Foot Locker, Inc.

Good morning and welcome to Foot Locker's first quarter 2023 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 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 that this conference is being recorded. I will now turn the call over to Robert Higginbotham, Interim Chief Financial Officer. 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. The reconciliation of GAAP to non-GAAP results is included in this morning's earnings release. 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 Commercial Officer, will then give more detail on our operating results across our banners. Then, I will review our quarterly results and financial position in more detail and provide color on our updated 2023 guidance. Following our prepared remarks, Mary, Frank, and I 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 today. We're now two months into the launch of our new lace-up strategy, and there's a good deal of progress to update you on, even as the environment has become more challenging. On March 20th, we hosted our Investor Day, where we unveiled the updated strategic direction for Foot Locker, which we call our Lace-Up Plan. Let me reiterate the premise of the plan. We operate in a large growth category with strong tailwinds. We have many assets to leverage, like our 50-year heritage in the industry and our leading brand equity in the marketplace. The underlying principle of our plan is that with the right focus, investments, and capabilities, we'll more fully participate in the rapid secular growth of the category and return our business to sustainable growth following this year, our reset year. Our conviction lies in the fact that Foot Locker occupies a unique place in the sneaker ecosystem as the number one global brand synonymous with sneakers and sneaker culture. We have a 50-year authentic history around street basketball and youth culture. And we are truly an iconic brand with over 90% brand awareness and social media engagement that dwarfs our competitors. And we're a favorite brand with a teen consumer who is the driver of future trends. By simplifying our business and investing in our core assets and capabilities, we'll be able to better harness that brand equity and drive sustainable long-term growth through the four new strategic imperatives that make up our LASA plan. In the first imperative, we will expand sneaker culture by serving more sneaker occasions, providing more choice, and driving greater distinction to tap into the inner sneaker head in all of us. Our second imperative is to power up the portfolio by creating clearer lanes for our banners and transforming our real estate footprint by opening new formats, shifting off mall, and closing underperforming stores. Our third imperative is to deepen our relationships with customers by reimagining and relaunching our loyalty program and building better CRM capabilities. And the fourth imperative is to be best-in-class omni by increasing our digital mix by improving the digital experience for our customers, as well as the connectivity between channels underpinned by systems improvements. As we begin to bring the LASA plan to life, my conviction and confidence in the direction we're charting and the team's rapid execution of the plan is just continuing to grow. However, since our investor day, in the face of increasing macro headwinds, our sales trends have slowed significantly just in the past month and a half, which will have an impact on our near-term results. In the first quarter, our comps fell by 9.1%, resulting in adjusted EPS of $0.70, somewhat below our original expectations, given the softer-than-expected trends that materialized beginning in April and have continued into May. Rob will go into more detail later in the call, but the recent softness has resulted in us taking a more aggressive promotional stance to drive demand and to effectively manage our inventory, and we're reducing our guidance for the year to reflect that. To give you some greater color on what we're seeing, following a much better-than-expected holiday season, we've seen the consumer retrench as they continue to face pressure from rapid inflation, which we see squeezing their ability to spend on discretionary items, including athletic footwear. In addition to overall discretionary spend seeing some pressure, those spending dollars also appear to be directed more towards services and away from products as consumers are forced to be more choiceful on how to spend their money. When we gave guidance, we were seeing steep comp declines given a number of factors, our reset with Nike, our transition of the Champs banner, our shutdown of the East Bay banner, and a 10% decline in average tax refunds, which have an outsized impact on our business given we over-indexed to a lower-income consumer. As part of our guidance, we had forecasted a pickup in growth in April as we moved past the tax refund drag and benefited from a more favorable launch calendar during the month. And while trends did improve, they did not improve nearly to the extent we expected, and that weakness has continued into May. As a result, we increase our promotional activity late in the first quarter and more so in the second quarter, and we expect that level of promotional activity to continue through the balance of the year, which will allow us to clear inventory and bring more newness to our customers. So while 2023 was always going to be a reset year for us, we now expect a sharper decline in both sales and earnings this year due to steeper macro headwinds combined with the other dynamics of our transition just mentioned. Despite the challenging environment, we remain confident in the lace-up plan as a roadmap to return us to sustainable growth next year. With that, let me update you on our progress so far on the lace-up plan's strategic imperatives. The first imperative is to expand sneaker culture, which has three major components. Serve more sneaker occasions, provide more choice, and drive greater distinction. I'll begin by commenting on the reset of our relationship with Nike. While the first quarter began to see the impact of the reset on our business, we did see strong results on a relative basis in our Nike and Jordan basketball business. Retro sell-throughs, albeit at reduced quantities, were very good. Nike and Jordan's signature basketball delivered strong gains, including the LeBron 20, the launch of the Ja 1, the Tatum 1, and Luca 1. And we believe the future of basketball is very exciting with these next-generation players leading the way. Meanwhile, the culture of basketball also continues to connect with consumers through models like the Jordan 1, Nike Dunk, and, of course, the Air Force 1. And I continue to be encouraged by the strong engagement of our mutual teams as we continue to partner around our areas of strategic alignment and strength, basketball, kids, and sneaker culture. In fact, our teams were together this week in Portland to plan our return to growth in our Nike business in 2024. We're also partnering closely on data sharing and building a stronger joint capability around demand creation for our shared customers and marketplace. Beyond continuing to partner with Nike in our mutual areas of customer focus, we will continue to serve more sneaker occasions and provide more choice consistent with the desires of our customers. This will mean continuing to diversify our assortment through the ongoing rollout of brands like Ann and Hoka on the performance side, both of which continue to see strong sell-through in current doors. Ann is now in over 250 doors globally, with Hoka in about 100. On the casual side, we're also adding Hey Dude to 450 doors across banners in North America. As the Hey Dude brand is becoming increasingly adopted by the fashion-forward expressionists, especially suburban young males, we see an opportunity to connect with those consumers through our banners while also bringing new styles and stories to our core customer, the sneaker maven. We also continue to see strong growth from brands like New Balance, Puma, and Asics, as well as outperformance in the Adidas brand, resulting in the diversity of our brand mix beyond our top brand, Nike, increasing to 35% from 33% last year. On serving more distinction, our exclusive mix of sales was 15% during the quarter, flat to last year. While still early days in our strategy to push that higher, we're pleased with our pipeline and evolving collaborative relationships with our brand partners to help drive that to 25% by 2026. We added excitement to basketball in the first quarter through our exclusive Mellow Ball x Puma, which drove excitement during All-Star Weekend with the Rick and Morty collaboration. Our exclusive Nike Air positioned in tuned air drove very strong results, especially through the soccer-inspired mercurial story, which performed well in international markets. And our Reebok Times and Well exclusive was also very well received by consumers. And finally, in apparel, our private label team is doing a great job, with our brands increasing from 7% to 11% of total apparel sales, led by growth in Locker and Cozy, both up over 50%. The next imperative is power up the portfolio, which includes creating distinct lanes for our banners and optimizing our real estate. On distinct lanes, we are on track to close our sidestep banner in Europe by the middle of the year. And our transition of chance to focus more on the active athlete segment is also making progress. With our current more distinct collection of five banners, we'll be able to differentiate more clearly in the marketplace as well as optimally cover more of the sneaker consumer market. In terms of real estate transformation, in the first quarter, we opened or converted 11 new Foot Locker community and power stores across the globe, giving us 184 stores in these bigger formats that allow us to offer a fuller expression of the category and sharpen our competitive edge in the marketplace. Our new formats now represent 12% of our global square footage, up from 9% a year ago, as we grow towards our target of 20% by 2026. Across all of our banners, off-mall now represents 35% of our North America square footage, up from 31% last year, as we marched towards our target of over 50% by 2026. Both our new formats and off-mall doors are outcomping the rest of our fleet, which continues to give us conviction in the strategy. Lastly, as part of our real estate transformation, we closed 35 underperforming stores during the quarter, which will allow us to focus on our higher quality locations. Moving on to our progress to deepen our relationship with our customers, we continue to work on enhancing our loyalty program and our overall CRM capabilities. During the first quarter, we launched our current FLX program in Canada, where we'll be conducting the pilot of our new loyalty program later this year. Approximately 25% of our sales in the first quarter were through our current loyalty program, similar to last year. By launching our new program next year, we continue to expect to drive improvement in sales penetration of loyalty to 50% by 2026 and 70% long-term. We also continue to develop and test new CRM capabilities with the team, making progress by standing up additional CRM campaigns to drive frequency and retention. Examples include recommending the next best product for you based on your past purchases, as well as a notification that a product in your cart is selling fast. And then our last imperative to be best-in-class omni, which means improving our digital presence as well as better integrating our channels with each other. In digital, we've already made early progress in improving conversion through enhancements including adding more calls to action, improved product recommendations, as well as technical improvements that have decreased error rates on our site. While our digital sales penetration for the quarter was flat versus last year, excluding East Bay, We saw trends improve through the quarter with our April digital percent of sales ending up year over year and above our plan, putting us on a strong early path towards our goal of reaching 25% by 2026, up from about 16% today. In stores, we continue to roll out upgraded handhelds across our store fleet, adding over 800 stores this quarter, giving our stripers improved visibility on inventory, access to product information, and ability to check out customers. and improving in-store conversion. We now have updated handhelds at over 50% of our stores, up from 21% at the end of last year, and still expect to be fully rolled out to 100% of the fleet by the end of this year. And as a key enabler to our strategy, our investments in technology are off to a great start. We've created agile delivery technology pods with our teams to increase speed to market and value creation more quickly. Over the last quarter, we focused on areas that directly impact our customer, digital, and loyalty. Changes that begin to remove friction points for our customers and improve the digital experience we provide, from improved search, add to cart, and the payment experience, have all already improved, resulting in conversion improvements and MPS growth. In fact, our experimentation pod focused on e-commerce wins has already proven over $30 million in incremental sales with new experiences and campaigns. Much more to come. Taken together, we're excited about what the team has been able to accomplish over the last couple of months with more in store for the future. So in summary, while early days since we launched our new strategy, we're building momentum and gaining traction across all of our key strategic initiatives and remain excited and committed to reaching our goals and returning to long-term sustainable growth. We also continue to strengthen and invest in our already talented leadership team. Following the recent key hires of Adrian Butler as our new chief technology officer and Kim Waldman as our new chief customer officer, we just announced that we brought on Blanca Gonzalez as senior vice president and general manager of the WSS banner. Blanca joins us from Nike, where she served as vice president of North America product merchandising. She brings nearly 20 years of experience in the category across various areas, and we couldn't be more excited to have her take leadership of our high-growth WSS banner with a unique focus on the Latino community. Welcome, Blanca. We also announced this morning that Mike Bond will be joining us as our new CFO starting next month. Mike joins us from Kohl's, where he most recently served as Executive Vice President of Finance and Treasurer and brings with him over 15 years of retail finance experience. I'm incredibly excited for Mike to come on board to help us deliver on our lace-up plan goals. Welcome, Mike. Rob will be returning to his prior role as head of IR and FP&A, and I'd like to thank him for his leadership of the finance organization while we conducted the search and for his ongoing contribution, including helping to lead the LASA plan. We truly have the best team in retail, so let me close by thanking the Foot Locker team for their dedication to executing on this challenging backdrop. I'm confident in our ability to navigate this environment as we continue to make progress on our long-term strategy. And now let me hand it over to Frank to provide more detail on our performance and important milestones by banner.