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.