Foot Locker, Inc.

Good morning, and welcome to Foot Locker's third 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 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 the global economic and market conditions. Currency fluctuations, customer preferences, and other risks and uncertainties described more fully in the company's press releases and reports filed with the SEC, including the most recently filed Form 10-K or Form 10-Q. Any changes in such assumptions or factors could produce significantly different results, and actual results may differ materially from those contained in the forward-looking statements. Please note this conference call is being recorded. I would now like to turn the call over to Mr. Robert Higginbotham, Senior Vice President, Corporate Finance, Investor Relations, and Treasurer. You may begin, sir.

Thank you, Operator. Welcome, everyone, to Foot Locker, Inc.' 's third 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 Vaughn, our Executive Vice President and Chief Financial Officer, will review our third quarter results and our updated 2024 outlook. Following our prepared remarks, Mary, Frank, and Mike will take your questions. To note, today's call will reference certain non-GAAP financial 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 fourth quarter 2024 results on March 5th, 2025. And now I will turn it over to Mary.

Thank you, Rob. I'll start this morning with a high level review of our third quarter results and our full year outlook. I'll then provide an update on our LACIP plan initiatives. Despite continued and meaningful progress, our third quarter results did not meet our expectations. As we consider this performance and the current promotional environment, we are taking a more cautious approach to our outlook and have revised our sales and earnings guidance for the year. While we're disappointed that we did not see as much sequential improvement in the business that we had anticipated three months ago, we are pleased to continue to demonstrate ongoing progress against our LASA plan as we delivered another quarter of positive comp results and meaningful gross margin improvement in the third quarter. Looking at our comp sales, our total comp increase of 2.4% in the quarter was led by share gains of our global Foot Locker and Kid Foot Locker banners, which comped up 2.8%. In addition, both our Champ Sports and WSS banners accelerated back to positive territory, up 2.8% and 1.8% respectively, led by strength in the back-to-school period. In the quarter, we saw consumers remain cautious with their discretionary dollars. More specifically, this translated to shoppers concentrating spending around the peak back-to-school selling season in August and then pulling back in September and October, which we believe reflected consumers holding off on spending ahead of holiday events. Turning to gross margin, we saw an improvement of 230 basis points year over year, led by merchandise margin recovery against last year's higher level of promotions. Our merchandise margin recapture accelerated versus the second quarter, although this recovery did not come through to the degree that we had anticipated. In the third quarter, we saw that the promotion environment was more elevated and widespread across channels than what we had anticipated three months ago. At the same time, we continue to demonstrate disciplined expense management, including through the execution of our cost savings plan, which is now on pace to deliver $90 million in savings this year, above our prior expectation of $80 million. Our non-GAAP earnings per share in the quarter were 33 cents, up from 30 cents last year, but below our guidance of approximately 40 cents. As we look to the remainder of the year, We have updated our full year non-GAAP EPS to be in the range of $1.20 to $1.30, down from our prior range of $1.50 to $1.70. Looking to the fourth quarter, we expect our customers to remain cautious with their discretionary dollars and to consolidate their spending over peak periods in the holiday season. We also expect the elevated promotional activity we saw in the third quarter to continue through the holiday season. On quarter-to-date trends, after a softer start to the season in the first three weeks of November, we saw meaningful acceleration in trend during Thanksgiving week. Looking towards the remainder of the quarter, we anticipate benefiting from a favorable launch calendar, but remain cautious in light of the steeper lulls we saw with the consumer in the third quarter outside of peak selling periods. This is in addition to an overall heightened promotional environment and condensed holiday period. We expect gross margin improvement in the quarter as we lap last year's elevated markdown levels in our business, particularly in the apparel category. However, we have moderated our expectations regarding our margin recapture opportunity in the quarter as we see elevated promotional dynamics inclusive of DTC and retail peers in both Europe and North America. While we're disappointed to be adjusting our full year outlook, we're continuing to make progress against our LASA plan and are committed to meeting our longer-term financial targets, including our 8.5% to 9% EBIT margin target by 2028. Now with that, let me provide an update on our LASA plan and progress against our strategies in the third quarter. Starting with our first imperative, which is expand sneaker culture. Let me start with our top partner, Nike. We're pleased with how we've elevated our partnership over the last several quarters. We look forward to building upon this momentum with Elliot Hill and his team at Nike. We have a longstanding relationship with Elliot and are excited to work with him given his passion for product, innovation, an athlete, and consumer insights to help drive distinction in the marketplace. Examples of our ongoing collaboration include the continued expansion of our work with Nike and Jordan brand on the clinic, and our premier multi-brand in-store Foot Locker home court basketball experience. In the near term, we remain on track to return to growth on an allocation basis with Nike in the fourth quarter, including a favorable launch calendar relative to both the third quarter and last year's fourth quarter. That said, we know we're balancing challenges in the global marketplaces quarter. We're seeing higher promotional levels in the marketplace compared to our prior expectations, particularly out of DTC in addition to wholesale competitors. Over time, we do expect the degree of promotional intensity to abate. We don't think it's structural as inventory levels are rationalized and as a more appropriate balance of DTC and wholesale is achieved in the channel. In the long term, we have full confidence in our largest partner in the strength of our partnership how Nike is positioning the brand for the future, and how that will benefit the category, the industry, and Foot Locker. At the same time, our proposition as a multi-brand retailer is reinforced by our results as we continue to see our highest frequency customers purchasing a wider array of brands. Also in the quarter, sales of brands such as Adidas, New Balance, Ahn, Hoka, UGG, and Asics were up strong double digits through a combination of door expansions as well as like-for-like gains. In lifestyle, Adidas continues to see strength globally, led by women through the lens of Terrace. In heritage running, we have expanded the number of doors with new balance expansions compared to last year, and strong comp gains across multiple footwear franchises across men's, women's, and kids. In performance running, Asics was one of our fastest-growing brands in the quarter, led by strong global momentum in multiple footwear franchises across men's, women's, and kids. Similarly, we're seeing strong gains in Ahn and Hoka, and we continue to plan for new doors for those brands as we look towards 2025 and beyond. Certainly, our controlled inventory levels give us a lot of flexibility and agility with how we're flowing product across multiple brand partners to better match our supply with customer demands. And finally, looking at our exclusive penetration in the quarter, it was 15% down 100 basis points year over year as we lap the 25th anniversary of Nike TN. Moving to our second pillar, which is power up the portfolio, a key objective of this pillar has been to reposition our champ sports banner towards the active athlete and sports style enthusiasts. The banner outperformed our expectations in the quarter with comps up 2.8%. the first positive comp sales results at the banner since its repositioning began. Another key objective in this pillar is to elevate and optimize our store experience through new door concepts as well as our refresh program as we continued our progress with both in the quarter. On new store concepts, recall we opened our 34th Street reimagined location in New York City in August. We also opened reimagined doors in Melbourne and Delhi with the latter marking our entry into the Indian market with our licensed partners, Metro Brands and Nike Fashion. Just last week as well, we opened our second location in Europe in Utrecht in the Netherlands. With six reimagined stores now live across North America, Europe, and Asia, we're excited to see the heart of sneakers come to life through this globally scalable concept. In all these locations, we've generally seen higher conversion levels, basket sizes, and increased penetration of women's footwear compared to the balance of chain. Next month, we're opening two additional reimagined doors here in the U.S. at Bay Plaza in the Bronx and Holyoke Mall in Western Massachusetts. Once these stores are completed, we'll have reimagined concepts that represent the full range of our store formats and box sizes within our global Foot Locker Store portfolio. That will bring our total reimagined concepts to eight this year, and we look forward to testing and learning from these locations as we build reimagined plans for the future. Turning to home court, we know that sneaker culture has long been influenced by sports and specifically basketball, and certainly the category remains a key driver of business as we aim to be the go-to destination for all things basketball. That's why we're pleased to continue rolling out our Foot Locker Home Court experience developed in partnership with with Nike and Jordan brand in select reimagined locations. Recall, Home Court is our premier multi-branded basketball-focused experience. This version of Home Court was co-designed with Nike and Jordan brand and features a visually striking experience meant to enhance our basketball storytelling. It's currently live in our 34th Street and Melbourne reimagined locations and demonstrates our mutual commitment and shared vision to deliver the ultimate in-store basketball experience. We've been very pleased with the results from Home Court thus far, and we intend to accelerate our investment in this experience, especially through our reimagined concept going forward. We continue to target 100 Foot Locker Home Courts by 2026. Our new concepts, including Foot Locker Reimagined, now represent 17% of our global square footage, up from 13% last year, and moving steadily towards our 2026 target of 20%. In addition to the reimagined concept, we made significant headway on our store refresh program, which aims to bring more of our fleet up to an elevated and consistent brand standard globally. 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. In the third quarter, We completed 167 refreshes, which was an acceleration from the 80 we did in the first half of the year. We remain on target for our goal of approximately 400 refreshes this year. 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 brand standard by the end of 2025. And finally, we're making strides in our shift to off mall. Penetration reached 41% of North American square footage, up five points from a year ago, and closer to our goal of 50% by 2026. Moving to our third pillar, which is deepen our relationship with our customers. Over the past several months, we've made steady progress driving awareness and relevancy for our banners with consumers. Our positioning has come to life through the rollout of brand platforms such as the Heart of Sneakers for Foot Locker and, more recently, Sport for Life for Champ Sports. And customers are responding to our brand campaigns in differentiated partnerships. As a result, we're seeing improvements in both awareness and consideration. More recently, in September, we celebrated the 50th anniversary of the Foot Locker brand with a month-long campaign dedicated featuring exclusive products co-created with Nike, New Balance, Adidas, Puma, and Converse. The campaign featured a strong Omni and social media presence and culminated with an exclusive concert with the Grammy-nominated Coy LeRae at our 34th Street Reimagined store here in New York City. In total, the campaign earned us over 1.7 billion media impressions. As we move towards the NBA tip-off in October, we began building upon the work we've done around our core basketball category. A year ago, we announced our agreement with the NBA to serve as an official league marketing partner here in the U.S. We more recently launched a new partnership with the legendary Chicago Bulls franchise ahead of the 24-25 NBA season. We know that the Bulls have long been at the forefront of basketball and sneaker culture, particularly with their association with Michael Jordan and the Jordan brand, and hold a shared commitment to basketball culture and the community. The partnership features community basketball events, exclusive in-store activations, and a co-branded tunnel walk series on social media, allowing fans a behind-the-scenes look at their favorite players as they're getting ready to take the course. We'll continue to lean into our basketball business through our partnerships with the NBA and the Bulls, in addition to our home court experience. Looking at holiday, we launched a campaign in November called Step Into Your Gift, which featured top NBA talent, including Anthony Edwards and LaMelo Ball, along with Coy LeRae. Through this work, we're underscoring Foot Locker's role as the heart of sneakers as we embody the energy of gift-giving and sneaker culture this holiday season. Moving on to loyalty, 27% of our sales in the third quarter were through our loyalty program, which was up four points compared to last year. Since the June relaunch of our FLX Rewards program here in the U.S., we've been very pleased with our members' response across a variety of KPIs, including a higher pace of enrollments, engagement with first-time redeemers, and higher AOVs compared to non-loyalty members. Following an improvement in our sign-up experience in stores towards the end of October, we've seen a meaningful improvement in the sales capture rate in stores as we've moved into November. This holiday, we're excited to continue to activate through the program, including the recent addition of members-only events in stores and online across banners. We're already seeing these events drive value for the program in the pace of new enrollments and lifts in the sales capture rates. We look forward to sharing incremental insights as the program moves towards our 50% loyalty penetration by 2026. Turning to our final pillar, be best in class omni. In our stores, comp sales were up 2.2% in the quarter. While traffic proved more challenging, especially in September and October, we saw some of our highest conversion increases in stores year to date, speaking to how our initiatives around product, in-store experience, and Striper education and trainings are working. On an enterprise level, global digital comps were up 3.6% as we continued to make strides in our online conversion rate due to ongoing improvements to the customer experience, including better merchandising capabilities. Our digital penetration in the quarter increased 60 basis points year over year to 17.6% of sales, As we continue to target around 25% e-commerce penetration by 2026. Last month, we were excited to roll out our new and improved mobile app across the US, which provides a faster, more modern shopping experience, featuring richer content and improved launch experience. Importantly, the app serves as a hub for our new loyalty program across both stores and online, making it that much easier for our members to track and access their points across channels. While still very early days, the app has already seen a strong uptick in conversion levels, and we're confident that this improved experience can be a significant lever for us to drive both our digital and loyalty penetration over time. In closing, despite continued and meaningful progress, our third quarter results did not meet our expectations. That said, we continue to see our sustained positive comps and gross margin expansion as proof points that the LASA plan is working across multiple dimensions. Now let me hand it over to Frank to provide more details on our category and banner performance.