Foot Locker, Inc.

Good morning and welcome to Foot Locker's second 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 effects of global economic and market conditions, currency fluctuations, customer preferences, 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 also note that this conference call is being recorded. I will now turn the call over to Robert Higginbotham. Mr. Higginbotham, you may begin.

Thank you, operator. Welcome, everyone, to Foot Locker, Inc.' 's second 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 and geographies. Then Mike Bond, Executive Vice President and Chief Financial Officer, 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 Mike 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. We have a number of topics we'd like to discuss this morning, including our second quarter results, updated outlook for the year, capital allocation, additions to our team, changes in our organizational structure, and the ongoing execution of our lace-up plan. I'd like... I'd like to start by touching briefly on our LACA plan and reinforce that we continue to believe the actions we're taking will drive our business forward, set Foot Locker up for sustainable and profitable growth, and create long-term value for our shareholders. I'm confident that we're executing the right strategies, simplifying and focusing our business and investing in capabilities required to be the modern on-the-channel retailer synonymous with sneakers and sneaker culture. And we have strong assets to leverage. We have an authentic 50-year heritage that's rooted in basketball and sneaker culture. We're an iconic brand with over 90% brand awareness and strong social media engagement. And we have strong brand partner relationships as a top wholesale partner for leading brands in our industry. With that said, we are continuing to operate in a highly dynamic retail environment. And while we developed the lace-up plan with the knowledge that 2023 would be a reset year, sales have been softer than expected through the first half. This has led us to further update our guidance for the year. In addition, as you saw in our press release this morning, our board has made the decision to pause our dividend to provide us with additional flexibility as we execute our strategies and invest in the business to return to growth. Looking back to March when we outlined our lace-up plan and our longer-term targets, We were coming off a strong holiday and had not yet seen the full weight of the macro environment on our lower income consumer. This became much more evident through the second quarter, including a weaker start to back to school. The store traffic and conversion challenges we began to see in late Q1 persisted through the second quarter as our customer remained cautious with their discretionary dollars. As a result, we promoted more heavily than initially planned to better compete for share of our customer's wallet and manage our inventory levels. These trends are reflected in our second quarter financial results, with comps down 9.4% at the lower end of our down high single-digit guidance, which we offset with disciplined expense management, helping us to deliver a non-GAAP EPS of 4 cents near the high end of our guidance range of 0 to 5 cents. The same sales and promotional dynamics have continued into August, and as a result, we've lowered our sales and margin outlook for the year. We've continued to reduce our inventory position as a result of our promotional strategies, and our updated outlook for the year assumes we continue that progress to end the year flat to slightly down year over year. This sets us up to be better positioned into the holiday season and to transition as well into 2024. In addition, we remain committed to expense discipline and continue to make progress on our cost savings plan this year. Our team remains agile, and we believe that the steps we're taking will allow us to continue to navigate the challenging macro environment and invest behind our strategic initiatives in support of longer-term shareholder value creation. A critical part of our path forward is having a leadership team in place. that brings a right combination of industry and Foot Locker knowledge with best-in-class retail experience to bring our strategies to life. I'm excited to now have my new senior leadership team fully in place after a series of recent hires, and they bring the right combination of functional expertise, enterprise thinking, and collaboration, requirements in the fast-changing world of retail and elevated customer expectations. As you know, since the beginning of the year, we've brought on a number of talented individuals in critical positions, including a Chief Technology Officer and Chief Customer Officer in March. And just this quarter, we welcomed Kristen Bauer, who was most recently at TCGPlayer.com, and who also spent time at TJ Maxx, Ulta Beauty, and Target as our new Chief Supply Chain Officer. And Jennifer Kraps, who was most recently at Starbucks, also joined us as our new EVP and General Counsel. We also welcomed our new EVP and Chief Financial Officer, Mike Bond, who brings with him over 15 years of retail finance experience, most recently serving as Executive Vice President of Finance and Treasurer at Kohl's. Mike's been an excellent addition to the team and will be a great partner in helping us achieve our lace-up plan ambitions. With our senior leadership team in place, we've also recently made important structural changes to our merchandising, marketing, and finance teams designed to enhance our ability to execute and immediately improve our forecasting skills and inventory management capabilities. Frank and Mike will share more on these changes in a few moments. I'd like to now provide more details on the progress we're making within our LACIP plan, even as we're facing a tougher year than expected. As you know, there are four strategic pillars to our LACIP plan. expand sneaker culture, power up the portfolio, deepen our relationships with customers, and best-in-class Omni. We're sharpening our competitive toolkit by investing behind certain technologies and capabilities to better position the business for offense and to better meet our customers' ever-evolving expectations. We're also helping our vendor partners drive incremental growth for their franchises. We're focused on being a strong partner to the brands we work with collaborating deeply across merchandising, marketing, and our Omni experience. We're partnering much further upstream to build out multi-year growth plans and co-creating customer facing marketing ideas that will drive our joint businesses. We've also been enhancing our capabilities around customer insights and data, allowing us to now share specific consumer segment opportunities and demand creation ideas with our partners. As I noted earlier, we paused our dividend to provide us with greater flexibility in the current environment. We know that leaning into LACEUP is the right decision to level up our capabilities and best position the business to compete in the modern marketplace. Looking forward, we'll prioritize initiatives that will drive the greatest immediate return and also make investments in foundational areas critical to our longer-term goals as a consumer-driven omnichannel retailer. While we're in the early days of lace-up, our team is energized by the green shoots we're seeing as our strategies start to take hold. These proof points make us even more confident that we're moving forward in the right direction. Let me walk you through our progress on each of our four strategic pillars. Our first imperative is to expand sneaker culture by serving more sneaker occasions, providing more choice, and driving greater distinction. While our reset with Nike continues to impact the business overall, we're seeing stronger results in our Nike and Jordan basketball business. This includes Air Force One, AJ1, Dunk, and Jordan Retro. We're also encouraged by the early sales of the new Nike Tech Police program, and we're thrilled to help launch Nike's first female signature basketball sneaker in the quarter. Meanwhile, we're continuing to develop very collaborative plans with our Nike partners, investing in key areas including basketball, kids, and sneaker culture. In fact, we just partnered on bringing the best of Nike and Jordan to the basketball community in New York City with our exclusive New York versus New York grassroots retail activation. Beyond our partnership with Nike, we're making progress on diversifying our assortments to provide more choices to our customers in line with their evolving needs, including more sneaker occasions. As a key example, we're leaning into our partnership with New Balance, now our fourth largest brand, and which grew well over 100% in the second quarter. We also remain excited about the trajectories of newer brands like Ahn and Hoka in performance running. While we're helping these brands extend their reach to our core shoppers, they're also helping us expand our customer base, including a more affluent and female customer. And we continue to push ahead with our growth plans with these brands. On is now in 280 doors and on its way to 350 this year. And Hoka is currently in 100 doors and headed towards 150 by year end. We also continue to see outperformance from brands like Puma, Crocs, Asics, and Brooks, as our customers are seeking out other brands with us. As a result, in line with our strategy, the diversity of our brand mix beyond our top brand Nike increased to 36% from 31% last year, making good progress towards our goal of over 40% by 2026. Our second imperative, Power Up That Portfolio, is about simplifying our portfolio of banners, creating clear lanes for each of them, while also transforming our real estate footprint through new formats and shifting off-mall. Within simplifying and creating distinct lanes, first, we completed the wind-down of our side-step banner, which will help us sharpen our focus on the Foot Locker brand in EMEA. And our transition of Champ Sports continues to make progress. While the Champ Sports banner continues to be the most acutely impacted by changes in our Nike allocation, the team is getting sharper with the brand's positioning as it appeals to that active athlete. On real estate transformation, we opened or converted four new Foot Locker community and power stores across the globe in the second quarter, giving us approximately 185 stores in these newer formats. which allows us to offer a fuller expression of the category. We remain encouraged by trends that we're seeing in these locations year to date, with traffic levels, conversion rates, and average tickets all outpacing our core fleet. These stores also help us reach consumers across channels, with our digital trends outperforming the rest of the market when we open up one of these new store formats. All in, our new store formats now represent about 12% of our global square footage, up from 9% last year. and making good progress towards our 2026 target of 20%. We're also continuing to expand the footprint at WSS, our off-mall banner that is the leading retailer focused on athletic footwear for the Latino family. In the quarter, we opened six new locations, including three in the Miami metro area. Those stores are off to an encouraging start, and we remain optimistic about our regional door expansion opportunities for WSS on its path to becoming a $1.3 billion business over time, up from $600 million in 2022. Together with the off-mall locations in Foot Locker and Kids Foot Locker, we're making strides with our overall shift to more off-mall exposure, with penetration reaching 36% of North American square footage, up four points from a year ago, and tracking well against our goal of 50% by 2026. Lastly, as part of our real estate transformation, we closed 108 underperforming stores during the quarter. Our third imperative is deepen our relationship with our customers, which is focused on building brand equity, reaching a broader set of customers, and enhancing our loyalty program and overall CRM capabilities. On building brand equity, we're sharpening our creative point of view to better articulate our brand proposition and elevate our mind share with consumers. For the first time, we launched a truly global back-to-school campaign, resulting in significantly increased engagement versus last year. These efforts are translating into online customer acquisition that grew by double digits in the second quarter in North America. We've invested incremental media dollars based on strong, short-term online returns, fueling customer acquisition as well as short-term online business growth. We're excited to unveil a full relaunch of the Foot Locker brand platform, including a high-reach, 360-degree campaign this holiday. On loyalty, 22% of our sales in the quarter were through our current loyalty program, compared to 24% last year. This was driven by lower Nike launch product allocation, which drives high participation among current loyalty members. We continue to make steady progress with signups globally and are looking forward to our new FLX program pilot launch in Canada next month. And our final imperative is to be best in class Omni, which means improving our digital presence as well as better integrating our channels with each other. Our digital penetration in the quarter increased to 15.5%, up 50 basis points year over year when excluding East Bay, which we closed late last year. Digital comps in our Foot Locker and Kids Foot Locker banners in North America were actually up during the quarter, with strength driven by increases in mobile conversion and new customer growth year over year. Our focus on site experience enhancements has generated significant wins, adding up to over $50 million in incremental annualized sales with new experiences and features. Our digital NPS and fulfillment NPS have improved significantly as well as we address customer friction points in our core online shopping flow, as well as improve the speed and reliability of our shipments. Into the back half, we'll continue to upgrade our site experience with improvements to search relevancy, site navigation, product recommendations, and display. This work in combination with our marketing efforts gives us confidence in our ability to achieve 25% e-commerce penetration over time. In switching to stores this quarter, we also continued our rollout of upgraded handheld technologies, adding over 1,100 locations in the quarter. This technology gives our stripers improved visibility on inventory, access to product information, ability to check out customers, and improving in-store conversion. We now have updated handhelds in over 80% of our stores, up from over 50% last quarter, and still expect to be fully rolled out to 100% of the fleet by the end of this year. In closing, I want to emphasize that while this reset year has been tougher than we expected, I am excited about the traction we're seeing with our LACIP plan. Importantly, our executive team is energized by the transformation taking place in the business and aligns with the LACIP strategies. While we're early in our multi-year journey, we're confident we'll evolve Foot Locker to be a competitive omnichannel retailer and drive sustainable and profitable long-term growth and shareholder value creation. And now I'd like to hand it over to Frank to provide more detail on our performance by banner.