Q4 2019 Earnings Call
Average selling prices were up low single-digits with units down mid-single digits.
Overall traffic at our stores declined mid single-digits while conversion improved.
And our North America geography Footlocker Canada Footaction and Champs Sports posted solid results for the quarter. Each up low single-digits, Footlocker us down low-single Kids Footlocker was down mid-singles Andy Spade declined double digits.
Internationally Footlocker Pacific finished off a terrific year with another strong performance generating a low double-digit copying in Q4 on top of the last year's double-digit increase.
Runners Point group was up mid-single digits while Footlocker Europe was flat for the quarter.
Looking at our business by brand across Footwear and apparel sales with our largest supplier. Nike continued to strengthen with sales outperforming the overall company results month collectively the results from our other suppliers were more challenging in the quarter from a family of business perspective. But where was relatively solid given the top comparison still last year with sales essentially flat women's Footwear had a strong quarter up mid-single digits kids produced a low single-digit game while men's was down low single-digits.
bike
Glory men's basketball posted its second consecutive quarter with a double-digit game.
Men's running which was impacted by the shift in Easy releases relative to last year and men's casual and seasonal styles were each down double-digits.
Looking a little deeper into the Footwear performance or expectation going into the fourth quarter was the the impact of the easy shift would be mitigated by a pick up and demand across other platforms and models together with a better result in our seasonal boot business. Well that performance did not meet expectations. Our team took action by partnering with Nike and Jordan to accelerate future orders of key on Trend styles to capture some of the customer demand.
Similar to the results we experienced in the third quarter apparel remained challenging declining mid single-digits are men's and kids apparel businesses were both down mid-singles while women's was flat stick. We'll talk more about Footwear and apparel highlights and a few minutes additionally our accessories business driven mainly by the Hat shoe care and bags was down High single-digits.
moving on
For the rest of the income statement our gross margin declined 90 basis points to 31.5% of sales. The lower rate was driven by a 70 basis-point decrease in our merchandise margin rate and twenty basis points of D leverage on our occupancy and buyers compensation expenses.
The lower-than-expected merchandise margin rate was driven by two factors first higher markdowns on a Peril both at stores and online as we worked to clear slower-moving o x within select branded program's performance assortments and licensed apparel as well as mixed pressure due to our pull back and private-label. This is partially offset by faith in our Footwear margins second pressure from lower initial markup rates due to vendor mix and category Max were also a contributing factor this quarter.
Our team did an excellent job managing expenses in the quarter as our sg&a rate improved by fifty basis points to 19.4% of sales as the month progressed. We carefully managed are variable expenses such as wages and marketing to align with sales.
in addition
We reduced bonus accrual based on our overall performance. So as you think about your models for next year, please note that the bonus reduction benefited. This quarter's rate by 7 basis points for the full year. Our sg&a expense rate increased to 20.6% from 20.3% last year due primarily to suck on going investments in our digital capabilities.
A depreciation and amortization came in at 45 million dollars for the quarter flat to last year while net interest income was two million dollars down from four million dollars off are reflecting lower interest rates.
Our fourth quarter non-gaap tax rate was 26.1% below last year's to for rate and better than are expected run rate of 27. 5% Do you pray to the geographic mix of income?
Turning to Capital allocation. We invested approximately $187 million dollars in the business in 2019. This was below our prior expectation doing a large part to a shift in the timing of expenditures on store projects. In addition. We spent fifty million dollars on strategic Investments for the year. We returned $164 million dollars of cash to our shareholders in the form of dividends during 2019.
and combined with our
Share repurchase program The Springs the total cash returned to shareholders for the year to $499 million dollars more than 90% of our adjusted net income.
So we announced last week our board declared a 5% increase to our quarterly dividend payout rate to $0.40 per share and approximate 4% rate of return in addition at your end. We had $867 million dollars remaining on the one point two billion dollars a share repurchase program that was authorized a year ago.
We and our board believe that our strong capital structure allows us to pursue the initiatives that will drive our performance and enable us to deliver on our long-term objectives while mom also continuing to enhance shareholder returns through our dividend and share repurchase programs.
Before I hand the call over the deck, let me touch on inventory which finished the year in good shape and actual FX rates inventory ended the quarter down 4.85% for 60 1 million dollars from a year ago using constant currencies inventory decreased 4% compared to total sales which were down 2.5% This disciplined approach to inventory management enabled us to increase inventory turns for the year to continue to blow fresh exciting assortments as we move into fiscal 2020.
And together we produced a solid result in the first year of our new strategic plan. We continue to make meaningful investments in the business delivered adjusted net income of $538 million dollars for the full year and produced a return on invested capital of 12. 5% up fifty basis points over the prior year.
One last exciting item. I want to share with you during the fourth quarter. We produced a record day with total sales exceeding $115 a mile a tone that wouldn't have been possible without the great work of our associate together with the operational benefits of the investment in our digital and supply chain capabilities. I record volume level our website Logistics systems and Associates delivered on our commitment to provide outstanding customer experiences.
with that
Will turn the call over to dick will be back in a bit to provide you with our outlook for 2020.
Thanks, Lauren and good morning everyone about a year ago at our investor day. We outlined our new strategic plan to differentiate our business and become a truly agile organization that can adapt quickly to satisfy our customers in this evolving Marketplace.
Overall 2019 was a solid year that demonstrates early but meaningful progress across many aspects of our business including investments in exciting stores that connect with local communities capabilities across our digital ecosystem which enable us to build even deeper connections with our customers in our supply chain and Logistics systems.
We also strengthened our relationships with our strategic vendor partners and together delivered new unique Concepts and the most sought-after Styles across all of our geography.
No turning to the fourth quarter. Our performance was certainly more challenging than we expected on the Q3 call despite having leading positions in key on Thursday or results for pressure during what was it compressed holiday shopping season were softer demand for seasonal categories in a very promotional apparel Marketplace.
We're also up against tough launch comparisons relative to the fourth quarter of last year.
With that said there were a number of bright spots and we are encouraged that we finished the year in a promising position with comp sales in January up double-digit.
Starting with Footwear the momentum in our basketball business continued to build across all of our geographies divisions and across men's women's and kids classic basketball shoes from Nike and Jordan again led the way the strong sales of the Air Force Ones in AJ ones.
also
Juuling the category where a number of Highly sought-after Jordan Retro launches and lifestyle models strong interest for the Gianna's Zoom freak in the hard-court from Adidas.
We also drove strong performance and women's Footwear on top of last year's High single-digit comp game. This year's result was led by Classic basketball styles from Nike and Jordans. We also have success in Converse and Puma.
Notably to 4 was the fifth consecutive quarter with positive comp sales for both our women's and kids footwear businesses and being up against a double-digit came up into four 2018. Our footwork business was essentially flat for the corner.
Para was more challenging as it had been in the past two quarters. Are you at spanners face significant challenges driven by the declines in assortments from our secondary Brands softer man for licensed and performance apparel as well as a plan decline in private label and the highly promotional Marketplace on the flipside. We did see some bright spots in the Box as well. They keep Tech and Club fleece performed very well. We saw green shoots with some up-and-coming Brands connected to youth culture.
additionally we
Have positive results and several International banners.
So while the margins and apparel retrenched in Q4, we see an opportunity to remix our assortments to drive top and bottom line Improvement.
This includes opportunities two-dimensional eyes are branded assortments along with new offerings that connect with youth culture.
Footlocker Pacific Division turned in another exceptional performance with strong results and Footwear including double-digit gains across men's women's and kids as well as a high school budget increase in the payroll.
The team did a great job this year posting the divisions fifth consecutive quarter if double-digit comp games.
Footlocker Taylor the poster the mother solid performance this quarter and finished the year up high single-digits at Champs Sports Footwear posted a mid-single-digit campaign in the corner there by kids and women's Footwear and Champs finished out the year up mid-single digits.
Next I will provide you with a progress report on our strategic initiatives beginning with our efforts to elevate the customer experience.
I'm happy to report that our new membership program flx is now live across all of our this means that our customers in the can now be rewarded for engaging in a shopping across our entire family of brands.
To the program centralized Redemption Center. Our members have access to exclusive experiences and offerings that reflect our customers multi-faceted interests inclusive of Music Sports art design and more.
They will also be rewarded with a head start just for becoming members which helps their chances of securing highly sought-after releases.
Looking forward flx, which is launched across the Netherlands France and the UK will continue to expand to additional countries over the course of 2020.
In Europe, we are making important strides in our digital and mobile platforms during the quarter. We completed the upgrade of our Foot Locker website in the 1st of 17 countries this new platform, which has been a success for a North American digital channels will be the foundation for an improved consumer experience with better story tone greater functionality and improved bandwidth for those she high-volume moments while we started out with a smaller Market in Norway. We expect to continue the role of two additional markets this year.
Turning to our store Fleet we intend to invest for long-term growth through our Global footprint first. We continue to refine our power store ovens are community-based power stores, which features a hyperlocal assortments and activations have been well-received. We attempt to build on that strength over the next several years after opening 6 power stores in 2019 took place. We open approximately twenty more than 20 20 with new locations in the US and across our International markets.
we also
10-day allocate Capital to our core stores around the world. We have an opportunity to evolve our Fleet later in the best elements of our power store offense improve the productivity of our existing square footage drive faster growth through these Investments.
This includes a test of an exciting New Corner Store format in the US.
All together we plan to remodel or relocate a hundred and twenty five stores with a hundred and ten of these focused on our core storms.
Additionally we continue to invest in new dedicated spaces for our female customers where we can Inspire her with curated assortments and unique experiences. We ended 2019 with 17 elevated women's faces across Europe 34 in the US at Footlocker Champs Sports and Footaction and we plan to scale the build out in 2012 with 42 fifty additional new spaces global.
A plan also includes further expansion in Asia. We open 2 stores in the fourth quarter now have 14 stores in the region for 2020. We expect to open an additional 12 stores, including both core and power store locations in New and existing markets.
To remain laser focused on our third strategic priority to drive productivity. We believe our investments in supply chain and Logistics will be key to achieving further gains in this area a 2019. We completed the retrofit of our Junction City Kansas facility enabling us to supply our stores and efficient lease process orders for digital channel.
In fiscal 2020 we have allocated capital for the upgrade of our Camp Hill Pennsylvania facility, which will transform it to a full-service Distribution Center serving. The eastern part of the us the upgraded facility will enable us to fulfill customer orders more rapidly replenish stores more often improve the overall customer experience yielding freight charge for savings from an optimized shipping number all while lowering. Our greenhouse gas emissions and our carbon footprint.
Leveraging the power of our people the 2019. We took advantage of our improved systems and training to ensure we have the right Associates on the sales floor with access to the right product at the right place at the right time. We were pleased to see this translate into games and conversion sales per payroll hour in sales per square foot home delivering that consistent high level of service.
importantly
This all led to meaningful improvement in our key customer metrics including overall customer satisfaction and that promoter score but we believe these are still early days. There are numerous opportunities to drive even further games. Of course, none of this would be possible without the efforts of our team last quarter. I introduced you to Lisa our new interactive Communications and learning platform the response from our Associates to this new system has been tremendous. They are engaging learning having fun and driving productivity.
Building stronger connections with the communities where we live and work offers additional paths to fostering local long-lasting relationships with our customers and proud of the efforts across Organization. For example heartening for the 31st year in a row with the federal admissions in L, helped 3,000 underprivileged children with back-to-school supplies joining forces with the Daily Bread food bank and trust them to give back to the community. Whereas our team in Europe did this year working collectively to donate books toys games food to Charities that support under privileged kids.
Cuz we look to fiscal 2020. We have a number of opportunities ahead of us with great product exciting events and the expansion of our power stores to new communities.
The excitement began in Chicago with our takeover of the city for the NBA All-Star Weekend.
In addition to exclusive Footwear launches, they customization workshops this year. We had appearances with NBA players such as Giannis Damian Lillard and Ben Simmons panel discussions and hook challenges with pacemakers musicians and influencers and more was a great way to get the year started but we have a lot more to come for example in a quarter. We will have more energy around basketball with plastic and signature styles from Nike and Jordan in the Nike pre game A House of Hoops, exclusive provided us wage super Stan paying tribute to the fiftieth anniversary of the Superstar with a celebration of both iconic sneakers, and we'll celebrate creatives through our off blank franchise with bandwidth.
We also expect to open our next.
for store at The New American Dream retail and entertainment complex at The Meadowlands in New Jersey and will bring even more unique experiences and access to exclusive offerings through f l a
Let me reiterate that we built upon our strong foundation in 2019. We are optimistic about our company's future. We believe we have the right plan in place to deliver against our long-term Financial objectives and by making progress on our strategic imperatives, we will strengthen our position at the center of sneaker and youth culture creating value for our shareholders.
Before I turn the call back over to Lauren. Let me share a few last Thoughts with you. First. I want to touch on the outbreak of the coronavirus the health and safety of our Associates jobs families our customers and our suppliers is our top priority. This is a fluid situation that we are actively monitoring starting with those areas of the world where we operate it and where we have seen some impact to store traffic for example Hong Kong Singapore in Italy.
we also have
The ongoing conversations with our vendor partners with respect to the supply chain, and we will work closely with them as the situation unfolds to manage the impact on our business office.
On a more positive note. I want to take a moment to welcome to recent additions to our board of directors Darlene Nicosia interest and Walker who bring a range of experiences in capabilities and Global Supply Chain management and consumer brand marketing. That will be a great source of insights to our board and management.
And finally, I want to thank each associate at Foot Locker Inc for their dedication and commitment without their focus execution and passion for the game. We would not be able to deliver great life experiences and Achieve our long-term objectives Lauren back to you. Thanks dick. And do you we continue to see opportunities to drive the business forward and fiscal 2020 on our way to reaching our long-term objectives, but first, let's take a look at fiscal 2020 as a reminder starting with today's call. We are only provide annual comp sales and EPS Outlook not detailed quarterly guidance for fiscal 2020. We believe we can deliver a low single-digit comparable sales gain and low to mid-single digit earnings per share growth.
Will again be a top-line headwind with foreign currencies weaker relative to the US dollar than they were at the same time last year the euro to US dollar rates days where it is today. The headwind would be more pronounced in the first half.
We are planning the gross margin rate to be up ten to Thirty basis points for the full year mostly driven by Improvement and our merchandise margin rate or sg&a expense life is expected to be up between forty to sixty basis points year-over-year this annual sg&a guidance also incorporates our ongoing investments in our digital capabilities additional minimum wage rate increases. And as I said earlier the normalization of bonus, which is 30 basis points of deal ever.
Looking at Capital expenditures. We are planning this year's Capital program to be 275 million.
The higher Capital spend this year reflects our increased investment in community-based power stores together with our commitment to elevate our core stores.
In addition the plan includes further digital Investments and initiatives to upgrade the company's supply chain and stick described in his comments.
We plan to spend approximately 150 million dollars to improve our store Fleet in 2020 including 65 new stores with further expansion and Asia off approximately 125 remodels or relocations of existing stores.
We plan to close approximately 150 stores. The store closures will be split between the North America and regions with the greatest concentration in. And Europe along with Runners point.
In terms of depreciation and amortization expense. We expect it to be approximately $185 million dollars in 2020.
We are planning interest income to be about four million dollars due to the lower interest rates in the US We are continuing to plan our effective tax rate to be in the range of 27 1/2 to 28% in 2020.
Our EPS guidance assumes the lower share count based on are opportunistic execution of our share repurchase program that covers the outlook for 20 28 lastly before we open the call up for questions. I want to update you on recent developments concerning two of our strategic Investments based on information that's come to our attention this week. We will be evaluating Investments made in 2018 of approximately 16 million dollars for potential impairments to be clear the financial results. We reported today do not contemplate any potential impact from this evaluation. If we determine there is an impact, we will disclose it in our 2019 10K that we will file next month consistent with past practices. Any impairments would be excluded from our non-gaap results.
with that operator
Please open up the call for questions ladies and gentlemen, we will now begin the question-and-answer session. If you would like to register a question, please press star then the number 1 on a telephone keypad if your question has been answered or you would like to withdraw your registration, please press * then two. If you are using a speakerphone, please lift your handset before entering your request off. Once again to register a question, please press star then one on your telephone keypad. Our first question will come from Susan Anderson with B Riley, please go ahead hi. Good morning. Thanks for taking my question. I guess when the guidance from I know you're not giving quarterly guidance. But are you assuming in the numbers in the impact from the coronavirus and are there any you know big differences in Cadence that you would call out by quarter? And then on the Peril friend, I guess how are you thinking about just the health of the inventory.
Now after fourth quarter, do you feel like there's still some clearing to happen?
With a parallel to kind of get the newer product in the doors. Thanks. I'll touch on the the coronavirus a little bit more in-depth in the the prepared remarks off your clearly. It's a fluid situation in we've built into the guidance what we know today. It's easy to say that what we know today will be different than what we know tomorrow. Right? The the situation is changing. We're working closely with our vendor Partners to understand the impact to the supply chain of product the factory capacities, etcetera, you know, we're also monitoring our truck in places that have been most impacted, you know Hong Kong Singapore and and now with the outbreak in Italy so and I I would tell you that that the the guidance encompasses what we know today, but I expect that to be fluid and continue to change. I don't know what I would also say, you know, it is seems that it's consistent with what we hope that resolves and it's not a protracted situation month.
You got on the apparel front the health of the inventory, you know, the the marketplace was really promotional in in the fourth quarter. We anticipated that it was probably a little a little more promotion than we expected think the team did a good job of of moving through some of the Styles where we had the biggest problems, you know, the the opportunity now is to to flip the inventory too long to get in sync with the summer consumer headed into spring and summer here as well as some of the changes from you know, the high brand reads that we've seen too too low brand reads and and more tonal things off. I think the team is doing a good job, you know as your deal in fashion, there's always a little bit of a a hangover from prior Seasons, but you know, I think the team did a great job in the fourth quarter to move that we could in the promotional environment. So I feel good about where our inventory sits today Susan.
Great, that's helpful. Thanks so much. Good luck this year. Thank you.
Our next question will come from Michael binetti with Credit Suisse, please go ahead. Hey guys. Thanks for all the help. I want to follow that parallel question really quickly. I think you were previously with the assumption that it might take, you know, a quarter or two into twenty twenty-two to really get the apparel inventories clean and kind of repositions of it to the new planogram. How would you would you describe that wage is probably going to continue to be somewhat of a of a drag on the gross margins in the in the first quarter as we kind of think about a little bit ahead here at this point, um wage, that's my first question. Thanks. Yeah, I think there will continue to be a little bit of a hangover as we we work through the seasonal piece, you know, the the winner that never was across much of the country, you know, we we don't sell em, but we sell heavier weight fleece etcetera. So and I think as we we turn the inventory, you know, they're likely will continue to be a little bit of a headwind, but you're going to I think the the team mate a strong
And you know, it will be there in q1. It's more important that we get the inventory flipped in the right fresh product in that that's good for the season. That's that's forthcoming.
Okay, so a little inventory. I mean would you would you describe the fourth quarter though is the is the the peak of the pressure from that from that clearance on on the gross margin? And is it at least diminishing in the in the phone not working for me? Think about that way or I think that's safe. I think you know between the end of the third quarter beginning of the 4th or the fourth quarter in terms of pressure to move through the inventory and and off, you know, the pressure was magnified by the promotional Marketplace that that blew up really starting right after Halloween right going into the quarter as opposed to you know, a young black Friday blow up where everybody gets gets down in in deep discounted on a parallel. So I I would I would posit that that the fourth quarter was probably the peak and while that's a bit of a hangover. It should not be at the levels of of Q4.
Okay, that's good to hear and I also want to ask about the you know, the basketball numbers being up double-digits to enroll. And I think you call this quarter. I think you referred to it as a sequential Improvement in the momentum in the fourth quarter after the nice number of the third quarter you sound more confident there that's been a really big important category if you guys in the past maybe just a little more thought on what's what's helping what's driving their wage, you know, the the fashion trends have been moving towards, you know more of the street where things but, you know, seeing basketball come back for you guys. Just knowing how big of a category that is is pretty encouraging. I'd love to get a sense of what you think working in a sustainable those Trends in basketball or after I know it's been a long time before third quarter since we heard that category as positive, but it's it's great if the category level to see that that growth month and you know, I would reiterate you know, what we've said repeatedly that our consumer is less motivated by category than some of the data we look at is, you know, that's all category-specific but Arthur's
Summer is really driven by what's the the hot silhouette in the marketplace? And right now the the basketball silhouette and some of the Classic basketball quite honestly between
AJ ones Air Force Ones the hardcourts, you know, those are pretty Classic basketball Silhouettes that the consumer this current consumer finds exciting and I took the brands are continuing to push heat into that area. And you know, you add to it a little bit of excitement around the the Gianna shoe. You you look at the Kyrie shoe. You look at Puma entering a basketball Marketplace. You look at New Balance entering basketball and there's a lot of great energy around the category in you know, the the influencers that that took consumer looks to are wearing more basketball product. You know, what we categorize is basketball product. And you know, I think that bodes well for the future, you know plus we've got, you know, the only issue and along basketball store in the marketplace with our House of Hoops and you know, we continue to fuel growth there and and look for exciting ways to drive both basketball Footwear and apparel connectivity with Arkansas.
Thanks. Thanks a lot. Take care. Thanks, Michael. Our next question will come from Jennie Stitcher with Jeffrey's please go ahead Thursday morning. Thanks for taking my question my questions on sg&a. So understanding that a bigger part of the lower spending four Q was incentive accruals. He just help us understand what kind of flux in the model is, come in, maybe below your plan of low-wage budget and then just any savings you're seeing to offset some of the areas of inflation and the model like wages. Thank you again reiterating our guidance for June 2020 full year forty to sixty basis points of view lever on low single-digit with a normalization of bonus accounting for about 30 bits of that month. So the the Dynamics around continued investment in our tax and and in our supply chain,
infrastructure and capable
Please yes, we've talked about before we you know on the text spend, you know feeling good that we're seeing result. We as we talked about our record day that we experience in the fourth quarter and our systems holding up really well in that we're we're pleased with the progress that we've made on the system's front. But as we think about that spent go forward, you know, we've talked to a gym for the you know, we benchmarked where we think Texans should be long range and and somewhere in the low 2% of sales is the the bench level to keep our systems up-to-date delivering and I would say as we think about that text and we're seeing the shift that those dollars are now progressively moving away from initiatives that we would categorize as foundational more towards things that are enhancements in our capabilities and things that are customer will experience very positive wage.
So we feel good about about what?
That does for the model of the other call out that I would have for you is you're thinking about sg&a rflx program looks less like the Loyalty program that we had before which was focused a bit more discount, right? So moving to FL X, which is more focused on rewards the way that shows up in the pin it out is less marked down so Improvement to the merchandise margin rate but a bit more in sg&a is those incentives are expense wrong item. So those are the Dynamics coupled with you know increases in minimum wages that we know about that's all been factored in so the leverage Point really still looks like mid single-digit.
Hopefully that was helpful. That's very helpful. And I just one quick question on you mentioned some of the launches sounds like you pulled forward a little bit into January with I think Jordan and Nike is that something we should think of is now ahead with two one Q or just little bit more color around that commentary there. Yeah. We didn't really refer to launch as being pulled forward. Right? I mean most of the pull forward is just good core product that we've been able to get our hands on and you know, it's something that our Merchants team does really well, they read and react and work with our vendor Partners. So if we have the ability to flow product into to help them will do that and we'll continue to do that process. I mean this has been going on for a long time, but you're part of the the benefit of Q4 was certainly being able to to flow in some retro ones in some some air force ones that you know would have hit normally in q1 will continue to pull forward from other quarters and we'll get the additional orders written with our vendor Partners to
Ultimately catch up but it's it's the way that our vendor team our Merchant team, excuse me works with the vendors to manage their open to buy.
Okay, great. Thank you next to me. Our next question will come from a bank, please. Go ahead.
Good morning, 1:00.
Just to touch one foot where you know Nike and Jordan clearly you had some success there, you know as you look out over the balance of the page or you know, just maybe speak about your confidence in the sustainability of that Pipeline and is there, you know a view that there can be of any more money.