John Maurer - IR Richard Johnson - CEO Lauren Peters - CFO

Erinn Murphy - Piper Jaffray Tom Nikic - Wells Fargo Securities Matthew Boss - JPMorgan Mitch Cummins - B. Riley & Company Robert Drbul - Guggenheim Securities Randy Konik - Jefferies Sam Poser - Susquehanna Financial Group Michael Binnetti - UBS Robert Ohmes - Bank of America Merrill Lynch Paul Trussell - Deutsche Bank Research

Good morning, ladies and gentlemen and welcome to Foot Locker's First Quarter 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. This conference call may contain forward-looking statements that reflect management's current views of future events and financial performance. These forward-looking statements are based on many assumptions and factors, including the effects of currency fluctuations, customer preferences, economic and market conditions worldwide, and other risks and uncertainties described in the company's press releases and the SEC filings. We refer you to Foot Locker, Inc.'s most recently filed Form 10-K or Form 10-Q for a complete description of these factors. Any changes in such assumptions or factors could produce significantly different results and actual results may differ materially from those contained in the forward-looking statements. If you have not received today's release, it is available on the Internet at www.prnewswire.com or www.footlocker-inc.com. Please note that this conference is being recorded. I will now turn the call to John Maurer, Vice President, Treasurer and Investor Relations. Mr. Maurer, you may begin.

Thanks, and welcome everyone to Foot Locker, Inc.'s earnings conference call for the first quarter of 2017. As reported in this morning's press release, the company posted a comparable sales gain of $0.5% and achieved net income of a $180 million in the first quarter compared to a $191 million of earnings in the first quarter last year. On a per share basis, we earned $1.36 this quarter, just below last year’s all-time record of a $1.39 per share. We’ll start our prepared remarks today with Ric Johnson, Chairman and Chief Executive Officer who will review the key factors contributing to our recent performance and the initiatives we have in place to accelerate our momentum. Lauren Peters, Foot Lockers Executive Vice President and Chief Financial Officer will then provide additional details on our financial results for the quarter. Ric?

Thank you, John and good morning, to all of you. Thank you for joining this morning. Let me start by saying we’re certainly not satisfied with our results this quarter, even though it was still a highly profitable quarter, one of our company’s best ever. Despite the unprecedented challenges we experienced early in the quarter. Our goal is to continually raise the earnings bar higher and we did not quite succeed in achieving that in the first quarter. Lauren and I will get into the details of the pluses and minuses in the period but I do want to emphasize that we remain confident in our strong position in the athletic retail industry. We have been diligently executing our strategic initiatives which I’ll remind you are, to drive performance in our core business, to expand our leading position in Kids, pursue European expansion opportunities, to improve our apparel business, build a more powerful digital business, to deliver exceptional growth in women's, and to build on our industry leading team. We’ve have made significant progress on each of these initiatives and I want to thank our outstanding team of associates who have made that progress possible. In fact, it is because of the exceptional efforts of what I believe is the best team in retail that our banners are positioned at the center of a very vibrant sneaker culture. That said, our customers are moving faster than ever before, thanks primarily to the fact that young people today are digital native. They change their shopping and buying habits quickly, they adopt and discard social media platforms in a heartbeat. The people who influence their preferences can change rapidly. And as a result of all of this, they see and adapt new athletic footwear and apparel styles more quickly than ever. We believe that the progress we have made in our initiatives and the tremendous opportunities still ahead of us to seize have enabled us to weather the recent slowdown in the business and staying at the center of sneaker culture. We will drive improvements in our results as the year progresses. In a moment I’ll give you an overview of why we believe that, but first let me level set the first quarter and our outlook for the coming quarters in 2017. John mentioned that our comparable sales finished Q1 up 0.5%. It was a bit of a roller coaster ride, as we noted in our pre-announcement last month comparable sales in February historically one of the biggest months of the year for us were down low teens. March rebounded to be up high single digits. April also lined up with a very high single digit increase. Although we have been expecting April to finish up low double digits, the last couple of weeks of the quarter were strong, but not quite as strong as we anticipated. This caused us to produce earnings of a $1.36 per share at the low-end of our revised outlook. Sales have been trending a bit lower than we had planned over the last few weeks. We are now forecasting the second quarter comparable sales will be up low single-digits with earnings relatively flat compared to a year ago. While we remain optimistic that we can accelerate our momentum over the second half of 2017 to reach mid-single digit comparable sales gains, we are developing a plan B so to speak, if these recent sales trends continue. That Plan B is primarily focused on controlling the expenses and inventory so we can deliver the mid single-digit EPS increase for the full year excluding the 53rd week that we mentioned in our pre-announcement, even if top-line growth is more modest than we originally planned. Let me now give you just a few examples of the opportunities we have for each of the initiatives I outlined in the beginning of my remarks. Together these give us the optimism that our momentum will accelerate over the rest of the year. First, our core mail banners, Foot Locker North America and Australia, Champs Sports and Action continued to operate at a very high level of productivity. We are maintaining our efforts to further elevate our customers engagement with these banners with investments in our physical stores including the addition of high profile stores this year in Toronto, Chicago, Los Angeles, Sydney and Melbourne. We will also continue our successful remodel programs in each of these standards. On the technology side, we will roll out a next generation point-of-sale system later this year which will improve the customer experience in all of our stores, that’s just our pinnacle properties. While U.S. store traffic was down in the quarter, the drop was entirely driven by February which we believe was heavily influenced by the delayed tax refunds. Traffic in the remainder of the quarter improved and we expect traffic which has been positive most of last year to normalize over the balance of the year. In terms of our second initiative, we have a strong leadership position and the market for our aesthetically [ph] inspired footwear and apparel for kids. Remember these kids are moving faster than ever and the first quarter was especially challenging for children, in part because the vendors don’t make some of today’s most popular styles in kid sizes. In any case, we did not have sufficient quantities of some of the hot lifestyle run-in products that our adult customers have been snapping up. That issue paired with a still soft signature basketball business which has been a relative important component of our Kids sales in the recent years meant that the Kids business faced an uphill battle in the first quarter. Fortunately, as we move to the rest of the year the Kids exposure to signature basketball will lessen and we expect lifestyle product quantities to improve. We have targeted our buyers over the remainder of the year at the best available styles from Audi, Nike and Puma. We also continue to see opportunities to expand the footprint of Kids Foot Locker across all of our markets. We have 33 new stores slated for this year with 20 in North America and 13 in overseas markets which will enable us to build out our already strong position in Kids. European expansion is our next growth pillar while comparable sales of our Foot Locker stores in Europe were down low single digits in the quarter, total store sales were up slightly given the addition of 26 net new locations compared to a year ago. Given recent macro events in Europe, traffic there was uneven cross our major markets and down in the quarter overall. We consistently find that our customers in Europe are quite resilient and so we believe the traffic there will gradually rebound. Just as in North America, we are continuing to invest in elevating our customer experience in Europe with pinnacle new stores coming to Rome and Turkey [ph] later this year. While we are also planning close to 100 other new stores in remodel projects. Comparable store sales were down mid single-digits at Runners Point and Sidestep store, certainly not acceptable, but an improvement from their previous run-rate. We believe we have cycled through them most difficult prefix and the segmentation strategy that we’ve started a couple of years ago. With new leadership in place there and with ongoing investments to improve our understanding of the customers and most importantly stronger product offerings, we believe that Runners Point and Sidestep in return to top growth as we progress through the year. Meanwhile our Internet business in Europe continues to grow rapidly. Digital sales were up strong double-digits for Foot Locker and Runners Point in the quarter and even higher for the Sidestep, off a smaller base. In fact, Foot Locker Europe did comp positive overall when combining digital and store results. We expect the momentum in Europe's digital business to continue throughout 2017. Apparel, our next growth initiative had a solid quarter, whereas in 2016 we made progress on profitability, but still lost penetration relative to footwear this quarter we saw faster growth in the apparel than footwear. At the same time, profit margins increased again. Champs Sports, which had the highest apparel penetration continued to perform well. In addition to a strong brand of business Champs has really led the way in demonstrating that we can design the latest trends into our private label products, so, at or close to price and enhance our overall apparel margin. Couple of other balance made notable progress too, one example is Kids Foot Locker, where apparel sales posted a high single-digit comp gain with improved margins. In fact, each banner has apparel strategies to enhance our vendor partnerships, improve speed to market and share best practices. We are also continuing to enhance the use of our own team addition apparel printing capabilities which helps get popular new designs into our stores more quickly and optimize our private label opportunity. We intend to use all of these building blocks to improve apparel results even further over the rest of the year. In terms of building our digital business, we are making progress on the number of fronts. A key investment we have been making is in the new e-commerce platform in order management system which I'm pleased to report has now gone live to one of our smallest online banners. We are monitoring performance while continuing testing and development for our other larger banners with a thoughtful rollout scheduled over the rest of this year and into 2018. This new platform is expected to significantly enhance our online conversions by increasing page load speed, improving product displays and suggested add-on purchases, optimizing video content and connecting ever more seamlessly with our other customer [indiscernible]. Although, we’ve had Boss and Moore's technology for some time now, we are still fine tuning how to best leverage our inventory to enhance our customers experience, while we will always want to satisfied a customer by being able to ship them the product they want from wherever in our system it resides, an even better scenario for us is to have them come to a store to pick up their merchandize, where we can then engage with them, augment their experience with our brands and potentially add to their original purchase. Overall having the latest systems capabilities will facilitate our more fundamental evolution into an organization which truly does not think in terms of separate channels. As we know full well that our customers naturally think of our brands as inclusive of all channels. This enhanced stability to focus on all elements of our brands will align better with the perspective of our customers and we believe drives stronger financial performance over the coming quarters and year. Finally, our women's business had another strong quarter with the SIX:02 being only store banner that's posted double digit comparable sales gain. With the two relatively new non-comp flagship stores in New York city, total sales at SIX:02 were actually up more than 50%. We're planning to open another flagship location in Los Angeles is Q4 also within a key Foot Locker store. SIX:02's biggest stores is actually our digital site, six02.com. We intend to focus the brands development the rest of this year by leading with digital. We plan to bring even stronger merchandizing to the site and build a sustainable and more diversified bash in creditability for SIX:02. Meanwhile, our women's business and our other banners continues to provide steady growth aided by we believe by the enhanced focus we have on the female muses of each of our core banners. She has an ever-broader array of influences on her fashion choices than our male counterparts and our banners are important destinations for her athletically inspired footwear choices. On top of all of these initiatives is her most critical element of our success compelling product stories and assortments from our vendor partners like Nike, Adidas and Puma in particular are producing exciting innovation with coveted new products still selling out quickly. Although there are as always also some styles that are on or approaching the download side of their lifecycle. Compared to the first quarter, we believe that products flow will strengthen in the second quarter even more so as we get into back to school. VaporMax is a perfect example of really great innovative new program from Nike. After a small introduction in Q1, the number of SKUs in units we'll have available will increase significantly during the current quarter and in the back half of the year. Similarly, we'll have some of the Audi product with boost [ph] material notably Nomads and Ultraboost, more reiteration and in better [indiscernible] the combination of all of these great products and strategic initiatives that gives us confidence that we can drive gradually improving topline and less bottom-line performance over the balance of the year. Let me now turn the call over to Lauren to give you the usual details of the quarter after which we’ll be happy to answer your questions.

Thank you, Dick and good morning, to you all. Dick has just given you some great color on the first quarter. I’ll fill in some of the details. First on the topline, let’s breakout our comparable sales by segment. The direct to customer segment delivered a solid performance, with an overall comparable sale gained of 12.1% while our stores posted a 1.2% comparable sales decline. Within direct to customer, sales at our storebanners.com business in the U.S. were up high single digits while our digital operations in Europe and Canada were both up strong double-digit. East Bay which remains our single largest digital banner was up low single-digit, a solid improvement from its performance over the past year. Overall, direct-to-customer sales increased to 13.9% of total sales from 12.7% a year ago. In our store segment, Champs Stores and Foot Locker Canada continue their strong sales results each delivering mid single-digit comp increases, driven by gains in both footwear and apparel. The other side of the ledger, Foot Locker in the U.S., Foot Action and Foot Locker Asia-Pacific posted low single-digit comparable stores sales decline. While sales at Kids Foot Locker were down in the mid teen. Turning to families of business, footwear was close to flat, apparel increased mid single-digit and accessories posted in mid single-digit decline. Within footwear as Dick mentioned women's footwear was strong posting a comparable sales gain just shy of double-digit. The men's footwear sales were up low single-digit, while sales of our children's footwear declined mid single-digit. By category, continued strong demand for lifestyle silhouette led to the mid-teens gain in running. Casual footwear was down mid single-digit, while basketball was down mid single-digit due in part we believe that the delay of IRS tax refund cheques until after the NBA All Star game. Average selling prices in footwear were up mid single-digit, reflecting customers continued demand for premiums makers while units were down mid single-digit. Strengthen our apparel business was relatively broad based, with gains across most of our geographies, channels and genders. Men's and Children's were both up mid single-digit, while our women's apparel business posted a double-digit gain. ASP is an apparel were up double-digits, while units were down reflecting the company's ongoing shift to a more premium assortment. Turning now to the rest of the income statement. Our gross margin rates came in at 34% in the first quarter, off 100 basis points from last year's 35% rate. A lower rate reflects a 40 basis points decline in our merchandize margin rate and a 60 basis points of deleverage on our occupancy and buyer's compensation expenses. Lower merchandize rate was primarily as a result of higher markdowns at our direct-to-customer business, where we win more promotional than in the past in order to drive traffic and clear slower moving products. At our stores, the markdown rate actually continued to improve even with the softer top line sales relative to our expectations. Despite the current promotional retail environment, our strategy continues to be to provide exciting destination for our customers primarily focused on selling premium sneakers and apparel at full price. As expected, occupancy cost increased following the investments in our various power stores that Dick mentioned a few moments ago. We mentioned on the prior call that leveraging occupancy would be challenging in 2017. At the low single-digit comp that was the bigger challenge in Q1. Our SG&A expense rate rose in the quarter by 30 basis points at 18.5% of sales. The contributors to the SG&A deleverage were the lower than planned sales combined with a minimum wage increases and higher medical benefit cost that we discussed on the call in February. In addition, the ongoing investments in our information and technology infrastructure while planned led to additional SG&A expenses year-over-year, offsetting some of the savings from lapping the cost of last year’s move into our new office space. Depreciation expense increased to $41 million from $39 million in the prior year. This expected increase reflects the higher levels of capital spending undertaken to enhance our store fleet, digital businesses, technology, logistics network and other infrastructure as we pursue our long-term objective. First quarter tax rate was 33%, 300 basis points lower than last year and close to our expectations. As noted on our previous call, the lower rate was driven by the required change in the treatment of express cash benefits from share based compensation, the effect of which is likely to be highest in Q1. For 2017, we still expect the full year tax rate to be about 34%. Moving on to the balance sheet, we ended the quarter with $1.49 billion of cash and cash equivalent, a decrease of $13 million from the end of Q1 last year. During the first quarter, we repurchased 546,000 shares for $38 million and paid out 41 million to our recently increased $0.31 quarterly dividend. We also invested $75 million of capital into our business including opening 30 new stores and remodeling or relocating 61 stores. We closed 39 stores, with the largest number of closures made up of Foot Locker and Lady Foot Locker stores in the U.S. We ended the quarter with 3,354 company owned stores. On a constant currency basis, inventory increased 2.8% above our standard given our 1.8% currency neutral total sales growth. Despite being off standard, our long-standing practice of disciplined inventory management leaves us well positioned to flow fresh, exciting products to customers both in the current quarter and beyond. Dick mentioned that we expect comparable sales for the second quarter to increase low single digits. But it already being our lowest sales volume quarter, this outlook would lead to a gross margin decrease of 60 to 80 basis points in Q2, with a similar mix of occupancy deleverage in a slightly lower merchandize margins as we experienced in the first quarter. SG&A leverage would also be a challenge with SG&A likely up 10 to 30 basis points as a rate of sale. I want to close our prepared remarks by reiterating the confidence that Dick conveyed about being able to reignite our momentum over the rest of the year. We believe we have plenty of runway to go on all of our strategic initiatives and are optimistic about the upcoming product flow, yet we will remain derivative on controlling expenses and inventory, so that we can deliver improved earnings even in a somewhat challenging sales environment. Silvana, let’s go ahead and open up the call for question now.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And our first question comes from the line of Erinn Murphy with Piper Jaffray. Please proceed with your question.

I have a couple of questions I guess. First starting off with second quarter, you talked about trends being a little bit slower. Are you currently seeing the business in a low single-digit range and so therefore your second quarter seems the continuation of that trend? Or are you assuming based on the product launches that the business picks up throughout the quarter?

Hi. Its Dick. We stop giving the quarter to date information a few quarters ago. And clearly, we’ve given what we believe will happen in the second quarter and its all built into our forecast and we’ve talked about in terms of low single-digits.

Okay. Fair enough. And then just a couple of other ones. In your brand discussion that you’ve talked about certain brands that were approaching a downward side of their lifecycle. Can you elaborate a little bit on that are there certain style or specific brands that you're just seeing meeting either more promotional or just kind of at that tail end of their cycle?

Let me be clear, it was not brands that are on the end of their lifecycle it was specific styles that are on their end of their lifecycle. If you go back a year Erinn, every -- assuming every teenage female potentially in the world needed to have a pair of Adidas Superstar or Stan Smiths, while we’re still selling a lot of Superstars and Stan Smiths that basic trend has changed a little bit, or that request -- require footwear for that teenage girl has shifted. So, we managed through style changes all of the time, but it's one of those things that, there was such a rabid sense of, got to have that product last year, it hasn’t quite been replace with something that’s got that same sort of velocity, but we managed few of those up cycles and down cycles all the time. So to be clear, it's not brands, it was referenced to specific styles.

Okay. And then just on that style specifically, it’s a lot more prevalence in the mall today. You can see it whether it’s a turnkey [ph] or even more of the department stores are kind of getting better allocation. Do you think that consumer is going elsewhere or do you think that more reflective of that style being, like you said, the end of the lifecycle?

I think it’s a -- the cycle being slowing down certainly, right and the Superstars and Stan Smiths have been around a long time and they have the ways that they come through and that’s a great example that certainly they are available at places, but our consumer, our core consumer moves very quickly and we still are selling a lot of Superstars and Stan Smiths, it's not just basic black and white or white and black --.

She might be opting the version with pink strips or different fabrics?

Absolutely.

Okay. And then just last question and I'll pop up in. Just big picture if you think about your strategy across Q1 going forward. It seems like some of the headwinds you had this quarter deferred tax rate funds maybe the relative importance of the All-Star week. I mean some of those headwinds are likely going to continue as we think about the next couple of years. So, how do you strategically think about some of the levers you have in that first quarter to execute it better in the future? Thanks.

Yeah. So, when we expect the tax sequence and to say the same going forward, right depending on what happens with any sort of tax reform, I don’t imagine that the path is going to change and the reasons that they slowed down are the reasons to try to fight broad [ph], et cetera. The All-Star game continues to be a relevant moment in our customers journey each year, next year the All-Star game is in Los Angeles, which again we have a lot investment that we’re making in LA. So what we have built with our great vendor partners, February and to be the hottest month even as I noted its one of our largest, biggest retail months and we’ve been fortunate in the past to have sort of the perfect storm with tax miss, the All-Star game, great silhouettes being available, Valentine’s Day, all sort of coming together. So we’ll certainly have to adjust our thinking as we look at Q1 making sure that we get the flow right because that perfect storm of things coming together is not likely to replicate itself. But it doesn’t necessarily mean that any of our strategies are wrong as it relates to the first quarter, we just have to think through the timing.

The timings differ, we build great businesses around when our customers are excited about products and have the cash and we’ll continue to do that.

Alright, thank you guys and all the best.

Our next question comes from the line of Tom Nikic with Wells Fargo Securities. Please proceed with your question.

So it kind of feels like there was a little bit less conversation around Adidas on this call relative to prior calls? You know I think you mentioned relative to Erin’s question that maybe there was a little bit less steam in the Superstars and the Stan Smiths, but can you talk about trends in Ultraboost and the Nomads and some of those other styles and if there is momentum there? And if there is anything kind of in the Nike assortment besides say VaporMax which you mentioned, which you have a level of excitement about? Thanks.

There is a lot of -- thanks Tom for the question. There is a lot of great stuff coming on from Adidas you know and certainly Superstars and Stan Smiths are in one part of the lifecycle, but when you look at things like Tubular Shadow and Nomads and EQT, you know lot of Ultraboost products, lot of Pureboost, we’ve got AlphaBounce we’ve got [indiscernible] and you know there is a lot of things coming from Adidas as well. So the fact that Superstars and Stan Smiths are part of their downward part of the lifecycle potentially. All of these other things are continuing to fuel the great brand heat that Adidas has done. Even some excitement around the James Hardin basketball shoes, so again there is a lot of good things on that side of the equation. Certainly, VaporMax from Nike is an exciting new innovation. We expect it to continue to resonate of our consumer and obviously it launched in Q1, but we expect more SKUs and styles and quantities available as we go forward. There is some of the old standby’s that are still bringing heat as well. we’ve got the Huarache, we’ve got the Special Forces that is AirForace One, the Paul George basketball shoe, Kyrie Irving's basketball shoe are all doing great. We see upside with the LeBron shoe just based on a little bit of shift in timing from last year. To Narrow which is a Foot Locker exclusive with Nike is resonating not just in Europe or in Australia were its sort of been a foundational part of their business, but its starting to get some traction back in the U.S. as well. So a lot of great heat from both of those brands.

Okay. Great. Thanks. And if I could just ask one more about SG&A. I think you talked about tightening or controlling expenses this year. Is there any kind of additional color there? And should we think that the growth rate of SG&A in dollars should moderate in the back half of the year?

Yeah. We remain very disciplined about spending those expense dollars, the SG&A, the bigger element in it is selling wages. And so managing that very carefully is about managing that hours and making sure that you have the hours associated with your peak selling period. And then that you’ve got the very best sales folks on the floor during the peak period so that you make the most of those hours to deliver great customer experiences. It is a bit of art, along with a lot of science and each of our operating divisions manages that process for their business. We’ve invested in tools to help them with that, part of this controlling it is making sure that we’re applying the best practices in doing that across the different operating businesses. So, when we talk about plan B or we’re planning out making sure that we’ve really are making the best use of the tools to manage those hours the best. And then there are lots of other elements, right. You’ve got lots of other variables including what we spend on marketing, there is a bit of the business where that marketing expense in the digital sphere has lots of analytics around it, so that you can make sure that you're spending those dollars wisely that to drive traffic and conversion, and the metric gets a little bit tougher when you translate that marketing to the stores environment, but we can couple it with digital to make sure we’re achieving traffic increases in conversion and stores environment as well. So, that’s an element, right. I can spend hours talking to you about expense, including things like utility that making good use of LED bulb. We have a very, very talented group of expense managers that watch our nickels because they all add up.

Got it. Thanks very much.

Our next question comes from the line of Matthew Boss, JPMorgan. Please proceed with your question.

I guess the dig beneath the surface with all the shift here. Dick, what you attribute the more choppy top line in athletic here? Does your Plan B, is it based on a more of a near-term blip or do you think we’re seeing a turn in the cycle? And I guess with that more micro, what categories have you seen re-slow in May. And then how would you rank the opportunities to improve in the back half for the year?

Matt, I remain firmly a believer of that it's not a cycle, right. We are living in a world that is capsulized, sneakers are a part, a very important part of our consumers wardrobe, they accessorize with it, sometimes they are the statement effort. So, again I think we have some shifts in Q1, obviously the tax shift being one that certainly impacts our customer in their desire to purchase sneakers when they've got that cash. I know there has been some proof that people don’t necessarily believe that. But, there is a direct correlation to tax checks hitting and sneaker sale. The shift of Easter, the later shift of Easter, which again we saw traffic increases in March and April combined as we looked at the Easter shift, but that shift is still impacting us. You know the Assentation Day holiday in Europe is next week and there is a whole bunch of school breaks which are generally good for sales for us as well. So again, it’s not really -- there is not comp to comp sort of comparison. We’ve talked about a little bit about the signature basketball, especially in Kids and you know I’m not as focused on categories. You know it’s about the coolest sneakers and then right now a lot of the sneakers heat happens to be coming out of running silhouettes. But we’re also seeing some heat from some companies like Vans, they're old school and skate highs. So our consumer is migration to what they see as the coolest shoe and they do that fairly effectively and our buyers are moving with them and trying to stay half a step ahead of them as we pivot through the product assortment.

Got it. And then just a follow-up, Lauren are you comfortable with the overall inventory exiting the first quarter. I guess any pockets of excess if you looked by banner? And then just on that gross margin, what’s the magnitude of the merch margin decline in 2Q and how should we model the back half of the year from a merchandize margin perspective?

So our disciplined approach to inventory management that we’ve been very consistent with helps us come out of a period like Q1 feeling good about the freshness of the inventory and that we can manage the rail. So the merchant team looks through the individual SKUs, the depths of what's on hand, the rate of sell through and they take the appropriate action. And we are able to take advantage of the fact that we are omnichannel to help us move through things by getting more eyeballs on it and making that inventory that might be in the stockroom available to the folks looking at it on our website. So we use that to our advantage and as we described, we actually came out of Q1 with fewer markdowns on the stores as we used the tools available to us. So we felt good about the inventory coming out of Q1 and we'll be disciplined about the buy go-forward with our expectations around the top line and make sure that inventory stays fresh. But coming back to your question about second quarter with the low single digit top line expectation, our thoughts around gross margin are that we’ve got again the deleverage 60 to 80 basis points and because we felt occupancy in there. So its Q2 is a lower sales volume quarter for us and we would experience deleverage on the occupancy and perhaps a little bit of pressure on the merchandize margin as we saw in the first quarter. So as we look at the back half, you know if you’re talking about mid-single digit top line which is how we’re seeing that back half, that we get an opportunity to squeak a bit of leverage out of gross margins. But I would be slight because of that occupancy dynamic. Is that helpful?

Yeah, that was very helpful. Thanks.

Our next question comes from the line of Mitch Cummins with B. Riley & Company. Please proceed with your question.

Yeah, thanks for taking my questions. I want to start on the basketball business, it sounded like it was a pretty big headwind in the quarter. It hurt your Kids business I would imagine that the tax refund delays didn’t align with the All-Star game and all of that. But, like how big is basketball in Q1 relative to the rest of the year? I would imagine that it’s definitely outsized in Q1. Is that’s the case?

We don’t really break down the size of categories across the seasons of quarters Mitch. And coming around the Kids basketball product is relevant because they don’t have some of the offsets with some of the running styles that the adult assortment has yet. The boost product for example is not taken down in the Kids models. So, there is more pressure on basketball and the Kids world, then necessarily across the adult banner. So, historically if you looked at the heat that’s been brought around the All-Star game. There is some basketball business done in the first quarter, but we also grew a lot of basketball business throughout the other quarters as well.

Okay. And then on running, I think the comments, I can't remember if it was you or Lauren made, that it was lifestyle running that was up mid-teens, maybe I heard that incorrectly, but is there -- could you give us kind of an overall running comp for the quarter?

Yeah. It's Total Running mid-teens.

Oh, that was Total Running mid-teens. Okay. Great. And then maybe lastly, do you have any comments on the real estate situation. Obviously, there is the bankruptcies and store closings. Just kind of curious if at some point that kind of works to your advantage as you go through lease renewals or I don’t know if there is any sort of like kick outs or co-tenancy agreements that you guys can sort of leverage to help out from that standpoint. And maybe bring your leverage point down a little bit?

Yeah. That’s an ongoing process, Mitch. We’ve got a team that’s still focused, we’ve got a very mature estate team and in expense management team that actually looks at the co-tenancy violations and kick out opportunities. We have certain percentage of our leases up that were years, so we certainly leverage those occupancy rates where we can to try to improve our position in each of those malls and in some cases we take shorter term leases because malls may be deteriorating. But, yeah over time I absolutely expect that we’ll get some leverage, there'll some malls that close, certainly we look at street stores as opportunities, we look at strip malls as opportunities. It’s above creating the heat, the product creates the heat, we’re trying to provide great destinations for our consumer. And we’ll try to leverage I guess other people miss fortunately when we talked about bankruptcies, et cetera, to try to be in a better position, stronger position financially.

Okay. All right. Thank you.

Our next question comes from the line of Robert Drbul with Guggenheim Securities. Please proceed with your question.

Hi, Dick. Good morning. I guess the one question that I have is, when you look at the trends out there. Do you think that the direct-to-consumer efforts of some of the brands are impacting the business at all today?

At all, sure. Right, I mean I think that there is some pressure from everybody that sell sneakers, we’re all fighting for consumers. I think that our understanding of our consumer base and our connectivity trying to create consistent authentic memorable experiences for our consumer whether they are in-store or online with us to allow us to push back against that. But, certainly people have a lot of shopping to us, its whether its online or places in malls around street. So I don’t know that its anymore right Bob, then it has been, but will continue to be diligent across all of the channels and leverage our inventory and our experiences with our consumers across all those channels.

And we know these customers well and we know the differences in those customers across our different brands. We understand what motivates them, what they were excited about and that's what we focus on bringing to them. So with that focus they know they've got to come to us to check out what we’ve got before they make a purchase decision.

Alright.

Bob, just one other quick point, you know the vendors continue to support our initiatives, right. We’re building House of Hoops, we’re looking at Kicks Lounges. The Fly Zones in Kids foot locker opening the Jordon Storm Paris, you know all of those things just speak to the strength of the relationship with key vendor partners.

And Dick, do you think that the Big Dollar brand is at all playing a role here in terms of attention or tucking dollars out of the marketplace?

No.

Thank you very much.

Our next question comes from the line of Randy Konik with Jefferies. Please proceed with your question.

Kind of disappointed about that Big Dollar brand, but I guess just a quick question, how do you think about you as you say the life cycle or the trend cycle of the Adidas Superstar and Stan Smiths start to erode, how should we be thinking about go forward AFP and unit trends just generally speaking, how should we be thinking about that on a rolling four quarter basis going forward? Thanks.

Randy we’ve proven overtime and talked many times in the last couple of years about our ASP model. You know we continue to see ASPs expanding and we believe that that is going to go forward. But ASP is not as simple as Superstars or VaporMax or something like that. I mean it’s a very complex formula, the amount of apparel that we sell factors in, we're selling $29.99 accessory kits versus $10 accessory kit, all those things factor into ASP. So we look at the ASP model and believe it has an opportunity to continue to increase and as it did in the first quarter with units being down a little bit. So we got that goring forward.

Right. I guess the only question is, given that these two shoes style had some really crazy impact on the total market in the last 12 months definitely from a unit perspective, that’s why I kind of asked about any type of nuances on thought process on units going forward because it was like you said everybody and their mother had these shoes on. So I am just curious on -- I get the ASP commentary, I’m just curious on how do you think about the unit trajectory going forward for the market?

Let me be clear, we still saw an awful lot of Stan Smiths and Superstars, right. It’s just that they backed out their pinnacle and they are on the -- they’ve been on this roller coaster for years and so I don’t again its one or two styles across our entire assortments Randy. So it doesn’t necessarily have an impact in the bigger picture for us.

Understood. Can I ask one last thing.

Sure.

Did you see any traffic or transactional volume differentials by real estate type? Meaning, in closed malls versus kind of city location centers. Just trying to get some perspective on any types of nuances in the traffic patterns or transactional patterns?

No significant changes, certainly we’ve has street stores and important locations for long time. We’ve had big mall stores for a long time. Our business in Europe is far more street based than mall base. So, no significant changes Randy in the transactional patterns. They to a certain degree follow where the population moves and as population does become a little more urban based over the coming years, expect that our strip stores will pick up a bit, we’ve read what everybody has written about the death of malls, which we don’t ascribe to that theory by the way, but as mall traffic changes that will also change traffic there. But nothing significant I’d call out.

Okay. Fair enough. Thank you so much.

Thanks, Randy.

Our next question comes from the line of Sam Poser with Susquehanna Financial Group. Please proceed with your question.

Thanks for taking my question. I guess the real question I have is when you look at February, March, April with all of the twist and turns from the calendar and everything. When do you think -- I mean how much of a real view of what's going on, do you have given all the shift. And if you don’t have a clear view now, when do you think the full calendar thing sort of balances out, where you can look at a trend on an apples-to-apples basis?

Yeah. That’s a great question, Sam. Because they really are no two days that are truly purely comped. So, again the Easter holiday, the really -- just holiday shift continues to impact the business in Europe with the two week shift. So, we study it every day, right, we look at the patterns that we expect, we look at the historical patterns. So, the guidance that we’ve gave is based on the view that we have today, and I don’t know that there is a clear moment in time that we suddenly say everything is perfectly aligned comp wise from here on out. So, I think we have as good a vision today as we have tomorrow.

I guess, I guess I really mean to ask is, does the way that you -- the way that February, March and April work together or would you compare that to the last year February, March and April, if not apples-to-apples at all. At what time period do you foresee being able to get a read on exactly the actual health of the business, if its mid singles or if its low singles or whatever it is, because I know what you see right now, but you're seeing what you're seeing, but it is an apples-to-apples. So, where do you think you'll sort of get a better comp view at what position?

Sam, I'm not quite sure how to answer your question, because we look at our comp views every day and every day we give more clarity and we get some things that cause more confusion. So, a launch shift here, a more out of a quarter of a product there, delayed shipment here, all of those things can have an impact on it. So, again I don’t think there is a nirvana point that says this is where we see things perfectly. We make adjustments every day based on what we see.

Thanks very much and good luck.

Our next question comes from the line of Michael Binnetti with UBS. Please proceed with your question.

Hey guys, good morning. Thanks for taking my question. Can you just clarify one thing on the model please? Lauren, I think I heard you say in the second half of revenue guidance is positive mid single-digit. I know you have a 53rd week and a little bit of footage growth, so I am just trying to clarify is the plan still that in the back half we can expect mid single-digit comps in each quarter after 2Q?

Mid single digit for Q3, Q4.

Comps or revenue?

Double digit EPS of what we’re towards with that mid single-digit topline over Q3, Q4 ex-53rd week.

Okay. And then just a few things on the quarter really quick. You mentioned the improved merchandize margins in stores given the heavy promotional cadence at the mall in the quarter that we saw, it was a little surprising. Do you feel like you left any business on the table in stores based on the promotional strategy?

Our position Michael has not changed, right. We’re selling premium sneakers, the consumers are coming into to our stores, looking for premium sneakers that they can’t find elsewhere. So we marked down product as appropriate to manage the lifecycle of products. But you know I feel like we leave business on the table every single day, but I think we maximize the amount of business that we take off the table. So where there is always a customer that we didn’t get to, there is always a size that we didn’t have and they didn’t want to wait. I don’t, our promotional cadence is set by our managing our inventory, our appealing to our customers desires and I think the way that we see it, we’re going to remain that premium destination. And I don’t expect that our guys in the operating divisions are going to go start chasing discounters in the mall, because that’s not who our customers are frankly.

And just one longer term question and if you think about the cost structure, I know this year you’ve got bit of sticky costs on some of the bigger marque stores. I think your lead times on stores like that are pretty long, so you look at the 2018, do you have the same store open fresher on the cost structure out of the year based on the leases you’re looking at today and then you mentioned plan B on the cost side. You know is there anything in particular you’re looking at before you break glass on some of the cost structure. I was just right from the hours, just sounds like you’re managing the hours in the stores pretty tactically but you know is there some point on the horizon you’re looking at for you say like let’s look at some of the more non-store expenses based on the reality here and traffic levels.

I don’t see it break glass in the time period. I mean we’ve got as we’ve described with the power stores, early days of their lease life you got more rent over a straight-line basis, so levering that is more challenging as you get further into their life and you get the flip side of that. But we will continue to make sure that we got the appropriate locations and Dick described we see opportunities optimal and those can have more favorable occupancy metrics. But it will continue to be a mix, I don’t see a day where that’s really easy.

Our next question comes from the line of Robert Ohmes with Bank of America Merrill Lynch. Please proceed with your question.

Dick, when should we expect the promotional environment for your online business to get less promotional, where are you guys in working through inventory? Is this something that continues in the back to school? Or are you almost through it. Where you guys have right now?

We’ll continue to use the online business as a way to expose more of our product to more eyeballs. So, again the comment that Lauren made was, its been a bit more promotional in the first quarter to ensure that our inventories stay fresh and we’ll continue to use that as an offensive weapon to do that.

Let me just call out that I described you that on the marketing side of our direct business, they can be very efficient with those dollars. So when you look at finished margins, they did quite well in levering their expenses. So, while you’re more promotional among gross margin line you make that up with being more efficient on the expense line to drive that traffic.

And as you guys look ahead to back to school. Do you expect to be in more promotional back to school in general than it was last year?

That’s a great question, Rob. I mean, I think when you look at some of the people that are feeling various pressures, I expect some of the apparel side of the business continues to be growing promotional. I expect less promotional -- a less promotional cadence in our specific category and our specific area of expertise. Premium sneakers are not going to be highly discounted, I don’t believe and our apparel teams are very conscious of what those on in the marketplace. But again our apparel is premium apparel, when you think about technically some of the things that motivate our customers. So, our customer is not coming to us looking for discounts. And while we promote as appropriate, we certainly don’t see ourselves being more promotional in the back to school season.

And just last thing. For back to school, just to clarify on the Kids business, do you think you will have the Boost product in kids? And also for back to school, what -- just trying to understand, what is the expectation for signature basketball for back to school? Are you expecting it to underperform?

Well, the boost product is not being taken down to kids in most silhouettes. So, the answer would be, it will not be. But there are other great silhouettes in running that are going to become more readily available in the Kids, in the back to school season. We talked about the signature basketball specifically in Kids, the pressure lessening in that product going into the back half of the year. So, if there are still going to be pressure on, but we certainly have less exposure in the back half, as we think about signature basketball in Kids.

Got it. That’s really helpful. Thanks.

Okay, Silvana, I think we have time for one more question.

And our final question comes from the line of Paul Trussell with Deutsche Bank Research. Please proceed with your question.

Thank you. So, Dick you’re standing by mid single-digit comps in the second half as well as double-digit earnings growth in the second half. My sense listening to this call to the analyst and the questions that are being asked here, and some investors. I don’t sense a comfort level with that view after what will be two consecutive quarters of low single-digit comps and no earnings growth. I hope to get more confident on that front about your second half and specifically maybe dig a little bit more on how the second quarter is just a blip. I think, the first quarter is somewhat understandable for most folks given that the delay, tax refunds and weak February scenario, but you said that when the consumer has the cash, they shop at Foot Locker and historically your merchants have been very well prepared for changes in style preferences. So hard to understand why this time is different.

It’s just a little bit of a lag Paul and I mean the product that I talked about earlier in my -- to somebody’s question. We see an increased flow of product, both from an innovation point of view. But more importantly for us, from a style and desk point of view, right. VaporMax was the example that I used. Certainly a great launch, initial launch in Q1, but nobody does it better than Nike in terms of controlling the quantities in the marketplace and making sure they’ve got production capabilities, et cetera to support it. So we see the style and units in several key programs going up in the back half and obviously the consumer, we believe will respond to that. So we remain very confident and it’s, the consumer hasn’t gone elsewhere and this segment continues to be very hot. If you look at the people that are influencing things in this category. Kanye West with his Easy product. We expect that to continue to be incredibly hot going into the back half and we expect our quantities to go up. So again it’s about the pipeline that we see not just from renovation, but from depth across those innovative and really high demands styles that we see. So it’s the sauce that we get to make and our buyers have done a great job of pivoting to the right places and now giving the quantities behind them in the end of Q2 and going into Q3 and Q4 is critical and we believe we’re well positioned to do that.

So and just a follow-up on that front. Again, so mid-single-digit comps in third and fourth quarter along with double-digit earnings growth. In a scenario in which you are closer to low-single-digit comps, a continuation of the second quarter trend for one reason or another. Help us understand how we should think about earnings growth in the second half given some of these expense initiatives you are working on today?

I think Lauren was pretty clear, the expense initiatives are in place and it will continue to be exercised to ensure that we can get towards that double-digit earnings growth that we talked about in the pre-announcement in earlier today. I mean we understand that it’s always easier when the top line is flowing more rapidly. But I also believe that our organization is talented enough and we understand all of the levers that can be pulled that we’re confident that we’ll be able to control expenses even if sales continue to be a bit softer.

Thank you and good luck.

Thanks Paul.

Okay. So that concludes our call for today. I'll be back at my desk shortly, if we didn’t get your question and I'll answer any more follow-up questions you may have. Please join us on our next earnings call, which we anticipate will take place at 9 AM on Friday August 18, following the release of our second quarter results earlier that morning. Thanks again. And good bye.

Thank you, ladies and gentlemen. This concludes today's conference. We thank you for participating. We ask that you may disconnect your lines.