Foot Locker, Inc.

Good morning ladies and gentlemen and welcome to Fort Locker's fourth quarter 2020 financial results conference call. At this time all participants are in listen-only mode. Later we will conduct a question and answer session. This conference call may contain forward-looking statements that reflect management's current views of future events and financial performance. Management undertakes no obligation to update these forward-looking statements which are based on many assumptions and factors and including the impact of COVID-19, effects of currency fluctuations, customer preferences, economic and market conditions worldwide, and other risks and uncertainties described more fully in the company's press releases and in reports filed with the SEC, including the most recently filed Form 10-K or Form 10-Q. Any changes in such assumptions or factors could produce significantly different results, and actual results may differ materially from those contained in the forward-looking statements. Please note that this conference is being recorded. I will now turn the call over to Jim Lance, Vice President, Corporate Finance and Investor Relations. Mr. Lance, you may begin.

Thanks, Operator. Welcome, everyone, to Foot Locker, Inc.' 's fourth quarter earnings conference calls. As described in today's earnings release, we reported fourth quarter net income of $123 million compared to net income of $134 million for the fourth quarter of last year. On a per share basis, fourth quarter earnings were $1.17 compared to earnings per share of $1.27 last year. This year's quarter includes pre-tax charges of $62 million related to the impairment of certain underperforming stores, a $4 million charge related to the impairment of one of the company's minority investments, a $4 million charge related to reorganization of headquarters and support organization in a mayhem, an $11 million gain that primarily reflects an advance on our insurance coverage related to social unrest, and a $5 million benefit in our deferred tax assets due to changes in Dutch tax law. Excluding these items, fourth quarter non-GAAP earnings were $1.55 per share, down 4.9% compared to earnings per share of $1.63 for the fourth quarter of last year. Lastly, 2020 full-year non-GAAP earnings were $2.81 per share, down from $4.93 in 2019. A lot is otherwise noted the figures and rates mentioned during our call today will be based on non-GAAP results. A reconciliation of GAAP to non-GAAP results is included in this morning's earnings release. We'll begin our prepared remarks with Dick Johnson, Chairman and Chief Executive Officer. Andy Gray, Executive Vice President and Chief Commercial Officer, will then provide additional insights into the business drivers in the quarter. Lauren Peters, Executive Vice President and Chief Financial Officer, will then review our fourth quarter results and provide some directional color around the first quarter of 2021. Following our prepared remarks, Dick and Lauren will respond to your questions. With that, I'll now turn it over to Dick.

Thank you, Jim. Good morning, everyone, and thank you for joining us. First off, I want to sincerely thank every associate at Foot Locker Incorporated for their commitment to the business through this remarkable year. Without their agility, focus, and creativity, we could not have overcome the many obstacles we encountered in 2020. Whether it was our store teams adeptly tackling the huge lift of closing and reopening our large store fleet, For our corporate employees quickly adjusting to function at a high level in the new work from home environment, we demonstrated what can be achieved in the face of adversity when our people band together and perform as one team. I am extremely proud and grateful to lead this exceptional group. Consistent with that, we are pleased to report that we delivered a strong bottom line result against the challenging macro backdrop in the fourth quarter. While we experienced some top line headwinds due to COVID related store closures in Europe and Canada, coupled with inventory delays due to congestion at the domestic ports, our overall performance shows that our teams were able to perform at a high level and remain focused on our customer. Our results were fueled by a solid product pipeline, an exciting holiday campaign and healthy customer demand. As a result, we drove strong full-price sell-through, healthier margins, and higher inventory productivity. In several of our divisions, comps positive in Q4. Moreover, on the whole, we saw sequential improvement as the quarter progressed. Following a low double-digit decline in November, comps turned modestly positive in December and January, finishing the year on a strong note. We believe the effect of fiscal stimulus was a positive in January as well. Our digital business remained a catalyst through the quarter, delivering impressive double-digit growth overall with strength across the board. In regions most heavily impacted by store closures, digital growth was up triple digits. In fact, in Europe, COVID-related restrictions have been an accelerator for digital capability and growth. For example, omnichannel growth in France was positive for the combined December-January period. Complementing the digital strength are some exciting new stores in this key market, including the opening of our Paris Power Store on Rue de Rivoli. As we've said before, we expect some of this accelerated shift to digital to remain permanent. Youth culture is increasingly looking towards digitally-led and culturally-connected brands for engagement Our significant investment in our digital capabilities has laid a strong foundation for us to continue deepening these connections with our customers. Turning back to our performance, I'd like to highlight Asia Pacific as it was our fastest growing geography globally, fueled by both strong growth in Australia and New Zealand and continued expansion across the region. We opened our first three Foot Locker stores in South Korea, including a power store in Hongdae and a high-profile store in Myeongdong. The latter is located in M Plaza, the premier shopping area in South Korea. Our store boasts three levels, including enhanced basketball and women's spaces and local artwork throughout the store. With one of the largest online markets in Asia, we expect South Korea will be an important long-term omnichannel growth driver for Asia Pacific in fiscal 21 and beyond. Andy will provide more detail around product highlights in the quarter and what we see in the pipeline for Q1. At a high level, ongoing strength in basketball remained a key driver within footwear. And while performance in running and other categories was impacted by shifts in the launch calendar, elevated storytelling around strategic brands such as UGG, Crocs, and Vans also contributed to the excitement during the holiday period. Within apparel, comfort trends around fleece remained strong, but as was the case with footwear, inventory pressure hurt our ability to entirely meet that demand. Now let me provide an update on our strategic initiatives and technology milestones. Beginning with FLX, This month marks the one-year anniversary of the North America launch of this important loyalty program and I'm pleased to say it was a successful year. Globally, we now have more than 17 million members enrolled in the program and we continue to see encouraging trends in the performance metrics. On average, members are spending more and shopping more frequently than non-members and often across multiple banners. Importantly, FLX is also proving a valuable customer acquisition tool, with over 44% of our members representing new-to-file customers. I look forward to keeping you updated as we aim to aggressively grow FLX membership. Moving to our key technology initiatives, we made strides to improve our omni-channel capabilities and add new functionality in Q4. We further developed our omnichannel experience by activating a Shop My Store feature on our website, which makes it easier for our customers to find products that they can pick up in nearby stores, strengthening the physical, digital connection that we know our customers expect. Second, we extended Apple Pay and Google Pay to our selection of digital payment options, building on our new payments platform and adding convenience and flexibility to the checkout experience. Third, building on the upgrade to our POS systems we talked about last quarter, we activated contactless payment options on handheld POS devices in many of our stores. This not only helped us maintain social distancing and keep register queues down during the holiday season, but also added speed and convenience for customers and associates. Finally, we launched a pilot dropship program with Nike to activate additional inventory on our sites that is not held in our stores or warehouses. While it's early on, the program aims to provide more of the right product at the right time to better satisfy customer demand and shorten lead times. We often talk about the changing dynamic of the global marketplace, and our laser focus on consistently enhancing the customer experience. To that end, in Q4, we established a new North America operating structure that created four distinct regions, each with its own geo-leader and customer experience team. Our goal is to put a hyper-local lens on underserved primary and secondary markets by customizing our outreach to individual neighborhoods. Coupled with our community store strategy and partnerships with local brands, schools, and organizations, this will enable us to sharpen our connectivity with our consumer. Our test of this strategy in the Northeast last year yielded encouraging results, giving us the confidence to expand it across North America and begin testing it in EMEA. Turning to our social responsibility initiatives, We continue to make great progress with our Leading Through Education and Economic Development program, or LEAD, as part of our commitment to fight racial inequality and injustice. Some exciting new developments within this effort include committing to invest $5 million in Mack Venture Capital, a black-managed venture capital firm dedicated to advancing businesses with diverse leadership. expanding our marketing partnerships and brand collaborations to 34 new Black-owned brands and creators. These include influencer partnerships and culture curators who define our brands and sneaker culture across social platforms, and enrolling nearly 100 team members in McKinsey & Company's Black Leadership Academy, a program that extends from executive mentorship to management capabilities. In addition, Tying back to our lead initiative, we are excited to continue working with our investment partner, Pencil, and its founder, Dwayne Edwards, to introduce robust programming in 2021 aimed at developing the next generation of Black designers. This includes education programs, scholarship opportunities, internships, and apprenticeship programs. In closing, I'm extremely proud of what we accomplished in 2020. but it's only the beginning of a new chapter for Foot Locker Incorporated. I am energized and looking forward with renewed optimism as we continue to advance our long-term strategies and build value for all our stakeholders. We've gleaned many insights through this unique COVID period, from the power of our enhanced digital capabilities to the strength of our relationships with our vendor partners, the depth of our connections with our consumers and the exceptional resilience of our global team. When viewed through the lens of our strategic imperatives, these insights will help guide our thinking into fiscal 2021 as we execute against a number of opportunities in the marketplace and strengthen our position at the center of youth and sneaker culture. Looking to fiscal 2021, with robust product tailwinds at our back, we believe we are set up with momentum. That said, the bottleneck situation at the ports remains in flux. Our merchant teams are working hard to maximize productivity and full-price sell-through, and we should gradually begin to see receipt flows and inventory levels normalized. I also need to add that the impact and uncertainty of COVID lingers on, forcing stringent lockdown requirements to remain in effect, largely in Europe. As a result, over 10% of our global store fleet is temporarily closed to comply with these restrictions. Even with uncertainty ahead, one thing that remains clear is the passion our customer has for this category, and we are committed to meeting their needs. Of course, we will continue to adapt to the COVID situation in real time, from market to market, putting the health and safety of our associates and customers first. while striving to deliver a standout customer experience. Now, before I turn the call over to Andy, I'd like to take a moment to congratulate and thank Lauren for nearly 24 exceptional years here at Foot Locker. Her contributions over that time have been many, and under her leadership as CFO for the last 10 years, we've built a truly world-class finance team. And she's been an incredibly valuable partner to me personally. While her retirement is well-deserved, she will be greatly missed. On behalf of the entire organization, I wish Lauren well as she moves on to this next exciting chapter of her life when she retires in April. And we'll now pass it over to Andy.

Thanks, Dick, and good morning, everyone. Let me also extend my thanks and congratulations to Lauren. It's been a pleasure working with you, and I wish you the very best in the years ahead. On our business, the continued focus against driving product leadership and diversity, maximizing our omnichannel capabilities, and enhancing our purpose and community initiatives was evident throughout the quarter, even against a challenging backdrop. In total, our footwear and apparel business both declined low single digits, while our accessory business was down high single digits, largely due to continued softness in bags and shoe care. The results in footwear were mixed, with gains in our North American footwear business offset by declines in Europe. Similarly, continued momentum in women's and kids' footwear, which delivered strong comp gains of high single digits and mid single digits respectively, was offset by a high single-digit decline in men's footwear. By category, men's basketball remained a bright spot in the quarter, delivering a low single-digit increase, led by strong storytelling and momentum around the key Nike icons, a strong pipeline of high-heat Jordan releases, and some compelling new initiatives by Puma and Reebok. Additionally, our seasonal merchandise across genders was very strong throughout the quarter, up double digits, with gains in UGG and new introductions, including Crocs. Meanwhile, men's running was down double digits, primarily due to a shift in the launch calendar related to Yeezy. Within apparel, women and kids also led the way with healthy double digits and low single-digit gains respectively. Men declined mid-single digits. As Dick mentioned, although fleece and comfort trends remained strong, inventory challenges created a pressure point. That said, results improved throughout the quarter. Fleece was the biggest driver with good performances by Nike and Adidas, complemented by ongoing partnerships with the North Face, Chinatown Market, and an expansion of our proprietary brands, which added new dimension to our business. And across all product areas, our customers responded well to elevated storytelling, while our consumer concept offense continued to deliver exciting, exclusive programs. These included Fresh Perspective, which featured unique versions of Nike's iconic silhouettes, a successful kid partnership with Puma and LOL Surprise, and the launch of our own Hype Bay collection to broaden our women's assortment. This was surrounded by the main event of the quarter, our 12 Days of Greatness campaign, where we partnered with some of the industry's top creators around the culture of basketball, including Just Dawn, Jeff Staple, Ruiji, Melody Asani, and many more. And we also continued to invest in new ideas through our greenhouse incubator and our homegrown initiatives, which created energy and provided a platform and exposure to the next generation of creators. And there's a lot coming to market in Q1 to keep our consumers engaged and excited. The culture of basketball remains strong. We will be celebrating city and community insights with our Nike Max Air concept, along with new and exclusive ideas against our key franchises with Adidas, Puma, Reebok, and New Balance. We have a big seasonal push with UGG, Crocs, and Champion, and we continue to develop new partnerships and programs with Diodora, Pipe Bay, K-Swiss, and our homegrown brands. And lastly, we have a strong pipeline of ideas and apparel to maximize the continued trend shift we've seen these past few quarters. In all, Despite some of the external headwinds, our underlying franchises are strong and the many new ideas and concepts flowing into our business are resonating with our existing customers and bringing new ones to us. As we continue to push our consumer offense forward, it's the combination of our connected product stories, our enhanced Omni capabilities, and our focus on community and purpose that will strengthen our relationships with our consumers. With that, I will now turn it over to Lauren.

Thank you, Andy, and good morning, everyone. We delivered solid bottom-line results on the fourth quarter, despite facing macro challenges that pressured our top line. Our comp sales declined 2.7%. This was largely due to COVID-related store closures and backlog at the U.S. ports, along with traffic declines in our largest global tourist markets. However, our gross margin improved compared to last year, both in dollars and on a rate basis, given healthy product demand and lower promotional activity on fresh inventory. This helped to partially offset higher SG&A expense, resulting in a mid-single-digit earnings per share decline in the fourth quarter, as our team executed nimbly against a dynamic environment. We were also pleased to report that total sales for the year decreased by only 5.7% to $7.5 billion. This is a noteworthy result given the significant top line pressure we experienced in Q1 of 2020. During the quarter, our stores were open for roughly 90% of potential operating days. But the breakout between regions tells a more accurate story. U.S. banners were open for nearly 100% of total days, while Foot Locker Europe and Canada were lower at approximately 60%, and Sidestep at roughly 50%, given the COVID restrictions. Taking a look at our fourth quarter results in more detail, total sales decreased 1.4%, or 3%, on a constant currency basis. Once again, our direct to customer channel led the way with a 44.2% sales increase, largely offsetting a 12% decline in our stores. As a percent of total sales, DTC rose to 27.4% for the quarter, up from 18.7% last year. Overall, we believe the external factors we described earlier somewhat masked the underlying strength of the holiday season. As Dick mentioned, multiple divisions comped positive in the quarter. Additionally, the sequential momentum we saw through the quarter was encouraging, as a low double-digit comparable sales decline in November was largely offset by modestly positive comps in December and January. Not surprisingly, the number of store closures in Europe and Canada, along with efforts to maintain social distancing measures through the higher volume holiday period, resulted in a double digit decline in store traffic. But our customers continue to shop with intent, driving conversion levels up 33% over last year. Average selling prices were up low single digits in the quarter. while units were down high single digits. Taking a look at our performance by region, in North America, Kids Foot Locker led the way with a double digit comp gain. Foot Action and Champs followed, both increasing mid single digits. Impressively, Foot Action and Kids also delivered full year comp increases, up mid single digits and low single digits respectively. Congratulations to the teams for an outstanding job. Foot Locker was essentially flat for the quarter, while Foot Locker Canada, which contended with numerous store closures, was down double digits. East Bay was also down double digits, as sales of hard goods and team performance product faced the continued headwind of lower group sports participation, primarily due to the pandemic. Internationally, Foot Locker Pacific continued its hot streak with comparable sales up double digits, capping off an impressive full year performance, which was also up double digits. Congratulations to the Foot Locker Pacific team. Foot Locker Asia delivered a double digit comp decline as COVID related store closures had a significant impact on the smaller base of stores there. Turning to Europe, as we've already discussed, widespread COVID restrictions across countries drove a double digit comp decline at both Foot Locker Europe and Sidestep. Although the direct businesses were very strong for both banners, they could not offset the declines in their stores due to lower digital penetration rates. Turning to the rest of the income statement, our gross margin leveraged by 160 basis points to 33.1% in the fourth quarter from 31.5% last year. Our merchandise margin rate was flat, driven by a meaningful reduction in markdowns. both on a sequential and year over year basis, offset by higher freight expense and the greater penetration of digital sales. The latter negatively impacted our gross margin by roughly 90 basis points. With respect to our inventory position, although we achieved our goal of being at a healthy composition by the end of the fiscal year, our levels are lower than we would like. At quarter end, our inventory was down 23.6% compared to the low single-digit sales decline. On a currency-neutral basis, inventory decreased 25.5%. As Dick said, we expect to see our inventory levels gradually normalize. Leverage of our relatively fixed occupancy and buyer's compensation provided us with 160 basis points of improvement versus last year. This was primarily driven by $29 million of COVID-related tenancy relief during the quarter, mainly comprised of one-time rent abatements. Our negotiations with our landlord partners remain ongoing with respect to additional rent relief. Our SG&A expense rate in the quarter delevered by 160 basis points to 21% of sales from 19.4% in the same period a year ago. Although our team continued to exercise discipline in managing expenses, the sales decline, coupled with nearly $4 million of PPE expense and 100 basis points of incremental bonus expense versus last year, contributed to this quarter's rate. That said, roughly $9 million in government subsidies provided some offset. For the full year, our SG&A expense rate increased to 21% from 20.6% last year, primarily due to deleverage on the sales decline, as SG&A dollars were down 3.8%. Depreciation expense was $44 million, down slightly to last year. We incurred interest expense of $2 million as compared to $2 million of interest income last year due to lower interest rates on our cash balances as well as higher fees related to our amended credit facility. On a gap basis, our tax rate came in at 22.9%. 380 basis points lower than last year due in part to the current year Dutch rate change we highlighted in our press release, offset by the revaluation of certain intellectual property. On a non-GAAP basis, our tax rate came in at 25.4%, below last year's Q4 rate of 26.1%. Looking at our liquidity, We ended the quarter with $1,680,000,000 of cash and cash equivalents, an increase of $773 million from the end of Q4 last year. Working capital was a significant source of cash with the reduced inventory and increase in payables driven by receipt timing relative to last year, coupled with our cash preservation efforts early in the year. We currently have no outstanding borrowings on our $600 million credit facility. Signaling confidence in our financial position, our board recently approved a $275 million capital expenditure program for fiscal 2021. With our ample liquidity, we believe we have the financial flexibility to manage through near-term macro fluctuations. while also resuming a higher level of investment into the business. As such, we plan to spend approximately $160 million to improve our store fleet in 2021, including approximately 100 new stores with further expansion in Asia and approximately 130 remodels or relocations of existing stores. We plan to close approximately 150 stores The balance of the capital expenditure program is focused on digital and supply chain initiatives designed to further improve customer experience. Turning to our return of cash to shareholders. This quarter, we returned $15 million to our shareholders in the form of our dividend. Last week, our board declared a 33% increase to our quarterly dividend to 20 cents per share for the first quarter of 2021. Regarding our share repurchase program, we repurchased roughly 660,000 shares for $27 million. We will continue to assess additional opportunistic buybacks going forward based on the environment. In terms of capital expenditures, we invested approximately $43 million into our business during the quarter, bringing our total for the year to $159 million, which was in line with our guidance. This funded the opening of 19 new stores, including the opening of our first stores in South Korea, as Dick mentioned, as well as the remodeling or relocating of 39 stores. bringing the total year-to-date openings to 69 stores. We also closed 53 stores in the quarter, primarily in North America, leaving us with 2,998 company-owned stores at the end of Q4. Given the ongoing uncertainty of the pandemic and the low visibility into the impact on our operations, we are still not providing guidance at this time. However, as you think about your models for Q1, it may be helpful to consider the following. Looking at sales, keep in mind that we are up against a 43% comp decline last year, as our stores were only open for 50% of potential operating days. Although the situation has much improved over last year, we are contending with over 10% of our store base temporarily closed due to COVID restrictions. With respect to gross margin, given the level and relative freshness of our inventory, we expect less promotional pressure on merchandise margins as compared to last year. Additionally, our current forecast does not contemplate significant rent abatements. Also keep in mind that our occupancy cost as a rate of sales last year was artificially inflated due to the deleverage on the steep sales decline. As such, we expect occupancy as a percent of sales to be closer to historical norms this year. Lastly, we expect elevated freight costs to remain a headwind. With respect to SG&A, please take into account that PPE costs will be incremental in Q1 this year, as we had virtually no PPE costs in Q1 last year. Looking at our non-GAAP tax rate, for the full year, we expected to remain somewhat elevated relative to historical levels due to geographic shifts in income, though not to the same degree as 2020. Before we take your questions, I'd like to thank the entire Foot Locker team for all their well wishes as I prepare for this next phase of my life. My more than two decades at Foot Locker have been incredibly fulfilling, and I've been very fortunate to work alongside such a talented and dedicated group. In fact, it has been an honor. I am extremely proud of our many accomplishments over the years. and the strong team we've built. The decision to move on is certainly bittersweet, but I know the company is in very capable hands. I look forward to watching Foot Locker's continued growth in the years ahead and will be cheering them on from the sidelines. With that, operator, please open up the call for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you'd like to register a question, please press star then the number one on your telephone keypad. If your question has been answered or you would like to withdraw your registration, please press star then two. If you're using a speakerphone, please lift your handset before entering your request. Once again, if you'd like to register a question, please press star one on your telephone keypad. The first question is from John Kernan from Cowen. Please go ahead.

Excellent. Good morning. Thanks for taking my question. Good morning, John. So, Dick, inventory dollars are at the lowest levels they've been in well over a decade, and I think even longer than that. I'm just curious how you think you're going to be able to service what could be elevated demand as stimulus checks start to mount. You obviously had a big second quarter Last year when stimulus went out, here is how you're viewing the environment to go after what should be fairly strong demand in coming months.

Yeah, we certainly anticipate strong demand, John, and I think you have to rewind all the way to March and April a year ago when we were starting to make adjustments. In the middle of Armageddon, we were making adjustments to inventory, pushing out, canceling, etc., We then came back and saw exceptional demand in the second quarter. You know, and the merchant team worked with our suppliers to sort of reshuffle again. We pulled inventory in where we could. Similar situation in third quarter where we exceeded, you know, what would have been our thinking back in March, April certainly. And, you know, probably the thing that we didn't contemplate was a slowdown at the port, certainly in North America, where You know, the delay on getting ships into port and the delay on getting containers through the port has impacted us as we got into Q4. So, again, I think our inventory levels will certainly begin to normalize over the quarter. You know, we're working with our vendor partners to look for alternative routing, et cetera. But, you know, I guess having great sales is a good thing to have, right, and, you know, being able to service the customers in the first quarter, second quarter, as we believe the stimulus package will, in fact, pass. The team is working hard to make sure that we get as much inventory available as possible.

Got it. And then, Warren, congratulations on your retirement. Thanks for all the help over the years. I wanted to see what your view is on the long-term shift to digital and the overall effects on not only the gross margin but the operating margin line, that there was a headwind In Q4, I believe, related to digital growth, some of the mix shifts obviously will normalize in 2021. I'm curious, though, as you look at digital now, how does this affect the long-term economics of the business?

Well, we want to service our customers however they choose to shop with us, and we know that digital is really important to that journey. So as we think about the long-term lasting impacts of what we've experienced this year, I guess we'll look back at it and say we were pleased to have had this hyper focus on digital because it really helped us hone our skills both in the technology and operational way to service that digital customer. So sometimes you get asked to predict, well, what's the level going to be? I don't pretend to know that. We know that when doors are open, our customers want to be in our doors as well. So we continue to see it being an omni-business model that serves us well. But you asked about the impact on the P&L. As we've described now for several quarters, there's obviously the freight that comes with shipping that product the last mile to the customer. And so when you think about gross margin, those digital sales do bear the cost of the freight. We have BOPUS initiatives as well, so we see that omnichannel offering allowing us to somewhat balance that, but that's the primary differential there. It doesn't bear the cost, obviously, of occupancy cost or selling wages to service those digital sales. So when you think about a finished margin or a contribution margin, primarily digital, right, so contribution margin being a contribution to overhead, those digital sales have a rate that is more beneficial than a store sale, which bears selling wages and occupancy costs. So that's the blend. And as you think about long-term, what it means to the P&L, well, it'll be about finding that right balance of stores and digital and optimizing the P&L overall. So, Shirley, we demonstrated in 2020 how strong our real estate team is at navigating occupancy and working with our landlords to find productive rates on that occupancy. We have built into our occupancy lease terms, you know, length of lease, flexibility as we navigate the North America rationalization of mall space. So I think all of these things set us up well to find the balance point as that shifts out over the years, digital stores.

Maybe one quick follow-up on merchandise margin. Obviously, a lot of movement in the first half of fiscal 20. Is there anything stopping merch margin or preventing merch margin from returning close to 2019 levels, given where your inventory levels are now?

Well, as we've just talked through, there's going to be this balance of digital stores, and that will certainly have an impact on the margin with that freight component. But if you're asking me about markdown levels, which is another important element to that, you know, I would say no. I mean, I think we've done very well at managing our promotional cadence because we have always been very focused on making sure that the inventory quality is fresh, and that has the primary impact on the markdown level.

Got it. Thank you. The next question is from Jonathan Compt from Baird. Please go ahead.

Yeah, good morning. Thank you. Maybe a bit of a follow-up, but I wanted to see if you could give any more color just on how, from your vantage point, the vendors are handling some of the inventory constraints, but also the expectations for potentially strong sales in the month ahead. Just what are you seeing on the vendor side for the key partners?

Again, you have to remember that we operate in a futures world, so our ability to pull inventory ahead is what we're really focused on today. Working with the merchant teams and our vendor partners, my belief is we're set up well for the quarter if we had no port congestion at all and no stores closed in Europe. There's a real balance point for us. And again, I think the merchants have done a good job of lining up the inventory. The question is the flow into our stores and into our distribution centers. But as it relates to our vendor partners and the relationships and their willingness to work with us to get the inventories levels where we need them, there's no hesitation at all.

Okay, understood. Thanks for that. And then Maybe a separate question back to margin. If I look at the last few quarters here, you've been operating combined above 2019 sales levels and pretty close from an operating margin perspective just over the last three quarters if I look versus 2019. There's obviously a lot of noise in that. Any broad stroke thoughts looking forward, how you should be able to recover margin, you know, in a sales recovery scenario? And if you get back to prior sales levels, are there different levers that you can get back towards, you know, 9% operating margins?

Well, I guess I would say points you to, as you've already looked to, to 2019 as being the last year without a lot of noise. And at the beginning of 2019, of course, we talked about how we saw our longer-term objectives around the business and the P&L model. And we would still see those as being objectives that we've got a shot at achieving over the longer term. So a lot of noise in 2020, but as we look to things normalizing, I would only point you in the near term to we still have this incremental cost related to PPE, and who knows how long that's going to be with us.

Okay, understood. Thanks, and best of luck in the next chapter, Lauren. Thank you.

Thanks so much. The next question is from Paul Lejuez from Citi. Please go ahead.

Sorry, guys. Thanks for taking the question. Can you talk a little bit about gross margin in the quarter by region? Obviously, you talked about a flat merchandise margin, but any color you can give by region. Any way to quantify the DP&E cost that we should be thinking about for this upcoming year, near term, both first half and second half? And then last, I'm just curious, how are you thinking about the release calendar in the first half and how that might influence, you know, 1Q versus 2Q performance? And then, you know, again, you know, match that against what's going on at the ports. Thanks.

Well, I'll take the first two answers. Let's talk about the lunch calendar. The regionality margin result on Q4 and even last year, it just has got so much noise in it. If you look at Q4, North America potential days open, we were close to 100%. That kind of dynamic certainly is in contrast to Europe and Canada at about 60% and sidesteps at 50%. I mean, those are just too different to really hold much value in picking them apart in the margin results. But I would tell you, when customers can get in and shop, it doesn't matter which of these regions, they like this product, they like this category, and they certainly see us as being a purveyor of really premium, cool product.

Laura, on the Europe side, though, you talk about weaker sales, obviously, but did that also result in much weaker merch margins compared to the U.S. business, which I think you said was flat on the blocker side?

When you've got that many doors closed, there is some level of promotional activity to ensure that you're keeping your inventory fresh. So it does have a correlation. When the doors are open, you don't experience that to the same degree. You've got more options to move your product, so it does have a margin impact.

Right, but no quantification that you can provide.

No, I just don't think it's going to be helpful with trying to paint the picture forward because it just was so different. On the PPE front, we've now had two quarters where the run rate on that was $4 million. So that's a pretty fair proxy for what you should expect. And, you know, we'll see. We continue to experience that. We've all become so used to carting around our own hand sanitizer. We bring it into the store and wherever we go. So there's less that falls on the retailer to supply there. But masks and cleaning supplies and stock covers, all of these things are with us for a while. So that's a pretty good run rate to use as a proxy for now. Dick, you want to talk about the product?

Yeah, when we jump to the launch calendar, we really like the way the launch calendar lined up going into the quarter. Clearly the slowdown at the ports is having some impact on the throughput, but again, from a launch versus launch, while they shift, as we've talked about many times, week to week, sometimes month to month, the launch calendar lines up really, really well for us. So again, the team is working hard to make sure that we've got the launch product available and that we prioritize that as it flows through the port and through our distribution center. But I think there's equal excitement around some of the other programs that Andy referenced in the prepared remarks. You know, when you think about bringing in our Nike Tuned Air product, you think about the blazers that are coming in. You think about the big investment that we're making in Crocs. All of the work that we're doing with Puma and the RSX and the Ryder and the Suede, I mean, are great examples. Our New Balance 327, you know, program is significant. Our Vans old school program is significant. The NMD program with Adidas, I mean, just really great, strong product that are I call them Monday through Friday sort of products as opposed to launch. But going back to specifically your question, the launch calendar lines up well. We're working hard to get those sneakers through the port and into our stores on launch date. But the surrounding business is really strong as well. The receipt flow looks really strong as well. Thanks, guys. Good luck.

Thanks, Paul. The next question is from Susan Anderson from B Reilly Securities. Please go ahead.

Hi, good morning. Thanks for taking my question. I guess just to follow up on the inventory levels, I'm just curious, is the product just sitting in the ports or on the water just delayed? How do you see that flowing in over the first quarter? And then where do you see inventory at first quarter end? And I think you mentioned a drop ship with Nike. Is that helping to alleviate the inventory issues at all, or it's still just very early days? And then I'm curious also if Nike's also seeing the same inventory issues. Thanks.

Well, the question on the ports and the flow is something that I'm not willing to predict and guess, right? You know, it's all COVID-related is the the port is slowed down due to COVID precautions and workflow is slowed down. You know, once the product gets into our portion of the supply chain, you know, I feel really confident that our team can move through the inventory and get it in the right place very quickly. So, you know, again, we think that it will start to normalize over the quarter, but, you know, we felt good about it going into, you know, last week, and then we saw a snowstorm that threw off the the intermodal sort of transportation that slowed things down. So there's a lot of variables out there. The drop ship program with Nike is really in its early, early stages. So while we certainly believe there's going to be benefits to us, Nike, and the consumer, it's just too early yet to say that we're seeing that impact moderate the inventory levels for us. And then as it relates to Nike inventory levels, that's a question that you'd ultimately have to ask them. I don't know where their inventory levels are at, but we clearly work closely with them as we work through our inventory challenges and the ports and moving things as quickly as we can, looking for alternative shipping routes, et cetera.

Great. Okay, that's helpful. And then if I could just add a follow-up on Mint's footwear, I guess the decline in fourth quarter, how much of that was related to Yeezy, Shift, and then I guess just lean inventory levels? And it sounds like you expect the pipeline in first quarter to be better than fourth quarter, maybe if you give a little bit more color there. Thanks.

Yeah, well, we wouldn't break down the specifics tied to Yeezy, but clearly the Yeezy launch shifts to earlier in the year had an impact on men's in the fourth quarter. So that's a good read through, Susan, on that impact. But we won't quantify the amount of Yeezys that moved out of the quarter. The pipeline, we do feel good about in the first quarter. And again, I think the flow is good. The programs that I mentioned, the launch calendar, If you go out and take a look at FootLocker.com and the launch calendar, you can see some really, really great products lined up. Again, the biggest question is ultimately the flow through the ports and getting them into our doors as it relates to all our digital sites. Clearly, in Europe, with the number of doors that we've got closed there, there'll be a significant push on the digital launch business. Again, there's a lot of moving parts and a lot of pressure points, but I think our team is navigating them pretty well. And again, I guess having great sales in Q2 and Q3 and pulling inventory into those quarters has left us, as Lauren talked about, a little bit leaner than we would like. But we do see that normalizing over certainly the first quarter, the first half.

Great. That's really helpful. Thanks so much. Good luck this quarter.

Thanks, Susan. Appreciate it. The next question is from Omar Saad from Evercore. Please go ahead.

Good morning. Thanks for taking my question. Lauren, congrats on a great career and your retirement. I wanted to follow up on the store closures. You mentioned that 10% are currently closed. Can you share that number, what it was throughout the fourth quarter? Obviously, store closures aren't going to be permanent and the port issues aren't going to be permanent. Maybe you could also give us a sense how material the port backup was in the quarter. Is it something relatively small or is it maybe more meaningful, the drag there? And then I had a follow-up question about the Nike inventory pilot too. Thanks.

Well, you know, Lauren hit on the door closure percentages or open percentages, I should say, across the quarter, across the geographies. And right now the door closure situation is mostly in Western Europe. You know, specifically Germany, you know, with the big door count closed. The UK with the big door count closed. France has about 60% of the doors in places that are closed. We've got restrictions in Italy where many, many malls are closed on weekends. You know, so there's a lot of moving pieces there. Canada has just started to open up, especially Ontario I think is scheduled. to open up in segments. So that's where our biggest store count is in Canada. And keep in mind that across the U.S., in many jurisdictions, we still face capacity limitations in stores. So we're in the same belief, Omar, that the closures aren't going to last forever, but they certainly impact the fourth quarter. If you go back and sort of take a look at the announcements by country, more in the last half of december through january than november first half of december but uh there were some governments that took some pretty drastic uh closing measures as we worked our way through the quarter um sorry omar what was the second part of the question the port the port was that a material that was the port backup a material impact on the quarter as well or relatively small uh it's a material impact for us right i mean we there's uh You know, according to the wires, there's about 30 ships that are backed up. You know, not that we have product on all 30 of those ships. And it's less about the backup than it is about the length of time that it's taking product to get through the port itself. And, you know, we're seeing about two- to three-week delays. And, you know, we have an awful lot of inventory that comes in through the West Coast. So it's a material number.

Got it, got it. And then, Dick, on the Nike – inventory pilot. I know it's still really early. Is this contemplated as something that could be a significant addition to your overall kind of SKUs and choice count that's available? Is it going to be a certain type of product, a certain level or premium level of product or categories of product, or is it still too early to make those calls?

Well, it will certainly be an enhancement to our offering, right? The program will continue to evolve with Nike as we figure out the that puts in the takes of what works and what appeals to the customer and what doesn't. But more importantly, it's places that inventory is sold out that we have a chance to get at more inventory. So again, as we made sure that the pipes are working and that the communication works back and forth, we're slowly starting to expand the SKU base that's available. And I'll feel more comfortable talking about the possibilities as we get into you know, 2021 a little bit deeper and we see the program, you know, work at its best and as we continue to expand the opportunity with Nike.

That's helpful context. Thanks.

Thank you, Omar. Our last question comes from Robbie Ohms from Bank of America, Merrill Lynch. Please go ahead.

Hey, good morning. Thanks for fitting me in. Lauren, you know, congrats on the retirement. All the best. And actually, you're welcome. And my question is maybe for you. I know you guys aren't giving guidance, but could you just maybe give us some color on how you're thinking about wage pressures in general going forward for Foot Locker and maybe remind us where your starting wages are at? And also on the freight side, I understand all the shortages in your term, but What about what's the freight cost outlook when you look, you know, through this year? Are there still pressures beyond getting, you know, when you get beyond port congestion? So sort of freight and wages, anything you can share with us would be great.

Yeah, well, on the wage side of it, as you know, we run a full-service model in our stores, and those stripers are a strategic competitive advantage. Well, I just can't say enough about that team, and our customer really values the experience with those associates. So, of course, we... want to make sure that we pay competitively, and we do. And certainly as there's conversation about minimum wages increasing over the coming years, that will impact our wages. But we remain very focused on how we navigate that productively, that this has been an ongoing dynamic. And so the things that we have done to enable our sales associates to be more efficient so that the hours are focused on their time with a customer are very helpful to navigating the wage outlook. We are equipping them with technology so that it's more efficient as they're servicing that customer, and we are doing everything we can to make their non-selling hours more efficient. And so these are the things that we think will allow us to navigate that change in wages as we look forward. We believe that there are still things that we can do there. On the freight front, I don't know that we see that dynamic changing much in the near term. Certainly lots of folks still shipping everything everywhere, and that puts pressure on that element. You know, can we look at a crystal ball and see a point where that normalizes and that's less of a headwind? Yeah. Anybody's call.

Got it. That's, you know, very helpful. Best of luck again. Thank you.

Thanks, Robbie. I would like to turn the call back to Mr. Lance for closing remarks.

Thank you for joining us today. Please join us again for our next earnings call, which we anticipate will take place at 9 a.m. on Friday, May 28th. The call will follow the release of our first quarter results earlier that morning. Thanks again, and goodbye.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.