Foot Locker, Inc.

Good morning and welcome to Foot Locker's third 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 call may contain forward looking statements that reflect management's current views of future events and financial performance. Management undertakes no obligation to update these forward-looking statements, which are based on many assumptions and factors 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 reports filed with the SEC, including the most recently filed Form 10-K or Form 10-Q. Any changes in such assumptions or factors could produce significantly different results, and actual results may differ materially from those contained in the forward-looking statements. Please note that this conference call is being recorded. I will now turn the call over to Robert Higginbotham, Vice President of Investor Relations. Mr. Higginbotham, you may begin.

Thank you, Operator. Welcome, everyone, to Foot Locker, Inc.' 's third 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. To remind everyone, in our first quarter release, we updated our definition of non-GAAP earnings to exclude all minority investment gains and losses, and our third quarter and year-to-date non-GAAP results for 2021 have been recast to reflect that. 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 Mary Dillon, President and Chief Executive Officer. Frank Bracken, Executive Vice President and Chief Operating Officer, will discuss our operations and progress on our growth initiatives in more detail. 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, Mary, Frank, and Andrew will respond to your questions. With that, I'll now turn it over to Mary.

Thank you, Rob, and good morning, everyone. Thank you for joining us. Let me start by saying how honored I am to join Foot Locker and the fast-growing industry at such a dynamic time and with such momentum on our business. Thanks for the hard work, dedication, and expertise of our teams across the organization, as well as a resilient customer base, We delivered better than expected results despite operating in a volatile environment, including inflationary pressure on the consumer around the globe. Our total sales, excluding changes in currency, increased by 3.3%, with comps up 0.8% against record results from last year, driving adjusted EPS of $1.27 above our original expectations. And given strong momentum coming out of the quarter, we are increasing our outlook for the rest of the year, which Andrew will review later in the call. But first, I want to provide an overview on a few topics. Why I chose to join Foot Locker, how I've spent my time during the first 90 days, the opportunities I see ahead, some of the early actions we've taken, and finally, an update on our brand performance, diversification efforts, and vendor relationships. So why did I choose to join Foot Locker? Let me start with the category. Sneakers are fun. I come in with a true love for the product, which has only grown every day that I've been here, along with the number of sneakers that I have. And this is a growth category with a long runway ahead. We're at the intersection of sport, fitness, fashion, and the casualization of society. And the tailwinds for sneakers, I believe, will be persistent for many years to come. And much like beauty, the sneaker category is driven by passionate enthusiasts who are deeply engaged in the category, products that allow for individual expression, that are fun to shop for, and where newness and innovation matters. Also, sneakers are an affordable luxury, a dynamic that we believe is helping to keep our category resilient in the face of steep inflationary pressures. Also like beauty, this is a category where shoppers value both a brick and mortar and digital experience. Now on to Foot Locker itself. With nearly 50 years of heritage, after playing a key role in making the category what it is today, Foot Locker has a tremendous amount of brand awareness and latent brand equity that I believe is not yet fully tapped. We are grounded in the history and culture of street basketball, youth culture, sneakerhead coolness, and Foot Locker is squarely at the intersection of sports, fashion, and trend, making our brand equity more relevant than ever. In addition to the company's rich heritage, our people are a true asset. The frontline store associates are stripers in blue shirts, love sneaker culture, and are experts in the category. And this creates an energy in the stores that is a key competitive advantage. Also, we have one of the most diverse young workforces in retail, and we have thousands of associates throughout our company that have built their careers here, in the field, in corporate offices, often after starting as part-timers in high school. Lastly, Foot Locker is a company that has a strong commitment to community, which is an important part of both the corporate culture and how we go to market. So during my first 90 days, I've spent my time visiting stores and getting to know the field team, addressing the company's overall capabilities and specifically our technology needs, getting to know many of our vendors, as well as talking to investors to understand their perspective and what they would like to see from us. So what are the opportunities I see? My early assessments have certainly validated all the reasons I was excited to join the company and have also shed light on where I see opportunities to become more efficient and more relevant in order to grow both our top and bottom lines. At a high level, that starts with looking for ways to simplify the business, to make sure we're focused on the areas that hold the most strategic value and will generate the most return. And it also includes shifting our approach in many ways from being product-led to consumer-led. which will allow us to create a consumer-driven demand engine that can grow our market share and even the category by expanding our customer base as well as our share of wallet with existing customers. The areas where we will be the most focused are our omnichannel presence and capabilities, our loyalty program and overall digital marketing strategies, and the technology platform which enables those efforts, as well as continuing our cost optimization work. Now, one of the biggest opportunities we have is to create a richer omnichannel experience, starting with e-commerce. Without having a specific target in mind yet, I believe at 16%, our e-commerce penetration is below where it should and can be, which means there's an opportunity to capture more online-only sales and, more importantly, build our omnichannel customer base. Our current omnichannel customers in the U.S. spend nearly four times the amount of our single-channel shoppers. yet they represent only 6% of our customer base, which leads to a vast opportunity to improve our engagement with customers across our channels and attract more of their spending dollars. I also see a tremendous opportunity to further refine and evolve our FLX loyalty program that was launched just a few years ago. While we're already capturing a considerable amount of our sales through members of FLX, I see more opportunity to improve the value proposition of the program, drive more engagement with our members through personalization, and ultimately attract more members and capture more share of wallet of our existing customers. In technology, we're in the process of reviewing our foundational needs as well as making sure we're building the right tools and capabilities to support those efforts in on-the-channel and marketing. Having a stronger backbone and technology enablers will be a key priority for us going forward. While many plans are still taking shape, we've begun to take some early action in some of the key areas I just discussed. Given the importance of technology and marketing, we've made some leadership changes in those areas and are in the process of actively recruiting best-in-class talent for key roles. As part of our effort to simplify the business and focus on the most productive uses of our resources, we've decided to halt Foot Locker's entry into Japan, and we have also decided to wind down two of our joint ventures in Europe. And Frank will elaborate on these strategic actions in a moment. Touching now on our assortment, some of our brand highlights and our vendor relationships. As the quarter progressed, we identified strong demand signals within basketball, sneaker culture, and kids. And we were able to partner with Nike to serve more customers in those categories, a trend we expect to continue into the fourth quarter. We therefore expect to end the year with a higher mix of Nike sales than we originally anticipated, in addition to the strong demand we've seen across our portfolio. Also, in coming to Foot Locker, I was excited to see expanding brand diversification at the company, because as in other consumer categories with high engagement, like beauty, choice and variety is something that consumers demand. As the category grows and customers realize they can build a sneaker wardrobe, Their appetite for variety and desire for choice is growing, and we know that 80% of our best customers already buy three or more brands. Given we are underpenetrated in virtually all of our brands outside of our top vendor, we continue to see opportunity to bring the customer a broader and richer set of product offerings across brands and categories. And we believe our third quarter results are further evidence that our efforts to broaden our portfolio are driving growth across multiple brands and helping us expand our customer base. Our overall comps increased by 0.8% as we continued to see momentum in our non-Nike sales at our core banners, which were up mid single digits, with most of our top 20 vendors posting strong growth. As we continue to deepen our partnerships across our portfolio, let me congratulate Bjorn Gulden as the next CEO of Adidas, which grew mid single digits in the quarter. As one of our biggest brands, we are excited to work with Bjorn and team to continue our enhanced relationship, including deeper product access across their portfolio, as well as enhanced store presentations, which will reach approximately 300 doors globally by the end of this fiscal year. I'd also like to congratulate Arne Freud for his appointment as the new CEO of Puma, which grew high single digits. Earlier this week, we were excited to announce an expanded partnership with Pumat to reach next-generation customers through exclusive basketball and other elevated collaborations. Building on the success of the LaMalo Ball franchise, we are continuing our exclusive access with the MB02, which launched last month. Beyond Basketball will be launching several collaborative projects with musicians and fashion designers, as well as an exclusive partnership with Cocomelon and KISS. And we'll be adding even more energy to the category at our Puma assortment through incremental hype drops, more exclusive, shared marketing partnership, and elevated experiences in-store and online. Moving on to the rest of the portfolio, we continue to see outsized gains in brands like New Balance, which was up nearly 70% this quarter, Crocs and Converse, which were both up over 25%, and UGG, which grew nearly 50%. And while apparel overall was soft for this quarter, our controlled brands continue to perform, growing over 50%, driven by strong fleece and outerwear performance through our CSG and Locker brands. And ProStandard, one of the black-owned brands we support through our LEAD program, has grown into a top-ten apparel brand through its successful local market streetwear focus on the licensed business. Now, overall, we are very proud of the progress we're making in remixing our vendor brand portfolio to be a more comprehensive multi-brand retailer and serving consumers with more sneaker choice. Looking ahead to holiday, we are encouraged by the momentum in the business and we're excited about our plans for holiday across our product assortment and how we'll be connecting with customers. With product, we have a strong launch lineup, including key releases of Jordan Retros, follow-up launches of Mellow Ball 2, new Crocs collabs with Round English, and Puma Times Paw Control, to name just a few. UGG will also be a key brand for us this season as it continues to dominate the holiday time period through their comfort icons. New Balance continues to become a much larger part of our business, and we're very happy about the holiday and 2023 product pipelines. And we're excited for Champ Sports to partner with Gymshark around a unique opportunity to be the first brick-and-mortar retailer to carry that dynamic fitness apparel brand in the U.S. We also continue our rollout of Ahn and Hoka, both of which are getting traction with our existing customers and helping us attract new customers. And we continue to partner with them to build accelerated growth plans in the seasons ahead. In marketing for holiday this year, we are launching our first ever truly integrated global campaign with Foot Locker Holiday House Party. Featuring a holiday party for sneaker fans around the world, this campaign leads with Foot Locker as a brand by showcasing our stripers in addition to musicians and online personalities to position Foot Locker as your sneaker home for the holidays. Also, we're entering the metaverse by launching a kids' Foot Locker house of play experience within Club Roblox. where virtual stripers will encourage players through a series of mini games in order to earn points to buy virtual sneakers. In summary, in addition to continuing down the path of offering an exciting range of brand options for our customers, giving incremental focus to our omnichannel capabilities and loyalty programs, continuing the cost optimization work that's underway, and further simplifying our business, I see a tremendous amount of opportunity ahead for Foot Locker, Inc., and I look forward to updating you on our new strategies as we move forward. And now let me hand it over to Frank to discuss some of our operations and growth drivers in more detail.