Q3 2020 Foot Locker Inc Earnings Call
[music].
20 to 20 <unk> financial results conference call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.
This conference call may contain forward looking statements that 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 and factors, including the impact of COVID-19 effects of currency fluctuations customer preferences economic end market condition to worldwide and other risks and uncertainties described more fully in the Companys press releases and end report.
Filed with the FCC, including the most recently filed form 10-K or form 10-Q.
Any changes in such assumptions or factors could produce significantly different results and actual results may differ materially from those contained in the forward looking statements.
Please note today's conference call is being recorded at at this time I'd like to turn the conference call over to Jim Lance Vice President Corporate Finance and Investor Relations Mr. Lance you may begin.
Thanks, operator, welcome everyone to foot locker Inc.'s third quarter earnings conference call.
I Hope you and your families are healthy and safe.
As reported in today's earnings release, we reported third quarter net income of $265 million compared to net income of.
$125 million for the third quarter of last year.
On a per share basis third quarter earnings were to dollars and 52 cents compared to earnings per share of $1.60 cents last year.
This year's quarter includes a pretax noncash gain of $190 million related to a higher valuation from.
One of the company's minority investments.
Pre tax charges of $3 million related to the wind down of the runners point banner.
And $1 billion from cost incurred to social unrest.
Excluding these items on a non-GAAP basis third quarter earnings were $1.21 cents per share up 7% compared to earnings per share of $1.13 cents.
For the third quarter of last year.
Unless otherwise noted the figures at 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.
We'll begin our prepared remarks, with Dick Johnson, Chairman and Chief Executive Officer, who will provide highlights from our third quarter performance and an update on our strategic initiatives, including how the company is navigating the code at night.
Yeah.
Andy Gray executive Vice President and Chief Commercial officer will provide additional insights into the business drivers at quarter.
Lauren Peters Executive Vice President and Chief Financial Officer will then review from third quarter results and provide some directional color around the fourth quarter of 2020.
Following our prepared remarks, Dick at more and we'll respond to your questions with that I'll now turn it over to to.
Thank you Jim Good morning, everyone and thank you for joining us.
This third quarter was unlike any we've seen before going.
Well would relate to the uncertainty around the timing of school Reopenings end team sports participation delayed the long end at the back to school selling season.
Yet despite kicking in later than usual momentum to build as the quarter to progress.
We delivered a strong top and bottom line performance demonstrating the resilience of the foot locker portfolio of brands.
These results not only reflect the deep connections with our customers and the strategic relationships, we have with our vendor partners, but also speak to the tremendous teamwork of our store teams theses end customer contact centers.
They continue to go above and beyond to create seamless and save shopping experiences for our customers.
I remain incredibly proud of their focus and dedication.
With the majority of our stores open throughout the quarter, we were able to utilize all of our omni channel tools to enhance the customer experience, including buy online ship from store to buy online pickup in store.
As we all know covert remains a fluid situation with cases surgeons around the world over.
Over 10% of our global store fleet is temporarily close to comply with government mandated to lock those in restrictions.
And this may just be at the beginning of a broader ways of store closures over the coming weeks as further proactive measures are taken to contain the spread of the virus.
In the meantime, we've continued to adapt our strategy is to reflect safety and social distance to protocols for.
For example, we stretch to Grand opening of our community based store income to California over seven days.
This work to our benefit enabling us to engage with the community for a longer period of time as we celebrate of local brands and drill pipe through media and Influencers.
Turning back to our performance our results were driven by the strength of of product Assortments with momentum in basketball continues to lead the footwear category globally.
Seasonal brands, such as timberland of the North face also contributed to very strong trends during the late back to school period.
Lastly, apparel momentum accelerated has to stay at home comfort trend increased demand in all apparel categories.
Once again, our digital business led the way delivering very strong growth of over 50%.
This was especially impressive in September and October when digital continued to outperform even as we saw double digit store comps in those months.
We are frequently asked how sustainable these digital trends are.
What I will tell you is that while we expect to penetration level to moderate we don't expect to go back to pre covert percentages.
Over the last few years, we have invested in and significantly strengthened our digital foundation.
This drove to sustain digital traffic growth through Q3 with strong upticks across all banners and geographies.
At the same time, we've been evolving our organization to be digitally led.
We're committed to great digital products storytelling.
Customers of noticed how much their experience has improved.
As we signaled last quarter promotional activity remained elevated in Q3.
A large part of our markdowns were due to a temporary decrease in the amount of product we returned to our vendors in light of the covenant related to supply chain complexity.
As such our team aggressively cleared through these goods in order to support our inventory of objectives.
Lauren will provide more detail on this but we ended the quarter with healthy inventory levels and a better composition with fresh receipts.
And that means we expect promotional activity to be lower in Q4 than the past two quarters.
Andy will provide more detail around product highlights in the quarter, what we see in the pipeline for Q4, but.
But suffice it to say we are encouraged by the enthusiasm and loyalty of our customers and the energy we are seeing in our product assortments.
One point before I provide an update of their strategic initiatives.
We completed the previously announced shutdown of our runners point of banner in Europe during the quarter closing the remaining stores consolidating the digital team and to our other European operations.
This was a difficult decision and we think the runners point team for their hard work over the years.
Now, let's turn to the progress we've made with our strategic initiatives in digital and technology capabilities.
Beginning with loyalty, we continue to make great strides with FX, having surpassed 11 million members of the U.S. and Q3.
Encouragingly members are spending to the average of 40% more than non members.
They also tend to shop more frequently with the number of orders per customer at more than 50% higher on average than non members.
We're also encouraged by the increase in cross border shopping across our portfolio, which is an important metric in the program.
These trends are even more pronounced among our most highly engaged members.
While still in early days Eplex is also being well received in Europe with member enrollment engagement trending positively.
We will continue to refine nflx globally and look forward to sharing more with you as the program continues to scale.
Moving to our technology initiatives, we continue to make good progress toward evolving as a fully integrated omni channel company.
Ill highlight a few of the notable achievements in Q3.
First we made additional investments in our BOPUS program, making several improvements to drive convenience for our increasingly omni channel customer.
For example, we added both this functionality to our native apps, which enables us to capitalize on our physical footprint with flexible fulfillment options.
We also established dedicated areas of more than 700 stores for customers to pick up their online orders simplifying the pick up process, while helping to maintain social distancing protocols.
Second we launch close to an all north American sites, and it's already become a top three payment option for us with over 2000 orders a day.
For those not familiar with cloud to it's a buy now pay later service that gives customers the opportunity to get the exciting product they want when they want it.
This complements after pay which is operational in Australia in the UK.
And to additional options are on the horizon, which are all built on the foundational payment platform work completed in Q2.
Finally, we continued to enhance our store Pos systems. For example, more countries languages are supported processing returns and web orders a simpler for our associates, who can accept E wallet payments, that's true, we chat and Alec pay and certain geography.
Turning to our social responsibility initiatives are tremendous efforts have really come to life over the past several months.
With respect to at $200 million commitment to uplift team members and consumers within the Black community known as our lead initiative Weve made great strides in developing a plan to drives upward mobility and to finds our commitment to supporting education economic development.
In addition, our back to school giveaway in partnership with soles for sole still needs of $1.5 million of footwear globally, roughly 19000 pairs of sneakers to help youth communities most affected by the pin debit.
And then we have a global collaborate product initiative.
This was launched to eight communities to exclusive collaborations with industry, leading designers and brands.
We released weekly launches donating $250000 to soles for schools to further facilitate our shoe donation to kids to need.
Let me now take a few minutes to update you on some of the latest developments with our portfolio of investment partners.
First off I'd like to congratulate team at gold for closing a $100 million series E round of funding.
This latest influx of external investment demonstrates the market's confidence in the broader sneaker category will allow go to address global opportunities across sneakers in new categories.
As an investor end to partner we are excited by goats continued success, we continue to work with them on innovative new ways to connect with our sneaker obsessed consumer.
Turning to network this small but fast growing video commerce platform continues to put wins on the board in terms of their consumer connectivity diversifying the revenue streams and testing new ideas to.
Our partnership with network, we've had several successful product pre launches across our banners and created unique and engaging content for our consumers.
Another partner I'd like to highlight is Duane Edwards at pencil.
Commitment to pencils core mission and track record for success has only increased this year.
We're proud to share of that they will be leaving to major programs across foot locker incorporated to the next generation of black footwear and apparel designers.
This work directly ties to our lead initiative.
Finally, we continue to view carbon 38 is an emerging leader in the women's space.
Our efforts to share capabilities across everything from digital marketing of loyalty to sourcing and vendor management is resulting in new learnings and efficiencies for our to companies.
Now I'd like to discuss our exciting plans for the upcoming holiday season.
We fully expect that our high heat launches exclusive co labs concepts and associated marketing campaigns will create significant energy throughout the selling season.
Compelling new product drops for the season are in the works from.
From the introduction of Hype Bay, and other exclusive apparel launches to foot locker North Americas 12 days of greatness basketball inspired campaign of product launch collection.
Which kicks off today.
And foot locker Europe's shoes don't change the world you do give back campaign.
From a tactical standpoint, youre, taking proactive actions to manage capacity and throughput both in stores and digitally.
We want to ensure the safety of our associates and customers, while delivering an outstanding customer experience to the holiday peaks.
These initiatives include implementing mobile checkout devices, and our highest volume stores as well as doors that have limited open registers due to social distance at.
Installing cash wrap extensions to over 250 stores to create six feet of social distancing space between Pos stations.
In establishing of virtual lying to you at that will allow customers to see their place in line when to store reaches capacity.
We will also continue to partner closely with our strategic vendors market by market, while keeping a close I end customer demand fluctuations given the uncertainty of coven and the likelihood of further restrictions.
All in even against this backdrop, we are well prepared to anticipate react to capitalize on evolving customer shopping behaviors.
Our financial position remains strong we are poised to continue advancing our long term strategies as we build value for our stakeholders.
I wanted to take a moment to express my sincere gratitude to each and every associate at foot Locker, Inc. It.
It is through their relentless dedication and hard work that we were able to achieve the results. We did this quarter.
I'm confident we will continue to manage through the uncertainties ahead with compassion and purpose as we drive our business forward and fulfill our mission to inspire and empower youth culture.
I'll now pass it over to Andy.
Thanks, Dick and good morning, everyone.
I also want to take a moment to acknowledge our team for old at a hard work and their commitment to enhancing the value we bring to the communities wheat, there and that Peter industry at large.
That commitment is what drives our organization to deliver Nike products really maximize our omni channel capabilities and enhance our purpose and community initiatives and I'm pleased to share I, we brought those priority to light right at the quarter.
From a product perspective, we saw a healthy balance in our business with gains in footwear and apparel across mens womens and kids.
The culture of basketball continues to be at driving force led by strong storytelling and momentum around to key Nike icon.
At strong pipeline of high heat, Jordan really to you and some new initiatives and storytelling type humor, Reebok and new balance.
Hi, Steve to merchandise was very strong throughout the quarter with good performances across summer and fall looks from brands like timberland of and Burqas, though.
In addition to.
At comfort trend benefit due to our power of it which gained momentum in the quarter.
Well it was the biggest driver with good performance and Nike Jordan and added to.
An ongoing partnerships with Northleaf and changes end market complementary to category and added new dimension to our business.
Lastly, how consumer content, often delivered elevated storytelling, including remix in tie, but featuring unique beverage end of nikes iconic silhouette.
Multiple long to eat against the exclusive humor, RSP must silhouette with Jayco.
Okay, and hair heat and excludes the collaboration to bring some Halloween energy to our consumer and continue to work with new balance against their three to seven franchise.
We also saw some encouraging success from our green host incubator, including crop and Nicole Mclaughlin.
Van and kids of immigrant Andy early introduction of Jayden Smith, you balance signature shoe.
Oh, no a lot of new ideas and concepts flowed into our ecosystem and rate need to well with our consumers.
I'm looking forward, we're excited of what we see coming in Q4 with a steady stream of our key franchisee complemented by a great flow of energy end markets.
This will be highlighted this year by the expansion of our annual week of greatness, which will become the 12 days of great.
Every Friday and Saturday over the big six weeks of the to eat and we will feature exclusive drops centered around the culture of basketball and some of the industrys called creator.
These include just on gas stable balmy, new Luigi malady of Fannie and many more.
Complementing this will be more exposed to combat such as Andy back the high end to strike featuring Galen Ramsey I.
Great Kids programming AOL surprise of humor.
Fantastic Nike concept to coat fresh perspective.
Beyond product I also remain excited about our community initiatives and hope to purpose is truly embedded into the fabric of our company.
In addition to collaborate which Dick mentioned, we are elevating all of our community efforts, including extending our community stores across the globe.
We're also expanding our local geo team to ensure we are more deeply rooted in the neighborhoods wheat, there that includes locally to be local product and local give back.
As you can see our team to be very busy to significant digital investment. We've made over the last few years is clearly paying off and we're proud of who we are more consistently and more personally connecting with our customers both in our stores and on our digital platform.
And linking to digital and physical expediency together to connected product stories and enhanced capability at enrich our customer journey is where we see the future.
And it's what we believe will separate us going forward.
And while the current environment Maple was challenging we remain steadfast in Matt commitment.
With that I will now turn it over to Lauren.
Thank you Andy and good morning, everyone.
We are very pleased to report that we delivered strong comp sales gain of 7.7% at.
High single digit earnings per share at Grad during the third quarter.
Despite the kind of at related headwinds in the early part of back to school, our team executed well at skillfully managed to to the dynamic environment.
High single digit growth in top line sales, coupled with ongoing discipline in our expense management.
Helped to offset continued albeit at sequentially at less gross margin pressure from at greater mix shift towards digital.
At higher promotional activity.
During the quarter, our stores were opened for roughly 95% of potential operating day.
It's kind of at 19 mandated closures to east, particularly in North America.
This was a meaningful improvement from the approximately 70% of operating days in Q to Q.
However, the operating environment remains dynamic given the potential for incremental kind of at locked down as we head into the colder months.
As Dick mentioned over 10% of our store base is temporarily closed due to recent restriction.
As always we will adhere to all necessary protocols to promote the health and safety of our team members and customers.
Taking a look at our third quarter results in more detail.
Total sales increased 9% on.
On a constant currency basis total sales increased 7.7%.
Our direct to customer channel continue to lead our performance.
52% sales increase.
More than offsetting and essentially flat result in our stores.
As a percentage of total sales DTC rose to 21.4% to the quarter.
Up from 15% last year.
Although the timing of school starts shift at later this year, we nonetheless had a very strong back to school season overall.
In low double digit comparable sales decline in August was more than offset by high double digit gain in September and October.
Store traffic remained challenged count double digits at cross geography.
And then Ken Ken you social distancing protocols.
However, our customers shop with purpose.
Driving conversion at more than 40% over the prior year level.
Average selling prices were down low single digits in the quarter.
While units were up high single digits.
Nearly all of our divisions performed well during the third quarter, so sales strength across our geography at snacks.
In North America.
Net action led the way with a strong double digit comp gain EM.
Impressively foot action has also delivered at a high single digit comp increase year to date, Inc.
Graduations to that came from an exceptional job in this unprecedented climate.
Meanwhile, Champs sports also posted strong double digit comp gain.
Foot locker and kids foot locker increased high single digits and low double digits respectively.
But locker, Canada, which was up against at double digit comp gain last year was down low single digits.
East space It was down high single digits.
At lower sports participation to to kind of Ed impacted sales of hard goods and performance of product.
Internationally at foot locker Pacific once again turned in solid results.
At comparable sales up strong double digits.
At continuation of its impressive year to date perform at which is also up double digits.
And graduations to the foot locker Pacific team for such a strong performance.
Last but not at least foot locker age at delivered a high single digit comp gain.
Turning to Europe.
Business remained weaker in that region were kind of at related to restrictions to became more widespread at the quarter progressed.
Well at locker, you're at posted a high single digit comp decline.
I'll sidestep decreased mid single digits.
As we noted last quarter, although the direct business was nicely positive in Europe. It was unable to offset the decline in stores given now that weren't digital penetration rate.
Looking at our sales by family of business, our apparel business led the way this quarter up double digits.
But were also turned in another strong performance up high single digits.
Our accessories business continues to see pressure down double digits, largely due to softness in bags shoe care at hard goods.
The results in footwear were solid across the board.
Led by a double digit comp gain in womens followed by high single digit increases in mens and kids.
By category men's basketball remains to highlight in the quarter deliver.
Delivering another impressive double digit increase.
And then spill end seasonal business with also at very strong.
Hi double digits.
Since running was flat.
Core and casual styles were down double digits.
A terrific performance in our women's footwear business with skills by ongoing strength in classic basketball and court style.
Our kids business was driven by a strong demands at cross screen at school and at that size.
At the strong product trends, we saw in men carried over to kids.
Within apparel cancerous at strong double digits in men's and women's were both up high single digits at.
At comfort trends remain to key driver as you heard from Tech and Andy.
Our north American and European apparel businesses.
<unk> strength across the board.
Solid gains in mens womens and kids.
In Asia Pacific, a nice gain and the kids business, but not enough to offset to clients and our mens and womens assortment.
Turning to the rest of the income statement.
Our gross margin de Levered by 120 basis points to 30.9% in the third quarter from.
32.1% last year.
Our merchandise margin rate decreased 390 basis points.
Driven primarily by higher markdowns to clear age to go ahead, and a greater mix of D. T C, which carries higher shipping costs.
Regarding markdowns as Dick mentioned, we have flexibility with our vendors that allows us to return at portion of slower moving product to them at any given quarter.
However, because of kind of it related supply chain disruptions to share.
The amount of return to vendor product or our TV.
It's been significantly reduced resulting in a higher promotional activity to clear those goods.
Markdown allowances from our vendors well how to fall, we're not enough to offset the impact of lower our TV assets.
All that said merchandise margin pressure with less in Q3 as compared to Q to Q.
Our actions to Claire age to product resulted in a healthy inventory position.
Gross and level at its composition as we head into the holiday season.
At quarter end, our inventory was down 8.5% compared to the high single digit sales gross.
On a currency neutral basis inventory decreased 9.3%.
Leverage of our relatively fixed occupancy and buyers compensation provided us with 270 basis points of improvement versus last year.
This was in large part to at at $32 million of that related tenants at relief during the quarter.
Primarily comprised of one time rent abatement.
We continue to actively negotiate with our landlord partners on at sprint.
We improved our SGN a expense rate in the quarter by 120 basis points.
At 20.1% of sales from 21.3% in the same period a year ago.
Our team's discipline to effort to manage expenses drove the lower SGN a relative to last year, despite roughly $4 million of incremental expense of personal protective equipment for P. P E.
Depreciation expense was $44 million flat to last year.
We incurred interest expense of $2 million at compared to $3 million of interest income last year.
Due to lower interest rates on our cash balances as well as higher fees related to our amended credit facility.
On a GAAP basis, our tax rate came in at 28.2%.
120 basis points higher than last year due in part to the geographic mix of income.
At Atlanta, that's on our ability to book tax benefits for losses related to certain international operations.
On a non-GAAP basis, our tax rate came in at 30.7% above last year's Q3 rate of 27.7%.
Looking at our liquidity.
We ended the quarter with 1 billion of $393 million of cash and cash equivalents.
An increase of $649 million from the end of Q3 last year.
Due in part to the increase in our current liabilities.
And we have no outstanding borrowings on our $600 million credit facility.
In terms of capital expenditures, we invested approximately $33 million into our business during the quarter.
Bringing our year to date total to 116 million.
The fund at the opening of 27, new stores, including the opening of our first West Coast community based power store in constant, California assets.
Well as of the remodeling or relocating of eight stores.
Bringing the total year to date opening to 50 stores.
We also closed 95 stores in the quarter, which included 70 runners point stores.
Leaving us with 3032 company owned stores at the end of Q3.
For the full year, we now expect to open approximately 70 stores.
Remodel or relocate 90.
And close to 100 and Ken.
Looking forward, we remain on track to invest to roughly $155 million at capital for the full year in line with our prior guidance.
As we think about the coming months and potential for incremental to that driven locked down we believe our strong net cash reserves at credit availability to.
Listen to us with ample liquidity to manage through the near term fluctuations, while continuing to invest in the business.
This brings me to our return of cash to shareholders.
This quarter, we returned $16 million to our shareholders in the form of our reinstated dividend.
Reflecting confidence in our financial position earlier this week, our board declared another dividend of 15 cents per share for the fourth quarter.
With respect to our share repurchase program, we opportunistically repurchased 308000 shares for $10 million.
We will continue to assess additional buybacks going forward based on the environment.
The potential for a kind of at 19 vaccine and 20 to 21 as a modest welcome positive uptake.
However, with increased uncertainty around the effects of the pandemic over the coming weeks.
Extent of locked down to end restriction.
And how these factors may impact to shopping behavior through the holiday season.
We're not providing guidance at this time.
All right of as you think about your models for Q4.
Maybe helpful to consider the following.
With respect to gross margin.
Given the progress we made in Q3 with our inventory, we now anticipate less promotional pressure on merchandise margin in Q4.
However, similar to Q3, we anticipate fewer our TV.
Which could still result in higher than normal markdown rates.
Additionally, we currently forecast to rent relief to provide less of a benefit to gross margin in Q4.
And we expect elevated freight costs to remain a headwind.
With respect to SGN, Inc. Please take into account to filing factors.
Despite the likelihood for incremental store closures in Q4 at benefit to EPS DNA from government subsidies is presently not being contemplated.
We had to bonus true up in Q4 of 2019 that positively impacted SGN, a by 70 basis points.
We don't anticipate this recurring in Q4 of 20 to 20.
Lastly, we continue to expect P.P.E. cost to be an ongoing expense for the foreseeable future.
Looking at our non-GAAP tax rate for the full year, we expect it to remain elevated relative to historical levels.
As geographic shifts in income May result in significant quarterly variances in the range.
Finally on behalf of the entire foot locker team I want to wish all of you a safe and happy Thanksgiving.
12 days of greatness, and a happy and healthy holiday season.
With that operator, please open up the call for questions.
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Our first question today comes from Jay sole from GBM. Please go ahead with your question.
Great. Thank you so much I think I want to ask your question. It sounded like basketball was really strong at and you said casual was down I think that's what I heard and that sort of interesting because the whole work from home to the comfort cosy trend. That's playing out you just described sort of whats happening more basketball was strong at some of the casual stuff was.
It was not as strong.
Well thanks to the question Jay we've talked a lot of about basketball in the heat that's coming in.
You know again, we get far more whole up a an categories that are accustomed to goals right or customer wants what's cool end right now, but he does really culling through the basketball silhouettes, and we're seeing great product from Nike grid product from Jordan worsened secondary you know strategic vendor partners of ours coming into basketball with.
To learn new balance so you know, they're just bringing to heat in our consumer absolutely. We're supposed to heat you know and it was there they are sitting around there there are holes or whatever they still want the coolest product in the of the said right now its basketball, there's still a lot of great stuff from the casual world.
We had a a really good to start to the boot season, if you will with to loom and so there's a lot of casual stuff. That's working its just how does it compare to last year. It was really the to the difference Jay and then more heat in basketball this year than a year ago little less grade product to in some of the casual categories.
To that causes the percentage.
Blips up and down of the way that to the way that we qualify that.
Got it if I could just follow up on the on the merchandise margin I think you mentioned at 390 basis points change year over year of a part of that was promotions and part of that was just mix shift of ecommerce is there any way to sort of break down the merchandise margin to to how much was promotions of how much was mix.
[noise] you haven't read out at the EM breakout that threenineteen that granularly on our sales.
The floor is yours, but suffice.
Suffice it to say that both of those elements to where material to that result.
Got it okay and that makes a lot of I can ask one more just on the stake and go keeps to remind us what obviously with the value of that income being increased.
What does the value of that that's been today and sort of what's the strategic plan going forward.
With the partnership with go.
Yeah, we invest to then go you know I think 18 months to years ago I forget exactly what led to the first investment in it and clearly we think the <unk>.
At in the team at go to provide a great.
Actual at this broader sneaker community. So as we think about at both from an investment point of view of it and get to location at the success Weve gone back out into the month of close for a good round of funding, which is what triggered the increase from the valuation.
But we see of the is more of them of investment we see it as a strategic partnership because we connect PC with a broader sneaker more so again, we continue to work with with the go team to find connection points.
Deep engagement with the width of the broader sneaker community.
Got it thank you so much.
That's true.
[laughter]. Our next question comes from Robby Ohmes from Bank of America Securities. Please go ahead with your question.
Hey, good morning, guys and the you know tripling rather at quarter end, great execution of very challenging environment to.
You know my question I I was hoping Dick.
In more and maybe you could chime in on this so overall.
Overall back to school you guys said it was very strong. So there was a shift in timing, which you explain to us.
You know you're you're talking about you know some of the you know your inventory sounds like it's in a better position position going into holiday now I I get the whole you know concerned about lockdowns, but maybe could you just talk about.
Where are the overall demand is it sounds like demand was just really strong overall from back to school is there you know what to stimulus playing out in your view and why wouldn't the demand you know remain very strong for holiday you guys are getting better all the time at a servicing customers with up and coming into your stores.
Maybe just I know, you're not giving guidance, but are there other things to be concerned about for the fourth quarter from a comp standpoint, it's a much easier comparison in the third quarter was and it sounds like momentum a unit remains really strong of your business.
Well, we really liked to product flow of going into the fourth quarter. Robert you know, it's a you know we've expanded a week of great Lewis to 12 days of greatness trying to spread out the holiday season to little bit as we try to take precautions to make sure that to.
We've got to health and safety of our employees of our customers. You know is the top priority. So again, we feel good about where the product line of business and clearly the thing that we can't control or some of the government mandates that we don't know when they're going to come though is Florida at both mentioned, we've got over 10% of of our flow.
To close right now clearly you all still be the same covert numbers that we do and you see searches all over we don't know how different local governments are going to react yeah. We feel confident that we can shift volume to our digital channels. Clearly we saw that back in March and April when the when it went to the world will shut down essentially.
So good I think the product, where we ended the quarter of from an inventory of perspective, we feel the inventories and to really healthy position as we look forward. We feel good about the product pipeline. So you'll there just are you own 2020, there are probably more of loans Robbie when there's ever been at her life as it relates to what.
Is going to happen with the pro to virus at locked down through to local governments et cetera, but again I think our team has learned how to react to be very proficient at at closing at opening stores not one of those skills that you really want to have but to the team has done a great job with it so and I I I feel good about the fourth quarter of feel good about the pipeline and.
You know as we think about shopping across various channels.
True, both actually getting goods and buying gift cards, you know, we've got a lot of of loans going into the fourth quarter.
Got you just a quick quick follow up you know Dick how are you in the vendors planning for the first quarter next year, such a you know that was when you had everything close to the snus kind of went away how Howard.
To kind of color you can give us on how you plan to against that.
Well, we always playing to win in the marketplace. Robbie So again as we worked with our strategic partners they've all got their plans as it relates to their supply chain to live product pipeline.
But we certainly believe you know we closed our stores are generally globally on March 17th. So we had the you know the all stores situation to in Chicago, We have a great. All star game in February you followed by suddenly a shutdown in your people at true what was going on.
Then ultimately the stimulus coming through later in the quarter. So that the first half of it again will be a little bit bumpy as we as we work through some of those comparisons but to you know, we're we're planning positively with our vendor partners.
Terrific look thanks, and best for Black Friday of the holiday season.
Thanks, Happy Thanksgiving, Robert you to Inc.
Our next question comes from Michael Binetti from Credit Suisse. Please go ahead with your question.
Hey, guys. Thanks for taking a of questions here to but you know I I.
End of Arne you didn't want to break down to merge margin to much but is there any is there any way to think about the the TV impact or the RGB impact and then I know, there's a lot of noise on the gross margin, but I didn't hear a lot of items in the language that that are transitory like the rent offsets and the at.
And the from vendor allowances, but how how best to think about the structural parts that you're seeing now do you still have line of sight to the 30% to 33% gross margin target from that over the next few years from the analyst day.
Yes things from at our Analyst day haven't really changed Michael right. I mean this is a certainly 2020 has caused a little bit of a roller coaster ride up and down as we look at some of that is you put a transitory items that hit the margin but.
But certainly our long term belief is the same.
Channel shift to must be a little bit different than we would have talked about in March of 2018.
Emphasis of different categories may change, but to give a consumer is all about what's cool.
Our vendor partnerships and the work that we do with all of our strategic vendor partners continues to be healthy. So from a margin perspective, we see progressing towards the same spots that we talked about in to the investor day at large from 19.
[noise] at <unk>.
I went to echo of.
Thought sentiment there at some more transitory assets to use your word and what were seeing and 'cause share.
And longer term I guess, perhaps on the exception sent out like the instead of that penetration rate end to judge at all certainly have been really strong at.
And while we expect to as you think longer term for that perhaps to moderate from there to their elevated levels that we've seen in the last.
A couple of quarters.
It probably is not tying back to pre pandemic penetration rates of the tough from a gross margin of perspective.
You know there at the freight at one that that kind of with higher judge at all that that would be factored in but you know even with that we stopped selling ferric at about at the profitability across the channel.
Yeah, you get to a little bit different to answer on gross margin of about finished margin you know we've been selling.
Really pretty much agnostic as to where the customer wants to shop like to shop. However, they want to but you know from our perspective at when things were caught up to want to steer them one way or another.
So you say you make it up on the EBIT margin Martin I guess, and you said it to us before I guess.
I'd also be curious on the Sq Nay leverage point, you know more broadly ones you mentioned to 4 million of covered cost at love to know if it's the same size in fourth quarter. If it's Peter just because of the bigger volume period, but you.
You know once we're through that you know how do you think of the EPS you de leverage point as you moving you know end to 21.
[noise] yeah, there on the P. any of the foreign like end dollar and in Q3, you know relative to at weekend, saying now [laughter] pretty kind of run rate but.
But you know we're learning we're learning about usage.
And at.
To anecdotally to clay.
Folks seem to like their out of hand, sanitizer, they develop a preference for it and so they total around that at that [laughter] intacta.
Since.
That that'll that'll be a factor of go forward and then also you know as as fan [laughter].
Hi, Matt tepid demand at we would expect some change in fact that unit cost of some of those items.
So to speak tear of air of broader question about leverage it's still at say mid single digit comp at allows us to to leverage of mass channel.
Okay. Thanks, a lot guys.
Our next question comes from Adrian.
Adrian you from Barclays. Please go ahead with your question.
Yes. Thank you so much and great news on the progress of Lauren I was actually wondering if he thank you you're.
You're welcome if he can talk to us about sort of the the RTD and.
You know I know your inventory of extraordinarily clean so it is the decision to.
Withhold inventory and therefore have better margin, but selling back that product or was it just to make sure that your stores. Our fall obviously when the customer kind of then they had a full array and assortment of product to purchase and then secondarily.
Some of the your vendors are actually starting to implement you know pretty significant I T initiatives, such as RF I'd like to that imply in terms of outfitting the stores that stores with that capability. Thank you very much.
[noise], yeah, I'm not going to speak at the dynamic on our TB and again one of were hearing that as well.
Just response to what happened with a supply chain that had not set up to.
Swaption to it early in the year at thing if you think about it.
Closer to globally.
And recognition of that.
Reverse logistics that returning of product to a band or from them to move at where and how.
That doesn't make sense. So therefore the decision at that we went to liquidate at that.
That inventory in place rather than kind of back for a pipeline of so therefore, oh up to more like.
Support through event or allow assets to to help us through that day.
Dynamics again, we would view that as not being at a long term dynamic.
Right.
Yeah, and I'm going to question about RF ideas. We're you know we're very excited about the potential for our at fight Deanna and fact at this point.
I don't have much of our business in Europe RF IP enabled.
And we first from reason to fire needing to put to price.
Price stickers on the product and they're up ourselves we have been putting end of RF I'd tags. We don't have that same situation in North America. So we're not our I'd.
Tag to it yet here.
But we see a lot of and.
Information that you get at about the product and MS. Matt It how fast stock to keep the very well and it improved inventory accuracy that just started our son of any benefits were at were very excited about the potential for at long term for our business.
Great. Thank you very to especially at this is my fingers start to.
It is the vendors start adding the RF ideas chips and tags early on in the process. It sort of changes the dynamic to Matt we're really excited about or if I'd.
Yep and that and the timing of that I mean, it sounds like at 20 to 21 initiative here, possibly in the U.S.
Yeah to be true of our vendor partners of the different place than the journey, but to I would think that we would see certainly see some enable much from 20 to 21.
Certainly a a better uptick in 2020 to.
[noise] right. They they have embarked end and to me Uh huh.
I'm very excited about that.
Thanks.
Our next question comes from Chris [laughter] Fuzzy of from at Wedbush. Please go ahead with your question.
Good morning, everyone. Thanks for taking my question to Chris.
I'm going to farm.
Farm at I guess first just on the on the stores at or close to temper. Some of your reference to just curious at any of that have any impact at all is at the tail end of Q3 and to where other stores are now at that largely Europe and Lauren I know you love. These merchandise margin question, but fair to say that to promotional activity.
At the bigger headwind on merchandise margin to free.
Shipping costs. So from my first question, but to have Oh.
I'll start with the store closures and then the Lauren jumping on to the merch margin because she does all of those questions. Chris you know are well.
No. The store closures are dominantly right now in Europe, but we do have places in the U.S., a daughter on El Paso that are close to et cetera. So you know so little bit of a moving target to Europeans have taken a little bit of a harder line in certain countries in terms of closures of.
Of shopping in other places of gathering so well is the covert number Serge you know, we're not quite true what to expect the effect of Europeans closed starting.
A few of them in late to late October more into mid November.
Most of the reopen dates or late November early December but always open you know that those are always subject to change. So again, we're trying to remain as fluid and as Joe as we can as we work to sort of the consumer you know through whatever channels, we have available and you know they they sort of migrate to the open channel at any given.
Moving so I'll turn the merge question over it looks margin question over to Lauren.
Yeah. So yeah, yeah, yeah, Stephen markdowns are a bigger impact and and that gets at all shaft.
Okay, and then part to to that that's me describe to so our TV moving significantly lower.
Is that fair.
70, 30 in the ballpark.
[laughter], Mark health, where more of material that digital share at Okay, and lastly, just from the inventory you made all of this progress I know you costs in Q4 could see you know some markdowns like of the question is.
Are you reacting to that potentially sell flow when you need to move product or do you look at your inventory and aged of quality.
Like there's still more of that needs to get done that you'll just be promotional regardless or just trying to understand if comps are still strong do you still need to price from of that product to warn at such a function of at their slow down and and closures due to more aggressive at some of that product.
Yeah, we feel good about where our end tours at from a college and perspective and the quality of the inventory.
So you know at ideally it doesn't turning to a promotional situation across the marketplace, where merchants will react accordingly, if it does but yes.
He's going to I think that to the caution to law's prepared remarks were more alone will.
With the supply chain disruption that we've seen we're pretty.
Proof positive that our to use will be at a lower level than historic. So we just really end ready to to move through inventory as necessary, but the team to such a tremendous job managing through Q to Q3 is to get listen to this great position have of into Q4 of that you I believe that to the promotional activity will be less to.
Our own point of view it depends to that and what happens in the marketplace.
Ah Okay, a lot of I'll leave it there all of the phone to hold it.
Great. Thanks, Chris.
And ladies and gentlemen, our last question today comes from Paul Trussell from Deutsche Bank. Please go ahead with your question.
Hi, good morning to that to her burn on for Paul I'm, Congratulations on the nice quarter.
Well I'm asked about that I want to ask about to variations you are seeing in different store locations. You know a bar of our small our flagship urban locations and then just how do you feel about your overall presence at exposure would end the mall and any changes to view around your parents to our strategy or international expansion of trends. Thanks.
Well you know we've talked about at the tourist locations of the toughest tip right low right from a traffic perspective.
You know the traffic in those stores is just to.
No not there because of the lack of tourists are moving from the two countries in some of these et cetera. So you know from a either to the F malls sort of perspective either of the traffic has been true look similar.
Ex any tourist locations, which are being more more impact of so.
Yeah, we really have a day when we thought the strategy as it relates to or power stores, we're still very much inclined to know we talked about the total store openings.
We're just about to loads to open as opposed to stores in Vancouver and Toronto.
You know there was a press release Lewis that will be out either today or tomorrow at ER.
On to excuse me that talks about those so we're continuing to poor world and clearly our strategy in Asia continues to be of positive strategy in a day Asia was kind of positive. This year. So are this quarter excuse me to.
Yeah, very much inclined to to to yeah.
At stores, where appropriate but our team continues to work of portfolio really hard identify times of places to pivot out of malls et cetera. So we're moving on channel retail includes physical stores connecting those physical stores to better with better digital experiences is all part of that process. So we feel good about.
Our stores strategy, our digital strategy and most importantly, our omni channel strategy.
Great it's growing at color and just one last quick question wondering if you think you've experienced any pull forward to now and into Threeq you from Fourq to you.
It's a great question, Andy you know the truth is that our consumer responds to great product. When that's available right. So again is is the high he comes to whether it's a you know.
Jordan whether to do of course, one whether it's you know some of the other great product at any called out you know our consumer response to it. So it's really important to the we understand the product pipeline because our consumer is right. There is lot awful lot of of data points that they can go out and find out when they're great product is coming so good I I think that force.
Quarters demand is going to be spread out across the corridor right. I mean based on you know black Friday deals starting in the end Halloween in many cases, we've tried to stretch it out with our 12 days of greatness as opposed to just a week of great. This we've tried to spread it out across those key day is on those six weeks. So I think demand is going to be stretched out but.
I think less about the pull demand into Q3 from Q4, because our consumer just response to great product and we know there's a lot of great product come in Q4.
Great. Thank you best of luck for holiday.
Thank you [laughter] Dan.
And ladies and gentlemen at this time, we'll end today's question and answer session I'd like to kind of kind of a call back over to Mr. Lance for any closing remarks.
Thank you for joining us today. Please please join US again for next earnings call, which we anticipate will take place at nine am on Friday February 26th.
The call will follow the release of our fourth quarter results earlier that morning.
Thanks, again and happy Thanksgiving Goodbye.
Okay.
And ladies and gentlemen that will conclude today's conference call. We do thank you for participating you may now disconnect your line.