Q4 2023 Foot Locker Inc Earnings Call
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Operator: We thank you for joining us. Again, thank you for joining the Foot Locker conference call. The call will begin momentarily. Thank you. Thank you. Thank you. Thank you. Good morning, and welcome to Foot Locker's fourth quarter 2023 financial results conference. At this time, all participants are in a listen-only mode.
Operator: Later, we will conduct a question and answer session. This conference call may contain forward-looking statements that reflect management's current views of future events and financial performance. Management undertakes no obligation to update these forward-looking statements, which are based on many assumptions and factors, including the effects of global economic and market conditions, current Fee Fluctantuation, Customer preferences, 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 Any changes in such assumptions or factors could produce significantly different results, and actual results may differ materially from those contained And I'd like to turn the floor over to Robert Higginbotham. Sir Higginbotham, you may begin.
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Speaker Change: Ladies and gentlemen, thank you for joining today's foot locker conference call on the call will begin momentarily. Thank you for joining once again.
Speaker Change: Thank you for joining me foot locker conference call the call will begin here momentarily.
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Robert Higginbotham: Thank you, operator. Welcome, everyone, to Foot Locker Inc.'s fourth quarter earnings. We'll begin with prepared remarks by Mary Dillon, our President and Chief Executive Officer. Frank Bracken, our Executive Vice President and Chief Commercial Officer, will then give more detail on our results across our banners and geography. Then, Mike Vaughn, our Executive Vice President and Chief Financial Officer, will review our fourth quarter results in more detail, our 2024 outlook, and our updated financial target. Following our prepared remarks, Mary, Frank, and Mike will take your questions.
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Speaker Change: Good morning, and welcome to foot lockers fourth quarter 2023 financial results Conference call.
Speaker Change: At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session.
Mary N. Dillon: To note, today's call will reference certain non-GAAP measures. Reconciliation of GAAP to non-GAAP results is included in this morning's earnings release. We also have a slide presentation posted on our Investor Relations website with information that will be referenced during the call. Finally, for future planning purposes, we tentatively plan to release our first quarter 2024 results on Thursday, May 30. Now, I will turn it over to Mary.
Speaker Change: This conference call may contain forward looking statements that reflect management's current views of future events and financial performance.
Speaker Change: 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.
Speaker Change: Currency fluctuations.
Speaker Change: Customer preferences.
Speaker Change: Other risks and uncertainties described more fully in the company's press release and reports filed with the SEC.
Speaker Change: The most recently filed Form 10-K or Form 10-Q.
Speaker Change: Any changes in such assumptions or factors could produce significantly different results actual results may differ materially from those contained in the forward looking statements.
Mary N. Dillon: Thank you, Rob. I'll start with our fourth quarter results and then provide an update on the progress our team continues to make on the LASA plan. At a high level, we're entering 2024 with solid momentum. While the macro and retail environments remain dynamic, our lace-up initiatives are taking root, and we're seeing positive results across the business. We've demonstrated that when we focus our efforts and investment dollars in the right places, we can generate meaningful operational improvements and financial returns for our business. Our focus in 2024 is on sustaining this momentum and continuing to invest in key areas of the business as we lay the foundation for sustainable, profitable growth. Turning to our results, in the fourth quarter, sales trends came in above our expectations, with comps declining 0.7%, far better than our comp guidance of down 7-9%. Notably, this included a 210 basis points headwind from the repositioning of our Champ Sports banner. Non-GAAP earnings per share of $0.38 also came in ahead of our $0.26 to $0.36 guidance range.
Please note todays conference call is being recorded.
Speaker Change: I'll turn the floor over to Robert Higginbotham 711, you may begin.
Robert Higginbotham: Thank you operator, welcome everyone to foot Locker, Inc. 's fourth quarter earnings call, we'll begin with prepared remarks by Mary Dillon, President and Chief Executive Officer.
Robert Higginbotham: Frank Bracken, our executive Vice President and Chief Commercial Officer will then give more detail on our results across our banners and geographies.
Then Mike Barnes, our executive Vice President and Chief Financial Officer will review, our fourth quarter results in more detail, our 2020 for outlook and our updated financial targets.
Speaker Change: Following our prepared remarks, Mary Frank and Mike will take your questions.
Speaker Change: To note 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. We also have a slide presentation posted on our Investor Relations website with information that will be referenced during the call.
Speaker Change: Finally for future planning purposes, we tentatively plan to release, our first quarter 2024 results on Thursday may 30th.
Mary N. Dillon: Our top line trends accelerated meaningfully from the third quarter, particularly at our Foot Locker and Kids' Foot Locker banners. These gains were led by ongoing progress in our conversion rates as customers responded to our strong assortments and our digital and in-store initiatives. And in digital, we outperformed our plans in the fourth quarter, including double-digit gains in customer acquisitions. We also improved across multiple KPIs during the quarter, including higher net promoter scores across stores, digital, and fulfillment, rising engagement and consideration through our brand campaigns, digital momentum and online customer acquisition, and higher conversion levels. As we saw trends accelerate from the third quarter, we were pleased to see sequential improvement driven by both our full price and promotional businesses. Additionally, we achieved positive AURs in the quarter, even with elevated promotional levels, as customers responded to our compelling holiday assortments, especially in footwear.
Speaker Change: And now I will turn it over to Mary.
Mary: Thank you Rob I'll start with our fourth quarter results and then provide an update on the advances our team continues to make on the laser plan.
Mary: At a high level, we're entering 'twenty 'twenty four with solid momentum, while the macro and retail environments remain dynamic our lease up initiatives are taking root and we're seeing positive results across the business. We've demonstrated that when we focus our efforts and investment dollars in the right places, we can generate meaningful operational improvements.
Mary: And financial returns for our businesses.
Mary: Our focus in 2024 is on sustaining this momentum and continuing to invest in key areas of the business as we lay the foundation for sustainable profitable growth.
Turning to our results in the fourth quarter sales trends came in above our expectations with comps declining 0.7% far better than our comp guidance of down 7% to 9%, notably this included a 210 basis points headwind from the repositioning of our Champs Sports banner.
Mary N. Dillon: As our sales performed better than we expected, we proactively reinvested in selected markdowns, particularly in apparel, to end the year in a solid inventory position. This enabled us to achieve leaner inventory levels versus our expectations and sets us up nicely to begin gross margin recovery in 2024. Looking back on the holiday season, we were pleased to see the green shoots from our strategies multiply and gain momentum. And we're just getting started.
Mary: non-GAAP earnings per share of 38 cents also came in ahead of our 26 to 36 cents guidance range.
Mary: Our topline trends accelerated meaningfully from the third quarter, particularly at our foot locker and kids foot locker banners.
Mary: These gains were led by ongoing progress in our conversion rates as customers responded to our strong assortments and our digital and in store initiatives and in digital we outperformed our plans in the fourth quarter, including double digit gains in customer acquisition.
Mary N. Dillon: It's been over 18 months since I joined Foot Locker and a year since we announced our LASA plan. I'm impressed by how quickly this team and the plan have come together to start showing early results that will ultimately drive our long-term success. I am more confident than ever that Lace Up is the right plan to make Foot Locker a consumer-led, modern, omnichannel retailer at the heart of all things sneakers.
Mary: We also improved across multiple kpis during the quarter, including higher net promoter scores across stores digital and fulfillment rising engagement and consideration through our brand campaigns.
Mary N. Dillon: Now, a year into executing our LASA plan, we've made some meaningful progress in terms of our organization and our strategies, including first, we've begun to evolve our channel mix and improve our customers' digital journey. We've been pleased to see our digital channel build momentum through the year, exiting the fourth quarter with an eight point nine percent digital channel comp, excluding East Bay results from last year. The gains were led by double-digit increases in online customer acquisition and improved conversion. Our digital channel penetration now sits at nearly 20%, exiting the year up 180 basis points from a year ago, excluding East Bay.
Mary: Little momentum, an online customer acquisition and higher conversion levels.
Mary: As we saw trends accelerated from the third quarter, we were pleased to see the sequential improvement driven by both our full price and promotional businesses Encouragingly, we achieved positive AUR in the quarter, even with elevated promotional levels as customers responded to our compelling holiday assortment, especially in footwear.
Mary: As our sales performed better than we expected, we proactively reinvested into selected markdowns, particularly in apparel to end the year in a solid inventory position.
Mary N. Dillon: Second, we're deepening our relationship with customers through our brand building and loyalty efforts. During the year, we were pleased to globally launch our new brand platform, The Heart of Sneakers. Our first campaign, Hype for the Holidays, saw early increases in our already high levels of brand awareness and consideration. We kicked off our new FLX loyalty pilot launch in Canada with a positive response and are excited to roll it out to the remainder of North America later this year.
This enabled us to achieve leaner inventory levels versus your expectations and sets us up nicely to begin gross margin recovery in 2024.
Mary: Looking back on the holiday season, we were pleased to see the green shoots from our strategies multiply and gained momentum and we're just getting started it's been over 18 months since I joined foot locker than a year since we announced our laser plan I'm impressed by how quickly this team and the plan has come together to start showing early results.
Mary N. Dillon: Third, we're strengthening our basketball leadership. We announced last fall our exciting return as an official league marketing partner of the NBA in the U.S. We will have a loud and proud presence at key NBA moments this year. During NBA All-Star 2024, for example, we debuted, along with our partners at Nike and Jordan Brand, a breakthrough yearlong basketball program called The Clinic.
Mary: That will ultimately drive our long term success.
Mary: I am more confident than ever that lease up is the right plan to make footlocker consumer led modern omnichannel retailer at the heart of all things sneakers.
Mary N. Dillon: In our stores, we launched Home Court, our new basketball-focused experience, and are pleased with the initial results. Next, we continue to simplify our business. Our LASA plan is based on the framework of simplifying our business and investing to grow. In 2023, we wound down the Sidestep banner and at most our presence in the U.S. In addition, we converted select Asian markets to a licensing model.
Mary: Now a year into executing our laser plan, we've made some meaningful progress in terms of our organization and our strategies, including first we have begun to evolve our channel mix and improve our customers digital journey, we've been pleased to see our digital channel build momentum through the year exiting the fourth quarter with an 8.9% digital channel.
Mary N. Dillon: These actions position us into 2024 and beyond for greater focus on our core banners and regions. In addition, we've evolved our talent mix and organization structure. Since I joined, we've made swift progress on assembling our executive leadership team, a winning combination of seasoned footlocker and category veterans, along with new executives with deep functional expertise, all working together with a winning agile and enterprise mindset. We also made changes to the structure of our merchant and buying teams, as well as our finance organization, to ensure inventory accountability and enhance forecasts.
Mary: <unk> Com, excluding east Bay results from last year.
Mary: The gains were led by double digit increases in online customer acquisition and improving conversion.
Mary: Our digital channel penetration now sits at nearly 20% exiting the year up 180 basis points from a year ago, Excluding East Bay.
Mary: Second we're deepening our relationship with customers to our brand building and loyalty efforts. During the year. We were pleased to globally launch our new brand platform. The hardest sneakers. Our first campaign height for the holidays saw early increases in our already high levels of brand awareness and consideration.
Mary N. Dillon: These changes have elevated our approach with our brand partners as we lead with customer insights and collaborate with them on multi-year growth plans. We're already seeing these efforts build with the quality of our assortments headed into spring season and beyond. And finally, we're right-sizing our cost structure. We made progress against our $350 million cost savings program in 2023, achieving roughly $135 million last year alone.
Mary: We kicked off our new F. L X loyalty pilot launch in Canada to positive response and are excited to roll it out to the remainder of North America later this year.
Mary: Third we are strengthening our basketball leadership, we announced last fall our exciting return as an official league marketing partner of the M. B a in the U S. We will have a loud and proud presence at key NBA moments. During this year during NBA. All Star 2024. For example, we debuted along with our partners at Nike and Jordan brand.
Mary N. Dillon: And we expect to make ongoing progress against our savings plan here in 2024. As we look ahead to 2024, our focus is on sustaining our current momentum as we execute our strategies. We have seen that when we focus our efforts and our investment dollars in the right places, we're swiftly generating operational improvements and financial returns for our business. Therefore, 2024 will be another year of significant investment for us as we continue to emphasize strategic areas of improvement across digital, store experience, loyalty, and brand building. As we continue our investment focus this year, we remain focused on our ROIs and balancing the near-term needs of the business with longer-term objectives. We know this discipline is correct as we lay the foundation for accelerating performance into 2025 and 2026 and for long-term, sustainable, profitable growth. I'd like to now provide more details on what we achieved during the fourth quarter as part of our LACEP plan. As we've discussed, there are four strategic pillars to LACEP.
Mary: <unk> a breakthrough year long basketball program called the clinic in our stores, we launched Homecourt, our new basketball focused experience and are pleased with the initial results.
Mary: Next we continue to simplify our business our laser plan is based on the framework of simplifying our business and investing to grow in 2023, we wound down the sidestep banner and Atmos presence in the U S. In addition, we converted in select Asian markets to a licensing model.
Mary: These actions position us into 'twenty, 'twenty, four and beyond for greater focus on our core banners in regions.
Mary: Further we've evolved our talent mix and organization structure.
Mary: Since I joined we've made swift progress on assembling our executive leadership team, a winning combination of season foot locker and category veterans, along with new executives with deep functional expertise all working together with a winning agile and enterprise mindset.
Mary: Okay.
We also made changes to the structure of our merchant and buying teams as well as our finance organization to ensure inventory accountability and enhanced forecasting.
Mary N. Dillon: The first is to expand sneaker culture by serving more sneaker occasions, providing more choice, and driving greater distinction. Now, as we continue to execute on this imperative, a key priority for this management team has been strengthening the way we communicate and collaborate with our partners. For example, last month, we hosted our first ever partner summit, which was met with an enthusiastic response.
Mary: These changes have elevated our approach with our brand partners as we lead with customer insights and collaborate with them on multiyear growth plans.
Mary: We're already seeing these efforts build with the quality of our assortments headed into the spring season and beyond.
Mary N. Dillon: We shared insights about our LACIP progress and priorities, plans for enhanced data sharing designed to identify opportunities to mutually grow our businesses, and opportunities for multi-season marketing to help us collectively tell compelling brand stories across consumer segments. Our improved strategic planning is strengthening our brand partnerships, and as we build out our loyalty and CRM muscles, we look forward to what's ahead. We also recognize it's important to protect and win in our core, and that includes a healthy basketball business. That's why we are especially excited about strengthening our basketball leadership.
Mary: And finally, we're right sizing our cost structure, we made progress against our $350 million cost savings program in 2023, achieving roughly a $135 million last year alone and we expect to make ongoing progress against our savings plan here in 2024.
Mary: As we look ahead to 2024, our focus is on sustaining our current momentum as we execute our strategies.
Mary: We have seen that when we focus our efforts and our investment dollars in the right places where swiftly generating operational improvements and financial returns for our business.
Mary N. Dillon: We celebrated the NBA All-Star 2024 a few weeks ago with a 50,000-square-foot interactive pop-up Foot Locker home court experience in downtown Indianapolis. Along with partners including Nike, Jordan Brand, Adidas, Puma, Converse, and Under Armour, we hosted the largest basketball activation in our history. In total, exciting activations and events from the weekend earned Foot Locker and our partners over a billion media impressions. These included events with athletes including Victor Wambanyama and Paolo Banchero.
Mary: They therefore, 'twenty 'twenty four will be another year of significant investment for us as we continue to emphasize strategic areas of improvement across digital and store experience loyalty and brand building.
Mary: As we continue our investment focus this year, we remain focused on our rois and balancing the near term needs of the business with longer term objectives. We know this discipline is correct as we lay the foundation for accelerating performance into 2025, and 2026 and for long term sustainable profitable growth.
Mary N. Dillon: Additionally, we joined forces with Nike and Prime Video to host a private screening of Iannis and Tante Compos' documentary, Iannis: The Marvelous Journey. Additionally, we used the weekend to debut The Clinic, our first-of-its-kind year-long program with the Nike and Jordan brands that will enable fans to interact with us in new and innovative ways. The clinic will celebrate the culture of basketball through interactive activations, high-reach media, real-life basketball clinics, social media content, community events, and more, providing a unique way for fans to interact with these leading basketball brands. We kicked it off with our first NBA ad spot, starring Nike's Kevin Durant and Jordan Brand's Jason Tatum, which is now airing on broadcast and social media channels and will continue throughout the NBA season
Mary: I'd like to now provide more details on what we achieved during the fourth quarter as part of our laser plan as we discussed Theres four strategic pillars to lace up the first is to expand sneaker culture by serving more sneaker occasions, providing more choice and driving greater distinction now.
Now as we continue to execute on this imperative a key priority for this management team has been strengthening the way, we communicate and collaborate with our partners. For example last month, we hosted our first ever partner Summit, which was met with enthusiastic response, we shared insights about our laser progress and priorities plans for enhanced data sharing designed to I'd.
Mary: <unk> opportunities to mutually grow our businesses and opportunities for multi season marketing to help us collectively tell compelling brand stories across consumer segments.
Mary N. Dillon: And in our stores, we launched our multi-branded basketball-focused Foot Locker home court experience this year and ended 2023 with just under 30 locations in key markets. We're very pleased with the initial results, including sales uplift and higher NPS in the stores or on the home court. We'll accelerate our investment in this concept, targeting over 100 of these specialized experiences by 2026. Turning to our brands, let's start with our largest partner, Nike. We're excited to return to growth with them later this year as we focus on our core pillars of basketball, kids, and sneaker culture. In 2024, we'll look to celebrate key basketball moments with them through the clinic, as well as throughout the year, including Air Max Day later this month.
Mary: Our improved strategic planning is strengthening our brand partnerships.
Mary: And as we build out our loyalty and CRM muscles, we look forward to what's ahead.
Mary: We also recognize it's important to protect and win in our core and that includes a healthy basketball business. That's why we are especially excited about strengthening your basketball leadership.
Mary: We celebrated the NBA all star 2020 for a few weeks ago with a 50000 square foot interactive pop up foot locker home court experience in downtown Indianapolis.
Mary: Along with partners, including Nike, Jordan brand, Artigas, Puma converse and under them or we hosted the largest basketball activation in our history.
Mary N. Dillon: Turning to our brand diversification plans, sales from brands outside our biggest brand, Nike, increased to 40% in the fourth quarter of 23, up from 37% last year, as we grew our door counts with vendors such as Adidas, New Balance, On Running, Hoka, and Ugg. A few highlights from the fourth quarter include New Balance, which is now our fourth biggest brand, growing again in excess of 100% with strength across genders and franchises, the launch of our Anthony Edwards exclusive AE1 with Adidas, along with strong demand for on-trend terrestrials. Continued success with Puma and LaMelo's MB03 and momentum with us, particularly among our female consumers. Importantly, with the diversity of our brand mix now at our 40% target exiting the fourth quarter, we're planning for growth across all our partner segments in 2024 and beyond. Helping to drive distinction for Foot Locker, our exclusive penetration in the quarter was 15 percent, led by franchises such as Nike's Tuned Air, Puma, and LaMelo's MB03, and with Adidas, the introduction of the AE1.
Mary: In total exciting activations in events from the weekend earn foot locker and our partners over 1 billion media impressions.
Mary: These included events with athletes, including Victor one by Yamana and Paolo bench. Harold. Additionally, we joined forces with Nike and Prime video to host a private screening of the honest and Tom take home Bulls documentary on Us the marvelous journey.
Mary: We use the weekend to debut the clinic, our first of its kind year long program with the Nike and Jordan brand that will enable fans to interact with us in new and innovative ways.
Mary: The clinical celebrate the culture of basketball through interactive Activations high reach media real like basketball clinics, social media content community events and more providing unique way for fans to interact with these leading basketball brands, we kicked it off with our first NBA AD spot starring Nike's Kevin.
Mary: <unk> and Jordan brand's Jayson Tatum, which is now airing on broadcast and social media channels and will continue throughout the N b a season.
Mary N. Dillon: As we refine our buying and merchandising team strategies under our new team structure, we now think an exclusive penetration closer to 20 percent is appropriate for our business rather than our prior 2026 target of 25 percent. This reflects our belief that putting our shelf space and inventory dollars behind fewer but bigger exclusive franchises with powerful marketing and storytelling will better support us in expanding sneaker culture. The second pillar of LaceUp is Power Up the Portfolio, which means transforming our real estate footprint and creating clearer lanes for our banners. For Real Estate Transformation, we're thrilled to be launching our first Store of the Future next month in Willowbrook, New Jersey, with three more planned later this year.
Mary: And in our stores, we launched our multi branded basketball focus foot locker homecourt experience. This year and ended 2023 with just under 30 locations in key markets.
Mary: We're very pleased with the initial results, including sales uplift and higher NPS in the stores with a home court will accelerate our investment in this concept targeting over 100 of these specialized experience is by 2026.
Mary: Turning to our brands, let's start with our largest partner Nike. We're excited to return to growth with them. Later this year as we focus on our core pillars of basketball kids and sneaker culture in 'twenty 'twenty four will look to celebrate key basketball moments with them through the clinic as well as throughout the year, including Air Max Day later this month.
Mary N. Dillon: These immersive retail experiences bring to life a unique, differentiated store environment with powerful brand storytelling informed by our customer insights. Elements from these stores will be applied to our 2025 openings and beyond. While we're excited about our stores of the future, we know we need to focus on our stores of the now, and that means taking a closer look at our existing fleets. In the back half of 2023, we piloted nearly 100 refreshes of select Foot Locker and Kids' Foot Locker doors with enhanced merchandising, branding, and fixtures.
Turning to our brand diversification plans sales from brands outside our biggest brand Nike increased to 40% in the fourth quarter of 23 up from 37% last year as we grew our door counts with vendors such as anti dos new balance on running HOKA and <unk>.
Mary: A few highlights from the fourth quarter include new balance, which is now our fourth biggest brand grew again in excess of 100% with strength across genders and franchises.
Mary N. Dillon: Early results have been very encouraging on both a productivity and a margin basis. As a result, we're accelerating this refresh work to create a more consistent and elevated brand experience globally across approximately two-thirds of our global Foot Locker and Kids Foot Locker doors over the next few years. We also continue to make progress rolling out our new formats, which now represent 16 percent of our global footage, up from 11 percent last year and moving further towards our 2026 target of 20 percent. Additionally, we're making strides in our shift to off-mall. Penetration reached 39 percent of North America's square footage, up five points from a year ago, and closer to our goal of 50 percent by 2026. By simplifying and creating distinct lanes, our repositioning of Champ Sports continues to take hold.
Mary: The launch of our Anthony Edwards exclusive E. One was Audi dos.
Mary: Along with strong demand for on trend terrorists styles continued.
Mary: Continued success with Puma and La Mallows M B O three and momentum with particularly among our female consumers.
Mary: Importantly, with the diversity of our brand that's now at our 40% target exiting the fourth quarter, we're planning for growth across all our partner segments in 2024 and beyond.
Mary: Helping to drive distinction for foot locker are exclusive penetration in the quarter was 15% led by franchises such as Nike's tuned air Puma and lamellar <unk> M. B O. Three it was honored as the introduction of the AE one.
Mary: As we refine our buying and merchandising team strategies under our new team structure. We now think an exclusive penetration closer to 20% is appropriate for our business rather than our prior 2026 target of 25%.
Mary N. Dillon: Comps declined 10.4% in the fourth quarter, far better than the Q1 through Q3 trend, as our new emphasis on the active athlete consumer started to resonate. In the quarter, the team accelerated real estate efforts by further rationalizing the store base with roughly 70 Champ stores closures, while at the same time investing in the ongoing fleet through nearly 200 merchandising resets. Now headed into 2024, we're targeting roughly 40 store closures, including 15 in the first half. With a more distinct store experience and an even sharper view on our assortment buys into spring and summer, we remain optimistic about CHAMP's sports potential in the marketplace. Our third pillar is deep in our relationship with our customers, which is focused on building brand equity, reaching a broader set of customers, and enhancing our loyalty program and overall CRM capabilities. On Building Brand Equity, in November, we launch our exciting new global platform, The Heart of Sneakers. It's our uniting vision for the Foot Locker brand. Our first campaign, Hype for the Holidays, earned over two billion media impressions, and we're particularly excited to see views and engagement on our social media channels surpass our expectations.
Mary: This reflects our belief that putting our shelf space in inventory dollars behind fewer but bigger exclusive franchises with powerful marketing and storytelling will better support us in expanding sneaker culture.
Mary: The second pillar of lace up his power up the portfolio, which means transforming our real estate footprint and creating clear lanes for our banners.
Mary: On real estate transformation, we're thrilled to be launching our first store of the future next month and Willowbrook, New Jersey with three more planned later this year. These.
Mary: These immersive retail experiences bring to life, a unique differentiated store environment with powerful brand storytelling and informed by our customer insights elements from these stores will be applied towards 2025 openings and beyond.
Mary: While we're excited about our stores of the future. We know we need to focus on our stores of the now and that means taking a closer look at our existing fleet.
Mary: In the back half of 2023 we piloted nearly 100 refreshes of select foot locker and kids foot locker doors with enhanced merchandising branding and fixed stream early results have been very encouraging in both their productivity and margin basis.
Mary N. Dillon: 2023 made clear that by investing in our brand on top of the funnel marketing efforts, we're driving greater consideration, brand awareness, and customer acquisition at strong incremental returns. Underscoring this progress, our online customer acquisition again grew strong double digits in North America in the fourth quarter and helped fuel our digital outperformance. This work is giving us the confidence to increase our marketing and brand building spend in 2024. This will include a campaign focused on a more fashion-forward female customer launching next month and a new brand platform for our Champ Sports banner planned for later this year. Turning to loyalty, 21% of our sales in the fourth quarter were through our current loyalty program, similar to last year, ahead of us rolling out our enhanced program. We launched our FLX Cash Pilot Program in Canada last fall and have been pleased with results across a variety of KPIs, including higher engagement with first-time redeemers, higher AOVs, higher UPTs, and higher trip frequency.
Mary: As a result, we're accelerating this refresh work to create a more consistent and elevated brand experience globally across approximately two thirds of our global foot locker and kids foot locker doors over the next few years.
Mary: We also continue to make progress rolling out our new formats, which now represent 16% of our global footage up from 11% last year and moving further towards our Twenty-twenty sits target of 20%.
Mary: Additionally, we're making strides in our shift to off mall penetration reached 39% of North America square footage up five points from a year ago and closer to our goal of 50% by 2026.
Mary: We've been simplifying creating distinct lanes or repositioning of Champs sports continues to take hold comps declined 10, 4% in the fourth quarter far better than the Q1 through Q3 trend as our new emphasis on the Athens athlete consumer started to resonate in the quarter the team accelerated real estate efforts by.
Mary N. Dillon: We look forward to a wider rollout of the FLX cash program across North America later this year and globally in 2025 as we advance our goal of 50% loyalty penetration by 2026. And our final pillar is to be best-in-class Omni, which means improving our digital presence and better integrating our channels seamlessly. Our digital penetration in the quarter increased to 19.5 percent, up 180 basis points year-over-year, excluding East Bay.
Mary: Further rationalizing the store base with roughly 70 Champs stores closures, while at the same time investing in the ongoing fleet through nearly 200 merchandising resets.
Mary: Now headed into 2024, we're targeting roughly 40 store closures, including 15 in the first half.
Mary: With a more distinct store experience and an even sharper viewpoint on our assortment buys into spring and summer we remain optimistic about Champs sports potential in the marketplace.
Mary N. Dillon: On an enterprise level, global digital comps were up nearly 9 percent, excluding the impact of our East Bay exit last year. Our digital conversion continues to push towards new highs, and we continue to see room for improvement looking ahead. In 2024, our focus is on additional improvements in the customer experience, including enhanced search and discovery capabilities, product listing and detail pages, improved storytelling, and continued cart optimization improvements. We're also excited to roll out a new Foot Locker mobile app later this year, which will provide a smoother shopping experience, drive greater connectivity with stores, and create a seamless experience with our loyalty integration.
Mary: Our third pillar is deepen 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.
Mary: I'm building brand equity in November we launched our exciting new global platform. The heart of Sneakers is are uniting vision for the foot locker brand.
Mary: Our first campaign hyper the holidays earned over 2 billion media impressions, and we're particularly excited to see views in engagement on our social media channels surpass our expectations.
Mary: 2023 made clear that by investing in our brand and top of the funnel marketing efforts, we're driving greater consideration brand awareness and customer acquisition at strong incremental returns.
Mary N. Dillon: Our progress to date on our digital transformation means that we are on track to achieve about 25% e-commerce penetration by 2026. Changing the stores at Foot Locker, we know our stripers are essential to the overall experience with our NPS in stores already at 90. In the third quarter, we launched a global collection of new training and tools focused on driving advanced omnichannel selling behaviors designed to ensure that we meet our customers' needs every time. One quarter into the program, we've already seen improvements with in-store conversion levels, omnichannel orders, and AOVs. We're continuing to build on this program in the first quarter to further enhance the overall customer experience. To sum up, I'm confident we're evolving Foot Locker to become the go-to destination for discovering and buying all things sneakers globally.
Mary: Underscoring this progress our online customer acquisition again grew strong double digits in North America in the fourth quarter and helped fuel our digital outperformance.
Mary: This work has given us the confidence to increase our marketing and brand building spend in 2024. This will include a campaign focused on a more fashion forward female customer launching next month and a new brand platform for our Champs Sports banner planned for later this year.
Mary: Turning to loyalty, 21% of our sales in the fourth quarter were through our currently loyalty program similar to last year ahead of us rolling out our enhanced program.
Mary: We launched our F. L X cash pilot program in Canada last fall and have been pleased with results across a variety of kpis, including higher engagement with first time Redeemers higher Arab these higher U P Ts and higher trip frequency.
Franklin R. Bracken: Our strategies are continuing to point us in the right direction. As we continue our investment focus areas in 2024, we're on the path to driving sustainable and profitable long-term growth in shareholder value. Now, let me hand it over to Frank to provide more details on our category and banner performance. Thank you, Mary, and good morning, everyone.
Mary: We look forward to a wider rollout of the F. L X cash program across North America later, this year and globally in 2025, as we advance our goal of 50% loyalty penetration by 2026.
Franklin R. Bracken: Starting with fourth quarter performance by category, Footwear Comped was positive low single digits, an improvement from negative high single digits last quarter. We were encouraged to see the acceleration in our footwear comps driven by full price selling, especially in our North American business. Challenges persisted in our apparel business, comps down low double digits as we know we have work to do to stabilize the category. Finally, accessories comped flat. In footwear, we continue to see the culture of basketball connect with consumers through models like Nike's Air Force One and Dunk, the Air Jordan One, along with Puma's Lamello MB03 and the Adidas AE1.
Mary: And our final pillar is should be best in class, omni, which means improving our digital presence and better integrating our channels seamlessly.
Mary: Our digital penetration in the quarter increased to 19.5% up 180 basis points year over year, Excluding East Bay.
Mary: On an enterprise level global digital comps were up nearly 9%, excluding the impact of or East Bay exit last year. Our digital conversion continues to push for its new highs and we continue to see room for improvement looking out.
Mary: In 2024, our focus is on additional improvements in the customer experience, including enhanced search and discovery capabilities product listing a detailed pages improved storytelling and continued cart optimization improvements.
Franklin R. Bracken: And as we continue to invest in the basketball category through our MBA partnership and brand partner programming, like the clinic with the Nike and Jordan brands, we are confident that we will strengthen our position in basketball culture and continue to be the leading destination for all things basketball. Meanwhile, New Balance continued to connect with multiple consumer segments as we again doubled the business in the fourth quarter, marking nearly 200% growth on a two-year basis. This growth was driven by innovation and well-orchestrated marketing campaigns across the men's, women's, and kids' categories.
Mary: We're also excited to rollout a new foot locker mobile App later, this year, which will provide a smoother shopping experience drive greater connectivity with stores and create a seamless experience with their loyalty integration our progress to date on our digital transformation means that we are on track to achieve about 25% ecommerce penetration by 'twenty two.
Mary: 26.
Mary: Switching to stores at foot locker, we know our stripers are central to the overall experience with our M. P. S in stores already at 90.
Franklin R. Bracken: And we're excited about building on this momentum into 2024 as we grow our door base in women's and kids and continue to more deeply connect the New Balance brand with a new generation of sneaker mavens and fashion-forward consumers. We also continue to see momentum with the Adidas Terrace trend. We saw strong sell-through of key silhouettes, such as the Samba, Gazelle, and Campus, as our inventory and in-stock positions improved throughout the quarter.
Mary: In the third quarter, we launched a global collection of new training and tools focus on driving advance army selling behaviors designed to ensure that we meet our customers' needs every time one quarter into the program, we've already seen improvements with in store conversion levels Omnichannel orders in <unk>.
Mary: We're continuing to build on this program in the first quarter to further enhance the overall customer experience.
Mary: To sum up I'm confident we're evolving foot locker to become the go to destination for discovering and buying all things sneakers globally. Our strategies are continuing to point us in the right direction as we continue our investment focus areas in 2024, we're on the path towards driving sustainable and profitable long term growth and shareholder.
Franklin R. Bracken: Our investment in these Adidas franchises will continue to drive growth into 2024 as we elevate the in-store presentation and connect with consumers through our spring trend campaign and our back to school message. On the lifestyle front, UGG played a meaningful role in our business this holiday. With must-have styles such as the Tasman and Ultra Mini, UGG was one of the most in-demand footwear brands, especially for our fashion-forward expressionists, led by the teen girl consumer.
Mary: Now, let me hand, it over to Frank to provide more details on our category and banner performance.
Franklin R. Bracken: We also continue to see consumers gravitate towards new ideas in the running category, led by brands such as On, Hoka, and Ace. We will continue to scale these brands through door expansion and allocation increases, as well as connecting them to our consumers through integrated marketing campaigns. And we are especially pleased to introduce the HOKA brand to kids earlier this quarter at our Kids Foot Locker and Foot Locker banners.
Mary: Yeah.
Franklin R. Bracken: Thank you Mary and good morning, everyone, starting with fourth quarter performance by category footwear, Comped positive low single digits, an improvement from negative high single digits last quarter.
Franklin R. Bracken: We were encouraged to see the acceleration in our footwear comps driven by full price selling, especially in our North American business.
Franklin R. Bracken: Challenges persisted in our apparel business with comps down low double digits as we know we have work to do to stabilize the category.
Franklin R. Bracken: We are very confident that we will continue to make progress as a best-in-class retailer for all of our brand partners. Our first-of-its-kind Brand Partner Summit in February enabled us to showcase our new and coming capabilities and align on 2024 go-to-market priorities. And the positive feedback we received on our store environments, our digital capabilities, and partner marketing was very supportive of our plan. Switching to channel performance, comparable sales in our source decreased 2%.
Franklin R. Bracken: Finally accessories comped flattish.
Franklin R. Bracken: In footwear, we continue to see the culture of basketball connect with consumers through models like Nike's Air Force, one and done the air Jordan one.
Franklin R. Bracken: Along with Puma Mellow M B O three and the Audi E. One.
And as we continue to invest in the basketball category through our NBA partnership and brand partner program I mean, like the clinic with the Nike and Jordan brands. We are confident that we will strengthen our position in basketball culture and continue to be the leading destination for all things basketball.
Franklin R. Bracken: While store traffic remained down year over year, we were pleased to see steady improvements in our conversion levels driven by our updated service behaviors. Average ticket also saw gains as we increased our AURs while UPTs were down slightly. Digital comps increased 5% or nearly 9% excluding East Bay, the online-only banner we exited late in 2022. As Mary mentioned, digital penetration during the quarter increased to 19.5% of sales, up 180 basis points year-on-year, excluding East Bay. Now for a performance by Banner and Geography.
Franklin R. Bracken: Meanwhile, new balance continued connect with multiple consumer segments as we again doubled the business in the fourth quarter, marking nearly 200% growth on a two year basis.
Franklin R. Bracken: This growth was driven by innovation and well orchestrated marketing campaigns across the mens womens and kids categories.
Franklin R. Bracken: And we're excited about building on this momentum into <unk> 'twenty 'twenty four as we grow our door base in women's and kids and continue to more deeply connect a new balanced brand with a new generation of sneaker mavens and fashion forward consumers.
Franklin R. Bracken: We also continued to see momentum with the artigas terrorists trend.
Franklin R. Bracken: In North America, overall comps were down 0.7%, including a 310 basis point negative impact from the Champ Sports repositioning effort. Our North American Foot Locker and Kids' Foot Locker banners strengthened in the holiday quarter as both stores and online benefited from improved merchandising, as well as our enhanced marketing and digital efforts. At Foot Locker North America, comps rose by 4.8%, driven by a strengthening in our core base business compared to the third quarter. Kids' Foot Locker comps were up 6.9%, led by a strong holiday season in November and December in both stores and online.
Franklin R. Bracken: We saw strong sell throughs of key silhouettes, such as the Samba Gazelle in campus as our inventory and in stock positions improved throughout the quarter.
Franklin R. Bracken: Our investment in these audio das franchises will continue to drive growth into 2024, as we elevate the in store presentation and connect with consumers and our spring trend campaign and our back to school messaging.
Franklin R. Bracken: On the lifestyle front log played a meaningful role in our business. This holiday.
Franklin R. Bracken: With must have styles, such as the Tasman and ultra many.
Franklin R. Bracken: Doug was one of the most in demand footwear brands, especially for our fashion forward expression is led by the teen girl consumer.
Franklin R. Bracken: We also continue to see consumers gravitate towards new ideas in the running category led by brands such as on HOKA and <unk>. We will continue to scale. These brands through door expansion and allocation increases as well as connecting them to our consumers through integrated marketing campaigns.
Franklin R. Bracken: At Champ Sports, comps were down 10.4% as repositioning efforts drove moderating comp declines versus the Q1 to Q3 trend. Towards the end of the quarter, we accelerated some store merchandising reset activity, further enhancing the brand's reimagining positioning as the home of sports style, where head-to-toe looks, sneaker essentials, and performance are fused to serve the sport-inspired consumer
Franklin R. Bracken: And we are especially pleased to introduce the HOKA brand to kids earlier, this quarter and our kids foot locker and foot locker banners.
Franklin R. Bracken: We are very confident we will continue to make progress as a best in class retailer to all of our brand partners.
Franklin R. Bracken: We executed roughly 70 Champs Sports store closures in addition to nearly 200 merchandising resets during the quarter. With our Champs Sports store fleet rationalized, an improved product on order, and a new brand platform launching later this year. We are optimistic we will continue to stabilize the banner and further drive the new consumer positioning in 2024. Moving to WSS, the banner saw comps down 6.1% in Q4, as the macro environment continued to weigh on the WSS consumer.
Franklin R. Bracken: Our first of its kind brand partner summit in February enabled us to showcase our new incoming capabilities and our lineup in 2024 go to market priorities.
Franklin R. Bracken: And the positive feedback we received on our store environments, our digital capabilities and partner marketing was very validating of our plans.
Franklin R. Bracken: Switching to channel performance comparable sales in our stores decreased 2%.
Franklin R. Bracken: While store traffic remained down year over year, we were pleased to see steady improvements in our conversion levels driven by our updated service behaviors.
Franklin R. Bracken: Average ticket also saw gains as we increased our aur's, while <unk> were down slightly.
Franklin R. Bracken: We were pleased to open 28 new locations in 2023, including 12 in the fourth quarter. And we've been thrilled with the recent progress that WSS is making under its new leadership team. That said, it's clear 2023 proved challenging for the WSS banner with full-year comps down 6.8% as its core customer base felt the impacts of a tough macro and higher inflation most acutely. As we navigate the economic environment and its impacts on the WSS consumer, we believe it's appropriate in the near term to temporarily reduce capital for our new store opening. As a result, our revised plans for 2024 include 20 new doors at WSS.
Franklin R. Bracken: Digital comps increased 5% or nearly 9% excluding east Bay the online only banner, we exited late in 2022.
Franklin R. Bracken: As Mary mentioned digital penetration during the quarter increased to 19, 5% of sales.
Franklin R. Bracken: 180 basis points year on year, excluding East Bay.
Franklin R. Bracken: Now for performance by banner and geography.
In North America overall comps were down 0.7%, including a 310 basis point negative impact from the Champs sports repositioning efforts.
Franklin R. Bracken: Our North America foot locker and kids foot locker banners strengthened in the holiday quarter as both stores and online benefited from improved merchandising as well as our enhanced marketing and digital efforts.
Franklin R. Bracken: While we still very much believe in opportunities for the banner over the long term and serving the fastest growing consumer segment in the U.S., we believe this is a prudent approach in the near term. Turning to Europe, comps for our Foot Locker banner were up 0.3%. However, the environment remained challenging and promotionally driven across many parts of Europe.
Franklin R. Bracken: At foot locker, North America comps rose by four 8% driven by a strengthening in our core base business compared to the third quarter.
Franklin R. Bracken: Kids foot locker comps were up six 9% led by a strong holiday season in November and December in both stores and online.
Franklin R. Bracken: The team is focused on improving the in-store experience through refreshes and an edited assortment this spring. They also continue to drive conversion improvements through new service behaviors and improved allocation methods. In Asia-Pacific, costs were down 0.2 percent. The Foot Locker banner saw comps up 0.6%, reflecting a promotional Australian marketplace. And finally, at Atmos, comps were down 1.8%, in part reflecting Japanese consumer pressure from a weaker yet. I'll now hand the call over to Mike to go over the financials and guidance in more detail. Thank you, Frank, and good morning, everyone.
Franklin R. Bracken: At Champs sports comps were down 10, 4%.
Franklin R. Bracken: As repositioning efforts drove moderating comp declines versus the Q1 to Q3 trend.
Franklin R. Bracken: Towards the end of the quarter, we accelerated some store merchandising reset activity further enhancing the brand's re imagining positioning as the home of sports style.
Franklin R. Bracken: We're head to toe looks sneaker essentials and performance are fused to serve the sport inspired consumer.
Franklin R. Bracken: We executed roughly 70 Champs sports store closures. In addition to nearly 200 merchandising resets during the quarter.
Franklin R. Bracken: With our Champs sports store fleet, rationalized and improve product on order and a new brand platform launching later this year.
Franklin R. Bracken: We are optimistic we will continue to stabilize the banner and further drive the new consumer positioning in 2024.
Michael Baughn: In the fourth quarter, starting with revenue, total sales rose 2%, including an approximate 100 million revenue contribution from the 53rd. Comps declined 0.7%, substantially better than our expectation of declines in the 7-9%. As Mary noted, the Champs sports repositioning represented a 210-basis point comp headwind. By month, November was positive in the low single digits. December was down slightly, and January trends moderated to down mid-single digits, including some impacts of inclement weather earlier in the month. Moving to margins, gross margin for the quarter declined 350 basis points to 26.6%. Merchandise margins fell by 400 basis points, driven by higher promotions to ensure we ended the year with appropriate levels of investment. Occupancy as a percent of sales leveraged 50 basis points on the higher sales volumes, including the 53rd.
Franklin R. Bracken: Okay.
Franklin R. Bracken: Moving to Ws says the banner salt comps down six 1% in Q4 as the macro environment continued to weigh on the WSI is consumer.
Franklin R. Bracken: We were pleased to open 28, new locations in 2023, including 12 in the fourth quarter.
Franklin R. Bracken: And we've been thrilled with the recent progress that WNS is making under its new leadership team.
Franklin R. Bracken: That said, it's clear 2023 proved challenging for the WSI banner with full year comps down six 8% as its core customer base felt the impacts of a tough macro and higher inflation most acutely.
Franklin R. Bracken: As we navigate the economic environment and its impacts on the WSI is consumer.
Franklin R. Bracken: We believe it's appropriate in the near term to temporarily reduce capital for our new store openings.
Franklin R. Bracken: As a result, our revised plans for 2024 includes 20, new doors at WSI.
While we still very much believe in opportunities for the banner longer term and serving the fastest growing consumer segment in the U S. We believe this is a prudent approach in the near term.
Michael Baughn: Approximately $10 million of gross margin savings from our cost optimization programs also flowed through our cost of goods line. For the fourth quarter, our SG&A rate came in at 22.4%. Representing D leverage of 10 basis points with savings from the cost optimization program of approximately 10 million dollars more than offset by inflation and wage and technology investment. Collectively, our cost optimization program generated total savings of approximately $20 million in the fourth quarter. Finally, non-GAAP earnings came in at $0.38, above the high end of our $0.26 to $0.36 outlay. The quarter also included a 12-cent EPS contribution from the 53rd. Turning to the balance sheet, we ended the quarter with $297 million of cash and total debt of $447 million. At quarter end, inventories were down 8.2% versus last year.
Franklin R. Bracken: Turning to Europe comps for our foot locker banner were up 0.3% the.
Franklin R. Bracken: The environment remained challenging and promotional driven across many parts of Europe.
Franklin R. Bracken: The team is focused on improving the in store experience through refreshes and an edited assortment. This spring.
Franklin R. Bracken: They also continue to drive conversion improvements through new service behaviors and improved allocation methods.
Franklin R. Bracken: In Asia Pacific comps were down 0.2%.
Franklin R. Bracken: The foot locker banner sock comps up 0.6%, reflecting a promotional Australian marketplace.
Franklin R. Bracken: And finally at Atmos comps were down one 8% in part, reflecting Japanese consumer pressure from a weaker yen.
Franklin R. Bracken: I'll now hand, the call over to Mike to go over the financials and guidance in more detail.
Franklin R. Bracken: Yeah.
Thank you Frank and good morning, everyone.
Mike: In the fourth quarter, starting with revenue total sales rose, 2%, including an approximate $100 million revenue contribution from the 50 <unk> week.
Mike: Comps declined 0.7% substantially better than our expectation of declines in the 7% to 9% range.
Mike: As Mary noted the Champs sports repositioning represented a 210 basis point comp headwind.
Michael Baughn: Far better than the 10.5% increase at the start of the quarter and our guidance of flat to down slightly year-over-year, putting us in a good position to begin margin recovery in 2020. Lastly, on the quarter, I want to point you to today's announcement on our $478 million non-cash charge on our minority investment portfolio, which flows through our other expense line but is excluded from our non-GAAP earnings calculation. As we did our annual impairment review, we felt it appropriate to reassess the value of our portfolio of minority investors and thus took the charge highlighted in today's release.
Mike: By month November was positive low single digits December was down slightly.
Mike: And January trends moderated to down mid single digits, including some impacts of inclement weather earlier in the month.
Mike: Moving to margins gross margin for the quarter declined 350 basis points to 26, 6%.
Mike: Merchandize margins fell by 400 basis points, driven by higher promotions to ensure we ended the year with appropriate levels of inventory.
Mike: Occupancy as a percentage of sales leveraged 50 basis points on the higher sales volumes, including the 50 <unk> week.
Mike: Approximately $10 million of gross margin savings from our cost optimization programs also flowed through our cost of goods line.
Michael Baughn: Moving on to our 2024 outlook, at a high level, we expect a return to sales growth and gross margin expansion this year. But we anticipate another year of significant investment as we work to build on our current momentum. For the year, we are issuing guidance for non-GAAP EPS of $1.50 to $1.70, representing growth of approximately 15% to 30% from the $1.30 we reported in 2023 on a 52-week basis. This guidance includes a non-recurring charge of 10 cents from the revaluation of our outstanding FLX points in North America as we roll out our broader Cash for Points program this year. This outlook includes the following drivers.
Mike: For the fourth quarter, our SG&A rate came in at 22, 4%.
Mike: Representing deleverage of 10 basis points with savings from the cost optimization program of approximately $10 million more than offset by inflation and wage and technology investments.
Mike: Collectively our cost optimization program generated total savings of approximately $20 million within the fourth quarter.
Mike: Finally, non-GAAP earnings came in at 38 cents above the high end of our 26 to 36 on to outlook.
The quarter also included a 12 cents EPS contribution from the 50 <unk> week.
Mike: Turning to the balance sheet, we ended the quarter with $297 million of cash and total debt of $447 million.
Mike: At quarter end inventories were down eight 2% versus last year.
Michael Baughn: We expect comps of plus one to plus three percent with comps flat to down low single digits in the first quarter and building momentum as we move through the year. This will be driven by several factors, including the refresh activity in the stores and returns in our ongoing brand building and marketing efforts. The launch of our new mobile app, the rollout of our new loyalty program, and the return to growth with Nike. Overall, our store count will be down approximately 4% in 2024, with square footage down approximately 1%. We expect to add roughly 35 new stores in the year and to close approximately 150.
Mike: <unk> better than the 10, 5% increase at the start of the quarter and our guidance of flat to down slightly year over year, putting us in a good position to begin margin recovery in 2024.
Speaker Change: Lastly on the quarter I want to point, you to today's announcements on our $478 million noncash.
Speaker Change: Noncash charge on our minority investment portfolio, which flows through our other expense line, but is excluded from our non-GAAP earnings calculation.
Speaker Change: And as we did our annual impairment review, we felt it appropriate to reassess the value of our portfolio of minority investments and thus took the charge highlighted in todays release.
Michael Baughn: Including an approximate 1 point drag from lapping the extra week, total sales for 2024 are expected to be down 1% to up 1%. Turning to our gross margins, we expect gross margin expansion of 210 to 230 basis points to a rate of 29.8 to 30.0 percent for the year, as we begin to recapture the gross margin compression for 2023 due to elevated promotion. I would note a few important dynamics to our gross margin expectations for the year. First, while our inventory has been brought down to healthy levels, it will take some time to transition consumer expectations away from those higher promotional levels. We therefore expect to see ongoing merge margin pressure through the first quarter, but it should improve as we move through the year.
Speaker Change: Moving onto our 2020 for outlook.
Speaker Change: At a high level, we expect to return to sales growth and gross margin expansion. This year, but we anticipate another year of significant investment as we work to build on our current momentum.
Speaker Change: For the year, we are issuing guidance for non-GAAP EPS of $1 50 to $1 70, representing growth of approximately 15% to 30% from $1 30, we reported in 2023 on a 52 week basis.
Speaker Change: This guidance includes a nonrecurring charge of 10 songs from the revaluation of our outstanding F. L X points in North America, as we rollout our broader cash for points program. This year.
Speaker Change: This outlook Embeds the following drivers.
Speaker Change: We expect comps of plus one to plus 3% with comps flat to down low single digits in the first quarter and building momentum as we move through the year.
Michael Baughn: Second, the rollout of our enhanced loyalty program will impact our gross margins in the following ways. During the second quarter, as we roll out our Enhanced FLX Loyalty Program, we will take an approximate $15 million charge to convert our existing member points to the new program. This new program provides our members with more value for the points that they have already earned.
Speaker Change: This will be driven by several factors, including the refresh activity in the stores.
Speaker Change: Returns on our ongoing brand building and marketing efforts.
Speaker Change: The launch of our new mobile App.
Speaker Change: The rollout of our new loyalty program and have returned to growth with Nike.
Speaker Change: Overall, our store count will be down approximately 4% in 2024 with square footage down approximately 1%.
Speaker Change: We expect to add roughly 35, new stores in the year and to close approximately 140.
Michael Baughn: Next, as the new loyalty program ramps up in the back half, we expect to see a modest gross margin drag as points are initially accrued, though we anticipate the program to be gross margin rate neutral and gross profit dollar accretive over time. On SG&A, we expect D leverage between 170 and 190 basis points, to a rate of 24.4% to 24.6%, driven by our ongoing investments in technology, digital, and brand building, as well as a return to more normalized levels of incentive compensation. Our plans include ongoing progress in our cost optimization, including an additional $80 million in cost savings targeted this year. Switching to cash flows, our capital expenditure outlook for the year is approximately $345 million. Slightly above the $335 million capex average for 2024-2026 we discussed in early 2021.
Speaker Change: Including an approximate one point drag from lapping the extra week total sales for 2024 are expected to be down 1% to up 1%.
Speaker Change: Turning to our gross margins, we expect gross margin expansion of 210 to 230 basis points to a rate of 29, 8% to 30.0% for the year as we begin to recapture the gross margin compression for 2023 due to elevated promotions.
Speaker Change: I would note a few important dynamics to our gross margin expectations for the year.
Speaker Change: First while our inventory has been brought down to healthy levels. It will take some time to transition consumer expectations away from those higher promotional levels.
Speaker Change: We therefore expect to see ongoing merch margin pressure through the first quarter, but improving as we move through the year.
Speaker Change: Second the rollout of our enhanced loyalty program will impact our gross margins in the following ways during the second quarter as we rollout our enhanced F. L X loyalty program, we will take an approximate $15 million charge to convert our existing member points to a new program.
Michael Baughn: This is driven by our plans to pull forward select investments, especially on the store experience front. While annual CAPEX figures may vary in the next few years, we are still committed to that cumulative $1 billion figure through 2026 and would still target that $335 million average. Further, we also project working capital to be roughly neutral for the year.
Speaker Change: This new program provides our members with more value for the points that they have already earned.
Speaker Change: Next as the new loyalty program ramps in the back half, we expect to see a modest gross margin drag as points are initially accrued, but we anticipate the program to be gross margin rate neutral and gross profit dollar accretive overtime.
Speaker Change: On SG&A, we expect deleverage between 170, and 190 basis points to a rate of 24, 4% to 24, 6% driven by our ongoing investments in technology digital and brand building as well as a return to more normalized levels of incentive compensation.
Michael Baughn: Looking at the quarters, let me also provide some additional context for our expectations on the shape of the year. For the first quarter, we expect comps of flat to down low single digits with momentum building through the year to reach plus 1% to plus 3% for the year. On gross margin, we expect pressure to continue into the first quarter as we strategically employ markdowns to help transition our consumer, but we expect gross margins to improve as the year progresses. Given those drivers, we expect first quarter EPS to represent approximately 5% to 10% of annual earnings. For the second quarter, we expect break-even earnings.
Speaker Change: <unk>.
Speaker Change: Our plans include ongoing progress in our cost optimization plans, including an additional $80 million in cost savings targeted this year.
Speaker Change: Switching to cash flows our capital expenditure outlook for the year is approximately $345 million.
Speaker Change: Slightly above the $335 million Capex average for 2024 through 2026, we discussed in early 2023.
Speaker Change: This is driven by our plans to pull forward select investments, especially on the store experience front.
Michael Baughn: Given the $15 million or 10 cent charge from our initial FLX loyalty transition that will fall into the second quarter, having a compressed impact on earnings within that period, as well as a tax rate significantly above the annual rate, similar to last year, given the lower level of income within the quarter. As noted previously, we expect our comp trends to improve from Q1's trend as the year progresses and as our initiatives around store refresh, digital, including our new mobile app, loyalty, and our return to Nike drive improved returns and margins, especially within the back half of the year. Looking beyond 2024, we wanted to take the time to update investors on how we are thinking about the longer-term financial profile of our business given the lower starting point exiting 2020. It's important to note that our 2026 operational targets from LACEP remain the same.
Speaker Change: While annual Capex figures may vary in the next few years, we are still committed to that cumulative 1 billion figure through 2026 and would still target that $335 million average.
Speaker Change: Further we also project working capital to be roughly neutral for the year.
Speaker Change: Looking at the quarters, let me also provide some additional context for our expectations on the shape of the year.
Speaker Change: For the first quarter, we expect comps of flat to down low single digits with momentum building through the year to reach plus 1% to plus 3% for the year.
Speaker Change: On gross margin, we expect pressure to continue into the first quarter as we strategically employ markdowns to help transition our consumer, but we expect gross margins to improve as the year progresses.
Speaker Change: Given those drivers, we expect first quarter EPS to represent approximately 5% to 10% of annual earnings.
Speaker Change: For the second quarter, we expect approximately breakeven earnings given the $15 million or Tencent charge from our initial F. L X loyalty transition that will fall into the second quarter, having a compressed impact on earnings was in that period.
Michael Baughn: We still target 40% plus penetration in our business beyond our top brand Nike by 2020. Digital at 25% of our mix, building exclusive penetration towards 20% down from our prior target of 25%. Loyalty at over 50% of sales by 2026 and 70% of sales longer term. Off mall at 50% of our North American square footage, and New Concepts at 20% of global square footage.
Speaker Change: As well as the tax rate significantly above the annual rates similar to last year, given the lower level of income within the quarter.
Speaker Change: As noted previously we expect our comp trends to improve from Q1's trend as the year progresses, and as our initiatives around store refresh digital including our new mobile App loyalty and a return to Nike to drive improved returns and margins, especially within the back half of the year.
Michael Baughn: As we focus more on the store of the future, as well as the refresh program in 2024, this means footage growth from our larger power and community doors is likely to be pushed out towards 2025 and 2026 as we focus on our core. As a result, we expect to build towards our prior plus five to plus six percent top line target into 2026 and beyond. On margins, we still see our original 8.5% to 9% operating margin target as achievable, but the timing of reaching that goal being pushed out by two years to 2028. Turning to capital allocation, as noted, we anticipate making additional investments in 2024 as we work to build on our current momentum. While we are entering the year positioned for recovery, we are currently prioritizing a rebuild in our cash position to ensure we maintain ample flexibility to support the continued execution of our LASA plan. As such, we are not resuming the dividend at this time.
Speaker Change: Looking beyond 2024, we wanted to take the time to update investors on how we are thinking about the longer term financial profile of our business given the lower starting point exiting 2023.
Speaker Change: It's important to note that our 2026 operational targets from lease ups remain the same.
Speaker Change: We still target, 40% plus penetration in our business beyond our top brand Nike by 2026.
Speaker Change: Digital at 25% of our mix.
Speaker Change: Building exclusive penetration towards 20% down from our prior target of 25%.
Speaker Change: Loyalty at over 50% of sales by 2026, and 70% of sales longer term.
Speaker Change: Off mall at 50% of our North American square footage.
Speaker Change: And new concepts at 20% of global square footage.
Speaker Change: As we focus more on the store of the future as well as the refresh program. In 2024. This means footage growth from our larger power and community doors is likely to be pushed out towards 2025 and 2026 as we focus on our core fleet.
Speaker Change: As a result, we expect to build towards our prior plus five to plus 6% topline target into 2026 and beyond.
Michael Baughn: We will reevaluate our returns to shareholders as we move through the year and have greater visibility on our sales and margin recovery and the trajectory of free cash flow into 2025. Returning capital to shareholders remains an important priority, and we continue to believe that the business can support and sustain a dividend at a competitive 30 to 35% payout over time. By leaning into our strategic investments in the near term, we will be better positioned to realize the longer-term earnings potential of our business. With that, Operator, please open the call for questions. Ladies and gentlemen, we'll now begin the question and answer session. If you would like to register a question, please press star and the number one on your telephone keypad. If your question has been answered or you'd like to remove yourself from the queue, please press star and two. If you are using a speaker phone, we do ask that you please lift your handset to allow for optimal sound quality.
Speaker Change: On margins, we still see our original eight 5% to 9% operating margin targets as achievable, but with a timing of reaching that goal being pushed out by two years to 2028.
Speaker Change: Turning to capital allocation as noted we anticipate making additional investments in 2024 as we work to build on our current momentum.
Speaker Change: While we are entering the year positioned for a recovery. We are currently prioritizing a rebuilding our cash position to ensure we maintain ample flexibility to support the continued execution of our lease up plan.
Speaker Change: As such we are not resuming a dividend at this time.
Speaker Change: We will reevaluate our returns to shareholders as we move through the year and have greater visibility on our sales and margin recovery and the trajectory of free cash flow into 2025 and beyond.
Speaker Change: Returning capital to shareholders remains an important priority and we continue to believe that the business can support and sustain a dividend at a competitive 30% to 35% payout over time.
Operator: Also, we do ask that you limit yourselves to one question with one follow-up. Our first question today comes from Bob Drbul from Guggenheim. Please go ahead with your question. Hi, good morning.
Speaker Change: By leaning into our strategic investments in the near term, we will be better positioned to realize the longer term earnings potential of our business.
Mary N. Dillon: So the question that I have really is, when you look at the 24 expectations, I think the sales guidance is probably a little better than we anticipated. Gross margins are definitely a little better. When you look at the expense rate as 24 progresses, just if you could give us a little more color around more of those expenses and the need and sort of the level of investment that you're making, I think that would be helpful. Thank you, Rob.
Speaker Change: With that operator, please open the call for questions.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session.
Speaker Change: I would like to register your question. Please press star and the number one on your telephone keypad.
Speaker Change: <unk> has been answered it makes them yourself.
Speaker Change: From the queue. Please press star two.
Speaker Change: If you are using a speaker phone. Please thank you.
Speaker Change: Handset to allow optimal sound quality.
Speaker Change: Also we do ask you limit yourself to one question with one follow up.
Speaker Change: Our first question today comes from Bob <unk> from Guggenheim. Please go ahead with your question.
Bob: Hi, good morning.
Mary N. Dillon: I'll just start at the high level and just say as we look at 24, it's an important year that I think accomplishes a couple things. We see strong results happening with our LASA plan, and we are committed to continuing to invest in those strategies. The green shoots we're seeing encourage us that this is the right path for us and to really drive us in terms of being a really sustainable long-term great omnichannel retailer, so those strategies are super important.
Bob: So the question that I have really is when you look at the 24 expectations.
Bob: I think the sales the sales guidance is probably a little better than we anticipated gross margins are definitely a little better when you look at the expense rate.
As 24 progresses.
Bob: If you could give us a little more color around more of those expenses in <unk>.
Michael Baughn: We also in 24, as you know, we are showing top line improvement, comp growth, as well as EBIT margin expansion. So we believe it's the right path to continue to move us on the path to achieve our LASA plan goals. And so that's how we've constructed the plan and feel good about it. And Mike, would you like to add more? Yeah, Bob. Good morning. This is Mike.
Bob: The need in sort of a level of <unk>.
Bob: Investment that you're making I think that would be helpful.
Speaker Change: Thank you, Brian I'll, just start high level and just say as we look at 'twenty four it's an important year that I think accomplishes a couple of things we see strong results happening with our latest plan and we are committed to continuing to invest in those trends and the green shoots we're seeing encourage us that this was the right path for us.
Michael Baughn: As you think through the pace of investments for us in 2024, the expense component does somewhat over index in the first half of the year, obviously taken into consideration with our guidance flow. We have IT costs year over year that are somewhat weighted towards the first half of the year. On the margin side, we did talk about loyalty once in Q2, and then some ongoing parts in the second half within margin. Real estate and refresh really pick up through the year. From an order of magnitude standpoint, the return of variable comp is the biggest swing factor when you think of the year over year movements.
Speaker Change: And to really drive us in terms of being really sustainable long term great omnichannel retailer. So that those strategies are super important. We also in 'twenty four as you know we are showing top line improvement comp growth as well as EBIT margin expansion. So we believe it's the right path to continue to move us off.
Speaker Change: And the path to achieve our laser plan goals and so that's how we've constructed the plan and feel good about it and language like deadline. Bob. Good morning. This is Mike as you think through the pace of investments for us in 2024.
Mike: The expense component does somewhat of an over index in the first half of the year.
Michael Baughn: Beyond that, our marketing and brand building investments and technology investments combined add something similar. The next overall piece is those loyalty costs inclusive of the one-time piece. And then finally, you know, general labor inflation and the expense component of our refresh activity round out, from an order of magnitude perspective, our investment. Great. Thank you.
Mike: Obviously taken into consideration with our guidance flow Ah we have it costs year over year that are somewhat weighted towards the first half of the year.
Mike: On the margin side, we did talk about loyalty one timer in Q2.
Mike: And then some ongoing parts and in the second half within margin, our real estate and refresh really picks up through the year from an from an order of magnitude standpoint. The return of variable comp is the biggest swing factor when you think of the year over year movements.
Michael Baughn: Our next question comes from Michael Binetti from Evercore ISI. Please go ahead with your question. Thanks for taking our questions here. Congratulations on the nice comp from the quarterback.
Mike: Beyond that our marketing and brand building investments and technology investments combined add something similar.
Mike: The next overall pieces those loyalty costs inclusive of the onetime piece and then finally, you know general labor inflation and the expense component of our refresh activity around out from an order of magnitude perspective, our investments.
Michael Baughn: Mike, I guess maybe I'll just follow that one and unpack that SG&A a little further. I think last year, you know, if we looked at it with a little bit of detail on a per-foot basis, SG&A ended the year maybe four or six percent lower than what you had initially guided. So I guess the bigger picture point is you showed good ability to flex that lower when sales came in, which actually realized a little differently than you'd hoped. Can you speak to where there may be flexibility in the SG&A plan this year? Do you have, you know, like a mid-single-digit ability to flex that wiggle room or push investments out? If the sales trend comes in lower, would you opt to pull forward investments if the sales trend comes in a little higher than you thought? Yeah, Michael. A great question.
Speaker Change: Alright, thank you.
Speaker Change: Okay.
Speaker Change: Our next question comes from Michael Binetti from Evercore ISI. Please go ahead with your question.
Michael Charles Binetti: Thanks for taking my questions here and congrats on that.
Michael Charles Binetti: Scott in the corridor.
Michael Charles Binetti: Mike I guess, maybe I'll just follow that want to unpack that SG&A will currently I think last year. If we look at it it was a little bit of detail on a per foot basis. SG&A ended the year, maybe for a 6% lower than what you had initially guided so I guess a bigger picture point as he showed good ability to flex that lower when sales net sales came in.
Michael Charles Binetti: Actualized, a little differently than you had hoped I guess can you can you speak to where there may be flexibility in the SG&A plan. This year do you have.
Michael Charles Binetti: Like a mid single digit ability to flex that wait all of them are pushing bathrooms out if the sales trend comes in lower would you would you opt to to pull forward investments if the sales trend comes in a little higher than you thought.
Michael Baughn: I think from our standpoint, you know, hopefully, we've shown you the discipline that when we do have movement in our sales off of our plan, we will flex our expenses appropriately, and we do have some movement within there that we can achieve. You know, we're obviously very focused on our cost optimization program, and you'll continue to see us make progress there. I think the thing that we do want to call out, though, is that 2024 is a year where we will continue to make the appropriate investments. And again, making those investments, there is an SG&A component to it that we feel is a really prudent investment to be making this year to allow us to accelerate our performance going into 2025 and 2026. So again, you know, we will have a flex point within our SG&A. And, you know, we will adjust accordingly as we see trends in business change, but also want to make sure that we're focused on making the right investments for the long term. Okay, thanks a lot for all the details. Our next question comes from Cristina Fernandez from... Tag.
Speaker Change: Yeah, Michael Great question, I think from our standpoint, hopefully we've shown you the discipline that when we do have movement in our sales off of our plan that we will flex our expenses appropriately and we do have some some movement within there that we can that we can achieve you know, we're obviously very focused on our <unk>.
Speaker Change: Cost optimization program and Youll continue to see us make progress in there.
Speaker Change: I think the thing that we do want to call out though is that 'twenty 'twenty four is a year, where we will continue to make the appropriate investments and again, making those investments there isn't SG&A component to it that we feel is a really prudent investments to be making this year to allow us to accelerate our performance going into 2025 and 2026.
Speaker Change: So again, we will have a flex point within our SG&A and we will adjust accordingly, as we see trends in the business change, but also want to make sure that we're focused on making the right investments for the long term.
Speaker Change: Okay. Thanks, a lot for all the details of it.
Speaker Change: Our next question comes from Christina Fernandez from.
Mary N. Dillon: Please go ahead with your question. Yeah, good morning. Thanks for the question. I wanted to ask about the positive comp for this year. What's underpinning that from an industry perspective?
Cristina Fernndez: Please go ahead with your question.
Cristina Fernndez: Yes. Good morning, Thanks for the question I wanted to ask about that.
Cristina Fernndez: The positive comp for this year, what's underpinning that from an industry perspective did you see better product innovation inventories cleaner question marketplace. So how much is the industry itself getting better versus system of the company specific initiatives you have in place.
Mary N. Dillon: Did you see better product innovation, and inventory being cleaner across the marketplace? So how much is the industry itself getting better versus some of the company-specific initiatives you have in place? Yeah, so, one of the things we feel very good about is that we can see a direct path between our conversion improvements and the strategies that we've been implementing in our LASA plan. So, you know, for example, in digital, our conversions are at an all-time high, and that's driven by improvements that we have specifically made as it relates to how we operate our digital strategies.
Speaker Change: Yeah. So you know I feel this is one of the things we feel very good about is that we can see a direct path between our conversion improvements and the strategies that we've been implementing in our lease up plan. So you know for example, digital our conversions at our all time high and that's driven by improvements that we have specifically made as it relates to how we operate our <unk>.
Speaker Change: Digital strategies.
Mary N. Dillon: Our store conversion, omni-order traffic, omni-average order volume, all up, and we can see that directly tracking with things that we're doing in terms of omni-selling behaviors in our stores, as well as our merchants doing a great job on assortment. So, we feel that a lot of the top line was really driven by strategies that we're beginning to see the green shoots from. In addition, certainly, the industry was promotional in the fourth quarter, especially around the holidays, as were we, and, you know, but the fact that we had positive AURs demonstrated that, you know, our customers were willing to pay full price for items as well. So, I think it's a real balance of promotion that we think is appropriate for what was required in the quarter, as well as, you know, taking control of our destiny with our own strategies. As we saw our demand continue to be strong in the quarter, we did take the opportunity to get more aggressive on taking markdowns in areas that we were more challenged from an inventory perspective, especially apparel, and that is a great outcome for us that we ended with inventory down 8% for the quarter.
Speaker Change: Our store conversion omni order traffic on the average order volume I'll answer we can see that directly tracking with things that we're doing in terms of omni selling behaviors in our stores as well as our merchants doing a great job on assortment. So we feel that a lot of the top line was really driven by its strategies that we're beginning to see the green shoots from in <unk>.
Speaker Change: And certainly the industry was promotional in the fourth quarter, especially around holiday as are we and but the fact that we had positive AUR has demonstrated that our customer is willing to pay full price for items as well. So I think it's a real balance of promotion that we think is appropriate for what was required in the quarter as well as taking control of our destiny with her.
Speaker Change: Those strategies.
Speaker Change: As we saw our demand continue to be strong in the quarter, we did take the opportunity to get more aggressive.
Speaker Change: They can taking markdowns in areas that were more challenged from an inventory perspective, especially apparel and that is a great outcome for us that we ended with inventory down 8% for the quarter.
Mary N. Dillon: And then a follow-up question on the gross margin outlook for 2024. Could you break down how much it said about the merchandise margin recovery versus other factors that are helping drive that improvement? Yeah, this is Mike.
Speaker Change: And then a follow up question on the on the gross margin outlook for 2024.
Speaker Change: Could you break down how much of it Ted.
Speaker Change: Merchandise margin recovery versus other factors that are helping drive that improvement.
Michael Baughn: So, you know, obviously, we're planning a margin recapture of 210 to 230 basis points, you know, coming out of this year, where we and the industry leaned into promotions in recent quarters. Mary just alluded to the appropriate steps that we took to improve our inventory position, and I really wanted to call out that they were both proactive and surgical in nature, really leaving us with the inventory position we were looking for in both terms of quality and Even with that, that healthier inventory level, though, we aren't modeling a full recapture of the promotional activity in 2023. We know that moving the consumer off of higher promotions will take some time.
Speaker Change: Hi, Yes. This is a this is Mike. So you know obviously, we're planning a margin recapture of 210 to 230 basis points.
Mike: Coming out of this year, where we and the industry leaned into promotions.
Mike: In recent quarters, you know Mary just alluded to the appropriate steps that we took to improve our inventory position.
Mike: Really wanted to call out that they were both proactive and surgical in nature.
Mike: Leaving us with the inventory position, we were we're looking for in both terms of quality and volume of that inventory.
Mike: Even with that that healthier inventory level, though we aren't modeling a full recapture of the promotional activity in 2023, we know that moving the consumer off of higher promotions will take some time.
Michael Baughn: That's why we're calling out that in Q1, we do expect to see some ongoing year over year pressure, but we do expect that to improve through the year. A couple of the nuances that we've highlighted is that the FLX rollout has the $15 million one-time impact in Q2.
Mike: What we're calling out that in Q1, we do expect to see some ongoing year over year pressure or would you expect that to improve through the year are comfortable the nuances that we've highlighted is that that I felt lex rollout as the $15 million one time impact in Q2, and then it's a new program ramps in the back half we do.
Michael Baughn: And then, you know, as the new program ramps up in the back half, we do expect a modest drag on initial accruals. And I do expect that program to be both rate neutral and margin dollar accretive over time. For the year shrink within there, we expect to be relatively neutral year over year. As you think through the 2024 gross margin build directly, of the 220 basis point midpoints, about 200 basis points of it, or a little more than that, 220 is the we expect to recapture about 75% of the promotional activity that we experience within the year. That FLX hit is about a 20 basis point offset within there.
Mike: Back to modest drag on initial accruals.
Mike: And I do expect that program to be both a rate neutral margin dollar accretive over time for.
Mike: Your shrink within there we expect to be relatively neutral year over year.
Mike: As you think through the 2020 for gross margin build directly.
Mike: Of the 220 basis points mid points about 200 basis points of it are a little more than that 220 years.
Mike: We expect to recapture about 75% of the promotional activity that we experienced within the year.
Mike: F L X hits its about a 20 basis point offset within there and then occupancy we expect to be about a 20 basis points.
Michael Baughn: And then occupancy, we expect to be about a 20 basis point help to us. We do lose a little bit from the extra week, but we'll gain a little bit on the low single-digit sales comp and the cost savings initiatives that we have in place. Thank you. Our next question comes from Janine Stichter from BTIG. Please go ahead with your question. Hi, good morning.
Mike: Help to us or we do lose a little bit from the extra week, but we will gain a little bit on the low.
Mike: The low single digit sales comps and the cost savings initiatives that we have in place.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Janine Stichter from BTG. Please go ahead with your question.
Franklin R. Bracken: I want to ask about your plans to drive exclusives to 20% from the 25% previously. What have been some of the learnings there that are causing you to change this target? And just how should we think about the relationship between exclusives and your susceptibility to the broader promotional environment? Thank you. Good morning. Thanks for the question. This is Frank.
Hi, Good morning wanted to ask about your plans to drive exclusive to 20% from the 25% previously what have been some of the learnings there that are causing you to change that target and just how should we think about the relationship between exclusives and your susceptibility of the broader promotional environment. Thank you.
Speaker Change: Good morning. Thanks for the question. This is Frank so it really the change in the target was predicated on some of the learnings from 2023 as we embarked on our store refresh program, we looked at space and SKU capacity and then also just the productivity of Skus and categories and determined that sometime.
Franklin R. Bracken: Yeah, so the change in the target was predicated on some of the learnings from 2023. As we embarked on our store refresh program, we looked at space and SKU capacity and then also just the productivity of SKUs and categories and determined that sometimes more isn't always more in all cases. And so what we really want to do is focus in on bigger and better stories and make sure that we've got the in-store and digital capacity to tell those stories, the marketing investment behind them, and then give them a little bit more room to breathe with the consumer. So those were some of the key learnings that informed that change in the long term. I will tell you, though, that we're very pleased with the composition results of our exclusive programs in 23 and then what we have on order and on the programming calendar for 2024. We continue to work very hard as we broaden our consumer and our brand portfolio with all of our partners. Our positions in basketball are only strengthening in 2024, but we're also bringing to market some really powerful kid-focused ideas for our KFL and our North America banner specifically. So I feel great about that.
Speaker Change: As more as it always does more and in all cases, and so what we really want to do is focus in on bigger and better stories and make sure that we've got the in store and digital capacity to tell those stories, the marketing investment behind it and then give them a little bit more room to breathe with the consumer so that was some of the key learnings that informed.
That change in the target long term I will tell you, though that we're very pleased with the composition results of our exclusive programs in 'twenty three and then what we have on our on order.
Speaker Change: On the programming calendar for 2024, we continue to work very hard as we broaden our consumer in our brand portfolio with all of our partners our positions in basketball are only strengthening in 2024, but we're also bringing to market. Some really powerful kids focused ideas for our <unk> and our North America banners specifically.
Speaker Change: So feel great about that and then the other thing is that the learnings about how we tag and market. The exclusivity I think we can do a little bit better job again by <unk> by being a little more discerning and whats programs on the calendar.
Michael Baughn: And then the other thing is the learnings about how we tag and market exclusivity. I think we can do a little bit better job again by being a little more discerning in what's programmed on the calendar. Great, and then just to follow up, if you think about the 28 target of an 8.5 to 9% operating margin, what are some of the guideposts that we should think about? And to clarify your comments about the re-acceleration in square footage growth in 26, should that be the year when we really start to see margins ramping towards that target? Thank you. Janine, this is Mike.
Great and then just a follow up as you think about the 28 target of an 8.5% to 9% operating margin what are some of the guideposts that we should think about it and to clarify your comments about the reacceleration and square footage growth in 'twenty should that be the year. When we really start to see our margins ramping towards that target. Thank you.
Speaker Change: Hi, Janine this is Mike so yes from a from a ramp perspective, I think 2026 is going to be are where you take 25% in 2026, you'll see us make.
Michael Baughn: So yes, from a RAMP perspective, I think 2026 is going to be where you, you know, 2025 into 2026, you'll see us make progress across that timeframe in terms of our EBIT margin, recapture on the way to the eight and a half to nine by 2028. I think the way that we think about the path from 2024 is obviously, as we get into 2025, we'll have the recapture of the one-time FLX point hit that we called out. We'll also have further gross margin recovery from the promotional pressure not currently contemplated within our 2024 guidance. We'll continue to make ongoing progress in our cost optimization program. Over this time, we'll also have tech costs begin to taper after we get through some of the major initiatives here early on. We'll see that normalize a bit down. We'll continue to have real estate rationalization, which will be margin-enhancing over time, and then ultimately, getting to that sales growth in the 5% to 6% range in 2026 and going forward will allow us to drive leverage down through the P&L. Great, thanks so much for all the color and best of luck.
Mike: We made progress across that timeframe in terms of our EBIT margin recapture on the way to the eight five to nine by by 2028.
Mike: The way that we think about the path from 2024 is obviously as we get into 2025, while the recapture of the one time F. L X point heads that we called out.
Mike: We'll also have further gross margin recovery of the promo pressure not currently contemplated within our 2020 for guidance.
Mike: We'll continue to have ongoing progress on our cost optimization program.
Mike: Over this time also have tech costs begin to taper after we get through some of the major initiatives here early on we will see that normalize a bit down.
Mike: We will continue to have real estate rationalization, which will be margin enhancing over time, and then ultimately getting to that sales growth in the 5% to 6% range in 2026 and going forward will allow us to drive leverage down through the P&L.
Great. Thanks, so much for all the color and best of luck.
Michael Baughn: Thank you. Our next question comes from Alex Stratton from Morgan Stanley. Please go ahead with your question. Great. Thanks a lot. Just a couple from me here.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Alex <unk> from Morgan Stanley. Please go ahead with your question.
Alex: Great. Thanks, a lot just a couple from me here, so just on the quarter and quarter to date trend it looks like comps decelerated sequentially in the quarter, maybe what do you make about December stopped down from November and can you just clarify how trends have evolved quarter to date.
Michael Baughn: So just on the quarter and quarter-to-date trend, it looks like comps decelerated sequentially in the quarter. Maybe, what do you make of that December step down from November? And can you just clarify how trends have evolved quarter-to-date? And then separately, what gives you confidence that comps can accelerate as promotions come off? So, Alex, thank you for the call. This is Mike.
Alex: And then separately what gives you confidence that the comp can accelerate as promotions come off.
Alex: So.
Alex: Alex Thank you for the call. This is Mike so from a from a January deceleration perspective, we did have a little bit of weather within our performance.
Michael Baughn: So, from a January deceleration perspective, we did have a little bit of weather in our performance, you know, but we were really pleased with the results we saw in November and December, and we really look at that combined period as the holiday timeframe, and again, we're pleased with that overall result. You know, from a quarter-end perspective, we're not going to address that specifically, other than, obviously, our trends today are incorporated within how we approach the guide for the year, and as a reminder for Q1, we're calling out flat to down low single digits in terms of the top line within Q1. And then, as we think through the comp growth for 2024, you know, I think it's really about us continuing to make the right investments and those right investments starting to come to life throughout the year. So, as we build to the top line, obviously, our refresh activity will help that. We'll launch our mobile app in North America. We have the loyalty enhanced version in North America.
But we were really pleased with the results. We saw in November and December and we really look at that combined period as the holiday time frame and again, we're pleased with that overall results.
Speaker Change: Coordinate perspective, we're not going to address that specifically other than obviously our trends to date are incorporated within how we approach to the guide for the year.
Speaker Change: And as a reminder, for Q1, we're calling out flat to down low single digits in terms of the top line.
Speaker Change: Within Q1, and then as we think through the the comp growth for 2024.
Speaker Change: I think it's really about us continuing to make the right investments in those right investments starting to come to life throughout the year. So as we build through the top line. Obviously, a refresh activity will help that will launch our mobile app in North America, we have the loyalty enhanced version in North America, We will continue to benefit from the ongoing brand building.
Michael Baughn: We'll continue to benefit from the ongoing brand building within our marketing team. We'll have the buys and assortments from our reorganized merchant team, and then, obviously, the return to growth with Nike later in the year. Thanks a lot.
Speaker Change: Within our marketing team.
Speaker Change: We will have the buys and assortments from our reorganized merchant team and then obviously the return to growth with Nike later in the year.
Speaker Change: Yeah.
Michael Baughn: Good luck. Thank you. Our next question comes from Jonathan Komp from Baird. Please go ahead with your question.
Speaker Change: Thanks, a lot good luck.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Jonathan Komp from Baird. Please go ahead with your question.
Michael Baughn: Yeah, hi, good morning, Mike, just one follow-up on the gross margin topic. Can you maybe just clarify, if you look over the next couple of years, how much total markdown related merchandise pressure you expect to get back and any further color when we think about the 2028 margin targets, what sort of gross margin range you're embedding within that? So, Jonathan.
Jonathan Robert Komp: Yes, hi, good morning, Mike just one follow up on the gross margin topic could you maybe just clarify if you look over the next couple of years how much total.
Jonathan Robert Komp: Markdown related merchandise pressure or you expect to get back and any further color. When we think about the 2028 margin targets, what sort of gross margin range, you're embedding within that.
Mike: So thanks, Jonathan I appreciate the question I think from from our standpoint, the promotional pressure that we've seen year over year really tied to the elevated elevated inventory that not only we had but it was in the industry.
Michael Baughn: I appreciate the question. I think from our standpoint, the promotional pressure that we've seen year over year, really tied to the elevated inventory that not only we have but is in the industry, we don't see that as structural. So, over the next couple of years, we are planning to recover that. But, you know, I think beyond that, we expect to have continued benefits from our reorganized buying teams and then also, you know, operating here from a cleaner inventory position. We expect to be able to maintain that and then improve our turn over time. I think in 2023, we turned at, you know, 2.6 or 2.7 from a cost standpoint, and we expect to be able to work that up to 3 over time.
We don't see that as structural so over the next couple of years, we are planning to recover that.
Mike: I think beyond that we expected to have continued benefits from our reorganized buying teams and then also operating here from a cleaner inventory position, we expect to be able to maintain that and then improve our turn over time I think in in.
Mike: In 2023 returned at two six or two seven from a cost standpoint.
Mike: And we expect to be able to work that up to three over time.
Michael Baughn: In terms of the exact components within the P&L in 2028, that's not something that we're going to comment on at this time, but we definitely expect to be able to continue to drive healthy margins that allow us to get to that eight and a half to nine percent EBIT. Understand. I appreciate that.
Mike: In terms of the exact components within the P&L in 2028, that's not something that we're going to comment on at this time, but we're we're definitely.
Mike: I expect to be able to continue to drive healthy margins that will allow us to get to that eight and after 9% EBIT.
Understood I appreciate that and maybe one broader follow up just on the integration with brand and specifically Nike.
Mary N. Dillon: And maybe one broader follow-up just on the integration with brands and specifically with Nike. I'm curious just to hear more about the evolution of the marketing partnership with Nike here and how we should view that in context. I know the discussion is returning to growth with Nike, but I think that's maybe a couple quarters behind the original target in terms of timing.
Speaker Change: I'm curious just to hear more about the evolution with a marketing partnership with Nike here and how we should view that in context I know the discussion is returning to growth with Nike I think thats, maybe a couple of quarters behind the original target in terms of the timing. So just thoughts on that that return to growth the timing and the visibility.
Mary N. Dillon: So just thoughts on that return to growth, the timing, and the visibility in conjunction with the new partnership here. Thank you. Sure. Thank you.
Speaker Change: And in conjunction with the new partnership here. Thank you.
Speaker Change: Sure. Thank you. Thank you for the question I'd say, we mentioned this in the comments as well that overall approach to working with our brand partners I think we've elevated this year and that really the Keystone was our partner summit is we're taking it to a consumer led view and multi year growth planning approach with all of our brand partners. It's important to note our relationship our partnership with Nike is strong.
Mary N. Dillon: I'd say, and we mentioned this in the comments as well, that our overall approach to working with our brand partners, I think we've improved this year, and really the keystone was our partner summit, as we're taking a consumer-led view and multi-year growth planning approach with all of our brand partners. It's important to note our relationship, our partnership with Nike is strong, and I think that, you know, for sure, the areas that we really align around are basketball, kids, and sneaker culture, especially with the fact that we have a younger multicultural consumer that we bring to the party. And so, you know, a perfect example of how we're working together is the activation we just did with them over the All-Star 2024 weekend in Indy and the launch of something called The Clinic, which is a Foot Locker, Nike, and Jordan brand-sponsored year-long event that will have activations in communities, social media, as well as a piece of advertising that's running right now in the NBA with Kevin Durant and Jason
And I think that for sure the areas that we really align around our basketball kids and sneaker culture, especially with the fact that we have a younger multicultural consumer that we bring to the party and so a perfect example of how we're working together is the activation. We just said with them all through the all star 2024 weekend.
Speaker Change: And Andy and the launch of something called the clinic, which is a foot locker and Nike Jordan brand sponsored year long event that.
Speaker Change: That will have activations in community social media as well as the piece of advertising that's running right now on the NBA with Kevin Durant adjacent paid them. So we're exciting to work were very excited to work together with Nike to really elevate basketball culture Sneaker culture, and we expect to return to growth at Nike on an allocation basis. Later this year during the holiday quarter, you know what the rest of.
Mary N. Dillon: So we're excited to work, we're very excited to work together with Nike to really elevate basketball culture and sneaker culture, and we expect to return to growth with Nike on an allocation basis later this year during the holiday quarter. You know, the rest of the year, we'll see, there's some uncertainty in the marketplace, and we know that as we get into the year, and so we'll see how that goes, but we definitely see growth happening on an allocation basis later in the year in the holiday quarter. Okay, thank you very much. Sure. And our final question today comes from Abby Zevonikis on behalf of Piper Sandler. Please go ahead with your question. Great, thanks so much for taking my question. Is there any color you can give on, you know, what you're contemplating in the full-year guide for, specifically in North America, Foot Locker, Foot Locker Kids versus Champs and WSS in terms of comps?
Speaker Change: That will see Theres, some uncertainty in the marketplace and we know that as we get into the year and so we'll see how that goes but we definitely see with growth of that happening on an allocation basis later in the year in the holiday quarter.
Speaker Change: Okay. Thank you very much sir.
Speaker Change: And our final question today comes from Javier <unk> from Piper Sandler. Please go ahead with your question.
Javier: Great. Thanks. So much my question is there just any color you can give on what you're contemplating in the full year guide for them, specifically in North America foot locker and foot locker kids versus.
Javier: Janssen W. SaaS intensive com. Thank you.
Michael Baughn: Thank you. Thanks, Abby. You know, from this standpoint, I'm not going to comment on the banner-specific comps that we're planning throughout the year.
Speaker Change: Thanks Savi.
Javier: From this standpoint, it's not going to comment on the banner specific comps that we're planning through the year I think we were pleased that in Q4.
Michael Baughn: I think, you know, we were pleased that in Q4, several of our banners obviously outperformed our expectations to lead to health. So, we think we have momentum really across the portfolio. But obviously, within that, WSS was a little softer.
Speaker Change: All of our banners.
Speaker Change: Obviously, you outperformed our expectations to lead to that also we think we have momentum really across the portfolio.
Speaker Change: Within there obviously, our WSI was a little softer and I think we're we're pleased with the management team there is doing to stabilize that going into the next year.
Mary N. Dillon: And, you know, I think we're pleased with what the management team there is doing to stabilize that going into the next year. Okay, and then just a follow up on digital. Can you talk about what exactly led the comps there in the fourth quarter? Was it anything to do with higher, you know, launch product versus the prior year or anything you're doing on the marketing side that you think led to that?
Okay, and then just sorry, a follow up on on digital can you talk about what exactly led that comes down in the fourth quarter was it anything to do with higher.
Speaker Change: Launch product versus the prior year or anything Youre doing on the marketing side that you think led to that thank you.
Mary N. Dillon: Thank you. Yeah, digital is really all about conversion, which is at an all-time high. And that's driven by improvements that our teams have been making on things that we can see directly. So, you know, mobile cart, navigation, urgency indicators, size filters, some, you know, those types of tactics are really driving our conversion. And, you know, we know there are quantifiable revenue impacts that we're seeing with improvements on our digital sites, as well as investment in digital media.
Speaker Change: Yes digital is really all about conversion, which is an all time high and that's driven by improvements at our teams have been making and things that we can see direct if that so mobile cart navigation urgency indicators size filter some some.
Speaker Change: Those types of tactics are really driving our conversion.
Speaker Change: We know Theres quantifiable scaled revenue impacts that we're seeing with improvements on our digital sites as well as investment in digital media.
Mary N. Dillon: Great, thank you. Sure. So let's, I think we need to wrap up. Thank you. Thank you for joining us today. I just want to sum up: we're evolving Foot Locker to be the global destination, the go-to destination, for discovering and buying all things sneakers. By continuing to execute on the LASA plan, we are confident we're on the path towards driving sustainable, profitable, long-term growth and shareholder value. I just want to extend my gratitude to the entire Foot Locker team, and in particular, our global Striper community, for what they do every day, working with excellence across our stores, online, and our distribution centers. And we look forward to updating you on our progress next quarter. Thank you. And ladies and gentlemen, with that, we'll be concluding today's conference call and presentation. We thank you for joining us. You may now disconnect your cable.
Speaker Change: Great. Thank you.
Speaker Change: Okay.
Speaker Change: Sure. So, let's I think we need to wrap up.
Speaker Change: Thank you. Thank you for joining us today as well as some up we're evolving foot locker to be the global destination go to destination for discovery and buying all seeing sneakers, we could by continuing to execute on the laser plan. We are confident we're on the path towards driving sustainable profitable long term growth and shareholder value I just want to extend my gratitude.
Speaker Change: <unk> to the entire foot locker team and in particular, our global Striper community for what they do every day working with excellence across our stores online our distribution centers and we look forward to updating you on our progress next quarter. Thank you.
Speaker Change: And ladies and gentlemen, with that we'll be concluding today's conference call and presentation. We thank you for joining.
Speaker Change: You may now disconnect your lines.