Q3 2024 Foot Locker Inc Earnings Call and Business Update
Speaker Change: Good morning and welcome to Foot Locker's third quarter 2024 financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. This conference call may contain forelooking statements that reflect management's current views of future events and financial performance.
Speaker Change: Management undertakes no obligation to update these four for looking statements which are based on many assumptions and factors including the effects of the global economic and market conditions.
Speaker Change: Currency fluctuations, customer preferences, and other risks and uncertainties described more fully in the company's press releases and reports filed with the SEC, including the most recently filed Form 10-K or Form 10-Q.
Speaker Change: Any changes in such assumptions or factors could produce significantly different results, and actual results may differ materially from those contained in the forward-looking statements.
Speaker Change: Please note this conference call is being recorded. I would now like to turn the call over to Mr. Robert Higginbotham, Senior Vice President, Corporate Finance, Investor Relations, and Treasurer. You may begin, sir.
Speaker Change: Thank you operator. Welcome everyone to Foot Locker Inc's third quarter earnings call. We will 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 geographies.
Speaker Change: Then, Mike Baughn, our Executive Vice President and Chief Financial Officer, will review our third quarter results and our updated 2024 outlook.
Speaker Change: Following our prepared remarks, Mary, Frank, and Mike will take your questions.
To note, today's call will reference certain non-GAAP financial measures.
Speaker Change: A reconciliation of GAAP to non-GAAP results is included in this morning's earnings release.
Speaker Change: 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 currently plan to release our fourth quarter 2024 results on March 5, 2025. And now, I will turn it over to Mary.
Mary Dillon: Thank you, Rob. I'll start this morning with a high-level review of our third quarter results and our full year outlook. I'll then provide an update on our LASA plan initiatives.
Mary Dillon: Despite continued and meaningful progress, our third quarter results did not meet our expectations. As we consider this performance and the current promotional environment, we are taking a more cautious approach to our outlook and have revised our sales and earnings guidance for the year.
Mary Dillon: While we're disappointed that we did not see as much sequential improvement in the business that we had anticipated three months ago, we are pleased to continue to demonstrate ongoing progress against our LASA plan as we delivered another quarter of positive comp results and meaningful gross margin improvement in the third quarter.
Mary Dillon: Looking at our comp sales, our total comp increase of 2.4% in the quarter was led by share gains from our Global Foot Locker and Kid Foot Locker banners, which comped up 2.8%.
Mary Dillon: In addition, both our Champs sports and WSS banners accelerated back to positive territory up 2.8% and 1.8% respectively, led by strength in the back-to-school period.
Mary Dillon: In the quarter, we saw consumers remain cautious with their discretionary dollars. More specifically, this translated to shoppers concentrating spending around the peak back-to-school selling season in August.
Mary Dillon: and then pulling back in September and October, which we believe reflected consumers holding off on spending ahead of holiday events.
Mary Dillon: Turning to gross margin we saw an improvement of 230 basis points year over year led by merchandise margin recovery against last year's higher level of promotions.
Mary Dillon: Our Merchandise Margin Recapture accelerated versus the second quarter, although this recovery did not come through to the degree that we had anticipated.
Mary Dillon: In the third quarter, we saw that the promotion environment was more elevated and widespread across channels than what we had anticipated three months ago.
Mary Dillon: At the same time, we continue to demonstrate disciplined expense management, including through the execution of our cost savings plan, which is now on pace to deliver $90 million in savings this year, above our prior expectation of $80 million.
Mary Dillon: Our non-GAAP earnings per share in the quarter were $0.33, up from $0.30 last year, but below our guidance of approximately $0.40.
Mary Dillon: As we look to the remainder of the year, we have updated our full-year non-GAAP EPS to be in the range of $1.20 to $1.30, down from our prior range of $1.50 to $1.70.
Thank you. Thank you.
Mary Dillon: We also expect the elevated promotional activity we saw in the third quarter to continue through the holiday season.
Mary Dillon: On quarter-to-date trends, after a softer start to the season in the first three weeks of November, we saw meaningful acceleration in trend during Thanksgiving week.
Mary Dillon: Looking towards the remainder of the quarter, we anticipate benefiting from a favorable launch calendar, but remain cautious in light of the steeper lulls we saw with the consumer in the third quarter outside of peak selling periods.
Mary Dillon: This is in addition to an overall heightened promotional environment and condensed holiday period.
Thank you.
Speaker Change: We expect gross margin improvement in the quarter as we lap last year's elevated markdown levels in our business, particularly in the apparel category.
Speaker Change: However, we have moderated our expectations regarding our margin recapture opportunity in the quarter as we see elevated promotional dynamics inclusive of DTC and retail peers in both Europe and North America.
Speaker Change: While we're disappointed to be adjusting our full year outlook, we're continuing to make progress against our LASA plan and are committed to meeting our longer-term financial targets, including our 8.5% to 9% EBIT margin target by 2028.
Speaker Change: Now, with that, let me provide an update on our LASA plan and progress against our strategies in the third quarter.
Speaker Change: Starting with our first imperative which is expand sneaker culture. Let me start with our top partner Nike. We're pleased with how we've elevated our partnership over the last several quarters. We look forward to building upon this momentum with Elliott Hill and his team at Nike.
Speaker Change: We have a long-standing relationship with Elliot and are excited to work with him given his passion for product, innovation, an athlete, and consumer insights to help drive distinction in the marketplace.
Speaker Change: Examples of our ongoing collaboration include the continued expansion of our work with Nike and Jordan brand on the clinic and our premier multi-brand in- store Foot Locker home court basketball experience.
Speaker Change: In the near term, we remain on track to return to growth on an allocation basis with Nike in the fourth quarter, including a favorable launch calendar relative to both the third quarter and last year's fourth quarter.
Speaker Change: That said, we know we're balancing challenges in the global marketplace this quarter. We're seeing higher promotional levels in the marketplace compared to our prior expectations, particularly out of DTC, in addition to wholesale competitors.
Speaker Change: Over time, we do expect the degree of promotional intensity to abate, we don't think is structural, as inventory levels are rationalized and as a more appropriate balance of DTC and wholesale is achieved in the channel.
Speaker Change: In the long term, we have full confidence in our largest partner, in the strength of our partnership, how Nike is positioning the brand for the future, and how that will benefit the category, the industry, and Foot Locker.
Speaker Change: At the same time, our proposition as a multi-brand retailer is reinforced by our results as we continue to see our highest frequency customers purchasing a wider array of brands.
Speaker Change: Also in the quarter, sales of brands such as Adidas, New Balance, On, Hoka, UGG, and Asics were up strong double digits through a combination of door expansions as well as like-for-like gains.
Speaker Change: In lifestyle, Adidas continues to see strength globally led by women through the lens of terrace. In heritage running, we have expanded the number of doors with new balance expansions compared to last year and strong comp gains across multiple footwear franchises across men's, women's, and kids.
Speaker Change: In performance running, ASICS was one of our fastest-growing brands in the quarter, led by strong global momentum in multiple footwear franchises across men's, women's, and kids.
Speaker Change: Similarly, we're seeing strong gains in On and Hoka, and we continue to plan for new doors for those brands as we look towards 2025 and beyond.
Speaker Change: Certainly our controlled inventory levels give us a lot of flexibility and agility with how we're flowing product across multiple brand partners to better match our supply with customer demand.
Speaker Change: And finally, looking at our exclusive penetration in the quarter, it was 15% down 100 basis points year-over-year as we lap the 25th anniversary of Nike TN.
Thank you.
Speaker Change: Moving to our second pillar, which is Power Up the Portfolio, a key objective of this pillar has been to reposition our Champ Sports banner towards the active athlete and sports style enthusiasts. The banner outperformed our expectations in the quarter with comps up 2.8%. The first positive comp sales results at the banner since its repositioning began.
Speaker Change: Another key objective in this pillar is to elevate and optimize our store experience through new door concepts as well as our refresh program as we continued our progress with both in the quarter.
Speaker Change: On New Store Concepts, recall we opened our 34th Street Reimagined location in New York City in August. We also opened Reimagined doors in Melbourne and Delhi, with the latter marking our entry into the India market with our licensed partners Metro Brands and Nike Fashion.
Speaker Change: Just last week as well, we opened our second location in Europe in Utrecht in the Netherlands.
Speaker Change: With six reimagined stores now live across North America, Europe, and Asia, we're excited to see the heart of sneakers come to life through this globally scalable concept.
Speaker Change: In all these locations, we've generally seen higher conversion levels, basket sizes, and increased penetration of women's footwear compared to the balance of chain.
Speaker Change: Next month we're opening two additional reimagined doors here in the U.S. at Bay Plaza in the Bronx and Holyoke Mall in Western Massachusetts.
Speaker Change: Once these stores are completed, we'll have reimagined concepts that represent the full range of our store formats and box sizes within our global Foot Locker store portfolio.
Speaker Change: That will bring our total reimagined concepts to eight this year, and we look forward to testing and learning from these locations as we build reimagined plans for the future.
Speaker Change: Turning to home court, we know that snaker culture has long been influenced by sports and specifically basketball and certainly the category remains a key driver of business as we aim to be the go-to destination for all things basketball.
Speaker Change: That's why we're pleased to continue rolling out our Foot Locker Home Court Experience developed in partnership with Nike and Jordan Brand in select reimagined locations.
Speaker Change: Recall, HomeCourt is our premier multi-branded basketball-focused experience. This version of HomeCourt was co-designed with Nike and Jordan brand and features a visually striking experience meant to enhance our basketball storytelling.
Speaker Change: It is currently live in our 34th Street and Melbourne Reimagined locations and demonstrates our mutual commitment and shared vision to deliver the ultimate in-store basketball experience.
Speaker Change: We've been very pleased with the results from HomeCourt thus far, and we intend to accelerate our investment in this experience, especially through our reimagined concept going forward. We continue to target 100 Foot Locker HomeCourts by 2026.
Speaker Change: Our new concepts, including Foot Locker Reimagined, now represent 17% of our global square footage, up from 13% last year, and moving steadily towards our 2026 target of 20%.
Speaker Change: In addition to the reimagined concept, we made significant headway on our store refresh program, which aims to bring more of our fleet up to an elevated and consistent brand standard globally.
Speaker Change: From a capital return perspective, we continue to see these refreshes hitting our internal hurdle rates and payback periods, supported by both comps and gross margins outperforming the balance of chain.
Speaker Change: In the third quarter, we completed 167 refreshes, which was an acceleration from the 80 we did in the first half of the year. We remain on target for our goal of approximately 400 refreshes this year.
Speaker Change: Adding our store refreshes on top of our new concepts, we're committed to elevating approximately two-thirds of our global footlocker and kids footlocker doors up to brand standard by the end of 2025.
Speaker Change: And finally, we're making strides in our shift to off-mall. Penetration reached 41% of North American square footage, up 5 points from a year ago, and closer to our goal of 50% by 2026.
Speaker Change: Moving to our third pillar, which is deepen our relationship with our customers. Over the past several months we've made steady progress driving awareness and relevancy for our banners with consumers. Our positioning has come to life through the rollout of brand platforms such as the Heart of Sneakers for Foot Locker and more recently Sport for Life for Champ Sports.
Speaker Change: And customers are responding to our brand campaigns in differentiated partnerships. As a result, we're seeing improvements in both awareness and consideration.
Speaker Change: More recently, in September, we celebrated the 50th anniversary of the Foot Locker brand with a Mont Blanc campaign featuring exclusive products co-created with Nike, New Balance, Adidas, Puma, and Converse.
Speaker Change: The campaign featured a strong Omni and social media presence and culminated with an exclusive concert with the Grammy nominated Coy LeRae at our 34th Street Reimagined store here in New York City. In total, the campaign earned us over 1.7 billion media impressions.
This is the end of the video.
Speaker Change: As we move towards the NBA tip-off in October, we begin building upon the work we've done around our core basketball category.
Speaker Change: A year ago, we announced our agreement with the NBA to serve as an official league marketing partner here in the U.S. We more recently launched a new partnership with the legendary Chicago Bulls franchise ahead of the 24-25 NBA season.
Speaker Change: We know that the Bulls have long been at the forefront of basketball and sneaker culture, particularly with their association with Michael Jordan and the Jordan brand, and hold a shared commitment to basketball culture and the community.
Speaker Change: The partnership features community basketball events, exclusive in-store activations, and a co-branded Tunnel Walk series on social media, allowing fans a behind-the-scenes look at their favorite players as they're getting ready to take the court.
Thank you.
Speaker Change: We'll continue to lean into our basketball business through our partnerships with the NBA and the Bulls in addition to our home court experience.
Speaker Change: Looking at holiday, we launched a campaign in November called Step Into Your Gift, which featured top NBA talent, including Anthony Edwards and LaMelo Ball, along with Koi LeRae.
Speaker Change: Moving on to loyalty, 27% of our sales in the third quarter were through our loyalty program, which was up four points compared to last year.
Speaker Change: Since the June relaunch of our FLX Rewards Program here in the U.S., we've been very pleased with our members' response across a variety of KPIs, including a higher pace of enrollments, engagement with first-time redeemers, and higher AOVs compared to non-loyalty members.
Speaker Change: Following an improvement in our sign-up experience in stores towards the end of October, we've seen a meaningful improvement in the sales capture rate in stores as we've moved into November.
Speaker Change: This holiday, we're excited to continue to activate through the program, including the recent addition of members-only events in stores and online across banners. We're already seeing these events drive value for the program in the pace of new enrollments and lifts in the sales capture rate.
Speaker Change: We look forward to sharing incremental insights as the program moves towards our 50% loyalty penetration by 2026.
Speaker Change: Turning to our final pillar, Be Best in Class Omni. In our stores, comp sales were up 2.2% in the quarter.
Speaker Change: While traffic proved more challenging, especially in September and October, we saw some of our highest convergent increases in stores year-to-date, speaking to how our initiatives around product, in-store experience, and Striper education and trainings are working.
Speaker Change: On an enterprise level, global digital comps were up 3.6% as we continued to make strides in our online conversion rate due to ongoing improvements to the customer experience, including better merchandising capabilities.
Speaker Change: Our digital penetration in the quarter increased 60 basis points year-over-year to 17.6% of sales as we continue to target around 25% e-commerce penetration by 2026.
Speaker Change: Last month we are excited to roll out our new and improved mobile app across the U.S. which provides a faster more modern shopping experience featuring richer content and improved launch experience.
Speaker Change: Importantly, the app serves as a hub for our new loyalty program across both stores and online, making it that much easier for our members to track and access their points across channels.
Speaker Change: While still very early days, the app has already seen a strong uptick in conversion levels and we're confident that this improved experience can be a significant lever for us to drive both our digital and loyalty penetration over time.
Speaker Change: In closing, despite continued and meaningful progress, our third quarter results did not meet our expectations.
Speaker Change: That said, we continue to see our sustained positive comps and gross margin expansion as proof points that the LASA plan is working across multiple dimensions. Now let me hand it over to Frank to provide more details on our category and banner performance.
Frank Bracken: Thank you, Mary, and good morning, everyone. Starting with third quarter product and brand partner performance, footwear comps positive high single digits.
Frank Bracken: These gains were led by strong results out of the Adidas, New Balance, On, Hoka, UGG, and Asics brands, while we are contending with some more recent softness out of our top partner Nike.
Thank you.
Frank Bracken: Within the basketball category, we continue to see strength within our portfolio of next-generation signature athletes, such as Nike's Jha2, Sabrina2, Adidas' AE1, and Puma's Melo04.
along with retro models such as Nike's Foamposite and Kobe.
Frank Bracken: I should also note that we were thrilled to feature Anthony Edwards in our Foot Locker holiday marketing campaign, which is now in market and driving great engagement with consumers.
Frank Bracken: We also introduced ANTA to several of our doors as well as online in the quarter and have been pleased with our customers response to the CHI-1. We'll continue to test and learn with this exciting new partner in the seasons ahead.
Frank Bracken: As Nike rebalances their product mix and inventory levels in the near term across the basketball classics franchises, we are seeing some short-term negative impacts on our business.
Frank Bracken: We are seeing higher promotional levels in the marketplace across both DTC and competition, which is having a cascading impact as we need to react and compete with those dynamics headed into the holiday season.
Frank Bracken: However, as previously communicated, we do return to growth on an allocation basis during the holiday season with Nike, and have a favorable launch calendar as well.
Frank Bracken: Meanwhile, our overall inventory levels with them remain controlled and we are working together closely to optimize new receipt flow, retail sell-through, and prioritize full price selling as best possible.
Frank Bracken: At a strategic level, we are confident in the strength of our partnership with Nike as we continue to engage with their new leadership team.
Frank Bracken: Serving our young multicultural customers through our strategic platforms of basketball, sneaker culture, and kids continues to be the top priority for our partnership.
Frank Bracken: Turning to the lifestyle category, Adidas continues to lead the global terrorist trend, especially within our women's and kids segments. Our order book and go-to-market plans remain very strong as we approach the holiday season as we continue to see robust consumer demand across our global banners.
Frank Bracken: In lifestyle running, New Balance continues to deliver strong momentum through a combination of door expansions as well as like-for-like gains.
Speaker Change: Franchises like the 90-60 have quickly become new icons with our younger multicultural consumer across men's, women's, and kids.
Speaker Change: Looking ahead, we continue to see room for growth with this important partner across all of our banners and geographies.
Speaker Change: ASICS is another brand that is seeing strong global momentum across men's and women's as it leverages its authenticity in running through styles such as the GEL-NYC and the GT2160. We look forward to working closely with ASICS leadership team to profitably grow our partnership globally.
Speaker Change: Within performance running, On and Hoka are continuing to bring new consumers into sneaker culture, especially women and kids.
Speaker Change: We're pleased to continue to drive strong double-digit gains with these partners as we selectively expand doors to reach new consumers while continuing to see strong like-for-like gains.
Speaker Change: Finally, as we look ahead to holiday season, the UGG brand continues to be a large part of our plans.
Speaker Change: With classics such as the Tasman, in addition to franchises like the Lomel, UGG remains a key partner to drive consumer excitement during the gifting season.
Speaker Change: Our go-to-market plans with UGG include engaging content and elevated in-store presentation, which we believe will capture our customers' attention.
Speaker Change: Turning to the apparel business, challenges persisted with comp declines deepening till down in the low 20s.
Speaker Change: As innovation within apparel is lagging compared to our footwear business, we see this manifest in a more promotional environment as consumers clearly are seeking more newness and innovation in the category.
Speaker Change: However, a bright spot continues to be our private label apparel business, especially CSG and CSG Active at Champ Sports.
Speaker Change: We will continue to invest in our private label capabilities and assortment, as it is driving outsized merchandise margins and offering styles and price points that our brand partners do not service.
Speaker Change: Finally, our accessories business comped up high single digits as we continue to build the shopper's transaction through categories such as socks, headwear, and shoe care.
Speaker Change: Here again, the merchandise margins are attractive as we work through both branded partners and private label to deliver our plans in this category.
Speaker Change: Switching to channel performance, comparable sales in our stores increased 2.2%.
Speaker Change: While traffic was down year-on-year, and down sequentially compared to the second quarter, we continue to see gains in conversion as well as average ticket, including positive AURs.
Speaker Change: Meanwhile, digital comps increased 3.6%. We continue to deliver higher digital conversion levels as our efforts to improve the customer digital experience continue.
Speaker Change: And as Mary mentioned, we recently upgraded our mobile app experience for Foot Locker in the U.S. where we are already seeing improved customer sentiment in the shopping experience alongside increasing conversion results.
Now for performance by Banner and Geography.
Speaker Change: In North America, overall comps were up 2.1%, including our Foot Locker North America comp up 1.6%.
Speaker Change: Our Foot Locker banner saw a strong back-to-school season across both men's and women's. The team drove excitement and engagement through the quarter with our compelling back-to-school campaign, our 50th anniversary celebration, and our basketball activations, including our Chicago Bulls announcement.
Speaker Change: With share gains across men's and women's in the quarter, we feel well positioned headed towards the remainder of the holiday season.
Speaker Change: Kids' Foot Locker comped up 3.2% in the quarter. Trends accelerated from the second quarter, led by a solid back-to-school season in August, as we were better able to match product supply with demand.
Speaker Change: Customers responded to our assortments across multiple categories including basketball, running, and seasonal, driving solid increases in our conversion levels.
Speaker Change: Looking to the fourth quarter, we believe our kids banner is well positioned to continue to take market share.
Speaker Change: At Champ Sports, comps were up 2.8%, a nearly 7-point improvement from second-quarter results and the first positive banter comp since the repositioning.
Speaker Change: Conversion levels were positive year over year as customers responded to the banner's updated head-to-toe sports style positioning with differentiated assortments from partners such as New Balance, Adidas, Asics, and our CSG label.
Speaker Change: Under its new brand platform, Sport for Life, Champs Sports is really celebrating the connection between sports and the on-the-go lifestyle of our active consumers.
Speaker Change: Last month, Champs Sports rolled out its holiday campaign featuring Aaron Judge for the Jordan brand and Trey Turner for Adidas. And we are seeing our marketing help Champs gain share with the active athlete and sports-style enthusiast consumer segments.
Speaker Change: Champ Sports also continues to distinguish itself in stores and in the community through its exclusive Run Club program.
Speaker Change: Feedback from our brand partners as well as customers has been very positive and the Champs team will continue to scale RunClub at Holiday and into 2025.
Speaker Change: Overall, we feel good about the traction Champ Sports continues to make under its new positioning as we head towards 2025 and are proud of the team leading that work.
Thank you. Bye.
Speaker Change: Moving to WSS, we were pleased to see comps inflect to a positive 1.8% led by a strong back-to-school performance in August.
Speaker Change: The Banner's efforts to emphasize value for the full family through its compelling marketing and differentiated assortments including below $80 footwear as well as global football and work where it continues.
Speaker Change: While the overall macro backdrop remains tougher for our WSS customers, our team continues to position the banner with compelling assortments and competitive offers in the peak holiday periods.
Thank you. Thank you.
Turning to Europe, comps were up 6.4 percent.
Speaker Change: Promotional levels were elevated in the marketplace, especially in digital and in the apparel category, and our teams reacted in the quarter to remain competitive.
Speaker Change: We continue to focus on elevating the consumer experience in our European business as we navigate the choppy environment. We opened our second Foot Locker Reimagined store this quarter near Amsterdam and we continue to invest in our store refresh program, which are performing well.
Speaker Change: In Asia-Pacific, comps were down 7.3%. At our Foot Locker banner, comps fell 5.6%, reflecting ongoing headwinds in the Australian marketplace from a challenged consumer.
Speaker Change: And finally, at Atmos, comps were down 11.2%, reflecting our decision to accelerate shifts to our own digital site and away from less profitable third-party digital platforms and partnerships.
Speaker Change: To conclude, we were pleased to deliver another quarter of positive comps and solid gross margin expansion in the quarter, led by our global Foot Locker and Kids Foot Locker banners, but also a return to positive caps from Champs Sports and WSS.
Speaker Change: Our lace-up strategies continue to take hold and our assortments are well positioned as we look towards the remainder of the holiday season, where we will continue to balance comp growth, margin expansion, and market share gains.
Mike Baughn: I'll now hand the call over to Mike to go over the financials and guidance in more detail.
Mike Baughn: Thank you, Frank, and good morning, everyone. In the third quarter, starting with revenue, total sales were down 1.4 percent, but were led by comps up positively at plus 2.4 percent, which was in line with the second quarter's results, but below our expectation of further acceleration.
Mike Baughn: We were pleased however that the Foot Locker North America, Kids Foot Locker, Champ Sports, WSS, and Foot Locker Europe banners all had positive comp sales.
Mike Baughn: In terms of cadence, comps peaked in the August back-to-school period as customers consolidated their spending during those key selling moments.
followed by softer trends in both September and October.
Mike Baughn: As a result, August comps of positive high single digits slowed to negative low single digits in both September and October.
Mike Baughn: Moving to margins, we were pleased to accelerate our year-over-year gross margin rate expansion in the quarter relative to our second quarter trend while also sustaining our positive comp trajectory.
Mike Baughn: Gross margin for the quarter expanded 230 basis points to 29.6 percent, highlighting our continued progress in recovering last year's heightened promotions, but falling short of our expectations.
Mike Baughn: While we continued to make sequential improvement in the third quarter, we also ensured we were positioned competitively in the marketplace and didn't pull back as far as we had expected.
Mike Baughn: Merchandise margins were the full driver of the improvements as they increased 230 basis points driven by fewer markdowns year-over-year.
Mike Baughn: Occupancy as a percent of sales was approximately flat on a rate basis.
Mike Baughn: Approximately $15 million of gross margin savings from our cost optimization programs also flowed through our cost of goods line.
Mike Baughn: For the third quarter, our SG&A rate came in at 24.6%, representing deleverage of 210 basis points.
Mike Baughn: SG&A dollar growth of 80% landed below our prior expectation of a low double-digit dollar increase as we continue to tightly manage expenses in addition to ongoing progress against our cost savings program.
Mike Baughn: Investments in technology and brand building increases drove the absolute dollar growth year-on-year.
Mike Baughn: These increases were partially offset by $10 million in savings from our cost optimization program.
Mike Baughn: Collectively, our cost optimization program generated total savings of approximately 25 million dollars in the quarter.
Mike Baughn: Finally, our earnings loss per share was $0.34 and our non-GAAP earnings per share landed at $0.33.
and Michael Bauer. Thank you. Thank you.
Speaker Change: Turning to the balance sheet, we ended the quarter with $211 million of cash and total debt to $445 million.
Speaker Change: At quarter end, inventories were down 6.3% versus last year, as we remain committed to keeping our inventories controlled.
Speaker Change: Despite the sales shortfall in the quarter, we remain pleased with the composition and quality of our inventory.
Speaker Change: We've operated with reduced inventory for the last four quarters to more normalize our composition and overall levels of inventory, and as we look forward, we continue to expect to end the year with inventories approximately flat to last year.
Speaker Change: I also want to highlight an update within our release regarding our non-cash impairment charges within the quarter.
Speaker Change: Following a strategic review, we took a $25 million non-cash charge against the Atmos trade name, which is excluded from our non-GAAP earnings.
Speaker Change: While the Atmos business continues to perform well, the charge reflects our recent moderation of growth expectations.
Speaker Change: The second is related to a $35 million non-cash charge on our minority investment portfolio following our routine asset review. This charge flows through our other expense line, but is excluded from our non-GAAP earnings calculation.
Speaker Change: Moving on to our 2024 outlook, we're updating our full year non-GAAP EPS guidance to $1.20 to $1.30 from $1.50 to $1.70 previously.
Speaker Change: We expect full-year comps of plus 1 to plus 1.5 percent at the lower end of our prior plus 1 to plus 3 percent comp range.
Speaker Change: Overall, our store count will be down approximately 4% in 2024, with square footage down approximately 2%.
Speaker Change: We expect to open 27 new stores in the year and to close approximately 130.
Speaker Change: Including an approximate $100 million drag from lapping the extra week, total sales for 2024 are now expected to be down 1% to down 1.5%.
Speaker Change: In terms of adjusted capital expenditures, we expect 2024 to be $320 million.
slightly less than our previous expectations of 330 million.
Now let me turn to our fourth quarter expectations.
Speaker Change: While the first three weeks of November underperformed our expectations, we did see an improved and nicely positive year-over-year trend during the Thanksgiving and Black Friday Like for Like week.
Speaker Change: We've seen consistently solid and improving trends within our stores and are navigating a promotional environment, especially in digital.
Speaker Change: In other words, the quarter is following the trend we have experienced all year, where customers are responding in the peak selling moments.
Speaker Change: The combination of the slower start to November, the positive Thanksgiving and Black Friday week, the elevated promotional environment, and the shortened holiday calendar have combined to inform our updated guidance.
Speaker Change: With that context in mind, for the fourth quarter, we expect our non-GAAP earnings per share to be in the range of $0.70 to $0.80.
Speaker Change: Our outlook assumes a comp of plus one and a half to plus three and a half percent.
Speaker Change: The middle end of the range assumes essentially a steady state from our third quarter comp trend.
Speaker Change: On gross margin, we assume improvement from the third quarter, with margins projected up 240 to 260 basis points year-over-year to 29.0 to 29.2 percent.
Speaker Change: With a backdrop more promotional than we anticipated this holiday, we're not able to dial back our promotions to the degree we expected 90 days ago.
Speaker Change: However, as highlighted by our outlook, we do still expect Q4 to be the most meaningful margin improvement year-over-year within 2024 as we don't anniversary some of the heavy promotional activity that we took last year, especially in the apparel category.
Speaker Change: With margin performance last year benefiting by 40 basis points from occupancy leverage from that extra week, the underlying margin improvement from the third quarter to the fourth quarter is expected to continue.
Speaker Change: On expenses, we expect a 10 basis points of deleveraged to 10 basis points of leveraged range of an SG&A rate of 22.3 to 22.5 percent.
Speaker Change: On an absolute dollar basis, we expect dollars down 2 to 3 percent as we continue to manage our expenses carefully, benefit from our ongoing cost savings program, and lap the extra week of expenses from last year.
Speaker Change: To close, while we are disappointed to be making changes to the full year outlook, we are also encouraged by our ongoing positive comps and gross margin expansion within the quarter, which we still expect to maintain and accelerate in Q4, supported by the momentum we have in our LASA plan.
Speaker Change: We remain committed to reaching our longer term EBIT target of 8.5% to 9% by 2028.
Speaker Change: We look forward to updating you on our progress next quarter. With that, Operator, please open the call for questions.
Speaker Change: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster.
Thank you. Thank you.
And then we'll see you in the next video.
Speaker Change: And the first question will come from Tom Nickick with Needham. Please go ahead.
Speaker Change: Thanks very much for taking my question. Mary, can you speak to the balance between sales and margin in the quarter? You know, you were able to improve both comps and gross margin, but just not to the degree that you expected. You know, can you kind of, you know, rationalize and contextualize the performance in the quarter and kind of drill down a little bit more into what fell short of expectations?
Mary Dillon: Sure, Tom. Thank you for your question. I'm happy to drill down further. So, you're right. I mean, I guess the way I would think about it is there's two things that are true at once this quarter, which is that we are proud of the progress that we're making on the LASA plan, and it was the second quarter that we had a set of consecutive positive comms.
Mary Dillon: share gains, meaningful gross margin expansion, yet performance did fall below expectations.
Mary Dillon: And, you know, those are driven by things we're doing in the LASA plan, so progress in our stores.
Mary Dillon: through the refresh and re-imagine, progress on digital through our new mobile app, progress on our customer relationships, I'd say loyalty and brand building, two really good examples.
Mary Dillon: So, you know, the good news is the investments are driving returns and hitting our internal hurdle rates and our paid-back periods.
Mary Dillon: In fact, they drove the highest conversion gains we've seen all year.
And Carolee Bennett.
Thank you. Thank you.
Speaker Change: Thanks, Mary, that's very helpful. If I could sneak in a follow-up on apparel. Obviously, there's a pretty big spread between, you know, solid growth in social care and the low 20s decline in apparel. And, you know, I know that you talked about the lack of innovation in the category, but do you think, you know, weather also played a part? That, you know, I know it's
Speaker Change: 75 degrees in New York on Halloween, probably not ideal for fall selling. Do you think that also contributed to the shortfall in apparel?
Frank Bracken: Hey Tom, this is Frank. So, yeah, the apparel business has clearly been a headwind for the business. In Q3 we saw the comps down in the low 20s versus our overall business up in the low single digits. So, you know, weather we don't think has been the biggest driver or headwind to our business. We're not really a big player in the outerwear business. We're mostly a fleece, t-short sets and bottoms based business.
Frank Bracken: I think it really has to do more from a category perspective in the industry, needing to be a little bit sharper by way of innovation, looking for new silhouettes, new materials, new colors to drive excitement with the consumer. I also believe there's a bigger opportunity for connectivity to sneaker storytelling and collections.
Frank Bracken: and then just overall more excitement in terms of merchandising and how we go to market with our partners.
Frank Bracken: That said, there were some continued positive signals out of our private label apparel business and we're going to continue to invest.
Frank Bracken: and our PL capabilities, as well as our go-to-market offense into 25 to make sure that we capture opportunities with the consumer, both from a category, a silhouette, as well as a price standpoint. So, good news is our inventories and apparel are well under control and reflective of the sales trend, and we're pretty clean from that standpoint. So, we're working hard with our partners to share insights and ideas to get back on track in 25.
Speaker Change: Thanks everyone, happy holidays, and be sure to watch the rest of the holiday season.
Thank you, Tom.
Speaker Change: The next question will come from Michael Vannetti with Evercore ISI. Please go ahead.
Speaker Change: Hey guys, thanks for taking our question here. So as we think about the guidance for fourth quarter, I think Mary...
I think, Mary, you might have said it was.
Speaker Change: The midpoint kind of lines up with what you saw in third quarter, but I think there was a few unusual things in the third quarter. It doesn't sound like weather was one of them, but I think that the launch calendar of maybe a couple important products or an important product might have moved on you. That could have been a negative. Is there, as you think about placing the guidance in fourth quarter in the middle of that range, is there, are there,
Speaker Change: It seems like trends are improving now. Are there other things we should be thinking about that you're baking in in the fourth quarter? Or do you have more certainty in the launch calendar from here? Any other takes we should think about considering trends are improving now as you get into the true holiday period? And then as we, I guess, bigger picture, as we think about...
Speaker Change: What we learned here with third quarter and fourth quarter gross margins and look out past this year Do you do you think this is you use the word temporary a few times you think this is?
Speaker Change: a rebasing that we need to start to rebuild from this lower level? Or it looks like consensus numbers for next year are still below pre-COVID levels, and you've made some serious changes to merchandise, closed a lot of unprofitable doors, got chance back to positive, etc. I'm trying to think about how to contextualize what we're learning here in the second half as we look out to next year.
Mike Baughn: Michael, this is Mike. I'll start on your question. So from a Q4 guidance perspective, you know, you're absolutely right. The midpoint of what we've communicated is really in line with the
Mike Baughn: the comp sales trend that we saw over the last 180 days across the second and third quarter.
Mike Baughn: You know, from our standpoint, you mentioned a couple of things that are puts and takes within the quarter, you know, Q3 did have a, you know, some launch product move around. But as we look to the fourth quarter, we do see Q4 launch from our view to be a nice tailwind to the business.
Mike Baughn: Some other things that we've got incorporated into our guidance is our apparel business trajectory slowed in the third quarter versus the second quarter.
Mike Baughn: That was about a 50 basis point quarter versus quarter drag on our business. So our Q4 is assuming that apparel stays relatively tough. Frank did call out earlier, though, that we do feel good about how the inventory is positioned, being down at a commiserate level to what the sales performance has been.
Mike Baughn: As we think about the quarter to date, it was a softer start to the month in Weeks 1-3 and we underperformed our expectations. We did move to a nicely positive, like-for-like comparison across the Thanksgiving and Black Friday week.
Mike Baughn: And then, you know, obviously we've seen the customer respond well in the peak selling moments and But we do expect things to be promotional as we think through the rest of the shortened holiday
season here.
Mike Baughn: As we think about the context for 2025, obviously we'll come back and give a much firmer view on this in March when we report.
the updated margin guidance for the year.
assumes we recapture about 35%.
of that promotional activity that we saw.
Mike Baughn: in 2023. So as we go into next year, we'd expect and our intention would be to continue to recover what we haven't gotten back, but obviously contingent on the promotional environment firming up to determine the degree of which we recover.
Mike Baughn: You know, I think the marketplace dynamics from our view right now are transitory, they're not structural, but obviously, you know, more to come on the duration of that.
Mike Baughn: And then, you know, importantly, the down 6% inventory was our fourth consecutive quarter of managing inventory down 6% to down 10%. You know, even with the sales in the third quarter, you know, underperforming our expectations a bit, we feel good about that positioning. We feel good about ending the inventory flat year over year and heading into 2025.
Okay, thank you.
Speaker Change: The next question will come from Janine Stitcher with BTIG. Please go ahead. Hi, thanks for taking my question. I was hoping you could elaborate a bit more on CHAMPS and WSS. Those have been two underperforming divisions and we saw them start to turn a corner. So just a bit about what's working there, maybe different from the other banners, and then within that be interested in any demographic trends that you're seeing. I know WSS in particular has higher, lower income consumer exposure. Just curious what you're seeing among income cohorts. Thank you.
Frank Bracken: Hey Janine, thanks for the question. This is Frank. So I'll start with Champ.
Frank Bracken: Clearly the team has been making some really great traction with its efforts to reposition the banner towards the active athlete and the sports style enthusiast and we're seeing the real payback and return on the more focused assortments and investments particularly behind our in-store and digital experience there. We saw really strong back-to-school results particularly over August as the consumer responded to those assortments and the new positioning which is Sport for Life.
Frank Bracken: And then recall that earlier in the year, we made some in-store improvements where we elevated 250 of the Champs fleet to represent the go-forward strategy and just do a better job in communicating that merchandising strategy and some of the key connectivity between footwear, apparel, and accessories.
Frank Bracken: You know, as we head into holiday, I think the team feels very good about our leadership and head-to-toe looks, including footwear, apparel, accessories.
Frank Bracken: We've got really strong positions in some of our sneaker essentials and icons.
Frank Bracken: And we're seeing really great consumer and brand partner response to our RunClub platform, which includes product assortment, community marketing, as well as digital storytelling. So overall, the quality assortment continues to improve. The banners demonstrating improved margins, as well as sales recovery, of course.
Frank Bracken: and we're seeing a really great response from our vendor partners, importantly. So, feel very good about that and expect that to continue.
Frank Bracken: Relative to WSS, we did make progress in the third quarter.
Frank Bracken: the overall third quarter to a positive result. We continue to look very hard at our price and value proposition for the full family and include that in our messaging, our marketing campaigns, and in-store pricing.
Frank Bracken: You know, that said, you mentioned the consumer and some of the demographics and income.
Frank Bracken: you know, the California market still represents about three quarters of the sales and clearly the consumer pressure there, whether it's housing, whether it's fuel prices, utilities, etc., food continues to sort of weigh on that consumer. So I think the team's done a really good job navigating the headwinds from the consumer pressure there. So we have made, you know, the appropriate slowdown in capital investments on store openings until such time as we feel we can re-accelerate, but we continue to be bullish on WSS, the leadership team, and the overall proposition as we manage through some tough consumer headwinds in the short term.
Great, thanks so much.
Speaker Change: The next question will come from Paul Luez with Citi. Please go ahead.
Speaker Change: Hi, this is Kelly on for Paul. Thanks for taking your question I'm just could you elaborate a bit more on the on the higher promos in the quarter where those? Faults, you know footwear versus apparel and sounds like They were concentrated in Nike and you had to be more reactive Based on Nike, you know promotion through the Nike DTC channel Is that a fair assumption and when we when would you expect Nike inventory to be more balanced across the marketplace?
Mike Baughn: Hi Kelly, thanks for the call. This is this is Mike and I'll start on the answer.
Mike Baughn: So, within the quarter, from a promotional standpoint in Q3, it was really Europe and apparel that were higher than what we had anticipated. We had sort of flagged Europe being concentrated some apparel promotions that were occurring, still feeling good about the overall inventory composition, but for the competitive nature and the ability to be able to respond to have some heightened promotions.
within there.
Mike Baughn: and then as we think through our Q4 outlook that we've provided.
Mike Baughn: You know, we expect those trends to continue specifically in terms of, you know, Europe and apparel, but also have seen the pace of promotion within North America, you know, particularly in DTC and then, you know, bleeding into the wholesale channels be elevated, and that's what our outlook is responding to.
Speaker Change: Got it. And just could you elaborate a bit more on the coordinate trend commentary, including your Thanksgiving week performance. Are coordinate trends running in line with guidance? Are you embedding in a deceleration column trend relative to where you're running today? Just any color that would be helpful. Thanks.
Speaker Change: So our quarter-to-day trends inclusive of that slower start and then you know what we saw across Thanksgiving and Black Friday really was the foundation for what we ended up providing.
Got it, thank you.
Speaker Change: The next question will come from Christina Fernandez with Telsey Advisory Group. Please go ahead.
Christina Fernandez: Hi, good morning. I wanted to follow up on the prior question around midnight heat trends you saw in the quarter. It seems like
Christina Fernandez: some of the softness and the brand was more broad-based. Last quarter, you had talked about some of the key lifestyle franchises still doing well for you. So can you talk about what you're seeing kind of broader with the brand and how it performed through the quarter?
Speaker Change: Yeah, and maybe I can start, and then Frank will add more, I'll just start high level, which is that, you know, I mean, stepping back, we feel really great about our partnership with Nike and our key areas of strategic focus together around basketball, secret culture and kids. And, you know, you've heard us talk about, most recently, the clinic, which is a program in conjunction with Nike and Jordan brand, as well as the home court, are just two good examples of that really coming to life through our LASA plan. And, you know, Ellie and Isimar, I think, are absolutely taking the right actions for the brand and the overall marketplace, and very confident in their actions that will benefit Nike brand, as well as our overall industry and partnership. So, you know, and we continue, as a brand, as a wholesaler, to make the right investments, we think, for our brand partners.
Speaker Change: to showcase their brands and make us the strongest on-the-channel retailer that we can be. I was praying to add a little bit more color on that.
Thank you.
Speaker Change: Yeah, I'll just start by, again, reiterating our excitement and optimism for Nike, the new leadership team there.
Speaker Change: Clearly they have strong brands with a ton of equity across both the Nike and Jordan platforms.
Speaker Change: and we're just really confident in the new offense that's being put in place and so while we work through some of the short-term pressure on some of the sell-throughs and some of the classics and lifestyle running, we are seeing that sort of right side throughout the quarter.
Speaker Change: and as we work into 2025 feel that there'll be a better sort of supply and demand balance.
Speaker Change: That said, we're not waiting. We're working very closely with the Nike team on our receipt intake, on re-merchandising our assortment to really distort the things that are newer and working better with the consumer.
Speaker Change: So think, you know, Nike Vomero, Nike Shox platform, seeing some of the new Max Air and DN perform well. And then across basketball, there's a lot to like in terms of signature athletes. We talked about Joss, Sabrina, but also the Kobe franchise has been strong, Foamposite, and then DT Max has also been a recent addition to the assortment that's performing well. So.
Speaker Change: We're in a good inventory position with them. We'll work through some of this short-term turbulence and play the long game for sure. But we're ultimately incredibly confident and appreciative of the partnership with Nike.
Speaker Change: Thanks for that caller. And then my second question was around the refreshed stores. I know it's early, the program started this year, but can you talk about if you're seeing those stores perform better than those that have not refreshed? Any insights there at least year-to-date on what you're seeing?
Speaker Change: Yeah, I'll start. I'll ask Mike to perhaps add a little more if I miss anything, but there's kind of two things to think about here. One is the reimagined stores that we talked about on the call, and by the end of the year we'll have eight of those. And we're really pleased with the performance, both of reimagined and refreshed. You know, we're seeing meaningful increases in conversion and basket sizes, and also penetration of women's footwear, particularly in the
Speaker Change: And so we're opening up the last couple of stores this year, and we look to do more in the future. But at the end of the year, we'll have eight locations.
Speaker Change: that'll really scan the globe in various store formats and sizes, which is great.
Speaker Change: So we're feeling good about about all those results and really it's all consumer insight driven in terms of a better layout, more intuitive shopping experience, better try-on experience, etc. Refreshes, you know, same story. There's sort of a reimagined is the blueprint for how we think about the whole look and feel of the of the fleet going forward. You know, seeing positive impacts on comps and gross margin. We're going to have about 400 of those done this year. By the end of 2025, we're looking to have two-thirds of the footlocker kids footlocker fleet and you know we're pleased with what we're seeing in terms of return on that investment so
Thank you for tuning in. We'll see you next time.
Speaker Change: Yeah, Mary, the only couple things I'd add to that is just, you know, when you think of the flow of refreshes throughout this year, you know, we only completed 80 of those in the first half, so Q3 was, you know, 167, so we're gonna have a similar addition of refresh stores as the third quarter in the fourth quarter to get to that 400.
Speaker Change: We've been really pleased with how efficiently the team has been doing this. You know, we're completing most of these in about 24 hours, so really minimizing the disruption within the stores.
Speaker Change: The combination of reimagined and refreshed over time, we expect to be able to get two-thirds of our fleet to brand standard within the next couple of years. And then finally, just speaking to the efficiency of the team, we announced today that our capital is going to come in a little bit lighter than what we had initially communicated.
Speaker Change: Your next question will come from Eric Cohen with Gordon Haskett. Please go ahead.
Eric Cohen: Hi, thanks for taking the question. I assume you guys have called out for a few quarters, several quarters, strong growth in Ahn, Hoka, New Bounds, A6. I'm just curious if customers coming and shopping these brands are new or incremental to Foot Locker brand rather than just buying these brands in lieu of, say, Nike or other legacy brands? Are you seeing any sort of structural shift in the demographics of your customers?
The End
Frank Bracken: Yeah, this is Frank. I'll start with that one. So I think it's some of both. I think we're seeing a consumer who's open to newness in terms of innovation and brands and
Frank Bracken: their entire closet is now representing a multi-brand sort of situation, so they're open to a variety of brands and categories, which is great for the health of us and for the health of the industry.
Frank Bracken: You know, that said, across HOKA and on, we are seeing and bringing a younger, more youthful, more multicultural consumer overall to both of those brands, and that's a function of
Frank Bracken: of course, our customer base, our real estate, and our digital marketing. At the same time, we also see new consumers to us, net new consumers coming into our funnel, which is great. So we think it's a win-win for both us and our brand partners. We're excited to represent those brands and have very thoughtful plans to increase door count, as well as improve sell-throughs in existing door bases. We've got some great holiday content and plans programmed, as well as some longer-term growth plans across that category as well. So we're very pleased and happy with the results.
Speaker Change: Great, and then just on the loyalty penetration increase, can you just talk about, is this new FLX loyalty program bringing in new customers that were not shopping at Foot Locker or is this just long time customers now signing up? Is any, sort of quantitatively, how much more these customers are spending or how much more frequently they're buying?
Speaker Change: Yeah, so we're seeing, again, some of both. I would say that because of the sign-up process and the convenience of our new in-store sign-up, we are seeing what were existing consumers now opting into our program because we've made it easier for them to do so. So that's been a net win. But of course, we also had some existing program members that we migrated over to the new platform. Overall, we're still, again, in the very early stages and effectively the second quarter of the rollout here in North America. But we are pleased with the engagement levels we've seen with consumers up and down the funnel. We are seeing increased spend, increased basket size, units per transaction. And then early, early, but also some good green shoots around.
Michael Higginbotham, Mary Dillon, Michael Baughn, Franklin Bracken
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Ms. Mary Dillon for any closing remarks. Please go ahead.
Mary Dillon: Thank you for joining us today. I remain confident that our decisions and strategies are the right actions to put Foot Locker on the continued path towards sustainable growth. I want to extend my thanks to the entire Foot Locker team and especially to our global Striper community for their dedication and commitment in ensuring that we have a successful holiday across our stores, online, and at our distribution centers. We look forward to updating you on our progress next quarter. Thank you and goodbye.