Good morning, ladies and gentlemen, and welcome to Foot Locker’s Second Quarter 2020 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 impact of COVID-19, effects of currency fluctuations, customer preferences, economic and market conditions worldwide, and other risks and uncertainties described more fully in the company’s press release and in reports filed with the SEC, including the most recently filed Form 10-K and 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 call is being recorded. I will now turn the call over to Jim Lance, Vice President of Corporate Finance and Investor Relations. Mr. Lance, you may begin.
FL Foot Locker
Thanks, Operator. Welcome everyone to Foot Locker, Inc.’s second quarter earnings conference call. I hope you and your families are healthy and safe.
As reported in today’s earnings release, we reported second quarter net income of $45 million, compared to net income of $60 million for the second quarter of last year. On a per share basis, second quarter earnings were $0.43, compared to earnings per share of $0.55 last year. This year’s quarter includes pre-tax charges of $90 million related to the wind down of the Runners Point banner and the Eastbay restructuring, $80 million for cost incurred for the recent social unrest, and $1 million charge related to the pension matter we have previously discussed.
Excluding these items, on a non-GAAP basis, the second quarter earnings were $0.71 per share, compared to earnings per share of $0.66 for the second quarter of last year. 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 earnings release. The call is being hosted remotely in order to uphold social distancing protocols with presenters calling in from different locations.
We will begin our prepared remarks with Lauren Peters, Executive Vice President and Chief Financial Officer, who will our second quarter results and provide some directional color around the back-half of 2020. Dick Johnson, Chairman and Chief Executive Officer, will provide highlights from our second quarter performance and an update on our strategic initiatives, including how Foot Locker is navigating the COVID-19 pandemic. Andy Gray, Executive Vice President and Chief Commercial Officer, will discuss his new role and will provide additional insights into the business drivers in the quarter.
Following our prepared remarks, Dick and Lauren will respond to your questions. With that, I’ll now turn it over to Lauren.
Thank you, Jim, and good morning everyone. We were pleased to report that we delivered a comp sales gain of 18.6% and returned to positive earnings growth during the second quarter. A meaningful lift in top line sales coupled with disciplined expense management helped to offset the gross margin pressure from the channel mix shift and the highly promotional environment. Overall, we believe our performance this quarter reflects the strong financial position of the company, the resilience of our team members, and the deep connections we have built with our customers and vendor partners.
Turning to our store fleet, as of today, we have over 2,850 stores open across our North America, AMEA, and Asia-Pacific region, or over 90% of our global store fleet. Due to both COVID-19 mandated closures and disruptions from social unrest, our stores were open during the quarter for roughly 70% of potential operating days; a meaningful improvement from the approximately 50% in the first quarter. With that said, the challenges facing our operating environment remains dynamic. We currently have approximately 260 stores temporarily closed across our fleet, including 174 mandated closures in California, 28 stores impacted by the social unrest, with the balance stemming from our health and safety protocols.
As the coronavirus situation evolves, we will continue to act in the best interest of our team members and customers. Taking a look at our second quarter results in more detail, total sales increased 17.1%. On a constant currency basis, total sales increased 17.3%. The impact of foreign currencies as compared to a year ago reduced sales by $5 million.
Our direct-to-customer channel led our performance with a 173% increase, more than offsetting a 7.6% decline in our stores.
As a percent of total sales, DTC rose to 33.2% for the quarter, up from 14.3% last year. By month, May comparable sales were down high single-digit, whereas June and July were much stronger, each producing high double-digit gains. Store traffic, which was impacted by the temporary store closures and social distancing measures, was down double-digits across geographies, more so, internationally versus the U.S.
However, our customer’s strong intent to purchase drove conversion up more 50% over the prior year level. Average selling prices were up mid single-digits in the quarter, while units were up double-digits.
Our second quarter sales performance reflected varying levels of strength across our geographies. In North America, Foot Locker, Footaction, Champs Sports, and Kids Foot Locker were all up strong double-digits, while Foot Locker Canada returned to solid high single-digit increase, and Eastbay delivered a double-digit gain. Internationally, the performance was more mixed. Foot Locker Pacific led the way with comparable sales up double-digit. Foot Locker Europe where consumers have been more conservative coming out of the stay-at-home orders and where digital penetration is not as strong posted a high single-digit comp decline. Runners Point and Sidestep posted a collective mid single-digit comp gain.
Turning to our families of business, footwear was the strongest category, up strong double-digits, apparel was also robust, up mid single-digit.
Our accessories business was down double-digits due primarily to softness in bags and shoe care. The results in footwear were fueled by strength across men's, women's, and kids with double-digit gains across the board. By category, Men's Basketball was the highlight in the quarter, delivering an impressive double-digit increase. Men's Running was up mid single-digit, while coat and casual styles were down double-digits.
Our women's footwear business reflected ongoing strength across classic basketball and coat styles, while our kids business was also driven by a strong demand in our infants business, excitement around classic basketball styles, and slight gains in running.
Turning to apparel, comp sales were up mid single-digits for the quarter, with women's and kids apparel up double-digits and men's up mid single-digits. With lots of time at home, comfort was top of mind, and fleet sales drove apparel results this quarter. The strength in our North American as Foot Locker Pacific apparel business was broad-based, with gains across men's, women's, and kids.
While in Europe, our women's and kids businesses posted gains, but not enough to offset declines in our men's assortment.
Moving on to the rest of the income statement, our gross margin de-levered by 420 basis points to 25.9% in the second quarter from 30.1% a year-ago.
Our merchandise margin rate decreased 700 basis points, due primarily to our purposeful use of markdowns to clear aging assortments, and a higher mix of DTC, which carries higher freight costs. The actions we took during the quarter to clear aged product as well as Q1-related backlogs resulted in meaningful progress in our inventory position. At quarter-end, our inventory was down 2.7%, compared to the double-digit sales growth. On a currency neutral basis, inventory decreased 3.7%. Leverage of our relatively fixed occupancy and buyers' compensation provided us with 280 basis points of improvement versus last year. Included in this quarter were $6 million of COVID-19 related rent savings.
Our negotiations with our landlord partners are ongoing.
So, stay tuned on that element. We improved our SG&A expense rate in the quarter by 360 basis points to 18.6% of sales from 22.2% in the same period a year ago. The lower expenses relative to last year were driven in part by $17 million in government subsidies, reduced costs due to the fewer number of days our stores were open, and our team's ongoing focus on disciplined expense management. This was partially offset by [technical difficulty] incentive compensation and $6 million of expense for Personal Protective Equipment or PPE. Depreciation expense decreased to $44 million from $46 million in the prior year. We incurred interest expense of $2 million, as compared to $2 million of interest income last year, due to the draw down on our revolving credit facility. On a GAAP basis, our tax rate came in at 35.4%. This is 590 basis points higher than last year, due in part to the geographic mix of income, given limits on our ability to book tax benefits for losses related to certain international operations. On a non-GAAP basis, our tax rate came in at 30.7%, above last year's Q2 rate of 27.1%.
Turning to our liquidity position, we ended the quarter with $1.373 billion of cash and cash equivalents, an increase of $434 million from the end of Q2 last year.
Importantly, during the quarter we amended and extended our credit facility increasing our borrowing capacity to $600 million. Equally of note, we’ve repaid the $330 million we previously borrowed.
In terms of capital expenditures, we invested approximately $31 million into our business during the quarter bringing our year-to-date total to $83 million. This funded the opening at 18 new stores, including our first store in Macau, as well as the remodeling or relocating of 26 stores.
We also closed 31 stores, leaving us with 3,100 company owned stores at the end of the quarter.
Looking forward, we now expect to invest $156 million in capital for the full-year, up slightly from our prior guidance with the increase to the add-back of Select IT and Real Estate projects. We believe the increase in our liquidity coupled with our limited existing debt gives us the financial flexibility to manage through the near-term uncertainty, while enabling us to continue investing in the business in fiscal 2020. This brings me to our return of cash to shareholders. Yesterday, our board of directors approved the reinstatement of our quarterly dividend program at a rate of $0.15 per share. We believe the ability to reinstate a cautious but meaningful dividend signals our board's confidence in the business and our financial strength.
As always, our board will continue to evaluate the dividend program on a quarterly basis. With respect to our share repurchase program, while the suspension of the program has been lifted, it remains an opportunistic program and we’ll continue to assess the environment.
Given the effects of the pandemic and all the moving parts in the macro environment, including the potential impact on school opening dates, team sports participation, and additional government aid, we're not providing guidance for the full-year at this time.
However, as you build your models for the back-half, it may be helpful to consider the following. With respect to gross margin, as we look forward, we anticipate a continued promotional environment in general and as we work toward our goal of being in a clean inventory position by year-end, and well positioned to bring in fresh exciting product.
We continue to work closely from a supply chain perspective to ensure an adequate and timely flow of goods for Q4 and holiday.
We’re also closely monitoring rising rates from our shipping partners, which will likely increase freight costs in the back-half. With respect to SG&A, please keep in mind the following headwinds.
Our operating days were at 70% in Q2, and barring any other disruptions we’re now expecting to be above that level in the back-half given the greater number of stores currently open.
Additionally, furlough credits and other forms of government subsidies were a benefit to SG&A in Q2, that is presently not being contemplated in the back-half.
Lastly, we expect $6 million in PPE costs we incurred in Q2 to be an ongoing expense for the foreseeable future.
Finally, looking at our non-GAAP tax rate, there maybe significant quarterly variances in the rate due to geographic shifts in income and for the full-year, we expect it to be elevated relative to historical levels. With that, I’ll now turn it over to Dick.
Thank you, Lauren, and good morning everyone. In the midst of the COVID-19 pandemic, the second quarter performance was truly exceptional as our team delivered strong top and bottom-line results.
While these undoubtedly remain challenge times, we are pleased by the health of our category, our deep connections with our customers, and the strength of our vendor relationships. I'm proud of the progress our teams have made.
As we reopen stores throughout the quarter, product heat combined with pent-up demand from our customers fueled our in-store sales, and impressively the momentum across our digital channels also continued to build.
We also believe the effect of the fiscal stimulus was a positive. With most of our store fleet open, we are excited to be able to serve our customers across all our channels. Throughout every part of our operations, we are focused on ensuring rigorous execution of our COVID-related health and safety protocols to protect our teams, and our customers.
Our store teams continue to do a great job.
Our customer contact centers are open and handling customer questions and our distribution centers are open, and operating at a high-level. When we look back at our progress during the quarter, the digital business was a standout, delivering triple-digit growth, even as we reopen stores. This excellent performance was driven by a number of factors, starting with the strength of our product assortment, including pent-up demand for a number of exciting launches in classic styles. Results were also aided by elevated promotional activity, as we focused on clearing slower moving goods, as well as backed up inventory deliveries from Q1. We enter the quarter with improved inventory level. Andy Gray, who recently assumed the new role of EVP and Chief Commercial Officer will provide more color around the product drivers from the quarter and what we see coming from our product pipeline.
Before that though, I want to discuss something that's incredibly important, not only to our company, but to our Board leadership team and me personally. A resolute commitment to fight ratio inequality and injustice and an inclusive and diverse organization, supporting the black community has long been part of the way we operate. Black culture plays a pivotal role in shaping sneaker culture, the foundation of our business at Foot Locker Incorporated.
As such, we take very seriously our responsibility to adding our voice and actions to drive meaningful and lasting change across the communities we serve.
We are now significantly expanding our commitment. We recently announced that we are committing $200 million over the next five years to initiatives that enhance the lives of our team members and our customers in the black community through economic development and educational opportunities.
Our efforts include investing in black-owned businesses, serving youth culture, purchasing more products from black-owned brands, continuing to partner with Dwayne Edwards at the Pensole Footwear Design Academy by funding training for Black Creatives, implementing internship, mentorship, and community outreach programs for black team members and communities, and increasing our funding from the Foot Locker Foundation UMCS scholarship program. These are only a few of the elements this program will encompass. It will manifest itself in many ways, and across many parts of our business with the goal of creating an impact that lasts well beyond five years.
Moving on to our business performance, I want to update you on how we have continued to advance our strategic initiatives and digital capabilities. Starting with FLX, membership growth was stronger in a quarter and what we're learning is that the more our FLX members engage with us, the more they spend as compared to nonmembers. Further, we leveraged a launch reservation system in the U.S. to create a more fluid and customer-friendly experience during high heat product releases. This has proven to be especially beneficial in the midst of the COVID-related in-store limitations, and social distancing protocols. We're also seeing positive signs in our European markets where FLX has launched, including in the U.K., Netherlands, and France. It's still early days, but the progress we are seeing in these key countries is encouraging.
Moving to our key technology initiatives, we deployed new websites in an additional nine European countries that built off the modernized platform we launched in North America last year. The new sites are easier to personalize the local markets that are connected and less costly to maintain, more compatible with our updated ecommerce systems, and they streamlined global data analytics and machine learning platforms.
We also integrated a new payment platform globally and optimized our checkout experience around it. This platform supports a vast number of global payment options along with automated fraud protections, and offers a better and faster customer experience at checkout, and finally, we implemented a new order management systems that improves a wide range of critical functions supporting our global growth strategies including inventory management, BOSS, BOPIS, merchandising, reporting and analytics, and notifications to our customers. The platform is built on a modern architecture, which will allow us to better integrate in the future as well. All in the technology investments we've discussed with you over the past several quarters truly benefited us in Q2, as we were well positioned to quickly adapt to the changes in our consumers buying habits and patterns resulting from the pandemic. I'd like to now provide more color around the new organizational structure we announced last month. Simply put, the world around us continues to rapidly evolve, and COVID has only accelerated the pace of change. At the same time, global competition is on the rise, and with it, the needs and expectations of our customers are expanding.
Our ability to adapt to those changes will ensure our success by strengthening our customer connectivity, and that's where our new organizational structure comes in.
As mentioned earlier, Andy Gray has been elevated to the new role of EVP Chief Commercial Officer, and his experience in driving consumer led strategies across multiple markets will serve us well as he leads us forward in this offense.
In addition, we appointed Frank Bracken as the EVP and CEO of North America, and Scott Martin as the EVP and CEO of Asia Pacific in addition to his responsibilities as the Chief Strategy and Development Officer. Andy, Frank and Scott will join Vijay Talwar, who heads up our EMEA division. Each of them have been with us for a number of years and have strong track records and driving the growth of the business. Each understand the opportunities and challenges we see coming, now we must stay ahead of the curve in sneaker culture, and deeply connected to youth culture to drive success.
Before I move on, we would like to take this opportunity to thank Jake Jacobs and Lew Kimble,, who headed our North America and Asia Pacific businesses. Each have decade's long careers with us. They have been instrumental in leading their respective teams and shaping and implementing the strategies that have led to Foot Locker success over the years. On behalf of the entire company, we wish them all the best in their next chapters. I will now pass it over to Andy.
Thank you, Dick, and good morning everyone.
Let me start by saying that I'm pleased and honored to be here speaking with you today, as our company embarks on this exciting new course.
As Dick it outlined earlier, one of the few consistence in the marketplace to date has changed, and the pace of that change is accelerating, and it's our ability to continually evolve with it that matters most, and is what will set us apart. The decision to vote our commercial offense where the team is explicitly focused on better serving the consumer is a milestone in our evolution.
As we enhance our focus on the entire consumer journey, my role will oversee all consumer facing functions globally, and ensure they all work in concert to strengthen our relationships, both with our consumers and our strategic vendor partners. This ranges from the product we buy, to the content we create to the physical and digital experiences we deliver and the connectivity and support we give to our consumers through.
As we said often this journey, we do so from a solid foundation.
Over the last five decades, we built tremendous equity with our consumers and vendor partners through an ecosystem that truly brings sneaker culture to the people, and now is the time to double down on the value we bring to the communities we serve and the sneaker industry at large. I will now provide you with some details around product drivers in the second quarter, beginning with our premium business with strong growth quarter, and despite being a more promotional marketplace to increase consumer appetite for the key marquee franchises really showcase the health of our category. Basketball was another driving force in the quarter. Even with the disruption in the sports calendar, the storytelling around the key Nike icons resonated very well in the marketplace, and alongside that, the Jordan Brand delivered a strong pipeline of high heat launching throughout the quarter. This coincides with an ongoing impact from the release of The Last Dance documentary, which connected the brand to a new generation of consumers and really drove maximum impact, and we also saw strong research into new ideas in the category, such as the exclusive launch of the PUMA RS-Dreamer led by J. Cole, which brought a different approach to the basketball category.
Moving on to seasonal merchandise, we benefited from the stay-at-home comfort train with strong performances in the suite category, as well UGG and Birkenstock brand. This also provided us good hourly rates for the fall season.
Finally, our consumer concept often delivered elevated storytelling, which continues to connect best with our consumer. We saw a number of great launches linked to this, including Nike’s pre-game concept, which was built from their athlete insight before a game and featured their iconic basketball silhouettes. Adidas’s Global City pack, which celebrated sneaker culture and insights from across the globe and was brought to life on their boost technology and 'Off the __' Collection with Vans, which is focused on individuality and breaking boundaries by delivering unique and fresh perspectives on their classic silhouette, all resonating well with the consumer.
Looking ahead, we continue to see opportunities in the market.
We have exciting programs with New Balance, Puma and Converse building of strong recent product launches across the globe, and we have the continuation of our concept offense with the lights of Remix from Nike, and Behind This Race project with Adidas, featuring some of their premier athletes.
We will also continue to build new opportunities through the filter of youth culture, as well as create a robust pipeline of exciting energy within our Greenhouse incubation team, connecting it all together with exciting and engaging content and experiences. The current environment likely come with more twists and turns navigate through, we will remain steadfast in delivering against our purpose of inspiring and empowering youth culture and continuing to evolve our offence to better serve our consumer. With that, I'll now turn it back to Dick.
Thanks, Andy. I'd like to take a few minutes to update you on some of the exciting work we're doing with our portfolio of investment partners. I’ll start by saying the resiliency demonstrated by these young businesses through COVID has been inspiring and given us more insight into the power of digital connectivity. We're still early in the journey of recognizing meaningful financial contributions from these investments, but we remain confident in their long-term potential.
We are working together to develop program that can scale into significant opportunities over time. I'll highlight a few. A partnership with Carbon38 has yielded new efficiencies in our digital marketing efforts. The learnings from how Carbon38 engages with our consumer online is helping to inform our own digital marketing strategies around engagement and loyalty, while also improving our marketing ROI. Likewise, our strengths as a large organization has helped Carbon operationalize several capabilities to serve their core consumer more efficiently.
Our investment in network is allowing us to take advantage of new capability opportunities around content marketing in demand creation. This generates hype, amplifies our product buys, and ultimately creates a new avenue for us to meaningfully connect with our consumers.
Additionally, we are exploring product partnerships that leverage the full power of networks various ties to the forefront of youth culture, and categories that our consumer cares about. Meanwhile, our relationship with GOAT continues to grow as we support their efforts to capture consumer mindshare in the sneaker and apparel space. Recognizing GOAT's in the broader sneaker ecosystem, we are working with them on ways to establish deeper connectivity with our shared consumer. Expect to see this partnership further evolve. In closing, let me sum up by saying that as we move through the back-to-school period in the back-half of 2020, we remain resolute in our efforts to deliver a standout customer experience while working with our strategic Brand Partners to manage what is a very fluid situation from market-to-market.
As Lauren mentioned, we’re keeping a close eye on customer demand fluctuations given the uncertainty around school reopening, team sports participation, unemployment levels and government stimulus, as well as any further government mandated store closures.
We also continue to focus on developing our longer-term strategies intended to ensure we maintain our position at the center of youth in sneaker culture, while further strengthening our financial performance and creating ongoing value for shareholders. In short, we believe we’re well-positioned to capitalize on evolving customer shopping behaviors through a sustained emphasis on digital as well as evaluating a further pivot off mall, including through our Power Store office. We believe our Power Store concept and community focus is the right offense to offset mall related pressures.
As we move through the changing COVID-19 dynamic, our teams will continue to employ a data driven approach to take advantage of the right opportunities as they arise.
Before I turn the call over for your questions, I'd like to express my deep appreciation to every member of the Foot Locker team in every store, office, home office and distribution center around the world.
Our performance in the second quarter is a testament to the strength of your dedication and focus. There are still obstacles and uncertainties ahead.
However, we have seen the resiliency of our customers along with the dedication of our team members I believe we will be a stronger, smarter and more nimble company on the other side of this. With that, Operator, please open up the call for questions.
Yes, thank you ladies and gentlemen, we’re now ready to begin the question-and-answer session. [Operator Instructions] And the first question comes from Janine Stichter with Jefferies.
Hi, good morning. Thanks for taking my question.
So, trying to get some…
Good morning, Janine.
Good morning, just trying to get some context down the back-half, I know there's a lot of moving pieces right now, but any color you can give into how you feel about the product pipeline in the third quarter, and then maybe the importance of basketball, which has been very strong versus some of those coat and casual styles that have been relatively weaker. How did that mix in the back-half compared to the first-half, and then just maybe any context you can give around the importance of back-to-school to your business? Thank you.
That's a loaded question, Janine, so good way to get started to this morning. The product pipeline, as Andy dove into a little bit, we've got a lot of concept work that's being really well accepted by our consumers, and as they come out to the stores, as they shop digitally there's a lot of connection points. Clearly, basketball with the Air Force 1s and the AJ1s and the Retro releases has been a really good category through the second quarter, and remember that included some launches that were pushed from the first quarter into the second quarter, so probably not a perfect, not a perfect equivalency, but clearly basketball remains important. It's great that the NBA is playing. The playoffs have started.
So there's a lot of energy around basketball. We see strength around some running silhouettes in certain markets as well. Running has always been a little bit stronger in Europe. It continues to be good in Europe, and we think there are opportunities with a lot of the Maxx Air silhouettes here in North America. Andy recapped a number of the kinds of work efforts that we've got going on, and those continue to be well-received, the 327 from New Balance, the J. Cole shoe with Puma really looking at basketball from a different point of view, some of the work we're doing with Commerce, we get more into the UGG season into the Timberland season as we get into back-to-school in the back-half of the year.
So, a lot of opportunities on those casual and classic styles. When it comes to back-to-school, we really don't expect the cadence to be the same as it's ever been before, right, as back-to-school tax-free holidays have shifted in some states and been pulled back in other states. The schools in many cases are still trying to determine how and when they go back.
So, we expect the cadence to be significantly different. It will impact us on a lot of fronts as we think about the back sports seasons as well.
So, the team is managing through it, and I look at it, and recall that if we had provided a lot of clarity around Q2 when we met in May, it would not have been a very good predictor of how we ended up in Q2, and we are sort of very similar to that today that you know, as back-to-school cadence shifts, our team will do everything we can to manage those shifts and deliver against the consumers that shop with us both online and digitally.
Great, thanks for all the color.
Thank you. And the next question comes from Tom Nikic with Wells Fargo.
Hey, good morning. Thanks for taking my question.
Good morning, Tom.
I wanted to ask about, I guess, looking to back-half and specifically for Q4, during the holiday season historically your stores have had pretty, pretty good traffic trends, and you had a lot of foot traffic in your stores, which I would imagine social distancing type of scenario would be a little bit more challenging for what's normally a crowded Foot Locker store during the month of December.
So, how do you think about that and navigating what could be some tricky operational challenges [if not, just follow through] [ph]?
Well, Tom, our number one concern is the health and safety of our employees and our customers.
So, social distancing, the safety protocols, the PPE that Lauren mentioned in her comments, all are critical to managing the flow to the stores, and the season, the holiday season is going to be really difficult to predict, right. None of us know where COVID is going to be at that point, but what we proved during the second quarter is that we can amp up our direct business, our digital business, and service the consumers as well.
So I think it will continue to be a balance between taking good care of our consumers as they come to the stores. I don’t know the Black Friday will look like Black Friday has looked in the past, I don't know that the Saturday before Christmas will look like the Saturday of the past. I'm just not sure what customer shopping behaviors will be, but I’m confident in our team's ability to deliver a healthy and safe experience for our consumers that do make it to the stores, but I would expect you’re right Tom that the traffic in store at any given moment on any given day will look a little bit different just based on social distancing protocols.
And Tom, I would add, our Op team is just so good, and they have really given some quality thought to the doors that might be particularly challenged in that way, based upon historic traffic patterns at peak, and we really have proactively thought through to be able to manage that kind of situation well.
So, thinking about how we service them by bringing them products to try on, but also managing through the process of checkout.
So, giving us some more points and the square footage, where we can actually complete the transaction, and making use of technology to make that checkout very smooth and quick.
So, these with some of the other technology callouts that we had earlier in the call, we are confident in our team's ability to manage through this well with the health and safety at the forefront.
That's helpful, thanks.
So just a quick follow-up on sort of along those lines, we've heard some retailers talk about trying to pull forward some of the holiday demands either before Black Friday or even into October, if that's something that you're considering or thinking about trying to?
Well, I think it's ultimately up to the customer, right? I mean, they make the decision when they're ready to shop. We're working very closely with our vendor partners as it relates to launch and heat product and product deliveries. Clearly, I don't believe the peaks will be quite as high, I believe they'll be broader just because people are not showing a propensity to be in crowded places.
So, I think that certainly trying to pull demand forward is one of the strategies being aggressive digitally to make sure that they're comfortable shopping and confident that they'll get their deliveries, so fine-tuning our supply chain to make sure that that happens.
All of those are variables that the team will look at in terms of servicing that high peak season. The one thing that we know is that the holiday won't shift. It's still going to happen on December 25 for those people that celebrate Christmas, and we have to be ready to take care of the consumer and that builds up to that that very important gift giving time.
Got it, thanks, Dick. Thanks, Lauren, and best of luck in back-half.
Thank you. And the next question comes from Michael Binetti with Credit Suisse.
Hi, guys. Good morning. Thanks for taking our questions here.
Good morning, Michael.
Lauren, I guess a couple for you. Yes, Lauren a couple for you. I guess, you commented in the gross margin comments that you want to be clean on inventory by year-end. It was down 3%, and revenues up 17% in the quarter.
You sounded like you moved through a lot of aged inventory. Where do you want the inventory to be at the end of the year? And it sounds like you would be directionally down more than 3% you just reported? Is there a path to positive comps in the back-half as demand is there based on the inventory plan? And then, I guess, the second question would be -- it’s nice to see you're moving the capital deployment strategy back in the right direction here very good signal for the medium term. I'm curious you described the repurchase plan as being opportunistic with your normal conservatism baked into language, but you're one of the first in the group that we watch to bring back a dividend and you're confident enough to bring back some of the CapEx early. At the stock price, I am curious what are some of the items on the list that are cautions for you in thinking about restarting share repurchases that are incremental to the positives that you saw over the medium-term that bring back the dividend and the CapEx?
All right, okay, so, two part questions.
So first around the inventory, as we called out with a strong top line that we had in the second quarter, we certainly made progress on our objectives around the inventory, which was dealing with what was the natural backup with the close store period that we had from Q1 into the early days of Q2, and that just by its nature creates some backup in the ageing.
So we make good progress against that, but we still have more work to do, and our objective is to get to the end of the year in a place where we were feeling very good about the quality of the inventory and that it's at the right level to support the expected business at the beginning of next year.
So the way you have concerns with being at 2.7%, down at the end of Q2 about being able to satisfy demand for back-half, not off of 2.7% decline that still leaves us with plenty of compelling product as Andy described to be able to satisfy our customer.
So, yes, but as we described some concerns about the rate given that we're still working on the inventories and putting some continued pressure on that margin outlook.
Turning to your second question about share repurchase, as we've described before, it is not a formulaic program that is opportunistic, and there are lots of things that go into evaluating whether or not it's the right time to exercise.
So what we're calling out is that we have an authorization that has $867 million still open on it, but there are lots of dynamics to consider around liquidity and cash preservation, the uncertainty in the back-half. These are all elements that go into considering whether or not it's the right time to seize that opportunity, but I know it's tough because it's not a formula. There's a lot that goes into thinking about it, but believe me, we talk about both dividends and share repurchase and our opportunities to invest in our business regularly with our board, but of course our first priority is always the investment in the business and after our long-term objectives, which we are excited about.
Got it, it's nice to have it there.
Okay, thanks for all the help.
Thank you. And the next question comes from Paul Trussell with Deutsche Bank.
Good morning, Paul.
My salute on a good second quarter and all the things you're doing with the business.
So first question is about the store fleet, and really just want to better understand how you're feeling about your presence and exposure within the mall and whether you have any changing views on the Power Store strategy or international expansion plans that have previously been outlined, and Lauren, while I know it's still in negotiation, are you pretty confident about the ability to kind of bring down average rent rates?
Well, I'll jump in first, Paul, on the mall exposure and how we're feeling about malls, and clearly, the COVID situation has accelerated work that we've had in process for a number of quarters as we continually monitored in the health of the fleet, in the health of the malls. We feel good about our community based Power Store efforts, right. Connecting with the community is something that's critical and those stores have shown us that when consumers aren't sheltered in place that they like to get into those environments and share experiences with our associates and connect with each other socially.
So we continue to believe that there are opportunities in those community based stores and the Power Stores, and we will continue to work with the mall developers and understand the health of malls in the overall health of the fleet, and clearly, we believe that there are expansion opportunities internationally, right, where we've just dipped -- our stuck our toe in the water, dipped their toe in the water.
As it relates to our Asia business, we just opened a store in Macau. We opened a great new store on Orchard Road, Singapore.
We continue to evaluate what the next countries will be that we'll enter in Asia, and we believe the work that Vijay and Susie and Kirk are doing in Europe is a growth opportunity with the Sidestep banner, and now that we're wrapping up the closure of the Runners Point banner.
So, again, I think stores continue to be an important part of the story, Paul, and I think that some of the digital acceleration that we've seen will certainly stick around, but one of the things that was really obvious when we started reopening our store fleet is that customers like being in our stores. They enjoy being in our stores. They enjoy the social aspect of shopping, even with social distancing.
So while the experience in store will continue to evolve, I'm still a believer that stores play a really important role and we will continue to monitor the health of the malls and work with the developers as we look at opportunities. I'll turn it over to Lauren on driving down the rent, overall average rent.
Well, as we described, we did see some benefit from the conversations, which have been very constructive with our landlord partners on our occupancy as it was impacted by the close down period, and those conversations continue with a fleet as large as ours.
You can imagine the time required to complete those conversations, and actually get the agreements papered, and it's at that point once you actually have it papered that you're able to record the financial impact of those agreements. Hence, they’re callout to stay tuned on that because it's still a work in progress.
Some of it gives you benefit of those agreements, give you benefit in the current period; others reach an agreement that stretches it out over the lease life.
So it is a mix.
So just in general what I would say is we are very much a desired tenant for our landlord partners. We bring great formats in this category that really serves specialty and athletic well.
So, being a desired tenant and a very good tenant, we think that that's helpful in getting occupancy arrangements that makes sense for our model, but leverage has really helped when you're driving positive comps.
And just on that Lauren as a follow-up, maybe just any other color on how you're managing labor and expenses in the back-half, just given the unknowns on the top line. Any help there would be beneficial to us trying to model?
Okay so, hopefully, you get the sense that we do that very, very carefully and with every line getting inspection as to what's the appropriate spend, and so, biggest element is selling wages, and as we've described since we've had 70% open days in second quarter that the 30% close was helpful in expense.
So we expect barring some unforeseen event that with 90% was hopefully open at selling wages will be adjusted accordingly.
So well, we'll see how whether or not government subsidies is an element, but as we described we're not predicting that at this point, but we're controlling the controllables as we described, and what was on last call on a bit on this call, we've learned an awful lot about effective marketing and to make the most of those marketing dollars both digitally and brand.
So that's helpful to us, and there's some variables that just continue to not experience expense like travel, nobody's really going anywhere unless it's absolutely essential.
So those are some of the bigger elements and we are managing quite closely Paul.
Thanks for the color. And thank you for your support of the culture, it's my best.
Thank you. And the next question comes from Chris Svezia with Wedbush.
Good morning, everyone. Thanks for taking my questions. I guess just first question from me, just want to square some thoughts around inventory and product.
You mentioned Lauren that you're working closely to get adequate good holiday product for Q4, and that you might have to have higher freight costs coming into the second-half. Are there situations whereby you're not getting adequate supply of product where demand is outstripping supply availability for whether it's basketball or Jordan or key franchises as you think about holiday and that's maybe some additional cost to get that in, I'm just trying to square that thought process against your current inventory position?
Well, Chris. It's no different now than it's ever been, right? The highest heat product demand always outstripped supply. We operate in a world that really does have a constraint around some of the supply on those high heat products for all the right reasons to keep them incredibly hot when they do come to the marketplace.
So again, the team is working with the vendor partners and I guess the common around freight is simply that supply chains are being taxed all over the world right now. Whether it be the shifting part of it from our distribution center in Junction City, it can appeal to our stores or our DTC shipments or be the transport from the far east into the ports in North America and Europe.
I think Lauren's comment really tied to supply chains that are tight right now and we're looking at every available avenue to make sure that we do in fact get the right product here for the holidays and I think that the merchant team certainly feels good about it right now, but it's an ongoing, dynamically changing world that we live in based on ports that run into a virus spike that have to slow down receipts, right? That you can't plan for, and you can't necessarily maneuver around.
So I think the additional freight really is more than just around constrained supply chain opportunities.
I mean, they're all I think that I would add is just a natural outcome of March, when things seized up as suppliers had to think through what needs to happen at the factory to deal with the backlog, and so, getting that reengaged as part of figuring out product flow for certainly for holiday.
Got it, okay, that's helpful. Thank you. And two more for me real quick, just number one. I'm just curious in Europe, any thoughts or added color? I know you're doing a lot there with the FLX program, digital platforms, et cetera, but also just curious as you look by market, how that is impacted to a degree relative to COVID spikes, things of that nature, relative to the underlying trends in the business, and lastly, just on merchandise margin, I know Lauren, you're expecting to be down with down 700 basis points in Q2, I guess where the inventory is, is that we're looking at that neighborhood or should it be something less than that? I'm just curious these thoughts about the pressure on merchandise margins going to the back-half? Thanks.
I'll jump into the Europe question first and then let Lauren come back on the merchandise margins.
If you take a look at the way the virus hit, think about how locked down Italy was for a long time. Italy being one of the lead markets for us in Europe certainly had an impact and as the Italian consumers come out into their summer period and their Summer Sale period and now are contemplating back to school, clearly they're going through many of the same things across that country and all of the countries in Europe. I read an article this morning about travel restrictions getting amped back up across Europe as summer holiday seasons, their vacations to the sea into the beaches have brought what they think are going to be some spikes.
So I think our team in Europe continues to manage the business and the uncertainty very well, very similar to the team here in the U.S. The Ops team does a great job. The merchant team does a great job and they're adapting to those uncertainties, Chris, but again, it's every country is dealing with it a little bit different in terms of local laws, social distancing, masks, all of those things that we hear about every day in the U.S. are very much a part of the Europe business, but the underlying business as we focus on a multi-banner strategy with Sidestep and Foot Locker, we expect to see the consumer continue to respond to the great product offerings and the great in-store environment and the digital connectivity that we've got with our core consumer today.
So I'll pass it over to Lauren on the merch margin question.
We described that there were two dynamics in the second quarter around margins that we had the elevated level of markdowns as we were working against our goals on inventory, quality against a backdrop just a general macro environment that's more promotional, and as we described, we continue to have more work to do, and I've just got an assumption that this promotional backdrop hangs with us until we get to a more normal place.
The other element that we described was much heavier penetration in our digital business, which naturally carries a lower margin rate because of the rate that's associated with getting that unit to direct to the customer.
So we were at 33% penetration in the second quarter versus 14% a year-ago.
So part of thinking through that margin is, how does that penetration play out as you've got a fleet that is more open, but our customers still thinking through the dynamic of which channel they prefer to shop in, and that does have an impact on the finished margin rate.
Got it, but is it fair to say that you would expect merchandise margin rate related to promotions to at least abate as you go through Q3 and into Q4. Is that a fair statement?
We still have work to do on the inventory quality and the environment still looks promotional to me.
Understood, thank you very much and all the best.
Thank you. And the last question comes from Robert Drbul with Guggenheim.
Hi, good morning. Thanks for taking the question, I guess two quick questions.
First, can you just spend a little time on I think with the resumption of the dividend, the level of the dividend and sort of how you’re approaching it going forward, and I guess just, Lauren, following the commentary on the work you are doing -- inventory, can you talk a little bit about just the flow of inventory throughout the stores online sort of how you are actually meeting the demand and sort of some of the investments around the navigation of making sure you get the sale and capture the sale no matter where the inventory sits in your facilities? Thanks.
Well, I’ll take the dividend question and maybe Dick would like to comment around the inventory flow across channels which my perspective customer decides where it’s going to be, and we do our best to make sure we have got it in the optimal place that satisfy their need.
So, I guess I answered that question before your question. The dividend we described it as we are thinking about it, it is a cautious we were getting back into it where it’s meaningful, and of course, there are many things that you look at to decide whether or not it’s meaningful, payout and the yield versus benchmarks, and so, these are all things that we considered, but the overall statement, we feel good about how we have managed through liquidity and our capital structure, and again, the Board feels that confidence too. Hence delivering a meaningful cash return to our shareholders which -- as we have described before are very important to how we think about the business.
Just to add to your second question, Bob, I mean Lauren gave a good answer, but the truth is we’ve invested in things like buy online ship in store, buy online pickup in store. The customers that shop with us handheld devices in the store -- the customers that shop with us across any channel really have access to all of the inventory, right? The question is, is it in the store that they happen to be standing in or where we ship it to them or back to that store form? So certainly the allocation process you always want the right inventory in the right place and exactly the right time, but, realistically the IT investments that we have made the POS investments that we have made, the handheld technology investments that we have made that we have been talking about for many, many quarters, all proved in Q2 that access to the inventory is critical, and even with down traffic, you are able to drive comp sales because all consumers really have access to all inventory, and we will continue to refine the allocation method and work with our supply chain to try to shorten the distance between any given product and the customer that orders it, but I think Q2 was really a testament to investments that we have made in the methodology that we have used. We actually opened stores first to ship out buy online shipment stores. Even before we could entertain our guests back in the stores, we had our associates in the backroom shipping out orders for direct-to-consumer digital order.
So, it’s a wonderful ecosystem, and I think our team does a great job of taking advantage of the inventory no matter where it sits.
Right, Dick. Thank you very much.
Thank you. At this time, I would like to turn the floor back to Mr. Lance for any closing comments.
Thank you for joining us today. Please join us again for our next earnings call which is scheduled for 9:00 a.m. on Friday, November 20. The call will follow the release of our third quarter results earlier that morning. Thanks again and be well.
Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating.
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