Q3 2021 Foot Locker Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to foot lockers third quarter 2021 financial results Conference call.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session.
This conference May contain forward looking statements that reflect management's current views of future events and financial performance.
Management undertakes no obligation to update these forward looking statements, which are based on many assumptions and factors, including the impact of COVID-19 effects of currency fluctuations.
Our preferences economic and market conditions worldwide and other risks and uncertainties described more fully in the company's press release and in our reports filed with the SEC, 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 that this conference is being recorded I would now like to turn the call over to Jim Landers, Vice President corporate Finance and Investor Relations. Mr. Lance you may begin.
Thanks, Operator, welcome everyone to foot locker, Inc, 's third quarter earnings call.
As described in today's earnings release, we reported third quarter net income of $158 million.
The recently announced closure of our acquisition of WSI is compared to net income of $265 million for the third quarter of last year and net income of $125 million for the third quarter of 2019.
On a per share basis third quarter earnings were $1 52.
Compared with $2 52, since last year and $1 16 for the third quarter of 2019.
During the third quarter of 2021, the company recorded pre tax adjustments to earnings, including a $30 million impairment and one of the company's minority investments.
$13 million of costs related to the wind down of the foot action banner.
$14 million of acquisition and integration costs related to Ws S.
As a reminder, last year's third quarter included a pretax noncash gain of $190 million related to the higher valuation of Joe.
On a non-GAAP basis earnings per share were $1 93, compared to $1 21 for the third quarter of last year and $1 13 for the third quarter of 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 <expletive> Johnson, Chairman and Chief Executive Officer.
Andy Gray Executive Vice President and Chief Commercial Officer will then provide color on the key products and customer engagement highlights from the quarter.
Andrew Page Executive Vice President and Chief Financial Officer will then review our third quarter results and provide guidance for the current fiscal year.
Following our prepared remarks, <expletive> and Andrew will respond to your questions with that I'll now turn it over to Derek.
Thank you Jim Good morning, everyone and thank you for joining us today.
We are pleased to report that the third quarter was another great performance for our company as we Comped a strong back to school season from last year that will supply chain challenges and delivered impressive bottom line results.
We also successfully completed the W. S S acquisition during the quarter and subsequent to the quarter end close the atmos transaction as well, bringing both of these great companies into the foot locker family of brands.
As we begin the fourth quarter and the all important holiday season, we continued to see three macro trends working in our favor.
One is the democratization of sneaker culture with more brands and more consumers participating in the ecosystem of sneaker culture.
With our position as a multi brand retailer through foot locker kids foot locker Champs Sports times East Bay and now W. S. S. In Atmos, we have an incredible connection to the marketplace and consumers.
Second is the growing emphasis on fitness and self care as people look to offset stress and work from home conditions like getting up and staying active to maintain their physical and mental wellness.
Whether it's whole fitness running training hiking or any number of other support fitness categories. We see consumers are turning to and returning to foot locker to meet their fitness needs and we see this trend increasing.
And third is the overall athleisure trend and further casuals nation of society.
Some of this was aided by the continued work from home environment.
Some of it by the new returned to work hybrid model, but overall people want to be more comfortable and that certainly plays into our strengths, especially around footwear, but also with our apparel business, which has been performing extremely well this year.
All of this to say consumer demand remains strong driven by Megatrends and consumer adoption and demand that favors the brands and the categories we sell.
Spending continues to be fueled by people wanting to look good as they venture out again.
In terms of the global supply chain, we're all aware of the challenges.
Fluid situation that we are making every effort to manage and we do have a few advantages.
First we are truly multi brand retailer with a diversified product mix, serving a broad range of consumer needs across price points.
We like our position in terms of our assortment of brands.
And we benefit from the very strong partnerships, we have built with them over many decades.
Times like these our partnerships are mutually beneficial and enabling us to look together as far into the future as possible to plan collaborate and be solution oriented.
Second carrier capacity is something we always keep a close eye on but we are much better positioned this year than in the past with Fedex U P.
And our pooled carriers and with the U S. Postal service is another alternative.
We've got better visibility than we've ever had on where their hotspots are so we can manage customer expectations appropriately.
Third we feel good about our distribution center staffing and capacity levels.
We are building in some additional flex capacity for the fourth quarter to ensure we are doing everything we can to effectively mitigate any macro pressures.
And fourth we are focused on leveraging the advantage that having approximately 3000 stores globally offers us to serve our customers and deliver the types of diversified product offerings inclusive of apparel accessories, and complimentary products that our customers come to us for.
In the third quarter, we successfully launched our control brands, we are especially excited about this offense. Our teams have been working hard to bring it to life in a big way and we are poised to push these brands meaningfully forward in the coming seasons.
At the same time, we are expanding our range of brand partners using programs like our innovative greenhouse incubator and lead initiatives to invest in up and coming designers new concepts exclusive collaborations and curated partnerships all of which will ultimately help us provide a broader range of product offer.
Brings to our consumers.
And finally, but perhaps most importantly, we are benefiting from great connectivity with our consumers.
Elevating the customer experience has long been one of our strategic pillars we.
We have great brand awareness and consumers continue to come to foot locker first.
I believe we have the best team in retail the best partners in the business and we feel very good about where we're headed for the upcoming holiday season and beyond.
Turning to our recent acquisition of Ws S. It's.
It's been a great start with their back to school and overall Q3 results.
Some of the early progress includes setting up our team addition offense for WNS, which we believe is a big operational opportunity to get speed to market to support their apparel business.
We have also looked at our supply chain technology and the other operating contracts and we've been able to secure some wins here as well.
All that to say the early integration work is off to a good start.
We are very bullish on Ws S driven in part by the strong connection to the Hispanic consumer in because it's very complementary to our existing portfolio from a consumer perspective, our merchandize assortment and pricing approach and the geography and real estate standpoint.
We are encouraged to see new Ws S stores perform above their budgets, giving us confidence to continue to expand the store base in the coming year.
Texas is our next WSI growth market plans are well underway for Dallas and Houston, and we also see some fill in market opportunities. We continue to open stores in northern California.
Turning now to Atmos, we are excited to have closed the acquisition earlier this month.
This premium globally recognized digitally led brand sits at the center of Sneaker culture.
We are thrilled to have <unk> and his talented team officially onboard.
Similar to Ws that we are bullish on this high growth business and are well underway with the integration process.
Turning to Champs Sports times ESP, it's been about 18 months since we combined these operating units and in late January we will be opening our first homefield store in South, Florida, which is the new concept, where these two banners come together, bringing the best of what they do individually.
So one singular location.
Our first whole field store will be the largest format. We have in our global fleet at about 35000 gross square feet.
We will have several features that drop on the equity in the DNA of Champs sports newspaper inclusive of the best Global brands in sport lifestyle performance.
We will also have a dedicated sold for East Bay training and performance footwear and apparel.
It will feature an athlete fuel station for guests with protein shakes and smoothies nutrition bars, and post recovery workout type supplements that consumers can enjoy in the space itself or byproducts to take home with them.
There will be several digital and interactive parts of the store, including an activation space, where we will hold coaching clinics training sessions and skill development or yoga workouts.
We will be live and interactive and bringing sport into the space and we're excited to be able to connect with the community through those experiences.
We'll also be able to leverage our east Bay team sports division through existing and new relationships with key schools.
Factor or 12 high schools within a 10 mile radius of the whole field location.
We will look to expand the relationships with those schools building bridges and opportunities with the athletic directors coaches and athletes themselves.
We are very excited to see this experience come together as we pilot this new concept.
Turning to foot action, our team has done an incredible job executing on the wind down and transitioning some of the locations to other banners.
To date, we've converted 18 locations and there are another nine under construction with over half of them rebranding as foot locker and about 40% is Champs sports and the remaining 10% is kids foot locker.
Without exception, we have seen encouraging productivity gains with these stores performing above expectations and well above their previous results.
We have negotiated or worked with our lease flexibility to close about 85% of the total fleet by year end.
We are continuing our negotiations with landlords for the approximately 35 stores that will remain open into fiscal 'twenty two.
We've had a great partnership with our vendors and are pleased with the vendor community's reception to the foot action transition.
We've been able to transfer not only inventory, but also access to some brands and concepts that will bode well for some of our go forward banners.
Especially Champs sports and East Bay.
Yesterday, we announced some exciting organizational enhancements to advance foot lockers long term growth in omnichannel objectives.
Frank Bracken Executive Vice President and Chief Executive Officer in North America has been named Chief operating officer effective immediately.
In his new role break will oversee the company's global operating divisions, the omni customer experience inclusive of global technology services and supply chain and our global franchise JV partnerships.
Susie Kim Senior Vice President General manager foot locker Europe has been named as President of EMEA and general manager of foot locker Europe also effective immediately.
Andy Gray Chief commercial officer will expand his responsibility by leading our global commercial unit, including product the powering up of our controlled brands omni marketing membership and commercial development and the lead initiative.
Together, the announced leadership appointments and organizational enhancements underscore our focus on aligning our commercial operations and finance functions to drive organizational productivity.
With a more agile operational structure, we will be in an even stronger position to expand our customer base and grow our connectivity with sneaker culture in the communities we serve.
Overall, our financial position remains strong our vendor relationships are very strategic in nature, and we continue to obsess around our customers, whether it's through our digital channels, social media F L X or an in store customer experience.
Our solid Q3 performance is why we remain optimistic about the strength of our portfolio the power of our Assortments and the loyalty of our customers.
We are confident that this positive momentum will continue into 2022 and beyond.
Before I turn the call over I want to express my sincere. Thanks to every team member at foot locker.
It is their dedication and hard work that made these outstanding results possible and will enable us to continue to drive our business forward and fulfill our purpose to inspire and empower youth culture.
With that I will now turn the call over to Andy.
Thanks, Nick and good morning, everyone.
During the quarter, we remain laser focused on continuing to strengthen our relationships with our existing consumers and bringing new ones into our business.
This enabled us to beat our result from last year and continued to outpace 2019.
To give you a breakdown of our performance our footwear business decreased low single digits.
While our apparel and accessory businesses were both up double digits all families of business were up relative to 2019.
While the total men's business was down slightly we saw acceleration in womens and positive momentum in kids driven by our success and drawing in more consumers and the expansion of our sneaker community.
Again, all areas were positive to 2019.
We also saw great vendor diversity showcasing the health of our category and the expansion of our consumers' tastes preferences as they fill their sneakers and apparel cause it.
The majority of our top 20 vendors 40 gain driving excitement in their respective categories, all of which helped to allstate supply chain disruption that impacted the flow of some of our franchisees and launch product.
Another area of our business that continues to gain momentum as apparel, which was up double digits and mens womens and kids bare Tees, both LOI and 2019.
Our branded business remains strong across category and our own brand business has expanded and accelerated.
In addition to our ESG business, which is our Champs sports private label offering we re imagined our ESP performance, where in the third quarter with a cross category launch featuring Jilin Hertz.
And we introduced our locker Brian for the first time to great reception from our customers.
This momentum continues into Q4, we're launching more owned brands, including Cozy and new apparel, Brian tailored for our female consumer.
We just launched all city by just Don a lifestyle brand created with Dauncy rooted in basketball and sneaker culture that is inspired by the spirit of community.
Dawn C has been a part of the cultural Vanguard for decades, as a music executive fashion designer sneaker collaborator and brand storytelling and this launch immediately raised the knee deep with the next generation of street wear enthusiasts.
And we have upcoming exclusive partnerships with more teeth makers and celebrity curators like mail or via signing as we continue to add dimension to our apparel business.
Don retailing continues to evolve and enable us to connect with our consumers.
As we work with all of our partners to deliver a strong pipeline of exciting exclusive product content.
It is a part in the marketplace.
We delivered 15 exclusive concepts in the third quarter, which were significant in terms of scale and consumer engagement.
And our powerful consumer constant golfing continues throughout the holiday season.
Including alternate reveal with Nike.
Any nascent very young.
Crocs and a weak collaboration Lewis de Guzman, and new balance and a whole host of excitement from Puma, including Melo ball L O L surprise and stable.
This all fans together with our positioning in the key footwear franchisees continued seasonally expansion with an increased focus on boots, and fleece and a very strong pipeline of product and inventory in apparel.
<unk> is well positioned to delight, the consumer and the holiday season.
Mixture of product diversity, our investment to enhance our omnichannel consumer journey was evident throughout the quarter as we continue to welcome hundreds of millions of visits to our sites and apps.
Focal areas of development for the team in the quarter included enhancing our mobile in App experience, where we see 90% of our online traffic come from.
Evolving our launch reservation process with new data algorithms to improve fairness and work towards ensuring unique individual winners and enhancing our buy online pick up in store experience leading to greater adoption.
Lastly, the ongoing expansion of our community stores and you often is a critical component of our strategy.
During the quarter, Downey, and Aley and bricks in London open their doors to great reaction from our consumers.
We also continued to build community through the rollout and expansion of our F. L X membership program.
We now have over 28 million enrolled members with over 3 million joining in this quarter alone.
We remain encouraged by the results and engagement of our members who spend more and shop more often than non members and theres still a lot of opportunity ahead of us with the program recently launching in Italy, Germany and Spain.
As we push our consumer led offense forward, it's a combination of product leadership and diversity enhanced omni experiences and our focus on community and purpose that continues to drive our leadership in the industry and strengthen our relationship with our consumers.
Let me now pass the call over to Andrew.
Thanks, Andy It is my pleasure to join you. This morning to discuss our third quarter results.
As we navigate the ongoing supply chain challenges, our strong third quarter results demonstrate the resilience and flexibility that our diversified product mix and our strong vendor relationships afford us.
During my review of the results I would like to note that in addition to comparing to last year I will also reference comparisons to the third quarter of 2019, where it is helpful.
On a year over year comparable basis, our third quarter sales were up two 2% and earnings per share grew almost 60%.
Impressively. This strong result was on top of the robust seven 7% comp gain in last year's third quarter and speaks to the strong connection we have built with our customer base.
This connection was apparent during the back to school period, where we saw strong customer engagement in our stores digital and social channels and growing attachment to our key initiatives like our <unk> membership program.
From a cadence perspective with school openings on a more normal schedule.
August led with a low double digit comp gain.
While September comps, which benefited last year from the later school openings declined high single digits.
We then saw momentum turned meaningfully positive in October with comp sales up low single digits.
Total sales for the quarter rose to $2 $2 billion.
Or a three 9% increase over the prior year and up 13, 3% versus the third quarter of 2019.
This includes a $56 million contribution from <unk> since the close of the transaction in mid September.
For the third quarter, our global fleet with opened for 97% of possible operating days with.
With temporary closures in Australia, New Zealand and certain markets in Asia and Germany.
Our year, our year over year comp sales to root our store channel increased four 2%.
Store traffic increased approximately 30% compared to fiscal 2020 as our customers continue to want an in store experience with our multi brand product assortment.
Yeah.
When compared to fiscal 2019 traffic was down high single digits and conversion was up significantly.
In our digital channels, which continued to be an important connection point with our customers safe.
Sales were down four 6% in the third quarter as we lapped an approximate 50% increase from last year.
Digital sales penetration rate was 19, 8%.
While down 160 basis points to 2020, it was well above the 15, 3% from 2019.
Our customers continue to overwhelmingly start their shopping journey with us digitally and if we continue to create a seamless omni experience. They can easily closely of transactions through our apps.
Our web site or in our physical stores.
Turning now to some highlights of our three geographies.
In North America.
Champs sports foot locker, Canada.
And kids foot locker banners led the way with low single digit comp gains.
Top of last year's double digit increases.
The other North American banner posted comp declines with foot locker in the U S down low single digits.
East Bay down high single digits and foot action in wind down mode close the quarter down over 20%.
In EMEA pent up demand continues to drive growth as stores reopened across all countries with strength across apparel women's footwear.
T J brands like converse and new balance leading to a another double digit comp gain at foot locker Europe and <unk>.
High teens comp gain at sidestep.
Our EMEA a fleet with opened 99% of possible operating days in the quarter compared to 96% in the third quarter of last year.
Our APAC region was down slightly due to ongoing challenges related to Covid. The fleet with open approximately 55% of possible operating days.
Alan from 82% in Q2 of this year.
But locker Pacific leveraged strong demand through the digital channel to offset the impact of the store closures and finished with a low single digit comp gain while foot locker Asia was down mid single digits.
We continue to make progress on our expansive strategy within Asia as we opened two new stores and sold during the third quarter and earlier. This month, we completed the acquisition of Atmos, giving us a strong presence in Japan.
One of the key markets and sneaker culture.
Across our markets regions and channels the combination of more limited promotional environment.
Solid demand and a higher penetration in our stores led to a low single digit increase in average selling prices.
While units were down slightly.
Moving down the income statement.
<unk> margin was 34, 7% compared to 39% last year and 32, 1% in the third quarter of 2019.
The improvement in our gross margin was driven by many of the same trends from the first half of 2021 as the combination of robust demand and fresh and lean inventory drove meaningfully lower levels of promotional activity.
Our merchandise margin rate improved 470 basis points over last year and.
And 80 basis points over 2019 drip.
Driven primarily by the meaningful reduction in markdown.
Looking into the holiday season, and the fourth quarter, we expect the promotional activity to remain favorable relative to both 2020 and 2019.
As a percent of sales, our occupancy and bias compensation costs.
Deleveraged 90 basis points over Q3 of 2020.
As a reminder, in last year's third quarter, we benefited from $32 million of Covid related tenancy relief versus $3 million this year.
When compared to Q3 of 2019, we leveraged our occupancy expense by 180 basis points.
Our SG&A expense came in at 29% of sales in the quarter compared to 21% in the prior year period.
When compared to 2019 SG&A rate improved by 40 basis points.
For the quarter depreciation expense was $49 million.
Up from $44 million last year.
Interest expense rose to $4 million from $2 million in the prior year due to the incremental expense related to the company's new bond issuance.
Within other income there was a benefit of $26 million.
Or <unk> 18 per share from the Mark to market of our investment in retail is limited.
As a reminder, retail is limited as our partner in the joint venture that manages our foot locker stores and select eastern and central European market and it's also our franchise partner in Israel.
Our non-GAAP tax rate came in at 27, 8% compared to last year's rate of 37%.
Turning to the balance sheet, we ended the quarter with approximately $1 $3 billion of cash down $54 million from a year ago.
At the end of the quarter.
Inventory was up nine 1% to last year drill.
Driven by our supply chain and logistics team efforts to position us well for the upcoming holiday season combined with the inventory that was included in the <unk> acquisition.
On a constant currency basis inventory was up eight 5% and sales increased three 6%.
In terms of capital expenditures, we invested $50 million in the quarter, bringing the year to date total to $137 million.
This funded the opening of 32 new stores.
<unk>, new foot locker community stores in Downey, California, and bricks in U K.
Sure.
Sports power stores in the Bronx, New York, and Torrance, California.
The expansion of sidestep in Belgium, and the conversion of 18 foot action stores.
We also relocated or remodeled 29 stores and closed 80 stores in the quarter, including 50 foot action stores.
With the addition of WSI stores, we finished the quarter with 2956 company owned stores.
For the full year.
We now expect to open approximately 144 stores, including eight new WSI stores.
Remodel or relocate 200 stores and closed 370 stores, including about 205 put actions doors.
Looking forward, we now expect to invest approximately $240 million in capital expenditures this year.
Lower than our prior guidance of $260 million due primarily to supply chain challenges with the balance shifting into 2022.
Turning to capital allocation, we and our board are confident in the financial position of the company and continue to believe that returning cash to our shareholders is an important aspect of the company's capital allocation strategy.
First we returned $30 million to our shareholders through our quarterly dividend program.
Next we saw opportunity given the value of the company stock and we repurchased 275 million shares of common stock for $129 million during the quarter.
In total we have returned $242 million to shareholders through the first nine months of the year through share repurchases and dividends, while continuing to make strategic investments to fuel our growth.
We also returned to the capital markets during the quarter.
Taking advantage of favorable market conditions to create more flexibility by issuing $400 million worth of 4% senior notes due in 2029.
Proceeds from the issuance will be used for general corporate purposes, such as repaid $98 million of senior notes due in January of 2022, and replenishing our inventory levels.
Of note.
Following the capital raise our liquidity position is comparable to pre pandemic levels.
In summary.
We are still on track with our capital allocation program investing in our business first with the.
<unk> focus on returning cash to shareholders through our dividend and opportunistic share repurchase programs.
Finally, turning to our full year outlook, which now includes the benefit from WSI and Atmos.
We believe we are well positioned for the holiday season in terms of both strong customer demand and inventory levels to support that demand.
Like other companies, we expect global supply chain constraints, including factory shutdowns and port congestion to continue to be a headwind through the fourth quarter and into 2022.
As such we remain appropriately cautious in the near term.
Based on our current visibility, we expect to deliver sales growth in the high teens for the full year with comp sales in the mid teens.
We are expecting the gross margin rate to be.
540 to 550 basis points for the full year versus 2020, mostly driven by a more rational promotional environment.
Our SG&A expense rate is expected to leverage between 40% and 50 basis points year over year.
Moving down the income statement, we expect depreciation and amortization expense to be approximately $190 million intra.
Interest expense about $14 million and our year over year effective tax rate around 28%.
We now expect our non-GAAP earnings range to be approximately $7 53 to $7 60 per share.
This guidance reflects our strong performance in the first nine months of the year and our increased visibility in the fourth quarter, while recognizing the supply chain challenges that we discussed.
As we look ahead to fiscal 2022.
Howard by the strength of our portfolio.
Rest of our assortment and the loyalty of our customers. We look forward to providing our fiscal 2022 outlook on our fourth quarter earnings call.
In closing, we believe the combination of our financial strength strategic relationships with our vendor partners and deep connection with our customers to provide us with flexibility to maneuver in this rapidly evolving marketplace through the fourth quarter and beyond executing towards our long term strategic.
<unk> and driving shareholder value.
We remain very confident in our strategy.
Pleased with the trajectory. We are currently on and we look forward to updating you on our progress in the coming quarters.
With that operator, please open up the call for questions.
Thank you ladies.
Ladies and gentlemen, we will now begin the question and answer session.
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The first question comes from Susan Anderson from B Riley. Please go ahead.
Hi, good morning, really nice shopping quarter.
But I guess I'm curious.
Curious on the inventory and obviously, it's pretty lean out there you know how youre feeling for holiday and then also maybe if you could talk about I guess, you know by brand the athletic brand versus lifestyle. If you were in better position.
One category or the other.
Yeah.
Kris Simpson thanks.
Tim did a tremendous job in the third quarter of actual get pull our inventory ahead of last year as you know and we ended the second quarter Bell, Let's think seven seven and a half slightly more of them that are really driving the third quarter was to get well positioned going into the holidays. So working with our vendor partner, we're working with our supply chain.
The supply chain team.
The logistics team.
We were actually able to get ahead on the inventory so as we are.
Ended the quarter with our inventory up I feel good about where we're at now.
Content of the inventory will be.
Moving throughout the quarter as some launch they'd shift and some things move around but.
Again, we've got good relationships with all of our vendor partners and I think our preferred.
Source of destination for the product that does get into the countries. So again I feel good about how we're positioned for the fourth quarter of <unk>.
Clearly consumer demand remains strong.
Great that sounds really positive.
And then if I could add a follow up on that owned brands that you're launching I guess the ones that you've already launched.
If you could talk about maybe if there's any early consumer response. It sounds like they are doing well are they in line with your expectations or better than your expectation so far.
Yeah. Thanks for the question Susan we are really positive about our own brands travel Chan with spend in the business for a long time with our Champs sports gear CL King.
The launch of the eastern performance brand in the third quarter and likely in the third quarter.
The work that we've done with them.
We're the only brand that I have any hesitation about and it's not the contest.
Clearly the delivery, but were scheduled to look.
To launch our women's clothing brands in the fourth quarter and as we continue to push some of the supply chain.
That takes a little bit pelleted, but the response from our consumer system strong both in stores and online across the geography in North America, where we did the first launch so again.
<unk> performance brand has been a little bit by compression and certainly the performance silhouettes lockers been while we're seeing from our lifestyle and street wear perspective, and the launch that we just had with what <unk> seen.
It has been really well received by that next generational Street, where fans and see US Jay just continues to perform well. So we're very positive about our own brand strategy moving forward.
Great and is this replacing I guess branded apparel within the stores and is there an expectation on what percent of the business the own brands can be longer term.
Well, it's really complementary to the brand new product that we've got in the stores sometimes there are.
Price point gaps that we find sometimes there are still a webcast that we find in volumes.
Great stories around our control brands and private brands.
Complement the branded product in the store.
We haven't publicly talked about a target for our control brands, yet, but as we launch them and gain some strength.
We'll certainly look to expand our presence globally.
Great. Thanks, so much good luck this holiday.
Thanks Krishna.
The next question comes from Paula <unk> with Citi. Please go ahead.
Hey, Thanks, guys.
If you feel that the third quarter sales were constrained at all by supply chain pressures or any delayed.
Delayed deliveries and I'm curious if you think that that gets better or worse as you look out into the fourth quarter.
<unk> just in terms of how sales might be moving moving around and then related to that curious have you seen any evidence of customers coming in just to stores for certain items and maybe they're not available.
Buying something else or if it is truly a michelle thanks.
Thanks for the question Paul.
I would say that certainly there is probably a little bit of sales in the third quarter that were impacted by the supply chain.
You read the same news that we range you've seen the 81, both stocked off of but L. A and long beach and.
The delays in getting product through our team did a fantastic job of.
Working with other partners identifying other ports identifying more rapid deployment of into our stores and through our network. So I think that.
We're balancing things the best we can with our bench.
We're partners in our supply chain partners. So again.
Thank the customers are walking into our stores.
Maybe not found in their first choice, but it's pretty clear to me based on the traffic that we saw in stores and the results that we just reported that our consumers are buying the best available product and our consumers continue to be driven by high heat product.
And if their size color style definitely happens to be available that they've shown a real capacity into continuing to shop work with our associates in the store and find the next best product and clearly I think the results from the third quarter.
Proof that the customer appetite for products in our categories continues to be high.
Thanks, Doug and just want to follow up on the production closing the stores that are closing what percent of those are located in.
Center, where you've got another one of your banners and do you look at that as a comp driver.
Well certainly anytime that we can close the door on our portfolio, we expect to recapture some of those sales across.
Other banners.
Polio.
You know Andrew or Jim you may have the exact number but my memories, so somewhere between 70 and 80% of the doors are centers, where we crossed over with at least one of our other banners. So Kevin we do expect.
While we lose 100% of the put actual sales when we when we closed the doors, we do expect those customers to find great opportunities to shop, and in Champs and foot locker or kids foot locker across our portfolio.
Got it. Thank you good luck.
Thanks, Paul.
The next question comes from Michael Binetti with Credit Suisse. Please go ahead.
Hey, guys. Thanks for taking our questions here.
I guess Victor.
I think the big question here is on inventory visibility for the spring.
We've been in.
Through the Python here with Vietnam, you gave us some help on on <unk>. It sounds like everything's, Okay here, but how much visibility do you have into the exact launch calendar for the spring given the issues. The footwear category has been dealing in.
Your words from last call the knock on effects from Vietnam, and everything you guys have to sort through how do you know, which shoes, you're getting how many pairs you're getting how how far are you from what you consider to be normal as far as visibility into applications and data like that for the spring at this point.
Well I would say Michael that initial visibility.
It's not where we expect it to be that being said the launch calendar throughout the third quarter has shifted and moved to in quantity and have shifted and moved in some long term from a launch some lift from the launch.
We saw our team able to maneuver through that we expect the same thing to happen in Q4.
The best laid plans and if you want to watch some of the launch calendars are all sort of put lots of that come in or our app and you're looking at large scale of those youll see that some of those states should we expect that to continue in Q4 and into Q1, the farther we get away from the shutdown in Vietnam, the more predictable at least the.
<unk> side of the equation won't be.
Still be battling port congestion and some supply chain challenges as the product starts to move but as we work with our vendor partners. It seems that we have been really well positioned in order to take advantage from a product lives, we'd always like more visibility right and we'd like to know exactly what that's going to show up in the port and what we're going to get them through.
But I think our team in conjunction with our strong relationships with our vendor partners.
Is best informed as possible.
Okay. Thanks for that and then if I could ask.
A follow up as you you know as you look more towards hopefully a more normal world as we get past all this year, what's striking is the cash balance here. He's got over 20% of your market cap in cash just very high levels. As you look at a more normal world like what do you see as the areas that you find the most opportunity to push harder into the biggest long term value creators for that for the company.
Shareholders on a multiyear basis, and what maybe it doesn't need as much investment as it did.
Pre COVID-19 as you'd think about.
What's really exciting to you as you get out past the last few years.
Well I think we've been pretty consistent Michael I don't know that Covid has changed our thoughts are on that first and foremost we're going to invest in the business and that means physical stores and digital experience in supply chain.
<unk> all of those things.
The need there has probably accelerated a bit quite honestly and as customers' expectations for great experiences will continue to to accelerate as we come out of COVID-19 into whatever the new normal is.
The acquisition of Ws Awesome Atmos, we expect to continue to.
In Boston those brands to continue their double digit growth that we've seen and obviously since we opened I think.
Andrew talked about eight stores opening in the fourth quarter from Ws assessing what's really exciting as we start to move that brand out of southern California. So that you know all of those things from technology to it.
Store experience and the Homefield store that we talked about down in Florida that will open later in January with the Champs times these pay up at.
All of those things are going to continue to require careful that being said you know the.
The board and.
Our team is really confident about the strength of the business.
<unk> continue to pay the dividend we've got a share repurchase program. That's got a value left in it and we continue to look for opportunistic chances to be in the market to buy our shares back. We also continue to look at capability gaps whether that's on the digital front, whether that's in our platform sort of a range, but we can.
Continue to scale and look for capabilities that can accelerate our experiences and connectivity with the consumer and we continue to rollout our things like our enhanced launch continue to open more countries move up all that F. L X excuse me all of those things that require a ton of attention in capital at the end of a day.
Okay. Thanks for the thought that they might have a good one.
Michael This is Andrew page as well also recall that while our cash balance at the end of the quarter was 1.3 billion.
There is.
The disbursement associated with the pain for the Atmos deal would not have happened by the end of the third quarter of 300 million out and as well as the.
Repayment of our upcoming bond maturity at 98 million, so that's $400 million.
The balance that we spoke of at the end of the third quarter already okay.
Okay. Thanks, a lot.
<unk>.
Thanks, Mike.
The next question comes from John Kernan with Cowen. Please go ahead.
Good morning, guys. Thanks for taking our question.
Okay.
The top line question to Ed at a gross margin question.
Maybe we'll start with the implied comp guidance for the fourth quarter what.
Are you seeing maybe from a supply chain perspective.
Launch cadence perspective.
Just overall retail condition perspective.
Twice, the slowdown that you're seeing.
What you saw in October it feels like there was a.
A big pick up in the business towards the end of October just curious what youre seeing as we enter Q4, it seems like the implied comp guidance, it's down around mid singles for Q4.
So just you could walk us through the assumptions in that whether it's supply chain constraints something you've seen the launch cadence that it implies that T cell phone from Q3.
Well Q3 comp was two two right. So again, we actually feel good about the fourth quarter as it relates to comps.
If you if you stack the comps in Q3 Q4.
They'll come out very favorable as Andrew talked about we had a more normalized Q3, if you will with the August in the more traditional back to school sort of timeframe September down a bit based on our back to school openings from a year ago, and then momentum back in the low single.
It's low to mid single digits in October. So again, there is not a significant step change John in Q4 so.
Matt and Mike.
A little bit different than your model, Matt, but we.
We feel good about Q4, obviously launches as I've talked about on.
On the Q&A session. When we talk through the call continuing to move around both quantities and dates.
Were those traditionally been a big Big Black Friday launch that launch has been pushed back a little bit and it will be early in December.
The launch calendar well, while strong U.
As always variable based on some of the supply chain that we've talked about and getting products and on the exact date of launches. So again, we feel good about Q4, we think the strength of the inventory that we're coming into the quarter with and the flows that we see right now we'll certainly fuel is as we think about the growth in the fourth.
Water.
Got it maybe just one quick follow up on gross margin, which has been phenomenal and the first nine months of this year.
Andrew what do you see in the model as being.
Normalized.
Gross margin and merch margin as we go into next year.
They're pretty tremendous expansion.
On the merch margin off the 2019 based this year I'm curious what do you think maybe.
Maybe a more normalized level.
Gross margin and merch margin shifts thank you.
Sure.
Yes. Thank you. So if you get into as you start thinking about our gross margin for the current year. I mean, we spoke a number of times that obviously 2021 is significantly impacted by a favorable promotional environment were less favorable promotional environment more rational promotions and therefore able to sale.
At a more full priced faithful.
We've talked a number of times about going forward, while we expect.
This favorable promotional environment too.
To continue to persist through the fourth quarter, we do expect.
Yeah, we do expect it to be a lesser extent than what you've seen going forward. So we haven't provided.
What we believe is our normalized guidance for 2022, we look forward to updating you in the Q4 about that but we do expect the promotional environment to choose the favorable promotional environment to start to subside.
Understood. Thank you.
Thanks, John the next question.
The next question comes from Robert Campbell with Guggenheim Securities. Please go ahead.
Hi, good morning.
Couple of questions from me I think the first one is.
As you looked at 22.
And you think about the foot action store closures can.
Can you talk about the margin opportunity sort of with the remaining change in sort of what you see sort of how they can stay in their lanes and how that could add to the financial performance of the business and I guess the second question that I have is on I mean, you talked about sort of carrier availability.
So in the next couple of quarters is there a next couple of weeks or months with Fedex UBS and the postal service is there a big financial variability on the shipping cost to you as you just try to find the optimal solution to shipping our products to the customers.
Yeah, Thanks for the questions Bob.
From the margin impossible to put action again, as we wind production down.
You know being judicious as we can with our markdowns and moving products around and as we talked about in our comments, we've had the ability to move product and even some brand opportunities from put action into.
Specifically Champs newspaper vessels will benefit them in the long run. So again I think the swim lanes for foot locker and Champs Tom since there are both pretty clear right Champs homes, they're focused on the sport performance Kid from a lifestyle perspective to the field of play.
Foot locker is very much or all sneaker culture in that street, where sort of opportunity for the kids. So again I don't know that there is once we get through the closures that there was much impact of the margin from foot action.
The team is doing a great job of winding down we're working hard with our landlord partners and with our vendor partners to make sure that we get them closed effectively and efficiently.
Certainly as we optimize on your second question, Bob certainly as we optimize the shipments.
Try to balance speed with cost and utilizing the right carrier the right place to pick up and deliver you know trying to work with our customers quite honestly for them to pick up product in the stores. So.
But you know as you.
As you cover a lot of folks you know that the cost of fragrance going up both the ocean freight and air freight to get product into the country and then the delivery to our distribution center and from our distribution centers to our tour stores. So it is certainly a bit of a headwind as we think about the macroeconomics of the supply chain.
But our team is building has built and continues to build a network that I think is pretty darn efficient and effective.
And I don't know if I missed this but are you guys doing the the week of greatness is that still on the docket.
Well, we've expanded beyond the week of greatness right I mean, we've done that a couple of years ago. As we took a black Friday and tried to extend it into the weekend and now we're really just looking at the holiday season because of some of the variability of these deliveries were trying to control some storytelling around.
Our private brands control brands and the things that we're confident that we'll deliver on time, but we're really just celebrating the season with a campaign called celebrate.
You fill in the blank of what you want to celebrate and again part of it is above grade sneakers part of it is about the the the connectivity that we've got with our.
With our consumers and trying to help them find some normalcy. This holiday season, great. Thank you very much.
Yes, so new Bob Thank you.
Yes.
Our last question today comes from Kate Mcshane Goldman Sachs. Please go ahead.
Hi, good morning, Thanks for taking our question.
Okay.
Inventory question.
I was wondering as.
As we get a little bit more into next year specifically.
Given that you know the Vietnam challenge it does seem like they're going to get.
Perfect.
The factories get ramped up into 2022 could we see a meaningful change in mix in terms of presentation in your store or will you be leaning into brands that have left Vietnam exposure and how much flexibility do you have within the Knicks have brands presenting in the store in that time period. In addition.
All the other things he can walk through.
My parents in the supply chain.
Okay.
Customers don't really care, where the product is built.
We're trying to create the most optimal assortment for our customers to meet their demands.
Obviously as we wait the assortment and we look at those production startups that you mentioned.
We will absorb.
The best product in and as I talked about earlier, our consumers are pretty resilient right now and that they're they're moving from one product to the next best available product, if we're not able to.
To circle excuse me solar storm with their top priority. So I think you will see some assortment changes in the store, but it's a it's more reflect of our customer tastes and mixing in the best product available more so than really thinking about the demand constraints or excuse me the supply constraints coming.
Out of Vietnam. So.
It is a it is a bit of a supply challenge for the industry right now, it's certainly not a demand challenge was our customers remain robust.
They're spending remains robust and the categories and the products that we've got in store.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Mr. Jim Landers for any closing remarks.
Thank you for joining us today. Please join US again for next earnings call, which we anticipate will take place at nine a M on Friday February 25th.
The call will follow the release of our fourth quarter results earlier that morning.
Thanks, again, and we want to wish everyone a happy Thanksgiving Goodbye.
Yeah.
Thank you ladies and gentlemen, the conference is now concluded. Thank you for participating in today's presentation. You may now disconnect.
Yeah.