Q1 2022 Foot Locker Inc Earnings Call
Okay.
Good morning, everyone and welcome to foot lockers first quarter 2022 financial results conference call.
At this time all participants are in a listen only mode.
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 customer preferences, economic and market conditions worldwide and other risks and uncertainties described more fully in the company's press releases and rip.
Ports 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 today's conference is being recorded at this time I'd like to turn the floor over to Robert Higginbotham, Vice President Investor Relations. Mr. Higginbotham you may begin.
Thank you operator, welcome everyone to foot locker, Inc. 's first quarter earnings call.
Today's call will reference certain non-GAAP measures a reconciliation of GAAP to non-GAAP results is included in this morning's earnings release.
Please note we have updated our definition of non-GAAP earnings to exclude all minority investment gains and losses.
Can find the appropriate adjustments to our reported 2021 non-GAAP earnings footnotes.
Yeah.
Also note we have a slide presentation posted on our Investor Relations website with information that will be referenced during the call.
Today, we will begin our prepared remarks, with <expletive> Johnson, Chairman and Chief Executive Officer.
Frank Bracken Executive Vice President and Chief operating Officer, who will provide more color on our operations and some of our strategic initiatives.
Andrew Page Executive Vice President and Chief Financial Officer will then review, our quarterly results and financial position in more detail and provide color on our updated 2022 guidance.
Following our prepared remarks, Jack Frank and Andrew will respond to your questions with that I'll now turn it over to Jack.
Thank you Rob good morning, everyone and thank you for joining us.
We're off to a great start in 2022 reporting a solid quarter against the tough comparisons of fiscal stimulus and historically low promotions from last year.
Despite those headwinds we grew our total sales by 1% with curbstone, only one 9% and.
And we delivered non-GAAP EPS of $1 60 per share down from our record results in 2021, but up nicely from 2019, our last pre Covid first quarter.
Let me start by thanking our team for their hard work dedication and commitment that drove these results.
I always say, we have the best team in retail and that is no more evident this quarter as our team continues to execute exceptionally well in a volatile environment.
Last quarter, we announced an acceleration in some of our key initiatives. We are happy to report significant progress against our objectives.
Further diversify our merchandise and vendor mix.
Our real estate off mall, and expand our key growth banners and enhance our omni channel offerings and capabilities.
Our first quarter results continued to demonstrate our growing ability to expand our customer base and delight them with a broader and richer product offering as we diversify our business across brands categories and channels.
With our overall comps down 1.9% the majority of our top 20 vendors posted sales gains in the quarter with strength from some of our biggest crater like Adidas and Puma.
Even more outsized growth from brands like new balance cracks in Congress.
All of which were up over 50%.
Importantly, let me take a moment to congratulate Nike on its 50th anniversary.
An incredible milestone for the brand that has had such an important impact on sport and sneaker culture.
Nike has been a driving force in shaping the industry that we know and love today, and we look forward to the next 50 years working with them to continue to excite consumers elevate the marketplace and fuel sneaker culture.
Our efforts to grow our apparel and accessories business continued to yield results with the categories well outpacing footwear once again pumping up over 10% despite difficult year over year comparisons.
Private label continues to be an important driver of our apparel business with lacquer and cozy continuing to gain traction in the early days and co created brands like all city Melody Assembly performing well with new drops in March and April .
And I don't want to spend some time walking through the opportunity we have with our brand diversification efforts, which have been successful to date and hold significant potential going forward.
Our strategic direction to diversify our offering is supported by three key pillars number one consumers want choice and value of multi brand experience.
We are underpenetrated in virtually all of our brands outside of our top vendor.
And three we have superior brand equity in the marketplace that we can leverage to capture incremental share across our portfolio.
Starting with choice.
As we analyze the baskets of our identified customers, we see that nearly 40% of transactions that have more than one item actually contained multiple brands.
Any consumers mix and match their selections across brands, whether it's multiple footwear brands or a head to toe, albeit a tour more brands.
Also 50% of footwear sales from our identified customers come from those who buy from us more than four times over a two year period.
80% of those frequent shoppers are multi brand consumers and overall they purchased approximately three different footwear brands on average.
So we know that our customers want multiple options and as our wholesale brands you're in a strong position to serve those needs in the marketplace.
But when we look at our brand mix historically, we have not been offering them about choice such that we have below our average market share nearly all of our brands.
According to the data from the NPD group, our overall share of the U S. Active footwear wholesale market is approximately 16%.
But outside of our top vendor our share is only 5%, suggesting a significant opportunity to capture share of other brands.
Our confidence in our ability to capture those sales is rooted in the superior brand equity we have built in the marketplace over nearly 50 years.
Let me share with you a few metrics that illustrate our powerful brand positioning.
The foot locker brand has over 12 million Instagram followers in the U S.
While a big number what's more impressive is that it is over five times, our top four competing third party retail banners combined.
The next closest having only 1 million followers.
Broader measures of our brand health relative to our competition also show a meaningful advantage.
<unk> metrics, such as awareness consideration and purchasing a recent third party study shows that foot lockers brand health index stands more than 20% above the average of its peer set.
Alright, Jeremy brand positioning and our strong customer base allow us to build scale for our vendors, enabling us to in turn broaden and deepen our relationships with them in order to expand our customer base further and capture incremental share.
As a prime example foot locker and <unk> recently announced a newly enhanced partnership that will take our decades long relationship to new Heights, as we combine forces to develop and build product franchises deliver more energy and hype launches and create compelling experiences for consumers and a much.
More integrated way than we've ever done before.
This enhanced relationship will establish foot lockers the lead partner variety that's in the basketball category as well as include the development and the expansion of key franchises across women's and kids apparel.
Including all of our banners across all of our geographies. This new effort will target over $2 billion in annual retail sales by 2025, nearly tripling levels from 2021.
We are incredibly excited about what we can accomplish together under this closer relationship designed to better serve the sport and sneaker community. Your body, that's greater access to our customers and expand our customer base even further.
But that is not the end of our work to elevate and expand our product portfolio.
We are continuing to develop new and enhanced partnerships with many other brands and vendors.
Cooler and new balance continued to drive outpaced growth and are becoming a significantly bigger part of our current and future business.
Key product allocation from new bandwidth continues to accelerate and exclusive partnerships like lamella ball drive the Puma business.
According to the NPD group the performance running footwear market in the U S and Canada generated a combined $4 $5 billion in revenue for fiscal 2021.
This is a category where foot locker does not yet fully participated.
We are working with some of the fastest growing brands in that category to help them connect with the younger customer while also helping us extend our customer reach.
Beginning this summer we will be partnering with Deckers brands to launch footwear product from poker and our foot locker banner.
Starting with foot locker that curve and select foot locker doors in the U S. This will be an important step towards our longer term strategic relationship between the brand and foot locker incorporated.
We are also continuing to develop our relationship with an running where we nearly doubled the store count where we carry the brand and look to continue to grow further from here.
As we develop new partnerships and they have more choice and excitement to our portfolio. We are confident in our ability to both expand our share with existing customers and grow our customer base.
We couldnt be more excited about the direction and potential of our business going forward.
Lastly, while the macroeconomic environment has become more uncertain in many ways over the past few months with interest rates and inflation increasing rapidly.
Our consumer has remained resilient.
We have not seen a material change in consumer behavior to indicate a softening in demand for our category.
Now I'll pass the call over to Frank to discuss our off mall strategy, our banner growth and the omni channel evolution.
Thank you <expletive> and good morning, everyone.
Starting with our real estate, we are increasingly confident in our off mall strategies as we collect more and more proof points across our community and power doors grow our double U S. S in Atmos standards.
Test new large format concepts.
In the first quarter, we opened or converted nine community empowered stores, bringing our total to over 70 on the way towards our goal of 300 globally in the next three years.
One of those was our first community store in Continental Europe , which opened near Paris and sodomy in April the.
The community response has been phenomenal as we connect with consumers through sneaker culture.
<unk> are localized product assortment and locally inspired events and activations.
As consumers expect more and more personalization in connection with the brands and retailers that serve them.
This hyper local approach is helping us create lasting customer relationships in a way that is lacking in the marketplace.
Backed by our field structure that is designed to support the customer experience at the market level. These stores are giving us a sharp competitive advantage in the markets, where we have executed the strategy so far.
As a whole community empower stores are delivering sales over 10% above their plan in the past 12 months and out Comping the regional benchmarks in the chain, giving us the ongoing conviction in our rollout of the format.
In April we also opened our first test of our new Champs Homefield concepts in Pembroke pines outside of Miami.
This off mall large format store, providing one stop shop across sport lifestyle support performance and nutrition and wellness, including rich interactive experiences for the modern athlete.
While very early days this first stores performing well and the consumer engagement from the community has been strong.
WNS continues to perform incredibly well as our large format off mall value banner focused on Hispanic communities.
Same store sales continue to outpace the rest of our fleet.
And overall performance continues to run ahead of our original forecast, putting us well on track to achieve $1 billion of top line sales by 2024 or 20% CAGR from an expected $650 million top line this year.
That growth will be fueled by robust same store sales growth and new units, where we see the potential to more than double the current store base of roughly 100 stores, including more stores in existing markets in the west and southwest as well as entering new markets, Florida, and Puerto Rico.
Atmos also had a very good start to the year with strong comp sales and the elevation of our store experience in the home market of Japan.
This included the remodeling of our Audi Das times Atmos concept shop in Harajuku.
As well as the opening of three new Atmos, pink stores, which are dedicated to serving the female consumer.
Atmos continues to perform ahead of our investment forecast.
And we will continue to review opportunities to unlock even greater value globally.
Our <unk> membership program continues to help us better serve consumers, including now having five key countries in Europe on the F. L X platform.
Our F. L X program serves as a tool to capture consumer data and better understand their wants and needs.
We are now capturing over 70% of sales through our members in the U S.
Up from 50%, just two years ago, allowing us to better track connect with and ultimately serve our customers better.
F. L X also acts to incentivize, our best consumers to stay engaged with our brands and shop more with us as our members continue to spend over 10% more than non members.
Our omnichannel consumer experience evolution continues to make strong progress, including our drop ship program and our partnership with <unk>.
We continue to rollout our drop ship program across vendors and regions to give our consumers a seamless extension of choice.
Drop ship also allows us to test new products and categories and consideration of adding them to the assortment in a bigger way, including in our stores.
In the first quarter, we added several major brands to the platform across our core U S and EMEA banners, including brand and health and wellness that were new to us like muscle foods and <unk>.
Finally, an update on our partnership with <unk>.
As we continue to expand access and rewards for our F. L. X members, we will begin to test offers and promotions on select products from the go platform.
This initiative will enable foot locker to reward its high value customers, providing more access to products that our members love.
We will keep you updated as this test progresses, and we continue to explore other ways with two platforms can create value together.
In summary, we are making meaningful progress to better serve and help lift our consumers communities to get closer to our best consumers through our membership program and to build more choice for our consumers through our connected drop ship partnerships.
I'll now hand, the call over to Andrew.
Thank you Frank and good morning, everyone.
Our first quarter results continue to demonstrate our ability to rebalance our business across brands and categories and to expand our reach in connection with our customers.
Our first quarter total sales increased 1%.
Excluding the impact of foreign currency total sales were up 3%.
On a comparable basis sales declined one 9%.
Comp declines in the U S. As we lapped sides of both fiscal stimulus from last year were partially offset by strong comp gains in other regions, particularly Europe , where we were up against a significant amount of store closures from a year ago.
While our overall comps were down one 9%.
Our non Nike comps increased in the high teens as we continue the efforts to rebalance our assortment.
The corner started with a high teens comp gain in February .
<unk> slowed to down high single digits in both March and April as we began to lap fiscal stimulus.
For the quarter, our global fleet with opened 98% of available days versus approximately 80% last year.
Comparable sales in our stores grew seven 9% with store traffic up approximately 25% while conversion was down approximately 10% versus last year.
When comparing to 2019, while our brick and mortar traffic is down.
Conversion is actually meaningfully higher showing a high level of intent from our customers when they visit our stores and the great work by our in store teams.
Our digital penetration was 18, 3% in the first quarter this year down from 24, 8% last year.
Total units were down slightly while average selling prices fell by mid single digits on higher apparel penetration and a mix shift within footwear.
Before we get into a breakdown of sales by geography, I want to start by expressing our deepest sympathies to those affected by the conflict in crisis in Ukraine.
Foot locker has partnered with the international Rescue Committee to help those impacted and to aid in their resettlement and recovery.
Additionally, our European team members have really stepped up by launching a series of grassroots support efforts.
From a business perspective, we have no direct exposure to Ukraine, or Russia, and while we have some stores in nearby countries in eastern Europe that we operate with that JV partners. It is a very small part of our European operations.
Now.
Turning to our results by geography and batter.
North America comps were down 11, 8%.
Given last year benefited from heavy fiscal stimulus in the U S.
Foot locker, Canada was up mid single digits, while foot locker U S was down high single digits and kids foot locker and Champs were both down low double digits.
Overall comps in EMEA grew over 50% as open store days improved to 97% from 39% last year.
And in APAC comps were up 10% with strong performance in both Pacific and Asia regions as Covid related restrictions eased across.
Our markets there.
While not yet in a reported comp basis, WSI and Atmos continued to perform strongly.
Ws S, which contributed $138 million in sales for the quarter Comped down only mid single digits well ahead of our other U S. Spanish despite fiscal stimulus, having a meaningful impact on that business.
Atmos, which contributed $49 million.
$49 million to sales Comped up high teens also outperforming other banners in Asia Pacific.
Moving down the income statement gross margin declined 80 basis points.
While occupancy was flat as a percentage of sales.
Merchandize margins fell by 80 basis points, driven by higher supply chain costs.
Slightly higher markdowns and the addition of WSI and Atmos.
Note WSI and Atmos carry a somewhat lower merchandise margin, though lower occupancy makes them overall gross margin neutral.
Yes.
At quarter end, our inventories were 37% above last year.
While the supply chain picture remains volatile we benefited from the improved receipt flow during the quarter, which positions us well to fulfill demand going forward.
For the first quarter, our SG&A rate came in at 21, 3%.
Presenting deleverage of approximately 190 basis points, driven by labor wage inflation and technology spend.
Depreciation expense was $55 million versus $45 million last year, driven mainly by the inclusion of WSI and Atmos.
Interest expense increased to $5 million from $2 million in the prior year due to the incremental expense from the company's bond issuance late last year.
Moving to our tax rate.
non-GAAP tax rate came in at 29, 8% above last year's rate of 28, 7% due to the geographic mix of our income.
Now turning to our balance sheet, we ended the quarter with $551 million of cash and $456 million of debt.
During the quarter, we repurchased two 7 million shares of our common stock for $89 million and paid $38 million in dividends.
Turning to our updated 2022 financial outlook.
Following our solid results from the first quarter.
Inventory position going into the remainder of the year and our strengthening vendor relationships based on our current visibility. We now expect to achieve the upper end of our revenue and earnings guidance for the full year.
While supply chain volatility continues we are pleased with our receipt flow so far this year.
Which gives us incremental confidence in our ability to fill demand for the balance of the year.
We therefore now see the upper end of the prior sales guidance for a total decline of 4% to 6% and a comparable sales decline of 8% to 10%.
No, we still expect Q2 and Q4 to be our toughest comparisons of the year.
Q2 faces ongoing stimulus headwinds and now Anniversaried, a mostly fully open Europe .
Q4 marks the beginning of our reduced allocations from Nike.
While we don't typically give quarter to date comments. So far in May we are tracking in line with our expectations.
We still plan to open approximately 100, new doors in 2022, including 40 community and power stores.
27 W. S S and nine Atmos stores, while closing a total of 190 stores.
Our store count will be down approximately 3% in 2022 with square footage down less than 2%.
On gross margin following better than expected markdown performance in the first quarter.
We are now estimating a 360 to 380 basis point decline in overall gross margin for the year versus our initial range of down 410 to 430 basis points.
We still assume that markdowns will begin to normalize through the year as we come off of the historically low markdowns that persisted in 2021.
But they have been slower to materialize than we originally expected.
We still expect supply chain cost to be a drag on our margins as well with that dynamic playing out about as we expected so far.
On SG&A, we've seen costs, particularly in labor increase at a faster rate than we originally expected.
We now see our expense rate in the range of flat to 2021 to up 20 basis points versus our prior range of 30 to 50 basis points of leverage which still includes benefits from our cost optimization work later in the year.
We kicked off our cost optimization initiatives during Q1 with our external partners.
And we are in our early stages of development.
We still expect to begin realizing savings in the back half of the year towards our $200 million annualized target.
Yeah.
As a result of our increased top line visibility, we now expect our non-GAAP EPS in 2022 to come in at the upper end of our prior four dilutes and 25 to $4 60 range.
Our balance sheet remains a strategic asset for our business with over $500 million in cash and $600 million Undrawn on our credit facility and strong coverage and leverage metrics.
Our Capex plan for 2022 remains unchanged at $275 million towards new store openings and ongoing technology and Omnichannel investments, which include the new distribution facility. We are opening in Reno, Nevada to serve the core business and.
In Houston, Texas to support the growth in WSI.
In closing we are excited about the direction, we're taking with the business and the progress we're making against our key priorities to enhance our value as a house of brands and expand our customer base.
With that operator, please open the call for questions.
Ladies and gentlemen at this time, we will begin the question and answer session if.
If you would like to register a question. Please press the Star then the number one on your telephone keypad.
If your question has been answered or you would like to remove yourself from the queue. You May press Star and then two.
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Also we do ask that you please limit yourselves to one question with one follow up.
Yeah.
Our first question today comes from.
Bob <unk> from Guggenheim. Please go ahead with your question.
Hi, good morning.
I guess I was just wondering on the inventory you know when you look at sort of the the sales numbers and your expectations for the next quarter and the rest of the year can you just a couple of questions on the inventory, but can you back out how much of that is from WSI was for Atmos and I'd be curious to see if you can.
Like you have much excess in and that inventory bucket that you have just trying to keep our hands around.
Any more Mark Congress that you see I know you took your gross margin guidance.
Any more color on that would be very helpful. Thanks.
Well Bob I appreciate the question and we feel good about where inventories that we haven't broken out specifically WSI and Atmos inventory.
But again remember that a year ago I would say that we were overselling, our inventory position. So the comparison of being up 37% with good flow and good fresh receipts, we feel good about.
We've said all along and we said it today again that we expect markdowns will continue to normalize I don't expect that there'll be back to 2020 levels.
But they will normalize more towards back 20 to 2019 levels, although we have not seen that materialize yet. So again, we feel good about our inventory positioning, but a little bit harder to forecast is sort of a glut of inventory gets released through the ports and they show up but we feel good about the quality and the.
The quantity of our inventory going into the second quarter.
Great if I could just.
Another one in.
As you push.
Long with other vendors outside of Nike when you think about the marketing reach of the marketing spend demand creation.
Wallets of these other players can you just talk about how you you know.
I feel like the partnerships will evolve over the next few quarters and years just on you know on the marketing side and the reach as you try to expand that.
Yes, but we know that we've gotta be demand creators right with all of our brand partners. We're out there trying to tell great stories, we're building product that supports those stories.
And.
We talked about it in our prepared remarks, the number of Instagram followers that we have multiplied by the number of followers that other of our vendor partners have we believe that reach will be significant and we do know that we're gonna have to spend against that.
That's all factored into our plans and into our.
Into our guidance, so theres really nothing incremental in that it's just leveraging that.
The connectivity that our brands have our brand partners have it and the connectivity that we have in the deep engagement that we have with our consumers.
Great. Thank you Dan.
Thanks, Bob.
Our next question comes from Kate Mcshane from Goldman Sachs. Please go ahead with your question.
Hi, good morning, Thanks for taking our question.
We just wanted to maybe better understand some of the apparel strength that you saw during the quarter I flagged as an area for certain other retailers that have been more difficult because of what their trend is there a way to dimensionalize, how apparel lots in different regions and different banners.
Well I'll start that Kate and then Frank will probably jump in with a couple of comments, but.
Our apparel is not heavily seasonal driven by the <unk>.
Heaviest product that we have for winter is fleece and that really has become a year round sort of product for our consumers. So we saw a little bit of a slower start with shorts and T shirts as the weather didn't really materialize into a normal spring pattern across most of our or geographies, but we see a research.
<unk> quite honestly in licensed apparel, we've talked about pro standard before and they continue to extend their licensed options.
Being relevant to our consumers so.
The pattern is very similar around our geographies, obviously, Australia, New Zealand or the.
Approaching winter as opposed to approaching summer, so a little bit of seasonality difference there but.
Anything to add on the apparel.
Yes, we certainly experienced some.
Some longer selling in some of our suites in core key items across some of our big global brands.
We did towards the end of the quarter to get a better ability to setup, our shorts and tees and some of our seasonal key items. So as those flowed into the stores and spring sorted blossom. We saw some good sell throughs and good Sumer consumer reaction. The other thing that's been very positive its been our control brand offense, particularly around the locker brand and <unk>.
Cozy and then also in East Bay performance and that's been a very intentional strategy to debenture lies our apparel business across categories and price points.
Okay. Thank you and my second question is just around the supply chain. It is encouraging to hear that.
It feels like you are in a good position when it comes to inventory I think that comparing the first quarter as well, but just in terms of.
How you are managing costs there.
The increase in <unk>.
Whether it be supply.
Supply chain or fuel or anything else.
You saw in the first quarter versus maybe what you had originally expected and what you expect for the year from a cost standpoint.
Yeah. Thanks, Kate This is Andrew So you know from a supply chain perspective, we had built in and we talked about at the end of when we gave our initial guidance we had built in.
Some supply chain drag that we expected during the year that that is all.
Operating as expected, we've generally seen the drag that we that we had expected.
In the past our supply chain costs have continued to be something that has been able to pass through some times that a consumer then.
So we think it will be a drag it's built into our guidance and you're really performing as expected right now.
Again, we were pleased with the first quarter flow.
And that that gave us confidence going into the to the back end of the year that we have the right product fresh inventory available to really get after back to school in the summer selling season.
Thank you.
Thanks Kate.
Our next question comes from Cory <unk> from Jefferies. Please go ahead with your question.
Hi, good morning, and thank you for taking my questions.
Can you talk a little bit more about what drove the strength in women's broadly across both footwear and apparel actually outperforming mens.
Part of that outperformance of men's in the strong female participation is that we've expanded our assortment right. We've given her more choices. So she is.
She has been in our stores. She hasnt been pleased we're trying to do broader vendor penetration.
Find the right products for her at the same time you know she has very much become a sneaker girl.
<unk> Air Force ones AJ ones critically important to her as well. So we've also added more women's apparel, Frank talked about our cozy brand, which is a <unk>.
Proprietary brand and the work that we're doing with melody is Sony on Earth.
Assortment that she's got it in our stores. So I think it's a combination of us finally, getting some things right and womens expanding the assortment, adding apparel into the store more stores for her to choose from and she is she is responding well. So it's good to see the team has done a great job to identify who are bringing the right brands and support.
Her choices.
Great and then on the cost savings plan can you just provide some incremental detail as to how that should be affecting the P&L ahead.
Yeah. Thank you. This is Andrew we haven't given.
Specific details on how that's going to affect the P&L. What I can say is that we expect to start to see some of that optimization start to flow through the P&L in the back half of this year.
As we talked about our target is approximately $200 million in annualized savings.
We are focused on many of the areas in our SG&A cost structure.
Look forward to.
Really bringing that plan to fruition, but at this point from a category perspective, we're not we're not in a position to add much more color on which categories and dimensional lines from a P&L perspective, but do understand that we expect to start to see that flow through the P&L in the back half of the year.
Understood. Thank you very much and best of luck.
Thanks Corey.
Our next question comes from John Kernan from Cowen. Please go ahead with your question.
Hey, Thanks for taking my question and good morning.
Hi, John .
Yes, Andrew maybe you could talk to what Youre seeing from a broader consumer environment.
Been a lot of changes in the way, particularly lower income consumers are shopping or changes in basket. There's changes in traffic patterns, just curious what you're seeing from a broader <unk>.
Tumor perspective.
I would think you know your comps being down only two.
A little bit better than feared for the quarter. So what are you seeing from.
Just the general macro consumer perspective.
Inflationary trends really pick up.
Yeah, It's a great question and one that we've talked an awful lot of Rhonda R. R tables or virtual calls John clearly, we have a wide wide customer base. So our customers still the economic spectrum, so the inflation rate.
The impact is different for each of those groups.
We provide our core customer with what I would call accessible luxury right regardless of what's going on in the world. They sort of use a new pair of chicks are new police piece or new had to really say that things with me are okay. So again as we look at traffic patterns as we look at baskets.
I will complement our WSI S team they've got a.
Customer that is a little bit more impacted but they've been very good with having some temp sales doing some promotional events understanding exactly what their customers going through because they are so deeply embedded in the community. So again, we are very conscious of interest rate increases, we're very conscious of inflation increases.
Our customer has been positive.
Traffic seems to be holding steady and we have not seen the trade down and product choices. So Frank do you want to jump in.
Yeah, Thanks, Nick so.
So I'll add to the consumer perspective that <expletive> just outlined and I'll come at it a little bit differently. Because the reality is we're all going to have to confront these sort of macro exogenous factors. We don't have a choice in that I think the real question.
Have we been able to adapt our operating model do we have the flexibility and the resiliency built into our plans for 'twenty. Two so I'll start by reminding everybody. The last two years have been anything but predictable would easing in the marketplace and throughout the pandemic I think our enterprises learn how to be agile and flexible how to react to what's happening in the <unk>.
Place in shorter time increments, so what's happening in the next 30 days. The next 90 days and how do we win and position ourselves with consumers and that's a muscle that we've honed and we're going to lean on as we operate into Q2 and the back half of the year now behind that agility muscle was a pretty robust set of real time predictive analytics that we use in the business we look at traffic.
Trends conversion rates or add to cart abandonment rates effectiveness of promotions, we've got a machine learning sales forecasting model and we use those insights to regulate our receipt flow our merchandise mix to throttle performance marketing and obviously adjust our pricing and so all of that agile management of the business.
The cost reduction work that Andrew just talked about means that we'll be playing what I'll call really good defense. Our teams will become very adept at that I think what really excites me, though is that we've been anticipating this moment over the course of the last 12 years 12 months and I think <expletive> mentioned it as a management team, we knew that comping stimulus and winning consumers would be challenging.
We've been playing some really great offense on the other side of the ball in order to meet this moment, our merchants have done an incredible job building a high percentage of our on order, that's either exclusive or models or exclusive concepts. So that's product that's only available at our foot locker banners.
We know that scarcity and exclusivity is a winning strategy in any market condition and then next to that we built a merchant plant that has more dimension more choice than ever before including more brands and more price points. So and then as I mentioned earlier on the previous question, we very intentionally develop our private label apparel brands Walker Cozy.
Speak to deliver value to consumers so and.
The last thing is we focus really intently on consumer conversion, both digitally and in stores at that moment of truth with consumers. So all of that to say, we've been very thoughtful about our plans and strategies with our merchandising concept and a new agility muscle that allows us to play both good defense as well as importantly, very good offense in this turbulent market.
That's really helpful. Just one follow up.
You're obviously accelerating the partnership with <unk>.
There are guidance calls for the biggest acceleration that they've seen in their north American business really since the Stan Smith.
Firstar craze started back in 2015.
What gives you the confidence that their basketball offering and that brand is going to resonate as strongly as you think it will what signs are you seeing.
As we go into the back half of this year.
Well, we're excited about basketball in general right, it's a strong category and as I.
I've talked about before our consumer migrates to where the best product. So we've seen that.
The Jerry Lorenzo and the pure guide an IV basketball are doing.
We know that there is some great product coming but we're equally excited about adding other brands that basketball category as well, but the exclusive the Puma has mental ball that we have.
Seen great product and we're going to have a law mellow low coming out the new balance.
The new balance work around their basketball and you've got the deal that we signed with APG around Reebok basketball. So classics performance. We just feel good about basketball in general and firmly believe that Ivy. This is going to be one of the key players along with our existing portfolio of Nike Hot silhouettes in the others.
I've mentioned, so it's basketball sort of on the rise, but I think this will certainly be a participant in that rise.
Alright, Thanks, Nick Best of luck.
Thanks, Doug.
And our next question comes from Lorraine Hutchinson from Bank of America. Please go ahead with your question.
Thanks, Good morning.
I'm, hoping to get your updated thoughts on the promotional environment seem to be in check in the first quarter.
Your expectations are around that.
And the apparel becomes a bigger part of the mix.
Change the need to promote products from here.
Well.
Laura and I appreciate the question and you know as we've talked about in our prepared remarks, the first quarter promotional environment was a little bit better than expected quite honestly and we expect promotions to go back to normalized throughout this year.
The shift to apparel, a little bit bigger apparel penetration certainly presents the opportunity for more markdowns, but as I said a minute ago. We don't have the high seasonal turnover in generally speaking apparel markdowns come when you get caught out of season or a season shifts faster than you.
Spectra product doesn't flow as expected so our consumers core apparel consists of shorts Tees fleece and headwear.
And we have the ability and the levers to pull.
Presentation in store and online based on which is the most seasonal at the moment. So right now obviously tees and shorts are an important piece of it doesn't mean, we don't sell the fleece that we've got in our stores and online so.
Jim.
I'm not concerned about apparel, creating a huge markdown risk.
It really is just our ability to flex our presentation and our sales opportunities with our consumers as we go through the seasons.
Thank you.
And our next question comes from Omar Saad from Evercore ISI. Please go ahead with your question.
Thanks for taking my question wanted to follow up a little bit deeper into the EBITDA.
Our expanded partnership maybe you could talk about what you and your merchants team.
To me, there's two key pieces of the basketball, new Jerry Lorenzo product that's out there.
We see that in Germany.
With that and how it fits into your overall offering given some of the areas that might be pulling back on and then also when it comes to the audit of the original brand.
Is that can be more of the apparel side is that going to be more of a key marquee footwear franchises.
Got it offering there.
A little bit deeper on how that original thesis.
Get into your store base.
Well the basketball work that I just commented on commented on Omar again, the team has seen much of the work.
The work, bringing added us bringing jerry into.
The lead in the basketball category.
Clearly connects a lot of elements from the court to the casual lifestyle to his sphere of gap brand.
The team sees great product there at the same time, we've got other IV this opportunities.
You talked about original as both footwear and apparel certainly we expect to drive more Avi.
Original as apparel than we've seen today.
There is a classic basketball.
There is the superstar trend that we're reintroducing superstars and Stan Smiths to new customers and a new generation of customers every day.
Every season quite honestly every year, certainly and I want to be clear that doesn't replace Nike right. We have a great relationship with Nike, We've got great basketball product that we're going to continue to sell from them and our basketball category as I talked about as much more than just a nike adding.
IV to <unk> there are many many players in basketball just like there are in all of the other categories in our consumer migrates through brands and some of the facts that we shared about our consumers being multi branded buyers wanting to have more choice. This just supports that positioning.
The work that we've been undertaking.
And we're now seeing an acceleration wrong.
Got it Thats great color.
And then maybe <expletive> to the broader conversation around share of different brands and how that has evolved over time is it possible kind of in the column of unintended consequences that obviously is great to have so much Nike inventory represent such a big piece of your business, but maybe it wasn't the healthiest balance for both you and Nike in the channel for it to be so dominant in terms of the inventory on the floor.
Laura.
Possibly a good thing for both sides and to some extent to pull back and have a bit more of a balanced assortment across brands not just for you but for them as well as best possible way to think about it.
Well.
Would look at it a little bit differently Omar I think the customer has always.
Made the decisions right.
I think that are offering more choices to the customer will in fact make us stronger.
But Nike does a tremendous job they've done we've talked about their 15th year anniversary and they create great products. They create great stories in our consumer has followed that and we followed that with our consumer.
As we add more brands to the portfolio I do believe that we will be stronger and I believe that the overall sneaker marketplace will certainly be stronger.
Thanks, Good luck.
Thank you Omar.
Our next question comes from Jay sole from UBS. Please go ahead with your question.
Great. Thank you so much I wanted to follow up on the new partnership with Audi.
The growth there.
Talking about this year.
That growth show up for foot locker and for Q, because Andrew I think you mentioned at the beginning of a reduction of allocation from Nike really impacts <unk> is it possible that some of that increase from from Audi will help offset the reduction from Nike.
Okay.
You know our our plan included growth in our non Nike brands all along so.
No doubt.
All of our all of our brands, we're planning for them all to grow and Adidas will contribute to that.
We're not anticipating a significant jump in our planned <unk> as a result of this this will flow through in its natural course, but it's given us more visibility, but we're not modeling a significant jump, but we did just that.
If not already modeled in.
Our guidance.
Yes.
This is <expletive> I would just reiterate that we've got a lot of great brand growth going on certainly the relationship provided us continues to grow but.
Our consumers seem to be incredibly excited as they hear about this lamella low program from Puma get the Puma Slipstream wood in beta which is an exclusive basketball classic we've got the new balance 550 acceleration coming we're going to expand our our performance running with on and hope to.
We've got easy launches.
We've had a lot of other brands growth built into our plan. So again, we're going to work to continue to accelerate.
Seats, where appropriate and drive sales as the customer finds more choice in our stores.
Got it okay. Thank you <expletive>.
And our next question comes from Michael Binetti from Credit Suisse. Please go ahead with your question.
Hey, guys I just wanted I don't want to ask thanks for the help on the detail here, an inter quarter March and April down high single digits, but maybe you could unpack the comment that may is tracking in line with expectations. Since I don't think we have a <unk> expectation externally that we can look at.
I think we've heard broadly across the space amaze accelerated.
Maybe just some context there.
Guidance for the quarter, but just some idea of how much that's you're seeing that improve and then on the SG&A for the guidance I think the rest of year, we got it down about $120 million to $140 million on a one year basis and that's with.
Two acquisitions in the base right. So WSI Atmos SG&A dollars can you just walk us through what some of the.
What some of the flex down is there I know I know you haven't given too much context around the $200 million savings, but maybe there's some of the broad restaurants to get comfortable with that as we look to the rest of that nature.
Yeah, So I'm going back to your initial question as it relates to the comments that Ive made about may.
Remember what.
What we were saying is that we saw.
Continued.
Excitement and demand from our consumers in Q1 and as we got into May we have not seen a material change in our consumer behavior.
Just to give you a little bit of color as to how things are shaping up for Q2.
That's what that comment was selected to.
As we are as we think about.
Our cost structure being down in the back half of the year remember that also includes.
The cost optimization initiatives that we're talking about.
Our our cost structure it does have a.
A flex as it relates to revenue we've all we've generally talked about a 10% to 15% flat. So as that is there is a revenue flexes that will flex with that and then as we talked about.
Our square footage will be down somewhat.
3% for this year, so 2% up to I apologize, but.
So those are some of the things as far as visibility that we're seeing in the back half of the year that show that we have opportunities to.
We performed better.
The remaining three quarters on a cost basis as it relates to deleverage versus first quarter.
And Michael This is <expletive> I would just add that as you think about Q2 in may remember that stimulus from a year ago has a tail to it right I mean, not everybody got the stimulus checks at the same time not everybody spent them at the same time.
So again, it's just the behavior has stayed fairly consistent as we jump into may and get started in Q2, okay.
Okay.
Go ahead.
Okay.
Biggest callout is that our model contemplated some of the stimulus lapping and we feel like we're still on plan as it relates to that.
Okay, if I could sneak one in on the AUR down mid singles.
Apparel penetration and mix shift within footwear.
Could you unpack that a little bit maybe just some thoughts on how the footwear AUR AUR could trend as you look to some of the diversification of product effort as you're flowing in as we get into the fall as the Nike next comes down.
Well, we fully expect that <unk> will be down a bit as we as we trade.
Out of some of the highest price Mark key product and replace it with other brands at the same time I don't think it's going to be significant but we continue to model our mix.
Expected footwear sales in.
Certainly, we'll see it go down as apparel becomes a bigger part of the mix clearly.
T shirts, and shorts have a different price point rhythm.
One of the benefits that we've got in our businesses that we do so 80 to 100 dollar fleece pieces, which you know helps from an AUR perspective, but.
We will see certainly a little bit of AUR degradation throughout the year, but.
I wouldn't I don't think it's going to be significant.
Okay. Thanks again, guys. Thanks for all the detail.
Michael Thank you.
Our last question comes from Tom Nick <unk> from Wedbush Securities. Please go ahead with your question.
Hey, good morning, guys. Thanks for squeezing me in here.
I just wanted to ask about.
Driving the growth.
The non Nike brands.
Very strong this quarter as strong in Q4 as well.
I mean is this really just a function of.
Sort of.
Hum.
Allocating more marketing to towards these brands I mean, I've noticed on social media you definitely see much more of a.
Our focus on some of the non Nike vendors.
The stuff that you're doing in stores.
Like how do you kind of continue to sort of drive these heat with these secondary brands to mitigate.
The headwinds that you can see from Nike.
Well, it's all of the above right. We continue to promote great storytelling, our merchant team continues to to build some products and concepts.
With our vendor partners.
Storyteller, both online in store and through our social engagement with our consumers.
It's how you lay out the store.
Oh.
Our store associates talked about all of the products are in kind sort of marketing will go back and forth with all of these brands, but it really is reinforced by the statistics that I shared during my prepared remarks that our consumers want choice and historically, we have not.
Displayed the amount of choice that they have been.
We still have a number of customers that love by Nike private and Theyre going to continue to love Nike product.
At the same time as I shared our multiple buyers on multiple footwear buyers.
I almost three different brands over a two year period. So again it is.
A little bit of.
Giving our consumers what they are asking for finally, they don't have to hunt and Peck, we've got better display et cetera, Knight Frank's got some strong thoughts on this as well.
Yes, Tom I'll, just sort of remind everybody that the idea that sneaker culture offer tightening and that there was a tailwind in terms of the athlete.
Which means that it's not just sneaker heads and enthusiasts that there is a broadening of the consumer for Bob When you think about how we deployed our portfolio of brands foot locker Champs.
Champs Ws sets Atmos.
That creates the landscape to capture and address more consumer opportunities with more brands more price points more categories. So it's not just about that core sneaker ahead, it's actually about broadening and connecting with more consumers.
Understood. Thanks, very much industrial this year.
Thanks, Tom.
At this time I would like to turn the floor back over to Mr. Robert Higginbotham for closing remarks.
Thank you for joining us today, please join US again for our next earnings call, which we anticipate will take place at nine a M. On Friday August 19th the call will follow the release of our second quarter results earlier that morning, Thank you and goodbye.
This concludes today's conference. We thank you for participating you may now disconnect your lines.