Foot Locker, Inc.

Good morning everyone and welcome to Foot Locker's first quarter 2022 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 releases and 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 today's conference is being recorded. At this time, I'd like to turn the floor over to Robert Higginbotham, Vice President, Investor Relations. Mr. Higginbotham, you may begin.

Thank you, Operator. Welcome, everyone, to Foot Locker, Inc.' 's first quarter earnings call. Today's call will reference certain non-GAAP measures. A reconciliation of GAAP to non-GAAP results is included in this morning's earnings release. Please note we have updated our definition of non-GAAP earnings to exclude all minority investment gains and losses. You can find the appropriate adjustments to our reported 2021 non-GAAP earnings in the footnotes of the release. Also note we have a slide presentation posted on our investor relations website with information that will be referenced during the call. Today, we'll begin our prepared remarks with Dick Johnson, Chairman and Chief Executive Officer. Frank Bracken, Executive Vice President and Chief Operating Officer, will provide more color on our operations and some of our strategic initiatives. Andrew Page, Executive Vice President and Chief Financial Officer, will then review our quarterly results and financial position in more detail and provide color on our updated 2022 guidance. Following our prepared remarks, Dick, Frank, and Andrew will respond to your questions. With that, I'll now turn it over to Dick.

Thank you, Rob. Good morning, everyone, and thank you for joining us. We're off to a great start in 2022, reporting a solid quarter against the tough comparisons of fiscal stimulus and historically low promotions from last year. Despite those headwinds, we grew our total sales by 1%, with comps down only 1.9%. and we delivered non-GAAP EPS of $1.60 per share, down from the record results in 2021, but up nicely from 2019, our last pre-COVID first quarter. Let me start by thanking our team for the hard work, dedication, and commitment that drove these results. I always say we have the best team in retail, and that is no more evident than this quarter as our team continues to execute exceptionally well in a volatile environment. Last quarter, we announced an acceleration in some of our key initiatives, and we are happy to report significant progress against our objectives to further diversify our merchandise and vendor mix, pivot our real estate off-mall and expand our key growth banners, and enhance our omni-channel offerings and capabilities. Our first quarter results continue to demonstrate our growing ability to expand our customer base and delight them with a broader and richer product offering as we diversify our business across brands, categories, and channels. With our overall comps down 1.9%, the majority of our top 20 vendors posted sales gains in the quarter, with strength from some of our biggest brands like Adidas and Puma, and even more outsized growth from brands like New Balance, Crocs, and Converse, all of which were up over 50%. Importantly, let me take a moment to congratulate Nike on its 50th anniversary, an incredible milestone for the brand that has had such an important impact on sport and sneaker culture. Nike has been a driving force in shaping the industry that we know and love today, and we look forward to the next 50 years working with them to continue to excite consumers, elevate the marketplace, and fuel sneaker culture. Our efforts to grow our apparel and accessories business continue to yield results with the categories well outpacing footwear once again, comping up over 10% despite difficult year-over-year comparisons. Private label continues to be an important driver of our apparel business with Locker and Cozy continuing to gain traction in their early days. And co-created brands like All City and Melody Asani performing well with new drops in March and April. I now want to spend some time walking through the opportunity we have with our brand diversification efforts, which have been successful to date and hold significant potential going forward. Our strategic direction to diversify our offering is supported by three key pillars. Number one, consumers want choice and value a multi-brand experience. Two, We are underpenetrated in virtually all of our brands outside of our top vendor. And three, we have superior brand equity in the marketplace that we can leverage to capture incremental share across our portfolio. Starting with choice. As we analyze the baskets of our identified customers, we see that nearly 40% of transactions that have more than one item actually contain multiple brands. meaning consumers mix and match their selections across brands, whether it's multiple footwear brands or a head-to-toe outfit of two or more brands. Also, 50% of footwear sales from our identified customers come from those who buy from us more than four times over a two-year period. 80% of those frequent shoppers are multi-brand consumers, and overall they purchase approximately three different footwear brands on average. So, we know that our customers want multiple options, and as a house of brands, we are in a strong position to serve those needs in the marketplace. But when we look at our brand mix historically, we have not been offering them enough choice, such that we have below our average market share in nearly all of our brands. According to the data from the NPD group, Our overall share of the U.S. active footwear wholesale market is approximately 16%. But outside of our top vendor, our share is only 5%, suggesting a significant opportunity to capture share of other brands. Our confidence and our ability to capture those sales is rooted in the superior brand equity we have built in the marketplace over nearly 50 years. Let me share with you a few metrics that illustrate our powerful brand positioning. The Foot Locker brand has over 12 million Instagram followers in the US. While a big number, what's more impressive is that it is over five times our top four competing third-party retail banners combined with the next closest having only 1 million followers. Broader measures of our brand health relative to our competition also show a meaningful advantage. Measuring metrics such as awareness, consideration, and purchasing, a recent third-party study shows that Foot Locker's brand health index stands more than 20% above the average of its peer set. Our iconic brand positioning and our strong customer base allow us to build scale for our vendors, enabling us to, in turn, broaden and deepen our relationships with them in order to expand our customer base further and capture incremental share. As a prime example, Foot Locker and Adidas recently announced a newly enhanced partnership that will take our decades-long relationship to new heights as we combine forces to develop and build product franchises, deliver more energy and hype launches, and create compelling experiences for consumers in a much more integrated way than we've ever done before. This enhanced relationship will establish Foot Locker as the lead partner for Adidas in the basketball category, as well as include the development and expansion of key franchises across women's, kids, and apparel. Including all of our banners across all of our geographies, this new effort will target over $2 billion in annual retail sales by 2025, nearly tripling levels from 2021. We are incredibly excited about what we can accomplish together under this closer relationship, designed to better serve the sport and sneaker community, give Adidas greater access to our customers, and expand our customer base even further. But that is not the end of our work to elevate and expand our product portfolio. We are continuing to develop new and enhanced partnerships with many other brands and vendors. Puma and New Balance continue to drive outpaced growth and are becoming a significantly bigger part of our current and future business. Key product allocation from New Balance continues to accelerate, and exclusive partnerships like LaMelo Ball drive the Puma business. According to the NPD Group, the performance-running footwear market in the U.S. and Canada generated a combined $4.5 billion in revenue for fiscal 2021. This is a category where Foot Locker has not yet fully participated. We are working with some of the fastest growing brands in that category to help them connect with a younger customer while also helping us extend our customer reach. Beginning this summer, we will be partnering with Decker's brands to launch footwear product from Hoka in our Foot Locker banner. Starting with FootLocker.com and select Foot Locker doors in the U.S., This will be an important step towards a longer-term strategic relationship between the brand and Foot Locker Incorporated. We are also continuing to develop our relationship with On Running, where we've nearly doubled the store count where we carry the brand and look to continue to grow further from here. As we develop new partnerships and add more choice and excitement to our portfolio, We are confident in our ability to both expand our share with existing customers and grow our customer base. We couldn't be more excited about the direction and potential of our business going forward. Lastly, while the macroeconomic environment has become more uncertain in many ways over the past few months, with interest rates and inflation increasing rapidly, our consumer has remained resilient. and we have not seen a material change in consumer behavior to indicate a softening in demand for our category. Now, I'll pass the call over to Frank to discuss our off-mall strategy, our banner growth, and omnichannel evolution.

Thank you, Dick, and good morning, everyone. Starting with our real estate, we are increasingly confident in our off-mall strategies as we collect more and more proof points across our community and power doors, grow our WSS and Atmos banners, and test new large format concepts. In the first quarter, we opened or converted nine community and power stores, bringing our total to over 70 on the way towards our goal of 300 globally in the next three years. One of those was our first community store in continental Europe, which opened near Paris in Saint Denis in April. The community response has been phenomenal, as we connect with consumers through sneaker culture, basketball, a localized product assortment, and locally inspired events and activations. As consumers expect more and more personalization and connection with the brands and retailers that serve them, this hyper-local approach is helping us create lasting customer relationships in a way that is lacking in the marketplace. Backed by a field structure that is designed to support the customer experience at the market level, these stores are giving us a sharp competitive advantage in the markets where we have executed the strategy so far. As a whole, community and power stores are delivering sales over 10% above their plan the past 12 months and outcomping their regional benchmarks in the chain, giving us the ongoing conviction in our rollout of the format. In April, we also opened our first test store of our new Champs home field concept in Pembroke Pines outside of Miami. This off-mall large format store provides a one-stop shop across sport lifestyle, sport performance, and nutrition and wellness, including rich interactive experiences for the modern athlete. While very early days, this first store is performing well, and the consumer engagement from the community has been strong. WSS continues to perform incredibly well as our large format off mall value banner focused on Hispanic communities. Same store sales continue to outpace the rest of our fleet. And overall performance continues to run ahead of our original forecast, putting us well on track to achieve $1 billion of top line sales by 2024. or a 20% CAGR from an expected $650 million top line this year. That growth will be fueled by robust same-store sales growth and new units, where we see the potential to more than double the current store base of roughly 100 stores, including more stores in existing markets in the West and Southwest, as well as entering new markets in Florida and Puerto Rico. Atmos also had a very good start to the year with strong comp sales and the elevation of our store experience in the home market of Japan. This included the remodeling of our Adidas x Atmos concept shop in Harajuku, as well as the opening of three new Atmos pink stores, which are dedicated to serving the female consumer. Atmos continues to form ahead of our investment forecasts, and we will continue to review opportunities to unlock even greater value globally. Our FLX membership program continues to help us better serve consumers, including now having five key countries in Europe on the FLX platform. Our FLX program serves as a tool to capture consumer data and better understand their wants and needs. We are now capturing over 70% of sales through our members in the US, up from 50% just two years ago, allowing us to better track connect with and ultimately serve our customers better. FLX also acts to incentivize our best consumers to stay engaged with our brands and shop more with us, as our members continue to spend over 10% more than our non-members. Our omni-channel consumer experience evolution continues to make strong progress, including our dropship program and our partnership with GOAT. We continue to roll out our dropship program across vendors and regions to give our consumers a seamless extension of choice. Dropship also allows us to test new products and categories in consideration of adding them to the assortment in a bigger way, including in our stores. In the first quarter, we added several major brands to the platform across our core US and EMEA banners, including brands in health and wellness that were new to us like Muscle Foods and iFit. Finally, an update on our partnership with GOAT. As we continue to expand access and rewards for our FLX members, we will begin to test offers and promotions on select products from the GOAT platform. This initiative will enable Foot Locker to reward its high-value customers, providing more access to products that our members love. We will keep you updated as this test progresses. and we continue to explore other ways the two platforms can create value together. In summary, we are making meaningful progress to better serve and uplift our consumers' communities, to get closer to our best consumers through our membership program, and to build more choice for our consumers through our connected dropship partnerships. I'll now hand the call over to Andrew.

Thank you, Frank, and good morning, everyone. Our first quarter results continue to demonstrate our ability to rebalance our business across brands and categories and to expand our reach and connection with our customers. Our first quarter total sales increased 1%. Excluding the impact of foreign currency, total sales were up 3%. On a comparable basis, sales declined 1.9%. Comp declines in the U.S., as we lapped sizable fiscal stimulus from last year, were partially offset by strong comp gains in other regions, particularly Europe, where we were up against a significant amount of store closures from a year ago. While our overall comps were down 1.9%, our non-Nike comps increased in the high teens as we continued the efforts to rebalance our assortment. The quarter started with a high teens comp gain in February, then slowed to down high single digits in both March and April as we began to lap fiscal stimulus. For the quarter, our global fleet was open 98% of available days versus approximately 80% last year. Comparable sales in our stores grew 7.9% with store traffic up approximately 25% while conversion was down approximately 10% versus last year. When comparing to 2019, while our brick and mortar traffic is down, our conversion is actually meaningfully higher, showing a high level of intent from our customers when they visit our stores and the great work by our in-store teams. Our digital penetration was 18.3% in the first quarter this year, down from 24.8% last year. Total units were down slightly while average selling prices fell by mid single digits on higher apparel penetration and a mixed shift within footwear. Before we get into our breakdown of sales by geography, I want to start by expressing our deepest sympathies to those affected by the conflict and crisis in Ukraine. Foot Locker has partnered with the International Rescue Committee to help those impacted and to aid in their resettlement and recovery. Additionally, our European team members have really stepped up by launching a series of grassroots support efforts. From a business perspective, we have no direct exposure to Ukraine or Russia, And while we have some stores in nearby countries in Eastern Europe that we operate with our JV partners, it is a very small part of our European operations. Now, turning to our results by geography and banner. North America comps were down 11.8%, given last year benefited from heavy fiscal stimulus in the U.S., but Locker Canada was up mid-single digits while Foot Locker US was down high single digits, and Kids Foot Locker and Champs were both down low double digits. Overall, comps in EMEA grew over 50% as open store days improved to 97% from 39% last year. And in APAC, comps were up 10% with strong performance in both Pacific and Asia regions as COVID-related restrictions eased across our markets there. While not yet in our reported comp basis, WSS and Atmos continued to perform strongly. WSS, which contributed $138 million in sales for the quarter, comped down only mid-single digits, well ahead of our other US banners. despite fiscal stimulus having a meaningful impact on that business. Atmos, which contributed $49 million to sales, comped up high teens, also outperforming other banners in Asia Pacific. Moving down the income statement, gross margin declined 80 basis points. While occupancy was flat as a percentage of sales, Merchandise margins fell by 80 basis points driven by higher supply chain costs, slightly higher markdowns, and the addition of WSS and Atmos. Note, WSS and Atmos carry a somewhat lower merchandise margin, though lower occupancy makes them overall gross margin neutral. At quarter end, our inventories were 37% above last year. While the supply chain picture remains volatile, we've benefited from the improved receipt flow during the quarter, which positions us well to fulfill demand going forward. For the first quarter, our SG&A rate came in at 21.3%, representing deleverage of approximately 190 basis points, driven by labor wage inflation and technology spend. Depreciation expense was $55 million versus $45 million last year, driven mainly by the inclusion of WSS and Atmos. Interest expense increased to $5 million from $2 million in the prior year due to the incremental expense from the company's bond issuance late last year. Moving to our tax rate, our non-GAAP tax rate came in at 29.8% above last year's rate of 28.7% due to the geographic mix of our income. Now, turning to our balance sheet, we ended the quarter with $551 million of cash and $456 million of debt. During the quarter, we repurchased 2.7 million shares of our common stock for $89 million and paid $38 million in dividends. Turning to our updated 2022 financial outlook. Following our solid results from the first quarter, our inventory position going into the remainder of the year, and our strengthening vendor relationships based on our current visibility we now expect to achieve the upper end of our revenue and earnings guidance for the full year. While supply chain volatility continues, we are pleased with our receipt flow so far this year, which gives us incremental confidence in our ability to fill demand for the balance of the year. We therefore now see the upper end of the prior sales guidance for a total decline of 4% to 6% and a comparable sales decline of 8% to 10%. Note, we still expect Q2 and Q4 to be our toughest comparisons of the year. Q2 faces ongoing stimulus headwinds and now anniversaries a mostly fully open Europe. Q4 marks the beginning of our reduced allocations from Nike. But we don't typically give quarter-to-date comments. So far in May, we are tracking in line with our expectations. We still plan to open approximately 100 new doors in 2022, including 40 community and power stores, 27 WSS and nine Atmos stores, while closing a total of 190 stores. Our store count will be down approximately 3% in 2022, with square footage down less than 2%. On gross margin, following better than expected markdown performance in the first quarter, we are now estimating a 360 to 380 basis point decline in overall gross margin for the year versus our initial range of down 410 to 430 basis points. We still assume that markdowns will begin to normalize through the year as we come off of the historically low markdowns that persisted in 2021, but they have been slower to materialize than we originally expected. We still expect supply chain costs to be a drag on our margins as well, with that dynamic playing out about as we expected so far. On SG&A, we've seen costs, particularly in labor, increase at a faster rate than we originally expected. We now see our expense rate in the range of flat to 2021 to up 20 basis points versus our prior range of 30 to 50 basis points of leverage, which still includes benefits from our cost optimization work later in the year. We kicked off our cost optimization initiative during Q1 with our external partners, and we are in our early stages of development. We still expect to begin realizing savings in the back half of the year towards our $200 million annualized target. As a result of our increased top line visibility, we now expect our non-GAAP EPS in 2022 to come in at the upper end of our prior $4.25 to $4.60 range. Our balance sheet remains a strategic asset for our business with over $500 million in cash and $600 million undrawn on our credit facility and strong coverage and leverage metrics. Our CapEx plan for 2022 remains unchanged at $275 million towards new store openings and ongoing technology and omnichannel investments, which include the new distribution facility we are opening in Reno, Nevada to serve the core business and in Houston, Texas to support the growth in WSS. In closing, we are excited about the direction we're taking with the business. and the progress we're making against our key priorities to enhance our value as a house of brands and expand our customer base. With that, operator, please open the call for questions.

Ladies and gentlemen, at this time, we will begin the question and answer session. If you would like to register a question, please press the star, then the number one on your telephone keypads, If your question has been answered or you would like to remove yourself from the queue, you may press star and then two. If you are using a speakerphone, we ask that you please lift your handset to allow optimal sound quality. Also, we do ask that you please limit yourselves to one question with one follow-up. Our first question today comes from Bob Dribble from Guggenheim. Please go ahead with your question.

Hi. Good morning. I was just wondering on the inventory, you know, when you look at sort of the sales numbers and your expectations, you know, for the next quarter and the rest of the year, and just a couple of questions on the inventory, but can you back out, you know, how much of that is, you know, from WSS or Atmos and be curious to see if, you know, do you feel like you have much excess in that inventory bucket that you have just trying to keep our hands around? You know, any more marked on risk that you see, I know you took a gross margin guidance up, but any more color on that would be very helpful. Thanks.

Well, Bob, I appreciate the question. And, you know, we feel good about where our inventory is at. You know, we haven't broken out specifically WSS and Atmos inventory. But, you know, again, remember that a year ago, I would say that we were overselling our inventory position. So the comparison of being up 37% with good flow and good fresh receipts, we feel good about. We've said all along, and we said it today again, that we expect markdowns will continue to normalize. I don't expect that they'll be back to 2020 levels, but they will normalize more towards back to 2019 levels, although we have not seen that materialize yet. So again, we feel good about our inventory positioning. It's been a little bit harder to forecast as sort of gluts of inventory get released through the ports and they show up, but we feel good about the quality and the quantity of our inventory going into the second quarter.

Great. If I could just sneak another one in. As you push along with other new vendors outside of Nike, when you think about the marketing reach or the marketing spend, demand creation, wallets of these other players, can you just talk about how you you know, feel like the partnerships will evolve over the next few quarters and years just on, you know, on the marketing side and the reach as you try to expand that?

Yeah, Bob, we know that we've got to be demand creators, right? With all of our brand partners, we're out there trying to tell great stories. We're building product that supports those stories. And, you know, we talked about it in our prepared remarks, the number of Instagram followers that we have multiplied by the number of followers that other of our vendor partners have, we believe the reach will be significant. And we do know that we're going to have to spend against that, right? But that's all factored into our plans and into our guidance. So there's really nothing incremental in it. It's just leveraging, you know, the connectivity that our brands have, our brand partners have, and the connectivity that we have and the deep engagement that we have with our consumers. Great. Thank you, Nick. Thanks, Bob.

Our next question comes from Kate McShane from Goldman Sachs. Please go ahead with your question.

Hi, good morning. Thanks for taking our question. We just wanted to maybe better understand some of the apparel strengths that you saw during the quarter. It's just been flagged as an area for certain other retailers that have been more difficult because of weather trends. Is there a way to dimensionalize how apparel looked in different regions and different banners?

Well, I'll start that, Kate, and then Frank will probably jump in with a couple of comments. But, you know, our apparel is not heavily seasonal driven, right? The heaviest product that we have for winter is fleece, and that really has become a year-round sort of product for our consumers. So, We saw a little bit of a slower start with shorts and t-shirts as the weather didn't really materialize into a normal spring pattern across most of our geographies. But we see a resurgence, quite honestly, in licensed apparel. We've talked about pro standard before, and they continue to extend their licensed options, and that's being relevant to our consumers. So the pattern is very similar around our geographies. Obviously, Australia and New Zealand are in the You know, approaching winter as opposed to approaching summer, so a little bit of seasonality difference there. But, Frank, anything to add on the apparel front?

Yeah, we certainly experienced some longer selling in some of our fleece and core key items across some of our big global brands. We did, toward the end of the quarter, get a better ability to set up our shorts and tees and some of our seasonal key items. So as those floated to the stores and spring sort of blossomed, we saw some good sell-throughs and good consumer reaction. The other thing that's been very positive has been our control brand offense, particularly around the Walker brand and Cozy, and then also in East Bay Performance. And that's been a very intentional strategy to dimensionalize our apparel business across categories and price points.

Okay, thank you. And my second question is, is just around the supply chain. It is encouraging to hear that you feel like you are in a good position when it comes to inventory. I think that came through in the first quarter as well. But just in terms of how you're managing costs there, what level of increase in whether it be just supply chain or fuel or anything else that you saw in the first quarter versus maybe what you had originally expected and what you expect for the year from a cost standpoint.

Yeah, thanks, Kate. This is Andrew. So, you know, from a supply chain perspective, we had built in, and we talked about it at the end of when we gave our initial guidance, we had built in some supply chain drag that we expected during the year. That is operating as expected. We've generally seen the drag that we had expected. In the past, our supply chain costs have, you know, continued to be something that has been able to be passed through sometimes to the consumers. And so we think it'll be a drag. It's built into our guidance, and you're really performing as expected right now. Again, we were pleased with the first quarter flow, and that gave us confidence going into the back end of the year that we have the right product, fresh inventory available to really get after back to school in the summer selling season.

Thank you.

Thanks, Kate.

Our next question comes from Corey Tarlow from Jefferies. Please go ahead with your question.

Hi. Good morning, and thank you for taking my questions. Can you talk a little bit more about what drove the strength in women's broadly across both footwear and apparel actually outperforming men's?

Well, part of that outperformance of men's and the strong female participation is that we've expanded our assortment, right? We've given her more choices. So she is, you know, she's been in our stores. She hasn't been pleased. We're trying to, through broader vendor penetration, find the right products for her. At the same time, you know, she's very much become a sneaker girl. And Air Force Ones, AJ Ones, you know, critically important to her as well. So We've also added more women's apparel. You know, Frank talked about our Cozy brand, which is a proprietary brand. And the work that we're doing with Melody Asani on her assortment that she's got in our store. So I think it's a combination of us finally getting some things right in women's, expanding the assortment, adding apparel into the store, more stores for her to choose from. And she's responding well. So it's good to see the team has done a great job to identify her. bringing the right brands and support her choices.

Great. And then on the cost savings plan, can you just provide some incremental details as to how that should be affecting the P&L ahead?

Yeah, thank you. This is Andrew. We haven't given specific details on how that's going to affect the P&L. What I can say is that we expect to start to see some of that optimization start to flow through the P&L in the back half of this year. As we talked about, our target is $200 million in annualized savings. We are focused on many of the areas in our SG&A cost structure. We look forward to, you know, really bringing that plan to fruition. But at this point, from a category perspective, we're not in a position to add much more color on which categories and dimensionalize from a P&L perspective. But do understand that we expect to start to see that flow through the P&L in the back half of the year. Understood. Thank you very much and best of luck.

Thanks, Corey.

Our next question comes from John Kernan from Cowan. Please go ahead with your question.

Hey, thanks for taking my question. Good morning. Hi, John. Dick, Andrew, maybe you could talk to what you're seeing from a broader consumer environment. There's been a lot of changes in the way, particularly lower income consumers are shopping. There's changes in baskets. There's changes in traffic patterns. Just curious what you're seeing from a broader consumer perspective. I would think, you know, your comps being down only two is a little bit better than feared for the quarter. So what are you seeing from just the general macro consumer perspective as inflationary trends really pick up?

Yeah, it's a great question and one that we talk an awful lot around our tables or virtual calls, John. Clearly, we have a wide, wide customer base. So our customers fill the economic spectrum. So the inflation rate, the impact is different for each of those groups. And we provide our core customer with what I would call accessible luxury, right? Regardless of what's going on in the world, they sort of use a new pair of kicks or a new fleece piece or a new hat to really say that things with me are okay. So again, as we look at traffic patterns, as we look at baskets, you know, I'll compliment our WSS team. You know, they've got a customer that is a little bit more impacted, but they've been very good with having some tent sales, doing some promotional events, understanding exactly what their customer is going through because they're so deeply embedded in the community. So, again, we are very conscious of interest rate increases. We're very conscious of inflation increases. But our customer has been positive. Traffic seems to be holding steady, and we have not seen a trade down in product choices. So, Frank, do you want to jump in?

Yeah, thanks, Dick. So I'll add to the consumer perspective that Dick just outlined, and I'll come at it a little bit differently because, The reality is we're all going to have to confront these sort of macro exogenous factors. We don't have a choice in that. I think the real question is, you know, have we been able to adapt our operating model? Do we have the flexibility and the resiliency built into our plans for 22? So I'll start by reminding everybody the last two years have been anything but predictable and easy in the marketplace. And throughout the pandemic, I think our enterprise has learned how to be agile and flexible. how to react to what's happening in the marketplace in shorter time increments. So what's happening in the next 30 days, the next 90 days, and how do we win and position ourselves with consumers? And that's a muscle that we've honed and we're going to lean on as we operate into Q2 in the back half of the year. Now, behind that agility muscle is a pretty robust set of real-time predictive analytics that we use in the business. We look at traffic trends. conversion rates, our add-to-cart abandonment rates, effectiveness of promotions. We've got a machine learning sales forecasting model. And we use those insights to regulate our receipt flow, our merchandise mix, to throttle performance marketing, and obviously adjust our pricing. And so all of that agile management of the business, plus the cost reduction work that Andrew just talked about, means that we'll be playing what I'll call really good defense. Our teams have become very adept at that. I think what really excites me, though, is that we've been anticipating this moment over the course of the last 12 months. And I think Dick mentioned it, that as a management team, we knew that comping stimulus and winning consumers would be challenging. So we've been playing some really great offense on the other side of the ball in order to meet this moment. Our merchants have done an incredible job building a high percentage of our on-order that's either exclusive models or exclusive concepts. So that's product that's only available at our Foot Locker banners. And we know that scarcity and exclusivity is a winning strategy in any market condition. And then next to that, we built a merch plan that has more dimension, more choice than ever before, including more brands and more price points. And then as I mentioned earlier on the previous question, we very intentionally develop our private label apparel brands, Locker, Cozy, East Bay, to deliver value to consumers. And the last thing is we focus really intently on consumer conversion, both digitally and in stores at that moment of truth with consumers. So all of that to say we've been very thoughtful about our plans and strategies with a merchandising concept and a new agility muscle that allows us to play both good defense as well as, importantly, very good offense in this turbulent market.

That's really helpful. Just one follow-up. You're obviously accelerating the partnership with Adidas. their guidance calls for the biggest acceleration that they've seen in their North American business really since the Stan Smith superstar craze started back in 2015. What gives you the confidence that their basketball offering and that brand is going to resonate as strongly as you think it will? What signs are you seeing as we go into the back half of this year?

Well, we're excited about basketball in general, right? It's a strong category. And as I've talked about before, our consumer migrates to where the best product is. So, you know, we've seen the work that Jerry Lorenzo and the Fear of God and Adi Basketball are doing. We know that there's some great product coming, but we're equally excited about adding other brands to that basketball category as well. The exclusive that Puma has with Lamello Ball that we have seen great product in, we're going to have a Lamello Low coming out. You know, the new balance... the new balance work around their basketball. And we've got the deal that we signed with ABG around Reebok basketball. So classics, performance, you know, we just feel good about basketball in general and firmly believe that Adidas is going to be one of the key players along with our existing portfolio of Nike hot silhouettes and the others that I mentioned. So it's basketball sort of on the rise, but Adidas will certainly be a participant in that rise.

All right. Thanks, Zach. Best of luck.

Thanks, Doug.

And our next question comes from Lorraine Hutchinson from Bank of America. Please go ahead with your question.

Thanks. Good morning. I'm hoping to get your updated thoughts on the promotional environment. It seems to be in check in the first quarter. What your expectations are around that and as apparel becomes a bigger part of the mix, if you see any change in the need to promote product from here?

Well, the Lorraine, I appreciate the question. And as we talked about in our prepared remarks, the first quarter promotional environment was a little bit better than expected, quite honestly. And we expect promotions to go back to normalize throughout this year. The shift to apparel, a little bit bigger apparel penetration, certainly presents the opportunity for more markdowns. But as I said a minute ago, we don't have the high seasonal turnover that And generally speaking, apparel markdowns come when you get caught out of season or a season shifts faster than you expect or product doesn't flow as expected. So our consumers' core apparel consists of shorts, tees, fleece, and headwear. And we have the ability and the levers to pull presentation in store and online based on which is the most seasonal at the moment. So right now, obviously, tees and shorts are an important piece of it. Doesn't mean we don't sell the fleece that we've got in our stores and online. So I'm not concerned about apparel creating a huge markdown risk. It really is just our ability to flex our presentation and our sales opportunities with our consumers as we go through the seasons.

Thank you.

And our next question comes from Omar Saad from Evercore ISI. Please go ahead with your question.

Thanks for taking my question. I wanted to follow up a little bit deeper into the expanded Adidas partnership. Maybe you could talk about what you and your merchant team think of To me, there's two key pieces. There's the basketball, the new Jerry Lorenzo product that's out there. Someone's got a chance to see that in Germany. Curious what you think of that and how it fits maybe into your overall offering given some of the areas that Nike's pulling back on. And then also when it comes to the Adidas Originals brand, Um, is that going to be more of the apparel side? Is that going to be more of a, some of those key marquee footwear franchises and getting off a standard offering there? We'd love to know a little bit deeper of how that original piece is going to fit into your store base.

Well, the basketball work that I just commented on, Omar, again, the team has seen much of the work and the work bringing Adidas, bringing Jerry into you know, be the lead in their basketball category, you know, clearly connects a lot of elements from the court to the casual lifestyle to his fear of God brand. And, you know, the team sees great product there. At the same time, you know, we've got other Adidas opportunities that you talked about. Originals is both footwear. and apparel. Certainly we expect to drive more Adidas Originals apparel than we've seen today. There's classic basketball. There's the superstar trend that, you know, we're reintroducing superstars and Stan Smiths to new customers, you know, a new generation of customers every season, quite honestly, every year, certainly. And I want to be clear that Adidas doesn't replace Nike, right? We have a great relationship with Nike. We've got great basketball product that we're going to continue to sell from them. And our basketball category, as I talked about, is much more than just a Nike adding Adi to it. There are many, many players in basketball, just like there are in all of the other categories. And our consumer migrates through brands. And some of the facts that we shared about our consumers being multi-branded buyers, wanting to have more choice, this just supports that positioning and is the work that we've been undertaking and we're now seeing an acceleration around.

Got it. That's great color. And then maybe, you know, Dick, to the broader conversation around share of different brands and how that has evolved over time, is it possible kind of in the column of unintended consequences that, you know, obviously it's great to have so much Nike inventory and represent such a big piece of your business, but maybe it wasn't the healthiest balance for both you and Nike in the channel for it to be so dominant in terms of the inventory on the floor and possibly a good thing for both sides and to some extent to pull back and have a bit more of a balance assortment across brands, not just for you, but for them as well. Is that a possible way to think about it?

Well, I would look at it a little bit differently, Omar. I think the customer has always made the decisions, right? And, you know, I think that, that, Our offering more choices to the customer will in fact make us stronger. But, you know, Nike does a tremendous job. They've been, you know, we talked about their 50th year anniversary and, you know, they create great product. They create great stories. And our consumer has followed that. And we followed that with our consumer. As we add more brands to the portfolio, I do believe that we'll be stronger. And I believe that the overall sneaker marketplace will certainly be stronger.

Thanks. Good luck.

Thank you, Omar.

Our next question comes from Jay Sol from UBS. Please go ahead with your question.

Great. Thank you so much. You know, I wanted to follow up on the new partnership with Adi and, you know, the growth that they're talking about this year. Will that growth show up for Foot Locker in 4Q? Because, Andrew, I think you mentioned the beginning of the reduction of allocation from Nike really impacts 4Q. Is it possible that some of that increase from Adi will help offset the reduction from Nike?

Our plan included growth in our non-Nike brands all along. So no doubt all of our brands, we're planning for them all to grow, and Adidas will contribute to that. We're not anticipating a significant jump. in our planned 4Q as a result of this. This will flow through in its natural course, but it's given us more visibility, but we're not modeling in a significant jump that was not already modeled in our guidance.

This is Dick. I would just reiterate that we've got a lot of great brand growth going on. Certainly the relationship with Adidas continues to grow, but Our consumers seem to be incredibly excited as they hear about this Lamello Low Program from Puma. We've got the Puma Slipstream with Invader, which is an exclusive basketball classic. We've got the new Balance 550 Acceleration coming. We're going to expand our performance running with Ahn and Hoka. We've got Yeezy launches. We've had a lot of other brand growth built into our plans, so Again, we're going to work to continue to accelerate receipts where appropriate and drive sales as the customer finds more choice in our stores.

Got it. Okay. Thank you, Dick.

And our next question comes from Michael Benetti from Credit Suisse. Please go ahead with your question.

Hey, guys. I just want to ask, thanks for the help on the detail here in the interquarter. March and April down high single digits, but Maybe you could unpack the comment that May is tracking in line with expectations, since I don't think we have a 2Q expectation externally that we can look at. I think we've heard broadly across the space that May has accelerated. Maybe just some context there. I don't want to guide for the quarter, but just some idea of how much you're seeing that improve. And then on the SG&A for the guidance, I think the rest of the year, we've got it down about $120 to $140 million on a one-year basis. and that's with two acquisitions in the base, right, so WSS and Atmos SG&A dollars. Can you just walk us through what some of the flex down is there? I know you haven't given too much context about the $200 million in savings, but maybe just some of the broad brushstrokes to get comfortable with that as we look to the rest of your SG&A.

Yeah. So going back to your initial question as it relates to the comments that I've made about May, You know, remember, what we were saying is that we saw continued excitement and demand from our consumers in Q1. And as we got into May, we had not seen a material change in our consumer behavior. Just to give you a little bit of color as to how things are shaping up for Q2. That's what that comment reflected to. As we think about, you know, our cost structure being down in the back half of the year, remember that also includes the cost optimization initiatives that we're talking about. Our cost structure does have a flex as it relates to revenue. We generally talk about a 10% to 15% flex. So as our revenue flexes, that will flex with that. And then as we talked about, our square footage will be down somewhat, 3% for this year. So 2%, I apologize. So those are some of the things as far as visibility that we're seeing in the back half of the year that show that we have opportunities to perform better in the remaining three quarters on a cost basis as it relates to deleverage versus first quarter.

Michael, this is Dick. I would just add that as you think about Q2 in May, remember that stimulus from a year ago has a tail to it, right? I mean, not everybody got the stimulus checks at the same time. Not everybody spent them at the same time. So, again, it's just that the behavior has stayed fairly consistent as we jump into May and get started in Q2. Yeah. Okay.

And I'll take, go ahead. Go ahead. Our biggest call out is that, you know, our model, contemplated some of the stimulus lapping, and we feel like we're still on plan as it relates to that.

Okay. If I could sneak one in on the AUR down mid-singles, mid-apparel penetration, and mix shift within footwear. Could you unpack that a little bit, maybe just some thoughts on how the footwear AUR could trend as you look to some of the diversification of product effort as you're flowing in as we get into the fall and as the Nike mix comes down?

Well, we fully expect that AURs will be down a bit, right? You know, as we trade out of some of the highest priced marquee product and replace it with other brands, at the same time, I don't think it's going to be significant, right? We continue to model our mix of expected footwear and sales and, you know, certainly we'll see it go down as apparel becomes a bigger part of the mix, clearly. T-shirts and shorts have a different price point rhythm. You know, one of the benefits that we've got in our business is that we do sell $80 to $100 fleece pieces, which, you know, helps from an AUR perspective. But, you know, we will see certainly a little bit of AUR degradation throughout the year. But, you know, I wouldn't – I don't think it's going to be significant. Okay. Thanks again, guys. Thanks for all the detail. Absolutely, Michael. Thank you.

Our last question comes from Tom Nickick from Wedbush Securities. Please go ahead with your question.

Hey, good morning, guys. Thanks for squeezing me in here. I just wanted to ask about driving the growth in the non-Nike brands. Very strong this quarter, strong in Q4 as well. I mean, is this really just a function of sort of – allocating more, you know, marketing towards these brands. I mean, I've noticed on social media, you know, that you definitely see much more of a focus on, you know, some of the non Nike vendors, is it, you know, stuff that you're doing in stores? Like, how do you kind of, you know, continue to sort of drive these heat with these secondary brands to mitigate the headwinds that you're going to see from Nike?

Well, it's all of the above, right? We continue to promote great storytelling. Our merchant team continues to build exclusive products and concepts with our vendor partners. We do the storytelling both online and on-store and through our social engagement with our consumers. You know, it's how you lay out the store. It's how, you know, our store associates talk about all of the products, you know, our in-kind sort of, Marketing will go back and forth with all of these brands, but it really is reinforced by the statistics that I shared during my prepared remarks that our consumers want choice. And historically, we have not displayed the amount of choice that they've been looking for. We still have a number of customers that love to buy Nike products, and they're going to continue to love Nike products. At the same time, as I shared, our multiple buyers, our multiple footwear buyers, you know, buy almost three different brands over a two-year period. So, again, it is a little bit of, you know, giving our consumers what they're asking for finally. They don't have to hunt and peck. We've got better display, et cetera. And I know Frank's got some strong thoughts on this as well.

Yeah, Tom, I just sort of remind everybody that, you know, the idea that sneaker culture is advertising and that there's a massive tailwind in terms of athletes, which means that it's not just sneakerheads and enthusiasts, that there is a broadening of the consumer. And when you think about how we've deployed our portfolio of brands, Foot Locker, Kids, Champs, WSS, Atmos, that creates a landscape to capture and address more consumer opportunities with more brands, more price points, more categories. So it's not just about that core sneakerhead, it's actually about broadening and connecting with more consumers.

Understood. Thanks very much and best of luck this year. Thanks, Tom.

At this time, I'd like to turn the floor back over to Mr. Robert Higginbotham 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, August 19th. The call will follow the release of our second quarter results earlier that morning. Thank you and goodbye.

This concludes today's conference. We thank you for participating. You may now disconnect your lines.