Foot Locker, Inc.

Good morning and welcome to Foot Locker's fourth 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 than 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 today's conference call is being recorded. I'd now like to turn the floor over to Robert Higginbotham. Sir Higginbotham, you may begin.

Thank you, Operator. Welcome, everyone, to Foot Locker, Inc.' 's fourth quarter earnings call. We'll begin with prepared remarks by Mary Dillon, our President and Chief Executive Officer. Frank Bracken, our Executive Vice President and Chief Commercial Officer, will then give more detail on our results across our banners and geographies. Then Mike Bond, our Executive Vice President and Chief Financial Officer, will review our fourth quarter results in more detail, our 2024 outlook, and our updated financial targets. Following our prepared remarks, Mary, Frank, and Mike will take your questions. To note, today's call will reference certain non-GAAP measures. Reconciliation of GAAP to non-GAAP results is included in this morning's earnings release. We also have a slide presentation posted on our investor relations website with information that will be referenced during the call. Finally, for future planning purposes, we tentatively plan to release our first quarter 2024 results on Thursday, May 30th. And now I will turn it over to Mary.

Thank you, Rob. I'll start with our fourth quarter results and then provide an update on the advances our team continues to make on the lace-up plan. At a high level, we're entering 2024 with solid momentum. While the macro and retail environments remain dynamic, our lace-up initiatives are taking root, and we're seeing positive results across the business. We've demonstrated that when we focus our efforts and investment dollars in the right places, we can generate meaningful operational improvements and financial returns for our business. Our focus in 2024 is on sustaining this momentum and continuing to invest in key areas of the business as we lay the foundation for sustainable, profitable growth. Turning to our results, in the fourth quarter, sales trends came in above our expectations with comps declining 0.7%, far better than our comp guidance of down 7% to 9%. Notably, this included a 210 basis points headwind from the repositioning of our Champ Sports banner. Non-GAAP earnings per share of $0.38 also came in ahead of our $0.26 to $0.36 guidance range. Our top-line trends accelerated meaningfully from the third quarter, particularly at our Foot Locker and Kids Foot Locker banners. These gains were led by ongoing progress in our conversion rates as customers responded to our strong assortments and our digital and in-store initiatives. And in digital, we outperformed our plans in the fourth quarter, including double-digit gains in customer acquisition. We also improved across multiple KPIs during the quarter, including higher net promoter scores across stores, digital and fulfillment, rising engagement and considerations through our brand campaigns, digital momentum and online customer acquisition, and higher conversion levels. As we saw trends accelerate from the third quarter, we were pleased to see the sequential improvement driven by both our full price and promotional businesses. Encouragingly, we achieved positive AURs in the quarter, even with elevated promotional levels, as customers responded to our compelling holiday assortments, especially in footwear. As our sales performed better than we expected, we proactively reinvested into selected markdowns, particularly in apparel, to end the year in a solid inventory position. This enabled us to achieve leaner inventory levels versus our expectations and sets us up nicely to begin gross margin recovery in 2024. Looking back on the holiday season, we were pleased to see the green shoots from our strategies multiply and gain momentum. And we're just getting started. It's been over 18 months since I joined Foot Locker and a year since we announced our lace-up plan. I'm impressed by how quickly this team and the plan has come together to start showing early results that will ultimately drive our long-term success. I am more confident than ever that lace-up is the right plan to make Foot Locker a consumer-led, modern, omnichannel retailer at the heart of all things sneakers. Now, a year into executing our LASA plan, we've made some meaningful progress in terms of our organization and our strategies, including, first, we've begun to evolve our channel mix and improve our customers' digital journey. We've been pleased to see our digital channel build momentum through the year, exiting the fourth quarter with an 8.9% digital channel comp, excluding East Bay results from last year. The gains were led by double-digit increases in online customer acquisition and improving conversions. Our digital channel penetration now sits at nearly 20%, exiting the year up 180 basis points from a year ago, excluding East Bay. Second, we're deepening our relationship with customers through our brand building and loyalty efforts. During the year, we were pleased to globally launch our new brand platform, The Heart of Sneakers. Our first campaign, Hype for the Holidays, saw early increases in our already high levels of brand awareness and consideration. We kicked off our new FLX loyalty pilot launch in Canada to positive response and are excited to roll it out to the remainder of North America later this year. Third, we're strengthening our basketball leadership. We announced last fall our exciting return as an official league marketing partner of the NBA in the U.S. We will have a loud and proud presence at key NBA moments during this year. During NBA All-Star 2024, for example, we debuted, along with our partners at Nike and Jordan brand, a breakthrough year-long basketball program called The Clinic. In our stores, we launched Home Court, our new basketball-focused experience, and are pleased with the initial results. Next, we continue to simplify our business. Our LASA plan is based on the framework of simplifying our business and investing to grow. In 2023, we wound down the sidestep banner and Atmos presence in the U.S. In addition, we converted select Asian markets to a licensing model. These actions position us into 2024 and beyond for greater focus on our core banners and regions. Further, we've evolved our talent mix and organization structure. Since I've joined, we've made swift progress on assembling our executive leadership team, a winning combination of seasoned footlocker and category veterans, along with new executives with deep functional expertise, all working together with a winning agile and enterprise mindset. We also made changes to the structure of our merchant and buying teams, as well as our finance organization, to ensure inventory accountability and enhance forecasting. These changes have elevated our approach with our brand partners as we lead with customer insights and collaborate with them on multi-year growth plans. We're already seeing these efforts build with the quality of our assortments headed into spring season and beyond. And finally, we're right-sizing our cost structure. We made progress against our $350 million cost savings program in 2023, achieving roughly $135 million last year alone. And we expect to make ongoing progress against our savings plan here in 2024. As we look ahead to 2024, our focus is on sustaining our current momentum as we execute our strategies. We have seen that when we focus our efforts and our investment dollars in the right places, we're swiftly generating operational improvements and financial returns for our business. Therefore, 2024 will be another year of significant investment for us as we continue to emphasize strategic areas of improvement across digital, store experience, loyalty, and brand building. As we continue our investment focus this year, we remain focused on our ROIs and balancing the near-term needs of the business with longer-term objectives. We know this discipline is correct as we lay the foundation for accelerating performance into 2025 and 2026 and for long-term, sustainable, profitable growth. I'd like to now provide more details on what we achieved during the fourth quarter as part of our LASA plan. As we discussed, there's four strategic pillars to LACEUP. The first is to expand sneaker culture by serving more sneaker occasions, providing more choice, and driving greater distinction. Now, as we continue to execute on this imperative, a key priority for this management team has been strengthening the way we communicate and collaborate with our partners. For example, last month we hosted our first-ever Partner Summit, which was met with enthusiastic response. We shared insights about our LACEUP progress and priorities, plans for enhanced data sharing designed to identify opportunities to mutually grow our businesses, and opportunities for multi-season marketing to help us collectively tell compelling brand stories across consumer segments. Our improved strategic planning is strengthening our brand partnerships, and as we build out our loyalty and CRM muscles, we look forward to what's ahead. We also recognize it's important to protect and win in our core, and that includes a healthy basketball business. That's why we are especially excited about strengthening our basketball leadership. We celebrated the NBA All-Star 2024 a few weeks ago with a 50,000 square foot interactive pop-up Foot Locker home court experience in downtown Indianapolis. Along with partners including Nike, Jordan Brand, Adidas, Puma, Converse, and Under Armour, we hosted the largest basketball activation in our history. In total, exciting activations and events from the weekend earned Foot Locker and our partners over a billion media impressions. These included events with athletes, including Victor Wambanyama and Paolo Banchero. Additionally, we joined forces with Nike and Prime Video to host a private screening of Iannis and Tante Compo's documentary, Iannis, The Marvelous Journey. We used the weekend to debut The Clinic, our first-of-its-kind year-long program with the Nike and Jordan brands that will enable fans to interact with us in new and innovative ways. The clinic will celebrate the culture of basketball through interactive activations, high-reach media, real-life basketball clinics, social media content, community events, and more, providing a unique way for fans to interact with these leading basketball brands. We kicked it off with our first NBA ad spot starring Nike's Kevin Durant and Jordan Brand's Jason Tatum, which is now airing on broadcast and social media channels and will continue throughout the NBA season. And in our stores, we launched our multi-branded basketball-focused Foot Locker home court experience this year and ended 2023 with just under 30 locations in key markets. We're very pleased with the initial results, including sales uplift and higher NPS in the stores with the home court. We'll accelerate our investment in this concept, targeting over 100 of these specialized experiences by 2026. Turning to our brands, let's start with our largest partner, Nike. We're excited to return to growth with them later this year as we focus on our core pillars of basketball, kids, and sneaker culture. In 2024, we'll look to celebrate key basketball moments with them through the clinic as well as throughout the year, including Air Max Day later this month. Turning to our brand diversification plans. Sales from brands outside our biggest brand, Nike, increased to 40% in the fourth quarter of 23, up from 37% last year, as we grew our door counts with vendors such as Adidas, New Balance, On Running, Hoka, and UGG. A few highlights from the fourth quarter include New Balance, which is now our fourth biggest brand, grew again in excess of 100%, with strength across genders and franchises. the launch of our Anthony Edwards exclusive AE1 with Adidas, along with strong demand for on-trend TerraStyles. Continued success with Puma and LaMalo's MBO3, and momentum with UGG, particularly among our female consumers. Importantly, with the diversity of our brand mix now at our 40% target exiting the fourth quarter, we're planning for growth across all our partner segments in 2024 and beyond. Helping to drive distinction for Foot Locker, our exclusive penetration in the quarter was 15%, led by franchises such as Nike's Tuned Air, Puma and Lamello's MB03, and with Adidas, the introduction of the AE1. As we refine our buying and merchandising team strategies under our new team structure, we now think an exclusive penetration closer to 20% is appropriate for our business, rather than our prior 2026 target of 25%. This reflects our belief that putting our shelf space and inventory dollars behind fewer but bigger exclusive franchises with powerful marketing and storytelling will better support us in expanding sneaker culture. The second pillar of LaceUp is power up the portfolio, which means transforming our real estate footprint and creating clearer lanes for our banners. On real estate transformation, we're thrilled to be launching our first Store of the Future next month in Willowbrook, New Jersey, with three more planned later this year. These immersive retail experiences bring to life a unique, differentiated store environment with powerful brand storytelling and informed by our customer insights. Elements from these stores will be applied to our 2025 openings and beyond. While we're excited about our stores of the future, we know we need to focus on our stores of the now, and that means taking a closer look at our existing fleet. In the back half of 2023, we piloted nearly 100 refreshes of select footlocker and kids' footlocker doors, with enhanced merchandising, branding, and fixturing. Early results have been very encouraging on both a productivity and margin basis. As a result, we're accelerating this refresh work to create a more consistent and elevated brand experience globally across approximately two-thirds of our global Foot Locker and Kids Foot Locker doors over the next few years. We also continue to make progress rolling out our new formats, which now represent 16% of our global footage, up from 11% last year, and moving further towards our 2026 target of 20%. Additionally, we're making strides in our shift to off-mall. Penetration reached 39% of North America's square footage, up five points from a year ago, and closer to our goal of 50% by 2026. Within simplifying and creating distinct lanes, our repositioning of champ sports continues to take hold. Comps declined 10.4% in the fourth quarter, far better than the Q1 through Q3 trend, as our new emphasis on the active athlete consumer started to resonate. In the quarter, the team accelerated real estate efforts by further rationalizing the store base with roughly 70 champ stores closures, while at the same time investing in the ongoing fleet through nearly 200 merchandising resets. Now headed into 2024, we're targeting roughly 40 store closures, including 15 in the first half. With a more distinct store experience and an even sharper viewpoint on our assortment buys into spring and summer, we remain optimistic about Champ's sports potential in the marketplace. Our third pillar 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, in November, we launched our exciting new global platform, The Heart of Sneakers. It's our uniting vision for the Foot Locker brand. Our first campaign, Hype for the Holidays, earned over 2 billion media impressions. And we're particularly excited to see views and engagement on our social media channels surpass our expectations. 2023 made clear that by investing in our brand and top-of-the-funnel marketing efforts, we're driving greater consideration, brand awareness, and customer acquisition at strong incremental returns. Underscoring this progress, our online customer acquisition again grew strong double digits in North America in the fourth quarter and helped fuel our digital outperformance. This work is giving us the confidence to increase our marketing and brand building spend in 2024. This will include a campaign focused on a more fashion-forward female customer launching next month and a new brand platform for our Champ Sports banner planned for later this year. Turning to loyalty, 21% of our sales in the fourth quarter were through our currently loyalty program, similar to last year, ahead of us rolling out our enhanced programs. We launched our FLX cash pilot program in Canada last fall and have been pleased with results across a variety of KPIs, including higher engagement with first-time redeemers, higher AOVs, higher UPTs, and higher trip frequency. We look forward to a wider rollout of the FLX cash program across North America later this year and globally in 2025 as we advance our goal of 50% loyalty penetration by 2026. And our final pillar is to be best-in-class omni, which means improving our digital presence and better integrating our channels seamlessly. Our digital penetration in the quarter increased to 19.5%, up 180 basis points year-over-year, excluding East Bay. On an enterprise level, global digital comps were up nearly 9%, excluding the impact of our East Bay exit last year. Our digital conversion continues to push towards new highs, and we continue to see room for improvement looking out. In 2024, our focus is on additional improvements in the customer experience, including enhanced search and discovery capabilities, product listing and detail pages, improved storytelling, and continued cart optimization improvements. We're also excited to roll out a new Foot Locker mobile app later this year, which will provide a smoother shopping experience, drive greater connectivity with stores, and create a seamless experience with our loyalty integration. Our progress to date on our digital transformation means that we are on track to achieve about 25% e-commerce penetration by 2026. Switching to stores, at Foot Locker, we know our stripers are essential to the overall experience, with our NPS in-stores already at 90. In the third quarter, we launched a global collection of new training and tools focused on driving advanced omni-selling behaviors designed to ensure that we meet our customers' needs every time. One quarter into the program, we've already seen improvements with in-store conversion levels, omnichannel orders, and AOVs. We're continuing to build on this program in the first quarter to further enhance the overall customer experience. To sum up, I'm confident we're evolving Foot Locker to become the go-to destination for discovering and buying all things sneakers globally. Our strategies are continuing to point us in the right direction. As we continue our investment-focused areas in 2024, we're on the path towards driving sustainable and profitable long-term growth in shareholder value. Now let me hand it over to Frank to provide more details on our category and banner performance.

Thank you, Mary, and good morning, everyone. Starting with fourth quarter performance, by category, footwear comped positive low single digits, an improvement from negative high single digits last quarter. We were encouraged to see the acceleration in our footwear comps driven by full price selling, especially in our North American business. Challenges persisted in our apparel business, with comps down low double digits, as we know we have work to do to stabilize the category. Finally, accessories comped flattish. In footwear, we continue to see the culture of basketball connect with consumers through models like Nike's Air Force 1 and Dunk, the Air Jordan 1, along with Puma's Lamello MBO3, and the Adidas AE1. And as we continue to invest in the basketball category through our NBA partnership and brand partner programming like the clinic with the Nike and Jordan brands, we are confident that we will strengthen our position in basketball culture and continue to be the leading destination for all things basketball. Meanwhile, New Balance continues to connect with multiple consumer segments as we again doubled the business in the fourth quarter, marking nearly 200 percent growth on a two-year basis. This growth was driven by innovation and well-orchestrated marketing campaigns across the men's, women's, and kids' categories. And we're excited about building on this momentum into 2024 as we grow our door base in women's and kids and continue to more deeply connect the New Balance brand with a new generation of sneaker mavens and fashion-forward consumers. We also continue to see momentum with the Adidas Terrace trend. We saw strong sell-throughs of key silhouettes, such as the Samba, Gazelle, and Campus, as our inventory and in-stock positions improved throughout the quarter. Our investment in these Adidas franchises will continue to drive growth into 2024 as we elevate the in-store presentation and connect with consumers in our spring trend campaign and our back-to-school messaging. On the lifestyle front, UGG played a meaningful role in our business this holiday. With must-have styles such as the Tasman and Ultra Mini, UGG was one of the most in-demand footwear brands, especially for our fashion-forward expressionists, led by the teen girl consumer. We also continue to see consumers gravitate towards new ideas in the running category, led by brands such as Ahn, Hoka, and Asics. We will continue to scale these brands through door expansion and allocation increases, as well as connecting them to our consumers through integrated marketing campaigns. And we are especially pleased to introduce the Hoka brand to kids earlier this quarter at our Kids Foot Locker and Foot Locker banners. We are very confident that we will continue to make progress as a best-in-class retailer to all of our brand partners. Our first-of-its-kind Brand Partner Summit in February enabled us to showcase our new and coming capabilities and align our 2024 go-to-market priorities. And the positive feedback we received on our store environments, our digital capabilities, and partner marketing was very validating of our plans. Switching to channel performance, Comparable sales in our stores decreased 2%. While store traffic remained down year over year, we were pleased to see steady improvements in our conversion levels driven by our updated service behaviors. Average ticket also saw gains as we increased our AURs while UPTs were down slightly. Digital comps increased 5% or nearly 9% excluding East Bay, the online-only banner we exited late in 2022. As Mary mentioned, digital penetration during the quarter increased to 19.5% of sales, up 180 basis points year-on-year, excluding East Bay. Now for performance by banner and geography. In North America, overall comps were down 0.7%, including a 310 basis point negative impact from the Champ Sports repositioning efforts. Our North America Foot Locker and Kids Foot Locker banners strengthened in the holiday quarter as both stores and online benefited from improved merchandising as well as our enhanced marketing and digital efforts. At Foot Locker North America, comps rose by 4.8%, driven by a strengthening in our core base business compared to the third quarter. Kids Foot Locker comps were up 6.9%, led by a strong holiday season in November and December in both stores and online. At Champ Sports, comps were down 10.4% as repositioning efforts drove moderating comp declines versus the Q1 to Q3 trend. Towards the end of the quarter, we accelerated some store merchandising reset activity, further enhancing the brand's reimagining positioning as the home of sports style, where head-to-toe looks, sneaker essentials, and performance are fused to serve the sport-inspired consumer. We executed roughly 70 Champ Sports store closures, in addition to nearly 200 merchandising resets during the quarter. With our Champ Sports store fleet rationalized, an improved product on order, and a new brand platform launching later this year, we are optimistic we will continue to stabilize the banner and further drive the new consumer positioning in 2024. Moving to WSS, the banner saw comps down 6.1% in Q4 as the macro environment continued to weigh on the WSS consumer. We were pleased to open 28 new locations in 2023, including 12 in the fourth quarter. And we've been thrilled with the recent progress that WSS is making under its new leadership team. That said, it's clear 2023 proved challenging for the WSS banner with full-year comps down 6.8 percent as its core customer base felt the impacts of a tough macro and higher inflation most acutely. As we navigate the economic environment and its impacts on the WSS consumer, we believe it's appropriate in the near term to temporarily reduce capital for our new store openings. As a result, our revised plans for 2024 include 20 new doors at WSS. While we still very much believe in opportunities for the banner longer term in serving the fastest growing consumer segment in the U.S., we believe this is a prudent approach in the near term. Turning to Europe, comps for our Foot Locker banner were up 0.3%. The environment remained challenging and promotionally driven across many parts of Europe. The team is focused on improving the in-store experience through refreshes and an edited assortment this spring. They also continue to drive conversion improvements through new service behaviors and improved allocation methods. In Asia Pacific, comps were down 0.2 percent. The Foot Locker Banner saw comps up 0.6 percent, reflecting a promotional Australian marketplace. And finally, at Atmos, comps were down 1.8 percent, in part reflecting Japanese consumer pressure from a weaker yen. I'll now hand the call over to Mike to go over the financials and guidance in more detail.

Thank you, Frank, and good morning, everyone. In the fourth quarter, starting with revenue, total sales rose 2%, including an approximate $100 million revenue contribution from the 53rd week. Comps declined 0.7%, substantially better than our expectation of declines in the 7% to 9% range. As Mary noted, the Champs sports repositioning represented a 210 basis point comp headwind. By month, November was positive low single digits, December was down slightly, and January trends moderated to down mid-single digits, including some impacts of inclement weather earlier in the month. Moving to margins, gross margin for the quarter declined 350 basis points to 26.6%. Merchandise margins fell by 400 basis points, driven by higher promotions to ensure we ended the year with appropriate levels of inventory. Occupancy as a percent of sales leveraged 50 basis points on the higher sales volumes, including the 53rd week. Approximately $10 million of gross margin savings from our cost optimization programs also flowed through our cost of goods line. For the fourth quarter, our SG&A rate came in at 22.4%. representing D leverage of 10 basis points with savings from the cost optimization program of approximately $10 million, more than offset by inflation and wage and technology investments collectively, our cost optimization program generated total savings of approximately $20 million within the fourth quarter. Finally, non-gap earnings came in at 38 cents above the high end of our 26 cents to 36 cent outlook. The quarter also included a $0.12 EPS contribution from the 53rd week. Turning to the balance sheet, we ended the quarter with $297 million of cash and total debt of $447 million. At quarter end, inventories were down 8.2% versus last year, far better than the 10.5% increase at the start of the quarter and our guidance of flat to down slightly year over year. putting us in a good position to begin margin recovery in 2024. Lastly, on the quarter, I want to point you to today's announcement on our $478 million non-cash charge on our minority investment portfolio, which flows through our other expense line but is excluded from our non-GAAP earnings calculation. As we did our annual impairment review, we felt it appropriate to reassess the value of our portfolio of minority investments and thus took the charge highlighted in today's release. Moving on to our 2024 outlook, at a high level, we expect a return to sales growth and gross margin expansion this year, but we anticipate another year of significant investment as we work to build on our current momentum. For the year, we are issuing guidance for non-GAAP EPS of $1.50 to $1.70 representing growth of approximately 15% to 30% from the $1.30 we reported in 2023 on a 52-week basis. This guidance includes a non-recurring charge of $0.10 from the revaluation of our outstanding FLX points in North America as we roll out our broader Cash for Points program this year. This outlook embeds the following drivers. We expect comps of plus one to plus 3% with comps flat to down low single digits in the first quarter and building momentum as we move through the year. This will be driven by several factors, including the refresh activity in the stores, returns in our ongoing brand building and marketing efforts, the launch of our new mobile app, the rollout of our new loyalty program, and the return to growth with Nike. Overall, our store count will be down approximately 4% in 2024, with square footage down approximately 1%. We expect to add roughly 35 new stores in the year and to close approximately 140. Including an approximate one-point drag from lapping the extra week, total sales for 2024 are expected to be down 1% to up 1%. Turning to our gross margins, we expect gross margin expansion of 210 to 230 basis points to a rate of 29.8 to 30.0% for the year as we begin to recapture the gross margin compression for 2023 due to elevated promotions. I would note a few important dynamics to our gross margin expectations for the year. First, while our inventory has been brought down to healthy levels, it will take some time to transition consumer expectations away from those higher promotional levels. We therefore expect to see ongoing merch margin pressure through the first quarter, but improving as we move through the year. Second, the rollout of our enhanced loyalty program will impact our gross margins in the following ways. During the second quarter, as we roll out our enhanced FLX loyalty program, we will take an approximate $15 million charge to convert our existing member points to the new program. This new program provides our members with more value for the points that they have already earned. Next, as the new loyalty program ramps in the back half, we expect to see a modest gross margin drag as points are initially accrued, though we anticipate the program to be gross margin rate neutral and gross profit dollar accretive over time. On SG&A, we expect deleverage between 170 and 190 basis points to a rate of 24.4% to 24.6%, driven by our ongoing investments in technology, digital, and brand building, as well as a return to more normalized levels of incentive compensation. Our plans include ongoing progress in our cost optimization plans, including an additional $80 million in cost savings targeted this year. Switching to cash flows, our capital expenditure outlook for the year is approximately $345 million, slightly above the $335 million CapEx average for 2024 through 2026 we discussed in early 2023. This is driven by our plans to pull forward select investments, especially on the store experience front. While annual CapEx figures may vary in the next few years, we are still committed to that cumulative $1 billion figure through 2026 and would still target that $335 million average. Further, we also project working capital to be roughly neutral for the year. Looking at the quarters, let me also provide some additional context for our expectations on the shape of the year. For the first quarter, we expect comps of flat to down low single digits with momentum building through the year to reach plus 1% to plus 3% for the year. On gross margin, we expect pressure to continue into the first quarter as we strategically employ markdowns to help transition our consumer, but we expect gross margins to improve as the year progresses. Given those drivers, we expect first quarter EPS to represent approximately 5% to 10% of annual earnings. For the second quarter, we expect approximately break-even earnings given the $15 million or 10 cent charge from our initial FLX loyalty transition that will fall into the second quarter, having a compressed impact on earnings within that period. as well as a tax rate significantly above the annual rate, similar to last year, given the lower level of income within the quarter. As noted previously, we expect our comp trends to improve from Q1's trend as the year progresses, and as our initiatives around store refresh, digital including our new mobile app, loyalty, and our return to Nike drive improved returns and margins, especially within the back half of the year. Looking beyond 2024, we wanted to take the time to update investors on how we are thinking about the longer-term financial profile of our business given the lower starting point exiting 2023. It's important to note that our 2026 operational targets from LACEUP remain the same. We still target 40% plus penetration in our business beyond our top brand Nike by 2026, digital at 25% of our mix, building exclusive penetration towards 20% down from our prior target of 25% loyalty at over 50% of sales by 2026 and 70% of sales longer term off mall at 50% of our North American square footage and new concepts at 20% of global square footage. As we focus more on the store of the future, as well as the refresh program in 2024, This means footage growth from our larger power and community doors is likely to be pushed out towards 2025 and 2026 as we focus on our core fleet. As a result, we expect to build towards our prior plus 5 to plus 6% top-line target into 2026 and beyond. On margins, we still see our original 8.5% to 9% operating margin target as achievable, but with the timing of reaching that goal being pushed out by two years to 2028. Turning to capital allocation, as noted, we anticipate making additional investments in 2024 as we work to build on our current momentum. While we are entering the year positioned for recovery, We are currently prioritizing a rebuild in our cash position to ensure we maintain ample flexibility to support the continued execution of our LASA plan. As such, we are not resuming a dividend at this time. We will reevaluate our returns to shareholders as we move through the year and have greater visibility on our sales and margin recovery and the trajectory of free cash flow into 2025 and beyond. Returning capital to shareholders remains an important priority. and we continue to believe that the business can support and sustain a dividend at a competitive 30% to 35% payout over time. By leaning into our strategic investments in the near term, we will be better positioned to realize the longer-term earnings potential of our business. With that, operator, please open the call for questions.

Ladies and gentlemen, we'll now begin the question and answer session. If you would like to register a question, please press star and the number one on your telephone keypads. If your question has been answered or you'd like to remove yourself from the queue, please press star and two. If you are using a speakerphone, we do ask that you please lift your handset to allow optimal sound quality. Also, we do ask that you limit yourself 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. So the question that I have really is when you look at the 24 expectations, I think the sales guidance is probably a little better than we anticipated. Gross margins are definitely a little better. When you look at the expense rate as 24 progresses, just if you could give us a little more color around more of those expenses and sort of, you know, the need and sort of a level of investment that you're making. I think that would be helpful.

Thank you, Rob. I'll just start high level and just say, as we look at 24, it's an important year that I think accomplishes a couple things. We see strong results happening with our LASA plan, and we are committed to continue to invest in those strategies. The green shoots we're seeing encourage us that this is the right path for us and to really drive us in terms of being a really sustainable, long-term, great omnichannel retailer. So those strategies are super important. We also, in 24, as you note, we are showing top-line improvement, comp growth, as well as EBIT margin expansion. So we believe it's the right path to continue to move us on the path to achieve our LASA plan goals. And so that's how we constructed the plan and feel good about it. And Mike, would you like to add more?

Yeah, Bob, good morning. This is Mike. As you think through the pace of investments for us in 2024, the expense component does somewhat over-index in the first half of the year. Obviously, taking into consideration with our guidance flow, we have IT costs year over year that are somewhat weighted towards the first half of the year. On the margin side, we did talk about loyalty one time in Q2. and then some ongoing parts in the second half within margin. Real estate and refresh really picks up through the year. From an order of magnitude standpoint, the return of variable comp is the biggest swing factor when you think of the year-over-year movements. Beyond that, our marketing and brand-building investments and technology investments combined add something similar. The next overall piece is those loyalty costs, inclusive of the one-time piece. And then finally, you know, general labor inflation and the expense component of our refresh activity round out from an order of magnitude perspective our investments.

Great.

Thank you.

Our next question comes from Michael Benetti from Evercore ISI. Please go ahead with your question.

Thanks for taking our questions here. Congrats on the nice comment on the quarter there. Mike, I guess maybe I'll just – follow that one on unpack that SG&A a little further. I think last year, you know, if we look at it with a little bit of detail on a per foot basis, SG&A ended the year, maybe four or six percent lower than what you had initially guided. So I guess the bigger picture point is you showed good ability to flex that lower when sales came in, actualized a little differently than you'd hoped, I guess. Can you speak to where there may be flexibility in the SG&A plan this year? Do you have, you know, like a mid-single-digit ability to flex that wiggle room or push investments out? If the sales trend comes in lower, would you, would you opt to pull forward investments if the sales trend comes in a little higher than you thought?

Yeah, Michael, great question. I think from our standpoint, you know, hopefully we've shown you the discipline that when we do have movement in our sales off of our plan that we will flex our expenses appropriately. And we do have some movement within there that we can achieve. You know, we're obviously very focused on our cost optimization program, and you'll continue to see us make progress in there. I think the thing that we do want to call out, though, is that 2024 is a year where we will continue to make the appropriate investments. And, again, making those investments, there is an SG&A component to it that we feel is a really prudent investment to be making this year to allow us to accelerate our performance going into 2025 and 2026. So, again, you know, we will have a flex point within our SG&A, and, you know, we will adjust accordingly as we see trends in the business change, but also want to make sure that we're focused on making the right investments for the long term.

Okay. Thanks a lot for all the details, Pat.

Our next question comes from Christina Fernandez from PAG. Please go ahead with your question.

Yeah, good morning. Thanks for the question. I wanted to ask about the the positive calm for this year what's underpinning that from an industry perspective did you see better product innovation inventories cleaner across the marketplace so how much is the industry itself getting better versus some of the company specific initiatives you have in place

Yeah, so, you know, I feel this is one of the things we feel very good about is that we can see a direct path between our conversion improvements and the strategies that we've been implementing in our LACER plan. So, you know, for example, digital, our conversions at an all-time high, and that's driven by improvements that we have specifically made as it relates to how we operate our digital strategies. Our store conversion, omni-order traffic, omni-average order volume, all up, and we can see that directly tracking with things that we're doing in terms of omni-selling behaviors in our stores, as well as our merchants doing a great job on assortment. So we feel that a lot of the top line was really driven by strategies that we're beginning to see the green shoots from. In addition, certainly the industry was promotional in the fourth quarter, especially around holiday, as were we. But the fact that we had positive AURs demonstrated that our customer was willing to pay full price for items as well. So I think it's a real balance of promotion that we think is appropriate for what was required in the quarter, as well as, you know, taking control of our destiny with our own strategies. As we saw our demand continue to be strong in the quarter, we did take the opportunity to get more aggressive on taking markdowns in areas that we were more challenged from an inventory perspective, especially apparel. And that is a great outcome for us that we ended with inventory down 8% for the quarter.

And then a follow-up question on the gross margin outlook for 2024. Could you break down how much is it the merchandise margin recovery versus other factors that are helping drive that improvement?

Yeah, this is Mike. So, you know, obviously we're planning a margin recapture of 210 to 230 basis points. You know, coming out of this year where we and the industry leaned into promotions in recent quarters, you know, Mary just alluded to the, you know, appropriate steps that we took to improve our inventory position. Really wanted to call out that they were both proactive and surgical in nature. really leaving us with the inventory position we were looking for in both terms of quality and volume of that inventory. Even with that healthier inventory level, though, we aren't modeling a full recapture of the promotional activity in 2023. We know that moving the consumer off of higher promotions will take some time. That's why we're calling out that in Q1 we do expect to see some ongoing year-over-year pressure. We do expect that to improve through the year. A couple of the nuances that we've highlighted is that that FLX rollout has the $15 million one-time impact in Q2. And then, you know, as that new program ramps in the back half, we do expect a modest drag on initial accruals. And I do expect that program to be both rate neutral and margin dollar accretive over time. For the year shrink within there, we expect to be relatively neutral year over year. As you think through the 2024 gross margin build directly, of the 220 basis point midpoints, about 200 basis points of it or a little more than that, 220 is we expect to recapture about 75% of the promotional activity that we experience within the year. That FLX hit is about a 20 basis point offset within there. And then occupancy, we expect to be about a 20 basis point help to us. We do lose a little bit from the extra week, but we'll gain a little bit on the low single-digit sales comp and the cost savings initiatives that we have in place.

Thank you.

Our next question comes from Janine Stricker from BTIG. Please go ahead with your question.

Hi, good morning. I wanted to ask about your plans to drive exclusives to 20% from the 25% previously. What have been some of the learnings there that are causing you to change this target? And just how should we think about the relationship between exclusives and your susceptibility to the broader promotional environment? Thank you.

Good morning. Thanks for the question. This is Frank. Yeah, so really the change in the target was predicated on some of the learnings from 2023. As we embarked on our store refresh program, we looked at space and SKU capacity and then also just the productivity of SKUs and categories and determined that sometimes more isn't always more in all cases. And so what we really want to do is focus in on bigger and better stories and make sure that we've got the in-store and digital capacity to tell those stories, the marketing investment behind it, and then give them a little bit more room to breathe with the consumer. So that was some of the key learnings that informed that change in the target long term. I will tell you, though, that we're very pleased with the composition results of our exclusive programs in 23 and then what we have on order and on the programming calendar for 2024. We continue to work very hard as we broaden our consumer and our brand portfolio with all of our partners. Our positions in basketball are only strengthening in 2024. but we're also bringing to market some really powerful kids-focused ideas for our KFL and our North America banners specifically, so feel great about that. And then the other thing is that the learnings about how we tag and market the exclusivity, I think we can do a little bit better job, again, by being a little more discerning in what's programmed on the calendar.

Great. And then just to follow up, if you think about the 28 target of an 8.5% to 9% operating margin, What are some of the guideposts there we should think about? And to clarify your comments about the reacceleration in square footage growth in 26, should that be the year when we really start to see margins ramping towards that target? Thank you.

Janine, this is Mike. So, yes, from a RAMP perspective, I think 2026 is going to be where you, you know, 2025 into 2026, you'll see us, you know, make progress across that timeframe in terms of our EBIT margin. recapture on the way to the 8.5 to 9 by 2028. I think the way that we think about the path from 2024 is obviously as we get into 2025, we'll have the recapture of the one-time ethylene point hit that we called out. We'll also have further gross margin recovery of the promo pressure not currently contemplated within our 2024 guidance. We'll continue to have ongoing progress in our cost optimization program Over this time, we'll also have tech costs begin to taper. After we get through some of the major initiatives here early on, we'll see that normalize a bit down. We'll continue to have real estate rationalization, which will be margin enhancing over time. And then, you know, ultimately getting to that sales growth in the 5% to 6% range, you know, in 2026 and going forward will allow us to drive leverage down through the P&L.

Great. Thanks so much for all the color and best of luck.

Thank you. Our next question comes from Alex Stratton from Morgan Stanley. Please go ahead with your question.

Great. Thanks a lot. Just a couple from me here. So just on the quarter and quarter-to-date trend, it looks like comps decelerated sequentially in the quarter. Maybe what do you make of that December step down from November? And can you just clarify how trends have evolved quarter to date? And then separately, what gives you confidence that the comp can accelerate as promotions come off?

So, Alex, thank you for the call. This is Mike. So from a January deceleration perspective, we did have a little bit of weather within our performance. But we were really pleased with the results we saw in November and December. And we really look at that combined period as the holiday timeframe. And again, we're pleased with that overall results. From a quarter-date perspective, we're not going to address that specifically, other than obviously our trends today are incorporated within how we approach the guide for the year. And as a reminder for Q1, we're calling out flat to down low single digits in terms of the top line within Q1. And then as we think through the comp growth for 2024, I think it's really about us continuing to make the right investments and those right investments starting to come to life throughout the year. So as we build to the top line, obviously our refresh activity will help that. We'll launch our mobile app in North America. We have the loyalty enhanced version in North America. We'll continue to benefit from the ongoing brand building within our marketing team. We'll have the buys and assortments from our reorganized merchant team, and then, obviously, the return to growth with Nike later in the year.

Thanks a lot. Good luck.

Thank you.

Our next question comes from Jonathan Komp from Baird. Please go ahead with your question.

Yeah, hi. Good morning. Mike, just one follow-up on the gross margin topic. Can you maybe just clarify as you look over the next couple of years how much total markdown-related merchandise pressure you expect to get back and any further color when we think about the 2028 margin targets, what sort of gross margin range you're embedding within that range?

So thanks, Jonathan. I appreciate the question. I think from our standpoint, the promotional pressure that we've seen year over year really tied to the elevated inventory that not only we had but was in the industry, we don't see that as structural. So over the next couple of years, we are planning to recover that. I think beyond that, we expect to have continued benefits from our reorganized buying teams and then also operating here from a cleaner inventory position. We expect to be able to maintain that and then improve our turn over time. I think in 2023, we turned a 2.6 or 2.7 from a cost standpoint, and we expect to be able to work that up to 3 over time. In terms of the exact components within the P&L in 2028, that's not something that we're going to comment on at this time, but we're definitely, you know, expect to be able to continue to drive healthy margins that allow us to get to that 8.5% to 9% EBIT.

Understood. I appreciate that. And maybe one broader follow-up just on the integration with brands and specifically Nike. I'm curious just to hear more about the evolution with the marketing partnership with Nike here and how we should view that in context. I know the discussion is returning to growth with Nike. I think that's maybe a couple quarters behind the original target in terms of timing. So just thoughts on that return to growth, the timing and the visibility in conjunction with the new partnership here. Thank you.

Sure. Thank you. Thank you for the question. I'd say we mentioned this in the comments as well, that our overall approach to working with our brand partners, I think we've elevated this year, and really the keystone was our partner summit as we're taking a consumer-led view and multi-year growth planning approach with all of our brand partners. It's important to note our relationship, our partnership with Nike is strong, and I think that for sure the areas that we really align around are basketball, kids, and sneaker culture, especially with the fact that we have a younger multicultural consumer that we bring to the party. And so a perfect example of how we're working together is the activation we just did with them over the All-Star 2024 weekend. in Indy and the launch of something called The Clinic, which is a Foot Locker Nike Jordan brand sponsored year-long event that will have activations in communities, social media, as well as a piece of advertising that's running right now in the NBA with Kevin Durant and Jason Tatum. So we're very excited to work together with Nike to really elevate basketball culture, sneaker culture. And we expect a return to growth with Nike on an allocation basis later in this year during the holiday quarter. You know, the rest of the, we'll see, and there's some uncertainty in the marketplace, and we know that as we get into the year, and so we'll see how that goes, but we definitely see growth happening on the allocation basis later in the year, in the holiday quarter.

Okay, thank you very much. Sure.

And our final question today comes from Abby Zevanekas from Piper Sandler. Please go ahead with your question.

Great. Thanks so much for taking my question. Is there just any color you can give on, you know, what you're contemplating in the full year guide for specifically in North America, you know, Foot Locker, Foot Locker Kids versus chance in WSS in terms of comps? Thank you.

Thanks, Abby. You know, from this standpoint, I'm not going to comment on the banner-specific comps that we're planning through the year. I think, you know, we were pleased that in Q4, several of our banners obviously outperformed our expectations to lead to health. So we think we have momentum really across the portfolio. You know, within there, obviously, WSS was a little softer. And, you know, I think we're pleased with what the management team there is doing to stabilize that going into the next year.

Okay. And then just, sorry, a follow-up on digital. Can you talk about what exactly led the comps there in the fourth quarter? Was it anything to do with higher, you know, launch product versus the prior year or anything you're doing on a marketing side that you think led to that? Thank you.

Yeah, digital is really all about conversion, which is at an all-time high, and that's driven by improvements that our teams have been making on things that we can see direct effect. So, you know, mobile cart, navigation, urgency indicators, size filters, some, you know, those types of tactics are really driving our conversion. And, you know, we know there's quantifiable scale revenue impacts that we're seeing with improvements on our digital sites, as well as investment in digital media. Great. Thank you. Sure. So I think we need to wrap up. Thank you. Thank you for joining us today. I just want to sum up. We're evolving Foot Locker to be the global destination, go-to destination for discovering and buying all things sneakers. By continuing to execute on the LASA plan, we are confident we're on the path towards driving sustainable, profitable long-term growth and shareholder value. I just want to extend my gratitude to the entire Foot Locker team, and in particular our global Striper community, for what they do every day, working with excellence across our stores, online, our distribution centers. And we look forward to updating you on our progress next quarter. Thank you.

And, ladies and gentlemen, with that, we'll be concluding today's conference call and presentation. We thank you for joining. You may now disconnect your lines.