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 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 made different materially than 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. Robert Higginbotham 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 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 lace-up plan. As we discussed, there's four strategic pillars to lace-up. 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 lace-up 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 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 exclusives 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 exclusives 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 Lace Up 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 Foot Locker and Kids Foot Locker 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 program. 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 integrations. 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 focus 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.