Foot Locker Executive Insights: Nike Slide and Europe

On Friday, Foot Locker Inc (NYSE:FL) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Nike Slide

Michael Binetti – UBS: Lauren, thanks for all the very thoughtful prepared comments this morning. Ken, if this was – I think, this was maybe the first positive quarter for Lady Foot Locker in a few quarters, if memory serves, is that accurate?

Kenneth C. Hicks – Chairman, President and CEO: That would be accurate.

Michael Binetti – UBS: You talked a little bit about a refresh strategy there, when we saw you guys at headquarters in March and then we heard a step up in the CapEx about like related to women’s. Can you tell us a little bit about the project? At the Analyst Day, I guess, we saw a slide with some new Nike (NYSE:NKE) fixtures in Lady Foot Locker, and maybe we could hear a little bit more about the details around that?

Kenneth C. Hicks – Chairman, President and CEO: Yes. With the – as you know we did a major study in looking at the women’s business and the opportunity there, and one of the most important things was that this is apparel driven, not shoe driven. So what we’ve done is significantly step up the apparel we have in the store. What you are talking about is you saw the bra and bottoms bars that we’ve placed in the stores, as well as we’ve increased other apparel, such as shorts, t-shirts, tracksuits from adidas and Nike (NYSE:NKE), so there is a heavier sense of apparel. There is also more performance in the stores. We are looking and hopefully early in the fall season we will have a new design for the Lady Foot Locker stores that we will test that will allow us to show the apparel even better, but at the same time not lose the strength we have in shoes. Then finally as I said, hopefully by the end of this year, we will be able to put up a store that is really designed from scratch and we will have a couple of prototypes to test that will allow us to really understand what we can fully do in the women’s business.

Michael Binetti – UBS: Were you guys able to teach yoga classes in the store, or I am just kidding…?

Kenneth C. Hicks – Chairman, President and CEO: I will not be able to teach a yoga class in the store.

Michael Binetti – UBS: So that’s been a chain that has been a real disappointment for a long time, and even since you’ve been there, something that I know you scratch your heads on and gone back to figure it out a few times. But I mean, maybe if you could help us just think directionally – I know you don’t like to breakdown the chains, but directionally where – how far below what you think that chain can do on sales per foot or what have you seen historically in sales per foot at the women’s business are we at this point, so we can think about the opportunity.

Kenneth C. Hicks – Chairman, President and CEO: We don’t breakout the specific chains, but I will tell you that it performs on all our productivity measures well below the men’s chains. Quite frankly based upon some of the competition out there, we see no reason why it couldn’t perform at the level of the men’s chains.

Michael Binetti – UBS: Then maybe I think you talked to us a little bit of about new prototypes that you were testing out at Champs and even the core Foot Locker, maybe just an update on how that looks?

Kenneth C. Hicks – Chairman, President and CEO: Well, we’ve now extended the prototype that we have for Champs in Tyrone Plaza and we’ve got the three more test stores out there and by the end of the spring, we will have a total of ten stores, so we will be able to test the real economic benefit of that. We are encouraged by what we are seeing with the three new ones, so – and two of those by the way happen to be new stores, but we’ll have them around the country and including up into Canada, so that we’ll be able to know what we’ll benefit from this, and know how fast we should be able to move on it next year. We’ve put in a new Foot Locker (NYSE:FL) prototype in Smith Haven Mall in Long Island, and the results of that are encouraging. We’re – as a prototype, we’re working out the bugs, and hopefully we’ll be able to rollout test stores and do the same thing that we’re doing with the Champs. It’s just running about six months behind where Champs is. Our approach is come up with the idea, prototype, work the bugs out of it, test it to understand the financials both in terms of cost to do and the benefit, and then rollout based upon that test, assuming that it’s a positive and meets our hurdle guidelines, rather than just say, here’s an idea, let’s go out and change the world, and maybe it works, maybe it doesn’t. We’re going to make sure the things we do work and have a payback.

Europe

Christopher Svezia – Susquehanna Financial: Just Ken just a little bit more deeper dive in Europe I guess, maybe if you add some color just geographically, I guess, between the five major European countries, just kind of where – what you’re seeing North versus South, and just the pickup in the business? I guess, where do you see – you mentioned Nike Free being in place, I guess, it was more on the footwear side than in the apparel side, and just your thoughts for that business, Europe as we move through the balance of the year?

Kenneth C. Hicks – Chairman, President and CEO: Yeah. I mean, there is no question Europe is a challenging environment, but to your point that there are differences. Greece us somewhat of a basket case and that is a challenge, but we only have a handful of stores there. Across Southern Europe, Portugal Spain, Italy, it’s a little more challenging and we obviously have a strong position in Italy but the good news is they were very productive and profitable stores and they continue to be productive and profitable, even with the business being down a bit. The Northern Europe, Germany, France, the Benelux countries are performing better and in fact in some cases some of those countries are up and those economies are better and so we see kind of a three tier business environment and we’re responding to that. That said in shoes, we’ve got some strong performers. I mention Free which is a plus for us, the Blazer, some of the – Adi classics are doing well, Converse is doing well for us, so there are parts of the business that are doing very, very well. Apparel which was a bigger business in Europe slowed down to bit. That was partially – I think it’s going to be a shift because it’s been – while we’ve been warm in the States, it’s been very cool in Europe and as it warms up I think our apparel or t-shirts and shorts will start to pick up there. So, it’s not an excuse, it’s a timing issue, so I am not Pollyanna, I am not saying things are great in Europe because it is challenging, but it moved, it’s in the low single-digit loss for the quarter. It’s a running up a little bit now. We’re forecasting it will be probably down in the low single-digits for the year, but we do have a lot of things that we’re performing well, at and it is a productive change that our division that delivers. It’s interesting a lot of talk now when Europe is not performing well and the U.S. is about Europe bringing us down. There wasn’t a lot of talk when Europe was flying and the U.S. was down and how Europe would bring us up but our job is to make sure we keep the balance and focus and drive the U.S. strong and make sure we maintain a strong position in Europe.

Christopher Svezia – Susquehanna Financial: Then just on the apparel side between private label and branded, you talked a lot about how branded performed, just a little color on private label and maybe any color between the margin delta between the two of them? Did they both improve, just any thoughts about that?

Kenneth C. Hicks – Chairman, President and CEO: Yeah. Our branded business continues to be strong because I’ll tell you the vendors are coming out with some great product Nike, adidas has been very, very strong, Under Armour. We’ve been very fortunate. Our private label is improving and we’ve got our women’s Actra brand is doing well. We’ve got Sneaker Freak which is a strong brand in Europe that’s doing well, but we continue to develop that business as we pulled down on the cotton by the pound t-shirts and move into more technical apparel, have more fashion in it and we also to some degree have done a shift because with our team addition capability we’re printing shirts for the brands that used to be – some of that capacity used to be used with our private label and is now being done by the brands – for the brands at a higher ticket, and we are happy and pleased do that because it’s a fast-growing business for us. With regards to the margins, we continue to improve in the margins. The branded margins are somewhat higher than the private label, but we’re continuing to make progress on both fronts.

Christopher Svezia – Susquehanna Financial: Just lastly, real quick, just your thoughts on the running businesses as we go through the year, obviously maybe some difficult comparisons, but just kind of your thoughts about how you think that could play out to what’s in the pipeline?

Kenneth C. Hicks – Chairman, President and CEO: I think, running is really going to continue to be a strong business. There is a lot of newness coming out. The Olympics will help. You got the Flyknit shoes coming out from Nike that will be exciting. Lightweight is really driving the business, and that one of the things that has happened though with that is some of the heavier, older shoes, with a higher ticket, people have moved to the lightweight technology and it’s a lower ticket. That put some pressure on the business. That said, we’re seeing some great new shoes come out in some of those, what I call, heritage lines that I think will help spark that business again. So, I think running is still a good story for the industry, and particularly, a good story for us.