FL Foot Locker

Jim Lance VP, Corporate Finance & IR
Lauren Peters EVP and CFO
Richard Johnson Chairman, President, and CEO
Tom Nikic Wells Fargo
Paul Trussell Deutsche Bank
Christopher Svezia Wedbush Securities
Michael Binetti Credit Suisse
Janine Stichter Jefferies & Company
Bob Drbul Guggenheim
John Kernan Cowen and Company
Susan Anderson B. Riley FBR
Call transcript

Good morning, ladies and gentlemen, and welcome to Foot Locker's Second Quarter 2019 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 currency fluctuations, customer preferences, economic and market conditions worldwide, and other risks and uncertainties described more fully in the company's press releases and in 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, that this conference is being recorded.

And at this time I would like to turn the conference call over to Jim Lance, Vice President, Corporate Finance and Investor Relations. Mr. Lance, you may begin.

Jim Lance

Thank you. Welcome everyone to Foot Locker, Inc.'s second quarter earnings conference call.

As announced in this morning's press release, the company reported net income of $60 million in the second quarter compared to net income of $88 million in the second quarter of last year. Earnings per share were $0.55 compared to $0.75 per share in the second quarter of 2018.

Excluding particular items on a non-GAAP basis second quarter earnings were $0.66 per share compared to $0.75 per share last year. The particular items included in this year's results are a $13 million charge related to the closure of 23 SIX:02 locations, an incremental $1 million charge related to the pension matter that we have spoken about in the past, and a $2 million tax charge related to U.S. tax reform. Last year the results included a $3 million charge related to the same pension matter offset by $2 million of tax benefits. Unless otherwise noted the figures and rates mentioned during our call today will be based on non-GAAP results. A reconciliation of GAAP to non-GAAP results is included in this morning's press release.

We will begin our prepared remarks with Lauren Peters Foot Locker's Executive Vice President and Chief Financial Officer who will provide details on our second quarter financial performance along with our financial outlook for the balance of the year. Dick Johnson, Chairman and Chief Executive Officer will then provide an update on our second quarter results along with an update on a number of ongoing customer connected initiatives and our product pipeline. Lauren.

Lauren Peters

Thank you Jim. Good morning to all of you and thank you for joining us today. Overall I would describe our results for the quarter as challenging in some areas, on track in others, and importantly showing sequential improvement throughout the period.

In addition we made progress against a number of key strategic initiatives. We reported a 0.8% comparable sales gain for the second quarter.

While it was at the low end of our guidance, the comps improved as we move through each month of the quarter. By month May comparable sales were down low single-digits, June was up low single-digits, and July was stronger producing a mid single-digit increase.

Taking a look at our second quarter results in more detail, total sales declined 0.4%. The impact of weaker foreign currencies compared to a year ago reduced sales by $22 million. On a constant currency basis, total sales increased 0.8%. Breaking out the comparable sales gains by channel, our stores were down 0.1% while our direct to customer channel led our performance with a 6.5% sales increase.

As a percent of total sales DTC rose to 14.3% for the quarter up from 13.5% last year. Store traffic was down both single-digits across geographies while conversion improved overall. Average selling prices were up mid single-digits in the quarter while units were down mid single-digits.

Second quarter sales performance reflected pockets of strength across our geographies. In North America Foot Locker Canada led the way with a low double-digit comp gain. Champs Sports was up mid single-digits, also Foot Locker U.S. was up low single-digits. Internationally Foot Locker Pacific had the strongest performance with comparable sales up low double-digit. Foot Locker Europe produced a low single-digit increase, its fourth consecutive quarter with the comp gain.

While Runners Point and Sidestep were collectively flat.

On the other side of the ledger Kids Foot Locker posted a low single-digit comps decline.

While Footaction and Eastbay were each down high single-digits. Footaction's result was due largely soft demand in their men's footwear business while Eastbay was pressured by softness and in its performance footwear and apparel.

Turning to families of business footwear was the strongest category with the low single-digit comp gain while apparel was down mid single-digits. In our accessories business fashion bags had another strong performance but that was offset by a decline in socks and hats which led to a mid single-digit comp decline. Within footwear women's and kids were again strong contributors during the quarter each posting a high single-digit comp gain while men's which was impacted to a greater degree by launch shifts was down slightly. By category men's running was up low single-digits while court and casual styles produced a slight gain. Basketball posted a low single-digit decrease during the quarter, however we did see positive trends with sales gains across classic styles. A strong performance in women's footwear was driven by classic basketball and court styles while kids was fueled by gains in running, court, and a slight gain in basketball.

Turning to apparel, comp sales were down mid single-digits for the quarter with men's, women's, and kids apparel all down within that range. Despite the challenges there were areas of growth. Foot Locker U.S. produced a low single-digit gain led by a strong double-digit gain in women's and a solid increase in men's apparel.

While in Europe our women's and children's apparel businesses each posted double-digit increases. Dick will provide some additional color on the second quarter’s product drivers.

Moving on to the rest of the income statement, our gross margin delevered by 10 basis points to 30.1% in the second quarter from 30.2% a year ago.

Our merchandise margin rate decreased 20 basis points due primarily to the higher mix of DTC which carries higher freight costs. Leverage of our relatively fixed occupancy and buyers compensation provided us with 10 basis points of improvement versus last year.

Our SG&A rate in the quarter increased to 22.2% of sales from 21.3% in the same period a year ago. The higher expense was largely due to the ongoing investments we're making in our digital capabilities and infrastructure as well as higher minimum wages. Depreciation expense increased to $46 million from $44 million in the prior year while interest income rose to $2 million from $1 million last year.

Our second quarter non-GAAP tax rate was 27.1% above last year's Q2 rate of 25.1%. The prior year period benefited from concluding a foreign tax audit.

Turning to the balance sheet, we ended the quarter with $939 million of cash and cash equivalents, a decrease of $11 million from the end of Q2 last year.

During the second quarter we returned $41 million to shareholders through our quarterly dividend and repurchased approximately 2.9 million shares for $120 million. With Management and the Board confident in our long-term plans we remain committed to returning cash to shareholders.

We will continue to execute our $1.2 billion share repurchase program in an opportunistic manner.

In terms of capital expenditures we invested approximately $36 million into our business during the quarter, consistent with the objectives we outlined in March bringing our first half total to $81 million. This funded the opening of 10 new stores including two more power stores, our second store in Hong Kong, and three more stores in Malaysia as well as the remodeling or relocating of 35 stores.

We also closed 37 stores including 23 SIX:02 locations leaving us with 3174 company owned stores at the end of the quarter. We now expect to spend $250 million in CAPEX for the full year. This is $25 million below the target we set at the beginning of the year with a reduction due primarily to changes in timing of certain projects. Based on this updated outlook for the full year we now expect to open around 65 stores including new power stores in Frankfurt and Melbourne. And to remodel or relocate 160 stores, all slightly below our previous guidance.

In addition we now expect to close 170 stores slightly more than we planned at the beginning of the year.

Inventory continued to be well positioned at the end of July with a year-over-year decrease up 2.2% compared to our 0.4% reported sales decrease. On a constant currency basis, inventory decreased 1% compared to the 0.8% sales growth. With this disciplined approach we are able to continue flowing fresh exciting product which keeps our inventory productive and positions us well for back to school and the remainder of the year.

Turning to our financial outlook for the full year, we are still on target to deliver a mid single-digit comp gain with gross margin now expected to be up 10 to 30 basis points, slightly lower than our previous range. We now expect SG&A to be up 30 to 50 basis points, a slight improvement versus our previous guide. We still expect depreciation to be approximately $185 million and our full year tax rate remains at approximately 27.5%.

Finally we continue to expect full year earnings per share to increase high single-digits consistent with our previous outlook.

In terms of the third quarter financial outlook we believe we are well positioned to capitalize on the all important back to school selling period.

We expect a mid single-digit comp gain with gross margins likely to expand 10 to 30 basis points and the SG&A rate to be down 10 to 30 basis points.

Finally, regarding the announced tariffs on imports from China.

We are actively discussing the subject with our vendor partners in order to limit the impact to our business and customers.

Our current guidance does not contemplate the tariff impact if any.

I will now turn the call over to Dick who will provide some color around our second quarter results along with an update on some exciting initiatives.

Richard Johnson

Thanks Lauren and good morning everyone. Despite the fact that our performance in the second quarter came in at the low end of our expectations we are making important progress against the strategic initiatives we outlined at our Investor Day earlier this year. We believe that by remaining focused on our four strategic imperatives elevating the customer experience, investing for long-term growth, driving productivity, and leveraging the power of our people we will succeed in accomplishing our long-term goals and deliver significant value to our shareholders. Further, we believe that with the company's strong financial position, our strategic relationships with our vendor partners, and the connection we have with our customers we are well positioned to build positive momentum in the back half of 2019. The fact that our comp performance improved as we move through each month of the second quarter is a positive sign.

For the back half of 2019 we are optimistic about the upcoming unique product concepts and the overall product pipeline. To highlight just a few of the bright spots from the second quarter, we had solid results in several men's basketball, running, and court styles.

Our women's and kids footwear businesses delivered strong results and we made important progress on several key initiatives.

For example, we expanded on our strategic partnership with our best in class partners including Nike and Adidas. We geared up for the opening of an exciting community based power store in a key sneaker market which I will talk about in a moment. We made progress on our new FLX membership program.

We are prepared for the upcoming launch of greenhouse, our in-house incubator. We launched a new in-store format at Champs Sports to fuel our women's business and we formally brought our Champs Sports and Eastbay banners together to have a united focus on the high school athlete on and off the field.

Let's first take a look at some of the key drivers in our business from the second quarter. In footwear we saw ongoing strength in Air Max styles and Air Force 1 from Nike as well as the iconic AJ1 from Jordan. We partnered with Nike on the summer blockbusters program working with the next generation of Nike athletes. Jayson Tatum, Devin Booker, and De'Aaron Fox which all performed well. From Adidas we partnered on creating the Passport Pack which paid homage to Berlin and Tokyo with unique versions of the NMD which was a success. The Puma RS-X franchise and Fila Disruptor continued to grow. In a collaboration between Converse and up and coming fashion label Chinatown Market was also a popular choice.

On the other hand the launches out of the second quarter that we previously outlined combined with lower demand of some legacy platforms and performance footwear at Eastbay pressured the overall results.

Our apparel business took a step backward in the quarter. This result was due in part to softer demand for some of the wind wear looks that have been successful over the past year or so.

In addition, our shift away from private label also contributed to the decline.

On the positive side fleece, both tops and bottoms along with branded graphic tees continued to resonate with our customers but were not enough to offset the challenges in the other categories.

Looking forward we have a number of exciting concepts and exclusives that we have been working on with our strategic vendor partners.

For example the launch of our exclusive evolution of the Swoosh footwear and apparel collection from Nike which celebrates the origins of the iconic logo. From Adidas we have the upcoming logo distortion collection with new iterations and branding of their world renowned silhouettes. Not to mention a number of easy drops spread across the back half. And there's even more heat coming with other exciting products from Puma, Converse, Reebok and others in the pipeline.

Now let me walk you through how we are performing against each of our four strategic imperatives.

First, I would like to touch on how we are elevating the customer experience.

We are uniquely positioned to bring and celebrate youth in sneaker culture around the world.

Our community based power stores are a great example of how we are using our deep knowledge and connections to create hyper local experiences for our customers. Earlier this month we opened the doors to Foot Locker Washington Heights, the second power store in New York City. Washington Heights is an important and unique community at the heart of sneaker and youth culture and our new community based power store will enable us to engage with that neighborhood in more meaningful ways.

The store which is largely staffed by local associates helps drive energy through immersive experiences and activations. It also serves as a platform for local brands, artists, and creators who are passionate about the heights. The store includes access to a full family shopping experience with footwear, apparel, and accessories from a wide variety of top athletic brands including Nike, Jordan, Converse, Adidas, Puma, and more.

Additionally the store will offer localized product including our homegrown initiative with exclusive and limited release apparel from local brands such as Lifestyle NYC and Triangular Swag dedicated to women's and kids spaces, digital My Lockers for online shoppers to pick up their orders.

Our work from local artist Danny Peguero in an activation space for community events.

Beyond that Foot Locker Washington Heights also serves as an example of the deepening strategic relationship between Foot Locker, Inc and Nike. Not only does the store leverage our digital assets, it is the first strategic partner store to tie into Nike's digital capabilities. Together we are combining our knowhow to create truly differentiated experiences for Foot Locker and Nike customers alike. It is also the global pilot for connected inventory which ties in the Foot Locker and Nike ecosystems in order to create data driven local assortments in a more seamless customer experience. This connection will offer our customers visibility into the store inventory not only through our Foot Locker mobile app but also through the Nike app.

The technology also offers our customers some additional features on their mobile devices.

The first is called shoecase which offers members the opportunity for access to cover the sneaker releases.

Next is the unlock box which is a digital vending machine where members can use their app to unlock limited edition items. Nike Scan allows customers to scan barcodes to learn more about a product's history and check availability and this is only the beginning. Over time we will add other exciting features and benefits through a connected membership program with Nike that will reflect the best of both brands. The partnership at Washington Heights is a clear example of how our companies are working together to evolve retail through innovative experiences that unite physical and digital.

Another important step in our journey would be the upcoming rollout of our new FLX program. FLX represents a shift on how we reward our most loyal customers, moving away from a discount based system to a program which offers exciting benefits and experiences that members truly value.

Some examples of membership benefits include head starts on launch products, gift cards, donations to relevant causes, and other benefits. We believe FLX has the potential to deepen our customer relationships, incentivize them to stay within the Foot Locker family, and enhance the overall lifetime value of our customers. Currently piloting with Lady Foot Locker and Foot Locker Netherlands we expect to expand the roll out of FLX across our U.S. banners after the holiday period. In Europe we expect the expansion to begin by early Q4 and continue through 2020 with Asia Pacific to follow later.

Turning now to our efforts around the women's business.

We are excited about the progress we are making in creating compelling spaces within our stores to cater to and engage with her.

One of those touch points is the new women's shop in shop format at Champs Sports.

We are using this space as a destination for her to find those styles that inspire her whether that's from our strategic brand partners or local products and boutique brands. She will also find authentic storytelling, community workshops, and customization opportunities.

The first three locations opened during the quarter in Dallas, Santa Monica, and San Jose. A fourth location opened in Las Vegas during Q3 with several more expected to open in 2019. We described to you earlier this year how building deeper and stronger connections with our customers across the brands, channels, and geographies will be an important aspect of elevating the customer experience.

With this in mind as we analyzed our brand segmentation strategy we saw an opportunity to broaden our appeal to the sport obsessed athlete by bringing Champs Sports in the Eastbay together under a unified leadership structure. Under this new structure Bryan Milburn who has been the General Manager for Champs Sports now leads both banners. We believe bringing these two brands together positions them to deliver the type of elevated product and experiences that inspire these customers in store or online both for their personal style and to help them achieve their top performance on the court or field of play.

Another part of building these customer connections involves investing in the communities where our customers live and play.

Our investment in Super Heroic and the work we are doing with Jason Mayden is an example of how we are empowering our youngest customers through play and helping children see themselves as capable of doing the impossible.

Another example is through the Foot Locker Scholar Athletes program which during Q2 awarded scholarships to 20 exceptional students that will help make college more accessible and enable them to pursue their dreams. Each of these impressive young individuals overcame hardships in their life and became an inspiration through their leadership in athletics, academics, and within their communities. In Europe Foot Locker celebrated inclusivity in sports and culture through the Women's World Cup through a campaign featuring up and coming female referees.

We also supported the amateur female referees in the UK by funding the cost of their training course and helping them on their path to becoming certified referees. We believe these efforts not only build deeper connections with the communities we serve but also help inspire and empower their members to achieve positive change in their lives.

In terms of our second strategic imperative which is our focus on investing for long-term growth I want to highlight Greenhouse.

Our new innovation hub, Greenhouse provides our company the opportunity to build and cultivate new relationships, new initiatives, and new ideas with an amazing community of brands and creators some of which we already work with today and others that we can't wait to get started with. Greenhouse will launch as a separate app that will tell one product story at a time with collections across footwear, apparel, accessories, art, and other categories.

We expect Greenhouse to launch this quarter with collaborations between L.A. street wear brand Rood and Starter [ph] and V Files and Fila as well as collections including Parisian brands Paperboy.

The Greenhouse canvas franchise with Adidas, an emerging Latin artist celebrating Hispanic Heritage Month and the launch of designer Dao-Yi Chow's sustainability platform O-1 which will feature his own brand Public School NY for the first time and the list goes on.

Some of these exciting stories and collections will be taken out of the Greenhouse to our global audience. The beauty of Greenhouse is that we can be patient and cultivate new partners and relationships for years to come. We're excited about this new innovative approach to connecting with designers and customers, its potential to strengthen the Foot Locker network, and our position at the center of youth culture.

Turning to our third strategic imperative we are also focused on our push to drive productivity gains whether that's through initiatives like RFID, inventory optimization, logistics, or expense management.

We also have a number of opportunities to drive productivity within real estate.

Our team continues to strategically pursue ways to improve leverage in the business.

Some of these efforts include more favorable lease terms, leveraging in-store digital capabilities, and driving efficiencies in our store design and build up costs.

As we make progress against these initiatives we will continue to update you along the way.

And lastly leveraging the power of our people, by investing in our people we are providing them with the tools to not only develop their skills but also enabling them to create elevated experiences for our customers every day and helping us to make meaningful progress in our initiatives in achieving our long-term goal.

So before we open the line for questions I want to thank our associates for their dedication and continued focus on connecting with our customers and working to drive the business forward. Again we remain optimistic about our upcoming unique product concepts and our product pipeline for the back half of 2019. With our strong financial position, our strategic relationships with our suppliers, and the connection we have with our customers we believe we are well positioned to build positive momentum in the back half in 2019. Operator, please open up the line for questions.


[Operator Instructions].

Our first question today comes from Tom Nikic from Wells Fargo. Please go ahead with your question.

Tom Nikic

Hey, good morning, thanks for taking my question. I just wanted to ask a lot of investors look out to Q4 and you had a really, really strong performance last year and I know that there were a lot of easy drops last year and I think that there's a bit of skepticism in the marketplace about some of the optimism that you're expressing about the two way to comp performance and the product pipeline, etcetera. Is there any sort of additional color that you can give to help us gain more comfort with the back half outlook particularly against some of the difficult compares that you're up against in Q4?

Richard Johnson

Yeah Tom, thanks for the question and clearly with Q2 not performing where -- it was at the low-end of our expectations but not really where we anticipated it, Q3 lines up really well from a launch perspective, right. We talked on our last call about some of the launches that shifted out of Q2.

One of them went into Q1, one went into Q3, and along with the launches come some traffic elements, right. There are people who make their way to the store.

So as we lined up the three months of the second quarter and saw the sequential gains, obviously July being the strongest as some of the states started with their no tax weekends and back to school lineups, so again we look at the launch calendar, we look at our open to buy, we look at other releases that support the concept work that we're doing and you know it really does line up strongly for us. Again, I won't or can't get into the specific numbers behind each of the launches but I know a lot of you in your self time study the launch calendar, if you go out and look you see how strong the launches are compared to last year. Certainly the [indiscernible] spread out a bit more in Q3 and Q4 rather than so heavy in Q4. But our merchant team has done a great job of working to find offsets for some of the shift out of Q4 into Q3 and again I'm confident. I see our open to buy, I see the launch calendar, and I feel really good about the product pipeline.

Tom Nikic

Got it, thanks for the color. And just one quick follow-up.

So it seems like in the apparel side there's been a bit of a shift here away from the wind wear that was hot for a really long time, sort of how quickly can you adapt to that and I guess lean in more on some of the stuff that's working and get the apparel side back to growth?

Richard Johnson

Yeah, I think the team has done it, quite honestly, I think that as we roll into Q3 and fleece becomes a much more prevalent piece of the consumers uniform our team has got the tech fleece, they've got the fleece pieces that are really important. The relationship with Champion continues to grow so there are all sorts of options that are in play and as kids really focus on their back to school elements there's a lot of fleece that will see consumers buying in our stores.

One of the things that I didn't call out in my prepared remarks, last July first LeBron made a big shift to Los Angeles which drove an awful lot of heat around LeBron in Los Angeles. And while there was great NBA shifts from a free agent perspective this July none of them had quite the intensity of that move of LeBron to Los Angeles.

So again that was a little bit of the whole but the wind wear that we call out and you mentioned, that shift is ongoing and I think our merchant team has done a great job to position us with fleece headed into back to school.

Tom Nikic

Got it, thanks for taking my questions and best of luck in the back half.

Richard Johnson

Thanks Tom.


Our next question comes from Paul Trussell from Deutsche Bank. Please go ahead with your question.

Paul Trussell

Good morning.

So the second quarter you're saying came in towards the very low end of your expectations.

As you kind of take a step back where were the areas if you will that maybe contributed to some of the shortfall versus you all meeting kind of more in the middle or towards the high end of your plan and is it fair to say that part of the reason that you're reiterating guidance for the full year is because you have seen the momentum from July continue into the third quarter to date?

Richard Johnson

Well, I won't comment about Q3. We stopped giving quarter-to-date sort of guidance a number of calls ago. But the weakness in Q2 Paul I think we hit a lot of it in our prepared remarks. Obviously we saw sequential improvement from May through July.

You know part of the May shift was clearly related to traffic and launches that shifted, launch that shifted into Q1. The apparel business being softer, again I never point to weather so we won't. But there were some significant weather events around the globe from heat to significant storms in places. But for us it really is -- there's always shifts in the business from a fashion perspective and the ramp down and the slowdown and the ramp up don't always happen at exactly the same time. But the good work that our merchant team has done again gives me the confidence that while we were a little bit light in Q2 that we've got the ammunition to deliver in Q3 and in the back half.

Paul Trussell

Thank you. And while I understand the tariff conversation is certainly ongoing and quite fluid. Is there any more color that you can provide on the potential impact if you are having conversations about different pricing strategies or sourcing strategies, just any additional help there would be appreciated? Thank you.

Richard Johnson

Yeah, on our private label I'll start there because that's the thing that we control the most.

As we work with our suppliers and while private label has become a smaller piece of our apparel business we're obviously working with our suppliers to understand the implications of the tariffs. We're looking for different sourcing and we'll figure out from a pricing perspective what we have to do to cover the gap again because this is -- the tariffs are ultimately a tax on the end consumer. And we need to figure that out how to soften that blow for the consumer.

On the footwear side each of those conversations with our vendor partners is a fluid conversation, right. There's a lot of energy in the industry to try to get the footwear piece of the tariffs postponed or pulled out of the next roll out. If they happen again we will continue to work with our vendors to understand whether that's an impact that will more than likely be in the early part of 2020 as opposed to the back half of 2019. But again each of those discussions is a little bit different because each of our vendors has different sourcing locations and the products that we buy are frequently sourced in different locations.

Paul Trussell

Thank you and best of luck.

Richard Johnson

Thanks Paul.


Our next question comes from Chris Svezia from Wedbush. Please go ahead with your question.

Christopher Svezia

Good morning and thank you for taking my questions. I guess first, excuse me, I guess first I just want to go back to the comp and the implied comp for the third quarter, excuse me. I just want maybe a little bit more I guess concrete evidence just sort of given what happened in Q2 when your line of sight at that point when you gave guidance about that low to mid single digit increase you fell a little bit short, as we sit here today based on maybe how the first half has unfolded, just any other concrete examples of product drivers, do you expect the apparel business to resume back to positive calm, to give investors sort of that confidence that yes, mid single-digit is not in fact -- is definitely achievable if not there is opportunity? And then secondarily to that as you think about fourth quarter is it linear in terms of that comp progression, just given the easy comparisons in Q4 or is that more low to mid single-digit implying to your stacked in sort of the low teens?

Richard Johnson

Well Chris I hate to sound like a little bit of a broken record but it really is around the visibility that we've got on launches.

I think just as back to school got started the receipt flow, the confidence we have on the launches again if I just look at the next few weeks we've got a strong Retro 12 today. We've got Yeezy tomorrow, we've got Air Force 1 and Air Max 97 next week. We've got a new color of the joy ride next week, we've got a new color of Zoom Freak the Giannis shoe which came out of the Gates really strong.

Next weekend we've got a strong Retro 10 we follow that with a strong Retro 4 and new colors of the Air Max 720. We get to the middle of September we've got multiple styles from Adidas and Pharrell Williams that again the customer has spoken very loudly about their support of. We've got a Timberland SpongeBob execution and the Timberland 6 inch boot continues to be part of the kid's uniforms.

So that's really just the back to school season and I haven't even called out all of the releases that are connected to our evolution of the Swoosh and the Logo Distortion from Adidas.

So again I get excited about product and I see a product lineup going through back to school and then through the end of the back half of the year that is really, really strong and I credit our product teams, I credit our vendor partners for creating some really great heat around sneakers, and certainly we believe that apparel will get better.

You know again as the uniform of the kid turns to fleece we've got a great relationship with Champion and some fleece products. Obviously tech fleece from Nike continues to be a really important element of that and they're doing a great job of working apparel into the concept work that our North American product and marketing team are doing.

So again I get energized by product and the energy level is certainly high in our building right now.

Christopher Svezia

And thank you Dick and just Q4, just any thoughts, you referenced mid single for Q3, just curious how you think about Q4 and how that stacks up?

Richard Johnson

Again, we've sort of giving you the direction for Q3 and sort of where we see the year.

You'll have to back in a little bit on your models to the guidance. But Q4 again, we talked -- I talked earlier in one of the earlier questions about the Yeezys. And clearly there's a bit of a shift out of Q4 into Q3 on the Yeezys but all of the launches that I just talked about our team is working hard to make sure that that level of heat flows throughout Q4 as well.

So it's -- everybody's model is a little bit different so I don't want to get specifically into Q4 but if you do the backup math I think you'll get to the right place.

Christopher Svezia

Okay. And finally just real quick for Lauren, just on the occupancy leverage on a 0.8 comp, just any color as we think about that and to the back half of the year?

Lauren Peters

Yeah Chris, as we've described our real estate team is very actively working on the points of leverage within occupancy.

So engineering, the build out, and the cost there when we have the opportunity at least renewal to look at the terms of the leases they're taking advantage of that. These things help and there's a little bit in there of the new lease accounting standard and applying that, so all of those things added up to the bit of leverage that we got in Q2.

Christopher Svezia

Got it, thank you very much, all the best.

Richard Johnson

Thanks Chris.


Our next question comes from Michael Binetti from Credit Suisse. Please go ahead with your questions.

Michael Binetti

Hey, thanks for taking my questions guys. Lauren, can I continue on that buying and occupancy question for a minute. It seems like you were expecting the leverage point there to be a little tougher this year.

So I was very happy to see it come down on the comps that was referenced there. Is that -- can we carry some of that lower leverage point into the back half as your expectation for same store sales improves and that should be -- I mean it sounds like the things that you're doing should make that line more leverageable than we were thinking coming into the year, is that a fair way to think about the back half?

Lauren Peters

Yeah, well we guided to Q3 with an expectation of expansion in the margin at 10 to 30 basis points on a mid single-digit. And that's a combination of both the merchandise margin and this leverage point on occupancy. But I would say that the underlying factors that we saw in Q2 around occupancy no reason to believe that that won't help us go forward.

Michael Binetti

Okay. And then Dick on the -- I know you've been very helpful in helping us get some more insight as to what makes you excited on the product launches in the back half and in the fourth quarter in particular. I will ask a little differently since now you have a good read on what's going to be good high product in the second half. Maybe you can help us think about the premium products in the back half as it compares to the back half of last year and maybe give us an idea of the mix of products on ASP that you see coming in the back half. I know you have a tough compare in the fourth quarter on that.

So, maybe you could just help us think about the allocations there and how to think about how ASP in particular will contribute as you get into the tough compare in the fourth quarter?

Richard Johnson

Thanks Michael for the question and ASP we talk about that frequently but it's a pretty complex model for us given the geographies, given the banners, and given the families of business that we do -- that we sell product in. And obviously the Yeezys is likely the root of your question around the Q4 ASP launch business and premium business are parts of our business. But when you think about fleece pieces that sell for $85, $95, $100, tech fleece that might be $110 to $150, all of those things add up to an ASP that we see continuing to expand. And again it's not any one particular item that offsets another particular item. It really is the mix of sales and the mix of the geographies and families of business.

As we see strength across the premium footwear that generally elevates more premium apparel which again helps the ASP calculation. But we continue to see the ability with our vendor partners to create premium product that has a high level of interest from our consumers and they really have not shown any resistance to price points as long as there is a price value relationship in their minds.

So, we see expanding ASPs going forward.

Lauren Peters

And all that said our merchants do work very hard to make sure that there is excitement in the product at all price points level.

Michael Binetti

Okay, so across the product platform there's some upward pressure there not just focus on the premium launch stuff. Can I sneak in one more, it is pretty encouraging see the strength across all the international businesses that you called out here, is that something that you expect to continue into the back half as you laid out the model in the comps you gave us? Thanks a lot.

Richard Johnson

Yeah, I think that our international business has performed well. We saw -- I think this is the third or fourth quarter in a row of comp gains, fourth quarter in a row of comp gains for the European business which again some real positives there as we see the premium sneakers and we see a lot of our investments that we've made across Europe specifically start to pay off. The Asian business is clearly still a startup business and we continue to expand our door count there. And our Canadian and Australian businesses, Canada obviously we include in our North American number but I think Lauren called out in her comments that Canada and Australia both have the strong second quarters. We certainly expect that international momentum to continue.

Michael Binetti

Thanks a lot guys. Best of luck with back to school.

Richard Johnson

Thanks Michael.


Our next question comes from Janine Stichter from Jefferies. Please go ahead with your question.

Janine Stichter

Hi, good morning.

Richard Johnson

Good morning Janine.

Janine Stichter

Hi good morning, sorry about that. I wanted to ask about the SG&A guide. It looks like it's looking a little bit better than you previously expected. I just want to get a sense of what's driving that and then if you can give us an update on some of the initiatives you talked about at the Analysts Day, I think you talked about using RFID to reduce your labor and some of the productivity initiatives, where are we there and how should we expect those two progress over the next year or so?

Lauren Peters

We are very proud of my expense management team. They do remain nimble and focused on driving productivity.

So the elements that we can't control are very hard at work on. Yes, we did describe a number of things that we anticipate over the longer-term yielding leverage points within the SG&A. Things like the work on RFID which is now fully in place across Europe, allows us to be more efficient on managing the back of house operations and therefore the hours so that we can make sure that those hours are more forward facing with our customers, very helpful there. It seems like tech enabled customer experience, now we've described the ongoing investments we're making in tech and that shows up in technology in the hands of our associates that enable them to have a more complete, more eloquent transaction with the customer, also a more effective use of ours.

Our data analytics investments, our investments in data scientists and our data lake is allowing us to look at that data and understand how to make our marketing dollars go further.

So, marketing efficiency and other elements that we are starting to see some progress on within SG&A.

So a whole bunch of things. I have been to frequently talking about the beauty of LED lightbulbs also with utilities and there's just so many elements that we remain focused on improving.

Janine Stichter

Okay, great. And then just to follow up on the occupancy, can you give us a sense of how many leases you have coming up for renewal over the next few years and then maybe just high level, what kind of reductions you're seeing as you go to renegotiate some of those leases?

Lauren Peters

Yes, but a bit more granular than we would get into in this format. But we've met with over 3000 stores and all of those leased. There's always a fair amount coming up for renewal. And it's in some cases taking very short-term leases where we have any concern about the long-term viability of the center that we're in. And we take advantage of that situation to structure in a very favorable lease terms over that shorter-term. It gives us a lot of flexibility to navigate what is a dynamic situation especially in the U.S. as there -- we have taken some forward steps of moving off mall where we had any concerns about the mall locations long-term viability. And those off mall locations can bring with them some favorable rent terms.

So the lease renewal option gives us quite a bit of flexibility.

Janine Stichter

Great, thanks so much.

Richard Johnson

Thanks Janine.


Our next question comes from Bob Drbul from Guggenheim. Please go ahead with your question.

Bob Drbul

Hey, good morning. I just want to see you. Hi, Dick. I just wanted to see could you expand a little bit more on the connected inventory, how that's going to work within Nike business with your store? And I guess as you think about what you've done in the Washington Heights store how many -- I mean I know it's early in a test but like is this something you could envision many more stores rolling out to or converting into from a Foot Locker perspective? Thanks.

Richard Johnson

Well we're really in the early days Bob. I don't know if you've made it up to 181st street yet but it's a pretty spectacular store and a really great sneaker market. Heights is passionate about sneakers and we really feel like we are connected to a community and getting more connected every single day.

So the connected inventory piece is the opportunity for us to leverage the inventory that we have in our system and the inventory that exists in the Nike system.

So as we -- again it's, in the early days we're seeing that there is some significant benefits for the consumers to have a broader view of the inventory, right. They know and our associates know where inventory is available and whether or not we can give it to them quickly.

So as we learn from this first store we will certainly perfect the process and perfect the connectivity and as we learned from this store I believe we'll be able to commercialize it and roll it out. But it may not look exactly like 181st Street, right. There will be iterations of this and I think we've talked long -- many times in our business about building prototypes and testing them and making sure that we've got everything right in working before we roll it out.

So I won't comment on the rollout plans because I'm not confident that we've got it perfect [Multiple Speakers] we're certainly going to learn on it.

So test and learn.

Bob Drbul

Okay, thank you very much.

Richard Johnson

Alright Bob. Thanks.


And our next question comes from John Kernan from Cowen. Please go ahead with your questions.

John Kernan

Good morning and thanks for taking my question.

Just wanted your thoughts on the overall growth of the resale market. There seems to be growing hype amongst some of these marketplaces and how you fit in with that ecosystem and do you think that there's dollars being shifted away from some of the primary markets like yourselves towards that resale channel and I know you've had a pretty significant investment in and I'm just wondering how you see all this going forward? Thank you.

Richard Johnson

Well, we see a holistic. We've got a holistic view of the sneaker market, right. We serve a very important piece of that market in our Foot Locker Champs, Foot Action across our portfolio of banners. Without a primary market there's really not a secondary market.

So again as we work with our vendor partners and thrive on the scarcity model I think that does have in fact help fuel the secondary market. And the secondary market provides access to product for kids that haven't been able to get it in the primary market and it's a -- I guess it's probably the perfect the supply demand sort of model, right, where the ultimate demand meets the supply at the right price point and they're able to do a transaction.

So our investment in gold [ph] you are adding indition [ph] in the team. It is really to help us understand that secondary market better to figure out how we work together with them keeping a clear line of distinction between the primary and secondary markets as we have a responsibility to our core consumers in our portfolio of brands to make sure that we service them and then the product does find its way to the secondary market.

I think if you look at the sneaker ecosystem instability the whole ecosystem is growing and that's good for us and that's good for our vendor partners.

John Kernan

Got it and then if I can just do a quick follow-up on merchandise margin in the back half of the year. Inventory is seemingly in a good position, you seem pretty confident on ASP is going in the back half.

You do have a little bit of a tough compare on margin going in the back half but how should we think about your confidence in large margin and maybe the flow between Q3 and Q4 that you're expecting within gross margin? Thank you.

Lauren Peters

Again so are our guide for Q3 and the full year 10 to 30 basis points expansion in margin and as we looked at Q3 with mid single digit that's helpful for us to achieve the leverage.

So it's a complex formula on the merge margin side of it. Certainly we had some pressure in Q2 as we mix a little bit stronger in DTC and the higher freight that's carried there, so bit of a headwind but the freshness of our inventory has continued to serve us really well on the markdown side.

And so it is that mix and the strength on the top line comp that caused us to have that guidance.

John Kernan

Got it thank you. Best of luck.


And our final question today will come from Susan Anderson from B. Riley FBR. Please go ahead with your question.

Susan Anderson

Hi, good morning. Thanks for taking my question. I guess I wanted to ask about the new FLX loyalty program. Maybe can you just talk about the pilot, I was curious if you're seeing any different consumer response versus the old program, and is there going to be any profit impact, it sounds like the new program is maybe less focused on discounts versus benefits?

Richard Johnson

Well you are spot on with the more focused on benefits as opposed to discounts and as we as we test the program really in a prototype phase with Lady Foot Locker and Foot Locker Europe we're seeing a couple of different things, right. In the U.S. where we've had a loyalty program the behaviors are a little bit different than in Europe where we haven't had a loyalty program before.

So the transference if you will on the U.S. side where we're moving somebody from the discounts to the membership is taking a little bit of work and but they're very happy with the redemption center and the options that we've got there. They're allowing their points to accumulate a little bit. In Europe it's a little bit different in there. They're using their points on benefits very quickly, right. It's a new concept for them in terms of Foot Locker having a loyalty program or a membership program.

So they're very quickly accumulating points going to the redemption center and finding something that strikes their fancy and using their points to redeem.

So again as we as we learn more and this is again one of the things that we do, we'll roll things out across the U.S., we will roll things out across more countries in Europe. And finally we will follow with Asia Pacific sometime in 2020. But the initial signs are very positive and we expect it will be a real benefit to us and more importantly to our consumers keeping them in our portfolio and allowing them to get great benefits out of the redemption center.

Susan Anderson

Great, that sounds interesting. And then maybe if I could just follow-up on the apparel question. I guess I'm kind of curious it seemed like maybe there is a little bit of a lack of newness lately in some of the retro sports apparel brands. I guess I was curious do you think it was alive with weather this past quarter and it does sound like you're seeing some more newness for the back half I guess coming from those kind of same brands that you have in the stores right now?

Richard Johnson

Well, we are certainly seeing newness from the brands that we have in store but we're also testing some new brands, right.

I think that's one of the strengths of our merchant team is they're very willing and very diligent about getting out and testing things, looking for the opportunity to accelerate product opportunities. It's one of the benefits that I think we have of being a global enterprise and that Europe sees trends, the West Coast sees trends in the U.S. We're able to communicate amongst our merchant organization in tests and try a lot of things.

So I'm optimistic about apparel would go into the back half as I mentioned.

I think the fleece programs that we've got come in the work that our team has done to make sure that there is apparel side to our concept work, the work that our vendor partners are doing to make sure that there are apparel options around launches.

All of that gives me optimism going into the back half.

Susan Anderson

Great and very helpful. Thanks so much. Good luck next quarter.

Richard Johnson

Thanks Susan. Appreciate it.


And ladies and gentlemen at this point I'd like to turn the conference call back over to Mr. Lance for any closing remarks.

Jim Lance

Okay. Thank you for joining us today. Please join us again for next earnings call which will take place at 9 A.M. on Friday, November 22nd. The call will follow the release of our third quarter results earlier that morning and thanks again and goodbye.


Thank you ladies and gentlemen, that concludes today's conference call. We do thank you for participating.

You may now disconnect your lines.