Foot Locker, Inc.

Good morning, and welcome to Foot Locker's second quarter 2024 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 or future events in financial performance. Management undertakes no obligation to update these forward-looking statements, which are based on any 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 those four looking statements. Please note this conference call is being recorded. I would now like to turn the conference over to Mr. Robert Higginbotham, Senior Vice President, FP&A, Investor Relations, and Treasurer. Sir, you may begin.

Thank you, Operator. Welcome, everyone, to Foot Locker, Inc.' 's second quarter earnings call. We will 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, We'll review our second quarter results in more detail and our 2024 outlook. Following our prepared remarks, Mary, Frank, and Mike will take your questions. To note, today's call will reference certain non-GAAP measures. A reconciliation of GAAP to non-GAAP results is included in this morning's earnings release. 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 currently plan to release our third quarter 2024 results on Wednesday, December 4th. And now I will turn it over to Mary.

Thank you, Rob. I'll start this morning with a brief overview of our second quarter results. I'll then comment on some recent strategic and organizational updates, and we'll close with an update on our progress against our lace-up plan. To start, the second quarter marks a meaningful inflection point in our business and the execution of our LACIP plan. In the quarter, we saw a return to positive total and comp sales growth while also returning to gross margin expansion, which demonstrates that our strategic investments in support of the LACIP plan are taking hold. Comps increased 2.6%, which was ahead of our expectations of flat to slightly positive. This was led by our global Foot Locker and Kids Foot Locker banners, which comped up 5.2%. Importantly, our comp trend strengthened as we moved through the quarter, with July our strongest month as we saw a solid start to the back-to-school season, especially in our stores, and with that strength continuing into August. We were also particularly pleased to see stabilization in the Champ Sports banner as the banner achieved meaningful comp improvement quarter over quarter as its repositioning continues to take root. Gross margin was up 50 basis points year over year, led by underlying improvement in merchandise margins from lower promotions as well as occupancy leverage, and offset by the planned impact of a non-recurring charge associated with our recent FLX rewards program transition. Finally, non-GAAP earnings per share was a loss of $0.05, including a $0.09 impact from the non-recurring FLX charge in the quarter, which was roughly in line with our expectations. As we look forward to the remainder of the year, we have momentum coming off our strong second quarter results, and we're approaching the back half of the year with confidence. Our strategies across store experience, digital, loyalty, and brand building are continuing to take hold. The impact of our LASA plan is accelerating. Our inventories are well positioned, and we're a flowing product to better match customer demand. As such, we are reiterating our full-year outlook, calling for a return to comp growth and debit margin expansion, and we're maintaining our guidance of non-GAAP EPS of $1.50 to $1.70. We remain focused on progressing against our LASA plan this year and meeting our near and longer-term financial commitments, including our 8.5% to 9% EBIT margin targets by 2028. With that focus on delivering against our strategic and financial targets in mind, I'd like to comment on the changes we announced this morning to our international operations as well as our corporate real estate footprint. An overarching principle of our LACEP plan is to simplify and optimize our business to ensure that we can invest behind and focus our energy on our core banners and markets in order to drive sustainable growth. As part of the LACEP plan over the past few years, we've made meaningful strides in streamlining areas of our regional and banner portfolio that were adding complexity to our business while also diluting our overall levels of profitability. In North America, we wound down banners such as Lady Foot Locker, Foot Action, East Bay, and Atmos' limited U.S. presence. In Europe, we closed our Runners Point and Sidestep banners. And in Asia, we converted our operations in Singapore and Malaysia to a licensed model. As we execute our LACIP plan, we've identified additional opportunities for streamlining our operations, leading to this morning's announcement regarding our international business. In our Asia Pacific region, we will begin to wind down our stores and e-commerce operations in South Korea. In Europe, we will close our stores and e-commerce businesses in Denmark, Norway, and Sweden. Further, we signed agreements to transfer our operations in Greece and Romania to Forless Group, a leading retail group and licensing partner in Southeast Europe. All of these changes are expected to be completed by mid-2025. I want to thank our teams and stripers in these markets who have worked with dedication and passion every day. Additionally, our agreements with 4List Group include future stores and e-commerce expansion in Southeast Europe. Including expansion in Greece and Romania, the ambition is to open over 100 stores in the region over time. In combination with our plans to enter India later this year with our licensed partners, Metro Brands and Nika Fashion, the health and contribution of our global licensing portfolio is building as we profitably expand the global reach of our Foot Locker brand in higher growth markets with reduced levels of investment and risk. Next, I want to address our intention to relocate our corporate headquarters to St. Petersburg, Florida, where we already have a meaningful executive and commercial presence, in late 2025. We will be expanding our footprint in St. Petersburg as we transition from New York City and plan to maintain only a limited presence in New York City going forward. Separately, in September, we will celebrate the opening of our new global technology services hub in Dallas, which will be a key enabler of our technology infrastructure modernization under LACE-UP. At Foot Locker, we are at our best when we support enterprise-level thinking and collaboration amongst our team members while also looking for ways to operate with financial discipline. Through these actions, we are ensuring ongoing strategic support of our lace-up plan and operational efficiency as we focus on driving long-term sustainable growth and shareholder value creation. Now with that, let me provide an update on our lace-up plan and progress against our strategies in the second quarter. Starting with our first imperative, expand sneaker culture, which aims to serve more customers and sneaker occasions through a curated assortment of premium brands and sneakers. With our return to positive comp sales in the second quarter, led by our strong results in footwear, we're showing that we are growing our market share through our efforts to expand sneaker culture. As we return to growth in the second quarter and into the back half, we're excited about achieving growth across all aspects of our product portfolio, including a return to growth with Nike starting in the fourth quarter of this year and into 2025. We'll achieve this through our emphasis on our mutual pillars of basketball, kids, and sneaker culture, and leading into our elevated storytelling and partnerships, such as the NBA, home court, and the clinic. For example, in the second quarter, we collaborated with Nike and Jordan Brand to tap into the growing popularity of women's basketball and through a clinic activation featuring WNBA guard for the Atlanta Dream, Ariel Powers, former WNBA player Lene Harper of the Chicago Sky, and Jordan Brand athletes, including Michaela Williams of the LSU Tigers, Kiki Rice of the UCLA Bruins, and Kiyomi McMiller of Rutgers Scarlet Knights. In July, we hosted a two-day activation in Phoenix, featuring a skills and drills clinic with young women hoopers, followed by an engaging panel discussion. Our celebration of women's basketball with the clinic speaks to what we continue to see as a key opportunity for our business as we look ahead, namely our women's business. Women's has consistently been our fastest growing business for the past few years. Looking out, we continue to see ongoing opportunity in the women's category. As we tap into the women's opportunity broadly, our brand diversification efforts play an important role as we see more women come into our funnel through our wider brand selection. In the second quarter, we introduced our first ever Spring Style and Trend campaign in partnership with Adidas and New Balance. The campaign strategically targeted women and earned us nearly 3 billion media impressions. Looking ahead, next month marks the Foot Locker brand's 50th anniversary, and we have some exciting plans to help celebrate our rich history at the heart of basketball and sneaker culture. With one-of-a-kind events and exclusive co-created products from Nike, New Balance, Adidas, Puma, and Converse, we can't wait to celebrate where we've been and where we're headed throughout the next 50 years. And finally, as we drive greater distinction in our assortments, our exclusive penetration in the quarter was 13%, down 100 basis points year over year against some tougher franchise comparisons and reflecting stronger relative strength from base aspects of our portfolio, especially among women and kids. The second pillar of LACEUP is power up the portfolio, which means transforming our real estate footprint and continuing to differentiate our banners. On real estate transformation, We're continuing the progress we've made last quarter with our reimagined store concept. We followed up the successful opening of our first concept door in New Jersey this spring with our second concept door in Paris, La Défense in May. Both stores truly bring the heart of sneakers to life. Response to this new concept has been very positive from our brand partners, stripers, and customers. In both locations, we've seen higher conversion levels and basket sizes and meaningfully increased penetration of women's footwear compared to the balance of chain. We have formally named this new concept as Foot Locker Reimagined, and these concepts are intended to be the next evolution of our store formats and the go-forward expression of our brand. Just last week, we were thrilled to reopen our iconic 34th Street store in New York City as our third Foot Locker reimagined door. This location puts our best and most modern foot forward in the heart of Manhattan and redefines how we engage with sneaker enthusiasts. The store features a pivotal advancement with our new home court concept, which recall is our premier multi-branded basketball experience. Homecourt, developed in partnership with Nike and Jordan brand, embodies our vision to deliver the ultimate global multi-branded basketball experience through customer-centric design, immersive digital experiences, and enhanced technology, all with exceptional service by our stripers. We intend to roll out this latest version of Homecourt in select stores going forward. 34th Street also features our updated Kids Foot Locker concept for the first time ever with a new look and feel. Given the strong response we are seeing to our first few reimagined doors, we are pulling forward three additional locations this year, with a total of eight now planned to open in 2024. This will include our new store later this quarter in Delhi, India, which will mark our entry into this market in coordination with our licensing partners, Metro Brands Limited and Nika Fashion. In addition to these new retail concepts, we continue to make headway on our store refresh program, which aims to bring even more of our fleet up to an elevated and consistent brand standard globally. Elements of our refresh program were informed by the same design brief as Reimagined, speaking to how Reimagined is serving as the blueprint of our future brand expression going forward. In the second quarter, we completed 67 refreshes. These refreshes are in addition to the over 100 doors we've touched over the last few quarters as we've executed the program, and will continue to scale as we move through the back half of the year. We remain on target to ramp the program as we go through the third and fourth quarter, especially given that our execution of these refreshes continues to improve, in some cases turned around in just 24 hours. From a capital return perspective, we continue to see these refreshes hitting our internal hurdle rates and payback periods, supported by both comps and gross margins outperforming the balance of chain. Our new concepts, including Foot Locker Reimagined, now represent 17% of our global square footage, up from 12% last year, and moving further towards our 2026 target of 20%. Adding our store refreshes on top of our new concepts, we're committed to elevating approximately two-thirds of our global footlocker and kids' footlocker doors up to our reimagined brand standard by year-end 2025. And finally, we're making strides in our shift to off-mall. Penetration reached 40% of North American square footage, up four points from a year ago, and closer to our goal at 50% by 2026. As we work to strengthen our portfolio, a key objective has been to stabilize the Champ Sports banner. As such, we were pleased to see progress with the repositioning of the banner in the second quarter. Comps declined 3.9%, which was a meaningful improvement from the first quarter and reflecting positive footwear comps. As we make progress in the banner's repositioning, we're seeing increases in brand awareness and share of wallet among the active athlete customer segment. During the quarter, we took another big step forward with the banner with the launch of Champ Sports' new brand platform titled Sport for Life, which celebrates the powerful connection between sports and the on-the-go lifestyle of our active consumers. With an assist from Micah Parsons of the Dallas Cowboys, Francisco Linder of the New York Mets, and Jalen Waddell of the Miami Dolphins, response from customers and our brand partners to the elevated platform has been positive. We're excited about the expanded and elevated vision for the Champ Sports banner looking ahead, and we'll have more to share in future quarters about the banner's evolution. Our third pillar is deepen our relationship with our customers, with a key anchor being our redesigned loyalty program and development of overall CRM capabilities. To start, a key milestone for our business was the relaunch of our enhanced FLX rewards program in the U.S. in mid-June. 24% of our sales in the second quarter were through our loyalty program, which was up 200 basis points compared to last year. Through the addition of point redemptions for cash discounts and other perks under the program, we expect to drive greater customer frequency and share of wallet. We've been very pleased with our members' response to date across a variety of KPIs, including an encouraging pace of enrollments, higher engagement with first-time redeemers, higher average order values compared to non-loyalty members, and higher units per transaction. As we move into the back-to-school and holiday selling periods, we're continuing to scale and activate the new program and benefits, and we look forward to sharing incremental insights as the program moves towards our 50% loyalty penetration target by 2026. And turning to our final pillar to be best-in-class Omni, which means improving our digital presence, and better integrating our customer journey across channels. Our digital penetration in the quarter increased to 15.9%, up 40 basis points year over year, and we continue to target about 25% e-commerce penetration by 2026. On an enterprise level, global digital comps were up nearly 4%, and we continue to make strides in our online conversion rate. In the second quarter, we made ongoing improvements to the online customer experience through elevated site content and messaging, enhanced navigation and search capabilities, and importantly, a product detail page redesign. We remain on track to roll out a new Foot Locker mobile app later this year in the fourth quarter, which will provide a faster, more modern shopping experience, along with greater product inspiration and storytelling, and serve as a hub for our new loyalty program. In our stores, comp sales accelerated meaningfully in the quarter as customers responded to our fresh summer assortments at full price. Our striper trainings focus on omnichannel selling behavior and product education tools that are driving increases in our store level conversion. In closing, we see a return to positive sales and comp growth in the quarter as well as gross margin expansion as proof points that the LASA plan is working. We're approaching the remainder of the year with confidence as our strategies are continuing to build momentum. And now let me hand it over to Frank to provide more details on our category and banner performance.