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FL Foot Locker

Participants
Jim Lance Vice President, Corporate Finance and Investor Relations
Dick Johnson Chairman and Chief Executive Officer
Andy Gray Executive Vice President and Chief Commercial Officer
Andrew Page Executive Vice President and Chief Financial Officer
Adrienne Yih Barclays
Kate McShane Goldman Sachs
Paul Lejuez Citi
Gaby Carbone Deutsche Bank
Janine Stichter Jefferies
Jonathan Komp Baird
John Kernan Cowen
Call transcript
Operator

Good morning, ladies and gentlemen and welcome to Foot Locker’s Second Quarter 2021 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 the 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 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. I will now turn the call over to Jim Lance, Vice President, Corporate Finance and Investor Relations. Mr. Lance, you may begin.

Jim Lance

Thanks, operator. Welcome everyone to Foot Locker Inc.’s second quarter earnings call.

As described in today’s earnings release, we reported second quarter net income of $430 million compared to net income of $45 million for the second quarter of last year and net income of $60 million for the second quarter of 2019. On a per share basis, second quarter earnings were $4.09 compared to earnings per share of $0.43 last year and earnings per share of $0.55 for the second quarter of 2019.

During the second quarter of 2021, the company recorded adjustments to earnings, including $303 million of non-cash gains related to our minority investments, of which $290 million was related to a higher valuation for the company’s investment in GOAT and a $39 million charge was due primarily to the impairment review of Footaction. On a non-GAAP basis, earnings were $2.21 per share, up over 200% compared to earnings per share of $0.71 for the second quarter of last year and compared to earnings per share of $0.66 for the second quarter of 2019. 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.

We will begin our prepared remarks with Dick Johnson, Chairman and Chief Executive Officer. Andy Gray, Executive Vice President and Chief Commercial Officer, will then provide additional insights into the business drivers in the quarter. Andrew Page, Executive Vice President and Chief Financial Officer, will then review our second quarter results and provide guidance for the current fiscal year.

Following our prepared remarks, Dick and Andrew will respond to your questions. With that, I will now turn it over to Dick.

Dick Johnson

Thank you, Jim. Good morning, everyone and thank you for joining us this morning.

We are pleased to report that our momentum continued into the second quarter, leading to excellent top and bottom line results that reflect the health of our category, the deep engagement we have with our customers and the strategic nature of our vendor partnerships. The broad-based growth was driven by strong performances in women’s and kids footwear, coupled with strong demand across apparel and accessories.

In addition with further gains in our inventory productivity and meaningfully low levels of promotional activity, we were able to deliver significant margin gains in a truly impressive bottom line performance.

For the second quarter, our global fleet was open for approximately 94% of possible operating days with temporary closures in Canada, certain markets in Asia and Germany. With economies reopening to a greater extent throughout most of the markets in which we operate, we saw low double-digit lift in traffic compared to fiscal 2020, which demonstrates the ongoing importance of our stores, where our customers enjoy spending time after connecting with us digitally. Together with the strength of our stores, our digital channels also drove important connections with our customers.

Our digital sales penetration rate was 20.1%, normalizing from the peak levels we saw in 2020 while remaining well above 2019 levels, a trend we expect to continue going forward. I am proud of the great progress our teams have made against the ongoing challenges created by the COVID-19 pandemic, delivering great customer experiences despite lean inventory levels and temporary store closures in certain countries.

Turning now to some highlights of our three geographies. In North America, our Kids Foot Locker and Champs Sports banners led the way with double-digit comp gains on top of last year’s double-digit increases.

Our U.S. fleet was open close to 100% of the possible operating days, while our Canadian business was impacted by closures in Ontario, resulting in doors being opened approximately 70% of possible operating days.

We are also making meaningful progress on our North America portfolio and fleet transformation strategy.

As we discussed last quarter, we made the strategic decision to wind down our Footaction banner by the end of fiscal 2022 and focus our resources on our core concepts. We just completed our first Footaction store conversion, reopening it as a Foot Locker format and we have approximately 50 more conversions planned for the back half of the year, along with 130 Footaction store closures. In EMEA, pent-up demand drove growth as stores reopened across all countries, leading to a double-digit comp gain at Foot Locker Europe. Altogether, our EMEA fleet was open 87% of possible operating days in the quarter compared to 70% in the second quarter of last year and a meaningful improvement from the 39% in the first quarter of this year.

Our APAC region delivered another solid quarter, also overcoming challenges related to COVID, with the fleet opened approximately 80% of possible operating days compared to over 90% in Q2 last year. But even with the decline in operating days, we saw a 30% comp increase in our Asia markets and a mid single-digit gain in the Pacific region.

We continued to make progress in our expansion strategy within Asia in the second quarter. We launched our local Foot Locker website in South Korea, which will help us connect with our customers and grow our social media following and create a stronger omni-channel business in the market.

We also opened 2 new stores in South Korea and 1 store in Singapore.

In addition, we are excited to announce that we have signed a licensing agreement to enter the Indonesia market in partnership with MAP Active, the leading brand commerce and athletic retailer in Southeast Asia.

We expect to launch the local Foot Locker website and opened 2 Foot Locker locations, a power store and a core store this year, with the first store slated to open by early Q4.

Turning to an update on FLX, we continued to see our membership program gaining traction as enrollment increases. We finished the second quarter with over 25 million members, up from over 20 million members at the end of the first quarter.

We are excited about the momentum and engagement in the program and the overall benefits it will provide to our business, including higher average spend for members versus non-members. It’s worth noting that members spent over 75% more than non-members in the second quarter as their average order values were approximately 10% higher than non-members and they shopped more frequently at our banners.

We are excited about where FLX is going and we will continue to create new features and evolve the customer experience for members within existing markets, while also working to launch the program in additional countries where we operate. Overall, these metrics are why we are optimistic about the strength of our portfolio, the power of our assortments and the loyalty of our customers. Andy will provide more detail around product highlights in the quarter and what we see in the pipeline for back-to-school and more broadly in Q3.

Before he does, I’d like to spend a few minutes discussing our recently announced agreements to acquire WSS and atmos and how we expect the addition of these two businesses to the Foot Locker Inc. family will advance our four strategic imperatives.

You may recall that on numerous occasions, we have articulated our commitment to our four strategic pillars in order to accelerate growth and drive greater value for our stakeholders.

First, elevate the customer experience; second, invest for long-term growth; third, drive productivity; and fourth, leverage the power of our people. The acquisitions of WSS and atmos fit our strategy to a tee while also tying back to our purpose, to inspire and empower youth culture and strengthening our connection to the sneaker community. Each transaction will be accretive, create disciplined growth and enable us to invest in platforms that will maximize value for Foot Locker’s shareholders.

As we discussed when we announced the two transactions, the addition of WSS and atmos to our brand portfolio will diversify our store footprint and product mix, provide access to complementary and differentiated customer bases and accelerate our growth both in North America and internationally. Moreover, together these acquisitions will expand our ability to service the entire retail price value spectrum. Today, we would like to provide additional detail on how we expect these two terrific businesses to deliver significant financial benefits and drive additional value for shareholders. Starting with WSS, the management team has built a strong and scalable business model, led by their off-mall real estate strategy, full family offerings, focus on the Hispanic customer and the commitment to elevating the communities that it serves. We see a path to approximately $1 billion in sales in the next 5 years from the $425 million in fiscal 2020 driven by the differentiated WSS consumer concept that we can bring to new U.S. markets and favorable future demographics of the United States marketplace.

In addition to market expansion opportunities, we also have identified both revenue-generating and operating cost synergies, our company’s expertise in private label apparel design and sourcing, along with the utilization of our team additions speed-to-market apparel facility, present opportunities to generate incremental apparel sales for WSS.

Our company will also deliver incremental supply chain capabilities and capacity, along with shared services operating synergies across the business. WSS is also well-positioned for operating margin enhancements in light of its full family offering that increases basket size, a successful labor model that values outstanding customer service and expertise in choosing high potential store locations that are well-positioned to succeed.

Turning to atmos, we are excited to add this premium globally recognized brand into our portfolio.

Over the past two decades, Hommyo-san, the Founder of atmos and his team have built a digitally-led and culturally-connected premium lifestyle brand that sits at the center of sneaker culture in Asia and beyond. This acquisition will represent a highly strategic entry point into the important Japanese marketplace with immediate scale as we continue our expansion across Asia-Pacific and tap into youth and sneaker culture across the globe.

As many of you know, atmos has a long and storied history of iconic collaborations with a variety of strategic brand partners that create unrivaled hype in our industry. They are also best-in-class when it comes to retail design in experiential stores located in key markets and shopping districts that serve as inspiring and critical touch points in the omni customer journey. atmos generates over 60% of its revenue from their digital channels and has a strong global following across social media platforms.

We expect low double-digit sales increases from the brand as we continue to drive growth in the Japanese market through the core business and key concepts like atmos pink, its premium female-focused offering and vendor partner doors as well as growth in other Asia-Pacific markets in select locations in the U.S. Both WSS and atmos are high-growth businesses.

We expect that each will generate low double-digit sales growth annually over the next 5 years that will in turn be accretive to the bottom line. Andrew will provide some additional color on the potential accretion in his remarks.

We are excited about welcoming both WSS and the Atlas to the Foot Locker Inc. family. We look forward to integrating these businesses for the benefit of all stakeholders. One other callout, I would like to make is regarding our investment in GOAT.

During the quarter, GOAT closed $195 million Series F round of funding, again confirming the market’s confidence in the broader sneaker category.

We continue to be excited about GOAT’s success as they expand into new categories such as luxury apparel and accessories and we will continue to look for ways to work together and expand the ecosystem. In short, the strength of our business has enabled us to invest in profitable growing businesses and deploy our capital effectively to drive shareholder value. Andrew will drill down into the numbers and discuss capital allocation and our outlook in a moment.

Before he does, here is my perspective as we look to the back half of the year.

We have positive momentum coming off of strong results from the first half. That said we are still facing several macro level issues from the global pandemic to the knock-on effect that it is having in our supply chain.

We are also working closely with our strategic vendor partners to ensure our continued access to product amidst the COVID-19 outbreak in Vietnam and other supply chain-related headwinds. But for those things that we can control, we believe we are in a very good place to deliver positive results in the back half of this year.

Our product pipeline, which continues to be very strong, is resonating well with our consumers. We anticipate the culture of basketball will continue to be a key revenue driver in the third quarter. Seasonal offerings will also be very important as consumers look to diversify their footwear purchases.

Lastly, apparel trends continue to be very favorable as we enter back-to-school in the fall season. And as we consider the opportunities for back-to-school in comparison to the delayed back-to-school season last year, a more normalized cadence this year presents an opportunity to capture more of that demand earlier in the quarter. That said we are keeping a close eye on possible disruptions caused by the evolving COVID-19 situation.

We continue to monitor the temporary store closures across the countries in which we operate and will adhere to government mandates. We look forward to getting our store fleet back to full strength and meeting the pent-up demand we expect to see from our customers as we fully reopen our stores.

Our financial position remains strong.

Our vendor relationships are very strategic in nature and we continue to obsess around our customers, whether it’s through our digital channels, social media, FLX or an in-store customer experience. I want to express my thanks to every team member at Foot Locker, Inc. It is their dedication and hard work that made these outstanding results possible and will enable us to continue to drive our business forward and fulfill our purpose to inspire in a power youth culture. With that, I will now turn it over to Andy.

Andrew Page

Thanks, Dick and good morning everyone.

Our second quarter results continue to showcase that our strategy to strengthen the relationship with our current customers and bring new customers into our business are working. The three key objectives here are to maximize our product leadership and diversity of brands, utilize our global scale and investments to elevate our store and digital experiences to get great product into the hands of our consumers and to continue to double down on our commitment to the communities we serve and we saw broad-based growth this quarter by following those objectives.

Our footwear business increased low single-digits.

Our apparel and accessories businesses were both up double-digits with both families of business also up double-digits compared to 2019. We saw consumer diversity across departments and our total men’s business was relatively flat and we saw acceleration in women’s and kids. Encouragingly, kids had the largest gain as we continue to recruit and bring in the next generation of sneaker head to start their lifelong journey with us. The culture of basketball, led by the key Nike icons and new additions from Adidas and New Balance, continues to create excitement and drive momentum.

Here, strength in women’s and kids more than offset a mid single-digit decline in men’s that was going up against a double-digit comp of last year.

Additionally, we brought new consumers to our business with an increased focus on the seasonal category, delivering a high double-digit increase with gains in Crocs, Ugg and Birkenstock, along with an expanded balkanized offering in the Vans and Converse, showcasing the variety our consumers want on their feet.

Another area of our business that continues to excite us and gain momentum is apparel, which was up double-digits to last year and 2019. Men’s, women’s and kids all delivered gains over 20%. And again, our kids business had the largest increase as we bring in the next generation for apparel as well. To add distinction to our assortments, we are thrilled to continue working with all of our partners to deliver a strong pipeline of exciting exclusive product concepts that resonate with all of our consumers. This is a big part of how we bring energy everyday. Recent examples would be our celebration of the 25th anniversary of the Griffey 1 with Nike, our Adidas All Day I Dream About summer concept featuring unique executions of their key iconic silhouettes and our Crocs and Party Animals concept where we partnered with Ron English to re-imagine their icon for summertime.

All of these programs are significant in terms of scale and consumer engagement.

Our powerful consumer concept offense continues into fall, including Puma and LaMelo Ball, New Balance and Louis de Guzman, Vans and Kids of Immigrants and many more.

In addition to our product concept, there is a lot to be excited about for fall. The culture of basketball momentum continues.

We are continuing our seasonal expansion with an increased focus on boots and fleece to maximize the season ahead and we have a very strong pipeline of product and inventory in apparel. What is new to our business will be the launch of our own brands to maximize the ongoing momentum in the category. These will feature brands like Locker and Cozy as well as exclusive partnerships with tastemakers and celebrity curators like Don C and Melody Ehsani. I am also very pleased to see the results of our commitment to building community and driving meaningful and lasting change for our consumers.

We are building and enabling community in many ways, both through the continued expansion of our community stores and geo offense to ensure we are more deeply rooted in the neighborhoods that we serve, and the continued rollout and expansion of our FLX membership program, where we see significant runway to grow our 25 million member community as well as driving engagement and incremental spend through value-added enhancements and meaningful benefits that excite our consumers and drive leadership in the industry.

Finally, with lead, we continue to fight racial inequality and injustice. We addressed our first year in June with a statement on our $200 million commitment. But to be more specific here, for the quarter, we expanded our associate scholarship program and completed our first summer internship bridge program focused on our black associates. We launched the Designing with Sol program with PENSOLE and New Balance, which creates opportunity for underrepresented voices in the footwear industry. And we continue to bring in Black-owned brands and concepts to give them a platform to connect with our audience.

We have featured 20 brands since announcing this program with 25 more planned for the year.

We’re extremely dedicated to meaningful and lasting change across our company and within the communities we serve.

As we push our consumer-led offense forward, our strategy will continue to be the combination of product leadership and diversity, enhanced omni experiences and our focus on community and purpose that will guide our actions and make the difference in how we lead this industry.

Let me now pass the call over to Andrew.

Andrew Page

Thanks, Andy. It is my pleasure to join you this morning to discuss our second quarter results.

Before I begin, I would like to note that in addition to comparing our results for last year, I will also reference comparisons to the second quarter of 2019, where it is helpful.

Now, let’s discuss our second quarter results. Starting with the top line, we delivered a 6.9% comp gain on top of the 18.6% gain in the second quarter of last year. Along with this strong demand, our focus on more full-price selling, combined with our disciplined expense management, yielded non-GAAP earnings per share of $2.21, an increase of over 200%. Taking a look at the second quarter, May’s comp gain was up over 50%. June, which was up against the initial reopening last year, was pressured the most, down high single digits.

While July was down low single digits with momentum improving as we move through the month. Breaking down our performance by region, North America experienced pockets of growth on top of robust comps from the second quarter of last year. Kids Foot Locker led with comps over 20%. Champs Sports followed with a low double-digit comp gain. Foot Locker posted a mid-single-digit comp gain. And Footaction, in a wind-down mode, closed the quarter down low double digits. Foot Locker Canada posted a high single-digit comp decline as we continue to face temporary store closures in key markets. Eastbay was down over 30% for the quarter.

As a digital-only banner, Eastbay did not benefit from store reopenings and was up against a double-digit comp gain in Q2 of last year. Foot Locker Asia delivered a roughly 30% comp gain, while Foot Locker Pacific increased in the low single-digit range.

Turning to Europe, based on easy COVID restrictions, Foot Locker Europe posted a low 20% comp increase. Sidestep, which experienced the most store closures during the quarter, decreased low single-digits. By channel, the strength in our comp sales this quarter was driven by our stores, which increased 28.4%.

Let me remind you that our fleet was opened 94% of potential operating days in the quarter versus approximately 70% last year.

Our direct-to-consumer channel returned to a more normalized level, accounting for 20.1% of total sales for the quarter, down from 33.2% last year but up from 14.3% in the second quarter of 2019. Reflecting on the more limited promotional environment, average selling prices were up mid-single digits in the quarter while units were up low single digits.

In addition, the higher sales penetration in our stores led to more full-price selling.

Moving down the income statement, gross margin was 35.1% compared to 25.9% last year. When compared to a more normal Q2 of 2019, gross margin improved an impressive 500 basis points. The trends we experienced in the first quarter continued in the second quarter with the combination of robust demand and fresher name inventory driving meaningfully lower levels of promotional activity.

Our merchandise margin rate improved 870 basis points over last year and 170 basis points over 2019, driven primarily by the meaningful reduction in markdown.

Looking ahead, we expect the promotional environment to remain favorable through most of this year but to a lesser extent than what we experienced in the first half.

As a percent of sales, our occupancy and bias compensation costs leveraged 50 basis points over Q2 of 2020 and 330 basis points over Q2 2019. This is inclusive of approximately $6 million of COVID-related rent abatements in the quarter, which was unchanged to compare to Q2 of last year.

Our SG&A expense rate came in at 19.8% of sales in the quarter as we returned to more normalized store operating levels. This yielded 120 basis points of deleverage over last year and 240 basis points of leverage compared to 2019.

In addition to careful expense control, we received approximately $4 million in government subsidies in the quarter, which is down from the $17 million we received in Q2 of 2020.

We also incurred $4 million of lower PPE expense and bonus expense came in 40 basis points lower.

For the quarter, depreciation expense was $48 million, up from $44 million last year.

While interest expense was $2 million, flat to last year.

Our non-GAAP tax rate came in at 27.4%, below last year’s rate of 30.7%. The improved rate in the current quarter reflects the lower proportion of nondeductible items on the overall rate.

Turning to our liquidity position, we ended the quarter with $1.8 billion of cash, an increase of $472 million compared to Q2 last year, primarily driven by our higher inventory turns. We currently have no outstanding borrowings on our $600 million credit facility. At the end of Q2, inventory was down 9.5% to last year versus total sales increase of 9.5% as strong demand outstripped the increase in receipts during the quarter. On a constant currency basis, inventory was down 10.4%, while sales increased 7.3%. We invested approximately $36 million into our business in the form of capital expenditures during the quarter. This funded the opening of 16 new stores as well as the remodeling or relocating of 23 stores.

We also closed 57 stores in the quarter, primarily in the U.S., leaving us with 2,911 company-owned stores at the end of Q2.

For the full year, we now expect to open approximately 120 stores, remodel or relocate 165 and close 345. These amounts reflect about 190 Footaction stores we plan to close or reposition in 2021.

Looking forward, we now expect to invest approximately $260 million in capital expenditures this year, down slightly from our prior guidance of $275 million.

However, this number and the fleet update do not reflect any impact related to our announced acquisitions of WSS and atmos.

As Dick mentioned, we are excited about the strategic potential that both assets bring to the Foot Locker Inc. family. They will provide us with the opportunity to expand into new markets, customer segments and price points as well as deepen our relationships with existing vendor partners, create new relationships with new vendors and diversify our retail footprint.

In addition, while both transactions are about growth, we also see opportunity for cost synergies with the WSS transaction. More specifically, in 2022, we expect that we will begin to generate approximately $10 million in annualized cost synergies by leveraging our supply chain and operating capabilities. Based on the expected growth trajectory for both WSS and atmos, we expect each of these businesses to achieve low double digits to mid-teens EBITDA margins over the next 5 years.

As we previously communicated, we anticipate both WSS and atmos will be accretive to Foot Locker’s earnings for fiscal 2021. We anticipate that accretion on an annualized basis will be in the range of $0.44 to $0.48 in 2022. In light of these strategic investments, we want to use this opportunity to reiterate our approach to capital allocation.

While we made adjustments to our strategy over the past year as we tackle the effects of the pandemic on our business, we have historically maintained and communicated our balanced approach that includes investing in our business to drive growth while also returning value to shareholders through dividends and opportunistic share repurchases. What you have seen so far this year is a reflection of exactly that approach, with a combination of thoughtful organic investments in our business and highly targeted M&A activity. At the same time, we continue to focus on delivering meaningful returns of cash to our shareholders through our dividend and share repurchase program. We believe the 50% increase to our quarterly dividend, which we announced earlier this week, signals our Board’s confidence in the business and our financial strength. To date, in fiscal 2021, we have paid out $42 million in dividends and repurchased approximately 745,000 shares for $41 million.

Going forward, we and the Board expect to continue with this focused capital allocation strategy designed to maximize shareholder value.

Finally, we are providing guidance for the current fiscal year.

As a reminder, our general practice is to only provide annual comp sales and EPS outlook and not quarterly guidance. Also, please note that this color excludes any impact of the acquisition as they have not yet closed; and that we are still operating in an uncertain environment and seeing shutdowns in certain markets outside the U.S., along with changes closer to home due to the COVID-19 variance.

For fiscal 2021, we remain optimistic and expect to deliver a low to mid-teen increase in comp sales. From a cadence point of view, keep in mind that Q3 is up against a strong back-to-school period, and some of the enhanced government assistance programs are scheduled to end.

We are expecting the gross margin rate to be up 490 to 510 basis points for the full year versus 2020, mostly driven by a more rational promotional environment.

Our SG&A expense rate is expected to leverage between 40 and 60 basis points year-over-year.

In terms of depreciation and amortization expense, we expect it to be approximately $185 million to $190 million.

Lastly, we expect our full year effective tax rate to be in the range of 28% to 28.5%.

We expect our non-GAAP earnings range to be approximately $7 to $7.15 per share. This guidance reflects the strong performance in the first half of the year and our optimism around the back half of 2021 and while recognizing that we are going up against more normalized store operating days versus last year.

Before we open up the call for questions, I want to emphasize that our team is focused on execution and delivering strong results.

Our financial position is strong, and it allows us to remain flexible as we seek to deliver against our strategic plans and drive shareholder value. With that, operator, please open up the call for questions

Operator

Thank you. [Operator Instructions] And the first question comes from Adrienne Yih with Barclays. Please go ahead.

Adrienne Yih

Yes. Good morning and congratulations, solid quarter and very well done.

Dick Johnson

Thanks, Adrienne.

Adrienne Yih

You are welcome. Dick, my first question is going to be for you. And I’m wondering, we’re talking about future ticket price, initial ticket like-for-like increases. No one’s really done it yet, but that’s on the comp supposedly for spring of 2022. Wondering if you’re seeing that in your discussions with your vendors? And then Andrew, for you, the low – the mid-teen – low double-digit to mid-teen EBITDA margins over the next 5 years for WSS and atmos, clarifying that, that’s segment margins? And can you remind us or help us that where they currently sit on an apples-to-apples basis? Thank you very much.

Dick Johnson

Thanks, Adrienne. I’ll tackle the first question on ASP and future ticket prices. And clearly, there is a lot of inflationary sort of tendencies in the marketplace right now that we’re all reading about.

We’re working closely with our vendor partners as we look at – as we look at pricing, obviously, we are a house of brands so they set a manufacturer suggested retail pricing. We adhere to their pricing policies and we ultimately figure out what the right price is for our customer, and we price the shoes accordingly. Again, the marketplace is very resilient when it comes to – our customers very resilient when it comes to pricing.

So again, as we think about spring, as we think about the flow of product, it’s conceivable that there will be some price increases.

One of the things that we’re looking at, as Andy talked about adding our private label product is we’re looking at all of those input costs and making sure that we get it priced right out of the gate.

So it’s a fine balance point with our customer. But clearly, the supply chain headwinds and some of the freight headwinds are causing all of the input costs to be looked at very closely. But again, we try to make sure that we get things priced and the price value is correct for our customer. I’ll turn it over to you, Andrew, on the margin question for WSS and atmos.

Andrew Page

Thank you. Adrienne, thank you as well. Yes, for the margins that I reflected for WSS and atmos, those think of those are kind of the business unit margins that we expect them to continue to run. Obviously, those business units will be rolled up into the regions that they operate in, but the margins that we gave you are what we expect those businesses to run in their discrete operating verticals. Right now, going into the pre-acquisition, we’re looking at similar margins now, low double-digit to mid-teens for those businesses right now.

We expect to be able to continue to have those businesses run at that margin and hopefully be able to contribute driving them up even more.

Adrienne Yih

Fantastic. Best of luck for back-to-school season and great job.

Dick Johnson

Thanks, Adrienne.

Operator

The next question comes from Kate McShane with Goldman Sachs. Please go ahead.

Kate McShane

Hi, thanks. Good morning.

Dick Johnson

Good morning, Kate.

Kate McShane

I wonder if you could talk a little bit more about what is driving the strength in women’s in the quarter? Were there any new launches or brands that were driving this? And how much do you think might be for market share gains?

Dick Johnson

Well, Kate, I would say that I think that we’re finally paying attention to women’s in a better way.

Our vendor partners are.

We’re doing a better job representing it digitally and speaking to her through our social channels and doing a better job in stores. The culture of basketball that Andy referred to has got some great, very female-friendly silhouettes. The Dunk has been well accepted. AJ1s has been well accepted by her. We had a great run with some Ugg boots and Ugg slides that very much a female-led attack in the summertime.

Our Crocs business, there is just a ton of things that are appealing to her right now in the sneaker world. And we’ve got a great assortment that our team has put together. But I’d like to give our team some credit that we’re really doing a great job thinking about her trying to better serve her both digitally and in-store. But I think we’re taking some market share.

I think she’s very comfortable in sneakers. And I think we’ve got a great assortment for her.

Kate McShane

Okay. Great. And then just as a second question around inventory. I know you highlighted the supply chain challenges in the previous question with regards to increasing price. But just in terms of what you are getting into the store and how you are managing inventory as we go into the back half of the year, what are some things that you are doing to ensure that you have enough in the store and you are limiting out of stocks?

Dick Johnson

Yes.

We are working really close with our vendor partners, Kate. And clearly, the shutdown in Vietnam will have a longer term knock-on effect. Most of the product for the back-to-school season and early holiday season is certainly built on the water and will be available. And our team has done a great job. We had a really strong quarter, obviously, in Q2. We had a strong receipts quarter. And we over received at our original plan. I guess the good news is that we oversold our original sales plan.

So, we didn’t make progress on our total inventory number, but the team has got it lined up pretty well. And again, barring things that are completely out of our control, I think that we are in good shape for the back-to-school season and into the holiday season.

Kate McShane

Thank you.

Dick Johnson

Thank you.

Operator

Your next question comes from Paul Lejuez with Citi. Please go ahead.

Paul Lejuez

Hi. Thanks guys. Question about the Vans business, just curious if you could expand a little bit on the comments about what you expect in the second half, specifically in men’s, I think you mentioned basketball as a driver. I was curious if you could provide some color there. Also, on the FLX loyalty program, I am curious if you actually see a pickup in spend when joined that program relative to before they joined or is it that your higher spending customers are the ones joining that program? Thanks.

Dick Johnson

Thanks for the questions, Paul. And again, Andy highlighted the strength of the culture of basketball. It’s always been one of the quarter posts of our business and our brands are bringing great heat.

Our team is doing a great job working with the brands to create some really strong storylines through the basketball category. Certainly, the Nike icons that Andy called out are the strength of the business, but we saw some new products from Puma, from New Balance, etcetera, and even some Adidas product that falls into the culture of basketball that continues to fuel that men’s business. But the culture of running is also very strong.

We have got a great running business.

Our slide business was strong in the men’s side of things.

Our seasonal business overall was strong.

So again, I think the men’s business up against probably the most difficult comps from last year because of the way the launch cadence was a year ago, but still very strong in a very relevant part of the business. The good news is that our men’s apparel continues to be strong as well. And Andy talked about the strength of apparel across all genders, but it really continues to – we continue to have the right uniform for this kid as they are going back to school. In FLX, we are not necessarily able to track the consumers before.

So, identifying what their habits were before FLX is a little bit more difficult. But certainly, we see an uptick in the amount of their spend and the number of times that they shop once they become FLX members.

So again, as we reviewed all of those metrics, they are all very positive. And the fact that we added 5 million more members in the quarter continues to show that the program is doing what we wanted it to. It’s increasing our connectivity with our consumer, it’s increasing that engagement. And as we are able to round out the redemption center with more participation and engagement activities, I think the FLX program will just continue to accelerate.

Paul Lejuez

Thank you. Good luck.

Dick Johnson

Thanks Paul.

Operator

The next question comes from Gaby Carbone with Deutsche Bank. Please go ahead.

Gaby Carbone

Hi guys. Congratulations on the nice quarter.

You are seeing some really exceptional top line numbers. Was wondering if you can maybe discuss how much do you think is going to be impacted from stimulus and tax credits are hit in July versus kind of the reopening in different markets versus like the strength of the product pipeline. I understand that might be hard to answer, but just curious how you are thinking about those dynamics?

Dick Johnson

Well, Gaby, thanks for the question, and it’s one of the things that we talk about a lot in our organization, right.

I think all of those things contribute. But the thing that’s most important is that our category right now in the sneaker category just has a lot of really interesting and really exciting products that are coming to market.

So our consumer, when they have cash in their pocket, they have always tended to move towards our assortments and in the product segment that we work in.

So certainly, stimulus is a part of it. The fact that we were open 94% of the days in store and our consumers still enjoy they connect with us digitally, but they enjoy spending time in the stores.

So, we actually saw a traffic increase in Q2, which again positive things as it relates to where we have got our product. And we will continue to have some stimulus in the marketplace with the child care credit that pays out over – on a regular basis.

Some of the other stimulus programs I think Andrew mentioned are slowing down a little bit as we look forward. But again, right now, there is just a tremendous amount of heat around the category, around the product and the product pipeline that Andy talked about coming into the back half continues to deliver that heat. And I think the consumer has a desire to have the pool, the best new kicks on their feet as they go into this next season.

So, I can’t really break it apart for you, but I do know that all of the things that you mentioned, Gaby, play a part in the success that we are having right now.

Gaby Carbone

Got it. And just a quick follow-up, you made a comment that you don’t expect the promotional environment to stay as good as what you just experienced in 2Q. This is what I was wondering if you can elaborate on that a bit?

Dick Johnson

Well, we have been able to run across all of our banners and across all of our geographies at record low markdowns, right. Inventories are low and lean. And I think that it will stay – the industry will stay fairly clean. But as you get into the holiday season, there is generally speaking more promotional activity out there.

As the seasons change, people have to get through seasonal inventory.

So, we just we don’t believe that we will continue to run at these record lows.

I think it’s going to be better than it’s been historically, but I don’t believe we will continue to run at these record lows and we will have to adjust to what’s going on in the marketplace. But the strength of the product that I talked about, again, and the freshness that we are able to bring into the stores and our digital sites, I think certainly helps us able to run low markdowns and keep things less promotional as we think about our banners. We don’t obviously speak for the others in the industry where I am not sure where their inventories levels are at and where their promotional activity is. But we have to look at what’s going on in the marketplace and be ready and be prepared. And I think that’s the a little bit of caution around the promotional activity. But again, I think it will be better than it’s been historically.

Gaby Carbone

Great. Thank you so much for that color.

Andrew Page

Gaby, let me just add a little bit to that. I mean as you think about we watch trends as we went through the quarter. And to Dick’s point, inventories are lean, the market looks relatively clean.

So, we continue to think that the lean inventory and the really, really desirable products in the market is a strong data point that continues to allow us to charge – to be able to receive more full price. But as you think about back-to-school and having a little bit more and normalized back-to-school season kicking off this year, we did see some level of increased promotional activity. But on a comparison basis, not as much as we would have typically seen in prior years as they kick off the back-to-school.

So, that’s another indicator that gives us reason to believe that the promotional market will pick up a little bit, but we don’t anticipate it being at the levels that we have seen in prior years.

Gaby Carbone

Great. Thank you so much.

Operator

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

Janine Stichter

Hi, good morning.

Dick Johnson

Good morning.

Janine Stichter

I was hoping you could talk a bit about – good morning, about the apparel piece of the business such as seeing a lot of shunt [ph] now. I am curious if you could comment on how much you think is the broader environment versus maybe changes you have made to the assortment? And then I think you have talked about some changes you have made to the way the product is merchandised in stores. Maybe go into that and talk about where you are in that transition? Thank you.

Dick Johnson

Thanks for the question, Janine. And it was really one of the strengths of the quarter. And we have talked about this cozy comfortable work from home, school at home sort of look. But the truth is that we have got the uniform that the consumer – our core consumer is wearing. It’s T-shirts and shorts in the summertime. Fleece piece is always welcome. And I think the team has done a great job of bringing fresh things to market into our stores and our digital sites. And again, I will give our team a tremendous amount of credit. They have got the right assortment. And importantly, we are doing a better job selling apparel in the stores.

For the longest time, it was just sort of an add-on opportunity for our team. But now we have got people that are really focused on selling apparel. It’s we are trying to make sure that it’s a full service opportunity for us to help people get into the right pieces. And when you think about some of the fleece pieces, they are at the same price level as a lot of our sneakers.

So, I think the consumers’ acceptance of the casual lifestyle has always been there with our core consumer. But this T-shirt and short and fleece sort of uniform that they wear is even more pronounced and I think will be more pronounced as we go into this back-to-school season.

So, I think it’s a combination of great assortment, the right product, fresh goods, and certainly a great job by our team to get it visually assorted and represented in the stores and digitally. And then our team in the stores actually being able to sell and doing a great job selling to our consumers.

Janine Stichter

Great. And then maybe just on the seasonal piece. Have you said how big that is on both annually and then maybe for the 4Q, I am sure it over indexes. And then anything on how big you think that could or should be as part of the business?

Dick Johnson

We haven’t broken it out in terms of percent of the business or total dollars, Janine. But again, we have sort of proven that there is more seasonal business to be done than we had historically done, right. When you think about the Crocs stories that we have been able to tell and been able to sell a number of Crocs in the store, the slides that have always been strong from Nike and Adidas and in other brands continued to accelerate, the UGG slides and slippers that we sold over the summer, that sets us up really well now to get into what has been the traditional seasonal assortment for us, which has been boots as we get into the back-to-school and holiday season.

So again, the consumer likes a lot of choices.

We have got winterized sneakers that are part of the seasonal representation as well.

So again, I think we are really well positioned. The boot season, we are sitting here on August 20, I guess, and none of us are thinking about snow flying in sloppy streets. But our core consumer thinks of that seasonal shift and thinks about the changes to their footwear. And again, I think we are really well positioned.

Our vendor partners have done a great job, and there will be some great stories this fall to tell around the seasonal goods.

Janine Stichter

Okay. Thanks very much.

Dick Johnson

You bet, Janine. Thank you.

Operator

The next question comes from Jonathan Komp with Baird. Please go ahead.

Jonathan Komp

Yes. Hi. Thank you. I wanted to just follow-up. When you think about the monthly trends you are seeing, could you share a little bit more maybe on a 2-year basis, if you are seeing stability or any change in trend? And any thoughts how we should plan the back half of the year if it will be different by quarter, just any thoughts on sort of the 2-year trajectory of the business?

Dick Johnson

Well, a lot of the numbers that we compared today, Jonathan, were appropriate against ‘19, were appropriate against ‘20. And the cadence is certainly a little more normalized as we think about the back-to-school season. Andrew talked a little bit about it in his prepared remarks that last year, at this time, there were still a lot of questions about whether kids were going to be going back to school physically, would it be virtual, would it be some sort of hybrid situation. The cadence right now seems to be that back to physical school is going to be the routine as we go into the third quarter for us.

Now the mask mandate has a whole different era – aura about the back-to-school season, but it does feel like kids are physically going to be back to school.

So, I think as we get into the normalization of stores being opened, kids are returning to a more normal sort of cadence, the cadence will probably be more representative of 2019 than 2020, because there were still a lot of puts and takes with openings and closings in the back-to-school season. But we do know that back-to-school is going to happen in August and September. We know that the holidays come the big six is going to be here. We know Christmas hits December 25th.

So, the consumers’ pattern, I would put it more close to 2019, Jonathan, than 2020, mostly because of the impact of environmental things, the pandemic across our store fleet, etcetera.

Jonathan Komp

Okay. That’s helpful. And then maybe just a bigger picture question on operating margin. The 13% plus in the first half, and it looks like you are guiding to double-digits for the full year, is that sort of the new rate that you expect to be at and maybe build from going forward or what are the main puts and takes we should think about your ability to maybe hold on to that double-digit operating margin?

Dick Johnson

Yes. I will pass that over to Andrew. He talked a lot about margin in his remarks and can probably add a little bit of color for you.

Andrew Page

Yes. Thank you, Jonathan. I mean you pointed it out, and we are really, really excited about our operational excellence that we have been able to pivot to, as we went through the pandemic and coming out of the pandemic. Obviously, operating margin has been really enhanced by the elevated growth in our top line, and we have been able to scale that top line growth. We don’t anticipate going backwards from our operational excellence, and we are going to continue to drive for. We think that really providing great products in the market, delighting our customer, engaging them across the entire omni spectrum, we will continue to bring our customers back to Foot Locker and then our performance from – with our vendor partners and our cost structure and our performance from our ability to deliver our SG&A, we feel confident that we will continue to drive operational excellence in those areas. Obviously, it’s a tough market out there with respect to the uncertainties around the COVID variant and how much it will impact operations.

And so that’s always a challenge and those are some things that are out of our control. Dick spoke a little bit about the ability to getting product out of Vietnam and how the COVID impact has impacted that as well. But as far as going backwards for operational excellence, we do not anticipate that.

Now controlling those things in the macro environment will continue to pivot and come through those just as we did in 2020 and the first part of 2021.

Jonathan Komp

Okay. Thanks for all the color.

Dick Johnson

Thanks Jonathan. Time for one more question, I think, operator?

Operator

The final question comes from John Kernan with Cowen. Please go ahead.

John Kernan

Yes. Great. Thanks for taking my question and congrats on a really nice first half of the year. I wanted to go back to the gross margin, 35% gross margin for the second quarter is pretty incredible where relative to where the business has operated historically. The merchandise margin has been tremendous. Can you just talk to your view on the ability to maintain this level of inventory productivity, how we should think about merch margin in the back half of the year? And your confidence in maintaining positive comps and driving merch margin at the same time?

Dick Johnson

Yes, I will start and then I will pass it over to Andrew, John. It’s a great question. And clearly, 35% margin in the quarter was exceptional, great work by the team. I talked earlier about the record low markdowns that we are running, the lean inventory.

Our team has learned that we can be more productive with our inventory. And when we see a turn in the way that it is, that’s a great sign that it’s good for cash flow. It’s good for gross margin, etcetera.

So, it’s been a lot of real positives as we think about margin. And I do believe that the marketplace is going to get a little bit more promotional.

So, we will have to be prepared for that.

I think that there is a lot of opportunities to continue to run a lean inventory with fresh goods, which ultimately, helps that gross margin and drives the top line, which allows us to get some leverage.

So, I will pass it over to Andrew to wrap up. But again, it’s one of those challenges that we have got to run at these levels.

Andrew Page

Yes. Thanks, Dick.

So, John thanks for the question.

As I talked about in our full year guidance, I am expecting margin expansion in the 490 basis points to 510 basis points over last year.

So with that, you can kind of back into – we expect the promotional environment to pick up a little bit in the back half.

And so you are going to see some deceleration in the back half compared to what you saw in the front half. But on the full year, we are still expecting approximately 490 bps to 500 bps of margin expansion compared to the prior year.

So we feel…

John Kernan

Yes. Sure. Understood, we can certainly – yes, we kind of see that just based on where you are guiding comps for the back half of the year and where you are guiding merch margin for the year and gross margin that there would be some expansion in the gross – in the merch margin in the back half of the year.

Just going back to the comp guidance and what’s implied for the back half of the year, can you talk to it feels like it’s fairly conservative relative to where the business is running now is it just on your concerns about the stimulus that’s maybe running its course or is there concerns on supply chain and the ability to get product in the stores in the back half of the year?

Dick Johnson

Well, again, John, I would just remind you that we are up against a pretty good back half of the year last year.

So from a comp perspective, we are going to try to stack comps on top of each other as we have done in the first two quarters. But comparing to 2020 continues to be difficult because of the openings and closings. But again, we feel good about the product pipeline that we have seen. We feel good about the product that’s flowing at this point. And as we get later in the quarter, if there is impact on some of the closures in Vietnam that we are seeing, obviously, we will react to those to the best possible ways. But again, we feel good about the back half of the year. It’s just when you are up against things that are completely out of your control, there may be some caution. But again, we feel good about the product pipeline. We feel good about the team that we have got in place. And our piece of the supply chain continues to work as hard as they can to make sure that there are fresh goods available for our stores.

So, we feel good about the back half.

John Kernan

That’s great. Thanks Dick. Thanks Andrew.

Dick Johnson

Thanks John.

Andrew Page

Thank you.

Operator

This concludes the question-and-answer session. I would like to turn the call back over to Mr. Lance for closing remarks.

Jim Lance

Thank you for joining us today. Please join us again for next earnings call, which we anticipate will take place at 9 AM on Friday, November 19th. The call will follow the release of our third quarter results earlier that morning. Thanks again. Goodbye.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating and you may now disconnect.