Q2 2022 Foot Locker Inc Earnings Call
Okay.
Good morning, everyone and welcome to foot locker second quarter 2022 financial results Conference call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.
This conference call may contain forward looking statements that reflect management's current views of future events and financial performance.
Management undertakes no obligation to update these forward looking statements, which are based on many assumptions and factors, including the impact of COVID-19.
<unk> <unk> of currency fluctuations.
Or preferences, economic and market conditions worldwide and other risks and uncertainties described more fully in the company's press releases and 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 obtained contained in the forward looking statements.
Please also note todays conference call 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, second 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.
To remind everyone last quarter, we updated our definition of non-GAAP earnings to exclude all minority investment gains and losses, and our second quarter and year to date non-GAAP results for 2021 have been recast to reflect that.
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 are <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.
Doubling our prepared remarks, <expletive> Frank and Andrew will respond to your questions with that I'll now turn it over to Dan.
Thank you Rob good morning, everyone and thank you for joining us.
Before we dive into the discussion of our second quarter results I'd like to speak briefly about the other news we announced this morning.
My planned retirement and the appointment of Mary Dillon is foot lockers next CEO .
The changes we announced today are the culmination of a thorough and thoughtful succession planning process with the rest of the board and I have worked on together.
We have made significant progress against our strategic objectives in recent years, which has allowed us to broaden our customer base, while deepening our connection to the sport and sneaker communities.
With the ongoing momentum we have built in our business the board and I believe now is the right time to complete the CEO transition.
We are thrilled that Marion will join the foot locker team and are confident she is the ideal person to lead the company into the future.
I know Mary is familiar to all of you. She has established a remarkable track record over a career spanning more than three decades.
This included leadership roles at companies, including Ulta.
Donald's Pepsico.
Mary has a passion for serving customers and our expertise in developing attractive brand portfolios and delivering a superior experience is deeply aligned with foot lockers priorities and strategy.
She is an inspiring leader who has not only been responsible for growing businesses, but it has also shown a commitment to fostering an inclusive and collaborative cultures that are impactful for organizations and customers alike.
We expect a smooth transition with a continued focus on our strategic imperatives and business goals.
Staying with the company through January 31, 2023, as executive Chair of the Board and then as a senior advisor until early April of next year.
In connection with the leadership transition the board will be separating the chair and CEO roles in our current lead independent director John a young will serve as non executive chair effective February one next year.
I've had the privilege of spending the largest part of my career. The last 30 years as part of the foot locker family.
Nearly eight rewarding years as CEO .
It has been an honor to lead this remarkable team and be part of building foot locker into the global leader. It is today sitting right at the heart of sport and sneaker communities.
Over the years, you've turned a brick and mortar company into a broad household brands with an increasingly engaged and interactive online retail community.
We have a tremendous foundation and I'm excited to see nearly take the business to its next level.
I will certainly be cheering foot locker on and its future successes and as the team continues to advance the company's core purpose of inspiring and empowering youth culture.
I appreciate the support of the analyst and Investor community and look forward to the opportunity to connect with many of you ahead of my retirement.
And with that I'll turn now to discuss our financial results.
As we turn to our Q2 results let me thank our team for their solid execution in an increasingly difficult macroeconomic environment.
The consumer is undoubtedly under pressure, especially at the lower end income range, which we began to see in our business as we progressed through the quarter.
Despite those headwinds our teams hard work and dedication drove very strong results with total sales down nine 2% versus the record year last year, but up 16, 4% versus 2019.
And our non-GAAP EPS of $1 10 for the quarter takes the overall first half to more than 20% above 2019 levels.
Our strategies are working.
We are further diversifying our merchandize and vendor mix, we're pivoting, our real estate off mall and expanding our key growth brands.
And we're enhancing our omni channel offerings and capabilities.
We're executing our strategy in spite of the tough macro backdrop.
I will focus on our merchandising and vendor mix and then Frank will update you on our real estate key banner growth and our Omnichannel capabilities.
To remind you our strategic direction of expanding our customer base through our diversified product offering is supported by three key pillars.
First consumers want choice and they value our multi brand experience.
Second we are underpenetrated in virtually all of our brands outside of our top vendor.
And third we have superior brand equity in the marketplace that we are leveraging to capture new customers across our portfolio of banners.
Our second quarter results continue to validate those three pillars and demonstrate that our increasing ability to grow our customer base by bringing the consumer a broader and richer product offering across our brands categories and channels is yielding positive results.
While our overall comps were down 10, 3% are non Nike sales in our core banners were actually up high single digits with many of our top 20 vendors posting strong gains.
For example, we continue to see outsized gains in brands like converse and vans, which were both up over 20%.
And new balance at Crocs, which were both up over 50% this quarter with products continuing to benefit from successful projects like <unk> and.
And the crux General Mills collection.
Also our partnership with Puma, including exclusive access to mellow ball products continues to drive new heat in the basketball category with the M. B O. One remaining one of our best selling shoes.
We continue to see success in growing our apparel and accessories business with the categories out Comping footwear by 800 basis points.
Part of that strength is coming from our control brands, which grew over 40% as we fill in gaps in the branded assortment to round out our offering to consumers with unique products, including their partnerships with Nancy the melody assigned.
Given our strong heritage brand equity and our knowledgeable sales force, we operate as a validated of trends and brands in the sneaker community, which is an important part of our value proposition to both consumers and brands.
One Great example of that is the performance running footwear category, where we are working with some of the fastest growing brands to help them connect with the younger consumer while also helping us extend our consumer reach.
As we announced last quarter. This summer, we began rolling out hope them to select stores and online at foot locker that churn.
We are extremely pleased with the reception so far in the early days.
We just added on running to our first European foot locker stores and now have the brand and 95 doors globally. We continue to grow the presence of that exciting brand with strong results.
And both Brooks and Asics grew 40% or more of this past quarter, despite the tough environment.
Our elevated partnership with Ivy. This is still in the early days, but it is off to a great start with the brand being given stronger positioning in most of the fleet enhanced presentation, starting to be rolled out and more collaborative marketing plans being developed.
The work on our global partnership continues and we remain optimistic about worthy enhance relationship will take us.
As we develop new partnerships and add more choice and excitement to our portfolio. We are confident in our ability to both deepen our relationships with existing customers and grow our customer base.
Now, let me touch on the current environment and recent trends.
After a strong start in May we saw trends slow in June which continued through mid July .
As trends soften the promotional environment has become more intense, especially in apparel, but also footwear.
In the back half of July trends started to pick up meaningfully, especially in our earliest back to school markets.
So as we look to the third quarter. We are excited about back to school and the strong start so far as well as the energy we are bringing to the market. This fall and holiday seasons with upcoming releases like lamella balls MB owed to the tray young too as well as new introductions from new balance in Q.
Launches from Jordan and easy.
One of our strengths is the ability to win in key buying periods like back to school and holiday when there is a real call to action.
Our view is that the back to school season will be strong, but we do see increased uncertainty from them until the holiday season begins given the more challenging macroeconomic environment.
Andrew will update you on our outlook shortly.
Despite a tougher backdrop, we remain enthusiastic about our business, both near term and long term.
Strategies are working and are all the more relevant.
Providing more choice to consumers as important as they make their more challenging decisions and how to allocate their dollars our ability to connect with consumers in a more personalized way through our community stores.
A unique offering in the marketplace.
And our broad offering across price points, including the value that <unk> provides gives our customers more options to engage with us depending on their spending power.
Our categories continue to have very persistent secular tailwind that will help drive growth.
The trend towards Casualization is alive, and well and even as people return to the office, we see sneakers as a permanent part of the work uniform across locations.
Also we believe the growing emphasis on fitness and self care will continue to drive demand for workout gear, including sneakers in activewear.
We have a number of strategic assets at our disposal, including strong vendor relationships, which we can use to manage our order flow and our flexible real estate portfolio to allow us to just our banner fleet.
Finally, I want to update you on some of our ESG efforts ahead of the release of our fiscal year 2021 impact report next week.
Earlier this year, we made our strongest environmental pledged to date by issuing a net zero greenhouse gas emissions ambition by 2050 or sooner.
In alignment with climate scientists recommendations.
We have also recently passed the second anniversary of our lead commitment to support the black community, including a pledge to invest $200 million over five years.
So far through this effort, we have invested over $50 million to support black owned brands and creators venture capital firms and efforts to create pathways for over 70 persons of color to work in our corporate offices through an internship program.
ESG is not just a program at foot locker. It is embedded in how we strive towards positive outcomes for our team members. The communities, we serve our customers suppliers shareholders and the plan.
And I'm, especially proud of our accomplishments in these areas.
With our strategies working in a category that remains vibrant.
Couldnt be more excited about the direction and potential of our business going forward.
Now I'll pass the call over to Frank to discuss our banners growth recent changes to our portfolio, our loyalty program and our omni channel evolution.
Thank you <expletive> and good morning, everyone, starting with our off mall pivot banner portfolio, we remain confident in our strategies as we deliver additional proof points across our community and power doors test new large format consumer experiences.
Grow our ws drafts and atmos banners and expand internationally.
In the second quarter, we opened or converted 25, new foot locker community and power stores, giving us nearly 100 doors in these formats on the way towards our goal of 300 globally by 2024.
This global strategy manifested locally in the second quarter, including new store openings in Washington, D C Houston, Paris, Berlin, Florence and Melbourne.
Our ability to connect and serve consumers in a hyper localized way through these stores is giving us a unique competitive advantage in the marketplace a strategy that both consumers and our vendor partners are giving us credit for.
Our community empower stores continued to deliver sales above their plan and to out comp there regional benchmarks in the fleet, giving us ongoing conviction and our rollout of the formats.
Our new Homefield community store concept in Pembroke Pines outside of Miami continues to perform well in its early months of testing.
Homefield provides an elevated consumer experience across for performance and sport lifestyle for the modern athlete through an off mall large format concepts.
The consumer reception. So far has been very strong with both conversion and average ticket well above the company average and increasing sales momentum within our performance based assortment led by performance running performance basketball included footwear.
We are pleased with the results so far and continue to evaluate the potential of the concept to serve sport inspired consumers and elevate innovation and storytelling for our industry.
We are also seeing promising results from our kids foot locker community store concept, which we call Hausa play.
This test store in an underserved neighborhood in the Miami market is a large format elevated experience, which enables us to expand our assortment provide community connectivity to kids and their parents and test new ideas and brands.
Traffic conversion rate and customer satisfaction at this concept store put it amongst the top doors in our entire fleet.
We have also been able to test new brands like Steve Madden, which led to a larger store rollout in Q3 for back to school.
And the larger format allows us to test additional size and apparel categories, such as our baby assortment, which again tested well and led to a larger store program.
Combined with our strong community activation and engagement, we look forward to opening two more household play doors in time for the holiday season, and the Baltimore community as well as our first on mall test store in Miami.
As we continuously optimize our banner portfolio and sharpen our banner positioning in June we announced some updates regarding our east Bay business.
First we announced the sale of our East Bay team sales business historically, approximately 1% of our annual sales, which will enable our enterprise to be more efficient in capital and resource allocation and service of our consumer led strategies.
Second we confirm that we will be fully consolidating our east Bay consumer E Commerce business into Champs sports as one banner completing the integration of those two banners that began in 2019.
The full integration of the East Bay retail business into our Champs Sports banner will allow us to more effectively served a modern athlete being more efficient with marketing spend and our operating model.
WNS are large format off mall value banner focused on Hispanic communities continues to perform above our original plans.
USS has opened nine new stores this year, including two openings in the first week of the third quarter.
We are well on track to have approximately 120 stores opened by the end of this year and 200 stores opened by 2024, as we deliver against our $1 billion sales target.
In Q2, we also opened our second distribution center dedicated to replenishing Ws that stores in Texas and to support future expansion eastward.
And in the third quarter, we will open our first WSI stores on the East coast as we look to serve and connect with the diverse Hispanic communities of South Florida.
Our business that Atmos continues to deliver impressive results and add new consumer access and capabilities to our enterprise.
Strong omnichannel traffic in Japan, and key partner markets enable atmos to deliver another quarter of double digit sales growth.
Our steady calendar, our collaborations and consumer engagement drove even deeper connections with consumers, including our first NFC launch in partnership with <unk> and <unk> as well as exclusive access and pop up retail with our partners at new balance.
And finally, we opened the first atmos paint womens concept shop outside of Japan in Jakarta, Indonesia.
Elsewhere in Asia, we continue to grow into untapped markets through new licensing arrangements.
This month, we expanded our licensing partnership with map active which successfully operates our stores in Indonesia.
Our partners will now introduce foot locker and the best of sneaker culture to local consumers in Thailand, and the Philippines, beginning in the fourth quarter. This year.
We are excited to be growing our relationship with the proven operators at math accurate.
This partnership will enable our capital efficient means to expand foot lockers geographic footprint and drive incremental EBIT.
Our omnichannel consumer experience evolution also continues to make strong progress.
In the first week of the third quarter, we completed the global rollout of our new foot locker E Commerce platform with the successful implementation in Singapore and Malaysia.
Our build once deploy many technology strategy will enable us to efficiently deliver experienced upgrades, while also enabling further geographic expansion.
Meanwhile, our <unk> membership program continues to help us better know and serve consumers.
<unk> serves as a platform to capture consumers data and better understand their wants and needs, enabling greater personalization.
We are now capturing over 70% of sales through our members in the U S up from 50% just two years ago.
And we have also expanded the <unk> program across six key countries in Europe .
In addition to personalization benefits <unk> also acts to incentivize our best consumers to stay engaged with our banners and shop more with us as our members continue to spend 10% more than non members.
Lastly, we also continue to rollout our drop ship program across vendors and regions to give our consumers the seamless extension of choice and to allow us to test new products and categories.
One of the partnerships and the program that we are incredibly excited about is with fanatics, a digital sports platform and global leader in licensed sports merchandise.
Starting this fall our customers will be able to shop, a much more extensive selection online for their favorite fan gear Cross major sports leagues and teams at foot locker Dot com kids foot locker dot com and Champs sports Dot com in the U S.
The partnership and assortment will grow through the fall season, as we add more leagues more teams and more athletes heading into the important holiday shopping season.
And as customers build their show of Pride outfits. They will also be able to find a new Paris sneakers and other activewear to complete the look.
So in summary, we are making meaningful progress across all of our banners and regions to better know and serve consumers through choice convenience and community.
I'll now hand, the call over to Andrew.
Thank you Frank and good morning, everyone.
Our second quarter results continued to reflect our progress in elevating our customers' experiences and growing our customer base.
The pace of change in the retail market is fluid.
Looking back at our results when we reported our first quarter on May 20th our recent sales trends were at the high end of our expectations within the context of still lapping stimulus and we then finished made stronger than we had originally planned.
But into June we saw a slowdown versus our expectations and traffic amid the rapid uptick in inflation.
Especially in the U S.
Although more dramatic and a lower income customer base, the softening was across the board.
That more pronounced softening and a lower income customer base was a trend we saw in our core business as well as our customer segments at WSI.
That trend continued into the first half of July .
But the back half of July began to improve particularly in the early back to school markets.
While the back to school trends are very encouraging given the uncertainty in the macroeconomic environment. We are still tempering our expectations for the balance of the year.
With that context, let me walk through the details of the quarter.
Our second quarter total sales decreased nine 2% compared to the record levels achieved last year.
But we're up 16, 4% compared to 2019.
Excluding the impact of foreign currency total sales were down six 1%.
On a comparable basis sales declined 10, 3%.
Though non Nike sales in our core business grew high single digits as we remain on strategy with rebalancing our product assortment.
By month comps were down high single digits in may with slow to down low teens in June and then improved to down high single digits in July .
For the quarter, our global fleet with opened 99% of available days versus approximately 90% last year.
Comparable sales in our stores fell, 6% where store traffic and our global fleet up low double digits and conversion down approximately 10%.
When comparing to 2019.
Brick and mortar traffic is down our conversion is actually still meaningfully higher.
So in a high level of intent from our customers when they visit our stores and the strong execution by our merchandising and in store teams.
Our digital penetration was 16, 9% in the second quarter this year down.
Down from 21% last year.
Above the 14, 3% from 2019.
Total units were down high single digits, and our core banners, while average selling prices fell by high single digits on higher apparel penetration, but also a decline in footwear.
Now turning to our results by geography and banner.
North America comps overall were down 16, 1% given last year was still benefiting from heavy fiscal stimulus in the U S.
Foot locker, Canada were up low single digits, while foot locker U S was down low double digits and kids foot locker and Champs were both down high teens.
Overall confident EMEA grew four 5% with strength across markets, particularly in France, where our investments and elevated real estate and local market and drove double digit growth.
Tourist centers across the region performed above average, though we saw broad based strength across non tourist markets as well.
And APAC comps were up 17, 7% with strong performance in both Pacific and Asia regions as we left some store closures in Australia and parts of Asia benefited from reduced travel restrictions.
While not yet in our reported comp base.
WSI and Atmos continue to perform strongly.
<unk>, which contributed $137 million in sales for the quarter.
Down low single digits, well ahead of our other use spanners, despite fiscal stimulus, having a meaningful impact on that business and being the most exposed to recent low income consumer weakness.
Atmos, which contributed $48 million to sales grew low double digits versus their results last year, continuing its strong trends.
Moving down the income statement gross margin declined 340 basis points.
Merchandize margins fell by 260 basis points, driven by higher markdowns as the promotional environment quickly picked up to more normalized levels in the quarter.
Higher supply chain costs, and the addition of WSI and Atmos.
In addition, occupancy deleveraged by 80 basis points on down comps.
As a reminder, ws sets and atmos carry a somewhat lower merchandise margin, though lower occupancy makes them overall gross margin neutral.
At quarter end, our inventories were 52% above last year and up 34% compared to 2019.
Hello products has improved and previously delayed products came in.
For the second quarter, our SG&A rate came in at 21, 9%.
Representing deleverage of approximately 210 basis points, driven by labor wage inflation, which continues to pressure our cost base more than anticipated.
Depreciation expense was $51 million.
It was $48 million last year, driven mainly by the inclusion of <unk> and Atmos.
Okay.
Interest expense increased to $5 million.
From $2 million in the prior year due to the incremental expense from the company's bond issuance last year.
And our non-GAAP tax rate came in at 30.0% above last year's rate of 27, 4% driven by the geographic mix of our income.
Now turning to our balance sheet.
We ended the quarter with $386 million of cash and $455 million of debt.
During the quarter, we repurchased one 4 million shares of our common stock for $40 million and paid $38 million in dividends.
Okay.
Turning to our updated 2022 financial outlook.
We are pleased with our solid performance in Q2, especially against last year's record performance.
We have a front footed and running our strategy, which includes diversifying our assortment, our real estate and our omnichannel offerings as we successfully expand our customer base.
We faced and navigated a number of headwinds that were not contemplated in our guidance that we provided in may most notably the rapid uptick in inflation, which is more quickly for our customers to make difficult spending the systems.
Based upon our current visibility we expect these macro headwinds to put pressure on consumer spending through the back half of the year.
As such we now expect to achieve the lower end of our original comp and earnings guidance.
Starting with sales we have adjusted our guidance for several factors.
The macroeconomic backdrop, primarily driven by inflation has become more channels.
Foreign exchange rates have become less favorable.
And we sold our team sales business, which while only approximately 1% annually does impact our total sales range for the back half.
We still expect to see comps down 8% to 9% for the year, which embeds the better second quarter performance offset by a softer than expected back half, which.
Which we now assume will be down approximately 10% to 12% with Q4 still expect it to be the toughest comp.
Our total sales range for the year, However, does come down given less favorable foreign exchange rates and the divestiture of our team sales business.
So we now expect a sales range of down 6% to 7% versus the prior upper end of down 4% to 6%.
We plan to open approximately 100, new doors in 2022 <unk>.
Including 40 community and power stores, while closing a total of 190 stores.
WSI and Atmos have experienced some construction timing delays and we now see 20, new <unk> stores and two new Atmos stores.
Down slightly from our original expectations for the year, though having no impact on our long term view of the banners.
Overall, our store count will be down approximately 3% in 2022 with square footage down less than 2%.
On gross margin, we are adjusting our outlook to account for.
Better occupancy trends as our occupancy mix of stores in the portfolio is developed better than we expected.
Somewhat better supply chain costs for the balance of the year, which are partially offset by the pickup in the promotional environment.
We feel good about our inventory in terms of quality and newness and think it puts us in position for a strong back to school season.
But we do have to compete in the more promotional environment.
Therefore, we are factoring in more pressure.
As a result, we are now estimating a 320 to 330 basis point decline in overall gross margin for the year.
Better than our prior range of down 360 basis points to 380 basis points.
No we expect inventory growth to slow from here, but remain up at the end of the year as we diversify our assortment and.
In terms of managing through the macroeconomic volatility we have a number of levers at our disposal to utilize if needed leveraging the strength of our relationships with our vendors.
On SG&A, we announced our cost optimization initiative during Q1, and we are now in the final development stages of this initiative, we still expect the program to generate $200 million of annual savings once fully executed with the benefits to begin in Q3.
And build into Q4.
Outside of these efforts, we continue to see cost increase at a faster than expected rate, particularly in labor.
As a result, we now see our expense rate in the range of up 60% to 70 basis points compared to 2021.
Up from the prior range of flat to up 20 basis points.
We therefore expect our non-GAAP EPS in 2022 to come in at the lower end of our original earnings guidance.
Or a more explicit range of $4 25.
To $4 45, which.
Which reflects that we expect the back half to be more challenged than we originally anticipated at the beginning of the year.
Our balance sheet remains a strategic asset for our business with nearly $400 million in test and 600 million Undrawn on our credit facility.
And strong coverage and leverage metrics.
Our Capex plan for 2022 remains unchanged at $275 million.
To be used towards new store openings and ongoing technology and Omnichannel investments, which include the new distribution facilities. We are up we are opening in Reno, Nevada to serve the core business and the WSI facility. We just opened in Houston.
Before I close out our prepared remarks, let me say on behalf of the entire foot locker family Vic. Thank.
Thank you for your carrying leadership friendship and long lasting impacts you have made on this organization.
In closing, we will remain steadfast on controlling the controllable and we look forward to updating you in November .
With that operator, please open the call up for questions.
Ladies and gentlemen at this time well begin the question and answer session.
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Also we do ask that you limit yourselves to one question with one follow up.
Our first question today comes from Jonathan Komp from Baird. Please go ahead with your question.
Yeah, Hi, Thank you and congrats on a long storied and successful career.
Maybe thanks Jonathan.
Yes. Thank you and then maybe sticking with that 0.1st stick I'm just curious to hear your perspective.
Bringing in.
Next later from externally versus internally and really as you've interacted with Mary initially any thoughts on her broad view of the company and what attracted her to the role.
Well I won't speak for Mary, Jonathan, but clearly the board and I have gone through a long process of thinking about succession, and timing et cetera, and as we look at where we are from the company. The strong momentum that we've got the foundation. That's been built the transformation that the team is leading and ultimately the strength of the team.
We decided that now is the right time to make this transition and Mary is the person that I have known through through my Association with <unk>.
Has value similar to our core values and the company continues to be focused on retail which is so important in other stands off mall retail and certainly beauty was a little bit different than sneakers, but ultimately I think that she is a great leader and will be a strong asset to the company I'm going to be around.
And help with that transition.
It's the right time its good for me I'm approaching 65% in February so I'm ready to.
Certainly keep.
Turning the page to the next chapter.
Certainly well deserved maybe just a follow up question.
I wanted to get your current thoughts on I'm really the state of the consumer I know this has been a topic now for several calls but.
Based on what you've seen over the last few months.
Now with back to school, maybe trending a little bit better, but still temporary near outlook.
Take what are your broader thoughts on the current health of the consumer and especially as you look forward to holiday that the ability to Willie.
Oh withstand some of the some of the external pressures out there.
Well Theres a lot of external pressures, we know the consumer is feeling that pressure, but ultimately we see our opportunity to win in those.
Almost forced buying periods right I mean, there's a reason for people to be buying it back to school. The traffic is up because people are sending their kids back to school and people are going back to school with new sneakers, New backpacks, new new shorts, New T shirts and fleece. So.
During that time period when people are out we know that we win with the consumer we expect that'll happen in the holiday.
The caution and I think Andrew talked about and I talked about it and I think Frank did as well, but it's really those times when there's not a superior call to action from the consumer that we worry a little bit about the duress that theyre under economically, but we're prepared we've got strong inventory positions, we've got great relationships with our vendor partners.
It's pretty competitive out there from a promotional point of view and will participate as we need to but given our assortment given our connectivity with the consumer given the engagement in the communities. We think that we win in these times and the consumers are out and shopping.
That makes sense I appreciate the color and best of luck with your transition.
Thanks, Jonathan.
Our next question comes from Cristina Fernandez from Telsey Advisory Group. Please go ahead with your question.
Good morning, and also congratulations on your retirement and the hiring of Mary Dillon.
Wanted to ask about the inventory competition can you provide more color.
How good the inventory is I mean, you Didnt mentioned in some inventory at <unk>.
So it said in.
Inventory that was supposed to come for spring summer or it did fall just more.
More color there would be helpful. Thanks.
Thanks for the question Christina and clearly we don't have a lot of heavily seasonal business. So the.
The timing just ends up in sort of came through the supply chain in lumps. This spring and the inventories up but we feel really good about it in terms of it being good quality product from great vendor partners and the consumer.
Certainly having an appetite for it so that's probably the biggest challenge that we saw in inventory was when the apparel pieces didn't come in sync with our footwear launch, but again still very saleable product and nothing that we're concerned about and we don't have heavy duty spring product due to our consumers unit.
One was sort of sneakers T shirts shorts fleece piece right and we're well positioned in all of those categories. The freshness is good for us in the Compton feels good.
And then as my follow up can you expand on the promotional environment that youre seeing at the moment and what do you expect for the back half.
Do you think.
The industry will go back to 2019 levels or are we still lucky Ed.
Somewhere in between where we're at with last year in 2019.
I'll start and then Andrew will jump in I'm sure because again, we look at it pretty directly I mean, the market got pretty promotional when you look at what happened in June and the first half of July I think we are back near the 2019 levels, but my hope is and again theres not a lot of science behind it because everybody.
Has different situations with their inventory levels. My hope is that the industry learned that we can sell full priced product and the consumer has an appetite for it. So I think it's a little bit temporary as people fight their way through some of the inventory bulges that you've heard reported in the numbers that we talked about today, but.
Again, I think that the inventory has rationalized its mark down cadence a little bit yeah I think.
Spot on with regard to what we're seeing in the promotional environment definitely came into the year anticipating that the.
Promotional environment would pick up.
And really had a belief that it would pick up in and not be us.
Not be on par with 2019, but really we're seeing the promotional environment really be fairly in line with where it was in 2019.
And as a result of that.
We definitely think the opportunities from a more favorable than expected promotional environment in the front half of the year.
And reflected in our updated guidance, what we anticipate to be.
A more promotional environment in the back half of the year.
We still believe that.
But our guidance reflects the increased promotional environment and with that it's reflected in our guidance but to.
To Dick's point.
We're hoping and anticipating as as the supply chain opened up in a very.
Uneven pattern that there is some buildup of inventory in the market and the hope is that.
As retailers get through that uneven flow of inventory.
Hope to moderate as we move into 2023.
Thank you.
Our next question comes from Alex Stratton from Morgan Stanley . Please go ahead with your question.
Great. Thanks for taking my question and congrats on the nice quarter.
I just wanted to dig into the assortment as it relates to apparel.
Noticed the increasingly becoming what seems like a higher percentage of the assortment of our store tax. So can you just talk about the bigger strategy there and then if it's possible.
Quantify kind of how much of that inventory growth you saw this quarter is an apparel versus footwear.
Yes.
Thanks for the question, Alex I'll start and then Frank will jump in one of our intended growth pillars as apparel and accessories.
We have devoted more space, we've devoted more open to buy we've created some great stories around footwear and apparel connectivity, which has allowed that apparel I'm glad youre seeing it in the stores quite honestly.
That's great intention to do that so our inventory.
Footwear and the growth were about equal in footwear and apparel, but our commitment on the apparel front continues to be that we're going to grow that as a percentage of our business.
Yes, I think Thats right I think it's a reflection of a very deliberate strategy to grow our apparel business across all genders men's women's and kids I think its also reflection of how the consumer.
Consumer shops in terms of a mixed basket opportunities in shopping occasions, we know that when consumers have a multi unit basket that over 40% of those trips as multiple brands as well. So it's very much in service of our apparel growth strategy as well as delivering against our vision of being a true household brands. So we feel very comfortable with how we're set up.
As we go through back to school.
Great. Thank you.
Our next question comes from Cory <unk> from Jefferies. Please go ahead with your question.
Hi, good morning, and thanks for taking my question <expletive> Congratulations on a great career and on your wishing you best of luck in your retirement.
First question as it relates to that.
Yes, Thank you and first question as it relates to the non Nike.
Sales momentum that you've seen you called out some really robust momentum it sounds like in performance running are there any other categories or brands, where he is.
In.
Really much better than expected.
Momentum that you want to call out.
Yes, I think we hit on a lot of those in our prepared remarks Corey right.
With new balance our work with.
With the Puma.
The accessibility that we've got a new exclusive exclusivity that we've got with the <unk> product ball product has been significant the <unk>.
<unk> business has been explosive for us like called out wholesale and on in the running category really trying to they're trying to connect with the younger consumer we're giving them that access at the same time, we're broadening that assortment and bringing new product to our existing customers.
Essex and Brooks both grew tremendously we've got a number of apparel brands that hooked up with that.
We continue to grow our IV dose relationship we're seeing good movement on the IV side as well so again truly as we become more of a house of brands. We continue to see strong performance from Nike certainly, but we continue to grow other brands faster.
Yes.
Also great examples of where the power of our portfolio is really serving a purpose against the consumer when you think about Ws asked in the workwear occasion, a great momentum around workwear, Eurostar, which is our private label food Caterpillar and Carhartt also great brands that are growing rapidly and then we mentioned home field, which is our express.
To serve the modern athlete in Champs sports Dot com, great momentum included footwear across multiple brands. So that's another category that we believe is performance.
Performance and innovation becomes an increasingly part of the consumers' closet.
Very helpful. Thanks, So much and then just as a follow up on the gross margin guide.
It sounds like you're taking the gross margin guide up a little bit, but revising the earnings guide down so within the gross margin line with the expectation that the promotional environment is likely to get a little bit worse, maybe just walk us through a little bit of the puts and takes within that line that drive your increased confidence in why gross margin should be higher.
From where you initially expected it to be.
Sure definitely I mean, if you look at the gross margin line I mean, we're anticipating and feeling from the merch side about 60 bps of improvement from a supply chain perspective, we are seeing about and thats offset by about <unk>.
80 bps of pressure on the on the on the merchandise side now the other thing that goes into our gross margin is occupancy and if you think about occupancy in our mix of occupancy we see leverage as you think about the stores that we've added online and the stores that we've taken are taken offline we end.
Having a better.
Better occupancy leverage in that change in mix of our of our stores. So.
About 50 bps improvement on the occupancy side 80 bps of pressure on the on the markdown side and.
60 bps of improvement in supply chain sites.
Understood. Thank you very much best of luck and congratulations again <expletive>.
Thanks Corey.
Our next question comes from Paul <unk> from Citi. Please go ahead with your question.
Hey, Thanks, guys I'm curious if there have been any changes or further developments on the timing of lower Nike allocation, just what that looks like for the back half of the year.
So I'm wondering if there were any.
<unk> chain issues that impacted flow of product during the second quarter that might have influenced sales one way or another.
Well again, the supply chain as I think Andrew called out in our prepared remarks got better during the quarter, but it still was not as good.
Victor Bowl as it was prior to some of the problems that we faced in 'twenty, one 2020. One so your inventory came in a little bit lumpy at times with Starwood liberally with overeat.
It was not as smooth as we'd like but again, the Nike trajectory is built into and factored into our guidance and we continue to work with Nike as we as we find the right glide path to two where we will end up but again, we feel comfortable with with the guidance.
Nike shift is included in that and we also continue to work well with all of the other brands as we look to offset some of that allocation change.
Got it thanks.
When you talk about the performance of our non Nike product prices versus Nike. This this quarter was that does that.
Consistent with what inventory looks like in Nike versus non Nike brands.
Yeah, we don't really double click into the content of our inventory, but again the consumer votes every time they go into a store and ultimately our team is working hard to make sure that we grow all brands. They do the best job that the chemical with Nike. They do the best job that they can live with the other brands that we represented this.
Stores. So again, we feel really good about the content of our inventory.
Obviously, the consumer voted in the quarter pretty positively when they were out shopping for back to school.
Got it thanks best of luck.
Thank you.
Our next question comes from Susan Anderson from B Riley. Please go ahead with your question.
Hi, Good morning, Thanks for taking my question I was wondering if you could maybe give some more color on the European business and what Youre seeing from the consumer over there and if you've seen improvement, particularly yes.
We opened up more this summer.
Yes, it's a great question I mean, we saw really nice traffic patterns change and many of the tourist cities, but as Andrew talked about even in the non tourist cities, we saw growth in traffic, which you know again.
The 99% open days this year versus 90 last year, a lot of those closures from a year ago, where in Europe . So is that as we cycle through those the traffic numbers look good but more importantly, the buying pattern looks good and clearly there is inflation in EMEA as well, but the consumer is out there shopping and.
The product patterns are a little bit different there are clearly more about the running silhouette in the indoor soccer silhouettes that.
I've always been important in Europe , a little less on the performance basketball, but certainly the D.
Premium basketball the retro is the air force ones AJ ones continue to be really important so.
<unk>, probably got some covenants as well.
Yes, it really was a pretty broad based recovery across Europe , a lot of the key markets, including France, Germany, Italy, and Spain drove strong gains, but as you look at even at the market level.
A couple of dozen markets were up double digits across the quarter. The only softness was in the UK, it's well documented that sort of inflation in the apparel in there and some of the struggles with the consumer base, there, but across continental Europe very very good results in a lot of the investments we've made in real estate I mentioned, a few Paris Berlin Florence across.
Some of our key cities are paying real dividends elevating the experience driving traffic and also providing a better conversion opportunity for our consumers.
Our next question comes from Adrian <unk> from Barclays. Please go ahead with your question.
Good morning, Let me add my congratulations <expletive> on your well earned retirement.
Mary Thanks.
Thank you I guess my first question is actually something that's probably smaller tiny.
In the long term strategy strategic plan, but.
I was interested in your NFC launch and how important that is to your core customer what's the kind of go forward strategy with that and then for Andrew a much more specific questions on inventory how much of the end of quarter inventory.
Averaging a cost increase call it inflation versus safety stock.
Are you seeing more favorable vendor terms, either markdown money overtime to our TV vendor.
What gives you confidence that come.
At the end of the calendar year, you can start to see.
And it felt inventory dollar parity.
Thank you very much.
Yes. Thanks, Adrienne this is Frank so as it relates to NFC is certainly one of the big impetus of the Atmos acquisition was the ability to be able to test and lean into that faster consumer and if you think about the home market of Japan, South Korea, where the brand is also very strong they are a very digitally savvy very progressive consumer.
So it was natural to test and Ftes are in those markets first through through the Atmos brand had very good results sellouts were within the day, but we really look at it.
Learning opportunity and something as we think about future capabilities. You cited something we're going to continue to test and innovate and learn I think there are many many opportunities to bundle in ftes with actual physical products and thats part of the journey.
So we're very pleased with the initial results more importantly, the capability and the ability to test and innovate into the future.
Okay helpful. Thanks.
Alright, Thank you with regard to inventory as we talked about in our prepared remarks inventory is up about 52% compared to the prior year.
And up in the mid <unk> as compared to 2019 with regard to the composition of that inventory in and how it affects our.
How does that growth.
About mid single digits is related to price. The rest of it is obviously is obviously units we expect our inventory growth to slow as we go through the year, we still expect it to be up at the yearend, but meaningfully lower than what you have seen at the end of Q2.
As a matter of.
Of ability to pull levers.
Over the last two years, especially during COVID-19, a lot of the opportunities to to pull different levers.
We're not available right now as we look at our inventory again, we feel really good about the freshness of it we feel really good about how it's going to be responsive to consumer demand for back to school and during the holiday season.
To the extent that.
As we lean into leverage the ability.
To take take advantage of vendor allowances the ability to take advantage of cancellations the ability to take advantage of returns those things have those opportunities have come back into play as we now start to exit.
Fly constraints that you that that many retailers were experiencing during the pandemic.
And ladies and gentlemen, our last question today comes from Omar Saad from Evercore. Please go ahead with your question.
Hi, This is Warren Cheng on line for Omar.
And our first congratulations on your retirement and also on the many exciting exciting announcements. This morning, you gave some great color on the why now question for the <unk> session and also just some of the key reasons why Mary since you can fit for the role I was wondering if there are particular areas from a strategy perspective, whether it's on the digital side or.
Grand strategy.
Our experience that were more heavily prioritized energy and your decision making process.
Well again as I talked about earlier the board made the decision based on a.
Abroad search internal and external and certainly as we think about the digital opportunity as we think about the things that Mary accomplished with Ulta and.
Understanding of off mall retailing and big box retailing, you'll all things that we're moving towards she became a logical choice.
Great choice to take the lead the leadership over at the company that Louis into the next chapter in the next phase and again those things are all strengths that she's got in she aligns very much as I talked about.
Strategically she understands where we're going certainly she'll come in and take a look at the work we've got in progress but.
She is such a quality leader a quality person that I think that I'm very confident about the timing of this and the candidate that we've selected.
That's very great insight and then my follow up I wanted to ask about how you see your fastest growing concepts more experiential concepts.
Like the community and power and Homefield concepts fitting into your ultimate footprint, they seem to be doing really well.
Is there a update you can give on how they're performing as unprofitable commercial concepts and how big that can be ultimately within your overall footprint.
Yes, Thanks, Marc for the question.
We have a stated objective of 300 power and community stores globally by 2024, and it's really part of our omni offerings that we have.
Great thing about these experiences they are elevated they provide great storytelling, great opportunity to introduce innovation, which is something very important to our vendors as well as to consumers, but they also drive a digital halo, we know so while the stores themselves not only are outperforming our expectations and outperforming their regional comps. They also create an arm.
The effect, which is really really important as you think about return on investment for us. So we're very happy with the different expressions across homefield across how to play in our foot locker community stores, which is a global strategy. So thanks for the question.
Thanks, Congratulations again, Nick and good luck.
Thank you.
And ladies and gentlemen at this time I'd like to turn the conference call 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 am on Friday November 18.
Call will follow the release of our third quarter results earlier that morning, Thank you and goodbye.
And this concludes today's conference call. We thank you for participating you may now disconnect your lines.