Foot Locker, Inc.

Q3 2021 Earnings Conference Call

11/19/2021

spk02: Good morning, ladies and gentlemen, and welcome to Foot Locker's third quarter 2021 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 may contain forward-looking statements that reflect management's current views of future events and financial performance. Management undertakes no obligation to update these forward-looking statements. which are based on many assumptions and factors, including the 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 release and in the 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 statement. Please note that this conference is being recorded. I would now like to turn the call over to Jim Lance, Vice President, Corporate Finance and Investor Relations. Mr. Lance, you may begin.
spk07: Thanks, Operator. Welcome, everyone, to Foot Locker, Inc.' 's third quarter earnings call. As described in today's earnings release, we reported third quarter net income of $158 million inclusive of the recently announced closure of our acquisition of WSS compared to net income of $265 million for the third quarter of last year and net income of $125 million for the third quarter of 2019. On a per share basis, third quarter earnings were $1.52 compared with $2.52 last year and $1.16 for the third quarter of 2019. During the third quarter of 2021, the company recorded pre-tax adjustments to earnings, including a $30 million impairment in one of the company's minority investments, $13 million of costs related to the wind-down of the foot action banner, and $14 million of acquisition and integration costs related to WSS. As a reminder, last year's third quarter included a pre-tax non-cash gain of $190 million related to the higher valuation of GOAT. On a non-GAAP basis, earnings per share were $1.93 compared to $1.21 for the third quarter of last year, and $1.13 for the third quarter of 2019. Unless 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 color on the key product and customer engagement highlights from the quarter. Andrew Page, Executive Vice President and Chief Financial Officer, will then review our third quarter results and provide guidance for the current fiscal year. Following our prepared remarks, Dick and Andrew will respond to your questions. With that, I'll now turn it over to Dick.
spk05: Thank you, Jim. Good morning, everyone, and thank you for joining us today. We are pleased to report that the third quarter was another great performance for our company, as we comped a strong back-to-school season from last year, battled supply chain challenges, and delivered impressive bottom-line results. We also successfully completed the WSS acquisition during the quarter, and subsequent to the quarter end, closed the Atmos transaction as well, bringing both of these great companies into the Foot Locker family of brands. As we begin the fourth quarter and the all-important holiday season, we continue to see three macro trends working in our favor. Number one is the democratization of sneaker culture, with more brands and more consumers participating in the ecosystem of sneaker culture. With our position as a multi-branded retailer through Foot Locker, Kids Foot Locker, Champ Sports Times East Bay, and now WSS and Atmos, We have an incredible connection to the marketplace and consumers. Second is the growing emphasis on fitness and self-care, as people look to offset stress and work-from-home conditions by getting up and staying active to maintain their physical and mental wellness. Whether it's home fitness, running, training, hiking, or any number of other sport fitness categories, we see consumers are turning to and returning to Foot Locker to meet their fitness needs. And we see this trend increasing. And third is the overall athleisure trend and further casualization of society. Some of this is aided by the continued work from home environment, some of it by the new return to work hybrid model. But overall, people want to be more comfortable, and that certainly plays into our strengths, especially around footwear, but also in our apparel business which has been performing extremely well this year. All of this to say, consumer demand remains strong, driven by megatrends in consumer adoption and demand that favors the brands and the categories we sell. Spending continues to be fueled by people wanting to look good as they venture out again. In terms of the global supply chain, we're all aware of the challenges. It's a fluid situation that we are making every effort to manage, and we do have a few advantages. First, we are a truly multi-branded retailer with a diversified product mix serving a broad range of consumer needs across price points. We like our position in terms of our assortment of brands, and we benefit from the very strong partnerships we have built with them over many decades. In times like these, our partnerships are mutually beneficial, enabling us to look together as far into the future as possible to plan, collaborate, and be solution-oriented. Second, carrier capacity is something we always keep a close eye on. We are in a much better position this year than in the past with FedEx, UPS, and our pool carriers, and with the U.S. Postal Service as another alternative. We've got better visibility than we've ever had on where their hotspots are so we can manage customer expectations appropriately. Third, we feel good about our distribution center staffing and capacity levels. We are building in some additional flex capacity for the fourth quarter to ensure we are doing everything we can to effectively mitigate any macro pressures. And fourth, we are focused on leveraging the advantage that having approximately 3,000 stores globally offers us to serve our customers and deliver the types of diversified product offerings, inclusive of apparel, accessories, and complementary products that our customers come to us for. In the third quarter, we successfully launched our controlled brands. We are especially excited about this offense. Our teams have been working hard to bring it to life in a big way, and we are poised to push these brands meaningfully forward in the coming seasons. At the same time, we are expanding our range of brand partners using programs like our innovative greenhouse incubator and lead initiative to invest in up-and-coming designers, new concepts, exclusive collaborations, and curated partnerships, all of which will ultimately help us provide a broader range of product offerings to our consumers. And finally, but perhaps most importantly, we are benefiting from great connectivity with our consumers. Elevating the customer experience has long been one of our strategic pillars. We have great brand awareness, and consumers continue to come to Foot Locker first. I believe we have the best team in retail, the best partners in the business, and we feel very good about where we're headed for the upcoming holiday season and beyond. Turning to our recent acquisition of WSS, It's been a great start with their back to school and overall Q3 results. Some of the early progress includes setting up our team addition offense for WSS, which we believe is a big operational opportunity to get speed to market to support their apparel business. We have also looked at our supply chain, technology, and other operating contracts, and we've been able to secure some wins here as well. All that to say, the early integration work is off to a good start. We are very bullish on WSS, driven in part by their strong connection to the Hispanic consumer and because it's very complementary to our existing portfolio from a consumer perspective, a merchandise assortment and pricing approach, and a geography and real estate standpoint. We are encouraged to see new WSS stores perform above their budgets giving us confidence to continue to expand the store base in the coming year. Texas is our next WSS growth market. Plans are well underway for Dallas and Houston, and we also see some fill-in market opportunities. We continue to open stores in Northern California. Turning now to Atmos, we are excited to have closed the acquisition earlier this month. This premium, globally recognized, digitally-led brand sits at the center of sneaker culture. We are thrilled to have Homi Osan and his talented team officially on board. Similar to WSS, we are bullish on this high-growth business and are well underway with the integration process. Turning to Champ Sports Times East Bay. It's been about 18 months since we combined these operating units, and in late January, we will be opening our first home field store in South Florida. which is the new concept where these two banners come together, bringing the best of what they do individually to one singular location. Our first home field store will be the largest format we have in our global fleet at about 35,000 gross square feet. We'll have several features that draw upon the equity and the DNA of Champ Sports and East Bay, inclusive of the best global brands and sport lifestyle performance. We'll also have a dedicated zone for East Bay training and performance footwear and apparel. It will feature an athlete fuel station for guests with protein shakes and smoothies, nutrition bars, and post-recovery workout-type supplements that consumers can enjoy in the space itself or buy products to take home with them. There will be several digital and interactive parts of the store, including an activation space where we will hold coaching clinics, training sessions, and skill development or yoga workouts. We will be live and interactive in bringing sport into the space, and we are excited to be able to connect with the community through those experiences. We'll also be able to leverage our East Bay team sports division through existing and new relationships with key schools. In fact, there are 12 high schools within a 10-mile radius of the home field locations. We will look to expand the relationships with those schools, building bridges and opportunities with the athletic directors, coaches, and athletes themselves. We are very excited to see this experience come together as we pilot this new concept. Turning to foot action. Our team has done an incredible job executing on the wind down and transitioning some of the locations to other banners. To date, we've converted 18 locations. and there are another nine under construction, with over half of them rebranding as Foot Locker, about 40% as Champ Sports, and the remaining 10% as Kids Foot Locker. Without exception, we have seen encouraging productivity gains with these stores performing above expectations and well above their previous results. We have negotiated or worked with our lease flexibility to close about 85% of the total fleet by year-end. We are continuing our negotiations with landlords for the approximately 35 stores that will remain open into fiscal 22. We've had a great partnership with our vendors and are pleased with the vendor community's reception to the foot action transition. We've been able to transfer not only inventory, but also access to some brands and concepts that will bode well for some of our go-forward banners, especially Champ Sports and East Bay. Yesterday, we announced some exciting organizational enhancements to advance Foot Locker's long-term growth and omni-channel objectives. Frank Bracken, Executive Vice President and Chief Executive Officer, North America, has been named Chief Operating Officer, effective immediately. In his new role, Frank will oversee the company's global operating divisions, the omni-customer experience, inclusive of global technology services and supply chain, and our global franchise JV partnerships. Susie Kuhn, Senior Vice President, General Manager of Foot Locker Europe, has been named as President of EMEA and General Manager of Foot Locker Europe, also effective immediately. Andy Gray, Chief Commercial Officer, will expand his responsibility by leading our global commercial unit, including product, the powering up of our controlled brands, omni-marketing, membership, and commercial development and the LEAD initiative. Together, the announced leadership appointments and organizational enhancements underscore our focus on aligning our commercial, operations, and finance functions to drive organizational productivity. With a more agile operational structure, we will be in an even stronger position to expand our customer base and grow our connectivity with sneaker culture and the communities we serve. Overall, our financial position remains strong. Our vendor relationships are very strategic in nature, and we continue to obsess around our customers, whether it's through our digital channels, social media, FLX, or an in-store customer experience. Our solid Q3 performance is why we remain optimistic about the strength of our portfolio, the power of our assortments, and the loyalty of our customers. We are confident that this positive momentum will continue into 2022 and beyond. Before I turn the call over, I want to express my sincere thanks to every team member at Foot Locker. It is their dedication and hard work that made these outstanding results possible and will enable us to continue to drive our business forward and fulfill our purpose to inspire and empower youth culture. With that, I will now turn the call over to Andy.
spk01: Thanks, Dick, and good morning, everyone. Throughout the quarter, we remained laser-focused on continuing to strengthen our relationships with our existing consumers and bringing new ones into our business. This enabled us to beat our results from last year and continue to outpace 2019. To give you a breakdown of our performance, our footwear business decreased low single digits, while our apparel and accessory businesses were both up double digits. All families of business were up relative to 2019. While our total men's business was down slightly, we saw acceleration in women's and positive momentum in kids, driven by our success at drawing in more consumers and the expansion of our sneaker community. Again, all areas were positive to 2019. We also saw great vendor diversity, showcasing the health of our category and the expansion of our consumers' taste preferences as they fill their sneaker and apparel closet. The majority of our top 20 vendors posted gains, driving excitement in their respective categories, all of which helped to offset supply chain disruption that impacted the flow of some of our franchises and launch products. Another area of our business that continues to gain momentum is apparel, which was up double digits in men's, women's, and kids, versus both LOI and 2019. Our branded business remains strong across categories, and our own brand business has expanded and accelerated. In addition to our CSG business, which is our Champ Sports private label offering, We reimagined our East Bay performance wear in the third quarter, with a cross-category launch featuring Jalen Hurts. And we introduced our Locker brand for the first time to great reception from our customers. This momentum continues into Q4. We are launching more own brands, including Cozy, a new apparel brand tailored for our female consumer. We just launched All City by Just Don, a lifestyle brand created with Don C, rooted in basketball and sneaker culture that is inspired by the spirit of community. Don C has been a part of the cultural vanguard for decades as a music executive, fashion designer, sneaker collaborator, and brand storyteller, and this launch immediately resonated with the next generation of streetwear enthusiasts. And we have upcoming exclusive partnerships with more tastemakers and celebrity curators like Melody Asani as we continue to add dimension to our apparel business. Storytelling continues to evolve and enable us to connect with our consumers as we work with all of our partners to deliver a strong pipeline of exciting, exclusive product concepts that set us apart in the marketplace. We delivered 15 exclusive concepts in the third quarter, which were significant in terms of scale and consumer engagement. And our powerful consumer concept offense continues throughout the holiday season, including Alter and Reveal with Nike, Adidas and Trey Young, Crocs and Awake collaboration, Louis de Guzman and New Balance, and a whole host of excitement from Puma, including Lamello Ball, LOL Surprise and Staple. This offence, together with our positioning in the key footwear franchises, continued seasonal expansion with an increased focus on boots and fleece, and a very strong pipeline of product and inventory in apparel, leaves us well positioned to delight the consumer in the holiday season. Next to our product diversity, Our investment to enhance our omnichannel consumer journey was evident throughout the quarter, as we continue to welcome hundreds of millions of visits to our sites and apps. Local areas of development for the team in the quarter included enhancing our mobile and app experience, where we see 90 per cent of our online traffic come from, evolving our launch reservation process with new data algorithms to improve fairness and work towards ensuring unique individual winners and enhancing our buy online pick up in-store experience leading to greater adoption. Lastly, the ongoing expansion of our community stores and geo-offense is a critical component of our strategy. During the quarter, Downey in LA and Brixton in London opened their doors to great reaction from our consumers. We also continue to build community through the rollout and expansion of our FLX membership programme. We now have over 28 million enrolled members, with over 3 million joining in this quarter alone. We remain encouraged by the results and engagement of our members, who spend more and shop more often than non-members. And there's still a lot of opportunity ahead of us with the program recently launching in Italy, Germany, and Spain. As we push our consumer-led offense forward, it's the combination of product leadership and diversity, enhanced Omni experiences, and our focus on community and purpose that continues to drive our leadership in the industry and strengthen our relationship with our consumers. Let me now pass the call over to Andrew.
spk06: Thanks, Andy. It is my pleasure to join you this morning to discuss our third quarter results. As we navigate the ongoing supply chain challenges, our strong third quarter results demonstrate the resilience and flexibility that our diversified product mix and our strong vendor relationships afford us. During my review of the results, I would like to note that in addition to comparing to last year, I will also reference comparisons to the third quarter of 2019 where it is helpful. On a year-over-year comparable basis, our third quarter sales were up 2.2%, and earnings per share grew almost 60%. Impressively, this strong result was on top of the robust 7.7% comp gain in last year's third quarter. and speaks to the strong connection we have built with our customer base. This connection was apparent during the back-to-school period where we saw strong customer engagement in our stores, digital and social channels, and growing attachment to our key initiatives like our FLX membership program. From a cadence perspective, with school openings on a more normal schedule, August led with a low double-digit comp gain, while September comps, which benefited last year from the later school openings, declined high single digits. We then saw momentum turn meaningfully positive in October with comp sales up low single digits. Total sales for the quarter rose to $2.2 billion. or a 3.9% increase over the prior year, and up 13.3% versus the third quarter of 2019. This includes a $56 million contribution from WSS since the close of the transaction in mid-September. For the third quarter, our global fleet was open for 97% of possible operating days. with temporary closures in Australia, New Zealand, certain markets in Asia, and Germany. Our year-over-year comp sales through our store channel increased 4.2%. Store traffic increased approximately 30% compared to fiscal 2020, as our customers continue to want an in-store experience with our multi-brand product assortment. When compared to fiscal 2019, traffic was down high single digits and conversion was up significantly. In our digital channels, which continue to be an important connection point with our customers, sales were down 4.6% in the third quarter, as we lapped an approximate 50% increase from last year. Digital sales penetration rate was 19.8%. While down 160 basis points in 2020, it was well above the 15.3% from 2019. Our customers continue to overwhelmingly start their shopping journey with us digitally. And as we continue to create a seamless Omni experience, they can easily close their transactions through our apps, our websites, or in our physical stores. Turning now to some highlights of our three geographies. In North America, our Champs to Sports, Foot Locker Canada, and Kids Foot Locker banners led the way with low single-digit comp gains, on top of last year's double-digit increases. The other North American banners posted comp declines, with Foot Locker in the U.S. down low single digits, East Bay down high single digits, and Foot Action in wind-down mode closed the quarter down over 20%. In EMEA, pent-up demand continues to drive growth as stores reopened across all countries with strength across apparel, women's footwear, and strategic brands like Converse and New Balance, leading to another double-digit comp gain at Foot Locker Europe and high teams comp gain at Sidestep. Our EMEA fleet was open 99% of possible operating days in the quarter compared to 96% in the third quarter of last year. Our APAC region was down slightly due to ongoing challenges related to COVID. The fleet was open approximately 55% of possible operating days, down from 82% in Q2 of this year. Foot Locker Pacific leveraged strong demand through the digital channel to offset the impact of the store closures and finished with a low single-digit comp gain, while Foot Locker Asia was down mid-single digits. We continue to make progress on our expansion strategy within Asia as we opened two new stores in Seoul during the third quarter. And earlier this month, we completed the acquisition of Atmos, giving us a strong presence in Japan, one of the key markets in sneaker culture. Across our markets, regions, and channels, the combination of more limited promotional environment, solid demand, and a higher penetration in our stores led to a low single-digit increase in average selling prices while units were down slightly. Moving down the income statement, gross margin was 34.7% compared to 30.9% last year and 32.1% in the third quarter of 2019. The improvement in our gross margin was driven by many of the same trends from the first half of 2021, as the combination of robust demand and fresh and lean inventory drove meaningfully lower levels of promotional activity. Our merchandise margin rate improved 470 basis points over last year and 80 basis points over 2019. driven primarily by the meaningful reduction in markdowns. Looking into the holiday season and the fourth quarter, we expect the promotional activity to remain favorable relative to both 2020 and 2019. As a percent of sales, our occupancy and buyer's compensation costs delevered 90 basis points over Q3 of 2020. As a reminder, And last year's third quarter, we benefited from $32 million of COVID-related tenancy relief versus $3 million this year. When compared to Q3 of 2019, we leveraged our occupancy expense by 180 basis points. Our SG&A expense came in at 20.9% of sales in the quarter. compared to 20.1% in the prior year period. When compared to 2019, our SG&A rate improved by 40 basis points. For the quarter, depreciation expense was $49 million, up from $44 million last year. Interest expense rose to $4 million from $2 million in the prior year due to the incremental expense related to the company's new bond issuance. Within other income, there was a benefit of $26 million or 18 cents per share from the mark to market of our investment in retailers limited. As a reminder, Retailers Limited is our partner in the joint venture that manages our Foot Locker stores in select Eastern and Central European markets, and is also our franchise partner in Israel. Our non-GAAP tax rate came in at 27.8% compared to last year's rate of 30.7%. Turning to the balance sheet, we ended the quarter with approximately $1.3 billion of cash, down $54 million from a year ago. At the end of the quarter, inventory was up 9.1% to last year, driven by our supply chain and logistics team efforts to position us well for the upcoming holiday season, combined with the inventory that was included in the WSS acquisitions. On a constant currency basis, inventory was up 8.5% and sales increased 3.6%. In terms of capital expenditures, we invested $50 million in the quarter, bringing the year-to-date total to $137 million. This funded the opening of 32 new stores, including new Foot Locker community stores in Downey, California, and Brixton, UK, Champs Sports Power stores in the Bronx, New York, and Torrance, California, the expansion of Sidestep in Belgium, and the conversion of 18-foot action stores. We also relocated or remodeled 29 stores and closed 80 stores in the quarter. including 50-foot action stores. With the addition of WSS stores, we finished the quarter with 2,956 company-owned stores. For the full year, we now expect to open approximately 144 stores, including eight new WSS stores, remodel or relocate 200 stores, and close 370 stores. including about 205 foot action doors. Looking forward, we now expect to invest approximately $240 million in capital expenditures this year, lower than our prior guidance of $260 million, due primarily to supply chain challenges with the balance shifting into 2022. Turning to capital allocations. we and our board are confident in the financial position of the company and continue to believe that returning cash to our shareholders is an important aspect of the company's capital application strategy. First, we returned $30 million to our shareholders through our quarterly dividend program. Next, we saw opportunity given the value of the company's stock, and we repurchased 2.75 million shares of common stock for $129 million during the quarter. In total, we have returned $242 million to shareholders through the first nine months of the year through share repurchases and dividends while continuing to make strategic investments to fuel our growth. We also returned to the capital markets during the quarter, taking advantage of favorable market conditions to create more flexibility by issuing $400 million worth of 4% senior notes due in 2029. Proceeds from the issuance will be used for general corporate purposes, such as repaying $98 million of senior notes due in January 2022 and replenishing our inventory levels. Of note, following the capital raise, our liquidity position is comparable to pre-pandemic levels. In summary, we are still on track with our capital allocation program, investing in our business first with a continued focus on returning cash to shareholders through our dividend and opportunistic share repurchase programs. Finally, turning to our full-year outlook, which now includes the benefit from WSS and Atmos. We believe we are well positioned for the holiday season in terms of both strong customer demand and inventory levels to support that demand. Like other companies, we expect global supply chain constraints, including factory shutdowns and port congestion, to continue to be a headwind through the fourth quarter and into 2022. As such, we remain appropriately cautious in the near term. Based on our current visibility, we expect to deliver sales growth in the high teens for the full year with comp sales in the mid-teens. We are expecting the gross margin rate to be up 540 to 550 basis points for the full year versus 2020, mostly driven by a more rational promotional environment. Our SG&A expense rate is expected to leverage between 40 and 50 basis points year-over-year. Moving down the income statement, we expect depreciation and amortization expense to be approximately $190 million, interest expense about $14 million, and our year-over-year effective tax rate around 28%. we now expect our non-GAAP earnings range to be approximately $7.53 to $7.60 per share. This guidance reflects our strong performance in the first nine months of the year and our increased visibility in the fourth quarter, while recognizing the supply chain challenges that we discussed. As we look ahead to fiscal 2022, powered by the strength of our portfolio, the breadth of our assortments, and the loyalty of our customers, we look forward to providing our fiscal 2022 outlook on our fourth quarter earnings call. In closing, we believe the combination of our financial strength, strategic relationships with our vendor partners, and deep connection with our customers provide us with flexibility to maneuver in this rapidly evolving marketplace through the fourth quarter and beyond. executing towards our long-term strategic imperatives and driving shareholder value. We remain very confident in our strategy, are pleased with the trajectory we are currently on, and we look forward to updating you on our progress in the coming quarters. With that, operator, please open up the call for questions.
spk02: Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you would 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 remove yourself from the queue, please press star then two. If you are using a speakerphone, please lift your handset to allow optimal sound quality. Once again, if you would like to register a question, please press star then one on your telephone keypad. The first question comes from Susan Anderson from D. Riley. Please go ahead.
spk11: Hi, good morning. Really nice job on the quarter. I guess I'm curious on the inventory. Obviously, it's pretty lean out there, you know, how you're feeling for holiday. And then also, maybe if you could talk about, I guess, you know, by brand, the athletic brands versus lifestyle, if you're in better position, you know, one category or the other.
spk05: Sure, Susan, thanks. You know, our team did a tremendous job in the third quarter to actually get our inventory ahead of last year's. You know, we ended the second quarter down, I think, seven and a half, slightly more than that. And our target really during the third quarter was to get well positioned going into the holidays. So working with our vendor partner, working with our supply chain team and the logistics team, we were actually able to get ahead on the inventory. So as we ended the quarter with our inventory up, I feel good about where we're at. Now, the content of the inventory will be moving throughout the quarter as some launch dates shift and some things move around. But again, we've got good relationships with all of our vendor partners, and I think our preferred source of destination for the product that does get into the country. So, again, I feel good about how we're positioned for the fourth quarter, and, you know, clearly consumer demand remains strong.
spk11: Great. That sounds really positive. And then if I could add a follow-up on the own brands that you're launching, I guess the ones that you've already launched, if you could talk about maybe if there's any early consumer response. It sounds like they're doing well. Are they in line with your expectations or better than your expectations so far?
spk05: Thanks for the question, Susan. We are really positive about our own brand strategy. And, you know, we've been in the business for a long time with our champ sports gear, CSG, and the launch of the East Bay Performance brand in the third quarter and Locker in the third quarter, the work that we've done with Don C., The only brand that I have any hesitation about, and it's not the content, it's clearly the delivery, but we're scheduled to launch our Women's Cozy brand in the fourth quarter. As we continue to push through the supply chain, that date's a little bit tentative, but the response from our consumers has been strong, both in stores and online across the geography in North America where we did the first launch. Again, I think the East Bay Performance brand has been led a little bit by compression and certainly the performance silhouettes. Locker's been well-received from a lifestyle and streetwear perspective. And the launch that we just had with Don C has been really well-received by that next generation of streetwear fans. And, you know, CSG just continues to perform well. So we're very positive about our own brand strategy moving forward.
spk11: Great. And is this replacing, I guess, branded apparel within the stores? And is there an expectation on what percent of the business the own brands could be longer term?
spk05: Well, it's really complementary to the branded product that we've got in the store. Sometimes there are price point gaps that we find. Sometimes there are silhouette gaps that we find. And we'll use and create stories around our controlled brands and private brands to complement the branded product in the stores. You know, we haven't publicly talked about a target for our control brands yet, but as we launch them and gain some strength with them, we'll certainly look to expand their presence globally.
spk11: Great. Thanks so much. Good luck this holiday.
spk05: Thanks, Susan. Appreciate it.
spk02: The next question comes from Paul Lajuez of Citi. Please go ahead.
spk08: Hey, thanks, guys. I'm curious if you feel that the third quarter sales were constrained at all by supply chain pressures or any delayed deliveries. I'm curious if you think that that gets better or worse as you look out into the fourth quarter 1Q, just in terms of how sales might be moving around. And then related to that, curious if you've seen any evidence of customers coming into stores for certain items and maybe they're not available, whether they're buying something else or if it is truly a missale. Thanks.
spk05: Thanks for the question, Paul. You know, I would say that certainly there's probably a little bit of sales in the third quarter that were impacted by the supply chain. I mean, you read the same news that we read. You see the 81 boats docked off of LA and Long Beach and, you know, the delays in getting product through ports. But our team did a fantastic job of working with vendor partners, identifying other ports, identifying, you know, more rapid deployment out into our stores and through our network. So, again, I think that we're balancing things the best that we can with our vendor partners and our supply chain partners. So, again, I think that customers are walking into our stores. They may be not finding their first choice, but it's pretty clear to me, based on the traffic that we saw in stores and the results that we just reported, that our consumers are buying the best available product. And our consumers continue to be driven by high-heat products, And if their size, color, style doesn't happen to be available, they've shown a real propensity to continue to shop, work with our associates in the store, and find the next best product. And, you know, clearly I think the results from the third quarter, you know, prove that the customer appetite for product in our categories continues to be high.
spk08: Thanks, Dick. And just one follow-up. On the foot action closing, the stores that are closing, What percent of those are located in a center where you've got another one of your banners, and do you look at that as a comp driver?
spk05: Well, certainly any time that we close a door in our portfolio, we expect to recapture some of those sales across other banners in our portfolio. You know, Andrew or Jim, you may have the exact number, but my memory says that it's somewhere between 70% and 80% of the doors are in centers where we crossed over with at least one of our other banners. So, again, we do expect, you know, while we lose 100% of the put action sales when we close the doors, we do expect those customers to find great opportunities to shop and in CHAMPS or Foot Locker or Kids Foot Locker across our portfolio.
spk06: Got it. Thank you. Good luck.
spk02: Thanks, Paul. The next question comes from Michael Bonetti with Credit Suisse. Please go ahead.
spk03: Hey, guys. Thanks for taking our questions here. I guess, I think the big question here is on inventory visibility for the spring. You know, we've been you know, through the Python here with Vietnam, you know, you gave us some help on, on 4Q. It sounds like everything's okay here, but how much visibility do you have into, you know, the exact launch calendar for the spring, given the issues that footwear category has been dealing and, you know, your words from the last call, the knock-on effects from Vietnam and everything you guys have to sort through, you know, do you know which shoes you're getting? How many pairs you're getting? How far are you from what you consider to be normal as far as visibility and allocations and dates like that for the spring at this point?
spk05: Well, I would say, Michael, that initial visibility, you know, is not where we expect it to be. That being said, the launch calendar throughout the third quarter has shifted and moved, and quantities have shifted and moved, and some on time for the launch, some late for the launch. And we saw our team able to maneuver through that. We expect the same thing to happen in Q4. You know, again, the best laid plans, and if you watch some of the launch calendars that are out there, if you're on footlots.com and or our app and you're looking at launch calendars, you'll see that some of those dates shift. We expect that to continue in Q4 and into Q1, right? The farther we get away from the shutdown in Vietnam, the more predictable, at least the production side of the equation will be, you know, and we'll still be battling port congestion and some supply chain challenges as the product starts to move, but As we work with our vendor partners, it seems that we have been really well positioned in order to take advantage when the product arrives. We'd always like more visibility, right? We'd like to know exactly when it's going to show up in the port and when we're going to get it through. But I think our team, in conjunction with our strong relationships with our vendor partners, has us as best informed as possible. Okay.
spk03: Thanks for that. And then if I could ask a question. A follow-up, as you look towards hopefully a more normal world as we get past all this here, what's striking is the cash balance here. You have over 20% of your market cap in cash, just very high levels. As you look at a more normal world, what do you see as the areas that you find the most opportunity to push harder into the biggest long-term value creators for the company, for shareholders on a multi-year basis, and what maybe doesn't need as much investment as it did? pre-COVID as you think about, you know, what's really exciting to you as we get out past the last two years?
spk05: Well, I think we've been pretty consistent, Michael, and I don't know that COVID has changed our thoughts around that, right? First and foremost, we're going to invest in the business, and that means physical stores, digital experiences, supply chain, you know, technology, all of those things. And, you know, the need there has probably accelerated a bit, quite honestly, as customers' expectations for great experiences will continue to accelerate as we come out of COVID into whatever the new normal is. You know, with the acquisition of WSS and Atmos, we expect to continue to invest in those brands to continue their double-digit growth that we've seen. And obviously, as we open, you know, I think Andrew talked about eight Stores opening in the fourth quarter for WSS, you know, that's really exciting as we start to move that brand out of Southern California. So, you know, all of those things, you know, from technology to in-store experiences, the home field store that we talked about down in Florida that will open later in January with the Champs Times East Bay effort, all of those things are going to continue to require capital. That being said, you know, the board in California You know, our team is really confident about the strength of the business. You know, we continue to pay the dividend. We've got a share repurchase program that's got value left in it, and we continue to look for opportunistic chances to be in the market to buy our shares back. You know, we also continue to look at capability gaps, you know, whether that's on the digital front, whether that's in a platform sort of arrangement. You know, we continue to scour and look for capabilities that can accelerate our experiences and connectivity with the consumer. And we continue to roll out things like our enhanced launch app, continue to open more countries with FLX, excuse me, all of those things that require time, attention, and capital at the end of the day.
spk03: Okay. Thanks for the thought, Mike.
spk05: Have a good one.
spk06: Michael, this is Andrew Page as well. Also recall that, you know, while our cash balance at the end of the quarter is $1.3 billion, there is, you know, the disbursement associated with paying for the at-most deal would not have happened by the end of the third quarter. That's $300 million, as well as the repayment of our upcoming bond maturity of $98 million. So that's $400 million of that balance that we spoke of at the end of the third quarter. Okay.
spk03: Okay, thanks a lot.
spk06: Thanks, Michael.
spk02: The next question comes from John Kernan with Cowan. Please go ahead.
spk04: Good morning, guys. Thanks for taking our question. A top-line question and a gross margin question. We'll start with the implied comp guidance for the fourth quarter. What are you seeing maybe from a supply chain perspective, launch cadence perspectives, Just overall retail condition perspective, it implies the slowdown that you're seeing from what you saw in October. It feels like there was a big pickup in the business towards the end of October. Just curious what you're seeing as we enter Q4. It seems like the implied comp guidance is down around mid-singles for Q4. So just if you could walk us through the assumptions in that, whether it's supply chain constraints, something you're seeing in the launch cadence that implies that decel from Q3.
spk05: Well, Q3 comp was 2-2, right? So again, we actually feel good about the fourth quarter as it relates to comps. And if you stack the comps in Q3-4, I think that they'll come out very favorable. As Andrew talked about, we had a more normalized Q3, if you will, with August in a more traditional back-to-school sort of time frame, September down a bit based on back-to-school openings from a year ago, and then momentum back in the low single digits, low to mid single digits in October. So, again, there's not a significant step change, John, in Q4. So our math on our end might look a little bit different than your modeled math, but we feel good about Q4. Obviously, launches, as I've talked about on the Q&A session and we talked through the call, continue to move around both quantities and dates. You know, where there's traditionally been a big Black Friday launch, that launch has been pushed back a little bit and will be early in December. You know, the launch calendar, while strong, you know, is always variable based on some of the supply chain that we've talked about and getting products in on the exact date of the launches. So, again, we feel good about Q4. We think the strength of the inventory that we're coming into the quarter with and the flow that we see right now will certainly fuel us as we think about growth in the fourth quarter.
spk04: Got it. Maybe just one quick follow-up on gross margin, which has been phenomenal in the first nine months of this year. Andrew, what do you see in the model as being a normalized gross margin and merge margin as we go into next year? It's been a pretty tremendous expansion on the merge margin off the 2019 page this year. I'm curious where you think maybe a more normalized level of gross margin and merge margin sits. Thank you.
spk06: Sure. Yeah, thank you. So as you get into, as you start thinking about our gross margin for the current year, we spoke a number of times that obviously 2021 is significantly impacted by the favorable promotional environment or less favorable promotional environment. more rational promotions and therefore able to sell products at a more full price basis. We've talked a number of times about going forward while we expect the favorable promotional environment to, you know, to continue to persist through the fourth quarter. We do expect, you know, we do expect it to be a lesser extent than what you've seen going forward. So we haven't provided, you know, you know, what we believe is our normalized guidance for 2022. We look forward to updating you in the Q4 about that. But we do expect the promotional environment to, the favorable promotional environment to start to subside.
spk04: Understood. Thank you.
spk02: Thanks, John. The next question comes from Robert Gerbel with Guggenheim Securities. Please go ahead.
spk09: Good morning. A couple questions for me. I think the first one is, so as you looked at 22 and you think about, you know, the foot action store closures, can you talk about the margin opportunity sort of, you know, with the remaining chains and sort of, you know, what you see, sort of how they can stay in their lanes and how that could add to the financial performance of the business? And I guess the second question that I have is on, I mean, you talked about sort of carrier availability. you know, in the next couple of quarters? Is there a, I mean, next couple of weeks or months with FedEx, UPS, and the Postal Service, is there a big financial, you know, variability on, you know, the shipping cost to you as you just try to find, like, the optimal solution to shipping out products to the customer?
spk05: Yeah, thanks for the questions, Bob. You know, from the margin impact with foot action, you know, again, As we wind foot action down, we're being as judicious as we can with our markdowns and moving products around. And as we talked about in our comments, we've had the ability to move product and even some brand opportunities from foot action into specifically Champs and East Bay that I think will benefit them in the long run. So, again, I think the swim lanes for Foot Locker, and Champs and East Bay are both pretty clear, right? Champs and East Bay are focused on that sport performance kid from a lifestyle perspective to the field of play. Foot lacquer is very much around sneaker culture and that street wear sort of opportunity for the kids. So, again, I don't know that there's – once we get through the closures, that there's much impact of the margin from, you know, foot action in the – The team is doing a great job of winding them down. We're working hard with our landlord partners and with our vendor partners to make sure that we get them closed effectively and efficiently. And certainly as we optimize, on your second question, Bob, certainly as we optimize the shipments, you know, we try to balance, you know, speed with cost in utilizing the right carrier, the right place to pick up and deliver. trying to work with our customers, quite honestly, for them to pick up product in the stores. But as you cover a lot of folks, you know that the cost of freight is going up, both the ocean freight and air freight to get product into the country, and then the delivery to our distribution center and from our distribution centers to our stores. And it is certainly a bit of a headwind as we think about the macroeconomics of the supply chains. But our team is building, you know, has built and continues to build a network that I think is pretty darn efficient and effective.
spk09: Great. And I don't know if I missed this, Dick, but are you guys doing the week of greatness? Is that still on the docket?
spk05: Well, we've expanded beyond the week of greatness, Bob, right? I mean, we've done that a couple of years ago as we took Black Friday and tried to extend it into the week and And now we're really just looking at the holiday season because of some of the variability of these deliveries. You know, we're trying to control some storytelling around our private brands, control brands, and the things that we're confident that we'll deliver on time. But we're really just celebrating the season with a campaign called Celebrate. And, you know, you fill in the blank of what you want to celebrate. And, again, part of it is about great sneakers. Part of it is about the – the connectivity that we've got with our consumers and trying to help them, you know, find some normalcy this holiday season.
spk09: Great. Thank you very much. Happy holidays.
spk05: Yes, same to you, Bob. Thank you.
spk02: Our last question today comes from Kate McShane, Goldman Sachs. Please go ahead.
spk10: Hi, good morning. Thanks for taking our question. I also have an inventory question. I was wondering, as we get a little bit more into next year specifically, given that the Vietnam challenges do seem like they're going to just persist as those factories get ramped up into 2022, could we see a meaningful change in mix in terms of presentation in your store? Will you be leaning into brands that have less Vietnam exposure? And how much flexibility do you have within the mix of brands presenting in the store in that time period, in addition to all the other things you've walked through with your levers in the supply chain.
spk05: Okay. You know, our customers don't really care where the product is built. You know, so we're trying to create the most optimal assortment for our customers to meet their demands. And, you know, obviously as we wait the assortment and we look at those production startups that you mentioned, you know, we will assort the store. to bring the best product in. And as I talked about earlier, our consumers are pretty resilient right now in that they're moving from one product to the next best available product if we're not able to service them with their top priorities. So I think you will see some assortment changes in the store, but it's more reflective on customer taste and mixing in the best product available more so than really thinking about the supply constraints coming out of Vietnam. So it is a bit of a supply challenge for the industry right now. It's certainly not a demand challenge as our customers remain robust. Their spending remains robust in the categories and the products that we've got in store.
spk10: Thank you.
spk02: This concludes our question and answer session. I would like to turn the conference back over to Mr. Jim Lance for any closing remarks.
spk07: Thank you for joining us today. Please join us again for next earnings call, which we anticipate will take place at 9 a.m. on Friday, February 25th. The call will follow the release of our fourth quarter results earlier that morning. Thanks again, and we want to wish everyone a happy Thanksgiving. Goodbye.
spk02: Thank you, ladies and gentlemen. The conference has now concluded. Thank you for participating in today's presentation. You may now disconnect.
Disclaimer

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Q3FL 2021

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