Foot Locker, Inc.

Please note that this conference is being recorded. I will now turn the call over to Mr. Robert Higginbotham, Senior Vice President, Corporate Finance, Investor Relations, and Treasurer. Sir, you may begin. Thank you, Operator. Welcome everyone to Foot Locker, Inc.' 's fourth 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, will review our fourth quarter results and our 2025 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. 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 first quarter 2025 results on May 29th, 2025. And now I will turn it over to Mary.

Thank you, Rob. I'll start this morning with a review of our financial results and outlook, and then we'll provide an update on the progress we continue to make with our LASA plan. At a high level, we made meaningful progress with our lace-up strategies in 2024 and closed out the year with performance in the fourth quarter that was better than our previously revised expectations. Our team's execution during the year helped drive three consecutive quarters of positive comp sales and year-over-year gross margin expansion. Our performance demonstrates that our strategies are driving results even as we navigate an increasingly dynamic external environment. As we look ahead in 2025 and beyond, we're focused on continuing our progress and further advancing towards our long-term operational and financial goals. We are confident we have the right plans in place to continue to drive profitable market share gains over time as we maintain our disciplined approach to managing and investing in the business. Turning to our results, our total comp increase of 2.6% in the fourth quarter was in line with our expectations and led by share gains out of our global Foot Locker and Kids Foot Locker banners, which comps up 3.6%. A strong build during peak holiday sales drove the gains. At Champs Sports, the fourth quarter marked the second consecutive quarter of positive comps since the banners repositioning began, with comps up 1.8%. Next, on gross margin, we saw an improvement of 300 basis points year-over-year led by merchandise margin recovery against the prior year's higher level of promotions and ahead of our revised expectations. This was despite an elevated promotional environment across both the DTC and wholesale channels. At the same time, we continued the execution of our cost savings plan, which generated $35 million in total in the fourth quarter. Our non-GAAP earnings per share in the quarter were above our revised expectations at 86 cents, compared to our 70 to 80 cent guidance. As we reflect on 2024, I'm proud of the progress we've made with our LASA plan and what's proven to be a dynamic consumer and category backdrop. During the year, we achieved some important financial milestones, including a return to positive enterprise comp sales growth, gross margin expansion, and positive free cash flow, all of which we expect to continue into 2025. Similarly, through our continued execution of the LACIP plan, we made significant progress in 2024 and will look to build upon these efforts in 2025. First, in stores, we're upgrading our customers' experience through both our new reimagined concept and extensive store refresh program, both of which remain an important part of our plans looking ahead, which I'll speak to in a few minutes. We now have eight reimagined doors open across North America, Europe, and Asia. The response to our reimagined doors has been extremely positive from our customers, our brand partners, and our landlords, and we're accelerating our focus on reimagined as part of our efforts in 2025. In 2024, we also completed over 400 refreshes, which elevate and improve consistency across our global Foot Locker and Kids Foot Locker doors, and we're planning for roughly 300 more refreshes in 2025. In digital, we made meaningful advancements in the customer experience, including the rollout of our new mobile app in the U.S. in November, and it increased our digital penetration 100 basis points to 18.2%. Moving to loyalty, we relaunched our FLX rewards program in the U.S. mid-year, and we've been pleased with adoption by new and existing members, as well as improvements across a variety of KPIs, including increased frequency of purchase. After some improvements to the enrollment process this fall, We saw a meaningful step up in our sales capture rate in the fourth quarter, reaching 49% of sales in North America in the quarter and just under our 50% 2026 target two years ahead of plan. Next, we're continuing to strengthen our basketball leadership through marketing partnerships such as the NBA and Chicago Bulls. We've also elevated our collaborations through the clinic with Nike and Jordan brand, as well as the rollout of our co-designed home court experience and select reimagined doors. Additionally, we made strides against our cost structure. In 2024, we achieved $100 million in savings as part of our $350 million cost savings plan, which was ahead of our expectations of $90 million in the year. And we're targeting incremental savings of $60 to $70 million in 2025. Further, we continue to take action to optimize our business and real estate footprint. In 2024, we announced our plans to exit international markets, including South Korea and Norway, Sweden and Denmark. We also made the decision to convert select markets in Europe to a licensed model. Overall, we made meaningful strides with our strategies in 2024, and we're looking ahead in 2025 to continue to execute our LASIK plan and drive our comp sales and gross margin progress. That said, as we moved through February, we saw consumers be more cautious and sensitive, which has impacted our business quarter to date. We're seeing consumers respond and come out to spend during compelling activations, key shopping events, and product launches or newness. They spend when there's a call to action, but they're more cautious in those in-between periods. Within the approach we've taken heading into 2025, we've adjusted some of our capital and spending plans to further prioritize where we're generating the strongest returns on investment. More specifically, we're maintaining our focus on our customer-facing investments, which have been driving our return to comp growth and share gains, and are also exceeding our hurdle rates. At the same time, we'll be slowing the investment cadence of some of our technology investments to ensure an appropriate pacing of these expenses against our top line. Our teams have been making great progress in updating our core technology stack, but we have decided to slow the cadence going forward. To be clear, we're continuing to prioritize our LACIP strategies and execution, but we're balancing the near and longer-term business needs as we make our investments. And we believe the adjustments we are making to our investments will best position us to continue to deliver on the top line while also continuing to make progress toward our longer-term financial goals. Now, let me turn to the progress we've made with our LACIP plan in the quarter and how we're further advancing our initiatives in 2025. starting with our first imperative, which is expand sneaker culture. We're continuing to strengthen our basketball leadership through our strategic partnerships and collaborations, as we know basketball is a category our customers are passionate about. Now in year two of our NBA partnership, we just hosted one of our largest basketball activations ever at NBA All-Star 2025 in San Francisco with a two-story interactive multi-brand experience. We showed up bigger and bolder this year and had lines wrapped around the block for four days throughout the activation. We hosted over 20,000 visitors and the excitement we generated across customers and the industry at large earned Foot Locker 3 billion media impressions. We had great support from our brand partners, including Nike, Jordan Brand, Adidas, Puma, Converse, Crocs, New Era, and Anta, as we launched high-heat sneaker drops and featured top NBA talent appearances. all designed to connect with the basketball community and inspire the next generation on and off the court. We also brought back the clinic, our program with Nike and Jordan brand, featuring an LED court, our daily basketball programming with top athletes, reinforcing the strength of our partnership. As always, our engaging stripers brought the energy and inspired our customers throughout the weekend. This immersive experience further cemented our position as a leader in basketball and sneaker culture. Turning to Nike, our partnership is strong and fully reset, and serving our multicultural customers continues to be a top priority for both our businesses. Our lace-up strategies, coupled with their building product pipeline and focus on storytelling, will position both our businesses for growth longer term. That said, we know we're balancing marketplace and category dynamics as we move into 2025 to make way for future innovations to come later in the year and into 2026. Looking out, we have full confidence in our partnership and the steps the Nike team is taking for the brand and marketplace longer term. In addition, our results with brands such as Adidas, New Balance, Ahn, Hoka, Asics, Saucony, Crocs, UGG, and Timberland continue to reinforce our proposition as a multi-brand retailer. Sales in those brands were up a combined double digits in the fourth quarter across men's, women's, and kids, and we continue to have room for growth on both an allocation and door count basis, with a multitude of brands as we look to 2025. And finally, looking at our exclusives penetration in the quarter, it was 15% in line with last year. We continue to target exclusives progress as we look to 2025 and still aim for about 20% penetration by 2026. Moving to our second pillar, which is power up the portfolio. Taking a step back, our teams have made a lot of progress in optimizing our real estate portfolio over the last several years. Since 2019, we've closed over 20% of our global doors, including the exiting of non-core banners and the exit or conversion of select international markets. In the last two years alone, we've also pared back our store exposure at the Champ Sports banner as part of its repositioning. While we are continuing some of that closure work in 2025, it's important to note that after this year, we will be at a new baseline in our fleet, and go forward, we'll be operating with a tighter, stronger store base with reduced exposure to lower tier malls. Now among that optimized fleet, a key objective in this pillar is to elevate, optimize, and standardize our store experience, and to bring the fleet to our newly designed brand standard. We began this journey through our Refresh program, which was our capital light and quickest mechanism to impact a large percentage of the fleet swiftly, with elevated and consistent signage, fixturing to support brand partner storytelling, and an improved customer experience. We did this while testing and ultimately proving out our new reimagined concept, which builds upon those same design principles to deliver a customer-centric experience, support brand storytelling, create fun and immersive customer experiences, and enhance the power of our stripers, including with technology tools. In 2025, we intend to refresh approximately 300 doors, and this is on top of the over 400 refreshes we accomplished in 2024, including 160 in the fourth quarter. Coming out of 2025, there will be over 800 stores that we've elevated through our refresh program in a two and a half year timeframe. With our refresh program set to slow after 2025, now our focus shifts to scaling our reimagined concept going forward. As such, we expect to open or convert 80 additional reimagined locations by the end of 2025, on top of the eight we ended with in 2024. We intend to at least maintain, if not accelerate that pace of reimagined openings as we look out the next few years. We anticipate the majority of our reimagined projects to be completed via conversions or relocations of existing locations. We're making this deliberate push given the strong returns these projects are delivering, as detailed in our investor presentation. Through the efforts we've made so far, as of the end of 2024, we now have 44% of our footage at brand standard, representing 44% of sales. Going forward, we expect to reach approximately 65% of our footage at brand standard and over 70% of sales by year-end 2026, including both refreshes and reimagines. Turning to our off-ball exposure, in the quarter, our penetration was up three percentage points from a year ago to 42% of North American square footage and closer to our goal at 50% by 2026. Now moving to our third pillar, which is deepen our relationship with our customers. Focusing on loyalty, we made meaningful progress after the relaunch of our FLX Rewards Program in the U.S. mid-2024, with our loyalty penetration in North America at 49% of our sales in the fourth quarter, which was up nearly 30 percentage points compared to last year, and just under our 50% 2026 lace-up target. Improvements to the FLX sign-up process in stores toward the end of the third quarter drove that meaningful improvement in the sales capture rate, as well as the pace of new enrollments. We also expanded on how we're activating around the program in the holiday quarter, including through the use of member-only events in stores and online across banners. In the quarter, we added 3.2 million FLX members here in North America, and we're coming into 2025 with the loyalty mix in our business at a fundamentally higher baseline. Further, at just a few quarters into the enhanced FLX rewards program, we've been pleased with adoption by new and existing members as well as response across a variety of KPIs, including frequency of purchase. We're excited about the progress we made with loyalty in 2024 and expect to build upon that further in 2025, including through bringing the program to Europe later this year. And turning to our final pillar, be best in class Omni. In stores, comp sales were up slightly positive in the quarter. Traffic outside of the key selling periods proved more challenging. That said, we continued to see conversion increases in the quarter as our initiatives around product and store experience, striper training, and planning tools drove results. Turning to digital, global enterprise digital comps were up 12.4% in the fourth quarter as we saw increases in organic traffic, AOV, and conversion. Customers responded to our approved experience, particularly through our new mobile app, which launched in November, as well as inventory depth and key styles. Our digital penetration in the quarter increased 230 basis points year over year to 21.8% of sales. And we continue to target about 25% e-commerce penetration by 2026. Particularly for our mobile savvy and younger customer base, having a new and improved mobile app across the U.S. that provides a faster, more modern shopping experience is a key advantage. And we look forward to building upon that work in 2025, including through the launch of store mode capabilities. which enables customers to scan product SKUs in-store and check out product availability, including sizes. We plan to roll out enhanced mobile apps for our Champs, Sports, and Kids' Foot Locker banners later this quarter. We're confident, based on our results to date, that an improved mobile experience across multiple banners can be a significant lever for us to drive both our digital and loyalty penetration over time. So in closing, we were pleased with our progress in the fourth quarter and 2024 overall, led by completing the year with three consecutive quarters of comp sales growth and year-over-year gross margin expansion. Our LASA plan is delivering results across multiple aspects of the business, and our disciplined approach is driving free cash flow. In 2025, we're planning to build off those results. 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 product and brand partner performance, Footwear comped positive high single digits. Gains in both our base business as well as a strong launch calendar drove comp sales in the quarter. These gains were led by growth and momentum from a broad portfolio of our brand partners. The Jordan brand delivered gains thanks to very compelling launches in the quarter and a complimentary sportswear business. Meanwhile, Adidas, New Balance, Ahn, Hoka, Asics, Saucony, Crocs, UGG, and Timberland all contributed meaningfully to the success of our footwear business at Holiday. As Nike rebalances their product portfolio and inventory levels in the short term in an effort to make way for future innovation, we are continuing to navigate some impacts on our business. Throughout this process, we continue to align closely with them to optimize our merchandise mix and inventory levels to support full price sales and partner with them to bring health back to critical consumer franchises like Air Force One, dunk in the AJ1. And as we looked