Q2 2020 Foot Locker Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Footlocker second quarter Twentytwenty financial results Conference call.
At this time, all participants are in listen only mode.
Later, we'll conduct a question answer session.
This conference call may contain forward looking statements reflect management's current views of future events and financial performance.
Management undertakes no obligation to update these forward looking statements, which are based on many assumptions or factors, including the impact of covered 19 effects of currency fluctuations.
Customer preferences economic in Mark kitchens worldwide. Other risks uncertainties described more fully in the company's press release and reports filed with the FCC and putting the most recently filed form 10-K and form 10-Q.
Any changes in such assumptions or factors could produce a different different results at actual results may differ materially from those contained in a forward looking statements.
Please note this conference call is being recorded.
No I call over Jim Lance Vice President corporate Finance and Investor Relations Mr. Lance you may begin.
Thanks, operator.
Welcome everyone to foot locker Inc.'s second quarter earnings conference call.
Hope you and your families are healthy and safe.
As reported in todays earnings release, we reported second quarter net income of $45 million compared to net income $60 million for the second quarter of last year.
On a per share basis second quarter earnings were 43 cents compared to earnings per share of 55 cents last year.
This years quarter includes pretax charges of $19 million related to the wind down of the runners point banner in the East Bay restructuring $18 million for costs incurred for the recent social unrest.
And a 1 million dollar charge related to the pension matter we have previously discussed.
Excluding these items on a non gap that you since the second quarter earnings were 71 cents per share compared to earnings per share up 66 answer the second quarter last year.
Unless otherwise noted the figures some rates mentioned during our call today will be based on non-GAAP results.
A reconciliation of GAAP to non-GAAP results is included in this morning's earnings release.
The call is being hosted remotely in order to uphold social distinct see me protocols with presenters calling in from different locations.
We'll begin our prepared remarks, with Lauren Peters Executive Vice President and Chief Financial Officer, who will review, our second quarter results and provide some directional color around the back out the 2020.
Dick Johnson, Chairman and Chief Executive Officer will provide highlights from our second quarter performance in an update on our strategic initiatives, including how footlocker is navigating the code 90 pandemic.
Andy Gray Executive Vice President Chief Commercial officer will discuss his new role and will provide additional insights into the business drivers in the quarter.
Following our prepared remarks, Dick and more and more respond to your questions.
With that I'll now turn it over to warrant.
Thank you gentlemen, and good morning, everyone.
We were pleased to report that we delivered a comp sales gain at 18.6% and returned to positive earnings growth during the second quarter.
A meaningful left in top line sales coupled with disciplined expense management helped to offset the gross margin pressure from the channel mix shift and the highly promotional environment.
Overall, we believe our performance this quarter reflects the strong financial position that the company the resilience of our team members and the deep connections, we felt with our customers and vendor partners.
Turning to our store fleet as of today, we have over 2850 stores open across our North America, and they and Asia Pacific region.
Our over 90% about global store fleet.
Due to both Cobas 19 mandated closures that disruptions from social unrest.
Our stores were opened during the quarter for roughly 70% of potential operating days.
A meaningful improvement from the approximately 50% in the first quarter.
That said the challenges facing our operating environment remains dynamic.
We currently have approximately 260 stores temporarily closed across our fleet.
Getting 174 mandated closures in California.
28 stores impacted by the social unrest with the balance stemming from our health and safety protocols.
That's the carotid virus situation evolve we will continue to act and the best interest of our team members and customers.
Taking a look at our second quarter results in more detail.
Total sales increased 17.1%.
On a constant currency basis total sales increased 17.3%.
The impact of foreign currencies as compared to a year ago reduced sales by $5 million.
Our direct to customer channel, let our performance.
With a 173% increase.
More than offsetting a 7.6% decline in our stores.
That's a percent of total sales DTC rose to 33.2% for the quarter up from 14.3% last year.
By month.
May comparable sales were down high single digits.
Whereas June and July were much stronger each producing high double digit gains.
Store traffic, which was impacted by the temporary store closures and social dismissing measures.
It was down double digit across geography.
More so internationally versus the U.S.
However, our customers strong intends to purchase drove conversion up more than 50%.
Over the prior year level.
Average selling prices were up mid single digits on a quarter, while units were up double digits.
Our second quarter sales performance reflected varying levels of strength across our geography.
In North America.
Footlocker foot action Champs sports and kids foot locker were all up strong double digits.
Well foot locker, Canada turns any solid high single digit increase.
And East Bay delivered double digit game.
Internationally the performance was more mix.
Footlocker specific led the way with comparable sales up double digits.
But locker Europe, where consumers have been more conservative coming out of the stay at home orders.
And where digital penetration is not a strong.
Posted a high single digit comp decline.
Runners point and sidestep posts are they collected mid single digit comp gain.
Turning to our families of business.
Footwear was the strongest category up strong double digit.
Apparel was also robust up mid single digit.
Our accessories business was down double digits, due primarily to softness and bags and shoe care.
The results on footwear worth fueled by strength across men's women's and kids.
With double digit gains across the board.
By category men's basketball with the highlight in the quarter.
Delivering an impressive double digit increase.
Men's running with up mid single digits.
Court and casual styles were down double digits.
Our women's footwear business reflected ongoing strength across classic basketball and court style.
Well our kids business was also driven by strong demand in our infants business.
Excitement around classic basketball style and slight gains in running.
Turning to apparel.
Comp sales were up mid single digits for the quarter with women's and kids apparel up double digits.
And men's up mid single digits.
With lots of time at home comfort with top of mind.
Fleece sales drove apparel results this quarter.
Strengthen our north American as foot locker Pacific apparel business was broad based.
With gains across men's women's and kids.
Well in Europe, our women's and kids businesses posted gains, but not enough to offset declines in our men's assortment.
Moving onto the rest of the income statement.
Our gross margin de Levered by 420 basis points to 25.9% and the second quarter.
From 30.1% a year ago.
Our merchandise margin rate decreased 700 basis points.
Due primarily to our purpose full use of markdowns to clear aging assortments.
At a higher mix of DTC, which carries higher freight car.
The actions, we took during the quarter to clear aged product as well as Q1 unrelated backlog.
Resulted in meaningful progress in our inventory position.
At quarter end, our inventory was down 2.7 per cent compared to the double digit sales growth.
On a currency neutral basis inventory decreased 3.7%.
Leverage of our relatively fixed occupancy and buyers compensation provided us with 280 basis points of improvement versus last year.
Included in this quarter were $6 million Covance 19 related rent savings.
Our negotiations with our landlord partners are ongoing.
So stay tuned on that element.
We improved our S DNA expense rate in the quarter by 360 basis points.
<unk>, 18.6% to sale from 22.2% in the same period a year ago.
The lower expenses relative to last year were driven impart by $17 million and government subsidies.
Reduce costs due to the fewer number of days our stores were opened.
And our teams ongoing focus on disciplined expense management.
This is partially offset revise incentive compensation.
And $6 million of expense for personal protective equipment for P. P E.
Depreciation expense decreased to $44 million from $46 million in the prior year.
We incurred interest expense of $2 million as compared to $2 million of interest income last year due to the draw down on our revolving credit facility.
On a GAAP basis, our tax rate came in at 35.4%.
This is 590 basis points higher than last year.
Due in part to the geographic mix of income.
Given limits on our ability to book tax benefit for losses related to certain international operation.
On a non-GAAP basis, our tax rate came in at 30.7% above last year's Q2 rate of 27.1%.
Turning to our liquidity position.
We ended the quarter with $1.373 billion, a cash and cash equivalents.
An increase of $434 million from the end of Q2 last year.
Importantly, during the quarter, we amended and extended our credit facility.
Are you seeing our borrowing capacity to $600 million.
Equally of note, we repaid the $330 million, we previously borrowed.
In terms of capital expenditures, we invested approximately $31 million into our business during the quarter.
Bringing our year to date total to $83 million.
This funded the opening of 18, new stores, including our first store in Macau, It's wells that were modeling or relocating of 26 stores.
We also closed 31 stores, leaving US with 3100 company owned stores at the end of the quarter.
Looking forward, we now expect you invest $156 million in capital for the full year.
Up slightly from our prior guidance with the increased due to the add back of select I, He and real estate projects.
We believe the increase in our liquidity coupled with our limited existing debt gives us the financial flexibility to manage through the near term uncertainty, while enabling us to continue investing in the business in fiscal 2020.
This brings me to our return of cash to shareholders.
Yesterday, our board of directors approved the reinstatement of our quarterly dividend program at a rate of 15 cents per share.
We believe the ability to reinstate it cautious but meaningful dividend.
Signals, our boards confidence and the business and our financial strength.
As always our board will continue to evaluate the dividend program on a quarterly basis.
With respect to our share repurchase program.
The suspension of the program has been lifted it remains an opportunistic program and we will continue to assess the environment.
Given the effects of the pandemic and all the moving parts and the macro environments.
Putting the potential impact on school opening date team sports participation and additional government aid or.
We're not providing guidance for the full year at that time.
However, as you build your models for the back half it may be helpful to consider the following.
With respect to gross margin.
We look forward, we anticipate continued promotional environment in general and as we work toward our goal of being in a clean inventory position by year end and well positioned to bring in fresh exciting product.
We continue to work closely from a supply chain perspective to ensure an adequate and piling flow of good for Q4 and holiday.
We're also closely monitoring rising rates from our shipping partner.
Which will likely increase freight car in the back half.
With respect to SGN a please keep in mind the following headwinds.
Our operating days, where 70% in Q2.
And barring any other disruption, we're now expecting to be above that level in the back half given the greater number of stores currently open.
Additionally, furlough credits and other forms of government subsidies ray benefit to SGN a in Q2.
That is presently not being contemplated in the back half.
Lastly, we expect the $6 million in P.P.E. costs, we incurred in Q2 to be an ongoing expense for the foreseeable future.
Finally, looking at our non-GAAP tax rate there may be significant quarterly variances in the rate due to geographic shifts in income.
And for the full year, we expected to be elevated relative to historical levels.
That I'll now turn it over to Dick.
Thank you learn and good morning, everyone.
In the midst of the colder than 18 pandemic. The second quarter performance was truly exceptional as our team delivered strong top and bottom line results.
While these undoubtedly remain challenging times, we are pleased by the health of our category, our deep connections with our customers and the strength of our vendor relationships.
I'm proud of the great progress our teams have made.
As we reopened stores throughout the quarter product he combined with pent up demand from our customers fueled our in store sales in impressively the momentum across our digital channels also continued to build.
We also believe the effect of the fiscal stimulus was a positive.
With most of our store fleet open we're excited to be able to serve our customers across all our channels.
Throughout every part of our operations, we are focused on ensuring rigorous execution of our covert related health and safety protocols to protect our teams and our customers.
Our store teams continue to do a great job.
Our customer contact centers are open the handling customer questions.
And our distribution centers are open and operating at a high level.
When we look back at our progress during the quarter. The digital business was a standout delivering triple digit growth, even as we reopened stores.
This excellent performance was driven by a number of factors.
Starting with the strength of our product assortments, including pent up demand for a number of exciting launches in classic styles.
Results were also aided by elevated promotional activity as we focused on clearing slower moving goods as well as backed up inventory deliveries from Q1.
We ended the quarter with improved inventory levels.
Andy Gray, who recently assumed the new role of easy VP and Chief commercial officer will provide more color around the product drivers from the quarter in what we see coming from a product pipeline.
Before that though I want to discuss something that's incredibly important not only to our company between our board leadership team and me personally.
Our resolute commitment to fight racial inequality in in Justice.
As an inclusive in diverse organization supporting the Black community has long been part of the way we operate.
Blood culture plays a pivotal role in shaping sneaker culture.
Fondation of our business at foot locker incorporated.
As such we take very seriously our responsibility to adding our voice and actions to drive meaningful and lasting change across the communities we serve.
We are now significantly expanding our commit.
We recently announced that we're committing $200 million over the next five years two initiatives that enhance the lives of our team members and their customers in the black community.
[music] economic development and educational opportunities.
Our efforts include investing in Blackpool businesses, serving youth culture.
Purchasing more products from black owned brands.
Continuing to partner with Dwayne Edwards at the pencil footwear design Academy by funding training for Black Creatives.
Implementing internship mentorship and community outreach programs for black team members in communities.
And the increasing our funding for the foot Locker Foundation, you Mcf scholarship program.
These are only a few of the elements. This program will encompass it will manifest itself in many ways in across many parts of our business with the goal of creating an impact that last well beyond five years.
Moving onto our business performance I want to update you on how we have continued to advance our strategic initiatives in digital capabilities.
Starting with FX membership growth was strong during the quarter.
What we're learning is that the more RF flex numbers engage with us the more they spend as compared to nine members.
Further we leveraged our launch reservation system in the U.S. to create a more fluid and customer friendly experience during high speed product releases.
This is proven to be especially beneficial in the midst of the covered related in store limitations and social distancing protocols.
[noise], you're also seeing positive signs in our European markets were FL access launched including the UK, Netherlands in France.
It's still early days, but the progress we are seeing in these key countries is encouraging.
Moving to our key technology initiatives.
We deployed new websites in an additional nine European countries that built off the modernize platform, we launched in North America last year.
The new sites are easier to personalize to local markets better connected and less costly to maintain.
More compatible with our updated ecommerce systems and they streamline global data analytics and machine learning platforms.
We also integrated a new payment platform globally and optimized our checkout experience erode.
This platform supports a vast number of global payment options, along with automated fraud protection and offers a better and faster customer experience a check though.
And finally, we implemented a new order management system that improves a wide range of critical functions supporting our global growth strategies, including inventory management boss, BOPUS merchandising reporting and analytics notifications to our customers.
The platform is built on a modern architecture, which will allow us to better integrate in the future as well.
All in the technology investments, we've discussed with you over the past several quarters truly benefited us in Q2, as we were well positioned to quickly adapt to the changes in their consumers buying habits and patterns, resulting from a pandemic.
I'd like to now provide more color around the new organizational structure, we announced last month.
Simply put the world around US continues to rapidly evolve in Cold-blood has only accelerated the pace of change.
At the same time global competition is on the rise and with it the needs and expectations of our customers are expanding.
Our ability to adapt to those changes will ensure our success by strengthening our customer connectivity and that's where our new organizational structure comes in.
As mentioned earlier, Andy Gray has been elevated to the new role will be VP Chief commercial officer.
And his experience and driving consumer led strategies across multiple markets will serve us well as he leaves us forward in the softens.
In addition, we appointed Frank Bracken is that you'd be p. in CEO of North America, and Scott Martin is the VP and feel of Asia Pacific. In addition to his responsibilities as the chief strategy and development Officer.
Andy Frank can Scott will join with J. tell wire, who heads up our media division.
Each of them have been with this for a number of years, then have strong track records and driving the growth the business.
The each I understand the opportunities and challenges we see coming now we must stay ahead of the curve in sneaker culture and deeply connected to youth culture to drive success.
Before I move 'em, who would like to take this opportunity to think Jake Jacobs, Luke Kimball, who heads our North America in Asia Pacific business.
Each had decades long careers with us.
They have been instrumental in meeting their respective teams and shaping implementing the strategies that have led to foot locker success over the years.
On behalf of the entire company, we wish them all the best in their next chapters.
I will now pass it over the Andy.
Thank you Dick and good morning, everyone.
I'd start by saying that I'm, we've known or to be here speaking with you today I'd our company embarks on its exciting new course.
As Dick outlined earlier, one of the few calling in the marketplace. The D. is change and the piece of that change it accelerating.
It is our ability to continually evolve with it matters, most and it's what we said at the bar.
The decision to go document you all fans for the team explicitly focused on better 70 consumer is a milestone in our evolution.
As we enhanced our focus on the entire consumer journey My rule will oversee all consumer facing from two globally and ensure the all work in concert to strengthen our relationships both with our consumers on our strategic vendor partners.
This reduced from the product we buy to the content, we create the physical and digital experiences we deliver.
On the Connectivities support we give to our consumers through that.
As we said often this journey, we do so from a solid foundation.
Over the last five decades, we built tremendous equity with consumers and vendor partner through an ecosystem that truly bring sneaker culture to the people.
No. Thanks doubled down on the value we bring the communities, we serve and the speaker industry at large.
I'll now provide you with some detail around product drivers in the second quarter.
But again with our premium business was strong grew at quarter end, despite being a more promotional marketplace increased consumer appetite for the key marquee franchisee really showcased the health of our category.
Basketball with another driving force in the quarter.
Even with the disruption in the sports calendar the store retailing around the key Nike icons resonated very well in the marketplace.
On the long say that the Jordan, Brian delivered a strong pipeline I eat long GE throughout the quarter.
This coinciding with an ongoing impact from the release of the last time documentary, which connected to Brian 10, new generation of consumers and really drove maximum impact.
And we also saw strong reception to new ideas and the category such as the exclusive launch of the Q <unk> are a streamer laid by GE cool, we brought a different approach to the basketball category.
Moving on to seasonal merchandise.
We benefited from its the it whom comfort train with strong performance fees and Weve category as well and Birkenstock Brian.
It's open provided does good early reads for the fall season.
Finally, our consumer concept often delivered elevated storytelling, which continues to connect banks that are concerned.
We saw a number of greet launch is linked to the including Nike free game content.
You should do from their athlete and take before again and featured there iconic basketball silhouette.
I'd now moving city pack, which celebrated sneaker culture and insights from across the globe and was brought to light on their boost technology.
And all the blank with bad.
Which is focused on individuality and breaking boundaries by delivering unique and fresh perspectives on their classic silhouette.
Oh resonating well with the consumer.
Looking ahead, we continue to see opportunities the market.
We have exciting programs you bound humor encumber building off strong recent product launches across the globe.
And we have the continuation of our content all fans the delightful remix from Nike.
On a behind the streets project without EDA, featuring some of their premier Applebee's.
We will also continued to build you opportunity through the filter of youth culture.
As well as create a robust pipeline of exciting energy within our greenhouse incubation deep.
Okay can you get all together with exciting engaging content next meeting.
The current environment will likely come with more twist and turns navigate through we will remain steadfastly delivering again, our purpose of inspiring and powering youth culture and continuing to have overall thing to better serve our consumer.
With that I'll now turn it back to date.
Thanks, Andy.
Take a few minutes to update you on some of the exciting work, we're doing with our portfolio of investment partners.
I'll start by saying the resiliency demonstrated by these young businesses through cold it has been inspiring and giving us more insight into the power of digital connectivity.
We're still early in the journey of recognizing meaningful financial contributions from these investments, but we remain confident in their long term potential.
We are working together to develop programs that can scale into significant opportunities overtime.
Ill highlight a few.
[noise] our partnership with carbon 38 has yielded new efficiencies in our digital marketing efforts the learnings from how carbon 38 engages with their consumer online, it's helping to inform our own digital marketing strategies around engagement and loyalty, while also improving or marketing ROI.
Likewise, our strengths as a large organization have helped carbon operationalize several capabilities to serve their core consumer more efficiently.
Our investment network is lowest to take advantage of new capability opportunities arose content marketing in demand creation.
This generates hype amplifies our product buys the ultimately creates a new avenue for us to meaningfully connect with our consumers.
Additionally, we are exploring product partnerships that leverage the full power networks various ties to the forefront of youth culture. He categories that are consumer curious about.
Meanwhile, our relationship with gold continues to grow as we support their efforts to capture consumer mindshare and the sneaker an apparel space.
Recognizing goats role in the broader sneaker ecosystem, we are working with them on ways to establish deeper connectivity with our shared consumer.
Expect to see this partnership further evolve.
In closing, let me sum up by saying that as we move through the back to school period in the back half of 2020.
We remain resolute in our efforts to deliver a standout customer experience, while working with our strategic brand partners to manage what is a very fluid situation to market to market.
As Lauren mentioned, we're keeping a close I end customer demand fluctuations given the uncertainty around school reopening team sports participation unemployment levels in government stimulus as well as any further government mandated store closures.
We also continue to focus on developing our longer term strategies intended to ensure we maintain our position at the center of youth and sneaker culture, while further strengthening our financial performance and creating ongoing value for shareholders.
In short we believe we are well positioned to capitalize on evolving customer shopping behaviors through a sustained emphasis on digital as well as evaluating a further pivot off mall, including through our power store often.
We believe our power store concept and community focus is the write off fans to offset mall related pressures.
As we move through the changing cope with 19 dynamic our teams will continue to employ data driven approach to take advantage of the right opportunities as they arise.
Before I turn the call over for your questions I'd like to express my deep appreciation to every member of the foot locker team never store office home office and distribution center around the World Our performance in the second quarter is a testament to the strength of your dedication and focus.
There are still obstacles. The uncertainties ahead. However, we've seen the resiliency of our customers along with the dedication of our team members I believe we will be a stronger smarter and more nimble company on the other side of this.
With that operator, please open up the call for questions.
Yes, Thank you ladies and gentlemen, we're now ready to begin the question answer session.
She'd like to reduce your question. Please press Star then one on your telephone keypad.
Your question is trying to answer or you would like to withdraw your question. Please press Star then too.
Sure you didn't speakerphone, please lift up your handset before and during your request once again, if you'd like to ensure question. Please press star one on your telephone keypad.
And the first question comes from our Janine Stichter with Jefferies.
Hi, Good morning, Thanks for taking my question, so trying to them and realize the bat warning I'm just trying to get some context around the back half I know, there's a lot of moving pieces right now, but any color you can get into how you feel about product pipeline in the third quarter and then maybe on NIM.
Basketball, which has been very sharply versus some of the casual styles have been relatively weaker how did that mix in the back half compared to the first half and then just maybe any context, you can get around the importance of back to foresee.
Thank you.
Well, it's a loaded question Julien so good weather getting started to this morning, you know the.
The product pipeline as Andy Dove into a little bit we've got a lot of concept work, that's been really well accepted by our consumers.
In as they come out to the stores as they shop digitally there's a lot of connection point.
Clearly a basketball with the the air force ones in the AJ ones and the retro releases, who has been a a really good category through the the second quarter and remember that that included some launches that were a push from the first quarter into the second quarter, So probably not not a perfect.
Now the perfect the equivalency, but clearly basketball remains important it's great that the NBS play in the playoffs have started so there's a lot a lotta energy.
Around basketball, we see strength thrown some running silhouettes in certain markets as well you were running has always been a little bit stronger in Europe. It continues to be good in Europe, and and we think there are opportunities with a lot of the Max Air Silhouettes here in North America, you, Andy Recapped, a number that can so the work Uh huh.
What's that we've got going on in those continue to be well received the though the three to seven from new balance the.
The J call shoe with the Puma you know really look the basketball from a different point of view some of the work we're doing with commerce.
We get more into the season into the timberland season, as we get into back to school in the back half of the year. So a lot of opportunities on those casual and classic styles.
When it comes to come back to school, we really don't expect the cadence can be the same as it's ever been before right is.
Back to school tax free holidays have shifted in some states and been pulled back and other states. The schools in many cases are still trying to determine how and when they go back. So we expect the cadence to be significantly different you know it will impact us a lot of front as we think about the back sport seasons as well.
So you know the teams managing through it and no I look at it and recall that if we have provided you know a lot of clarity around Q2, when we met in May it would not have been a very good predictor of how we ended up in Q2, and we're sort of very similar to that today that you know as back to school.
We'll keep in shifts.
He will do everything we tend to manage those shifts and deliver against the.
The consumers the shop with us both online and digital.
Great. Thanks, Charlie.
Thanks Julie.
Thank you and the next question comes on top and they catch with Wells Fargo.
Hey, good morning, Thanks for taking my question I'm willing to you know what that I want to ask about I guess looking about cap and specifically for Q4 and during the holiday season.
Historically.
A year stores have no pretty.
Pretty good traffic trend.
Had a lot of foot traffic in the stores, which I would imagine it now.
Social distancing.
Type of scenario would be.
A little bit more challenging CRE.
For what is normally a crowded footlocker store during the month of December.
So how do you think about that no navigating a decrease from a tricky operational challenges.
Our Q.
[noise] is well tell you know a number one concern is the health and safety of our employees in our customers. So.
Social distancing the safety protocols, the pp that Lauren mentioned in her comments all are critical to managing the flow through the stores and.
You know the season the holiday season is going to be really difficult to predict right. None of us know workover, it's going to be at that point, but what we proved during the second quarter is that weekend amp up our.
Direct business, our digital business in service the consumers as well so I think it will continue to be a balance between taking good care of our consumers as they come to the stores.
No no the Black Friday will look like Black Friday is looked in the past I don't know that the Saturday before Christmas will look like the Saturday.
Over the past I'm, just not sure were customer shopping behaviors will be.
But I am confident in our team's ability to deliver.
Healthy in safe experience for our consumers the do make it to the stores, but I would expect you're right.
The traffic in store at any given moment on any given day will look a little bit different just based on social distancing protocols.
And Tom I, I, where they add that you know our team has the shop.
Oh go ahead, and they have really getting federal quality thought to the doors that might be particularly challenged in that way based upon.
Store traffic patterns that Pete and we really have proactively thought through due to be able to manage that kind of situation well so thinking about how we service.
But bringing products it's right on.
But also managing through the process check out, so and giving us more points and less square footage, where we can actually come clean the transaction and making use of technology to make that checkout very smooth quit.
He is with some of the other technology call outs that we had earlier in the call where were.
Confident in our team's ability to manage through the well away with a health and safety at the forefront.
That's helpful. Just a quick follow up sort of along along those lines. We've heard some retailers talk about trying to.
I guess pull forward some of the holiday demand.
Before I sign a or even into October.
That's something that Youre, considering all core.
Thinking about the bottom line.
Well I think it's it's ultimately up to the customer term right I mean, they make the decision when they're ready to shop, we're working very closely with our vendor partners as it relates to launch and keep product and product deliveries.
Clearly.
I don't believe the peaks will be quite as high I believe there will be broader just because people.
Our not showing a propensity to be in crowded place so.
Thank the that certainly trying to pull.
Demand for word is one of the strategies being aggressive digitally to make sure that they're comfortable shopping and confident that don't get their deliveries. So.
Fine tuning our supply chain to make sure that that happens.
All of those are variables that the team will look at you in terms of servicing that high peak season.
The one thing that we know is that the holiday will shift it's still going to happen on December 25th for those people that celebrate Christmas.
We have to be ready to take care of the consumer in that build up to that that is very important giftgiving time.
Got it thanks, guys I far not best of luck.
Thanks, Doug.
Thank you and then next question comes from Michael Binetti with Credit Suisse.
Hey, guys. Good morning, Thanks for the taking my questions here.
And Mike a couple of reads.
Lauren a couple for you I guess you commented that the gross in the gross margin comments that you wanted to be clean on inventory by year end. It was down 3% on revenues up 17 in the quarter you sounded like you moved through a lot of age inventory, where do you want the inventory be at the end of the year and it sounds like you would be directionally down more than the three just reported is there.
Is there a path positive comps in the back half is demand is there based on the inventory plan and then I guess the second question would be [noise].
Nice to see a room and the capital deployment strategy back in the right direction here very good signal for the medium term I'm curious you described the repurchase plan as being opportunistic what's your normal conservatism baked into the language, but you know you're one of the first in in that group that we watch to bring back a dividend and you're confident enough to bring back from the capex.
Really.
At the stock price I am curious what are some of the items on the list that are cautions for you and thinking about restarting share repurchases.
That are incremental to the positives you that you saw over the medium term to bring back the dividend in the Capex.
Okay, sorry, Q2 part question.
First around the inventory as as we called out.
Strong topline and we had a second quarter.
We certainly made progress on our objective is around the inventory, which those dealing labs.
With a natural backup with their close store period that we had friends kill him into the early days acute Yale.
And that just by its nature creep back up in the aging. So we make good progress again that but we still have more work to do and our objective is to get to they enter thing here in a place where we're feeling very good about quality of the inventory and that's up the right level.
To support the expected business at the beginning of next year.
So do I have learned with being at 2.7% down at the end of Q2 about being able that satisfied that man for.
Back half, okay, not off of 2.7% decline that that's totally itself there are plenty out.
Telling product does take them and he described and to be able to satisfy our customer.
So yeah, but that's the way described.
I'm, sorry about that rate given that we're still working on the inventory.
Putting some continued pressure on that margin outlook.
Turning to your second question about share repurchase.
As we've described before it is.
Not a formulaic program. It is opportunistic and there are lots of things that go in to evaluating whether or not it's the right kind to exercise. So what we're calling out as though we have an authorization that has.
867 million still open on that but there are lots of dynamics to consider.
Around.
Liquidity and cash preservation of the uncertainties in the back half these are all.
Elements that go into considering whether or not it's the right time to to see if that opportunity.
I'd now like flat top because it's not a formula Theres a lot that goes into thinking about it but but believe me we talk about both dividends and share repurchase and our opera Kennedy's train bus and our business.
Regularly with our board that of course, our first priority and probably thinking about Latin and that business. After a long term objectives, which we are excited about.
Got it it's nice to have it there so okay. Thanks for all the for all the help.
Thanks, Michael.
Thank you and the next question comes from Paul Trussell with Deutsche Bank.
Good morning, and.
Wow.
Mike alluded to on a good second quarter and all the things you're doing.
And with the business so.
First question is about the store fleet.
And really just one a better understand how you're feeling.
About your presence and exposure within the mall.
And whether you have.
Any changing views on the power store strategy.
We're international expansion plans that had previously been outline.
And and more and while I know, it's still in negotiation. You know are you pretty confident about the ability to kind of bring down.
Average rent rates.
But I'll jump in first Paul on the mall exposure in how we're feeling about malls and.
You know clearly you know the Covance situation has accelerated work that we've had in process for you know.
Number of quarters as we continually monitor the fleet in the health of the fleet in the health of the malls.
We feel good about our community based power store efforts right connecting with the community is something that is critical in those stores have shown us that when consumers or sheltered in place that they'd like to get into those environments and sure experiences with our associates and connect with each other socially so.
We continue to believe that there are opportunities in those community based stores in the power stores and we will continue to a you know to.
Work with the mall developers and understand the health of malls in the overall health of the fleet.
And clearly we believe that there are expansion opportunities internationally right, where we just tipped are stuck our toe in the water dipped our toe in the water as it relates to our Asian business. We just opened a store in Macau, we opened the of great New store on Orchard Road in Singapore.
We continue to evaluate what the mix countries will be the will enter in Asia, and we believe that the work that the Virgin Susie and kick are doing in Europe is a growth opportunity with the sidestep better now that we've we're wrapping up the closure of the runners point better so you'll get ethic stores.
Continue to be an important part of the story, Paul I think that some of the digital.
Acceleration that we've seen will certainly stick around but one of the things that was really obvious when we started reopening our store fleet is the customers like be another stores. They enjoy dealer stores. They enjoy the social aspect of shopping even with social distances. So you know while the experience in store will continue to evolve.
I'm still a believer that stores play really important role and we will continue to monitor the the health of the malls and you work with the developers as we look at opportunities.
I'll turn it over to learn on the driving down on the rent.
Overall average rent [noise].
Yeah, well as we described we did see some benefit from the conversations which at them very constructive with our land Board partners on our occupancy is it wasn't.
Impacted by the close down period.
And then are those those conversations continue with a fleet as large as ours. You you can imagine the time required to complete those conversations I've actually got the agreements papered.
And that's at that point once you actually habit paper that you're able to a record financial impact of both at Green Oh.
Hello, Claire or call out to stay tuned on that because it's still a work in progress some of that gives you benefit those agreements get your benefit.
In the current period other reached an agreement that stretches set out over the lease life. So it isn't that.
So just in general what I would say is that we are I mean, a very much a desired tenant for our.
The landlord partners, we bring great formats and in this category.
That really serve specialty and athletic well.
So with.
Being a desired panna.
And a very good Canada, we think that that's helpful and and getting occupancy arrangements that that makes sense for our model.
[laughter] leverage has really helped when you're when you're driving positive huh.
[laughter] and just on that weren't as a follow up maybe just any other color.
On how you're managing labor and expenses.
In the back half you know just given the the unknowns.
On the top line any help there would be.
Beneficial to us trying to model.
Okay. So hopefully.
You get a sense that we do we do that Barry for Terry carefully and Wes.
Every line getting inspection as to what's the appropriate spend.
So you know biggest element is selling wages and as we've described since we've had a 70%.
We have opened a isn't in second quarter that the 30% closed was helpful expense. So we and expect barring some unforeseen event that with 90% of the fully up and let the selling wages well.
The adjusted Accordingly.
Well, well see how you know whether or not government subsidies as an element, but as we described we're not we're not predicting that at this point.
But we are you know we're controlling the controllables as we described.
Well its fourth on last call on it that on this call we've learned an awful lot about effective marketing.
How to make them I'll start those marketing dollars, both digital only and bring on.
So that flat helpful to Ah Ah.
And.
But there's some variable clip, but just continue to not the experience there.
Expense like travel nobody is really going anywhere unless it's absolutely essential.
So those are some of the bigger elements and and we are managing them quite closely it Paul.
Thanks for the color and thank you for your support or the culture My best.
Thank you.
Thanks, Paul.
Thank you.
Question comes of Chris If I was here with Wedbush.
Good morning, everyone. Thanks for taking my questions squeezing me in lateral.
I.
I guess just first question for me just want to square some thoughts around inventory and product.
You mentioned mortgage working closely to get adequate good holiday product for Q4 and that you might have to have higher freight costs coming into the second half are there are situations where bye.
Sure you're not getting adequate supply a product where demand is outstripping supply availability for whether its passport Jordan or key franchises as you think about holiday enough, maybe some additional cost to get bad and I'm, just trying to square that thought process against your current inventory.
Well, Chris if it's no different now than it's ever been right. The hardest to keep product demand always outstrip supply you know we operate in a world that really does have a.
Constraints around some of the supply on those those high heat products.
For all the right reasons to keep them incredibly hot when they do come to the marketplace. So again the team is working with the the vendor partners and you know the I guess the kilometer on freight is simply that supply chains are being taxed all over the world right now whether it be a yield the shipping part of it you know from our debt.
Attributes in southern junction city in care pill tourist stores or DTC shipments or be the transport from a from a the far east into the ports in North American Europe. So it's a influence come it really tied to euro supply chains that are tight right now and.
We're looking at every available Avenue to make sure that we do in fact get to the right product here for the holidays and utilizing.
The merchant team certainly feels good about it right now, but it's an ongoing yo dynamically changing to the world that we live in based on.
Ports the.
Run into a virus spike that have to slow down receipts right that you can't planned for.
And you can't necessarily maneuver around so you know I think the additional freight really is more just erode constrained.
A supply chain opportunities.
Right I mean, there I think that I went out of the just the natural outcome of March certain when things seem that but suppliers had to think through what needs to happen at the factory to deal with the backlog.
And so getting that Reengaged, that's part of figuring out product flow for certainly for holiday.
Got it Okay. That's helpful. Thank you and two more for me real quick just a number one I'm just curious in Europe, any thoughts or added color I know you're doing a lot. There are lots program digital platforms et cetera, but also just curious as you look by market how that it's impacted you know to a degree relative to covert spikes things.
To that nature.
Relative to the underlying trends in the business and lastly, just on merchandise margin Lauren you're expecting to be down down 700 basis points in Q2, I guess, where the inventory is is that we book installed on neighborhood or should it be something less than that I'm just curious.
Thoughts about the pressure on merchandise margins back out.
I'll just I'll jump into the Europe question first a little more and come back on the merge margins.
If you take a look at the way the virus hit.
Think about how locked down Italy was for a long time.
Italy being one of the lead markets for Us in Europe, certainly had an impact and as the telling consumers come out into their summer period in their summer sale period in though are contemplating back to school clearly they're going through many of the same things across that country in all of the countries in Europe. They read an.
Article this morning about travel restrictions getting amped backup across Europe is your summer holiday seasons, there there they're vacations to the to the C into the beaches have brought what they think are gonna be some spike so.
I think our team in Europe continues to manage the business in the uncertainty very well very similar to the team here in the U.S. The ops team does a great job. The merchant team does a great job and there are adapting to those uncertainties, Chris but you're going to its a every country is dealing with it a little bit different in terms of low.
Local laws social distancing masks all of those things that we hear about everyday in the U.S. or are very much a part of the Europe business, but the underlying business as we focus on a multi band or strategy with sidestep and foot locker, we expect the euro to see the consumer continue to respond.
To the grade product offerings in the great in store environment in the digital connectivity that we've got with the with our core consumer today.
So ill pass it over to learn of the merch margin question.
So we we describe that there were two dynamics so in the second quarter around margins that we had the elevated level of markdowns as we were working and against our goals on inventory quality against a backdrop, just a general macro environment that's more promotional.
And as we've described we continue to have more work to do and.
I've just got an assumption that that's promotional backdrop hangs with us until we get to a more normal place. The other element that we described was.
Much happier penetration in our digital business, which naturally carries a lower margin rate because ups freight that's associated with getting die unit to direct to the customer.
Larry we were at 33% penetration in the second quarter versus 14, and a year ago. So part of thinking through that margin as how does that penetration.
Play out.
As you've got a a fleet that is more open by the customers still thinking through the dynamic of which channel they prefer to shop and on that but does have an impact on the finished margin right.
Got it but it's fair to say that you would expect merchandise merger related to promotions to at least abate as you go through Q3, it into Q4 fair statement.
And we still have work to do on the inventory quality and the and buyer mats still looks from national today.
Understood. Thank you very much in all of that.
Thank you and last question comes from Robert Trouble with Guggenheim.
Hi, Good morning, Thanks for taking my question I guess two quick questions first can you just spend a little time on any what's the resumption of the dividend.
The level that dividend in sort of how you're approaching it going forward and I guess just on following that commentary on the work you're doing the inventory can you talk a little bit about just the the flow of inventory throughout the stores online sort of how you're actually meeting the demand and sort of some of the investments.
Around the navigation of making sure you get their sale and capture the sale no matter, where the inventory sits in your facilities. Thanks.
Well I'll take the dividend question and maybe pick wed like to comment around there.
Inventory flow across channels, which I think from my perspective, the customer decides where it's kind of be and then we do our best an extra we've got it in the optimal place to satisfy their need.
I guess I answered that question before year [laughter] question [noise].
And then the Devin.
We described it as we're thinking about it is a cautious we weren't getting back into it but it's meaningful and of course wondering though that many things that you look at to decide whether or not meaningful payout.
And they yield versus.
Benchmarks and so these are all things that that we considered but the overall statement.
We feel great about how we manage through liquidity in our capital structure and you know the board feels that confidence to hence delivering a meaningful cash return to our shareholders such as we've described before.
Very important to how we think about.
The business.
Well I'd just add to your second question, Bob I mean, Loring Lauren gave a good answer but but the truth is we've invested in things like buy online ship from store buy online pick up in store.
The customers that shop with us handheld devices in the store the customers that shop with us in across any channel really have access to all of the inventory write. The question is is it in the store that they happened to be standing in or will we ship it to them or back to that store for them. So you will certainly the allocation process you always want the.
The right inventory in the right place at exactly the right time, but but realistically the IP investments that we've made the Pos the investments that we've made the handheld technology investments that we've made.
You know that we've been talking about for many many quarters. All proved the in Q2 the access to the inventory is critical and even with down traffic you're able to drive club sales because all consumers really have access to all inventory and we'll continue to refine the allocation method and work with.
Our supply chain to to try to shorten the distance between any given product in the customer that orders it but I think.
Q2 was really a testament to the investments that we've made in the the methodology that we use we actually opened stores first to ship out buy online ship from store orders, even before we could entertained our guests back in the stores, we had our associates in the back room shifting out orders for direct to consumer digital or.
So get it's a it's a wonderful ecosystem that I think our team does a great job of taking advantage moment of the inventory no matter where it sits.
Great. Thank thank you very much.
Thanks, Bob.
Thank you.
At this time I would like to turn the floor back to Mr. lands for any closing comments.
Thank you for joining us today. Please join US again for next earnings call, which is scheduled for 90 M. on Friday November Twentyth.
The call will follow the release of our third quarter results earlier that morning.
Thanks, again and be well.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating in all disconnect.