will be worth an incremental $0.12 per share
With that, let me turn the call over to Dick to discuss our initiatives that we believe will reposition the company for long-term growth
Dick?
Well, we described, I think, fairly thoroughly the reorganization and the positioning of ourselves to get out to those long-term growth opportunities to make sure that the organization is set up to do that
But as we evidenced in the third quarter, we really have very strong expense management culture, and we look for the opportunities to lever at lower comps
That leverage point has been mid-single digit comps for our structure this year
But we look to manage cost sales per payroll hour
That's the biggest function within SG&A, selling wages
So we look to make sure that we have got the very best salespeople in the store at the peak hours, that management of scheduling is very important
And then we look to make sure that the marketing money that we spend is driving what we want it to, increased traffic and increased conversion
But, <UNK>, we look at every lever
We manage our electricity through using things like LED bulbs because they're much more cost effective
Yeah, so every lever, but SPH and sales per square foot are obviously very meaningful
Thank you for calling out what we have done on the inventory for the last couple of quarters because that is really the thought process to make sure that we are keeping the inventory fresh and that we have got capacity to bring in those improving assortments
So I – and I'm not going to get into expectations around 2018 at this point
It's a little bit premature
But we do believe that the actions that we're taking, we continue to take through the fourth quarter, will set us up well to come into 2018 with strong inventory
And certainly the speed initiatives that our suppliers are working on and that we are partnering with them on are helpful to that formula and that expectation
Yes, Sam, I'm not going to go into the detail of what those percentages look like
Just suffice to say that we have standards that we have in place at this organization, runs the business by to make sure that the inventory is in a good place
So, that has been a discipline that has served us well for years and we are sticking to that
But the connection of apps, releases by app, there's store connection as well
And this is an advantage for us, that we have a store fleet that can complement that experience
And our vendor partners appreciate that asset that we have
Yes, on the share buyback, we ended the third quarter with the remaining $863 million of our original $1.2 billion authorization
So, the share buyback is not a formulaic, it is – our number one priority is investing in the business, but a very important objective is meaningful returns cash to the shareholders and certainly, we've demonstrated that this year
But where we see value, we act appropriately
