Q3 2023 Foot Locker Inc Earnings Call
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Good morning, and welcome to foot lockers third quarter 2023 financial results Conference call.
Speaker 2: Good morning and welcome to Foot Lockers 3rd quarter 2023 Financial Results Conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session.
Speaker 2: This confidence call may contain forward-looking statements that reflect management's current views of future events and financial performance.
This conference call may contain forward looking statements that reflect management's current views of future events and financial performance.
Speaker 2: Management undertakes no obligation to update these forward looking statements, which are based on many assumptions and factors, including the effects of global economic and market conditions.
Management undertakes no obligation to update these forward looking statements, which are based on many assumptions and factors, including the effects of global economic and market conditions currency fluctuations customer preferences and other risks and uncertainties described more fully in the Companys press releases.
Speaker 2: Currency fluctuations, customer preferences, and other risks and uncertainties describe more fully in the company's press releases and reports filed with the SEC, including the most recently filed form 10K or form 10Q. Any changes in such assumptions or factors could produce significantly different results. An actual result made different materially from both contained in the forward-looking statement. Please note, this conference...
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 this conference is being recorded.
Speaker 2: I would now like to turn the call over to Mr. Robert Higgin-Vottom, Senior Vice President, SPNA, Investor Relations, and Treasurer. Mr. Higgin-Vottom, you may begin.
I'd now like to turn the call over to Mr. Robert Higginbotham.
Senior Vice President of P N, a investor relations and Treasurer, Mr. Hagan Madam you may begin.
Speaker 3: Thank you, operator. Welcome everyone to Foot Locker Inc. Third Quarter earnings call. Today's call will reference certain...
Thank you operator, welcome everyone to foot locker, Inc. 's third quarter earnings call.
Today's call will reference certain non-GAAP measures.
Speaker 3: A reconciliation of gap to non-gap results is included in this morning's earnings release. Note we have a slide presentation posted on our investor relations website with information that will be referenced during the call.
Reconciliation of GAAP to non-GAAP results is included in this morning's earnings release.
Note, we have a slide presentation posted on our Investor Relations website with information that will be referenced during the call.
Speaker 3: Today, we'll begin our prepared remarks with Mary Dellen, President and Chief Executive Officer.
Today, we will begin our prepared remarks, with Mary Dillon, President and Chief Executive Officer.
Speaker 3: Frank Bracken, Executive Vice President and Chief Commercial Officer, will then give more detail on our operating results across our banners and geogers.
Frank Bracken Executive Vice President and Chief Commercial Officer will then give more detail on our operating results across our banners and geographies.
Then Mike Barnes Executive Vice President and Chief Financial Officer will review, our quarterly results in more detail and provide color on our fourth quarter and updated 2023 guidance.
Speaker 3: Then Mike Bond, executive vice president and chief financial officer, will review our quarterly results in more detail and provide color on our fourth quarter in updated 2023 guide.
Speaker 3: Following our prepared remarks, Mary, Frank, and Mike will respond to your questions. With that, held now.
Following our prepared remarks, Mary Frank and Mike will respond to your questions with that I'll now turn it over to Mary.
Speaker 4: Thank you Rob. Good morning everyone and thank you for joining us today for a discussion of our third quarter financial results, our outlook for the holiday season and an update on the advances our team continues to make on our lace up initiative.
Thank you Rob good morning, everyone and thank you for joining us today for a discussion of our third quarter financial results our outlook for the holiday season, and an update on the advances our team continues to make on our lease up initiatives, while the operating environment remains uncertain momentum behind the lease up plan is beginning to unlock wins as our team executes.
Speaker 4: While the operating environment remains uncertain, momentum behind the laceup plan is beginning to unlock winds as our team executes in a customer and brand partner focused collaborative and agile manner. It's been over years since the joint footlocker, and while we recognize that we have work ahead of us, I'm encouraged by the progress we've been making in this reset year.
And a customer and brand partner focused collaborative and agile manner.
It's been over a year since I joined foot locker and while we recognize that we have work ahead of us I'm encouraged by the progress we've been making in this reset year.
Speaker 4: I can continue to be confident that we're executing the right strategies as we simplify and focus our business and invest in the capabilities that will enable footlocker to be the best on the channel retailer at the intersection of sneakers and sneaker culture. As we say in our new brand platform, the heart of sneakers.
I continue to be confident that were executing the right strategies as we simplify and focus our business and invest in the capabilities that will enable foot locker to be the best omni channel retailer at the intersection of sneakers and sneaker culture as we say in our new brand platform the heart of sneakers.
Speaker 4: In the third quarter, COMS declined 8%, including a 3.com headwind from the repositioning of our champ sports banner. We delivered earnings per share ahead of our expectations at 30 cents.
In the third quarter comps declined 8%, including a three point comp headwind from the repositioning of our Champs Sports banner.
We delivered earnings per share ahead of our expectations at 30 cents.
Trends in the quarter accelerated from our first half run rate driven by a strong back to school and our kids foot locker banner.
Speaker 4: Trends in the quarter accelerated from our first half run rate, driven by a strong bath to school in our kids' foot locker banner. We also delivered sequential improvement in our conversion rates across stores and our digital channel outperform their expectations, including a positive trend in October .
We also delivered sequential improvement in our conversion rates across stores and our digital channel outperformed our expectations, including a positive trend in October.
Speaker 4: Importantly, we continue to exercise discipline expense management and made further progress in executing our cost savings plan.
Importantly, we continued to exercise disciplined expense management and made further progress in executing our cost savings plan.
Speaker 4: Based on the results we generated year to date, combined with our outlook for the fourth quarter, we are narrowing our bottom line guidance to $1.30 to $1.40 for the full year. As we balance early successes and our lace-up initiatives, with the uncertainty we're seeing in the external environment and our internal inventory goal.
Based on the results we generated year to date combined with our outlook for the fourth quarter. We are narrowing our bottom line guidance to $1.30 to $1 40 for the full year as we balanced early successes in our lease up initiatives with the uncertainty we're seeing in the external environment and our internal inventory goals.
As we entered the fourth quarter. Our teams have stayed out until as we learn from and build upon recent progress. We know we're buying for wallet share with a value conscious consumer this holiday season.
While our customers remain discerning with their discretionary dollars and we expect that will continue through the season. We're also seeing them respond to newness at key moments.
Quarter to date, we've been pleased with the trends as consumers respond to a full price holiday Assortments. In addition to our compelling deals.
As a team we continue to make strides as our customer facing and support teams are wealthy and executing at an elevated level into the holiday season.
Over the Thanksgiving week period, we saw solid traffic levels and conversion gains in our stores and online.
While customers have responded to our competitive offers we also saw nice gains in ticket and basket size as our customer is willing to pay full price when the product is new compelling and trend right.
While we're encouraged by our building momentum we acknowledge up much of the holiday season is still ahead of us and we factored in a quarter to date performance into our fourth quarter plans.
While there's still uncertainty in the macro backdrop, we're encouraged by the building momentum against our strategic initiatives as I'll discuss in more detail in a few moments to summarize however, we'd name a few key wins, including solid strides in our digital performance, including improving conversion levels and double digit gains in new customer acquisition.
Increases in our already high brand awareness levels, suggesting our top of funnel marketing and brand building efforts are resonating.
Stabilizing conversion trends in stores as product flows resonate in our in store execution improves.
Strides in Champs sports with banner comps actually outperforming our original plans from the start of the year.
And finally early positive readout of our loyalty pilot launch in Canada.
All in looking ahead, we know that by continuing to lean into or at least the plan. We're on the right path towards longer term shareholder value creation.
Now before we dig into our lease up progress I want to take a moment to talk specifically about our basketball business.
Sneaker culture has mom and influenced by sports and specifically basketball and that's why we are so excited about our recent agreement with the NBA for foot locker to serve as an official league marketing partner here in the U S foot.
Foot locker in the M. B a have a nearly 25 year history of working together and we're thrilled to be building on that in the years to come with this new partnership.
This season, you'll see foot locker and the NBA collaborate around exciting content on court virtual signage, featuring our iconic striper logo and activations around marquee events, such as the NBA All star game.
We'll also be focused on social engagement and we're excited about reaching the M. P. As 84 million followers on Instagram along with other platforms with our brand building and Congress driving content.
We will focus on creating collaborative content, highlighting our basketball product and point of view.
The NBA will connect directly into our loyalty F. L X program and will provide additional benefits and access to our customers in new and exciting ways.
Our kickoff to announce a partnership featured a special basketball activation event in times square that featured over 50 members of our Striper hype crew.
In early November we also rolled out our new global brand platform. The heart of sneakers, which is uniting our vision around the foot locker brand. This was a global launch with all our regions going live simultaneously and the response has been amazing to date, we've earned over 1 billion media and Influencer impression since the campaign's launch.
Our first campaign with our platform as our holiday campaign called hype for the holidays, which includes a star studded roster of NBA all stars.
We know that when we win basketball is good for us and importantly, it's good for our brand partners. We've been thrilled by the support they're showing a response or a basketball initiatives.
Another key example of our basketball focus is the rollout of our new home court experience at our foot locker banner. This is a unique multi branded basketball experience with elevated merchandising storytelling and experiences.
While still early days and in only a handful of our top basketball doors. Early response by our customers has been very positive and we're continuing to invest in the concept.
We will have more to report on in basketball in future quarters, but I hope you're taking away from my comments today, how much all of US here at foot locker are looking forward to further enhancing our customers' experiences and strengthening our already dominant basketball leadership in the months and years ahead.
I'd like to now provide more details on the progress, we're making within our lease up plan and the early wins, we're achieving both in stores and online.
Now as you know there are four strategic pillars to lace up so let me walk you through the momentum we're building in each of them.
Our first is to expand sneaker culture by serving more sneaker occasions, providing more choice and driving greater distinction.
A key part of servicing our customers, making sure we're strong partners to all the brands. We work with this means collaborating with them on multiyear growth plans in consumer facing marketing ideas, while also investing to mutually grow our businesses.
Within Nike, we're seeing strong partnership between our teams as we build growth plans around our key pillars basketball kids and sneaker culture as I noted earlier, we believe the future of basketball is bright for foot locker and we're encouraged that the culture of basketball also continues to connect with consumers who models like the Air Force One air Jordan one.
And Nike dock retro sell throughs remained solid in the third quarter, albeit with lower units compared to last year.
We're also celebrating key moments with Nike, including the 25th anniversary launch of the Nike tuned Air franchise, one of our key exclusives with Nike and a core anchor and sneaker culture, especially across EMEA, where there is a rich heritage with this franchise.
With Adidas, we continue to build momentum with their terrorist inscape franchises, including the samba Gazelle in campus.
Together with our exclusive Anthony Edwards basketball shoe launch. This December we have some powerful holiday moments ahead with Adidas.
And as we think about strengthening our position in basketball, we were pleased with the recent launch of the Puma La mellow three and we're also excited about puma's renew collaboration with Rihanna, which we'll be launching in stores and online tomorrow.
New balance continued its strong run as we once again achieved well over 100% year over year sales increase in the third quarter with multiple franchises performing well across men's women's and kids.
We continue to see door expansion opportunities and new balance well its empty.
We built on the share gains we've seen in this exciting brand.
Within performance running we continue to push ahead with our growth plans on on an <unk>.
<unk> is now in 420 doors head of our earlier plans for 350 doors. This year as together, we accelerated expansion plans to meet the strong consumer response to their unique and innovative product with HOKA. We've added 50 doors since last quarter, bringing our total door count to 150 ahead ahead of holiday.
We remain bullish on our partnership with these exciting newer brands or planning for even more door count expansion across these two brands next year.
At the same time, we also continue to achieve strong gains with brands like Essex, and Brooks and performance running.
And we're seeing gains from brands such as Crocs and are on the more lifestyle site as our customers are looking to us to offer brands that fit their whole lifestyle needs.
Helping to drive distinction for foot locker are exclusive penetration in the quarter was 15% similar to last year led by key franchises such as Nike is tuned air and pool Muslim mellow ball.
Finally in our quest to meet our customers' desire for multiple brands across multiple occasions, the diversity of our brand mix outside of our top brand Nike increase of 36% of sales from 32% last year, making good progress towards our goal of over 40% by 2026th.
Our second imperative power of the portfolio is about transforming our real estate footprint through new formats and shifting off mall, while also simplifying our portfolio of banners and creating clear lanes for each of them on real estate transformation, we opened or converted 13, new foot locker community and power stores across the globe in the third.
Quarter, giving us a 198 stores in these newer formats.
We continue to see comp trends in these locations outperformed the remainder of the fleet with higher levels of traffic conversion and ticket.
We also see a double digit ecommerce halo in the markets around these locations.
All in our new formats now represent approximately 13% of our global square footage up from 10% last year, and making progress against our 'twenty 'twenty sits target of 20%.
Additionally, we're making strides with our overall shift to more off mall exposure penetration reached 36% of North American square footage up three points from a year ago, and making progress towards our goal of 50% by 2026.
As to WSI are off mall banner that is the leading retailer focus on athletic footwear for the Latino family. This year. We're on track to open 26, net new locations with four new locations in the third quarter and five year to date in the Miami, Florida market.
Lastly, as part of our real estate transformation, we closed 14 underperforming stores during the quarter.
Within simplifying and creating distinct lanes during the quarter, we announced the closure of our three U S Atmos stores and its website, which will be wound down in January.
And then as we think about the laser framework of simplifying and investing to grow this applies to atmos as we focus its growth in its core market.
At Champs, we continue to make headway with our repositioning work.
While comps declined by approximately 20% in the third quarter, the banners actually tracking better than we originally expected at the beginning of the year, including a meaningful improvement in the October exit rate compared to the first half trend.
The team is getting even sharper with champs positioning towards the active athlete, including positive early results through store refreshment in the third quarter those plan for an accelerated rollout into year end.
With a more distinct store experience and an even sharper viewpoint on its assortment buys into the spring we remain optimistic about the Champs sports potential in the market place.
Our third pillar is deepening our relationship with our customers, which is focus on building brand equity, reaching a broader set of customers and enhancing our loyalty program and overall CRM capabilities.
Building brand equity, we are better articulating and celebrating our brand proposition via our brand building storytelling and marketing in fact, we've seen gains in our unaided brand awareness showing that our top of the funnel marketing and brand building efforts are resonating and driving greater mindshare with consumers.
I noted earlier the launch of our global brand platform and our height for the holidays campaign, which was named one of the best campaigns for holiday. This year by Adweek in the campaign, you'll see globally shared content featuring our stripers as a hype crew dedicated to boosting up everyday sneaker lovers with the help of some very high profile M. B a athletes such.
As Kevin Durant, Anthony Edwards, Lamella ball, and Steph Curry, along with international recording artist and Nissan.
The campaign kicked off to tremendous success as I noted earlier, we have seen over 1 billion impressions since our campaign launch we're already seeing brand perception lift against key attributes such as trend style in service since the media launch.
This work, we're doing around greater top of funnel marketing, including incremental marketing investment is driving consideration and customer acquisition at strong incremental returns case in point once again, our online customer acquisition grew strong double digits in the third quarter in North America and helped fuel our digital outperformance in the quarter.
On loyalty, 23% of our sales in the third quarter were through our current loyalty program compared to 22% last year. We're excited to launch our F. L X cash test pilot in Canada in September and we've been pleased with the early results Encouragingly, we've seen a rise in active members higher average order values versus non loyalty.
L T and a significant number of F. L X cash redemptions by first time users, suggesting broader appeal as we refocus it to offer benefits beyond primarily launch access.
As we learn from our pilot here in 2023 we're making progress on our plans to roll it out to the remainder of North America in 2024 and globally in 2025.
And our final pillar is to be best in class, omni, which means improving our digital presence as well as better integrating our channels with each other.
Our digital penetration in the quarter increased to 17% up 150 basis points year over year, when excluding East Bay, which we closed late last year.
For the second consecutive quarter combined digital comps were positive in our foot locker and kids foot locker banners in North America, and given our improved digital execution, especially in mobile and traction with new customers company wide. We saw an accelerating nicely positive comp for all of global ecommerce in the month of October.
Our focus on site experience enhancements continues to generate significant wins, adding up to nearly $80 million of projected incremental annual sales with reduce friction points and improved experiences and features.
Moving forward, we will continue to upgrade our site experience with improvements to our product listing and detailed pages through elevated content merchandising and badging.
Our plans for 'twenty 'twenty four include the rollout of a new foot locker app with a new design intended to enable smoother cleaner shopping experiences. We are focus on improving the product launch experience driving greater connectivity with the stores and greater loyalty integration.
This work in combination with our marketing efforts gives us increasing confidence in our ability to achieve 25% e-commerce penetration over time.
Switching the stores when you think about foot locker, our stripers are essential to the overall customer experience their product and service experts, who create a positive in store experience with our M. P. S. In stores already above 90, we want to maintain and even increase their passion and impact which is why we keep them engaged in learning and insured.
Have the tools they need to serve our customers in the third quarter. We were pleased to launch a collection of new training and tools for our stripers across the globe, specifically focused on driving advance on selling behaviors with a mantra of always on never know.
While fully launch later in the quarter were beginning to see improved engagement and conversion in the stores.
We also finished the rollout of our upgraded handheld show all North American stores. The technology gives us stripers improved visibility on inventory access to product information and ability to check out customers and improve in store conversion.
Okay.
To sum up while the retail environment remains dynamic our teams are focused on staying nimble, particularly through this important holiday season.
Even as we focus on supporting our topline and closely managing our inventory through the near term we're continuing to go after the big future opportunities, we see for our business.
I'm confident we're evolving foot locker to truly be all things sneakers and to be a competitive omnichannel retailer that can drive sustainable and profitable long term growth and shareholder value now, let me hand, it over to Frank to provide more detail on our performance by banner.
Thank you Mary and good morning, everyone now, let me comment on our third quarter performance by category footwear, Comped down high single digits, while apparel felt mid teens and accessories comped positive low single digits, starting with basketball. We are seeing continued strength in court classics and retro styles.
From Nike and Jordan. This includes Jordan retro AJ, one Air Force, one and dunk, which provided a meaningful connection to the culture of basketball for our mens womens and kids consumer during the back to school season.
Our signature basketball business also started to rebound in the third quarter.
Who must Melbourne to let our signature business in Q3 and was flanked by strong performance from the Nike job, one Le Bron and Jordans Tatum one.
Switching gears to the running category new balance continues to drive impressive growth across all banners and geographies.
Importantly, this growth is fueled by multiple footwear franchises and is registering across our mens womens and kids consumer.
We were pleased to once again gained market share with the new balanced brand in Q3 and fully expect that trend to continue into the holiday season.
We also remain excited about our consumers continued response to the HOKA brand and on running.
We continue to see these brands bring new customers into sneaker culture.
Our banners helped bring younger more multicultural consumers to their brands.
We expanded our door base with both bringing ends in Q3 ahead of the holiday season, enabling access to more consumers and we are excited to partner with HOKA as they became the presenting sponsor of our 44th annual foot locker Cross country Championships.
Thousands of elite high school runners have been treated to footwear and apparel kids from Hooker and we partner to create onsite activations and content creation to fuel our social channels.
Meanwhile, challenges remain within some lifestyle running platforms. It was in these areas that we remain promotional and working through inventory levels to get clean by the end of the year. While we still have work to do I was encouraged by our results in the first weeks of November and especially during a strong black Friday week.
From a lifestyle standpoint played a meaningful role in our business this back to school, especially for our female consumers.
With a compelling assortment and must have styles such as the Tasman.
Quickly became one of our top footwear vendors for the quarter.
There are strong brand connection to the fashion forward consumer gives us confidence that this trend will continue through the holiday season.
Moving to apparel, we continue to see the consumer reacting positively to key items like Nike Tech Fleece, and Nike Club Fleece, and our private label brands La Hawker and C. S. G also delivered strong sales productivity.
The consumer has many options when it comes to apparel and we will continue to be appropriately promotional this holiday season, as we work through inventory and adjust our assortment strategies for 2024.
As we look ahead to this holiday season, we are enthusiastic about a number of premium footwear opportunities, we are seeing resonate with our consumers.
Including the scaling of Nike and Jordan signature basketball models at holiday and the excitement around our new NBA marketing partnership and the storytelling platform that it brings.
The December launch of the Jordan Retro 11 gratitude.
The exclusive launch of Anthony Edwards signature basketball shoe with Adidas the AE one.
Enhanced brand presentation inventory levels and marketing with the new balanced brand.
Beyond his newest collaboration with Puma, the Fenty creeper fatty launching tomorrow, both online and in stores.
Increased supply of trend bright Adidas models like Samba Gazelle in campus.
Seasonally relevant concepts and classics from ujiji.
And the continued momentum that we are experiencing and running through the HOKA and on brands.
By channel comparable sales in our stores decreased eight 5%.
Traffic remained down year on year, and we continued to see some pressure on average ticket.
Encouragingly, our conversion levels, while still down year on year, so steady sequential improvement each once the quarter as customers responded to our promotional efforts as well as our flow of premium must have items.
Digital comps fell by five 6% however.
However, excluding east Bay, the digital only beginner, we wound down last year digital comps were up 0.4%, including positive digital comps in October as our top of funnel marketing and efforts to improve conversion drove gains.
We're also pleased that our foot locker, North America and kids foot locker banners. Once again saw a combined positive digital comps in the quarter.
By banner in geography in North America, overall comps declined by 9.5%, including a 3.8% negative impact from the Champs sports repositioning efforts in the region.
At foot locker, North America comps fell by 4.9% driven by ongoing consumer and product headwinds in lifestyle running in apparel offsetting strength in the culture of basketball and running innovation.
Encouragingly, our power and community stores continue to outcome the balance of chain in Q3, reinforcing our confidence in those new concepts.
Kids foot locker comps were up 5% led by a strong back to school in August in both stores and online.
With a compelling assortment and strong back to school marketing our Caf L banner, clearly connected with the youth consumer and their parents this season as well as the teen girl.
With best in class partnerships with Nike Jordan New balance.
K ASO is well positioned to finish the year strong as we enter the holidays.
At Champs sports comps were down 20% as we preferred the foot locker banner for key launches and constrained supply of Nike Inc. Products during the reset.
We were pleased to see comps at Champs sports improved from first half trends, especially into the month of October.
In fact, as Mary noted the banner comps ahead of our internal plans last quarter.
Each season, the Champs team continues to sharpen its positioning as the home of sports style, where they few sport inspired apparel sneaker essentials and performance to serve the needs of the sport inspired consumer.
Looking ahead to the holiday quarter, we're encouraged by the early reads from recent capital light store refresh activity and are accelerating that work later in the fourth quarter.
In fact by yearend, we expect over 240 of the Champs sports locations will be refreshed.
We were also slightly adjusting our store closure plans for 2024.
We will still close approximately 85 doors by the end of year.
However, we will push about 30 store closures into Q1 and Q2 next year. So that we can continue to liquidate inventory and also spread some of the operational burden of those store closures over a slightly longer time period.
Moving to Ws says the banner soft comps down nine 4% in Q3 as the macro environment continues to weigh on that lower income consumer where ws since over indexes.
During the quarter, we opened three new doors, bringing our total to 129 and are on track to open 26, net new stores for the year or growth of approximately 20%.
We're still roughly two thirds of stores in California, we continue to see regional growth opportunities for WNS over time.
This holiday the WNS team launched an integrated marketing campaign themed more joy for everyone. This is the first ever integrated WSI is campaign to include online to offline content and connection points, including several connected TV and digital spots during key customer moments.
While the short term remains challenged due to macro economics, we remain confident in our WSI banner, which is squarely positioned against the fastest growing consumer segment in America.
Turning to Europe overall comps were down four 2%.
As the macro environment remains challenging across many parts of Europe. The team is focused on improving the in store experience conversion levels and inventory management.
The European team is also focused on reigniting the foot locker brand in key markets like here in the U S. We're seeing traction with our global brand campaign, our holiday Assortments as well as the store refreshes that we've completed thus far.
In Asia Pacific comps were down slightly at a negative 0.5%.
The foot locker banner salt comps down one 2%.
To the promotional marketplace dynamics, and lower consumer confidence, especially in Australia.
And finally at Atmos comps were up 0.8% as the business continues to connect with sneaker enthusiasts and delivers compelling innovation and brand stories from our partners.
Finally, we hope you saw this mornings announcement about our expansion into India in 2024.
We're thrilled to be bringing our multi brand sneaker experience to India's rapidly growing consumer class with the help of our new partners Metro brands limited and Nike fashion.
This new partnership will enable the renown foot locker brand and striper to further expand sneaker culture, one of our core lease up strategies in a capital efficient manner, while also generating incremental licensing royalties.
So in summary, while the environment remains dynamic our teams continued to balance the delivery of must have full priced premium assortments. This holiday alongside strong omnichannel marketing programs, while at the same time remaining extremely vigilant about our inventory and gross margin management.
Now hand, the call over to Mike to go over the financials and guidance in more detail.
Thank you Frank and good morning, everyone.
Now turning to third quarter results.
Starting with revenue our total sales fell by eight 6% on a comp decline of 8%, which was better than both our first half trend and our prior annual outlook of comps down 9% to 10%.
As noted previously the repositioning of Champs sports represented a three point comp headwind within the quarter.
By month August comps were down high single digits.
September also was down high single digits in October declines moderated to down mid single digits.
While traffic and conversion remained headwinds year over year in the third quarter, we saw steady improvements in our conversion.
This was especially true in September and October as customers responded to our promotional efforts and importantly, as our efforts to drive greater digital and in store conversion took hold.
While we saw our lunch business be less of a headwind in the third quarter versus the second quarter trend. We also saw some stabilization of our base business as customers responded to our fresh fall receipts. In addition to our compelling promotions.
Moving down the income statement gross margin for the quarter declined 470 basis points to 27, 3%.
Merchandize margins fell by 370 basis points with the majority of the decline driven by higher promotions to move through inventory and to reach our price sensitive shopper.
We also continued to see elevated shrink levels.
Outside of merchandize margin occupancy costs Deleveraged by 100 basis points on the sales decline.
Yeah.
Approximately $5 million of gross margin savings from our cost optimization programs helped to offset a portion of the pressure from promos shrink and occupancy deleverage.
For the third quarter, our SG&A rate came in at 22, 5%, representing deleverage of 100 basis points with savings from our cost optimization program of approximately $25 million more than offset by deleverage on the sales decline inflation and investments in frontline wage and technology.
Collectively our cost optimization program generated total savings of approximately $30 million in the third quarter and we still expect to capture approximately 40% of the total $350 million targeted savings within this year.
Finally, non-GAAP earnings came in at 30.
Our initial expectations as improving conversion levels, especially on digital drove a better than expected comp decline. In addition to our cost savings measures.
Moving onto our outlook for the full year and the fourth quarter.
Given the trends we are seeing in November we are narrowing our full year non-GAAP EPS to a range of $1 30 to $1 40 from $1 30 to $1 50 previously.
Our outlook now Embeds, an 11 cent EPS contribution in the fourth quarter from the 50 <unk> week.
Down from 15 previously as we've as we've refined our view and finalize our commercial planning assumptions around the extra week.
With the extra week, adding approximately a one percentage point lift to sales total sales for the 50 <unk> week year are expected to fall by 8% to eight 5%.
Overall, our store count will be down approximately 7% in 2023 with square footage down approximately 2% as we convert more stores to larger formats.
Within the fourth quarter, our outlook Embeds non-GAAP earnings per share in the range of 26 cents to 36 cents.
Our outlook assumes a comp of down 7% to down 9%.
The note the lower end continues to contemplate macro risk this holiday season, and the upper end continues to reflect ongoing positive response to our holiday Assortments and the wins, we are seeing from our strategic initiatives.
On gross margin, we expect declines of approximately 290 to 310 basis points towards a range of 27.0 to 27, 2%.
On expenses, we expect deleverage of approximately 40 to 70 basis points towards the range of 22.7% to 23.0% on the sales declines.
Finally, our capex outlook for the year is now $275 million down from $290 million previously due to the timing of real estate projects.
Turning to the balance sheet, we ended the quarter with $187 million of cash and total debt of $449 million.
At quarter end, our inventories were 10, 5% above last year down slightly from the 11% level at the start of the quarter.
It's important to note that our inventory balance includes an approximate six point impact from the strategic pull forward of inventory to ensure smooth product flows ahead of the holiday season.
We are reaffirming our expectation to end the year with inventory flat to slightly down versus last year.
In terms of shareholder distributions within the quarter, we paid $38 million in dividends and did not repurchase any stock.
As we announced last quarter, our board made the decision to pause dividends beyond the third quarter's payment to ensure financial flexibility in support of our strategic projects.
We still expect to update investors around our longer term capital allocation goals and financial targets. When we report fourth quarter results early next year.
And with that operator, please open the call for questions.
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Today's first question comes from Cristina Fernandez with Telsey Advisory Group. Please go ahead.
Hi, good morning.
Two questions first one I wanted to see if he could.
Talk further about the improvement that you've seen in October it seems.
A lot of it is company specific versus the consumer better. So if you look at the product and location that youre getting.
Key Shannon or responds to promotions I guess, how would you rank whats driving the business and then the second question I had was if you could talk about the composition of the inventory as you look at where you expect to end the year I guess, how much clearance promotional activity do you expect to continue in 2024. Thank you.
Yes.
Thanks, Christina well, let me start with we did exit the third quarter with improved trends and I think one of the highlights for US was the positive digital comps that we saw globally in October and that really was driven by really I think some traction we're seeing with our lease up initiatives and some of the improvements that we're making in digital and as we got into the.
The Black Friday weekend, I'll, just say, what we're continuing to see as we saw solid traffic levels and conversion improvements we're seeing customers come out you asked about assortment I'd say, it's both for you know a great holiday promotional deals as well as our full price holiday Assortments. So the assortment is working well.
But we're particularly pleased with our conversion trends online I think as I said, we're doing a better job of converting the solid traffic levels that we have with an improved customer experience.
We see the customer remaining pretty discerning and event driven and responding both to holiday promotions as well as full price in our signature key items that are that are selling well.
In terms of the inventory strategy, let me just start maybe Mike you can add I'd say you know we talked about this we certainly have made a deliberate effort to be vocal around our holiday promotions to continue to move through our inventory as Mike mentioned, we also made the decision to pull forward some inventory buys into the third quarter to make sure we have smoothed product flow during the holiday weeks and some of these key into.
A man items and again, that's allowing us to capture both deals seeking customers and those looking for innovation and on trend. The bottom line is we are confident with the guidance range and our inventory targets wishes to end the year flat to slightly down.
Yes, Thanks, Barry the only thing I would add as we look at the trend throughout the quarter I think interestingly as we look at October versus some of the other retailers, we saw the trend improvement come through footwear.
Within our business apparel was actually a slightly trend softening versus August and September and as we think through our inventory composition today.
The majority of our plus 10, 5% is concentrated in footwear apparel was only up slightly.
And then as we think through our guidance for this year.
The promotional levels intact really to help continue to make progress on that inventory and end the year flat to <unk>.
Lee down we feel that's a good level of inventory to operate going into next year.
And obviously as we think through 2024.
Promotional activity will be dependent on how the overall.
Customers performing and inventories in the channel in general.
Thank you. The next question is from Alex <unk> with Morgan Stanley. Please go ahead.
Perfect.
Thanks for taking the question and congrats on some improvement here in the quarter I wanted to focus on the sales guidance quickly here does it looks like it assumes the underlying trend might get worse quarter over quarter, that's how it looks but I asked because it doesn't seem to contemplate the 50 <unk> week benefit. So maybe if you can just walk us through the puts and takes there as you arrived at that.
It would be Super helpful. And then I've just got one follow up.
Sure Alex This is Mike from a.
From a topline guidance perspective into Q4, we called out in the prepared remarks that our low end really is just continuing to acknowledge that there is some macro and customer.
Risks and that the high end of how we're approaching things are really is reflecting the momentum we're seeing within the laser plan tied to our strategic initiatives and continue.
Continue to improve conversion and items like that.
I think we continue to expect this holiday to be competitive and promotional as we looked at the quarter as we go into December here. Obviously, we've said we feel good about the trajectory of our business right. Now. We're also acknowledging we're up against a tougher compare in the month of December which is inclusive of a launch headwind as well.
So that was everything we took into consideration there, but feel we've appropriately bracketed our performance in Q4.
Great and then just one quick one on inventory just a follow up I want to make sure I understand.
In terms of your user getting new flow versus using promos like how do you feel about the assortment now compared to three months ago have you cleared through more of the access that you've had the promo or not and then also on that I think one of the comments around chances that you could be liquidating into the first half so should I interpret that as you'll have inventory as a <unk>.
Your point through the first half of next year or how do I think about that thanks a lot.
Yeah, Hi, this is Frank I'll jump in here. So I think we're operating really two dimensions here, we talked I think already about how we're using our promotional engine and demand creation to continue to liquidate through inventory that needs a little bit of help it a little bit of encouragement with consumers at the same time. The majority if not all of the receipt pull forward in the comp.
Position of our holiday Assortments are the strongest that we've had all year and that's what gave us the confidence to do some of the pull forward and also substantiates the guidance that we're going into year to year and I would add onto that versus 90 days ago. We've also been able to secure some additional vendor support on the backend, which gives us confidence that we are going to in fact deliver again.
First our end of year inventory targets and start off 24 from a position of strength.
As it relates to Champs, it's really less a reflection of inventory management and more around the fact that because we are having a strong and busy holiday season, we want to smooth out a little bit of the wind down of some of those stores to take off some of that burden on our store ops team. So that we can be very thoughtful about moving goods around redeploying our stripers.
And our Champs associates appropriately and being very empathetic, there, but also capturing some are some of the strong demand at the same time. So so hence the change in the strategy there.
Thank you. The next question comes from Janine Stichter with BTG. Please go ahead.
Hi, good morning, and congrats on the progress wanted to ask you insights into what you're seeing with the lower income consumer where you have pretty significant exposure I'm wondering if you're seeing it get a bit better there and then also I ever calling you talked at the analyst day. There was some discussion around growing your exposure with middle income consumer. So I'm wondering if you're seeing any change in your consumer cohort.
Thank you.
Yeah. Thank you Jeanine I I'd start with a general view of the consumer there certainly is a lot of different factors come here as people I think have any household income right. So persistent inflation higher interest rates are some reduced savings student loan repayments we have.
Our customer on that 50% of our customers are under $50000 or so household income. So the monthly pressure is real but having said that what we're seeing is people just all year being pretty discerning on how and when to spend being event driven things like back to school things like you know Black Friday, cyber Monday, but also seen.
And that there's a lot of interest and demand in full key key items that are full price as well. So I would say that where we feel that we're in a good place in terms of our assortment and our promotions planned as we get through holiday and feel that in fact, we're actually seeing some indication that some of our customers are more willing to cut back on experiences in our category.
So we'll see how it plays out I think it's a little early to say that we've changed it had much impact on income cohort, but certainly you know our proposition.
Appeals to people of all income levels, so, but we feel we've got a good handle on how our customers is a feeling and also how they're responding positively to what we're offering.
Great. Thanks, so much.
Thank you. The next question is from Lorraine Hutchinson with Bank of America. Please go ahead.
Thank you good morning.
We need to focus on the NBA agreement or their financial obligations that foot locker will have to cover that.
Yeah, Hi, Lorraine. This is Frank yeah. So so it is a multi year agreement there are contractual obligations on both sides. One from obviously from a cash and a media commitment standpoint on our side and in turn from the MBA the commitment and access to content creation to events and activations into collaborations to bring really Greg.
Compelling storytelling and consumer experiences. So one of the tenants of our lease up plan behind foot locker is reaffirming our basketball leadership.
And we think that the.
The brand foot locker and the NBA brand sort of go hand in hand in glove and so we're very excited to reestablish that relationship which has a 25 year history I think it will be a very compelling proposition for our consumers.
The outreach and the support we've already gotten from our brand partners has been terrific and you will already see some of our activations here heading into the end of the year as we get into the holiday games and into all Star weekend in February of 2024. So we're very excited about this partnership yeah, and I would only add that you know a great part of the value of this partnership is the media value and so.
Even just for example exposure to the N b as Instagram followers, which is 84 million people right. So it gives us an amazing platform to amplify the natural partnership between foot locker and the MBA and we're already seeing some real positive traction.
Thank you and then just to follow up then you would put a lot of costs out over the past year or so as you think about SG&A next year and in the coming years, how do you see the tradeoff between further cost cuts or building back some of the marketing and other bucket.
Yeah Lorraine. This is Mike so from a cost standpoint, I think we've highlighted that we think in total there is $350 million that we can take out and we're still very confident that this year will take out about 40% of that of that total as.
As we think about SG&A going forward. There is about two thirds of that cut will be reinvested back into the business as we think through both technology, and then marketing and brand building and items like that.
So I think as we get back and return to growth here, there's an opportunity for us to continue to leverage SG&A.
And that's how we're thinking about it going forward.
Thank you. The next question is from Tom Nicotine with Wedbush Securities. Please go ahead.
Yeah.
Okay.
Yeah.
Tom you might be on mute.
Operator, we can take the next call.
Okay.
Operator, we can take the next question.
And our next question today will come from Tom Nickel of Wedbush Securities. Please go ahead.
Okay.
Okay.
Hi can you hear me now.
While we were waiting for you. Thank you.
Yeah.
Sorry, I apologize for that.
No worries I wanted to ask about the <unk>.
<unk> relationship and I know.
Mary.
At the Investor Day earlier this year, you talked about reinvigorating that relationship should we still think that you resumed growth with Nike.
Next year in 2024.
Thank you Tom Yeah, you know what listen our relationship with Nike is strong and I'd say, we're very aligned on the areas that we can complement each other in the marketplace and drive growth. So you've heard us talk about basketball kids and sneaker culture, especially with a young multicultural customer base that foot locker brings to the marketplace. So in Nike as well as <unk>.
All of our brand partners I think appreciate the investment that we're placing in the laser plan, which is simply raising our game as a retailer the ecosystem. So we're focused on leading with.
<unk> focus on customer insights and how we can uniquely drive growth together elevating the customers retail experience and you heard us talk about our store refreshes power community doors, all out Comping rest of the fleet. The third focus is elevating our digital and loyalty experiences and then of course, which branches commented on investment investing in our brand.
And specifically our basketball leadership position so the M. B a partnership the heart of Sneakers Homecourt you know in fact, I think Nike like other brand partners was pleased to hear about our partnership and they immediately partner with us to provide one of their premier MBA partners, Kevin Durant Carhartt Sneakers campaign. So so that said all of that said, we're still in the midst of a REIT.
At year end I S. T. Together, we're looking forward to 2024 and beyond stabilizing and returning to growth. We're in the early planning stages and I'd say, we'll be in a better position to get more specific as we report our fourth quarter results and talk about 'twenty four and beyond.
Alright. Thank you very much Marianne best of luck for the rest of the holiday season. Thank you.
Thank you. The next question is from Michael Binetti with Evercore ISI. Please go ahead.
Hey, guys. Thanks for taking my question.
That's on the comments on Thanksgiving, it's nice to hear.
I guess just.
As I kind of think back about some of the questions have been asked here on the Nike reset when that can become.
Become less of a headwind in some of the moving parts here. It seems that at least some of the comp improvement you've seen lately is coincidence you guys driving your promotional levers to the consumers responding it didn't sound like your answer to I think Alex before meant that you want us to believe inventories you're necessarily going to be high suggests promos will need to be elevated into early 'twenty four.
But you did lower your expectation for the very last week of the year. The 50 <unk> week in January Im just wondering.
How do you think about the pass.
To positive same store sales of the consensus models or thinking about for next year. If you think of the inventories.
We'll dictate lower promotions as we get into 2024 and the other moving parts that you've spoken about in Q&A.
Hi, Michael This is Mike from from our standpoint, I think as we as we look at Q4 again, we expect things to remain promotional and we've accounted for that within our within our guidance.
As you know within the 50 <unk> week specifically.
Really as we got closer to the fourth quarter here, we finalized our commercial planning.
And the update there is really a reflection of that.
I think what we're committing to today is that you know you will see inventory continue to progress down throughout this quarter and will be flat to slightly down which we feel is in a good position to operate heading into 2024.
And then as we think through 2024 expectations and how were approaching that will come back on that in a couple of months and update you.
Okay, and if I could ask one just near term on the <unk>.
The model in <unk>.
Fourth quarter. The gross margin can you speak a little bit to how we should think about the merch margin versus buying occupancy any any reason occupancy won't be similar to down 100 basis points on the negative comp in third quarter, maybe a little better with an extra week.
So we do get some occupancy benefit within gross margin due to the 50 <unk> week.
I think we.
I think the year over year change of $2 90 to 300.
From a merch margin standpoint.
Occupancy would be less of a pressure because of the 50 <unk> week is how I'd model it.
Thank you. The next question comes from Bob <unk> with Guggenheim. Please go ahead.
Hi.
<unk>.
I was just wondering if you could share a little bit more on the exclusive.
The roadmap from 15% to 25%.
Are there any early wins either this holiday or early next year that you could share with us around just the drivers for that exclusive increase thanks.
Okay.
Yeah, Bob that's a great question. So a couple of examples exiting the third quarter, we celebrated the 25th anniversary of the Nike tuned Air franchise, which was a global celebration and has long been an exclusive position for foot locker and some incredible consumer activation sell through and ultimately great commercial results out of that franchise.
As we head into the fourth quarter I can I can note the launch of the Puma Mellow III, which has also been our number one signature athlete for a second season straight here and then we're looking very much forward in December to the launch of the Adidas Anthony Edwards one.
One is it's called and so he has been playing incredibly well and we think is going to be a great ambassador on another weapon in the signature Arsenal portfolio. So those are some examples in the near term as it relates to holiday that we feel very very strongly about.
Great. Thank you very much.
Thank you. The next question is from Adrienne <unk> with Barclays. Please go ahead.
Hey, good morning, Paul Kearney on for Adrian Thanks for taking our question.
Can you speak to the margin performance of the overall business, excluding Champs clearly the occupancy deleverage as more champs producing merchandise margin pressure evenly across banners, but I guess bottom line is are you seeing an improvement in merchandise margin at core foot locker and then I have a quick follow up thanks.
Yeah.
I guess.
Hello. Good morning, this is Mike from from our standpoint.
Consider that as you look through the promotional activity that.
We've been taking on.
We are doing it pretty consistently.
Across banners I.
I think when we talked to a lot of the wins, we're seeing within our full price selling and a lot of the key items.
Lot of that is focused within the foot locker banner.
Okay.
Okay. Thanks, and a quick follow up was.
Thank you just mentioned that Youre seeing increased levels of vendor support.
Was that increased levels relative to last year is that both in footwear and apparel. Thank you very much.
Yes, Paul this is Frank so the comment I made was was in regards to inventory management and some of the relief and support that we're going to get at the end of the year to help with some of our aging and some of our lesser performing goods. So that's an increase both Tor ultra last year as well as our new point of view from 90 days ago. So we continue.
To flow in new and positive receipts, but also know that our partners are also along for the journey with us here to make sure that we end the year clean.
Thank you our last question today comes from Gabby Carbone with Deutsche Bank. Please go ahead.
Hi, Good morning. Thanks for taking my question I was just wondering if you can talk to any changes in store expansion plans beyond this year I understand this shift.
In cabs, but is there anything else that we should be thinking about beyond 'twenty three.
Well I mean, I guess I would say we would reiterate that are part of our laser plan is really re shifting the portfolio right investing in key banners and actually what I would say, mainly the big difference being footlocker, increasing the number of stores that we have off mall as a percent of total as well as our new formats of community and the <unk>.
Power doors, so or as well as how to play for kids foot locker. So so there is format shifts that we are still on the path on for our laser plan that early indications are that they are actually outperforming the rest of the comp the fleet, which is great. We also mentioned.
That we're doing some store refreshes right now that we're pulling forward as rapidly as we can to really increase just the overall store visual storytelling inside the store the shop ability and that's early days, but we're actually seeing that is quite positive and in the case of chance also realigning and really focusing on the active athlete. So we're doing kind of.
Many things in process in terms of refreshing the current store fleet as well as in continuing to introduce new formats consistent with a laser plan targets that we communicated before.
Okay, great. Thank you so much for that.
Thank you I would like to turn the call back to Mary Dillon for closing remarks.
Thank you for joining us today and I'd, just like to close by thanking our over 45000 foot locker employees in particular, our striper community as they get our stores websites and Dcs ready for the remainder of the holiday season, we look forward to updating you on our progress next quarter and happy holidays to everybody listening. Thank you.
This concludes today's conference. Thank you for participating you may now disconnect.