Q3 2022 Foot Locker Inc Earnings Call
[music].
Good morning, and welcome to foot lockers third 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 manner.
Management undertakes no obligation to update these forward looking statements, which are based on many assumptions and factors, including the impact of COVID-19.
That's of currency fluctuations customer preferences, economic and market conditions worldwide and other risks and uncertainties described more fully in the company's press release 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 contained in the forward looking statements.
Please note that this conference call is being recorded.
I will now turn the call over to Robert Higginbotham, Vice President of Investor Relations. Mr. Higginbotham you may begin.
Thank you operator, welcome everyone to foot locker, Inc. Third 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 in our first quarter release, we updated our definition of non-GAAP earnings to exclude online.
Minority investment gains and losses in our third 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, with Mary Dillon, President and Chief Executive Officer.
Frank Bracken Executive Vice President and Chief operating Officer will discuss our operations and progress on our growth initiatives in more detail.
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, Mary Frank and Andrew will respond to your questions with that I'll now turn it over to Mary. Thank you, Rob and good morning, everyone. Thank you for joining US let me start by saying how honored I am to join foot locker in this fast growing industry, it's such a dynamic time and with such momentum on our business. Thanks.
The hard work dedication and expertise of our teams across the organization as well as the resilient customer base, we delivered better than expected results. Despite operating in a volatile environment, including inflationary pressure on the consumer around the globe.
Our total sales excluding changes in currency increased by three 3% with comps up 8% against record results from last year, driving adjusted EPS of $1 27 above our original expectations and.
And given strong momentum coming out of the quarter, we are increasing our outlook for the rest of the year, which Andrew will review later in the call.
But first I want to provide an overview on a few topics.
Why I chose to join foot locker, how I spent my time during the first 90 days the opportunities I see ahead. So the early actions, we've taken and finally, an update on our brand performance diversification efforts and vendor relationships.
So why did I choose to join foot locker, let me start with the categories sneakers are fun I come in with a true love for the product, which has only grown everyday that I've been here along with the number of sneakers that I have.
And this is a growth category with a long runway ahead, where the intersection of sports fitness fashion in the casual station of society and the tailwind for sneakers I believe will be persistent for many years to come.
Yeah, much like beauty. The sneaker category is driven by passionate enthusiasts, who are deeply engaged in the category products that allow for individual expression. There are fun to shop for and where newness and innovation matters also sneakers are an affordable luxury a dynamic that we believe is helping to keep our category resilience in the face of steepness.
Lace generic pressures.
Also like beauty. This is a category where shoppers value both in brick and mortar and digital experience.
No unequipped locker itself with nearly 50 years of heritage after playing a key role in making the category. What it is today foot locker has a tremendous amount of brand awareness and latent brand equity that I believe is not yet fully tapped we are grounded in the history and culture of Street basketball youth culture Sneaker headquarter Miss.
And foot locker is squarely at the intersection of sports fashion and trend, making our brand equity is more relevant than ever.
In addition to the company's rich heritage our people are a true asset the frontline store associates, our stripers in blue shirt loves sneaker culture, and our expertise in the category and this creates an energy in the stores that is a key competitive advantage also we have one of the most diverse young workforces in retail and we have thousands of associates.
Throughout our company that have built their careers here in the field and corporate offices, often after starting his part timers in high school.
Lastly at foot locker as a company that has a strong commitment to community, which is an important part of both the corporate culture and how we go to market.
So during my first 90 days I've spent my time visiting stores and getting to know the skilled team addressing the company's overall capabilities and specifically our technology needs getting to know many of our vendors as well as talking to investors to understand their perspective, and what they would like to see from us.
So what are the opportunities I see my early assessments have certainly validated all the reasons I was excited to join the company and about the shed light on where I see opportunities to become more efficient and more relevant in order to grow both our top and bottom line.
At a high level that starts with looking for ways to simplify the business to make sure. We're focused on the areas that hold the most strategic value and will generate the most return.
And it also includes shifting our approach in many ways from being product led to consumer led.
Which will allow us to create a consumer driven demand engine that can grow our market share and even the category by expanding our customer base as well as our share of wallet with existing customers.
The areas, where we will be the most focus are our omnichannel presence and capabilities, our loyalty program and overall digital marketing strategies and the technology platform, which enables those efforts as well as continuing our cost optimization work.
Now what are the biggest opportunities we have is to create a richer omnichannel experience starting with e-commerce.
Without having a specific target in mind, yet I believe it's 16% our e-commerce penetration is below where it should and can be which means there is an opportunity to capture more online only sales and more importantly, build our omnichannel customer base.
Our current omnichannel customers in the U S. Then nearly four times the amount of our single channel shoppers yet they represent only 6% of our customer base, which speak to our best opportunity to improve our engagement with customers across our channels and attract more of the spending dollars.
I also see a tremendous opportunity to further refine and evolve our F. L X loyalty program that was launched just a few years ago.
Well, we're already capturing a considerable amount of our sales through members of F. L X I see more opportunities to improve the value proposition of the program drive more engagement with our members to personalization and ultimately attract more members and capture more share of wallet of our existing customers.
In technology, we are in the process of reviewing our foundational needs as well as making sure. We're building the right tools and capabilities to support those efforts and omni channel and marketing.
Having a stronger backbone and technology enablers will be a key priority for us going forward.
While many plans are still taking shape, we've begun to take some early action in some of the key areas I just discussed given.
Given the importance of technology and marketing we've made some leadership changes in those areas and are in the process of actively recruiting best in class talent for key roles.
As part of our effort to simplify the business and focus on the most productive uses of our resources, we have decided to halt foot lockers entry into Japan, and we have also decided to wind down two of our joint ventures in Europe , and Frank will elaborate on these strategic actions in a moment.
Touching now on our assortment and some of our brand highlights and our vendor relationships as the quarter progressed, we identified strong demand signals within basketball sneaker culture, and kids and we were able to partner with Nike to serve more customers in those categories. A trend we expect to continue into the fourth quarter.
We therefore expect to end the year with a higher mix of Nike sales than we originally anticipated. In addition to the strong demand we've seen across our portfolio.
Also in coming to foot locker I was excited to see expanding brand diversification of the company because as in other consumer categories with high engagement like beauty choice and variety is something that consumers demand.
As the category grows and customers realize they can build a sneaker wardrobe their appetite for variety and desire for choice is growing and we know that 80% of our best customers already by three or more brands.
And we believe our third quarter results are further evidence that our efforts to broaden our portfolio are driving growth across multiple brands and helping us expand our customer base.
Our overall comps increased by <unk>, 8% as we continued to see momentum in our non Nike sales at our core banners, which were up mid single digits with most of our top 20 vendors posting strong growth.
As we continue to deepen our partnerships across our portfolio, let me congratulate bjorn Golden as the next CEO of Adidas, which grew mid single digits in the quarter.
As one of our biggest brands. We are excited to work with viewers and team to continue our enhanced relationship including deeper product access across our portfolio as well as enhanced store presentations, which will reach approximately 300 doors globally by the end of this fiscal year.
I'd also like to congratulate RNA Bryan for his appointment as the new CEO of Puma, which grew high single digits.
Earlier. This week, we were excited to announce an expanded partnership with Puma to reach next generation customers through exclusive basketball and other elevated collaborations building on the success of the law Mellow ball franchise, we are continuing our exclusive access with the N B O two which launched last month.
Beyond basketball will be launching several collaborative projects with musicians and fashion designers as well as an exclusive partnership with Coco Mellon in kids.
And we'll be adding even more energy to the category and our Puma assortment through incremental hype dropped more exclusive shared marketing partnership and elevated experiences in store and online.
Moving on to the rest of the portfolio, we continue to see outsized gains in brands like new balance, which was up nearly 70% this quarter crocs, and converse, which were both up over 25% and <unk>, which grew nearly 50%.
And while apparel overall was softer this quarter our control brands continued to perform growing over 50% driven by strong fleece and outerwear performance through our CST and locker brands.
And pro standard one of the Black owned brands, we support through our lead program has grown into a top 10 apparel brand to a successful local market Street, we're focused on the license business. So overall, we are very proud of the progress we're making in remixing, our vendor brand portfolio to be a more comprehensive multi brand retailer and serving.
<unk> with more sneaker choice.
Looking ahead to holiday, we are encouraged by the momentum in the business and we're excited about our plans for holiday across our product Assortments and how we'll be connecting with customers.
With product, we have a strong launch lineup, including key releases of Jordan retro followup launches of mellow ball to new crops labs, with Ron English and cooler times, Paul control to name just a few.
We will also be a key brand for us this season as it continues to dominate the holiday time period through their comfort icon.
New balance continues to become a much larger part of our business and we're very happy about the holiday in 2023 product pipeline and we're excited for Champs sports to partner with Jim sharp around a unique opportunity to be the first brick and mortar retailer security that dynamic fitness apparel brand in the U S.
We also continue our rollout of <unk> and <unk>, both of which are getting traction with our existing customers and helping us to attract new customers and we continue to partner with them to build accelerated growth plans in the seasons ahead.
And marketing for holiday. This year, we are launching our first ever truly integrated global campaign with foot locker Holiday House Party, featuring our holiday party for sneaker fans around the World. This campaign leads with foot locker as a brand by showcasing our stripers. In addition to musicians and online personalities to position foot locker is.
George Sneaker home for the holidays.
Also we're entering the meta groups by launching at kids foot locker Hausa play experience within club roadblocks, where virtual stripers will encourage players to a series of mini games in order to earn points to buy virtual sneakers.
In summary in addition to continuing down the path of operating an exciting range of brand options for our customers, giving incremental focus to our omnichannel capabilities and loyalty program continuing the cost optimization work, that's underway and further simplifying our business I see a tremendous amount of opportunity ahead for foot locker, Inc, and I look for.
And to updating you on our new strategies as we move forward and now let me hand, it over to Frank to discuss some of our operations and growth drivers in more detail.
Thank you Mary and good morning, everyone. This morning, I'll take you through an update of our banner performance in our real estate strategies, then discuss our supply chain network upgrade and finally, the moves we've taken to simplify our business.
Starting with performance by our portfolio of banners and geographies.
In North America, our overall comps declined modestly by one 1% with foot locker up high single digits on strong basketball trends and gains in all major back to school markets.
Kids foot locker increased mid single digits, driven by broad based strength across brands and effective marketing campaigns around back to school.
Champs sports was down low double digits, but was still up compared to 2019, as we distorted inventory to our foot locker and kids foot locker banners.
WNS are off mall value banner focused on Hispanic communities contributed $162 million in sales for the quarter and Comped up low single digits, improving from the down low single digits in the second quarter.
While the WNS consumer continues to be pressure and traffic remains impacted our execution in store helped drive conversion improvement, resulting in positive comp growth for the banner despite the tough environment.
Importantly, the new WNS stores, we opened so far in 2022 are performing in line with their sales plans.
And we continue to see encouraging results from our WSI loyalty program, which is delivering over 80% of sales across the entire fleet.
This past quarter marked the first full year of foot locker owning this well positioned business and one year later as we strategically expand the ws that store footprint, we continue to gain confidence in the business.
Hispanic population is the fastest growing demographic segment in the United States with the census Bureau projecting the Hispanic American population to reach 72 million by the end of this decade. An addition of 10 million consumers from 2020.
With its special connection to that community and only 108 stores today WNS has an incredible runway for growth in both its core markets in the west and southwest as well as new regions, where the Hispanic population is forecasted to grow the fastest.
We will mark the beginning of our expansion into the southeast region with our first Florida store later this quarter.
We still expect to deliver approximately $600 million of sales. This year and we are confident with favorable consumer demographics strong market planning and merchandising plans and a robust loyalty program will make W. Access the next $1 billion retail banner in our portfolio.
Moving on to other regions overall comps in Europe grew 8%.
With ongoing strength in key markets led by France, Italy and Spain.
We also began a rollout of the focus in Europe , elevating our omnichannel experience and approximately 400 stores across the region.
In Asia Pacific comps increased 36, 5% driven by the ongoing loosening of travel restrictions and some Asian markets lapping some store closures last year due to COVID-19 and improving inventory and receipt flow.
And finally, Atmos continued strong trends in connection to sneaker culture, contributing $40 million to sales up double digits versus the results last year led by a strong performance in their core market Japan.
Moving on to real estate.
While our fleet includes a strong portfolio of mall based stores. We also continue to deliberately pivot our business off mall, where it makes sense to be more closely connected to our consumers and communities as well as provide us the opportunity to build a larger store that can offer a better expression of brands categories and genders.
Our community empower store rollout is an important part of that strategy.
The third quarter, we opened or converted nearly 20, new foot locker community empowered stores across the globe, giving us approximately 150 doors in these formats on the way towards our goal of 300 globally by 2024.
Our community empower stores continued to deliver sales growth above their plan and to out comp the regional benchmarks and look we by several hundred basis points, giving us ongoing conviction in our strategy.
Including <unk>, we expect our store count in North America to be approximately 25% off mall by the end of the year.
And we will continue to push that penetration higher over time, as we rollout more community and power doors expand WNS and strategically pivot other stores off mall as well.
Next I want to update you on our distribution network in the United States, our largest retail market as we work to optimize our supply chain and get closer to our customers in order to better serve them.
With the full wind down East Bay operations to be complete by year's end, we will be closing, our wausau, Wisconsin distribution facility at the end of our fiscal year.
Prior to 2021, we serve the entire country out of that facility. Another centrally located DC in Kansas, and therefore had two day delivery coverage of only 38% of the U S.
In Q3, 2021, we opened our camp Hill facility in Pennsylvania to serve the east coast more directly which improved our standard two day delivery coverage to 75% of the U S.
And I'm now happy to announce the opening of our new state of the art distribution Center in Reno, Nevada, which will serve the western part of the country cutting shipping times in the area by more than 50%.
With the Reno opening we now have a truly regional network system, which will take our two days standard shipping coverage to over 95% of the United States.
As we explore ways to enhance our omnichannel capabilities to better serve consumers this distribution backbone and ability to deliver a two day shipping promise to most of the country will be an important foundation.
Lastly, as Mary mentioned in her opening comments, we are intently looking for ways to simplify our business model. So that we can invest resources and allocate capital to their highest and best use.
As part of that effort, we have decided to hold the foot locker banners entry into Japan, which was scheduled for Q4 of this year.
I would like to thank and commend our teams for their great work in preparing us to enter that market.
However, given the strong presence in performance of Atmos in Japan, we have decided to reallocate capital to elevate the atmos omnichannel experience to grow and serve consumers in this vibrant sneaker culture market.
We have also wound down two separate joint ventures, we previously had in Europe .
One where we were minority partners in stores operating in the Benelux region, and another where we Werent majority partners and adventure that operated stores in eastern Europe .
These moves are in addition to the sale of our East 18 sales business. This summer and the wind down of the East Bay Dot Com consumer business that will be complete by the end of this year.
Taken together these moves helped to simplify our business operations and allow us to focus our teams and corporate services on our largest and most profitable banners and operating units.
So in summary, our core banners delivered solid results during the third quarter led by the performance of our community and power stores as we continue to strategically pivot our business off mall.
We continue to remain excited about the growth potential we see in our WSI banner, serving the Hispanic community.
We've enhanced our distribution network to better serve both our stores and our online customers and our critical U S market.
And we are simplifying our operations. So that we can continue to invest in the banners in regions that generate the greatest return on capital and effort.
I'll now hand, the call over to Andrew.
Thank you Frank and good morning, everyone.
Our third quarter is a wonderful demonstration of foot lockers positioning in the market our solid execution and further evidence that our strategies are working.
When we updated you last quarter, we discussed the strong start to back to school being preceded by a much softer than expected June and early July such that we were hesitant to over extrapolate. The strong late July and early August trends beyond the back to school season.
But given solid demand improved access to inventory and the execution of our teams we were able to sustain much of that momentum throughout the quarter with August up mid single digits September up low single digits in October up against our toughest multiyear comparison of the quarter.
<unk> down mid single digits.
Overall, our third quarter total sales decreased slightly 0.7% compared to the record levels achieved last year.
But were up three 3%, excluding the impact of foreign currency.
On a comparable basis sales increased <unk>, 8% with our non Nike sales in our core banners growing mid single digits as we remain on strategy with the rebalancing of our product assortment.
By category.
We're comped up low single digits, while apparel and accessories, Phil mid single digits.
Comparable sales in our stores increased four 7%.
Our digital channel Comped down 14, 5% with overall penetration at 16, 3%.
This is down from 19, 8% last year, but still above the 15, 3% from 2019.
Moving down the income statement.
Gross margin for the quarter declined 270 basis points to 32.0%.
Merchandize margins fell by 280 basis points, driven by higher markdowns as a promotional environment remained elevated.
Occupancy leveraged slightly by 10 basis points still aided somewhat by the layering by the layering of WSI and atmos into our base.
As a reminder, WSI and Atmos curious somewhat lower merchandise margin the lower occupancy makes them overall gross margin neutral to our total business.
At quarter end, our inventories were 29, 5% above last year, but down from the 52% year over year increase we noted at the end of Q2.
On SG&A, let me start by providing you with an update on our $200 million cost optimization program.
This is the largest most comprehensive review of our cost structure the company has ever pursued.
I'm incredibly proud of the team's work in progress and both identifying a wide range of opportunities and beginning to execute on them.
This has truly been an enterprise wide effort that is intended to not only take cost out of the business, but to also ensure that we can remain nimble in a dynamic industry across business cycles.
Given the scope of the effort the opportunities we are targeting a very broad and will spend efficiencies at corporate and store levels, including everything from procurement to store operations.
In order to properly implement we have slowed execution in some areas, but we still expect to fully realize the full $200 million overtime.
In the fourth quarter, we expect to realize approximately $9 million of SG&A savings from the program on top of the approximately $9 million, we realized in the third quarter, bringing the total for the year to approximately $18 million.
For the third quarter, our SG&A rate came in at 21, 5% representing deleverage of approximately 60 basis points, driven mostly by labor wage inflation, which continues to grow at a rapid pace. This deleverage was offset by approximately $9 million of savings.
From our cost optimization program.
Depreciation expense was $52 million versus $49 million last year, driven mainly by the inclusion of <unk> and Atmos.
Our non-GAAP tax rate came in at 31, 7% above last year's rate of 28.0% driven by the geographic mix of our income.
Now turning to our balance sheet, we ended the quarter with $351 million of cash and $454 million of debt.
We paid $37 million in dividends and did not repurchase any stock during the quarter given our historical preference to remain relatively net debt neutral.
Moving on to our outlook for the rest of the year.
Following our better than expected results in the third quarter, the solid momentum in demand and a strong inventory position, we are increasing our forecast for the fourth quarter and the full year.
For the year, we are raising our guidance for non-GAAP EPS to the range of $4 42.
To $4 50.
Up from our prior range of $4 25.
To $4 45.
Given it is the last quarter of the year. We are also providing updated guidance in terms of the fourth quarter, though we will not be providing quarterly guidance on an ongoing basis.
Now for guidance on the fourth quarter.
With our non Nike sales in core banner is up mid single digits in the third quarter and nearly 10% year to date.
Brits and elevating and driving growth in other brands has progressed more quickly than we expected at the beginning of the year.
Meanwhile, as Mary mentioned, we've been able to partner with Nike to fulfill incremental demand that we identified in that brand.
Overall, we feel good as we ended Q3 with a strong inventory and receipt position and high quality product.
As a result, we now expect our fourth quarter comps to decline by 628%, which is improved from our prior expectation of down double digits.
That improvement is despite a roughly $50 million negative impact from no longer selling easy.
We plan to open approximately 20, new doors in the fourth quarter, while closing a total of approximately 85 stores.
Overall, our store count will be down approximately 4% in 2022 with square footage down slightly as we convert more stores to larger formats.
With FX and as an ongoing drag and having fully anniversaried the acquisitions of <unk> and Atmos, we expect our total sales to fall by 8% to 10% or two percentage points below our comp.
We expect our gross margin to decline by 370 to 400 basis points to 29.0 to 29, 3% driven by occupancy deleverage on the down comp and somewhat larger markdown pressure compared to Q3, but in line with our expectations.
Note that while the promotional environment has continued to anticipate intensify we are receiving more support from our vendors to help fund markdown dollars.
Historically, we've managed a collection of four basic inventory levers.
Cancellations are.
Vs push outs and vendor allowances or VHS.
We've worked closely with all of our brand partners to balance all of these levers.
Each brand part and they utilize us all of them, but this year based on heavier overall inventory levels.
<unk> are higher than usual.
At the end of the year, we still expect our inventories to remain up versus last year, which will put us in a strong position to start 2023.
I should also note that the removal of the UC product does not have a material impact on our gross margin is the margin on that product was close to the company average.
Moving to SG&A, we expect to deleverage by 90 to 100 basis points to 23, 3% to 23, 4% driven by ongoing wage inflation and the deleverage from the down comp partially offset by an estimated approximately $9 million of savings from our <unk>.
Cost optimization program.
No we do not expect to buyback any shares during the fourth quarter.
As a result, we expect our fourth quarter non-GAAP earnings per share to be in the range of 45 to 53 sets.
Lastly, while we won't be giving 2023 guidance until we report our fourth quarter earnings in February we do want to remind everyone that we will have a 50 <unk> week in our 2023 fiscal year.
In closing we are excited about the momentum in the business. The resiliency, we have seen in our customers and our growing ability to better serve them and we look forward to updating you on our progress in Q4.
With that operator, please open the call for questions.
We will now begin the question and answer session.
I would like to register a question. Please press 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. Please press Star then two.
If you are using a speaker phone please lift your handset to allow optimal sound quality.
Also we do ask that you limit yourself to one question with one follow up.
At this time, we will pause momentarily to assemble the roster.
And our first question will come from Bob <unk> of Guggenheim. Please go ahead.
Hi, good morning, and Mary Congrats to joining foot locker welcome and congrats on a great quarter.
Thank you Bob I appreciate that.
I guess the first question I had actually for you. Mary is can you just help us understand your plan for working with Nike and managing that relationship. We just start there.
Sure well first of all thank you for your comments and I'm really proud and honored to be the new CEO of foot locker and really proud of the quarter that our team delivered the momentum that we see in our business and it actually one of the things that really struck me as very smart as I started was I love our brand diversification efforts I mean, I know from other consumer categories like beauty choice.
Is this something that consumers want and we see that at foot locker right that our best guess or buying multiple brands and so.
A large part of our momentum is driven by the fact that we have elevated the number of brands partner with them have a lot of new brands to the assortment, having said that of course, our relationship with Nike is very important it's strong.
Been able to partner with Nike to provide our customers with increased demand signals that we saw in the quarter and areas that we do particularly well together basketball sneaker culture kids. So to me I see this is a multifaceted relationship over many years that I'll continue to build on.
Great and just on a follow up to that I don't know this for you or for Andrew but thank you both made comment too.
Improved access to other inventory can you just maybe address that and elaborate a little bit more what you've seen and sort of what you've been able to get your hands on that you didn't have sort of in the quarter or going into the quarter.
Great I'll, let Frank take that Frank Yeah, Hey, Bob It's Frank.
We're constantly.
Communicating and looking for opportunities together with our partners and Nike.
Especially around sharp once of the basketball category Sneaker culture and of course, our kids business. So you heard in my opening comments around the strength of our power and community stores and how well, they're performing with the core consumer base, and then think about house of hoops and the sharp sharp point provides a basketball and then you guys know <unk> is the only.
<unk> focused concept in athletic specialty. So those are strategies are highly complementary to Nike strategy and then finally as Mary said, we saw some demand signals and we were collectively able to pick up on those signals and react together in a way that was our strategy for both companies and to me. That's the definition of strong partnerships. So thats what happened.
Sure.
Great. Thank you very much.
The next question comes from Tom Nick <unk> of Wedbush Securities. Please go ahead.
Okay.
Hey, good morning, everybody. Thanks for taking my question.
I guess following up on the Nike point, there and I think that's part of the year, you said that Nike would.
Fall below 55%.
Wholesales.
Bye.
I guess by the fourth quarter and you're kind of.
Coming in better than that is the plan that Nike will still all kind of fall below that 55% level over time.
And it's just taking a little bit longer because you're kind of working with them a little bit closer or.
Do you think maybe the overall reduction in the Nike penetration will not to be.
Dramatic as you communicated try this fiscal year.
Tom. Thank you for the question. So overall I would say high level, our diversification strategy remains on track.
But I'd also say that probably moving towards more of a soft landing I guess, if you will so our Nike mix was down in the third quarter, we expect it to be down in the fourth quarter, but just to a lesser extent I guess I'd say than we originally expected and beyond that yes. We can see we will see the mix continue to mix down to around that 55% of sales that we spoke about but I'd say.
<unk> be more gradual about it and as we see a steady increase in other brands.
And that's how it's playing out.
Got it and just a quick follow up obviously.
Sure.
Calling for much less of a comp decline in Q4 than what you are communicating earlier. This year is that primarily because you're not having the hard landing.
With Nike or is it also because the.
Non Nike brands are outperforming your expectations I'd expect you expect them to do better than that in the fourth quarter than what you previously thought.
All of the above I mean, the good news is the consumer or the customer at foot locker, showing great resilience and momentum for the category entity arrange their array of brands that were offering. So it really is a combination of some of our other brands a number of brands who are partnering with to continue to have even more momentum than we might have predicted and then somewhat more partnership that we're seeing.
Nike in the quarter in terms of some of these demand signals that we're seeing in the marketplace. So together that that gives us confidence for the quarter.
Thanks, Barry and happy holidays, everyone.
Thank you.
The next question comes from Kate Mcshane of Goldman Sachs. Please go ahead.
Hi, Good morning, excuse me. Thank you for taking our question.
Barry you had mentioned one of your priorities that you were focused on was.
Deepening your online penetration.
But I know that you do have a customer that does tender.
Quite a bit with cash still so I wondered if you had any thoughts around any kind of limitations to the online penetration because of that and how do you address it.
Hi, Kate Thank you for the question.
What's really true of this category is that both brick and mortar and online matter that's for sure for our customers. So we see our best guess or buying in both channels.
For different reasons right, sometimes it's to go in and try and explore sometimes people are paying with cash and that's not the majority, but sometimes but then also everybody knows that there's a digital experience that surrounds every every decision that people make in every category, but certainly in sneakers. So for us I don't know that there's a limitation I mean right now I think we're still in the early innings of how high is up on.
Our online penetration.
We know that there's frankly improvements that we can do and the overall experience and we're focused on that and so I don't have a specific target in terms of where I see it going but it'll definitely be higher than today and again, the best guess, we will engage in both channels.
Okay. Thank you.
Then I had a question.
For Andrew just with regards to the savings program, how we should be thinking about the cadence of the $200 million in savings over time.
Yeah. Thanks, Kate I appreciate it yes.
As I've mentioned in my prepared remarks.
Savings program it is its wide ranging.
Very large scope will see approximately $18 million of SG&A pick up share.
We still see.
Realization of the $200 million savings, it's going to be a little longer than anticipated I would expect that it's going to go a little bit beyond 2023, and probably realizing in 2024.
But it is a very extensive program.
Taken in picking up traction in 2023 and fully realized beyond 2023.
Thank you.
Okay.
The next question comes from John Kernan of Cowen. Please go ahead.
Good morning, Congrats on the momentum and thanks for taking my questions.
Andrew back to you.
Foot locker is one of the few retailers and businesses that we look at that as Roy Hill in line with their pre Covid gross margin levels, even with the.
The decline this year on the hard comparisons when you look at gross margin what do you see as the biggest opportunities long term obviously you're.
Buying and occupancy leverage can come with better comps is there something in the merchandise margin.
You see as the potential drivers for upside in the coming years.
Well I mean, you mentioned one of the things that obviously included in average and are included in our gross margin is occupancy and we will continue I believe as we continue to pivot our small get larger format spaces will continue to.
To pick up momentum in our total gross margin as it relates to occupancy.
With regard to our private label and exclusivity I see that as key opportunities for us to pick up points on the merch side, given the fact that we can control the cost and the pricing on that side, and therefore realize better margins, but in a retail space beyond that.
A bit constrained because we go to market at MSRP and so therefore, a little less control on some of the some of the other pricing leverage.
We have outside of retail.
Got it and then maybe just one follow up going from a downturn two and up one is an impressive feat.
And.
I'm just curious if he could zero in on the biggest drivers of the comp acceleration.
Particularly in the first few months of that quarter.
Got you to this result.
Yeah, I mean, I think you know as we.
As we entered the quarter and we talked a little bit about this coming out of Q2, we started to see that.
Traffic pick up as we exited July and got into the early back to school seasons, but if you look at.
Our biggest formats kfm and foot locker as we move through the quarter, we continued to see strong resilient and see from our consumers and those large formats.
Our conversions definitely helped with shoppers coming into the coming into our stores with more intentionality and they're shopping decision so much higher much higher conversions.
Definitely higher traffic that we saw and so when you combine the the.
Increased traffic in our large format the higher conversion rate and those large formats, and then Mary talked about it and Frank talked about it being continue casual ovation and strong tailwind in our sectors continue to give us confidence and momentum as we go into the fourth quarter.
That's great Thanks, and best of luck in holiday.
Alright, thank you.
The next question comes from Michael Binetti of Credit Suisse. Please go ahead.
Hey, guys just a quick one on the model and then I have a bigger picture one prime area.
Fourth quarter earnings is usually you know pre Covid I think you said you know when we talked earlier that.
You see some shopping patterns that look more like pre COVID-19 and pre covet. Your earnings are always 40% to 60% higher in the fourth quarter, then third quarter I know, there's a lot going on but Andrew.
Andrew maybe you can help us just reconcile that a little bit and then did are there other parts of SG&A that moved up in that in the fourth quarter. It looks like leverage points, a little different there and then I guess bigger picture Mary can you just speak to the culture at this business as a high profile sneaker launch events, it's been something that drives a lot of energy with your customer the chase that.
Winning the prize.
What is that part of the business look like after Nike reset an easy exit some of the higher profile product that we saw you guys launching over the last few years.
Yeah, I guess I'm not exactly sure, but I would say is that certainly signature launches and partnering with our brand partners will always be a part of the equation because that's what customers want right. So so we will continue I mean, we have a great relationship with lamellar <unk>, we're launching the MB two in the fourth quarter.
Many many collaborations that we have across all of our brand partners. So well always participate in part of that it's a broad market. You know we're not they're not the only place that people can buy these things certainly but that'll be a key part of our strategy going forward is there anything Frank do you want to add to Michael's question I think I think the other thing is as we dimensionalize our consumer in the assortment it's launched.
Our core base business in both.
Are important and both to be successful. So those things can be simultaneously true and you think about the introduction of innovation into the category of the adoption of crocs within the sneaker culture.
It's bringing new customers into the category, which is really exciting. So we're not as dependent on our launch calendar for saying, we can have that and we can have a really strong flow of innovation that recruiting recruits new customers into the category and I'll just mention with regards to on OCA.
Seeing great gender diversity.
Retention and acquisition of the female consumer since inception, when those two brands, which again just speaks to this trend of the broadening of sneaker culture and more consumers wanting to participate.
Good point, yes.
And then Mike we're getting back to some of your model questions.
I appreciate your call out on the on the walk from third quarter to fourth quarter, but do remember this fourth quarter is the first big impact of the Nike drop in allocation. So.
That's why you see comps very similar coming down against your expectations in the fourth quarter compared to the third quarter.
We do expect obviously some continued.
The growth that SG&A.
Against you, even if you compare it against 2019, so SG&A, we expect to be similar in Q3 to Q4, but on the on the deleverage on the top side, that's really reflective of the fact that this is the first quarter of the big step down as it relates to Nike.
Thanks, a lot for everything.
Okay.
Yes.
The next question comes from Lorraine Hutchinson of Bank of America. Please go ahead.
Thanks, Good morning.
Mary I thought your.
Outlook on some things that you hope to change was very interesting I was just wondering on the cost side are there any big investments needed in <unk>.
Our marketing as you see it to really realize this.
Some of your goals on the better omni presence loyalty digital marketing anything that we need to think about are there from a capex or SG&A standpoint over the next several years to fund these changes.
Well no I am I am really excited about the possibility of unleashing more capability around demand creation, using our loyalty program to even greater factor customer data and data analytics.
Improving some of the experience in an Omnichannel world that we're in so that's what we're in the early stages I would say of determining what the investment levels might need to be now. The good news is we're already on aggressive cost reduction plan right as Andrew talked about in his and his work. So so that's good that that will give us some sources of investment and it's pretty clear now what.
We do is going to be manageable from a cash flow perspective, and and really from an opex perspective anything we choose to spend on would be sales drivers with clear rois attached to them. So more to come I understand youre, probably trying to build out the modeling, but I think we will come to conclusion soon but we think we have it well in hand.
Thank you.
The next question comes from Jay sole of UBS. Please go ahead.
Great. Thank you so much Andrew I think you mentioned that.
The EZ impact would be about $15 million in Q4.
Theres been some talk biodiesel is that they would rebrand the product and maybe start delivering them again can you just talk about that strategy and how it impacts foot locker, especially as we look into Q1 Q2 Q3 of next year do you expect to continue to have a negative impact from the removal of easy or will it be some way to sort of offset that with the rebranding. Thank you.
Yes.
As we talked as you noted above.
About a $50 million.
Expected.
Impact in Q4, which we have built into our guidance and we're comfortable with our guidance excluding music.
It relates to going forward, we have we're not planning to.
We don't have that planned.
Fourth quarter and that's we have we're comfortable with our decision we're comfortable with.
With Adidas.
<unk> landed on that and we feel.
<unk>.
We're moving forward we've.
We've moved on past that yes, I think it's probably a better question honestly for the Adidas team to be perfectly candid, but what I can tell you is we've got a full assortment of Adidas products everything from booster nomads classic basketball and Theres a great partnership if they launch with Jerry Lorenzo and for Europe . This holiday, so, we'll lean into and partner and continue.
To collaborate and celebrate stories and plenty of other franchises across EMEA.
It's Brian .
Got it and maybe if I can ask one more and where do you see inventory at the end of <unk> do you see it being back in line with the sales trend or maybe I need one more one more quarter.
Inventory at the end of Q4 is still going to be up it's going to be up.
In the similar range as we talked about and you saw in the mid 30%.
Low 30 percents for Q3, so we expect inventory to still be up.
Got it thank you so much.
Yes.
The next question comes from Matthew Boss of Jpmorgan. Please go ahead.
Great. Thanks, So Mary well clearly early days, how do you view foot locker as a destination for the consumer today, maybe high level, what do you see as low hanging fruit to expand the customer file or drive incremental customer traffic and then just for Andrew as we think about Bottomline profitability your guy.
For this year calls for just over 7% operating margin could you help bridge the gap maybe to roughly 9% pre pandemic or are there any structural hurdles that you see preventing multiyear opportunity to meet or potentially exceed that level pre pandemic.
Well Matthew I'll start thank you for asking because I am Super excited about the possibilities ahead, you know we operate in a category, that's obviously very exciting and dynamic with secular tailwind around the globe.
Casuals Nation of Society, which is a global trend I happened to be of the mindset that theres a lot of folks who don't even know they can have an entire sneaker wardrobe I, Amy anyway, but I'm, just saying I really feel like there's a lot of possibilities. Some chapters ahead. It's a category that we have great leadership and great equity in history, we really authentically.
Street basketball and youth culture, and worth the intersection of fitness and trend in sport and I think there's a lot of folks who probably don't know footlocker I believe it or not right. So we've got strong brand awareness, but maybe still a latent equities and I think as we think about certainly there are the momentum we're already seeing with the diversification of brands and I think Frank.
Well, we're seeing things that new brands, bringing new customers women getting more attracted to foot locker and we're really just getting started so combination of what we do in our stores, what we do online the products that we offer and then as I said earlier, how we use tools to really create a demand engine that's bigger than just the products that we sell all of those are very important but really.
<unk>, new customers to foot locker and current customers to come more often and give us a bigger share of their wallet and theres a lot of places you could buy sneakers, but I'm convinced that we're going to continue to make foot locker the destination for all things sneakers.
And then speaking to.
Profit and margins.
We're not speaking to your guidance beyond 2022.
So we feel very comfortable where we are we are definitely looking forward to getting on the fourth quarter call in.
And providing future outlook, but were not to be confused guidance beyond 2022 at this point.
Yeah.
The next question comes from Cory <unk> of Jefferies. Please go ahead.
Hi, good morning, and thanks for taking my question and congrats on a great quarter.
So.
Could you maybe talk a little bit about the promotional environment. It sounds like markdown pressure is expected to get slightly worse.
Would you generally talk about what you're seeing presently.
Is it slightly worse, maybe in apparel versus footwear any color there would be appreciated. Thanks.
Yes, sure I'll start and I'll ask Frank to jump in with some more color well no question that we know across all sectors of consumers right. Now that there is a promotional environment inflation is is high you know Fortunately unemployment is low and wages are rising we're seeing this category and our shoppers to be pretty resilient, very resilient and picking us and prioritizing that.
Said, it's a promotional time and I think we would expect that to continue through the fourth quarter. The good news is our level our promotions are working well and our car shoppers are responding.
Frankly, if there's anything else you'd like to add to the question.
I would just say that within our guidance, we've allowed ourselves some flexibility to be able to be agile and react to be competitive.
We continue to see the sell through to guess off the top line as well as put us in the inventory position that we're forecasting brand of the year and then obviously there is a great partnership and collaboration with the vendor community to make sure that we are.
Delivering value and the price value is there in terms of the marketplace. So.
Lastly, our inventories very fresh and healthy very seasonally relevant merchant team has worked very hard as the supply chain has normalized or not back to pre COVID-19, but it's certainly gotten significantly better so the flow of goods being seasonally relevant things like winter boots.
<unk> are showing up and we found in stores were well stocked the capture of the cold weather markets.
For this holiday season.
Great. Thank you very much and then just on the fourth quarter commentary it sounds like October comps or I believe down mid single digits, but.
The guide is for kind of down mid to high singles is that just a reflection of kind of conservatism just any color there would be helpful.
I mean really it kind of goes back to my answer earlier on the fact that this is the fourth quarter will be the first meaningful quarter for steep quarter, and then Nike allocation drug.
Yes.
Got it thanks very much.
Our last question will come from Paul <unk> of Citi. Please go ahead.
Hey, Thanks, guys.
If you could frame the size of the easy business for us for the first three quarters of next year just to understand the whole that you might be facing without that product and also curious what when you have a sale from our signature launch what's the attachment rate looked like or U P piece, you know tied to.
To that launch versus a transaction outside of a signature launch thanks.
Yes, I'll start off with kind of.
Sizing that the easy business about $120 million.
Business for us in 2022.
Set of which $50 million was going to be allocated to the fourth quarter.
We expect that that while not giving guidance in 2023, we expected that to be a somewhat larger proportion going into 2023.
Yes.
<unk> two is to launch in footwear to launch an attachment certainly the brands are great storyteller, I think Jordan brand the Puma brand. The Nike brand one of the things that has been challenging candidly through October has been supply chain disruption and the ability to deliver apparel connectivity with the footwear launch that has significantly improved we saw.
That improved sequentially throughout Q3 and back to school and we're pretty confident in Q4, we're going to have much better alignment, which for US means both online and stores. We can tell the full story and comprehensive consumer and drive that better basket. So I think holiday, we'll see improvement in that front.
Got it and then just a clarification Andrew D. One funny that you mentioned does that.
That was what was supposed to happen in 'twenty two and then we back 50 out of that 70 in quarters one through three.
Yes, okay, great. Thank you and good luck.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Robert Higginbotham for any 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 February 24th the call will follow the release of our fourth quarter earnings results earlier that morning, Thank you and goodbye.
Yeah.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.