Q2 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to foot locker second quarter 2019 financial results Conference call.
At this time all participants are in a listen only mode.
Later, we'll 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 effects of currency fluctuations customer preferences, economic and market conditions worldwide and other risks and uncertainties described more fully in the Companys press releases and reports 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 this conference is being recorded.
And at this time I like to turn the conference call over to Jim Landers, Vice President Corporate Finance and Investor Relations Mr. Lance you may begin.
Thank you.
Welcome everyone to foot locker Inc.'s second quarter earnings conference call.
As announced in this mornings press release, the company reported net income of $60 million in the second quarter compared to net income of $88 million in the second quarter of last year.
Earnings per share were 55 cents compared to 75 cents per share in the second quarter of 2018.
Excluding particular items on a non-GAAP basis second quarter earnings were 66 cents per share compared to 75 cents per share last year.
The particular items included in this year's results or a $13 million charge related to the closure of 20 362 locations.
An incremental $1 million charge related to the pension matter that we've spoken about in the past.
And a $2 million tax charge related to U.S. tax reform.
Last year. The results included a 3 million dollar charge related to the same pension matter.
Offset by $2 million of tax benefits.
Unless otherwise noted the figures and rates mentioned during our call today will be based on non-GAAP results.
A reconciliation of the GAAP to non-GAAP results is included in this mornings press release.
Well begin our prepared remarks with worn Peters foot lockers executive Vice President and Chief Financial Officer, who will provide details on our second quarter financial performance.
Along with our financial outlook for the balance of the year, <expletive> Johnson, Chairman and Chief Executive Officer will then provide an update on our second quarter results along with an update on a number of ongoing customer connected initiatives and our product pipeline Lauren.
Thank you Jim Good morning to all of you and thank you for joining us today.
Overall, I would describe our results for the quarter as challenging in some areas on track and others and importantly, showing sequential improvement throughout the period.
In addition, we made progress against a number of key strategic initiative.
We reported a 0.8% comparable sales gain for the second quarter.
Well it was at the low end of our guidance the comps improved as we move through each month of the quarter.
By month May comparable sales were down low single digits.
Journalists.
No single digits and July was stronger producing mid single digit increase.
Taking a look at our second quarter results in more detail.
Total sales declined 0.4%.
The impact of weaker foreign currencies compared to a year ago reduced sales by $22 million.
On a constant currency basis total sales increased.
0.8% breaking out the comparable sales gains by channel our stores were down 0.1%.
Well, our direct to customer channel led our performance, but the 6.5% sales increase.
As a percent of total sale D T C rose to 14.3% for the quarter up from 13.5% last year.
Store traffic was down low single digits across geography, well conversion improved overall average selling prices were up mid single digits in the quarter, while units were down mid single digits.
[laughter] corridor sales performance reflected pockets of strength across our geography.
In North America foot locker, Canada led the way, but the low double digit comp gain.
Champ Sports was up mid single digits.
Oh Footlocker U.S. was up low single digits.
Internationally Footlocker Pacific had the strongest performance with comparable sales up low double digits.
Foot locker Europe produced a low single digit increase its fourth consecutive quarter with a comp gain.
Well runners point and sidestep work collectively flat.
And the other side of the Ledger kids foot locker posted a low single digit comp decline.
Well foot action and East Bay were each down high single digits.
What actions result was due largely due to soft demand in their men's footwear business.
Well East Bay was pressured by softness and its performance footwear and apparel.
Turning to families of business.
Footwear was the strongest category with a low single digit comp gain while apparel was down mid single digits.
And our accessories business fashion bags had another strong performance, but that was offset by a decline in socks, and hats, which led to a mid single digit comp decline.
Within footwear women's and kids were again strong contributors during the quarter.
Each posting a high single digit comp gain well, then which was impacted to a greater degree by launch shift was down slightly.
By category men's running was up low single digits, while court in casual styles produced a slight gain.
Basketball posted a low single digit decrease during the quarter. However, we did see positive trends with sales gains across classic style.
The strong performance in women's footwear was driven by classic basketball courts style.
Well kids was fueled by gains in running court.
Flight pain in basketball.
Turning to apparel.
Comp sales were down mid single digits for the quarter with men's women's and kids apparel, all down within that range.
Despite the challenges there were areas of growth.
Foot locker U.S. produced a low single digit gain led by strong double digit gain in women and a solid increase in men's apparel.
Well in Europe , our women's and children's apparel businesses, each posted double digit increases.
<expletive> will provide some additional color on the second quarter's product driver.
Moving onto the rest of the income statement, our gross margin de Levered by 10 basis points to 30.1% in the second quarter.
From 30.2% a year ago.
Our merchandise margin rate decreased 20 basis points due primarily to the higher mix of D. T C, which carries higher freight costs.
Leverage of our relatively fixed occupancy and buyers compensation provided us with 10 basis points of improvement versus last year.
Our SGN a rate in the quarter increased to 22.2% of sales.
I'm, 21.3% in the same period a year ago.
The higher expenses largely due to the ongoing investments, we're making in our digital capabilities and infrastructure as well as higher minimum wages.
Depreciation expense increased to $46 million from 44 million in the prior year.
Interest income rose to $2 million.
I'm 1 million last year.
Our second quarter non-GAAP tax rate was 27.1% above last year's Q2 rate of 25.1%.
The prior year period benefited from concluding a foreign tax audit.
Turning to the balance sheet, we ended the quarter with $939 million of cash and cash equivalents.
It decrease of $11 million from the end of Q2 last year.
During the second quarter, we returned $41 million to shareholders through our quarterly dividend and repurchased approximately 2.9 million shares for $120 million.
[laughter] with management and the board confidence in our long term plans, we remain committed to returning cash to shareholders and we'll continue to execute our $1.2 billion share repurchase program in an opportunistic manner.
In terms of capital expenditures.
We invested approximately $36 million into our business during the quarter.
Consistent with the objectives, we outlined in March, bringing our first half total to $81 million.
That's funded the opening of 10, new stores, including two more power stores, our second store in Hong Kong and three more stores in Malaysia, as well as the remodeling or relocating up 35 stores.
We also closed 37 stores, including 23, six so two locations, leaving US with 3174 company owned stores at the end of the quarter.
We now expect to spend $250 million in Capex for the full year.
This is $25 million below the target we set at the beginning of the year with a reduction due primarily to changes in timing of certain projects.
Based on this updated outlook for the full year, we now expect to open around 65 stores.
Including new power stores in Frankfurt and Melbourne.
That's remodel or relocate 160 stores all slightly below our previous guidance.
In addition, we now expect to close 170 stores slightly more than we planned at the beginning of the year.
Inventory continued to be well positioned at the end of July but the year over year decrease of 2.2% compared to ours, 0.4% reported sales decreased.
On a constant currency basis inventory decreased 1% compared to the 0.8% sales growth.
With his disciplined approach, we are able to continue blowing fresh exciting product, which keeps our inventory productive and positions us well for back to school and the remainder of the year.
Turning to our financial outlook for the full year.
We are still on target to deliver mid single digit comp gain with gross margin now expected to be up 10 to 30 basis points.
Slightly lower than our previous range.
We now expect SGN aid to be up 30 to 50 basis points, a slight improvement versus our previous guide.
We still expect depreciation to be approximately $185 million and our full year tax rate remains at approximately 27.5%.
Finally, we continue to expect full year earnings per share to increase high single digits.
Consistent with our previous outlook.
In terms of the third quarter financial outlook. We believe we are well positioned to capitalize on the all important back to school selling period.
We expect a mid single digit comp gain but gross margins are likely to expand 10 to 30 basis points.
Yes, DNA rate to be down 10 to 30 basis points.
Finally regarding the announced tariffs on imports from China.
We are actively discussing the subject with our vendor partners in order to limit the impact to our business and customers.
Our current guidance does not contemplate the tariff impact if any.
I will now turn the call over to <expletive> Who'll provide some color around our second quarter results along with an update on some exciting initiatives.
Thanks, Lori and good morning, everyone.
Despite the fact that our performance in the second quarter came in at the low end of our expectations.
We are making important progress against the strategic initiatives, we outlined at our Investor day earlier this year.
We believe that by remaining focused on our four strategic imperatives.
Elevating the customer experience investing for long term growth.
Driving productivity and leveraging the power of our people.
We will succeed in accomplishing our long term goals and deliver significant value to our shareholders. Further we believe that with the company's strong financial position.
Our strategic relationships with our vendor partners and the connection we have with our customers. We are well positioned to build positive momentum in the back half of 2019.
The fact that our comp performance improved as we moved through each month of the second quarter is a positive sign.
For the back half of 2019, we are optimistic about the upcoming unique product concepts and the overall product pipeline.
The highlight just a few of the bright spots from the second quarter.
We had solid results in several men's basketball running and port styles.
Our women's and kids footwear businesses delivered strong results and we made important progress on several key in this initiatives.
For example, we expanded our strategic partnership with our best in class partners, including Nike amounting to US we geared up for the opening of an exciting community based power store in the Q speaker market, which I will talk about in a moment.
We made progress on our new F.L.X. membership program, we prepared for the upcoming launch of greenhouse our in house incubator.
We launched a new in store format at Champs sports to fuel our women's business and we formally brought our Champs sports and East Bay banners together to having United focus on the high school athlete on and off the field.
Let's first take a look at some of the key drivers in our business from the second quarter.
In footwear, we saw ongoing strength in Airmax styles in the Air force ones from Nike as well as the iconic AJ ones from Jordan.
We partnered with Nike on the summer Blockbusters program working with the next generation of Nike athletes, Jason paid them, Devon Booker into hundred Bucks, which all performed well.
From Adidas, we partnered on creating the passport pack, which predominantly to Berlin in Tokyo with unique versions of the N.M.D., which was a success.
The Puma RSX franchise and feel a disruptor continue to grow.
And the collaboration between converse in up and coming fashion label trying to tell the market was also a popular choice on the other hand, the launch shifts out of the second quarter that we previously outlined combined with lower demand of some legacy platforms and performance footwear at East Bay pressure of the overall result.
Our apparel business took a step backwards in the quarter.
This result was due in part to softer demand for some of the wind where looks that have been successful over the past year or so.
In addition, our shift away from private label also contributed to the decline.
On the positive side fleece tops and bottoms, along with branded graphic Tees continued to resonate with our customers, but were not enough to offset the challenges in the other categories.
Looking forward, we have a number of exciting concepts and exclusives that we have been working on with our strategic vendor partners.
For example, the launch of our exclusive the evolution of the Swedish footwear and apparel collection from Nike, which celebrates the origins of the iconic logo.
Somebody thus we have the upcoming logo distortion collection with new iterations and branding of their world renowned silhouettes.
Not to mention a number of usually drops spread across the back half.
And there's even more he coming with other exciting products from Puma vans, Reebok and others in the pipeline. So let me walk you through how we are performing against each of our four strategic imperatives.
First I would like to touch on how we are elevating the customer experience, we are uniquely positioned to bring and celebrate youth and sneaker culture around the world.
Our community based power stores are a great example of how we are using our deep knowledge and connections to create hyper local experiences for our customers.
Earlier this month, we opened the doors to foot locker, Washington Heights.
The second power store in New York City.
Washington Heights is an important and unique community at the heart of Sneaker News culture.
And our new community based power store will enable us to engage with that neighborhood in more meaningful ways.
The store, which is largely staffed by local associates helps drive energy through immersive experiences and activation.
It also serves as a platform for local brands artists and creators who are passionate about the height.
The store includes access to a full family shopping experience with footwear apparel and accessories from a wide variety of top athletic brands, including Nike Jordan Converse I do does Puma and more.
Additionally, the store will offer localized product, including our home grown initiative with exclusive in limited release apparel from local brands, such as lifestyle, NYSE and triangular sway dedicated women's and kids spaces.
Digital my lockers for online shoppers to pick up their orders.
Our work from local Orvis Danny go Roe.
In an activation space for community events beyond that foot locker, Washington Heights also serves as an example of the deepening strategic relationship between foot locker Inc. and Nike.
[noise] not only does the store leverage our digital assets.
The first strategic partner store to tie into Nike's digital capabilities.
Together, we are combining our know how to create truly differentiated experiences for foot locker Nike customers alike.
It is also the global pilot for connected inventory, which ties in the foot locker and Nike ecosystems in order to create data driven local assortments any more seamless customer experience.
This connection will offer our customers visibility into the store inventory not only through our foot locker mobile app, but also through the nikkei up.
The technology also offers our customers. Some additional features on their mobile devices. The first is called shoe case, which offers members the opportunity for access to cover the sneaker releases.
Next is the unlocked box, which is a digital vending machine where members can use their apt to unlock limited edition items.
Nike scheme allows customers to scan barcodes to learn more about a products history and check availability.
And this is only the beginning overtime, we will have other exciting features and benefits through a connected membership program with Nike that will reflect the best of both brands.
The partnership at Washington Heights is a clear example of how our companies are working together to evolve retail through innovative experiences that you like physical and digital.
Another important step in our journey will be the upcoming rollout of our new F. Lx program.
FX represents a shift in how we reward our most loyal customers.
Moving away from a discount based system to a program, which offers exciting benefits and experiences the members truly value.
Some examples of membership benefits include head start to launch products gift cards donations to relevant causes another benefit we believe FLS has the potential to deepen our customer relationships incentivize them to stay within the foot locker family.
And enhance the overall lifetime value of our customers.
Currently piloting with Lady foot locker and foot locker, Netherlands, we expect to expand the rollout of FL ex across our U.S. banners. After the holiday period in Europe , we expect the expansion to begin by early Q4 and continue through 2020 with Asia Pacific to follow later.
Turning now to our efforts around the women's business. We are excited about the progress we are making creating compelling spaces within our stores the cater to engage with her.
One of those touch points as the new women's shop in shop format at Champs sports.
We are using this space as a destination for her to find those styles that inspire her whether that's from our strategic brand partners are local products and boutique brands. She will also find authentic storytelling community workshops and customization opportunities.
The first three locations opened during the quarter in Dallas, Santa Monica in San Jose.
A fourth location opened in Las Vegas during Q3 with several more expected to open in 2019.
We described to you earlier this year, how building deeper and stronger connections with our customers across the brands channels and geographies will be an important aspect of elevating the customer experience.
With this in mind as we analyzed our brand segmentation strategy, we saw an opportunity to broaden our appeal to the sport obsessed athlete by bringing Champs sports in the East Bay together under a unified leadership structure.
Under this new structure, Brian Milburn, there's been a general manager for Champs Sports now leads both banners.
We believe bringing these two brands together positions them to deliver the type of elevated product and experiences that inspire these customers in store or online both for their personal style and to help them achieve their top performance on the court or field of play.
Another part of building these customer connections involves investing in the communities, where our customers live and play our investment in Super High ROIC and the work we're doing with Jason made and is an example of how we are empowering our youngest customers through play in helping children see themselves as capable of doing the impossible.
Another example is through the foot locker scholar athletes program, which during Q2 awarded scholarships to 20 exceptional students that will help make college more accessible and enable them to pursue their dreams.
Each of these impressive young individuals overcame hardships in their life and became an inspiration through their leadership in athletics academics and within their communities in Europe Footlocker celebrated inclusivity in sports and culture through the women's World Cup through a campaign featuring up and coming female referees.
We also supported the amateur female referees in the UK, but funding the cost of their training course, and helping them on their path to becoming certified referees.
We believe these efforts not only build deeper connections with the communities. We serve but also help inspire and empower their members to achieve positive change in their lives.
In terms of our second strategic imperative, which is our focus on investing for long term growth I want to highlight greenhouse our new innovation hub.
Greenhouse provides our company the opportunity to build and cultivate new relationships new initiatives, the new ideas with an amazing community of brands and creators some of which we already work with today and others that we can't wait to get started with.
Greenhouse will launch as a separate app that will tell one product story of the time with collections across footwear apparel accessories art in other categories. We expect greenhouse to launch this quarter with collaborations between L.A. Street wear brand rude and starter and be files and Phila.
As well as collections, including Parisian brand paperboard.
The greenhouse canvas franchise with Adidas in emerging lab Meritas celebrating Hispanic heritage month, and the launch of designer Dow you chose sustainability platform or one which will feature is owned brand public schooling why for the first drop and the list goes on.
Some of these exciting stories in collections will be taken out of the greenhouse towards global audience.
The beauty of greenhouses that we can be patient and cultivate new partners and relationships for years to come.
We're excited about this new innovative approach to connecting with designers and customers its potential to strengthen the foot locker network and our position at the center of youth culture.
Turning to our third strategic imperative. We are also focused on our push to drive productivity gains whether that's through initiatives like RF I'd inventory optimization logistics or expense management.
We also have a number of opportunities to drive productivity within real estate.
Our team continues to strategically pursue ways to improve leverage in the business. Some of these efforts include more favorable lease terms leveraging in store digital capabilities and driving efficiencies in our store design and build up costs as we make progress against these initiatives. We will continue to update you along the way.
And lastly, leveraging the power of our people by investing in our people, we are providing them with the tools to not only develop their skills, but also enabling them to create elevated experiences for our customers every day.
And helping us to make meaningful progress in our initiatives in achieving our long term goals. So before we open the line for questions I want to thank our associates for their dedication and continued focus on connecting with our customers and working to drive the business forward.
Again, we remain optimistic about our upcoming unique product concepts and our product pipeline for the back half of 2019 with our strong financial position, our strategic relationships with our suppliers and the connection we have with our customers. We believe we are well positioned to build positive momentum in the back half of 2019.
Operator, please open up the line for questions.
And ladies and gentlemen at this time well begin the question and answer session.
If you would like to register a question. Please press star and the number one on your telephone keypad.
If your question has been addressed and you would like to withdraw your registration Please press star and two.
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Once again, if you would like to register a question. Please press Star then one on your telephone keypad.
Our first question today comes from Tom Nikic from Wells Fargo. Please go ahead with your question.
Hi, good morning, Thanks for taking my question.
Hi, I just wanted to ask.
A lot of.
Investors look out to Q4, and you had a really really strong performance last year and.
I know that there were a lot of easy dropped last year and I think that there is a.
A bit of skepticism in the in the marketplace about.
HM because some of the optimism that you're expressing about the two wage copper forman certainty product pipeline et cetera, I was there any sort of additional color that you can give to.
Help us gain more comfort with the.
Back half outlook, particularly against some of the difficult compares that you're up against in Q4.
Yes.
Thanks for the question and clearly with Q2, not performing where.
It was at the low end of our expectations, but not really where we anticipated that.
Q3 lines up really well from a launch perspective right. We talked on our last call about some of the launches that shifted out of Q2, one of them. One into Q1, one went into Q3 and along with the launches come some traffic elements right.
That people make their way to the stores. So as we lined up to the three months of the second quarter and saw the sequential gains obviously July being the strongest as some of the states started with their no tax weekends and back to school line ups. So you know again, we looked at the launch calendar, we looked at our open to buy we look at other releases that support the concept work that we're doing and it really does line up strongly for US again, I won't or can't get into the specific numbers behind each of the launches, but but I know a lot of you and yourself. Tom study launch calendar. If you go out and look you know you see how strong the launches are compared to last year. Certainly the uses are spread out a bit more in Q3 and Q4, rather than the so heavy in Q4, what our merchant team has done a great job of working to find offsets for some of the the shift out of Q4 into Q3 and again I'm confident.
I see our open to buy I see the launch calendar and I feel really good about the product pipeline.
Got it thanks for the color and just one quick follow up.
So yes.
Seems like in the apparel.
Hi, there its been a bit of a chef Pierre away from that you have to win where that was bought for a really long time.
You know sort of how quickly can you.
Adapt to that and I guess, the lean and more on some of the stuff that's working.
And get the the apparel side back to growth.
Yes, I think the team has done it quite honestly I think that as we roll into Q3, and fleece becomes a much more prevalent piece of the consumers uniform. Our team has got the tech fleece, they've got the fleece pieces that are really important relationship with champion continues to grow. So there are all sorts of options that are in play and as kids really focus on their back to school elements. There. There's a lot of fleece that we'll see.
Consumers buying in our stores you are one of the things that I Didnt call out my prepared remarks last July 1st of all Brian made a big shift to Los Angeles, which drove an awful lot of.
He'd around labrum in Los Angeles, and while there was great MBJ shifts.
From a free agent perspective, just this July none of them had quite the intensity of that move up let Brian to Los Angeles. So again that was a little bit of the hole, but the wind where the that we called out and you mentioned that shift is ongoing and I think our merchant team has done a great job to position us with with fleece headed into back to school.
Got it thanks for taking my questions and best of luck in the Bakken.
Thanks, Tom.
Our next question comes from Paul Trussell from Deutsche Bank. Please go ahead with your question.
Good morning, Good morning, Paul.
So the second quarter.
You are saying came in towards the very low end of your expectations as you kind of take a step back.
Where were the areas. If you will that maybe contributed to some of the shortfall versus you all meeting kind of more in the middle or towards the high end of your plan and is it fair to say that part of the reason that you are reiterating guidance for the full year is because you have seen the momentum from July continue into the third quarter to date.
Well I will comment about Q3, we stopped giving quarter to date sort of guidance.
You know a number of calls ago, but you know the weakness in Q2, Paul I think we hit a lot of it in our prepared remarks, obviously, we saw a sequential improvement from May through July .
Part of the May shift was clearly related to traffic and the launches that shifted.
Launch that shifted into Q1.
The apparel business being softer you know again I never point to weather. So we won't but there was some significant weather events around the globe from heat too significant.
Storms in places, but youre going to.
For us it really is a there's always shifts in the business from a fashion perspective, and the ramp down in the that's the slowdown in the ramp up don't always happens what exactly the same time, but you know the good work that our merchant team has done again gives me the confidence that while we were a little bit light in Q2 that we've got the ammunition to deliver in Q3 and in the back half.
Thank you and while I understand the.
Tariff conversation is certainly ongoing and quite fluid.
Is there any more.
Color that you can provide on the potential impact.
If you if you are having conversations about.
Different pricing strategies or sourcing strategies, just any additional help there.
Would be appreciated thank you.
Yes on our private label I'll start there because that's the thing that we control the most as we work with our suppliers and while private label is become a smaller piece of.
Our apparel business, we're obviously working with our suppliers to understand the implications of the tariffs were looking for different sourcing and we'll figure out from a pricing perspective, what we have to do to cover to cover the gap again, because this is the tariffs are ultimately a tax on the end consumer and we need to figure that out how to soften the blow for the consumer on the footwear side each of those conversations with our vendor partners.
Is a fluid conversation right. There is a lot of energy in the industry to try to get the footwear piece of of the tariffs postponed or pulled out of the next rollout if they happen again, we will continue to work with our vendors to understand whether that's an impact.
That will more than likely be in the early part of 2020 as opposed to the back half of 2019, but again each of those discussions as a little bit different because each of our vendors has different sourcing the locations and the products that we buy are frequently sourced in different locations.
Thank you and best of luck.
Thanks, Paul.
Our next question comes from Chris Svezia from Wedbush. Please go ahead with your question.
Good morning, and thank you for taking my questions I guess first [laughter].
Excuse me I guess first just want to go back to the comp.
And the implied comp for the third quarter excuse me I, just want maybe a little bit more I guess concrete evidence just sort of given what happened in Q2. When your line of sight at that point. When you gave the guidance about that low to mid single digit increase you fell a little bit short as we sit here today based on maybe how the first half as it unfolded just any other concrete examples of product drivers do you expect the apparel business to resume back to positive comp to give investors sort of that confidence that yes mid single digit is not in fact, you know is definitely achievable if not there's opportunity and then secondarily to that as you think about fourth quarter or is it linear in terms of that comp progression just given the easy comparisons in Q4 or is that more low to mid single digit implying two year stacked and sort of the low teens.
Well Chris.
I hate to sound like a little bit of a broken record, but it really is around the visibility that we've got on launches I think just as a back to school got started the receipt flow the confidence we have on on the launches again, if I just look at the next few weeks you know we've got a strong retro 12 today, we've got a U.S east tomorrow.
We've got Air Force ones in Air Max 90 Sevens next week, we've got a new color of the Joy ride next week.
We've got a new color the zoom threeq, the Jama shoe, which.
Came out of the gates really strong.
Next weekend, we've got a strong retro 10, we follow that with a strong retro for and new colors of the year mix 720.
We get to the Middle of September we've got multiple styles from Adidas and for L. Williams that again, the customer has spoken very loudly about the their support of we've got a timberland sponge Bob the execution in the timberland six inch boot continues to be part of the kids uniform. So that's really just the back to school season, and I haven't even call out all of the releases that are connected to our evolution of the solution the logo distortion.
From Adidas, So again I get excited about product and I see a product lineup going through back to school and then through the end of the back half of the year that is really really strong and I credit our our product teams I credit our vendor partners for creating some really great heat around the sneakers and certainly we believe that apparel will get better.
Again as the uniform of the Kid turns to fleece.
We've got a great relationship with the with champion and some fleece products, obviously tech fleece from Nike continues to be a really important element of that and they're doing a great job of working apparel into these trends into the concept work that our north American product and marketing team are doing so yes, I get energized by product in the energy level is certainly high on our building right now.
And thank you <expletive> and just our Q4, just any thoughts you referenced mid single for Q3, just curious how you think about Q4 and how that stacks up.
Yes, again, weve sort of giving you the direction for Q3 and sort of where we see the year you'll have to back in a little bit on your models to the guidance, but Q4 again, we talked I talked earlier in the one of the earlier questions about the uses and clearly there's a bit of a shift out of Q4 and Q3 on the easiest but all of the launches that I just talked about our team is working hard to make sure that that level of heat flows throughout Q4 as well so it's a.
Everybody's models, a little bit different so I don't want to get specifically into Q4, but if you. If you do the backup math I think you'll get to the right place. Okay and finally, just real quick for Loren just on the occupancy leverage on <unk> 0.8 comp just any color as we think about that and to the back half of the year.
Yeah, Chris Oh.
Yes, we described our our real estate team very actively working on the points of leverage within occupancy so engineering, the build out and the costs. There when we have the opportunity at lease renewal and you have to look at the term of the lease is they're taking advantage of that these things help and there's a little bit up in there of the new lease accounting standard on applying that so all of those things added up to a bit of leverage that we got in Q2.
Got it. Thank you very much all the best Thanks, Chris.
Our next question comes from Michael Binetti from Credit Suisse. Please go ahead with your question.
Hey, guys. Thanks for taking my questions guys Loren Loren talked continue on that be buying and occupancy question for a minute. If it seems it seems like you are expecting the leverage point there to be a little tougher. This year. So I was very happy to see it come down on the comp that was referenced there is that.
Can we carry some of that lower leverage point into the back half is your expectation for same store sales improves and that should be I mean that sounds like that the things that you're doing should make that line more leverageable then than we were thinking coming into the year is that fair way to think about the back half yeah, well you know we guided to Q3 with an expectation of expansion in the margin at 10 to 30 basis points on a mid single digit and that's a combination of both the merchandise margin on the leverage point on occupancy.
But.
I would say that the underlying factors that we saw in Q2 around occupancy no reason to believe that that will help us go forward.
Okay.
And then <expletive> on the.
I know you've been very helpful on on helping us give some more insights as to what makes you excited on the product launches in the back half and in the fourth quarter in particular.
I'll ask a little differently. Since now you have a good read on what is going to be good hi product. The second half maybe you can help us think about.
The premium products in the back half as it compares to the back half of last year, and maybe give us an idea of the mix of products on ASP that you see coming in the back half I know you have a tough compare in the fourth quarter on that.
So maybe you could just help us think about.
The allocation there and how to think about how how ASV in particular will contribute as you get into the into the tough compare in this in the fourth quarter.
Yes. Thanks, Thanks, Michael for the question.
Especially when we talk about it frequently but it's a pretty complex model for us given the geography is given the banners and given the families of business that we do that we sell product and then you. Obviously you know the UGI is that.
Most likely the the root of your question around the Q4 SP launch business and premium business.
Our parts of our business, but when you think about.
Fleece pieces that sell for 85, 95, $100 Tech fleece that might be 110 to $150 all of those things add up to.
An ASP that we see continuing to expand.
And again, it's not any one particular item that offsets another particular item. It really is the mix of sales in the mix of the geographies and families of business right as we see strength across the premium footwear that generally elevates the more premium apparel, which again helps the DSP calculation, but we continue to see the ability with our vendor partners to create.
Premium product that has a high level of interest from our consumers and they really have not shown any resistance to price points as long as there is a price value relationship in their mind. So we see expanding ASP is going forward.
But all that said our merchants to work very hard to make sure that there is excitement and the product at all price points level.
Okay. So across the product platform. There is some upward pressure there not just don't just focus on the the premium launched.
Okay, and then one more you yeah, I would say is pretty encouraging to see this strength across all the international businesses that you called out here is that is that something you expect to continue into the back half as you as you laid out the model and the comps you gave us. Thanks, Thanks a lot.
Yes, I think that our international businesses performed well we saw I think this is the third or fourth quarter or ROE of comp gains fourth quarter in a row of comp gains for the European business, which again, some real positives there as we see the premium sneakers and we see a lot of our investments that we've made across Europe specifically.
Start to pay off.
The Asian business is clear clearly still a startup business and we continue to expand our door count there and our Canadian and Australian businesses.
Candidate obviously, we include in our North American number, but I think Lauren called out in her comments that Canada and Australia. Both have the strong second quarters, and we certainly expect that international momentum to continue.
Thanks, a lot guys best of luck with back to school.
Thanks, Mike.
Our next question comes from Jeanine stricter from Jefferies. Please go ahead with your question.
Hi, good morning.
Good morning Jeanine.
Hi, good morning, sorry about that.
No word.
I wanted to ask about the ash in a guide and looks like it's looking a little bit better than you previously expected just wanted to get a sense of what's driving that and then if you can give us an update on some of the initiatives you talked about the analyst day on I think you talked about using our if I do it through reduced store labor and just some of the productivity initiatives, where are we there and how should we expect those to progress over the next year or so.
Yeah, I'm very proud of my my expense management teams as they do remain nimble and focused on driving productivity. These are the elements that.
We can't control, we're very hard at work on yes, we did describe a number of things that we anticipate over the longer term yielding is leverage points within the us gionee things like the work on RF I'd, which is now.
Fully in place across Europe allows us to be more efficient on managing the back of house operation.
And therefore the hours so that we can make sure that those hours or more forward facing with our customers very helpful. There HM.
On its things like.
Tech enabled customer experience you know we've described to the ongoing investments, we're making in tech and that shows up in in technology in the hands of our associates that enable them to have a more complete more eloquent a transaction with the customer also a more effective use of ours our arm.
Data analytics investments, our investments in and data scientists and our data Lake is allowing us to.
Look at that data and understand how to make our marketing dollars go further so marketing efficiency and other elements that so we're starting to see some progress on within us DNA.
So a whole bunch of things.
[laughter] into frequently talking about the beauty of L. IGI label of Alps up.
With utilities and our did it just so many elements that we remain focused on on improving.
Okay, Great and then just a follow up on the occupancy can you give us a sense of how many leases you have coming up for a new over the next two years and then maybe just high level, what kind of reductions you're seeing are you going to renegotiate some of those leases.
Yeah, it's a bit more granules and we then we would get into in this format, but you know weve met with over 3000 stores and all of those leased there's always a fair amount coming up for renewal and it's a you know in some cases, taking very short term leases, where we have any concern about the long term viability of the centers that were in and and we take advantage of the situation to structure very the favorable lease terms over that shorter term. It gives us a lot of flexibility to navigate what is a dynamic situation, especially in the us.
There we have taken some forward steps us moving off mall, where we had any concerns about the mall locations long term viability and those those off mall locations I am can bring with them some favorable rent terms.
So the lease renewal option gives us quite a bit of flexibility.
Great. Thanks, so much.
Thanks, Jamie.
Our next question comes from Bob Drbul from Guggenheim. Please go with your question.
Hey, good morning.
Hi, <expletive> I was just wondering Steve could you expand a little bit more on the connected inventory, how thats going to work with the Nike business with your store and I guess as you think about what you've done in the Washington Heights store.
How many.
I know it's early in the past, but like is this something you could envision many more stores rolled rolling out two were converting into from a foot locker perspective. Thanks.
Well, we're we're really in the early days of I don't know if it moves it up to 180 for street, yet, but it's a pretty spectacular store in a in a really great sneaker market. You know the heights is passionate about sneakers and.
We we really feel like we are connected to the community and getting more conducted every single day. So you are the connected inventory piece is the opportunity for us to leverage that the inventory that we have in our system and the inventory that exists in the Nike system. So as we go again it's.
In the early days, we're seeing that there is some significant benefits for the consumers to have a broader view of the inventory right. They know and our associates know where inventory is available in whether or not we can give it to them quickly. So you as we learn from this first store we will certainly.
Perfect the process and perfect the connectivity and.
As we learn from the store.
I believe we will be able to commercialize it rule it out but it may not look exactly like the 181st Street right there will be iterations of this and.
I think we've talked long long.
Many times in our business about building prototypes and testing them and making sure that we've got everything right and working before we roll it out so I won't comment on the rollout plans because I am I'm not confident that we've got it perfect. Yes, certainly we're saying we're going to learn a certainly going to learn on it so test and learn.
Okay. Thank you very much.
All right. Thanks.
And our next question comes from John Kernan from Cowen. Please go ahead with your question.
Hi, good morning, and thanks for taking my question.
Hi, Jim.
Just wanted your thoughts on the overall growth of the resale market there seems to be growing high.
Among some of these marketplaces and how you fit in with that ecosystem and.
Do you think that theres dollars being shifted away from.
Some of the primary markets like yourselves towards that resale channel and I know you.
Had a pretty significant investment.
Go it I'm just wondering.
How you see all this going forward. Thank you.
Well, we see a holistic we've got a holistic view of the sneaker Mark right. You know that we serve a very important piece of that market in our foot locker Champs would action you know across our portfolio of banners without a primary market theres really not a secondary market. So again as we work with our vendor partners and.
Thrive on the scarcity model I think that does have in fact help fuel the secondary markets in the secondary market provides access to product for kids that havent been able to give it in the primary market and it's a it's a I guess, it's probably the perfect the supply demand sort of model right where.
The the ultimate demand.
Meets the supply at the right price point and they are able to do a transaction. So our investment in go any indication in the team.
Is really to help us understand that secondary market better to figure out how we work together with them keeping a clear line of distinction between the primary and secondary markets as we have a responsibility to our our core consumers and our portfolio of brands to make sure that we service them and then you know the product does find its way to the secondary market I think if you look at the sneaker ecosystem in totality the whole ecosystem is growing and that's good for us and Thats good for our vendor partners.
Got it and then if I can just do a quick follow up on merchandise margin in the back half of the year.
Inventory is seemingly in a good position you seem pretty confident on ASP is going in the back half you do have a little bit of a tough compare on merch margin going on the back half, but how should we think about.
Your confidence in March margin, maybe the flow between Q3 and Q4.
That youre expecting within gross margin. Thank you.
Again, so our guide for Q3 and.
Full year 10 to 30 basis points expansion in margin and as we look at Q3 with mid single digit that's helpful for us to achieve the leverage.
So it's a complex formula on the merch margin side of it.
Certainly we had some pressure in Q2, as we mix a little bit stronger in DTC and and higher freight that's carrying there's a bit of a headwind, but the freshness of our inventory has continued to serve us really well on the markdown pie and so it is that mix.
And.
Strength on the top line comp.
That tag cause us to have that guys.
Got it thank you best of luck.
And our final question today will come from Susan Anderson from B. Riley FBR. Please go ahead with your question.
Hi, Good morning, Thanks for taking my question I guess I wanted to ask about the new FX loyalty program. Maybe can you just talk about the pilot I was curious if you're seeing any different consumer response versus the old program and is there going to be in the profit impact because it sounds like the new program is maybe less focus on discounts versus benefits.
Well you are spot on with the more focused on benefits as opposed to discounts and.
As we as we test the program really in a prototype phase with Lady foot locker and foot locker Europe , we're seeing a couple of different things ready in the us where we've had a loyalty program. The behaviors are a little bit different than in Europe , where we havent had a loyalty program before so the transference. If you will on the us side, where we're moving somebody from the discounts to the membership.
He is taking a little bit of work in but they are very happy with the redemption center and the options that we've got there, they're allowing there are points to accumulate a little bit in Europe , it's a little bit different than that they're they're using their points on benefits very quickly right. It's a new concept for them in terms of foot locker, having a loyalty program or a membership program. So they're very quickly accumulating points going to the redemption center and finding something that strikes there financing using their points to redeem so again as we as we learn more and this is again one of the things that we do we'll roll things out across.
The us will roll things out across more countries in in Europe , and finally, we'll follow with Asia Pacific sometime in 2020, but the initial signs are very positive and we expect it will be a real benefit to us and more importantly to our consumers keeping them in our portfolio and allowing them to get great benefits out of the redemption Center.
Great. That's that's sounds interesting.
And then maybe if I could just follow up on the apparel questions. I guess I was kind of curious it seemed like maybe there's a little bit of the lack of newness lately in some of the retro sports apparel brands I guess I was curious do you think it was alive that was weather this past quarter and it does sound like you're seeing some more business for the back half I guess.
Coming from those kind of same brands that you have in the stores right now.
Well, we are certainly seeing newness from the brands that we have in store, but we're also testing some new brands right I think thats one of the strengths of our merchant team is there, they're very willing and very.
Diligent about getting out of testing things looking for the opportunity to accelerate.
Product opportunities, it's one of the benefits that I think we have of being a global.
A global enterprise and the Europe sees trends the West coast. These trends in the us were able to communicate amongst our merchant organization in test and trial out of things so.
I am optimistic about apparel as we go into the back half as I mentioned I think the fleece programs that we've got coming the.
The work that our team has done to make sure that there is apparel tied to our concept work. The work that our vendor partners are doing to make sure that they are our apparel options around launches all of that gives me optimism going into the back half.
Great very helpful. Thanks, So much good luck next quarter.
Thanks I appreciate it.
And ladies and gentlemen at this point I would like to turn the conference call back over to Mr. Lantz for any closing remarks.
Okay. Thank you for joining us today. Please join US again for our next earnings call, which will take place at nine am on Friday November 22nd the call will follow the release of our third quarter results earlier that morning, Thanks, again and goodbye.
Thank you ladies and gentlemen that concludes today's conference call. We do thank you for participating you may now disconnect your lines.