Foot Locker's FL CEO Kenneth Hicks on Q1 2014 Results

[sean]

Foot Locker's FL CEO Kenneth Hicks on Q1 2014 Results

Good morning, ladies and gentlemen, and welcome to the Foot Locker's First Quarter 2014 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. These forward looking statements are based on many assumptions and factors including the effects of currency fluctuations, customer preferences, economic and market conditions worldwide, and other risks and uncertainties described in the company's press release and SEC filings.

We refer you to Foot Locker Inc.'s most recently filed 10 K or Form 10 Q for a complete description of these factors. Any changes in such assumptions or factors could produce significantly different results and actual results may differ materially from those contained in forward looking statements. Please note that this conference is being recorded.

I will now turn the call over to Mr. John Maurer, Vice President, Treasurer and Investor Relations. Mr. Maurer, you may begin.

Thank you, Christine. I'd like to welcome all of you to Foot Locker Inc.'s first quarter earnings conference call. This morning we reported first quarter net income of $162 million, an increase of 17% compared to last year's net income of $138 million. On a GAAP basis, this year's net income represents $1.10 per share, a 22% increase over the $0.90 per share we earned in the first quarter of 2013.

This quarter was the most profitable first quarter ever in the long history of our company. Q1 was also the most profitable of New Balance Outlet Store any quarter, not just a first quarter, in our history as an athletic company.

Included in these results are approximately $2 million of charges related to a trade name impairment in Ireland and additional Runners Point Group integration costs. Excluding these items on a non GAAP basis, Foot Locker's first quarter earnings were $1.11 per share compared to the $0.91 recorded in the first quarter of 2013 after excluding certain RPG acquisition costs.

Except as noted otherwise, the figures and rates mentioned during our remarks will be based on these non GAAP results. A reconciliation of GAAP to non GAAP results is included in this morning's press release.

Lauren Peters, Executive Vice President and Chief Financial Officer will kick off our prepared remarks this morning with a detailed review of our first quarter financial results. She will then hand the ball to Dick Johnson, our Executive Vice President and Chief Operating Officer to provide additional product and operational insight into our results.

And finally Ken Hicks, our Chairman and CEO, will team with Dick to review the progress we are making on seizing the many near and long term opportunities the company is executing against. And we will conclude with an opportunity for you to ask questions. Lauren?

Thank you, and good morning to you all. 2014 has started off quite well, as indicated by the very strong earnings John just outlined, and the 7.6% comparable sales gain we reported today. In fact, including Runners Point Group, our total sales increased 14% in the first quarter.

Breaking out our comparable sales gains by segment, our stores were up 6.4% while our direct to customer segment was up 17.2%. We noted on our previous call that February's comp gain was in the low double digits. March comp sales were up in the low single digits despite the negative impact of the shift of Easter into April this year, while April's gain was in the low double digits.

Among our domestic store divisions, Kids Foot Locker was once again the sales leader in the quarter with a stellar mid teen comp gain. also had an excellent result, posting a high single digit comp new balance 574 womens navy sales gain.

Footaction and Champs Sports posted a mid single and low single digit gain respectively. Lady Foot Locker came in with a low single digit women's shoes new balance 574 comp loss which represents a significant sequential improvement over last year, which Dick will discuss further during his remarks.

Foot Locker Europe generated a solid mid single digit comp women's shoes new balance 574 gain. With only one country, Italy, not posting an overall sales gain in the quarter. In fact, several countries were up double digits, including our Foot Locker business in Germany.

On top of that, Runners Point Group delivered a comp gain in the double digits, although I need to remind you that RPG sales will not be included in our reported comp base until October of this year. Foot Locker Asia Pacific continued its strong run producing a high single digit comp gain. Foot Locker Canada posted a mid single digit decline. Eastbay, still the biggest part of direct to customer was up low single digits while CCS, the smallest piece, was down mid single digits.

Our direct to customer sales were 11.3% of total sales, up almost 100 basis points from a year ago. These strong sales results yielded an equally strong result in gross margin, which improved to 34.6% of sales from 34.2% a year ago.

Consistent with the guidance on our call in March, the increase was primarily related to leveraging the fixed elements of our gross margin, producing a gain of 70 basis points. Merchandise margin was down 30 basis points due primarily to initial markup decline.

Our SG rate also improved to 19% of sales from 19.2%. As good as this result is, in fact, 19% is our best ever quarterly SG rate as an athletic company. It was negatively impacted by a couple of things.

First, excluding Runners Point Group our SG rate would have been 18.6%. We bought a profitable business with a full management team and infrastructure and for the most part we intend to keep that structure in place leveraging it for growth. That said, there are definitely operating synergies we're beginning to realize and which will continue to benefit us going forward.

The second factor impacting our SG rate this quarter was a $2 million increase in our legal reserves. As expected, depreciation expense increased to $36 million, reflecting a higher level of capital investments we've been making in the last couple of years.

The rest of the income statement, primarily interest and income taxes, came in very close to our expectations going into the quarter. We also delivered balance sheet results in line with our targets.

First, inventory increased 8.5% overall, compared to our 14% total sales increase. Excluding RPG and using constant currencies, inventory was up just over 3% New Balance Outlet Store compared to our comparable sales gain of 7.6%.

We also ended the quarter with just over $1 billion of cash and short term investments, a decrease of about $100 million from the end of Q1 last year. We continued to execute our share repurchase program, acquiring approximately 1.5 million shares for $70 million and we also paid an increased dividend of $0.22 per share representing an additional $32 million.

Together, the share repurchases and dividends amounted to over $100 million of cash returned to our shareholders. We also invested approximately $500 million of capital into our business

Thank you for that correction, John, $50 million of capital into our business to drive future growth.

During the first quarter, we opened 27 stores and closed 36.

As outlined in March the largest number of openings was in Europe and in Kids Foot Locker, while half of the closures were in Lady Foot Locker. We ended the quarter with 3,464 company owned stores.