Foot Locker Earnings Call Nuggets: Increased Cost Vendors and Fall Outlook

Foot Locker Inc (NYSE:FL) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Increased Cost Vendors

Kate McShane – Citigroup: Ken, I was wondering if you could give a little bit more detail from the increased costs vendors are passing on to you which are weighing on gross margins a bit. I wonder why this is happening now especially in light of what we’ve been through the last couple of years with raw material cost. And what percentage of your product is being impacted?

Kenneth C. Hicks – Chairman, President and CEO: We saw larger cost increases a year ago, but they continue and will continue to see cost increases, not just because of materials but because of labor cost and other costs that they are seeing; fuel costs go up. The cost – we work with the vendors to try to manage the cost and make sure they’re focused on products that can accept it. But that said, some of the shoes that have been in the line a while, costs have gone up, they’ve made adjustments. Those are more difficult to pass on. Newer product with changes, we’ve seen higher cost on some of them. But since the customer doesn’t have a reference point, we were able to pass those on more readily, but there’ve been cost increases and will continue to be cost increases and they’ve had an effect on the IMU. It’s not a big effect but an effect.

Lauren B. Peters – EVP and CFO: 30 basis points.

Kate McShane – Citigroup: Can I just follow up with, do you expect that to continue for the next couple of quarters or longer enough the same level of impact that you saw in Q2?

Kenneth C. Hicks – Chairman, President and CEO: We probably will live with cost increases for the rest of our lives. But that said, I think we are getting very smart about how we pass them on. Once the price – once we get them, and we are able to raise the price of the product, it normalizes the IMU.

Lauren B. Peters – EVP and CFO: Katy, it’s one of the dynamics that we deal with and this is why we are so focused on initiatives that we have that will improve merchandise margins for us. So, the allocation system that we’re investing in helps us get right product to the right place at the right time, and that means less markdown. So, that’s how we deal with the dynamic.

Fall Outlook

Robby Ohmes – Bank of America Merrill Lynch: Ken, could you give us a little more color on the month-to-date comps in terms of – is it the same mix that you saw in the second quarter meaning where Europe is comping very strong, but U.S. is running negative? As you maintain that sort of low mid-single-digit comp guidance, what is different or not different from what you saw in the second quarter that could make comps in the U.S. be the same or worse or better? Maybe just give some help on how you now see the fall and holiday playing out for the Foot Locker and Champs business in the U.S.?

Kenneth C. Hicks – Chairman, President and CEO: We see the U.S. business as improving and the business for back-to-school is off to reasonable start. We feel good about it. There is a lot of new products that’s helping to drive that. You’ve got Springblade from adi, you’ve got 3-Ply from Nike. So, we are seeing those elements do well. We talked about the growth of (indiscernible) and how that’s doing well. That’s having a positive impact on our U.S. business and it moved to the positive category. We still see good business internationally and good business online. We also in the apparel are seeing some promising trends with fleece, but it is a little early to declare victory but fleece has started off nicely. So, we feel very good about the fall with the new product that we’ve got and the line-up of launches.

Robby Ohmes – Bank of America Merrill Lynch: So, just to clarify for the back half in that low mid-single digit guidance should we expect little better comp out of the U.S. than what you saw in the second quarter and maybe not quite as impressive comp out of Europe. Is that how you guys are getting to that guidance?

Lauren B. Peters – EVP and CFO: I think we would expect U.S. to continue. What Ken has described, I (would say) Europe moving off a bit trends.

Kenneth C. Hicks – Chairman, President and CEO: Yeah. So, the U.S. should get a little better and hopefully Europe will continue where it is.

A Closer Look: Foot Locker Earnings Cheat Sheet>>

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