Q4 2020 Foot Locker Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to <unk>.
Foot locker is fourth quarter 2020 financial results conference call.
At this time all participants are in 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.
<unk> 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 and market conditions worldwide and other risks and uncertainties described more fully in the company's press releases and in <unk>.
Of course filed with the SEC, including.
That's 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 that this conference is being recorded I will now turn the call over to Jim Lance Vice President Corporate Finance and Investor Relations. Mr. Lance you may.
Ken.
Thanks, Operator, welcome everyone to foot Locker, Inc. 's fourth quarter earnings conference call.
As described in today's earnings release, we reported fourth quarter net income of $123 million compared to net income of $134 million for the fourth quarter of last year.
On a per share basis fourth quarter earnings were $1 17.
Compared to earnings per share of $1 27 last year.
This year's quarter includes pretax charges of.
$62 million related to the impairment of certain underperforming stores.
A $4 million charge related to the impairment of one of the company's minority investments a for.
$4 million charge related to reorganization of headquarters and support organization in EMEA.
And of $11 million gain that primarily reflects an advance on our insurance coverage related to social unrest.
And a $5 million benefit in our deferred tax assets due to changes in Dutch tax law.
Excluding these items fourth quarter non-GAAP earnings were $1 55 per share down four 9% compared to earnings per share of $1 63 for the fourth quarter of last year.
Lastly, 2020 full year non-GAAP earnings were $2 81 per share down from $4 93 in 2019.
Unless otherwise noted the figures and 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 will begin our prepared remarks, with Dick Johnson, Chairman and Chief Executive Officer.
Andy Gray Executive Vice President and Chief Commercial Officer will then provide additional insights into the business drivers in the quarter.
Lauren Peters Executive Vice President and Chief Financial Officer will then review our fourth quarter results and provide some directional color around the first quarter of 2021.
Following our prepared remarks, Dick and Lauren will respond to your questions.
With that I'll now turn it over to day.
Thank you Jim Good morning, everyone and thank you for joining us.
First off I want to sincerely. Thank every associate at foot locker incorporated for their commitment to the business through this remarkable year.
Without their agility focus and creativity, we could matter of overcome the many obstacles we encountered in 2020.
Whether it was our store teams of definitely tackling the huge lift of closing and reopening of our large store fleet for our corporate employees quickly adjusting to function at a high level and the new work from home environment. We demonstrated what can be achieved in the face of adversity, when our people band together and perform as one teams.
I'm extremely proud and grateful to lead this exceptional group.
Consistent with that we are pleased to report that we delivered a strong bottom line result against the challenging macro backdrop in the fourth quarter.
While we experienced some top line headwinds due to COVID-19 related store closures in Europe, and Canada, coupled with inventory delays due to congestion at the domestic ports are overall performance shows that our teams were able to perform at a high level and remain focused on our customer.
Our results were fueled by a solid product pipeline, an exciting holiday campaign and healthy customer demand.
As a result, we drove strong full price sell through healthier margins and higher inventory productivity.
And several of our divisions Comped positive in Q4.
Moreover, on the whole we saw sequential improvement as the quarter progressed following of low double digit decline in November comps turned modestly positive in December and January finishing the year on a strong note.
We believe the effect of fiscal stimulus was a positive in January as well.
Our digital business remains of catalyst through the quarter delivering impressive double digit growth overall with strength across the board.
And regions most heavily impacted by store closures digital growth was up triple digits.
In fact in Europe, Covid related restrictions have been an accelerator for digital capability and grow.
For example, omni channel growth in France was positive for the combined December January period.
Complementing the digital strength there are some exciting new stores in this key market, including the opening of our Paris power store on route of revealing.
As we've said before we expect some of this accelerated shift to digital to remain permanent.
Youth culture is increasingly looking towards digitally led and culturally connected brands for engagement.
Our significant investment in our digital capabilities has laid a strong foundation for us to continue deepening these connections with our customers.
Turning back to our performance I'd like to highlight Asia Pacific as it was our fastest growing geography globally.
Fueled by both strong growth in Australia, and New Zealand and continued expansion across the region.
We opened our first three foot locker stores in South Korea, including of power store in Hyundai and of high profile Storm Yang Dong.
The latter is located in EM Plaza, the Premier shopping area in South Korea.
Our store, both three levels, including enhanced basketball on women's spaces, and local art work throughout the store.
With one of the largest online markets in Asia, We expect South Korea will be an important long term omni channel growth driver for Asia Pacific in fiscal 'twenty, one and beyond.
Andy will provide more detail around product highlights in the quarter, what we see in the pipeline for Q1.
At a high level ongoing strength of basketball remained the key driver within footwear.
And while performance in running and other categories was impacted by shifts in the launch calendar elevated storytelling around strategic brands such as of Crocs and bands also contributed to the excitement during the holiday period.
Within apparel comfort trends around police remains strong, but as was the case with footwear Inc.
Inventory pressure hurt our ability to entirely meet that demand.
Now, let me provide an update on our strategic initiatives and technology milestones.
Beginning with F L X.
This month marks the one year anniversary of the North America launch for this important loyalty program and I'm pleased to say it was a successful year.
Globally now have more than 17 million members enrolled in the program.
We continue to see encouraging trends in the performance metrics on average members are spending more and shopping more frequently than non members and often across multiple banners Inc.
Portly F. L. X is also proving of valuable customer acquisition tool with over 44% of our members representing new to file customers.
I look forward to keeping you updated as we aim to aggressively grow F. L X membership.
Moving to our key technology initiatives, we made strides to improve our omni channel capabilities and add new functionality in Q4 for.
First we further developed our omni channel experience by activating a shop my store feature on our websites, which makes it easier for our customers to find products that they can pick up at nearby stores strengthening that physical digital connection that we know our customers expect.
Second we extended Apple pay and Google pay to our selection of digital payment options building at our new payments platform, and adding convenience and flexibility that the checkout experience.
Third building on the upgrade to our POS systems, we talked about last quarter reactivated contactless payment options on handheld Pos devices in many of our stores.
This not only helped us maintain social distancing and keep register accused down during the holiday season, but also added speed and convenience for customers and associates.
Finally, we launched a pilot drop ship program with Nike to activate additional inventory at our sites that has not held at our stores of warehouses.
While it's early on the program aims to provide more of the right product at the right time to better satisfy customer demand and shorten lead times.
We often talk about the changing dynamics of the global marketplace and our laser focus on consistently enhancing the customer experience.
To that end in Q4, we established a new North America operating structure that created for distinct regions each with its own Geo leader in customer experience team.
Our goal is to put a hyper local lens on underserved primary and secondary markets by customizing, our outreach to individual neighborhoods.
Coupled with our community store strategy and partnerships with local brands schools and organizations. This will enable us to sharpen our connectivity with our consumer our test of this strategy in the northeast last year yielded encouraging results, giving us the confidence to expanded across North America.
And begin testing it in EMEA.
Turning to our social responsibility initiatives, we continue to make great progress with our leading through education and economic development program or lead as part of our commitment to fight ratio inequality and injustice.
Some exciting new developments within this effort include <unk>.
Committing to invest $5 million and Matt venture capital of Black manage venture capital firm dedicated to advancing businesses with diverse leadership.
Expanding our marketing partnerships and brand collaborations to 34, new black on brands and creators.
These include Influencer partnerships, and culture, curators, who define of brands and sneaker culture across social platforms.
And enrolling nearly 100 team members in Mckinsey and companies Black leadership Academy of program that extends from executive Mentorship to management capabilities.
In addition, tying back to our lead initiative. We are excited to continue working with our investment partner pencil and its founder Dewayne Edwards to introduce robust programming in 2021 aimed at developing the next generation of black designers.
This includes education programs scholarship opportunities internships, and apprenticeships call wins.
In closing I'm extremely proud of what we accomplished in 2020, but it's only the beginning of a new chapter at per foot locker incorporated.
I am energized and looking forward with renewed optimism as we continue to advance our long term strategies and build value for all our stakeholders.
We've gleaned many insights through this unique COVID-19 period from the power of our enhanced digital capabilities to the strength of our relationships with our vendor partners the depth of our connections with our consumers and the exceptional resilience of our global team.
When viewed through the lens of our strategic imperatives. These insights will help guide our thinking in the fiscal 2021, as we execute against a number of opportunities in the marketplace and strengthen our position at the center of abuse and sneaker culture.
Looking to fiscal 2021 with robust product tail winds at our back we believe we are set up with momentum.
That said the bottleneck situation at the ports remains in flux.
Our merchant teams are working hard to maximize productivity and full price sell through we should gradually begin to see receipt flows and inventory levels normalize.
I also need to add that the impact and uncertainty of Covid lingers on forcing stringent lockdown requirements to remain in effect largely in Europe.
As a result over 10% of our global store fleet is temporarily closed to comply with these restrictions.
Even with the uncertainty ahead, one thing that remains clear is the passion of customer has for this category and we are committed to meeting their needs of.
Of course, we will continue to adapt to the COVID-19 situation in real time for market to market, putting the health and safety of our associates and customers first while striving to deliver a standout customer experience.
Now before I turn the call over to Andy I'd like to take a moment to congratulate and thank Laura for nearly 20 for exceptional years here at foot locker for.
Contributions over that time of been many and under her leadership as CFO for the last 10 years, we've built a truly world class finance team.
And she has been an incredibly valuable partner to me personally.
While her retirement as well deserved she will be greatly missed.
On behalf of the entire organization I wish Lauren well as she moves on to this next exciting chapter of her life when she retires in April.
I will now pass it over to Andy.
Thanks, Jake and good morning, everyone.
Let me also extend my thanks, and congratulations to Lauren it's been a pleasure working with you and I wish you the very best in the years ahead.
On our business at continued focus against driving credit leadership and diversity maximizing our omni channel capabilities and enhancing our purpose and community initiatives was evident throughout the quarter even against a challenging backdrop.
In total on footwear and apparel, both declined low single digits WILDBERRY accessory business was down high single digits, largely due to continued softness in bags and shoe care.
The results were mixed with gains in our North American Super of business offset by declines in Europe.
Similarly continued momentum in women's and kids' footwear, which delivered strong comp gains of high single digits on mid single digits, respectively.
Please also state of high single digit decline in Maine sooner.
By category men's basketball remains a bright spot in the quarter.
On a low single digit increase led by strong storytelling and momentum around the key Nike icons strong pipeline of high heat Jordan releases, and some compelling new initiatives by Puma and rebuilt.
Additionally, our seasonal merchandize across genders with very strong throughout the quarter up double digits with gains in on and new introductions, including crocs.
Meanwhile, men's running was down double digits, primarily due to a shifting of launch calendar related to E D.
Within apparel.
Women's and kids also led the way.
With healthy double digits and low single digit gains respectively.
<unk> declined mid single digits as Dick mentioned, although we see comfort trained remain strong inventory challenge at Crazy the pressure point.
<unk> results improved throughout the quarter of fleece was the biggest driver with good performance by Nike and Andy Knott.
Complementing on ongoing partnerships with the northeast Chinatown market and an expansion of our proprietary brands, which added a new dimension to our business.
And across all product areas, our customers responded well to elevated storytelling, while on consumer content offerings continued to deliver exciting exclusive programs.
These included price perspective.
Which featured unique beverages of nikes iconic silhouette.
On a successful partnership with Puma on Allo and surprise.
On the launch of our own height be collection to broaden our women's assortment.
This was eroded by the main events of the quarter. Our 12 days of greatness campaign, where we partnered with some of the industry's top creators around the culture of basketball Inc.
<unk> just on James staple Luigi Malady at Fannie and many more.
And we also continued to invest in new ideas through our greenhouses incubator and our homegrown initiatives, which created energy and provided a platform an exposure to the next generation of creators.
And there's a lot coming to market in Q1 to keep our consumers engaged and excited.
The culture of basketball remains strong.
We will be celebrating city and community insights with our Nike, Matt VR content, along with new and exclusive of ideas against our key franchisees with 90 day, Puma revoke and new mountains.
We have a big seasonal peaks at all crops in champion and we continue to develop new partnerships and programs with diet or a type b, Keith with kind of homegrown brands and Lance.
We have a strong pipeline of ideas and apparel to maximize at continued trend shifts we've seen these past few quarters.
And on.
Despite some of the external headwinds on underlying franchises are strong and in many new ideas and concepts into our business are resonating with our existing customers and bringing new ones to us as.
As we continue to push on consumer offense forward at the.
Combination of our connected product stories, our enhanced omni capabilities on our focus on community on purpose.
Strengthen our relationships with our consumers.
With that I will now turn it over to Lauren.
Thank you Andy and good morning, everyone. We delivered solid bottom line results on the fourth quarter, despite facing macro challenges that pressured our top line.
Comp sales declined two 7%.
This was largely due to COVID-19 related store closures and backlog at the U S ports, along with traffic declines in our largest global tourist markets.
However, our gross margin improved compared to last year, both in dollars and on a rate base at Kevin healthy product demand at lower promotional activity on fresh inventory.
This helped to partially offset higher SG&A expense.
Bolting on a mid single digit earnings per share decline in the fourth quarter.
Our team executed nimbly against this dynamic environment.
We were also pleased to report that total sales for the year decreased by only five 7%.
Seven on a half billions of dollars and cents.
Noteworthy at result, given the significant top line pressure, we experienced in Q1 of 'twenty 'twenty.
During the quarter, our stores were opened for roughly 90% of potential operating days.
But the breakout between regions tells a more accurate story.
U S banners were open for nearly 100% of total days.
All of foot locker, Europe, and Canada were lower at approximately 60%.
Sidestep at rapidly, 50% given the COVID-19 restrictions.
Taking a look at our fourth quarter results in more detail.
Total sales decreased 1.4 per cent.
For a 3% on a constant currency basis.
Once again, our direct to customer channel led the way.
With a 44.2% sales increase.
Largely offsetting a 12% decline in our stores.
As a percentage of total sale D. T C rose to 27.4 per cent for the quarter up from 18, 7% last year.
Overall, we believe the external factors we described earlier.
Somewhat mask the underlying strength of the holiday season.
As Dick mentioned multiple divisions comped positive in the quarter.
Additionally, the sequential momentum we saw at three of the quarter was encouraging at the.
For low double digit comparable sales decline in November was largely offset by modestly positive comps in December and January.
Not surprisingly the number of store closures in Europe and Canada.
Along with efforts to maintain social distancing measures through the higher volume holiday period.
Resulted in a double digit decline in store traffic.
But our customers continue to shop with intent.
Driving conversion levels up 33% for last year.
Average selling prices were up low single digits and at quarter.
While units were down high single digits.
Taking a look at our performance by region.
North America Kids foot locker led the way with a double digit comp gain.
So at action of Champs, followed both increasing mid single digits.
Impressively foot action and kids also delivered full year comp increases.
At mid single digits, and low single digits, respectively.
Congratulations to the teams for an outstanding job.
Foot locker was essentially flat for the quarter.
Foot locker, Canada, which contended with numerous store closures was down double digits.
East Bay was also down double digits.
Sales of hard goods and team performance product.
The continued headwind of lower at groups sports participation, primarily due to the pandemic.
Internationally foot locker Pacific continued its hot streak.
At comparable sales up double digits.
Capping off an impressive full year performance, which was also up double digits congratulations to the foot locker Pacific team.
So at locker Asia delivered a double digit comp decline.
It's COVID-19 related store closures had a significant impact on a smaller base of stores there.
Turning to Europe, as we've already discussed widespread COVID-19 restrictions of cross countries drove a double digit comp decline at both foot locker Europe and sidestep.
Although the direct businesses were very strong for both banners.
Could not offset the declines in their stores due to lower digital penetration rates.
Turning to the rest of the income statement.
Gross margin leveraged by 160 basis points to 33.1% end of fourth quarter from 31, 5% last year.
Our merchandise margin rate was flat.
Given by a meaningful reduction in markdowns at both on a sequential and year over year basis.
The offset by higher freight expense and the greater penetration of digital sales of ladder negatively impacted our gross margin by roughly 90 basis points.
With respect to our inventory position.
Although we achieved our goal of being at a healthy composition by the end of the fiscal year, our levels are lower than we would like at <unk>.
Quarter end, our inventory was down 23, six per cent compared to the low single digit sales decline.
On a currency neutral basis.
Inventory decreased 25, 5%.
As Dick said, we expect to see our inventory levels gradually normalize.
Leverage of our relatively fixed occupancy and buyers' compensation provided us with 160 basis points of improvement versus last year.
This was primarily driven by $29 million of Covid related tenancy relief during the quarter.
Mainly comprised of a one time rent abatements.
Our negotiations with our landlord partners remain ongoing with respect to additional rent relief.
Our SG&A expense rate in the quarter de Levered by 160 basis points to 21% of sales from 19, 4% and at the same period a year ago.
Although our team continued to exercise discipline in managing expenses, the sales decline coupled with nearly $4 million at the P. P expense and 100 basis points of incremental bonus expense versus last year.
<unk> to this quarter's rate.
That said at roughly $9 million in government subsidies provided some offset.
For the full year, our SG&A expense rate increased to 21% from 26% last year.
Primarily due to deleverage on the sales decline at <unk>.
SG&A dollars were down three 8%.
Depreciation expense was $44 million down slightly to last year.
We incurred interest expense of $2 million as compared to $2 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 22, 9% 380 basis points lower than last year due in part to the current your Dutch rate change, we highlighted in our press release.
Offset by the revaluation of certain intellectual property.
On a non-GAAP basis, our tax rate came in at 25, 4% below last year's Q4 rate at 26.1 per cent.
Looking at our liquidity, we ended the quarter with $1.680 billion of cash and cash equivalents.
An increase of $773 million from the end of Q4 of last year.
Working capital was a significant source of cash with the reduced inventory and increase in payables driven by receipt timing relative to last year couple.
Coupled with our cash preservation efforts early in the ear.
We currently have no outstanding borrowings on our 600 million dollar credit facility.
Signaling confidence on our financial position our board recently approved at 275 million dollar of capital expenditure program for fiscal 'twenty and 'twenty one.
With our ample liquidity, we believe we have the financial flexibility to manage through near term macro fluctuations well also resuming at a higher level of investment into the business.
As such we plan to spend approximately $160 million to improve our store fleet in 'twenty and 'twenty one.
<unk> approximately 100, new stores with further expansion in Asia.
And approximately 130, remodels or relocations of existing stores.
We plan to close approximately 150 stores.
The balance of the capital expenditure program is focused on digital end supply chain initiatives designed to further improve customer experience.
Turning to our return of cash to shareholders.
This quarter, we returned $15 million to our shareholders in the form of our dividend.
Last week, our board declared at three three per cent increase to our quarterly dividend to <unk> 20 per share for the first quarter of 2021.
Regarding our share repurchase program, we repurchased roughly 660000 shares for $27 million.
We will continue to assess additional opportunistic buybacks going forward based on the environment.
In terms of capital expenditures, we invested approximately $43 million into our business during the quarter.
Bringing our total for the year to $159 million, which was in line with our guidance.
This funded the opening of 19, new stores, including the opening of our first stores in South Korea as Dick mentioned as.
As well as the remodeling or relocating of 39 stores.
Bringing the total year to date openings to 69 stores.
We also closed 53 stores in the quarter, primarily in North America.
Leaving us with 2998 company owned stores at the end of Q4.
Given the ongoing uncertainty of the pandemic and although visibility end to the impact on our operations, we are still not providing guidance at this time.
However, as you think about your models for Q1 it may be helpful to consider the following.
Looking at sales keep in mind that we are up against a 43% comp decline last year at their stores were only open for 50% of potential operating days.
Although the situation is much improved over last year, we are contending with over 10% of our store base temporarily closed due to COVID-19 restrictions.
With respect to gross margin given the level at a relative freshness of our inventory.
We expect less promotional pressure on merchandise margins as compared to last year at.
Additionally, our current forecast does not contemplate significant rent abatements.
Also keep in mind that our occupancy cost as of right of sales last year was artificially inflated due to the deleverage on the steep sales decline.
As such we expect occupancy as a percentage of sales to be closer to historical norms of share.
Lastly, we expect elevated freight costs remain a headwind.
With respect to SG&A. Please take into account the P. P E Cos will be incremental in Q1 this year.
As we had virtually no P. P E costs in Q1 last year.
Looking at our non-GAAP tax rate for the full year, we expect it to remain somewhat elevated relative to historical levels due to geographic shifts in income they're.
No not at the same degree of 'twenty 'twenty.
Before we take your questions I'd like to thank the entire foot locker team for all of their well wishes as I prepare for this next phase of my life.
My more than two decades at foot locker has been incredibly fulfilling and I've been very fortunate to work alongside such a talented and dedicated group.
In fact, it has been an honor.
I am extremely proud of our many accomplishments over the years and the strong team we've built.
The decision to move on has certainly bittersweet, but I know of the company is in very capable hands.
Look forward to watching foot lockers continued growth in the ears of head and will be cheering them on from the sidelines with that operator, please open up the call for questions.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session.
If you'd like to register a question. Please press Star then the number one on your telephone keypad for your question has been answered or you would like to withdraw your registration. Please press Star then two if you're using a speaker phone. Please lift your handset before entering your request once again, if you'd like to register a question. Please press star one on your <unk>.
Telephone keypad.
The first question is from John Kernan from Cowen. Please go ahead.
Excellent good morning, Thanks for taking my question.
Good morning, John.
Predict inventory dollars are at the lowest level they've been in well over a decade at I think even longer than that I'm just curious.
How do you think youre going to be able to service what could be elevated demand is at stimulus checks start to Mount and you obviously had a big second quarter.
Last year when stimulus went out.
Curious how youre viewing the environment to go after what should be fairly strong end demand.
In coming months.
Yeah, we certainly anticipate strong demand John and I think you have to rewind all the way to.
March and April a year ago, when we were starting to make adjustments on the middle of Armageddon, we were making adjustments to inventory pushing of cancelling etcetera.
And then came back and saw exceptional demand in the second quarter on the merchant team worked with our suppliers to sort of a reshuffle of Gan, we pulled inventory and where we could similar situation of the third quarter, where we exceeded what would've been our thinking back end in March April certainly end.
Probably the thing that we didn't contemplate was a slowdown at the port certainly in North America, where.
At the delay in getting ships into port and the delay on getting containers through the port has impacted us as we got into Q4. So you know again I think the our inventory levels will certainly begin to normalize over the quarter.
We're working with our vendor partners to look for alternative routing et cetera, but.
We I guess, having great sales is a good thing to have or either of them.
Being able to.
Service for customers in the first quarter second quarter is we believe the stimulus package will in fact the past.
The team is working hard to make sure that we get as much inventory available as possible.
Got it and then Lauren congratulations on your retirement on thanks.
Thanks for all of the help over the years I wanted to.
You see what your view is on the long term shift to digital and the overall effects on the.
Not only the gross margin, but the operating margin line that there was a headwind.
In Q4 I believe.
Weighted to digital growth some of that some of the mix shift obviously will normalize.
In 2021, I'm curious, though as you look at digital know.
How does this affect of long term economics of the business.
Well, we want of service our customers. However, they choose to shop with us and we know that digital is really important to that journey.
So as we think about the long term.
Last thing impacts of what we've experienced this year.
Yes, well look back at it and say we were pleased to have had this hyper focus on digital because it really helps us hone our skills at.
On the technology end.
And the operation of latest service that picture of customer.
I am sometimes you get asked of predict well, what's the level of an a b I don't pretend to know that we know about my doors are open on our customers wanted to be on our doors as well.
We continue to see at being and omni business model that serves us well, but you asked about the impact on on the P&L.
As we have described now for several quarters, because obviously the freight that comments with shipping that product for the last mile to the customer and so when you think about gross margin sort of spin.
<unk> sales do bear, saying cost of freight.
We are both of us.
Initiatives as well.
See that our omni channel offering, allowing us to them.
Somewhat balance of that but that's the primary to parental there.
It doesn't bear the cost I, obviously of occupancy cost or selling wages to serve at the digital sales. So when you think about at <unk>.
Finished margin on our contribution margin at them right.
Primarily digital at right so of contribution margin being at the contribution to overhead. So it's digital sales have at rate that is more.
Beneficial then at stores, they all of which are selling wages on occupancy.
So that's the blend and as you think about long term what it means to the P&L well it'll be about finding that right balance of stores and digital on optimizing of P&L. Overall, so surely we demonstrated in 2020, how strong are our real estate team is at.
Navigating occupancy and working with our landlord to find that productive.
Our rates on that occupancy we have built in to our occupancy lease terms.
Length of lease flexibility as we navigate the.
North America of rationalization of mall space.
So I think all of these things set us up well to find that at the balance point as that shifts out over the years digital stores.
Okay, maybe one quick follow up on merchandise margin, obviously, a lot of movement in the first half.
Of fiscal 'twenty.
Is there anything stopping merch margin for preventing merch margin from returning.
For a quote close to 2019 levels, giving you more of your inventory levels are now.
Yeah.
Well as we've just talked through at this kind of be the balance of digital stores and that will certainly have an impact on that yeah margin without freight component.
But if you're asking me about them.
Mark down levels, which is another important element to that.
I would say no I mean, I think we've done very well at at managing our promotional cadence because we have always been very focused on making sure that the inventory quality is fresh.
And that has the primary impact on the markdown level.
Got it thank you.
The next question is from Jonathan Komp from Baird. Please go ahead.
Yeah. Good morning, Thank you, maybe a bit of a follow up but I wanted to see if you could give any more color just on how from your from your vantage point of the vendors are handling some of the inventory constraints, but on so the expectation for casually strong strong sales on the month ahead and just what are you seeing.
On the vendor side for the key partners.
Again, you have to remember that we operate on the futures World. So you know our ability to pull inventory ahead of us what we're really focused on today.
On working with the merchant teams at our vendor partners.
We're at.
My belief is we're set up well for for the quarter. If we had no port congestion at all of those stores closed in Europe. So there's a real balance point for us and again I think the merchants have done a good job of lining up the inventory. The question is the flow into our stores and into our distribution centers, but at.
As it relates to our vendor partners on the relationships and their willingness to work with us to get the inventories levels, where we need them they're there.
There's no hesitation at all.
Okay understood. Thanks for thanks for that and then maybe a separate question back to margin if I look at the last few quarters here you've been operating you know combined.
Bob 2019 sales levels.
Pretty close from an operating margin perspective, just over the last three quarters, if I look versus 2019, there's obviously a lot of noise on that so any any broad strokes thoughts looking forward, how you shouldn't be able to recover margin.
Net sales for recovery scenario, and if you get back there.
For prior sales leveled out or are there different levers that you could get back towards 9% operating margin.
I guess I I win.
0.22 at as you've already alert two to 2019 in spring of last year without a lot of noise and at the beginning of 'twenty at 19 of course, we talked about.
How are we saw our longer term objectives.
That said and the P&L model.
And we would still see those as being objective of something that we've got a shot at achieving over the longer term.
There's a lot of noise at 2020.
And as we look to things normalizing.
I would only point share in the near term to it we still have this incremental costs related to PPE.
And you know who knows how long that's going to be with us.
Okay understood. Thanks, and best of luck on that next chapter of Lauren. Thank you. Thanks, so much.
The next question is from Paul <unk> from Citi. Please go ahead.
Hey, sorry, guys. Thanks for taking my question.
Can you talk a little bit about gross margin on the quarter by region, obviously, you're talking about of flat merchandise margin, but any color you can give by by region.
So anyway to quantify the PP&E cost of it should be thinking about for for this upcoming year.
Year.
Near term, both first half and second half and then last I'm. Just curious how are you thinking about the release calendar in the first half on how that might influence <unk> performance and then again match that against whats going on at the ports.
Well I'll, let Lauren yeah.
Okay.
Well, that's the packet they've got to launch calendar.
Yeah.
I just like the region analogy margin of result on.
On Q4 in any of them last year.
It just got so much noise on that right because I think if you look at Q4 at all.
North America potential days opened we were close to 100% zone and that kind of dynamic.
Certainly as a contra.
Contracts too.
Europe at in Canada at about 60% on sides. That's at 50 of them and those are just two different too to really hold much value on them taking them apart on the margin result.
But I would tell you.
When when the customers can get in of shop doesn't matter, which of these regions like the product. They like this category and they certainly see us as being a purveyor of really premium of cool product.
So Matt what Lauren, but did that did that did the euro on the Europe side, though you know you're talking about weaker week of sales, obviously, but did that also you know, resulting in much weaker merch margin compared to the U S business, which I think you said was flat on a per lockers huh.
I mean, when you when you've got that many doors closed there is some level of promotional activity to ensure that you're keeping your inventory for ash. So it does have a correlation.
When you when the doors are open and you don't experience. That's at the same degree you've got more options to move your product flow at those type of margin impact right no quantification that you kind of provide.
No. It at just don't think it's going to be helpful with.
What I'm trying to paint the picture for word for it.
Just with a different.
On the P. P E. Frac, we've now had two quarters, where at the run rate on that but for millions of dollars.
That's a pretty fair proxy for what you should expect that we'll see a weighted.
We continue to experience that we've all become so used of carton around around hand, sanitizer, we bring it into at the store and wherever we go sort of if there's less of that all of us on the retailer at a supply there but.
Masks and cleaning supplies.
It covers all of these things are with us for for a while so that's a pretty good run rate to use as a proxy for now.
Yes.
Correct, Yeah, when we jump to the launch calendar, we we really like the way the launch calendar of lined up going into the quarter.
Clearly of a slowdown at the ports is having some impact on the throughput, but again from a launch versus law 12 day. They shift as we've talked about many times a week to week, sometimes more per month, the launch calendar lines up really really well for us. So again the team is working hard to make sure of that we've got the launch of.
Product available and that we prioritize that as it flows through the port of toward distribution center, but I think there's you know equal excitement around some of the other programs that Andy referenced in the in the.
Prepared remarks, you know when you think about bringing.
And our Nike tuned air product to think about the Blazers that are coming in and you think about the big investments that we're making in products all of the work that we're doing with Puma P. R. S X and the writer in the Suede I mean, there are great. Examples of our new balance of 327, you know.
Program was significant on vans old School program of significant NMDA program without who does I mean, just really great strong product that are I call on Monday through Friday sort of products as opposed to launch but going back to specifically of your question. The launch calendar lines up well, we're working hard to get those sneakers.
Through.
At the port on through into our stores on launch day, but the surrounding business is really strong as well the receipt.
Flow looks really strong as well.
Thanks, guys. Good luck.
Thanks, Paul.
The next question is from Susan Anderson from B Riley Securities. Please go ahead.
Hi, Good morning, Thanks for taking my question I.
I guess, just a follow up on the inventory levels I'm. Just curious is the product just sitting on the ports are on the water just delayed how do you see that flowing in over the first quarter of them and then where do you see inventory at first quarter end and I think you mentioned of drop ship with Nike is that helping to alleviate the inventory issues.
At all or it's still just very early days and then I'm curious also at Nike is also seeing the same inventory issues.
Well the question of on the ports on the flow of something that I'm not willing to predict and guess right. It's all COVID-19 related as the reported slow down due to COVID-19 precautions and workflow of slowed though once the product gets into our portion of the supply chain.
I feel really confident that our team can move through the inventory and get it at in the right place very quickly. So you know again, we think that it will start to two to normalize over the quarter, but you know we felt good about of going into a last week of mental saw a snowstorm that threw off the theater.
Modal sort of transportation that slowed things down. So there is a lot of variables out there the.
The Dropship program with Nike is really in its early early stages. So well, we certainly believe there's going to be benefits to us Nike on the consumer.
It's just too early yet to say that we're seeing that impact of moderate that the inventory levels.
Levels for Us and then as it relates to Nike inventory levels. That's a question that you would ultimately have to ask them at all.
No where their inventory levels are at but we clearly work closely with them on as we worked through our inventory challenges in the ports and moving things as quickly as we Ken looking for alternative shipping relative etc.
Great. Okay. That's helpful.
And then if I could just at a follow up on men's footwear I guess the decline in fourth quarter, how much of that was related to easy shift and then I guess, just you know at lean inventory levels and it sounds like you expect the pipeline in first quarter to be better than the fourth quarter at maybe if you'd give a little bit more color there. Thanks.
Yeah, well, we wouldn't break down the specifics type of easy, but clearly the big easy launched shifts to earlier of the year.
It had an impact on nims in the fourth quarter. So that's a good read through so as our net.
That impact, but we won't quantify the amount of uses of that moved out of the quarter.
The pipeline, we do feel good about in the first quarter and again I think for flow is good for the programs that I've mentioned the launch calendar. If you go out and take a look at foot locker of dot com on the launch calendar you can see some really really great products lined up Ken. The biggest question is ultimately the flow through the ports and getting them into our doors.
You know as it relates to our digital sites.
Clearly in Europe with the number of doors that we've got close there there'll be a significant push on the digital.
Launch business, so again theres a lot of moving parts at a lot of pressure points, but I think our team is navigating them pretty well and you know again.
Guess, having great sales in Q2, and Q3 and pulling inventory into those quarters has left us as Lauren talked about a little bit leaner than we would like but we do see that normalizing over certainly the first quarter of the first half.
Great. That's really helpful. Thanks, so much good luck this quarter.
Thanks, Susan I appreciate that.
The next question is from Omar Saad from Evercore. Please go ahead.
Good morning, Thanks for taking my question Lauren Congrats on a great career on your retirement.
I wanted to follow up on the store closures you mentioned that 10% are currently closed can you share that number what it was kind of throughout the fourth quarter.
Obviously store closures aren't going to be permanent end the port issues aren't gonna be a permanent maybe you could also give us a sense how material of the port backup was in the quarter or is it something real at relatively small or is it maybe more meaningful at the drag there and then I had a follow up question about the Nike inventory pilot too. Thanks.
Sure well you know Lauren hit on the door closure of percentages of open percentage for us I should say across the quarter across the geographies and right now the they are at the door closure of situation is mostly in western Europe, specifically, Germany with a big door count closed.
The U K with a big door count closed France has.
About 60% of the doors in places that are closed.
Got restrictions in Italy, where many many malls are closed on the weekend of them. So there.
There, there's a lot of moving pieces there of Canada has just started adult on up, especially our material I think is scheduled to.
To open up in the segment, so that's where our biggest store count is in Canada.
And keep in mind that across the U S. In many jurisdictions, we still face capacity limitations in stores. So you know the.
We're in the same belief on one of the closures aren't going to last forever, but they certainly impacted fourth quarter.
If you if you go back and sort of take a look at the announcements by country.
More in the last half of December through January then November 1st half of December but are there. There was some governments that took some pretty drastic clothing measures as we worked our way through the quarter.
Sorry on more of what was the second part of the question for the Port the Port was that of material that was the port back up of material impact on the quarter as well are relatively small.
But at some material impact for US right I mean, we there is a you know.
According to the wires. There is for about 30 ships that are backed up here on that that we of product that alternative for those ships and it's it's less about the backup than it is about the length of time that it's taking product to get through the port itself and we're seeing about two to three week delays and we are of.
On awful lot of inventory that comes in through the west coast sorts of material number.
Got it got it and then Dick on the Nike inventory pilot I know, it's still really early you know is at.
This contemplated as something that could be of significant addition to your overall kind of skews and choice count that's available.
Is it going to be a certain type of product of certain level of premium level of product or categories of product or is it still its still too early to make those calls.
Well it will certainly be of an enhancement to our offering right. The program will continue to evolve with Nike as we figure out the the per.
Puts them at takes of what works and what appeals to the customer what doesn't but more importantly, you know at places that that inventory is sold out but we have a chance to get at more inventories. So you know again as we've made sure that the pipes of working them at the communication of works back and forth, we're slowly starting to expand the <unk>.
Few base, that's available and I'll feel more comfortable talking about the possibilities as we get into 'twenty 'twenty, one of little bit deeper and we see the program.
Work at it's at its best and then as we continue to expand the opportunity with Nike.
That's helpful context. Thanks.
Thank you Omar.
Our last question comes from Robbie Holmes from Bank of America Merrill Lynch. Please go ahead.
Hey, good morning, Thanks for fitting me end Lauren.
Congrats on the retirement of all the best at.
Actually you just for me.
You're welcome and my questions maybe for you I know you guys arent.
Giving guidance, but could you just maybe give us some color on.
On how youre thinking about wage pressures in general going forward for foot locker, and maybe remind us where you are starting wages are at and also on the freight side I you know I understand all of the.
Shortages near term, but what what about what's the right cost outlook. When you look through this year or are there still pressures beyond getting.
When you get beyond core congestion, so sort of freight and wages anything you could share with us would be great.
Yeah, well on on the wage side of it unless you know we run a full service model and in our stores and those stripers or a strategic competitive advantage day.
Well I, just can't say enough about that team and our at our customer really values the.
On experience with those associates. So of course, we one of them make sure that we pay competitively and we do.
And certainly as there's conversation about minimum wage is increasing over the coming years.
That will impact our our wages.
But we remain very focused on at how we navigate that productively that doesn't spend on ongoing dynamic that's at the things that we have done too.
Enable our sales associates to be more efficient so that the hours are focused on their time with our customer are very helpful to navigating the wage outlook.
We are equipping them with technology, so that at its more efficient of their servicing that customer and we are doing everything we can to make their non selling hours and more efficient and so because of the things that we think will allow us to to navigate that change in wages as we look forward. We believe that there are some.
All things that we can do there on the freight front.
I don't know that we see that dynamic changing much in the near term and you know certainly lots of folks still shipping everything everywhere at.
And of that put pressure on that element so at that and how can we look at at Crystal ball and see at point, where that normalizes on that's what's at the headwind.
Yeah.
Anybody's call.
Got it that's very helpful Best of luck again.
Thank you thanks.
Thanks Ravi.
I would like to turn the call back.
Back to Mr. Lance for closing remarks.
Yes.
Thank you for joining us today. Please join US again for next earnings call, which we anticipate will take place at non a M. On Friday May 28, the call will follow the release of our first quarter results earlier that morning.
Thanks, again and goodbye.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Okay.
Yes.
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